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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)



|x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
|- | ----------------------------------------------------------------------------------

For the quarterly period ended March 31, 2006

OR



| ̈ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
|- | -----------------------------------------------------------------------------------

For the transition period from  to
.

Commission file number 000-24661

FiberNet Telecom Group, Inc.

(Exact Name of Registrant as Specified in its Charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 52-2255974                          
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)

570 Lexington Avenue, New York, NY 10022

(Address of Principal Executive Offices)

(212) 405-6200

(Issuers Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ̈

Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ̈Accelerated filer ̈Non-accelerated filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ̈No x

As of May 8, 2006, the registrant had 6,305,849 shares of common stock outstanding.



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INDEX



|         |  |                                                                                                    |  |     
|-------- |  | -------------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                                    |  | Page
|PART I.  |  | FINANCIAL INFORMATION                                                                              |  |     
|Item 1.  |  | Condensed Consolidated Interim Financial Statements (unaudited)                                    |  | 3   
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations              |  | 3   
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                         |  | 10  
|Item 4.  |  | Controls and Procedures                                                                            |  | 10  
|PART II. |  | OTHER INFORMATION                                                                                  |  |     
|Item 1.  |  | Legal Proceedings                                                                                  |  | 11  
|Item 2.  |  | Unregistered Sales of Equity Securities and Use of Proceeds                                        |  | 11  
|Item 3.  |  | Defaults Upon Senior Securities                                                                    |  | 11  
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                |  | 11  
|Item 5.  |  | Other Information                                                                                  |  | 11  
|Item 6.  |  | Exhibits                                                                                           |  | 12  
|         |  | Condensed Consolidated Balance Sheets as of March 31, 2006 and December 31, 2005                   |  | 14  
|         |  | Condensed Consolidated Statements of Operations for the three months ended March 31, 2006 and 2005 |  | 15  
|         |  | Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2006 and 2005 |  | 16  
|         |  | Notes to Condensed Consolidated Interim Financial Statements                                       |  | 17  



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PART I

FINANCIAL INFORMATION



|Item 1. | Condensed Consolidated Interim Financial Statements (unaudited)
|------- | ---------------------------------------------------------------

See attached.



|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

This report contains certain forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such statements are based on
managements current expectations and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Investors are cautioned that there can be no
assurance that actual results or business conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of various factors, including, but not limited to, those described in our Annual Report
on Form 10-K for the fiscal year ended December 31, 2005. As a result, our future operations involve a high degree of risk. Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of
new information, future events or otherwise.

Our operations and ability to grow may be affected by numerous factors, including: the difficulty inherent in
operating a company in a rapidly evolving market; our history of operating losses and cash flow deficits; our limited financial resources and uncertainty as to the availability of additional capital, if necessary, to fund our operations on
acceptable terms, if at all; our success in maintaining carrier hotel lease agreements and license agreements with building owners and in obtaining additional agreements; the financial difficulties and instability that some of our customers and
vendors are experiencing; the lack of growth in demand for our services or the failure to manage the growth of our operations; the frequency of service interruptions on our networks and the scalability and reliability of our networks; the potential
occurrence of a natural disaster or act of terrorism that could impact our networks; the potential loss of key personnel, information support systems or key software licenses; the potential for litigation from stockholders, customers, vendors or
other third parties; continued pricing pressure and price competition for our services; the potential development by competitors of competing products and technologies; restrictions imposed on us as a result of our debt; and changes in the
regulatory environment. Our failure to achieve certain operational results would violate certain debt covenants thereby potentially accelerating the outstanding balance under our credit facility for immediate payment.

Overview

We own and operate integrated interconnection facilities
and diverse transport routes in the two gateway markets of New York/New Jersey and Los Angeles, designed to provide comprehensive broadband interconnectivity enabling the exchange of traffic over multiple networks. We have experienced significant
operating losses and net losses. We expect to continue to experience such losses as we continue to operate our business. We also have a limited operating history. Consequently, prospective investors have limited operating history and financial data
upon which to evaluate our performance.

The telecommunications industry has experienced a period of uncertainty and rationalization. We have been
negatively impacted by the general economic environment and by the difficulties that impacted our industry. Expectations for growth in demand for broadband services did not materialize, resulting in significant excess capacity in existing
communication networks. This excess supply of bandwidth and the intense competition among industry participants produced substantial pressure on the pricing of our services with significant decreases in recurring monthly charges. In addition,
customer contracts and services have been cancelled, resulting in a loss of recurring revenues to us. We are unable to determine the extent to which additional contracts or services that we provide to our customers will be cancelled, and we cannot
forecast our ability to replace those cancelled contracts with new contracts. As a result, our revenues, business operations and liquidity may continue to be negatively affected by the market environment.

Factors Affecting Future Operations

Revenues. We generate
revenues from selling network capacity and related services to other communications service providers. Revenues are derived from four general types of services:



| |  |  | On-net transport services.Our transport services include the offering of broadband circuits on our metropolitan transport networks and FiberNet in-building networks
(FINs). Over our metropolitan transport networks, we can provision circuits from one of our carrier hotel facilities to another carrier hotel facility or to an on-net building via an interconnection with our FIN in that building. We can
also provision circuits vertically between floors in a carrier hotel facility or an on-net building.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Off-net transport services. We provide our customers with circuits on networks that we do not own. We sell this connectivity to our customers by purchasing the underlying
circuits from other wholesale telecommunications carriers.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Colocation services. Our colocation services include providing customers with the ability to locate their communications and networking equipment at certain of our carrier
hotel facilities in a secure technical operating environment. We can also provide our customers with colocation services in the central equipment rooms of certain of our on-net and off-net buildings.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Communications access management services.Our access management services include providing our customers with the non-exclusive right to market and provide their retail
services to tenants in our on-net and off-net buildings.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our revenues are typically generated on a monthly recurring basis under contracts
with our customers. The terms of these contracts can range from month-to-month to fifteen years in length. We continue to experience a trend of entering into shorter term contracts with our customers. Our customers typically elect to purchase
services on a month-to-month basis or for a contracted period of one year. All of our revenues are generated in the United States of America.

Our services
are typically sold under fixed price agreements. In the case of transport services, we provide an optical circuit or other means of connectivity for a fixed price. Revenues from transport services are not dependent on customer usage or the distance
between the origination point and termination point of a circuit. The pricing of colocation services are based upon the size of the colocation space or the number of colocation units, such as cabinets, provided to the customer. Revenues from access
management services are typically determined by the square footage of the commercial office properties to which a customer purchases access. We have experienced price declines for some of our services over the past year due to industry trends, with
transport services experiencing the greatest decreases. We expect our operating results to continue to be impacted by decreases in the prices of our services.

The growth of our revenue is dependent upon our ability to provide additional services in our existing facilities. We also believe that the majority of the growth in our revenues will come from our existing customers. Consequently, our
growth in revenue is dependent on the underlying growth of our customers businesses and their need for our services within the facilities that we already operate. We continue to add additional customers, particularly domestic subsidiaries of
internationally based carriers. However, we believe the number of companies that are potential customers is decreasing, due to the industry rationalization. In addition, we currently do not anticipate expanding our network infrastructure to other
carrier hotel facilities or on-net buildings and off-net buildings. Within each of our existing facilities, our revenues will depend upon the demand for our services, the competition that we face and our customer service.

We typically begin our sales cycle by entering into a master services agreement. This document outlines the operating specifications and commercial standards that are
required of us by the customer. Customers can order a specific service, or, alternatively, they can purchase general availability on our networks or in our facilities on a recurring basis.

Customers primarily purchase services from us only on an as-needed basis, when their network requirements mandate an immediate need for additional services. They have
not elected to purchase general availability on our networks, nor have they purchased services on a speculative basis. We have also experienced significant disconnections of transport services, as customers groom their networks to eliminate excess
capacity. This loss of revenues has had a significant negative impact on our financial results and may continue.

Our transport services have been
negatively impacted by customers disconnecting higher-bandwidth circuits and replacing them with lower-bandwidth circuits to more efficiently manage the access costs of their networks. The new transport services that we are providing typically are
also for lower-bandwidth circuits, as our customers expand their network connections on a more limited basis. The growth in transport revenues that we have experienced on a quarterly basis in 2006 and 2005 is a result of an increase in the number of
circuits we have provisioned, offsetting our disconnections and price declines. In the future, we anticipate generating significantly more of our revenues from transport services than from the other services we provide. The scalability of our
network architecture allows us to increase transport capacity to a greater degree than is possible with our other services.

Our off-net transport services
provide our customers with circuits on networks that we do not own. We purchase circuits from other wholesale telecommunications carriers and sell this connectivity to our customers. We offer these services in markets that we currently serve, other
metropolitan markets that we do not serve with our own networks, and on a long-haul basis to connect metropolitan areas.

Currently our colocation services
produce approximately one-quarter of our revenues. Our colocation services have not experienced the same level of disconnections and price declines as our transport services. The physical constraints of available colocation space in our facilities
and our competitors facilities have limited the supply imbalance that has developed in the connectivity market. In addition, unlike the fluctuations in demand for bandwidth based upon end-user usage, demand for colocation space is more stable
because of the consistent need for a location to locate networking equipment. As a result, prices for colocation have not decreased as much as those of transport, and carriers are less likely to terminate colocation contracts. However, the growth
prospects of our colocation services are not as great as those of our transport services, as we are limited in the amount of colocation space that we can sell without making a significant investment in an additional colocation facility. Our ability
to expand the capacity of our transport networks is much greater due to technological advancements in fiber optics, such as dense wave division multiplexing or DWDM.



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Our access management services business has been steadily declining, and we expect that trend to continue. The revenues
that we are generating from this type of service are from long-term contracts entered into in prior years. We do not expect to sign any new contracts for access management in the near future. The remaining terms of our existing access management
service contracts range from a month-to-month basis to expiration in 2008.

Cost of Services. Cost of services is associated with the operation of
our networks and facilities. The largest component of our cost of services is the occupancy expenses at our carrier hotel facilities, on-net buildings and off-net buildings. These occupancy expenses primarily represent rent expense, utility costs
and license fees under direct leases with landlords. They also include charges for colocation space in other carriers facilities and cross connection fees to interconnect our networks with other carriers networks. Most of our license
agreements for our on-net and off-net buildings require us to pay license fees to the owners of these properties. In addition, our two leases at 60 Hudson Street in New York City require us to pay license fees. These license fees typically are
calculated as a percentage of the revenues that we generate in each particular building. In addition, we incur off-net connectivity charges for the costs of purchasing connectivity from other wholesale telecommunications carriers to provide our
customers with transport services on networks that we do not own. As we provide additional off-net transport services, we will purchase more connectivity from other carriers. Other specific costs of services include maintenance and repair costs.
With the exception of off-net connectivity charges and license fees, we do not anticipate that cost of services will change commensurately with any change in our revenues as our cost of services is generally fixed in nature.

Selling, General and Administrative Expenses. Selling, general and administrative expenses include all of our personnel costs including stock related costs,
occupancy costs for our corporate offices, insurance costs, professional fees, sales and marketing expenses and other miscellaneous expenses. Personnel costs, including wages, benefits and sales commissions, are our largest component of selling,
general and administrative expenses. Stock related expenses relates to the granting of stock options and restricted stock to our employees, we make equity grants to our employees in order to attract, retain and incentivize qualified personnel. These
costs are non-cash charges that are amortized over the vesting term of each employees equity agreement, based on the fair value on the date of the grant. We do not allocate any personnel cost relating to networks operations or sales activities
to cost of services. We had 68 employees as of March 31, 2006 compared to 75 as of March 31, 2005. Prospectively, we believe that our personnel costs will increase moderately. Professional fees, including legal and accounting expenses and
consulting fees, represent the second largest component of our selling, general and administrative expenses. These legal and accounting fees are primarily attributed to our required activities as a publicly traded company, such as SEC filings and
financial statement audits, and could increase prospectively due to the enhanced regulations regarding corporate governance and compliance matters. Other costs included in selling, general and administrative expenses, such as insurance costs,
occupancy costs related to our office space, and marketing costs, may increase due to changes in the economic environment and telecommunications industry.

Depreciation and Amortization. Depreciation and amortization expense includes the depreciation of our network equipment and infrastructure, computer hardware and software, office equipment and furniture, and leasehold improvements,
as well as the amortization of certain deferred charges. We commence the depreciation of network related fixed assets when they are placed into service and depreciate those assets over periods ranging from three to twenty years.

Critical Accounting Policies

Our significant accounting policies are
described in Note 2 to the condensed consolidated interim financial statements included in Item 1 of this Form 10-Q. Our discussion and analysis of financial condition and results from operations are based upon our condensed consolidated
interim financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of the financial statements requires us to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate the estimates that we have made. These estimates have been based upon historical
experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe our most critical accounting policies include
revenue recognition, an allowance for doubtful accounts, the impairment of long-lived assets and the recognition of deferred tax assets and liabilities.

Revenue Recognition

We recognize revenues when earned as services are provided throughout the life of each sales order with a customer. The
majority of our revenues are invoiced on a monthly recurring basis under sales orders that are typically one year in length. Certain of our contracts require us to invoice our customers for the periods ranging from one year to the full term of the
contract. We record deferred revenue for the amount of an invoice that has been paid and not recognized as revenue.

We have one reciprocal agreement,
whereby we purchase services from one of our customers under a single agreement. The services provided and obtained through this agreement were priced at fair value as of the date of the agreement. We recognized the transport and colocation revenues
from this agreement in accordance with our stated revenue recognition policy, and we concurrently recorded the expenses for colocation services as cost of services in our consolidated statements of operations. None of the expenses associated with
our reciprocal agreement are capitalized. These costs are expensed as incurred. For the quarter ended March 31, 2006, our reciprocal agreement accounted for $0.1 million, or 1.3%, of revenues and $0.1 million of our cost of services. For the
quarter ended March 31, 2005, reciprocal agreements accounted for $0.1 million, or 1.5%, of revenues and $0.1 million of our cost of services.



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Allowance for Doubtful Accounts

We continuously monitor collections and payments from our customers and maintain an allowance for doubtful accounts based upon our historical experience and any specific customer collection issues that we have
identified. While such credit losses have historically been within our expectations, there can be no assurance that we will continue to experience the same level of credit losses that we have in the past. A significant number of our customers filed
for bankruptcy or are otherwise in significant financial distress. A significant change in the liquidity or financial position of any one of these customers or a further deterioration in the economic environment or telecommunications industry, in
general, could have a material adverse impact on the collectability of our accounts receivable and our future operating results, including a reduction in future revenues and additional allowances for doubtful accounts. If we determine that
collection of a receivable is not reasonably assured, we fully reserve the receivable and reverse that reserve only when collection becomes reasonably assured, which is generally upon receipt of payment.

Impairment of Long-Lived Assets

We assess the fair value and
recoverability of our long-lived assets, whenever events and circumstances indicate the carrying value of an asset may not be recoverable from estimated undiscounted future cash flows expected to result from its use and eventual disposition. In
doing so, we make assumptions and estimates regarding future cash flows and other factors to make our determination. The fair value of our long-lived assets is dependent upon the forecasted performance of our business, changes in the
telecommunications industry and the overall economic environment. When we determine that the carrying value of our long-lived assets may not be recoverable, we measure any impairment based upon a forecasted discounted cash flow method. If these
forecasts are not met, we may have to record additional impairment charges not previously recognized.

Recognition of Deferred Tax Assets and
Liabilities

We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax
bases of assets and liabilities. We regularly review our deferred tax assets for recoverability and establish a valuation allowance based upon historical losses, projected future taxable income and the expected timing of the reversals of existing
temporary differences. As a result of this review, we have established a full valuation allowance against our deferred tax assets.

Results of
Operations

Three Months Ended March 31, 2006 Compared to Three Months Ended March 31, 2005

Revenues.Revenues for the quarter ended March 31, 2006 were $9.0 million as compared to $7.9 million for the quarter ended March 31, 2005. We increased
the number of our customers from 218 at March 31, 2005 to 239 as of March 31, 2006, primarily with the addition of domestic subsidiaries of internationally based carriers. We believe that there are greater opportunities to serve domestic
subsidiaries of foreign telecommunications companies in our gateway markets, as domestic carriers consolidate and rationalize. Revenues were generated by providing transport, colocation and communications access management services to our customers
and are quantified as follows:



|                          |  |                                      |       |      |   |          |  |   |       |  
|------------------------- |  | ------------------------------------ | ----- | ---- | - | -------- |  | - | ----- | -
|                          |  | For the three months ended March 31, |       |      |  
|(amounts in thousands)    |  | 2006                                 |       | 2005 |   | $ Change | 
|On-net transport revenue  |  | $                                    | 5,222 |      | $ | 4,794    |  | $ | 428   |  
|Off-net transport revenue |  |                                      | 1,581 |      |   | 1,186    |  |   | 395   |  
|Colocation revenue        |  |                                      | 2,059 |      |   | 1,704    |  |   | 355   |  
|Access revenue            |  |                                      | 165   |      |   | 265      |  |   | (100  | )
|                          |  |                                      |       |      |   |          |  |   |       |  
|Total Revenue             |  | $                                    | 9,027 |      | $ | 7,949    |  | $ | 1,078 |  
|                          |  |                                      |       |      |   |          |  |   |       |  

We recognized $5.2 million in on-net transport service revenues for the quarter ended March 31, 2006, up from
$4.8 million for the quarter ended March 31, 2005. Off-net transport service revenues for the quarter ended March 31, 2006 were $1.6 million, up from $1.2 million for the quarter ended March 31, 2005. Revenues from colocation and
other services were $2.1 million for the quarter ended March 31, 2006 compared to $1.7 million for the quarter ended March 31, 2005, and revenues from communications access management services declined to $0.2 million for the quarter ended
March 31, 2006 from $0.3 million for the quarter ended March 31, 2005.

The vast majority of our transport and colocation services are provided
within and between our carrier hotel facilities in the New York/New Jersey market. On-net transport revenues increased as we provided a greater number of lower-bandwidth circuits to our customers, offsetting the disconnections and price decreases
that we have been experiencing. Off-net transport revenues increased over the same period last year as we continue to leverage our current customer base. Colocation revenues were generated as we leased additional caged space, cabinets and racks in
our facilities. Since we are approaching capacity at some of our colocation facilities, we may have to invest in expanding these facilities to offer additional space to our customers. We expect transport services to grow at a



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faster rate than colocation. Our network infrastructure has significant capacity to provide additional broadband transport connectivity, and our colocation
facilities are approaching more stabilized utilization rates. Our access management services business has been steadily declining, and we expect that trend to continue throughout 2006. The revenues that we are generating from this type of service
are from long-term contracts entered into in prior years. The remaining terms of our existing access management service contracts range from month-to-month to expiration in 2008. We do not expect to sell any additional access services, and we
believe our existing contracts for access services may not be renewed when they expire.

For the quarters ended March 31, 2006 and 2005, there were no
individual customers that accounted for over 10.0% of our revenues. Reciprocal agreements accounted for $0.1 million, or 1.3%, of revenues for the quarter ended March 31, 2006, compared to $0.1 million, or 1.5%, of revenues for the quarter
ended March 31, 2005.

Cost of Services.Cost of services, associated with the operation of our networks and facilities, were $4.4 million for
the quarter ended March 31, 2006, compared to $3.8 million for the quarter ended March 31, 2005. The majority of our cost of services is occupancy expenses, consisting of rent, license fees, and utility costs, for our carrier hotel
facilities, on-net buildings and off-net buildings. Other cost of services includes off-net connectivity charges and maintenance and repair costs.



|                                       |  |                                      |       |      |   |          |  |   |     |  
|-------------------------------------- |  | ------------------------------------ | ----- | ---- | - | -------- |  | - | --- | -
|                                       |  | For the three months ended March 31, |       |      |  
|(amounts in thousands)                 |  | 2006                                 |       | 2005 |   | $ Change | 
|Occupancy expenses                     |  | $                                    | 3,055 |      | $ | 2,834    |  | $ | 221 |  
|Off-net connectivity charges           |  |                                      | 1,261 |      |   | 863      |  |   | 398 |  
|Maintenance and repair and other costs |  |                                      | 124   |      |   | 126      |  |   | (2  | )
|                                       |  |                                      |       |      |   |          |  |   |     |  
|Total Cost of Services                 |  | $                                    | 4,440 |      | $ | 3,823    |  | $ | 617 |  
|                                       |  |                                      |       |      |   |          |  |   |     |  

Occupancy expenses represented 68.8% of cost of services or $3.1 million for the quarter ended March 31,
2006, an increase of $0.2 million as compared to 74.1% or $2.8 million for the quarter ended March 31, 2005. This increase was due to increases in colocation and cross-connection charges and an increase in utility usage.

Off-net connectivity charges were 28.4% of cost of services or $1.3 million for the quarter ended March 31, 2006, compared to 22.6% of the cost of services or $0.9
million for the quarter ended March 31, 2005. We expect these connectivity charges to increase commensurately with our increase in revenues from off-net transport.

Maintenance and repair costs were 2.8% or $0.1 million of cost of services for the quarter ended March 31, 2006, compared to 3.3% or $0.1 million for the quarter ended March 31, 2005. These costs will
continue to represent a relatively small and fixed component of cost of services.

Our reciprocal agreement accounted for $0.1 million of our cost of
services for each of the quarters ended March 31, 2006 and 2005.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the quarter ended March 31, 2006 were $3.9 million compared to $4.7 million for the quarter ended March 31, 2005. Personnel costs represented 62.5%, or $2.5 million, of selling, general and administrative
expenses for the quarter ended March 31, 2006 compared to 53.9%, or $2.5 million, for the quarter ended March 31, 2005. Professional fees were $0.3 million for the quarter ended March 31, 2006, compared to $0.4 million for the quarter
ended March 31, 2005. During the quarter ended March 31, 2006, we expensed $0.1 million for fees related to the twentieth amendment of our credit agreement which was determined to represent a modification of terms under the guidelines set
forth in Emerging Issues Task Force Issue (EITF) 96-19, Debtors Accounting for a Modification or Exchange of Debt Instruments. During the quarter ended March 31, 2005, we expensed $0.6 million of deferred
transaction costs related to the termination of our stock purchase agreement with Consolidated Edison, Inc. We anticipate selling, general and administrative expenses to increase modestly throughout 2006 with the general growth of our business.

Stock related expenses, included in selling, general and administrative expenses, for each of the quarters ended March 31, 2006 and 2005 were $0.2
million and $0.1 million, respectively. This non-cash expense relates to the amortization of restricted stock granted to our employees. The restricted shares that have been granted become unrestricted on the tenth anniversary of the grant date, and
the related expenses are amortized on a straight-line basis over the ten-year period. Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share Based Payment (SFAS
123(R)), applying the modified prospective method. An incremental stock compensation expense increase of approximately $58,000 was recognized during the first quarter of 2006 on existing stock options. As a result of the Companys decision to
adopt the modified prospective method, prior period results have not been restated.

Depreciation and Amortization.Depreciation and
amortization expenses for each of the quarters ended March 31, 2006 and 2005 were $2.2 million.



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Interest Income.Interest income for the quarter ended March 31, 2006 was approximately $14,000,
compared to approximately $18,000 for the quarter ended March 31, 2005. Interest income is generated on our cash balances, which are at variable rates of interest and are invested in short-term, highly liquid investments.

Interest Expense.Interest expense for each of the quarters ended March 31, 2006 and 2005 was $0.7 million and $0.5 million, respectively. As of
March 22, 2006, our loans were converted to a fixed rate of 9.0%, and this interest rate change is included in the twentieth amendment to the credit agreement underlying our credit facility.

Net Loss.We reported a net loss of $2.3 million for the quarter ended March 31, 2006 compared to a net loss of $3.3 million for the quarter ended
March 31, 2005. This change is a result of the aforementioned changes in our operations.

Liquidity and Capital Resources

To date, we have financed our operations through revenues collected from our customers, direct equity investments from our stockholders, the issuance of additional debt
and equity securities in private transactions and by arranging a credit facility with a group of lenders. We had a loss from operations and a net loss for the three months ended March 31, 2006 of $1.6 million and $2.3 million, respectively,
compared to a loss from operations and a net loss of $2.8 million and $3.3 million, respectively, for the three months ended March 31, 2005. During the three months ended March 31, 2006, cash provided by operating activities was
approximately $0.3 million, and cash purchases of property, plant and equipment were $0.6 million, compared to cash used in operating activity and cash purchases of property, plant and equipment of $1.0 million and $0.7 million, respectively, for
the three months ended March 31, 2005.

For the three months ended March 31, 2006, we received $2.1 million in net cash for financing related
activities. For the three months ended March 31, 2005, we received $0.8 million in net cash for financing activities. We believe we will be able to generate sufficient cash flows from operations in order to sustain our current and long term
operations.

On March 22, 2006, we entered into a common stock purchase agreement (the Stock Purchase Agreement), with certain investors,
pursuant to which we issued to the investors, in a private offering, an aggregate of 1.05 million shares of common stock at a price of $2.10 per share, for gross proceeds of $2.2 million. Pursuant to the terms of the Stock Purchase Agreement,
we also issued to such investors warrants (with an expiration date three and one-half years after closing) to purchase an aggregate of 0.3 million shares of common stock at an exercise price of $2.64 per share. Additionally, we paid our
placement agent a fee of $0.1 million and issued warrants (with an expiration date three and one-half years after closing) to purchase an aggregate of 0.1 million shares of common stock at an exercise price of $2.64 per share. Michael Liss,
chairman of our Board of Directors, is currently associated with the placement agent but will not receive, directly or indirectly, any fees or other compensation in connection with the Stock Purchase Agreement and the transactions contemplated
thereunder. We also paid $0.2 million in professional fees in connection with the execution of the Stock Purchase Agreement.

In connection with the Stock
Purchase Agreement, we entered into a registration rights agreement with the investors, dated as of March 22, 2006, which requires us to file a registration statement with the Securities and Exchange Commission with respect to the resale of
(i) the shares of common stock issued to the investors, (ii) the shares of common stock underlying the warrants issued to the investors and (iii) the shares of common stock underlying the warrants issued to the placement agent. The
registration statement was filed on April 21, 2006 and declared effective by the Securities and Exchange Commission on May 10, 2006.

On
March 22, 2006, we executed a twentieth amendment to the credit agreement with our lenders, pursuant to which, among other things, the lenders consented to the above-referenced transaction. The twentieth amendment, which was effective as of
March 22, 2006, extends the maturity date for the credit agreement from February 9, 2007 to March 7, 2008. The amendment also set the applicable interest rate to 9.0% and revised the amortization payment schedule to $0.1 million for
June 30, 2007, $0.2 million for September 30, 2007 and $0.3 million for December 31, 2007, with the balance due at maturity. The amendment also requires us (i) on or before May 15, 2006, to engage a financial advisor to
assist us in preparing a comprehensive strategic business plan and (ii) on or prior to May 30, 2007, to issue equity to raise proceeds of at least $3.0 million. In addition, the twentieth amendment removed the lenders observation
right for the board of directors and incorporated adjustments to the financial covenants of our credit facility. On April 24, 2006, we engaged a financial advisor to assist us in preparing a comprehensive strategic business plan.

As a condition to the lenders entering into the twentieth amendment, we entered into a warrant agreement with the lenders on March 22, 2006 (the Warrant
Agreement), pursuant to which we agreed to issue warrants (with an expiration date three and one-half years after closing) to the lenders to purchase an aggregate of 0.3 million shares of common stock at an exercise price of $2.64 per
share. We determined the fair value of the warrants issued in connection with the twentieth amendment to be $0.6 million using the Black-Scholes option-pricing model, with the following assumptions: risk-free interest rates of 4.72%, expected
dividend yields of 0%, expected life of three and one half years to expiration and expected volatility of 121%. The fair value amount was included in deferred charges and will be amortized over the remaining life of the credit facility. In
connection with the Warrant Agreement, we entered into a registration rights agreement with the lenders, dated as of March 22, 2006, which requires us to file a registration statement with the Securities and Exchange Commission with respect to
the resale of the shares of common stock underlying the



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warrants issued to the lenders. The registration statement was filed on April 21, 2006 and declared effective by the Securities and Exchange Commission
on May 10, 2006.

There can be no assurance that we will be able to raise additional capital or obtain additional amendments to our credit agreement.
If we are able to raise additional capital, there can be no assurance that such issuance will be in an amount sufficient to satisfy our obligations under our credit agreement, or will be on terms that are satisfactory to the lenders.

As of March 31, 2006, we had $14.2 million of indebtedness outstanding under our credit facility and $4.8 million of outstanding letters of credit. In addition, we
had $0.8 million of availability to issue letters of credit under the credit facility, subject to compliance with the terms of the credit agreement. The interest rate on our outstanding borrowings under the facility was fixed at 9.0%. We were in
full compliance with all of the covenants contained in the credit agreement as of March 31, 2006. Our financial covenants include minimum consolidated revenue, minimum consolidated EBITDA (as defined in the credit agreement underlying the
credit facility), maximum cumulative capital expenditures, minimum consolidated interest coverage ratio, and a minimum cash balance. The compliance levels and calculation of such levels with respect to those covenants are as defined in the credit
agreement, as amended, which is on file with the Securities and Exchange Commission. Non-compliance with any of the covenants, requirements, or other terms and conditions under the credit agreement constitutes an event of default and potentially
accelerates the outstanding balance of the credit facility for immediate payment.

We spent $0.6 million in capital expenditures during the three months
ended March 31, 2006, primarily for the implementation of customer orders, including the purchase of network equipment to increase capacity and to interconnect with new customers. Our capital expenditures totaled $0.7 million for the three
months ended March 31, 2005. We have substantially completed the deployment of our FINs, carrier hotel facilities and metropolitan transport networks. In 2006, we expect to invest a total of $2.5 million to $3.0 million in capital expenditures,
primarily for customer order activity, the expansion of certain of our facilities and new product initiatives. We also intend to upgrade certain information technology systems and key operating systems. We may expend additional capital for the
selected expansion of our network infrastructure, depending upon market conditions, customer demand and our liquidity and capital resources.

During the
three months ended March 31, 2006, 18,750 shares of restricted stock were returned to us as the result of employee terminations.

As of May 8,
2006, we had 6,305,849 million shares of common stock outstanding, or 7,803,371 million shares of common stock outstanding on a fully diluted basis, assuming the exercise of all outstanding options and warrants.

From time to time, we may consider private or public sales of additional equity or debt securities and other financings, depending upon market conditions, in order to
provide additional working capital or finance the continued operations of our business, although there can be no assurance that we would be able to successfully consummate any such financing on acceptable terms, if at all. For additional disclosure
and risks regarding future financings and funding of our ongoing operations, please see Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal
year ended December 31, 2005 as filed on March 30, 2006. We do not have any off-balance sheet financing arrangements, except for outstanding letters of credit, nor do we anticipate entering into any.

Recent Accounting Pronouncements

In December 2004, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 153, Exchanges of Nonmonetary Assets (SFAS No. 153), which eliminates the exception for
nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS No. 153 was effective for nonmonetary asset exchanges occurring after
January 1, 2006. The adoption of SFAS No. 153 did not have a material impact on our condensed consolidated interim financial statements.

In May
2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (SFAS No. 154), SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It requires
retrospective application to the prior periods financial statements of voluntary changes in accounting principle and changes required by an accounting pronouncement in the event the pronouncement does not include specific transition
provisions. This Statement is effective for accounting changes made beginning after January 1, 2006. Any impact of this statement will be evaluated upon the issuance of new accounting pronouncements, if needed.

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments (SFAS No. 155), which amends SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities, (SFAS No. 133), and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, (SFAS No. 140). SFAS No. 155 simplifies the accounting for certain derivatives embedded in other financial instruments by allowing them to be accounted for as a whole if the holder elects to account for the
whole instrument on a fair value basis. SFAS No. 155 also clarifies and amends certain other provisions of SFAS No. 133 and SFAS No. 140. SFAS No. 155 is effective for all financial instruments acquired, issued or



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subject to a remeasurement event occurring in fiscal years beginning after September 15, 2006. Earlier adoption is permitted, provided we have not yet
issued financial statements, including for interim periods, for that fiscal year. We are currently assessing the impact that the adoption of SFAS No. 155 will have on our results of operations and financial position.

In March 2006, FASB issued Statement of Financial Accounting Standards No. 156, Accounting for Servicing of Financial Assets  an amendment of FASB
Statement No. 140 (SFAS No. 156). The provisions of SFAS No. 156 are effective for fiscal years beginning after September 15, 2006. This statement was issued to simplify the accounting for servicing rights and
to reduce the volatility that results from using different measurement attributes. We are currently assessing the impact that the adoption of SFAS No. 156 will have on our results of operations and financial position.



|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

Our
exposure to financial market risk relates primarily to our marketable security investments. We generally place our marketable security investments in high credit quality instruments, primarily U.S. government obligations and corporate obligations
with contractual maturities of less than one year. We operate only in the United States, and all sales have been made in U.S. dollars. We do not have any material exposure to changes in foreign currency exchange rates.



|Item 4. | Controls and Procedures
|------- | -----------------------

Evaluation of Disclosure Controls and
Procedures.Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period
covered by this Quarterly Report on Form 10-Q, have concluded that, based on such evaluation, our disclosure controls and procedures were effective.

Changes in Internal Controls.There were no changes in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that have materially affected, or are
reasonably likely to materially affect, the registrants internal control over financial reporting.



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PART II

OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

None.



|Item 1A. | Risk Factors
|-------- | ------------

None.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------

None.



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------

None.



|Item 4. | Submission of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------

None.



|Item 5. | Other Information
|------- | -----------------

None.



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|Item 6. | Exhibits
|------- | --------

The following documents are filed herewith as part of
this Form 10-Q:

Exhibit 31.1  Section 302

Certification of Principal Executive Officer

Exhibit 31.2  Section 302

Certification of Principal Financial Officer

Exhibit 32  Section 906 Certification



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SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: May 15, 2006



|                             |  |                              
|---------------------------- |  | -----------------------------
|FIBERNET TELECOM GROUP, INC.
|                             | 
|By:                          |  | /s/ Charles S. Wiesenhart Jr.
|Name:                        |  | Charles S. Wiesenhart Jr.    
|Title:                       |  | Vice President-Finance and   
|                             |  | Chief Accounting Officer     
|                             |  | (Principal Financial Officer)



|* | The Chief Accounting Officer is signing this quarterly report on Form 10-Q as both the principal financial officer and authorized officer.
|- | ------------------------------------------------------------------------------------------------------------------------------------------



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FIBERNET TELECOM GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands, except
per share amounts)



|                                                                                                                                                                                |  |                |          |   |                   |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | -------- | - | ----------------- | - | -------- | -
|                                                                                                                                                                                |  | March 31, 2006 |          |   | December 31, 2005 |  
|ASSETS                                                                                                                                                                          |  |                |          |   |                   |   |          |  
|Current Assets:                                                                                                                                                                 |  |                |          |   |                   |   |          |  
|Cash and cash equivalents                                                                                                                                                       |  | $              | 3,599    |   |                   | $ | 1,899    |  
|Accounts receivable, net of allowance of $508 at March 31, 2006 and December 31, 2005                                                                                           |  |                | 3,035    |   |                   |   | 2,299    |  
|Prepaid expenses                                                                                                                                                                |  |                | 370      |   |                   |   | 449      |  
|                                                                                                                                                                                |  |                |          |   |                   |   |          |  
|Total current assets                                                                                                                                                            |  |                | 7,004    |   |                   |   | 4,647    |  
|Property, plant and equipment, net                                                                                                                                              |  |                | 64,572   |   |                   |   | 66,135   |  
|Other Assets:                                                                                                                                                                   |  |                |          |   |                   |   |          |  
|Deferred charges, net of accumulated amortization of $2,261 and $2,080 at March 31, 2006 and December 31, 2005,
respectively                                                    |  |                | 1,210    |   |                   |   | 828      |  
|Other assets                                                                                                                                                                    |  |                | 1,585    |   |                   |   | 1,625    |  
|                                                                                                                                                                                |  |                |          |   |                   |   |          |  
|Total other assets                                                                                                                                                              |  |                | 2,795    |   |                   |   | 2,453    |  
|                                                                                                                                                                                |  |                |          |   |                   |   |          |  
|TOTAL ASSETS                                                                                                                                                                    |  | $              | 74,371   |   |                   | $ | 73,235   |  
|                                                                                                                                                                                |  |                |          |   |                   |   |          |  
|                                                                                                                                                                                |  |               
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                            |  |                |          |   |                   |   |          |  
|Current Liabilities:                                                                                                                                                            |  |                |          |   |                   |   |          |  
|Accounts payable                                                                                                                                                                |  | $              | 3,926    |   |                   | $ | 3,762    |  
|Accrued expenses                                                                                                                                                                |  |                | 3,836    |   |                   |   | 4,251    |  
|Deferred revenuescurrent portion                                                                                                                                               |  |                | 1,554    |   |                   |   | 1,194    |  
|                                                                                                                                                                                |  |                |          |   |                   |   |          |  
|Total current liabilities                                                                                                                                                       |  |                | 9,316    |   |                   |   | 9,207    |  
|Long-Term Liabilities:                                                                                                                                                          |  |                |          |   |                   |   |          |  
|Notes payable, less original issue discount of $691 and $888 at March 31, 2006 and December 31, 2005, respectively                                                              |  |                | 13,470   |   |                   |   | 13,298   |  
|Deferred revenuelong term                                                                                                                                                      |  |                | 3,971    |   |                   |   | 3,786    |  
|Other long term liabilities                                                                                                                                                     |  |                | 1,040    |   |                   |   | 946      |  
|                                                                                                                                                                                |  |                |          |   |                   |   |          |  
|Total Long Term Liabilities                                                                                                                                                     |  |                | 18,481   |   |                   |   | 18,030   |  
|                                                                                                                                                                                |  |                |          |   |                   |   |          |  
|Total Liabilities                                                                                                                                                               |  |                | 27,797   |   |                   |   | 27,237   |  
|Stockholders Equity:                                                                                                                                                           |  |                |          |   |                   |   |          |  
|Common stock, $0.001 par value, 2,000,000,000 shares authorized and 6,305,849 and 5,274,600 shares issued and outstanding at March 31,
2006 and December 31, 2005, respectively |  |                | 6        |   |                   |   | 5        |  
|Additional paid-in-capital                                                                                                                                                      |  |                | 443,347  |   |                   |   | 440,555  |  
|Deferred rent (warrants)                                                                                                                                                        |  |                | (1,689   | ) |                   |   | (1,732   | )
|Accumulated deficit                                                                                                                                                             |  |                | (395,090 | ) |                   |   | (392,830 | )
|                                                                                                                                                                                |  |                |          |   |                   |   |          |  
|Total stockholders equity                                                                                                                                                      |  |                | 46,574   |   |                   |   | 45,998   |  
|                                                                                                                                                                                |  |                |          |   |                   |   |          |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                      |  | $              | 74,371   |   |                   | $ | 73,235   |  
|                                                                                                                                                                                |  |                |          |   |                   |   |          |  

The accompanying notes are an integral part of these condensed consolidated interim financial
statements.



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FIBERNET TELECOM GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except
for per share amounts)



|                                                             |  |                              |        |   |      |   |        |  
|------------------------------------------------------------ |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                                             |  | Three months Ended March 31, |       
|                                                             |  | 2006                         |        |   | 2005 |  
|Revenues                                                     |  | $                            | 9,027  |   |      | $ | 7,949  |  
|Operating expenses:                                          |  |                              |        |   |      |   |        |  
|Cost of services (exclusive of items shown separately below) |  |                              | 4,440  |   |      |   | 3,823  |  
|Selling, general and administrative expense                  |  |                              | 3,935  |   |      |   | 4,726  |  
|Depreciation and amortization                                |  |                              | 2,225  |   |      |   | 2,240  |  
|                                                             |  |                              |        |   |      |   |        |  
|Total operating expenses                                     |  |                              | 10,600 |   |      |   | 10,789 |  
|                                                             |  |                              |        |   |      |   |        |  
|Loss from operations                                         |  |                              | (1,573 | ) |      |   | (2,840 | )
|Interest income                                              |  |                              | 14     |   |      |   | 18     |  
|Interest expense                                             |  |                              | (701   | ) |      |   | (518   | )
|                                                             |  |                              |        |   |      |   |        |  
|Net loss                                                     |  | $                            | (2,260 | ) |      | $ | (3,340 | )
|                                                             |  |                              |        |   |      |   |        |  
|Net loss per sharebasic and diluted                         |  | $                            | (0.42  | ) |      | $ | (0.66  | )
|Weighted average common shares outstandingbasic and diluted |  |                              | 5,378  |   |      |   | 5,098  |  

The accompanying notes are an integral part of these condensed consolidated interim financial
statements.



15



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##### Table of Contents

FIBERNET TELECOM GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)



|                                                                                          |  |                              |        |   |      |   |        |  
|----------------------------------------------------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                          |  | Three months Ended March 31, |       
|                                                                                          |  | 2006                         |        |   | 2005 |  
|Cash flows from operating activities:                                                     |  |                              |        |   |      |   |        |  
|Net loss                                                                                  |  | $                            | (2,260 | ) |      | $ | (3,340 | )
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |                              |        |   |      |   |        |  
|Depreciation and amortization                                                             |  |                              | 2,225  |   |      |   | 2,240  |  
|Stock related expense                                                                     |  |                              | 179    |   |      |   | 129    |  
|Deferred rent expense                                                                     |  |                              | 43     |   |      |   | 44     |  
|Other non-cash items                                                                      |  |                              | 350    |   |      |   | 302    |  
|Change in assets and liabilities:                                                         |  |                              |        |   |      |   |        |  
|(Increase) decrease in accounts receivables                                               |  |                              | (736   | ) |      |   | 1,769  |  
|Decrease in prepaid expenses                                                              |  |                              | 80     |   |      |   | 144    |  
|Decrease in deferred charges                                                              |  |                              |       |   |      |   | 622    |  
|Decrease in other assets                                                                  |  |                              | 13     |   |      |   | 5      |  
|Increase (decrease) in accounts payable                                                   |  |                              | 164    |   |      |   | (690   | )
|Decrease in accrued expenses and other long-term liabilities                              |  |                              | (323   | ) |      |   | (255   | )
|Increase (decrease) in deferred revenues                                                  |  |                              | 545    |   |      |   | (1,976 | )
|                                                                                          |  |                              |        |   |      |   |        |  
|Cash provided by (used in) operating activities                                           |  |                              | 280    |   |      |   | (1,006 | )
|Cash flows from investing activities:                                                     |  |                              |        |   |      |   |        |  
|Decrease in restricted cash                                                               |  |                              |       |   |      |   | (10    | )
|Capital expenditures                                                                      |  |                              | (633   | ) |      |   | (722   | )
|                                                                                          |  |                              |        |   |      |   |        |  
|Cash used in investing activities                                                         |  |                              | (633   | ) |      |   | (732   | )
|Cash flows from financing activities:                                                     |  |                              |        |   |      |   |        |  
|Proceeds from debt financings                                                             |  |                              |       |   |      |   | 1,000  |  
|Payment of financing costs of debt financings                                             |  |                              |       |   |      |   | (247   | )
|Payment of financing costs of equity financings                                           |  |                              | (152   | ) |      |   |       |  
|Proceeds from issuance of equity securities                                               |  |                              | 2,205  |   |      |   |       |  
|                                                                                          |  |                              |        |   |      |   |        |  
|Cash provided by financing activities                                                     |  |                              | 2,053  |   |      |   | 753    |  
|                                                                                          |  |                              |        |   |      |   |        |  
|Net increase (decrease) in cash and cash equivalents                                      |  |                              | 1,700  |   |      |   | (985   | )
|Cash and cash equivalents at beginning of period                                          |  |                              | 1,899  |   |      |   | 2,909  |  
|                                                                                          |  |                              |        |   |      |   |        |  
|Cash and cash equivalents at end of period                                                |  | $                            | 3,599  |   |      | $ | 1,924  |  
|                                                                                          |  |                              |        |   |      |   |        |  
|Supplemental disclosures of cash flow information:                                        |  |                              |        |   |      |   |        |  
|Interest paid                                                                             |  | $                            | 685    |   |      | $ | 230    |  

The accompanying notes are an integral part of these condensed consolidated interim financial
statements.



16



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##### Table of Contents

FIBERNET TELECOM GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(UNAUDITED)

1. ORGANIZATION AND OPERATIONS

FiberNet Telecom Group, Inc. (hereinafter referred to as the Company or FiberNet) is a communications service provider focused
on providing complex interconnection services enabling the exchange of voice and data traffic between multiple, global networks. The Company owns and operates integrated colocation facilities and diverse transport routes in the two gateway markets
of New York/New Jersey and Los Angeles. FiberNets network infrastructure and facilities are designed to provide comprehensive broadband interconnectivity for the worlds largest network operators, including leading domestic and
international telecommunications carriers, service providers and enterprises. The Company operates with the highest levels of reliability and resiliency to deliver core network backbone services for mission critical requirements.

FiberNet is a holding company that owns all of the outstanding common stock of FiberNet Operations, Inc., a Delaware corporation and an intermediate level holding
company, and 96% of the outstanding membership interests of Devnet L.L.C. (Devnet), a Delaware limited liability company. FiberNet Operations, Inc. owns all of the outstanding common stock of FiberNet Telecom, Inc., a Delaware
corporation, and the remaining 4% of Devnet. FiberNet Telecom, Inc. owns all of the outstanding membership interests of Local Fiber, LLC (Local Fiber), a New York limited liability company, and all of the outstanding membership interests
of FiberNet Equal Access, LLC (Equal Access), also a New York limited liability company. FiberNet Telecom, Inc. also owns all of the outstanding membership interests of Availius, LLC (Availius), a New York limited liability
company, which was recently created in November 2005. The Company conducts its primary business operations through its operating subsidiaries, Devnet, Availius, Local Fiber and Equal Access.

The Company has agreements with other entities, including telecommunications license agreements with building landlords, interconnection agreements with other
telecommunications service providers and leases with carrier hotel property owners. FiberNet also has entered into contracts with suppliers for the components of its telecommunications networks. These contracts and agreements are critical to the
Companys ability to execute its business strategy and operating plan.

The Companys operations and ability to grow may be affected by numerous
factors, including the state of the telecommunications industry; the difficulty inherent in operating an early-stage company in a new and rapidly evolving market; its history of operating losses and cash flow deficits; its limited financial
resources and uncertainty as to the availability of additional capital to fund its operations on acceptable terms, if at all; its success in maintaining carrier hotel lease agreements and license agreements with building owners and in obtaining
additional agreements; the financial difficulties and instability that its customers and vendors have experienced; the lack of growth in demand for its services or the failure to manage the growth of its operations; the frequency of service
interruptions on its networks and the scalability and reliability of its networks; the potential occurrence of a natural disaster or act of terrorism that could impact its networks; the potential loss of key personnel, information support systems or
key software licenses; the potential for litigation from stockholders, customers, vendors or other third parties; continued pricing pressure and price competition for its services; the potential development by competitors of competing products and
technologies; restrictions imposed on it as a result of its debt; and changes in the regulatory environment.

Under FiberNets current operating plan,
as adjusted for the twentieth amendment to its credit facility (see Note 7), the Company does not anticipate requiring any additional external sources of capital to fund its operations in the coming year. The Company does not have any off-balance
sheet financing arrangements, except for outstanding letters of credit, nor does it anticipate entering into any.

2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES

Basis of Presentation

The condensed
consolidated interim financial statements include the accounts of the Company and its wholly-owned subsidiaries, FiberNet Operations, Inc., Devnet, FiberNet Telecom, Inc., Availius, Equal Access and Local Fiber. The accompanying unaudited condensed
consolidated interim financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and footnotes necessary for a fair presentation of financial position, results of
operations, and cash flows in conformity with accounting principles generally accepted in the United States of America. However, in the opinion of management, all adjustments consisting of normal recurring accruals necessary for a fair presentation
of the operating results have been included in the condensed consolidated interim financial statements.

These condensed consolidated interim financial
statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Companys Annual Report on Form 10-K for the year ended December 31, 2005, as filed with the Securities and
Exchange Commission on March 30, 2006.



17



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##### Table of Contents

All significant inter-company balances and transactions have been eliminated.

Use of Estimates

The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents include highly liquid investments with an original maturity of
three months or less when purchased. The carrying amount approximates fair value because of the short maturity of the instruments.

Property, Plant and
Equipment

Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method
over the estimated useful lives of the assets, once placed in service. The estimated lives are as follows:



|                               |  |                                                          
|------------------------------ |  | ---------------------------------------------------------
|Computer software              |  | 3 Years                                                  
|Computer equipment             |  | 3 Years                                                  
|Office equipment and furniture |  | 5 Years                                                  
|Leasehold improvements         |  | 15 Years or remaining life of lease, whichever is earlier
|Network equipment              |  | 10 Years                                                 
|Network infrastructure         |  | 20 Years                                                 

Maintenance and repairs are expensed as incurred. Long-term improvements are capitalized as additions to property,
plant and equipment.

Impairment of Long-Lived Assets

The Company reviews the carrying value of long-lived assets for impairment in accordance with Statement of Financial Accounting Standard (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS No. 144) whenever events and circumstances indicate the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases
where undiscounted expected future cash flows are less than the carrying value, an impairment loss would be recognized equal to an amount by which the carrying value exceeds the fair value of the assets.

Revenue Recognition

FiberNet generates revenues from selling network
capacity and related services to other communications service providers. The Company recognizes revenues when earned as services are provided throughout the life of each sales order with a customer. The majority of the Companys revenues are
generated on a monthly recurring basis under contracts of various lengths, ranging from one month to fifteen years. Most of the Companys contracts are to provide services for a period of one year. Revenue is recognized over the service
contract period for all general services. Deferred revenues consist primarily of payments received in advance of revenue being earned under the service contracts.

As of March 31, 2006 and 2005, the Company had one reciprocal agreement. The services provided and obtained through this agreement were priced at fair market value as of the date of the agreement and are included in revenues and cost
of services in the accompanying condensed consolidated statements of operations. The Company recorded revenues from this reciprocal agreement for transport services of approximately $0.1 million for the three months ended March 31, 2006 and
2005. The Company leased colocation facilities under this agreement. The total amount expensed for services rendered under the reciprocal agreement for the three months ended March 31, 2006 and 2005 was approximately $0.1 million.

Fair Value of Financial Instruments

The Company estimates that
the carrying value of its financial instruments approximates fair value, as all financial instruments, except for notes payable, are short term in nature or bear interest at variable rates. The Company estimates that the carrying value of its notes
payable approximates fair value.



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Goodwill

Cost in
excess of net assets of an acquired business, principally goodwill, is accounted for under Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets requires goodwill and certain
intangible assets no longer be amortized, but instead be reviewed for recoverability. The Company performs its annual impairment test in December. The Company also tests for impairment if an event occurs that is more likely than not to reduce the
fair value of the Company below its book value. The Company had no goodwill as of March 31, 2006.

Deferred Charges

Deferred charges are primarily comprised of deferred financing costs, which are amortized over the term of the related credit facility. Deferred charges also include
costs to access buildings that are amortized over the term of the related contracts, initially 15 years.

Earnings Per Share

Basic earnings per share have been computed using the weighted average number of shares outstanding during the period. Diluted earnings per share are computed by
including the dilutive effect of common stock that would be issued assuming conversion of stock options, warrants and other dilutive securities. Dilutive options, warrants and other securities did not have an effect on the computation of diluted
earnings per share for the three months ended March 31, 2006 and March 31, 2005, as they were anti-dilutive due to the fact that the Company was in a loss position for the respective periods.

Concentration of Credit Risk

The Company may have concentration of
credit risk among its customer base. The Company performs ongoing credit evaluations of its customers financial conditions. As of March 31, 2006, two customers accounted for 30.0% of the Companys total accounts receivable. As of
December 31, 2005, one customer accounted for 15.1% of the Companys total accounts receivable.

For the three months ended March 31, 2006
and 2005, there was no individual customer that accounted for over 10% of the Companys total revenue.

The Company continuously monitors collections
and payments from its customers and maintains allowances for doubtful accounts based upon its historical experience and any specific customer collection issues that are identified. While such credit losses have historically been within the
Companys expectations, there can be no assurance that the Company will continue to experience the same level of credit losses that it has in the past. A significant change in the liquidity or financial position of any one of these customers or
a further deterioration in the economic environment or telecommunications industry, in general, could have a material adverse impact on the collectability of the Companys accounts receivable and its future operating results, including a
reduction in future revenues and additional allowances for doubtful accounts.

As of March 31, 2006, the Company had an allowance for doubtful
accounts of $0.5 million. During the three months ended March 31, 2006, there were no write-offs in the allowance for doubtful accounts, and there were no charges to bad debt expense. As of March 31, 2005, the Company had an allowance for
doubtful accounts of $0.7 million. During the three months ended March 31, 2005, there were no write-offs in the allowance for doubtful accounts, and there were no charges to bad debt expense.

Equity Incentive Plan

The Company occasionally makes equity grants
comprising of stock options or shares of restricted stock to its employees as part of its employee equity incentive plan. As of March 31, 2006, the Company has 785,924 shares authorized for issuance under our Equity Incentive Plan Stock options
are typically granted with a three year vesting period from the date of grant, and expire ten years from the date of grant. Restricted stock is typically granted with a ten year period before it becomes unrestricted.

Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), Share Based Payment (SFAS No. 123(R)), applying the
modified prospective method. Prior to the adoption of SFAS No. 123(R), the Company applied the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, in accounting for its stock-based awards and,
accordingly, recognized no compensation cost for its equity incentive plan other than for its restricted stock awards. Under the modified prospective method, SFAS No. 123(R) applies to new awards and to awards that were outstanding as of
December 31, 2005 that are subsequently vested, modified, repurchased or cancelled. Compensation expense recognized during the first quarter of 2006 includes the portion vesting during the period for (1) all share-based payments granted
prior to, but not yet vested as of, December 31, 2005 based on the grant-date fair value estimated in accordance with the original provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123) and (2) all share-based payments granted subsequent to December 31, 2005, based on the grant-date fair value estimated using the Black-Scholes option-pricing model.



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Accounting for Income Taxes

The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes, which requires the use of the liability method of accounting for deferred income taxes. Under this method, deferred income
taxes represent the net tax effect of temporary differences between carrying amount of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. Additionally, if it is more likely than not that some portion
or all of a deferred tax asset will not be realized, a valuation allowance is required to be recognized.

Accounting for Derivative Instruments

The Company accounts for derivative instruments in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS No.133), as amended. SFAS No. 133 establishes standards of accounting and reporting for derivative instruments and hedging activities, and requires that all derivatives be recognized on the balance sheet at
fair value. Changes in the fair value of derivatives that do not meet the hedge accounting criteria are reported in earnings. The Company did not have any derivative contracts during the three months ended March 31, 2006 or in the year ended
December 31, 2005.

Segment Reporting

The Company
is a single segment operating company providing telecommunications services. Revenues were generated by providing transport, colocation and communications access management services to customers, as summarized below.



|                          |  |                                      |       |      |   |      
|------------------------- |  | ------------------------------------ | ----- | ---- | - | -----
|                          |  | For the three months ended March 31,
|                          |  | 2006                                 |       | 2005
|On-net transport revenue  |  | $                                    | 5,222 |      | $ | 4,794
|Off-net transport revenue |  |                                      | 1,581 |      |   | 1,186
|Colocation revenue        |  |                                      | 2,059 |      |   | 1,704
|Access revenue            |  |                                      | 165   |      |   | 265  
|                          |  |                                      |       |      |   |      
|Total Revenue             |  | $                                    | 9,027 |      | $ | 7,949
|                          |  |                                      |       |      |   |      

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 153, Exchanges of Nonmonetary Assets (SFAS No. 153), which eliminates the exception for
nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS No. 153 was effective for nonmonetary asset exchanges occurring after
January 1, 2006. The adoption of SFAS No. 153 did not have a material impact on the condensed consolidated interim financial statements.

In May
2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (SFAS No. 154), SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It requires
retrospective application to the prior periods financial statements of voluntary changes in accounting principle and changes required by an accounting pronouncement in the event the pronouncement does not include specific transition
provisions. This Statement is effective for accounting changes made beginning after January 1, 2006. Any impact of this statement will be evaluated upon the issuance of new accounting pronouncements, if needed.

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments (SFAS No. 155), which amends SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities, (SFAS No. 133), and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, (SFAS No. 140). SFAS No. 155 simplifies the accounting for certain derivatives embedded in other financial instruments by allowing them to be accounted for as a whole if the holder elects to account for the
whole instrument on a fair value basis. SFAS No. 155 also clarifies and amends certain other provisions of SFAS No. 133 and SFAS No. 140. SFAS No. 155 is effective for all financial instruments acquired, issued or subject to a
remeasurement event occurring in fiscal years beginning after September 15, 2006. Earlier adoption is permitted, provided the Company has not yet issued financial statements, including for interim periods, for that fiscal year. The Company is
currently assessing the impact that the adoption of SFAS No. 155 will have on its results of operations and financial position.

In March 2006, the
FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets  an amendment of FASB Statement No. 140 (SFAS No. 156). The provisions of SFAS 156 are effective for fiscal years beginning after
September 15, 2006. This statement was issued to simplify the accounting for servicing rights and to reduce the volatility that results from using different measurement attributes. The Company is currently assessing the impact that the adoption
of SFAS No. 156 will have on its results of operations and financial position.



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3. EQUITY INCENTIVE PLAN

Effective January 1, 2006, the Company adopted SFAS No. 123(R), applying the modified prospective method. Prior to the adoption of SFAS No. 123(R), the Company applied the provisions of APB Opinion No. 25,
Accounting for Stock Issued to Employees (APB No. 25), in accounting for its stock-based awards, and accordingly, recognized no compensation cost for its stock plans other than for its restricted stock awards. Under the
modified prospective method, SFAS No. 123(R) applies to new awards and to awards that were outstanding as of December 31, 2005 that are subsequently vested, modified, repurchased or cancelled. Compensation expense recognized during the
first quarter of 2006 includes the portion vesting during the period for (1) all share-based payments granted prior to, but not yet vested as of December 31, 2005, based on the grant date fair value estimated in accordance with the
original provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123) and (2) all share-based payments granted subsequent to December 31, 2005,
based on the grant-date fair value estimated using the Black-Scholes option-pricing model. No stock options were granted to employees during the first quarter of 2006. In the first quarter of 2006 the adoption of SFAS No. 123(R) resulted in
incremental stock-based compensation expense of approximately $58,000. The incremental stock-based compensation expense caused net loss to increase by approximately $58,000, and basic and diluted earnings per share to decrease by $0.01 per share. As
a result of the Companys decision to adopt the modified prospective method, prior period results have not been restated.

Prior to the adoption of
SFAS No. 123(R) , the Company applied APB No. 25 to account for its stock-based awards. The following table illustrates the effect on net loss and earnings per share if the Company had applied the fair value recognition provisions of SFAS
No. 123 for the three months ended March 31, 2005:



|                                                                                                                             |  |                                   |        |  
|---------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------- | ------ | -
|(in thousands, except per share data)                                                                                        |  | Three Months Ended March 31, 2005 |       
|(unaudited)                                                                                                                  |  |                                   |       
|Net loss, as reported                                                                                                        |  | $                                 | (3,340 | )
|Deduct: Total stock-based employee compensation expense determined under fair value based method, net of related tax effects |  |                                   | (37    | )
|                                                                                                                             |  |                                   |        |  
|Pro forma net loss                                                                                                           |  | $                                 | (3,377 | )
|Net loss per share:                                                                                                          |  |                                   |        |  
|As reported: Basic and diluted                                                                                               |  | $                                 | (0.70  | )
|Pro forma: Basic and diluted                                                                                                 |  | $                                 | (0.70  | )

Before adoption of SFAS No. 123(R), pro forma disclosures reflected the fair value of each option grant
estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants that occurred during 2004: risk-free interest rate of 4.29%, expected dividend yield of 0%, expected life of seven years to
expiration and expected volatility of 295%. There were no stock option grants during the three months ended March 31, 2006 or for the year ended December 31, 2005.

A summary of stock based compensation activity within the Companys stock-based compensation plans for the three months ended March 31, 2006 is as follows:



|                                 |  |                 |   |  |                               |        |                                                 |     |                          |   |  
|-------------------------------- |  | --------------- | - |  | ----------------------------- | ------ | ----------------------------------------------- | --- | ------------------------ | - | -
|                                 |  | Number ofShares |   |  | WeightedAverageExercise Price |        | WeightedAverageRemainingContractualTerm (Years) |     | AggregateIntrinsic Value
|Outstanding at December 31, 2005 |  | 71,108          |   |  | $                             | 322.26 |                                                 |     |                          |   |  
|Granted                          |  |                |   |  |                               |       |                                                 |     |                          |   |  
|Exercised                        |  |                |   |  | $                             |       |                                                 |     |                          |   |  
|Forfeited                        |  | (2,080          | ) |  | $                             | 420.33 |                                                 |     |                          |   |  
|                                 |  |                 |   |  |                               |        |                                                 |     |                          |   |  
|Outstanding at March 31, 2006    |  | 69,028          |   |  | $                             | 319.35 |                                                 | 5.9 |                          | $ | 
|                                 |  |                 |   |  |                               |        |                                                 |     |                          |   |  
|Exercisable at March 31, 2006    |  | 57,070          |   |  | $                             | 383.89 |                                                 | 5.6 |                          | $ | 

The aggregate intrinsic value for stock options outstanding and exercisable is defined as the difference between
the market value of the Companys stock as of the end of the period and the exercise price of the stock options. All outstanding, exercisable and cancelled options during the first quarter of 2006 had no intrinsic value. During the three months
ended March 31, 2006 and March 31, 2005, the Company did not grant any stock options.



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The following is a summary of nonvested stock option activity:



|                               |  |                 |   |  |                                     |      
|------------------------------ |  | --------------- | - |  | ----------------------------------- | -----
|                               |  | Number ofShares |   |  | WeightedAverageGrant-Date FairValue
|Nonvested at December 31, 2005 |  | 12,740          |   |  | $                                   | 11.34
|Granted                        |  |                |   |  |                                     |     
|Vested                         |  | (782            | ) |  | $                                   | 2.19 
|Forfeited                      |  |                |   |  |                                     |     
|                               |  |                 |   |  |                                     |      
|Nonvested at March 31, 2006    |  | 11,958          |   |  | $                                   | 11.39
|                               |  |                 |   |  |                                     |      

At March 31, 2006, there was approximately $82,000 of total unrecognized compensation cost related to
nonvested stock options. The cost is expected to be recognized over a weighted average period of 0.5 years.

The Company also grants restricted stock
awards to its employees. Restricted stock awards are valued at the closing market value of the Companys common stock on the day of the grant, and the total value of the award is recognized as expense ratably over the vesting period of the
employees receiving the grants. The Company did not grant restricted stock awards during the first quarter of 2006. As of March 31, 2006, the total amount of unrecognized compensation expense related to restricted stock awards was approximately
$3.6 million, which is expected to be recognized over a weighted-average period of approximately 7.4 years. The Company recognized compensation expense of approximately $121,000 during the first quarter of 2006 on existing restricted stock awards.

During the three months ended March 31, 2006, 18,750 shares of restricted stock were returned to the Company as the result of employee terminations,
and during the three months ended March 31, 2005, 8,000 shares of restricted stock were returned. All shares of restricted stock become unrestricted on the tenth anniversary of the grant date, and the stock options vest in three equal annual
installments, commencing on the issuance date, subject to the terms and conditions of the Equity Incentive Plan. As of March 31, 2006 and December 31, 2005 the outstanding shares of restricted stock totaled 424,678 and 443,428,
respectively.

For the three months ended March 31, 2006 and 2005, total stock-based compensation was $0.2 million and $0.1 million, respectively.

4. PROPERTY, PLANT AND EQUIPMENT

Property, plant and
equipment consist of the following (dollars in thousands):



|                                     |  |                |         |   |                   |   |         |  
|------------------------------------ |  | -------------- | ------- | - | ----------------- | - | ------- | -
|                                     |  | March 31, 2006 |         |   | December 31, 2005 |  
|                                     |  | (unaudited)    |         |   |                   |  
|Computer software                    |  | $              | 449     |   |                   | $ | 350     |  
|Computer equipment                   |  |                | 559     |   |                   |   | 534     |  
|Leasehold improvements               |  |                | 31      |   |                   |   | 30      |  
|Office equipment and furniture       |  |                | 146     |   |                   |   | 146     |  
|Network equipment and infrastructure |  |                | 106,106 |   |                   |   | 105,596 |  
|                                     |  |                |         |   |                   |   |         |  
|Subtotal                             |  |                | 107,291 |   |                   |   | 106,656 |  
|Accumulated depreciation             |  |                | (42,719 | ) |                   |   | (40,521 | )
|                                     |  |                |         |   |                   |   |         |  
|Property, plant and equipment, net   |  | $              | 64,572  |   |                   | $ | 66,135  |  
|                                     |  |                |         |   |                   |   |         |  

Depreciation expense on property, plant and equipment was $2.2 million for each of the three months ended
March 31, 2006 and 2005.

5. ACQUISITION OF GATEWAY COLOCATION

On January 30, 2004, the Company completed the acquisition of the operating assets of gateway.realty.new jersey.llc, also known as Gateway Colocation. The transaction was structured as an acquisition of assets,
and the purchase agreement includes an earn-out payment based upon the achievement of certain financial objectives with respect to the revenues generated by the facility, which if payable, will be paid in shares of the Companys
common stock.



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On March 22, 2006, the Company entered into an amendment to the earn-out provision of the purchase
agreement, which had previously expired on January 30, 2006. The terms of the amendment extend the duration of the earn-out provision for an additional twenty-four months retroactive to January 30, 2006. As of March 31,
2006, there have been no additional costs recorded in connection with the extension and no additional shares have been earned in accordance with the terms of the earn-out provision.

6. TERMINATION OF CONSOLIDATED EDISON COMMUNICATIONS STOCK PURCHASE AGREEMENT

On December 10, 2004, the Company entered into a stock purchase agreement with Consolidated Edison, Inc. (the Con Ed Agreement) for the purchase of all of the issued and outstanding shares of Consolidated Edison
Communications Holding Company, Inc. (CEC), a wholly-owned subsidiary, for $37.0 million. In order to finance the acquisition of CEC, the Company entered into a securities purchase agreement (as amended, the Investor Purchase
Agreement), with certain investors for the sale of up to $37.0 million in shares of a newly issued convertible preferred stock and common stock warrants.

In connection with the execution of both the Con Ed Agreement and the Investor Purchase Agreement, the Company entered into certain transactions with its lenders under the Companys credit facility. The Company executed with the
lenders a thirteenth amendment to the credit agreement, pursuant to which, among other things, the lenders consented to the above-referenced transactions, however, as a result of the termination described below, the thirteenth amendment was also
terminated by its terms.

On May 4, 2005, the Company entered into a Mutual Termination and Release Agreement (the Termination Agreement),
with Consolidated Edison, Inc., which terminated the Con Ed Agreement. The Con Ed Agreement was terminated because of the parties inability to resolve certain contractual issues. As a result of the termination of the Con Ed Agreement, on
May 4, 2005, the Investor Purchase Agreement, which the Company entered into to finance the acquisition of CEC, terminated pursuant to its terms. The Termination Agreement contains mutual releases of liability. The Company did not incur any
early termination penalties in connection with the termination of the Con Ed Agreement or the Investor Purchase Agreement. As a result of the termination of the Con Ed Agreement and the Investor Purchase Agreement, at December 31, 2005, the
Company included a total of $1.1 million of transaction costs in selling, general and administrative expenses.

7. SIGNIFICANT EVENTS

On March 22, 2006, the Company entered into a common stock purchase agreement (the Stock Purchase Agreement), with certain investors, pursuant to which
the Company issued to the investors, in a private offering, an aggregate of 1.05 million shares of common stock at a price of $2.10 per share, for gross proceeds to the Company of $2.2 million. Pursuant to the terms of the Stock Purchase
Agreement, the Company also issued to such investors warrants (with an expiration date three and one-half years after closing) to purchase an aggregate of 0.3 million shares of common stock at an exercise price of $2.64 per share. Additionally,
the Company paid its placement agent a fee of $0.1 million and issued warrants (with an expiration date three and one-half years after closing) to purchase an aggregate of 0.1 million shares of common stock at an exercise price of $2.64 per
share. Michael Liss, chairman of the Companys board of directors, is currently associated with the placement agent but will not receive, directly or indirectly, any fees or other compensation in connection with the Stock Purchase Agreement and
the transactions contemplated thereunder. The Company also paid $0.2 million in professional fees in connection with the execution of the Stock Purchase Agreement. The Company recorded the fees incurred as a result of the Stock Purchase Agreement as
a reduction of the net cash proceeds.

In connection with the Stock Purchase Agreement, the Company entered into a registration rights agreement with the
investors, dated as of March 22, 2006, which requires the Company to file a registration statement with the Securities and Exchange Commission with respect to the resale of (i) the shares of common stock issued to the investors,
(ii) the shares of common stock underlying the warrants issued to the investors and (iii) the shares of common stock underlying the warrants issued to the placement agent.

On March 22, 2006, the Company and the lenders executed a twentieth amendment to the credit agreement, pursuant to which, among other things, the lenders consented to the above-referenced transaction. The
twentieth amendment, which was effective as of March 22, 2006, extends the maturity date for the credit agreement from February 9, 2007 to March 7, 2008. The amendment also fixed the applicable interest rate at 9.0% and revised the
amortization payment schedule to $0.1 million for June 30, 2007, $0.2 million for September 30, 2007 and $0.3 million for December 31, 2007, with the balance due on maturity. The amendment also requires the Company (i) on or
before May 15, 2006, to engage a financial advisor to assist the Company in preparing a comprehensive strategic business plan and (ii) on or prior to May 30, 2007, to issue equity to raise proceeds of at least $3.0 million. In
addition, the twentieth amendment removed the lenders observation right for the Companys board of directors and incorporated adjustments to the financial covenants of the Credit Facility. During the quarter ended March 31, 2006, the
Company expensed $0.1 million for fees related to the twentieth amendment of the credit agreement which was determined to represent a modification of terms under the guidelines set forth in Emerging Issues Task Force Issue (EITF) 96-19,
Debtors Accounting for a Modification or Exchange of Debt Instruments.

As a condition to the lenders entering into the twentieth
amendment, the Company entered into a warrant agreement with the lenders on March 22, 2006 (the Warrant Agreement), pursuant to which the Company agreed to issue warrants (with an expiration date three and one-half years after
closing) to the lenders to purchase an aggregate of 0.3 million shares of common stock at an exercise price of $2.64 per share. In connection with the Warrant Agreement, the Company entered into a registration rights agreement with the lenders,
dated as of March 22, 2006, which requires the Company to file a registration statement with the Securities and Exchange Commission with respect to the resale of the shares of common stock underlying the warrants issued to the lenders. The
Company determined the fair value of the warrants issued in connection with the twentieth amendment to be $0.6 million using the Black-Scholes option-pricing model, with the following assumptions: risk-free interest rates of 4.72%, expected dividend
yields of 0%, expected life of three and one half years to expiration and expected volatility of 121%. The fair value amount was included in deferred charges and will be amortized over the remaining life of the credit facility.



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