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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, 2008

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 large accelerated filer, accelerated filer and small reporting company in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer   ̈    Accelerated filer   ̈    Non-accelerated filer   ̈    Small reporting company  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 2008, the registrant had
7,497,515 shares of common stock outstanding.









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INDEX



|         |  |                                                                                                    |  |     
|-------- |  | -------------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                                    |  | Page
|PART I.  |  | FINANCIAL INFORMATION                                                                              |  |     
|Item 1.  |  | Condensed Consolidated Interim Financial Statements (unaudited)                                    |  |     
|         |  | Condensed Consolidated Balance Sheets as of March 31, 2008 and December 31, 2007                   |  | 13  
|         |  | Condensed Consolidated Statements of Operations for the three months ended March 31, 2008 and 2007 |  | 14  
|         |  | Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2008 and 2007 |  | 15  
|         |  | Notes to Condensed Consolidated Interim Financial Statements                                       |  | 16  
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations              |  | 3   
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                         |  | 9   
|Item 4.  |  | Controls and Procedures                                                                            |  | 9   
|PART II. |  | OTHER INFORMATION                                                                                  |  |     
|Item 1.  |  | Legal Proceedings                                                                                  |  | 11  
|Item 1A. |  | Risk Factors                                                                                       |  | 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                                                                                           |  | 11  



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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 discussed in
our Annual Report on Form 10-K for the fiscal year ended December 31, 2007. 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.

Overview

We own and operate
integrated colocation facilities and diverse transport routes in the two gateway markets of New York/New Jersey and Los Angeles. Our customized connectivity infrastructure provides an advanced, high bandwidth, fiber-optic solution to support the
demand for network capacity and to facilitate the interconnection of multiple customers networks.

Factors Affecting Future Operations

Revenues. We generate revenues from selling network capacity, colocation 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. In addition, we provide other interconnection services, including hubbing to aggregate lower bandwidth endlink circuits into a
single, higher bandwidth circuit as well as protocol and signaling conversion to exchange traffic between domestic and international circuits and next generation Ethernet, IP and VoIP technologies.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Off-net transport services. We provide our customers with circuits on networks that we do not own. Customers purchase these services from us to benefit from
our network design, provisioning and management expertise. We sell this connectivity to our customers by purchasing the underlying circuits from other wholesale telecommunications carriers. By bundling these services with our on-net transport
services and colocation services, we are able to provide a full range of network services to our customers.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Colocation services. Our colocation services include providing customers with customized cages, cabinets and racks 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 commercial office buildings.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Communications access management services.Our access management services entail providing our customers with access to provide their retail communications
services to tenants in certain commercial office 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 15 years in length. 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 is 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 few years due to industry trends, with transport services experiencing the greatest decreases. Our operating results may continue to be impacted by decreases in the
prices of certain of our services.



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We believe that the majority of the growth in our revenues will come from our existing customers. While
we continue to add additional customers, particularly domestic subsidiaries of internationally based carriers, we believe the number of companies that are potential customers is not increasing due to industry consolidation. Consequently, our growth
in revenue is largely dependent on the underlying growth of our customers businesses and their need for our services.

The growth of
our on-net transport and colocation revenues is also dependent in part upon our ability to provide additional services in our existing facilities and our current markets. We are currently expanding our colocation footprint in the New York City
market, and over the long term, we intend to derive additional colocation revenues, as well as increased transport revenues, from this expansion. As a result, within each of our facilities and markets, 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 legal and business terms, operating specifications and commercial standards that are required of us by the customer. After entering into the master service agreement, customers can order specific services from
us through individual sales orders.

Customers primarily purchase services from us when their requirements mandate an immediate need for
additional services, either for their own internal network use or for access to their customers or other vendors. As their demand for network connectivity or colocation grows, we benefit by providing new services to them. We also experience
disconnections of services, as customers groom their networks to eliminate excess capacity or adjust their changing network requirements. This loss of revenues may negatively impact our financial results.

Our on-net transport services primarily provide network core connectivity to our customers, enabling them to exchange traffic between their own points of
presence or from one of their points of presence to that of another carrier or service provider. These services accounted for 46.4% of our revenues in the first quarter of 2008. We can provide on-net transport services utilizing multiple
transmission protocols, including legacy North American standards, international standards and new technologies, such as Ethernet, IP and VoIP. Our ability to provide service using varying standards, as well as to interconnect traffic between
standards, is an important factor in the growth of our on-net transport business.

Another key factor in the growth of our on-net transport
business is the large number of nodes on our network and the resulting number of carriers that we can interconnect with. It is important for us to be able to exchange traffic directly with many other carriers in order to offer the greatest value to
our customers, by enabling a single interconnection with us to deliver connectivity to a significant number of other carriers. Additionally, the scalability of our network architecture allows us to increase transport capacity to a greater degree
than is possible with our other services, yielding incremental operating leverage from our existing infrastructure and facilities. We are able to expand capacity in part due to technological advancements in fiber optics, such as dense wave division
multiplexing or DWDM.

Our off-net transport services constitute network connectivity that we provide to our customers, utilizing circuits
that we purchase from other wholesale telecommunications carriers. These services produced 29.9% of our revenues in the first quarter of 2008 and are the fastest growing portion of our business. In providing these services to our customers, we
manage all aspects of the service delivery, including network design, installation, monitoring and troubleshooting. Our ability to bundle these services with our other offerings allows our customers to utilize a single vendor for their network
requirements. We offer these services in markets that we currently serve with our own infrastructure, in other metropolitan markets that we do not serve with our own networks, and on a long-haul basis to connect metropolitan areas, significantly
increasing our addressable market beyond the metropolitan markets in which we own network infrastructure and facilities.

Historically 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 prudent basis. The growth in transport revenues that we have experienced on a quarterly basis in 2007 and in the first three
months of 2008 is a result of an increase in the number of circuits that we have provisioned, which more than offset 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.

Our colocation services produced 22.5% of our revenues in the first quarter of 2008.
Colocation revenues are generally stable in nature, as customers tend to maintain a more consistent need for a location to house their networking equipment and therefore typically enter into three to five years contracts for colocation services.
Upon purchasing colocation space from us, customers secure their network equipment in our highly conditioned facilities and establish connectivity to exchange traffic with other networks. Our facilities maintain rigorous standards for power,
cooling, security, reliability and other



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environmental controls. It is the physical constraints of available colocation space in our facilities and our competitors facilities that have created
a favorable market environment for colocation services. The growth prospects of our colocation services are a function of the space that we have available to sell to our customers. Many of our existing colocation facilities are approaching
stabilized occupancy rates. As a result, we constructed a new 11,000 square foot facility at 60 Hudson Street in New York City. We are also converting 8,000 square feet of currently unoccupied colocation space at our location at 165 Halsey Street in
Newark, New Jersey into an internet-grade facility with enhanced power capacity to also expand our offering capabilities that is expected to be operational in the second quarter of 2008.

Our access management services business accounted for 1.2% of our revenues in the first quarter of 2008 and has been declining. 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 2012.

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 and commercial office 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 commercial office 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, 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 relate 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 network operations or sales activities to our cost of services. We had 72 employees as of March 31, 2008 compared to 71 as of March 31, 2007. 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 20 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 condensed consolidated interim 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. We evaluate the estimates that we have made on an on-going basis. 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.



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Results of Operations

Three months ended March 31, 2008 Compared to Three months ended March 31, 2007

Revenues.Revenues for the
quarter ended March 31, 2008 were $13.6 million as compared to $11.6 million for the quarter ended March 31, 2007. We increased the number of our customers to 265 as of March 31, 2008 from 244 at March 31, 2007. 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 endedMarch 31, |        | Change
|(amounts in thousands)    |  | 2008                                |        | 2007   |  
|On-net transport revenue  |  | $                                   | 6,272  |        | $ | 5,782  |  | $ | 490  
|Off-net transport revenue |  |                                     | 4,059  |        |   | 3,325  |  |   | 734  
|Colocation revenue        |  |                                     | 3,057  |        |   | 2,367  |  |   | 690  
|Access revenue            |  |                                     | 168    |        |   | 160    |  |   | 8    
|                          |  |                                     |        |        |   |        |  |   |      
|Total Revenue             |  | $                                   | 13,556 |        | $ | 11,634 |  | $ | 1,922
|                          |  |                                     |        |        |   |        |  |   |      

We recognized $6.3 million in on-net transport service revenues for the quarter ended
March 31, 2008, up from $5.8 million for the quarter ended March 31, 2007. Off-net transport service revenues for the quarter ended March 31, 2008 were $4.1 million, up from $3.3 million for the quarter ended March 31, 2007.
Revenues from colocation and other services were $3.1 million for the quarter ended March 31, 2008 compared to $2.4 million for the quarter ended March 31, 2007, and revenues from communications access management services were $0.2 million
for each of the quarters ended March 31, 2008 and 2007.

The 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 circuits to our customers. The growth in new on-net transport services more than offset the disconnections
and price decreases that we experienced. Off-net transport revenues increased over the same period last year as we continued to leverage our current customer base by providing services outside our gateway markets of New York/New Jersey and Los
Angeles. Colocation revenues increased as we licensed additional caged space, cabinets and racks in our facilities. Our network infrastructure has significant capacity to provide additional transport connectivity, and we also have the network
capabilities to deliver connectivity utilizing new technologies, such as Ethernet and IP services. Our access management services business has been steadily declining, and we expect that trend to continue throughout 2008. 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 2012. 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, 2008 and 2007, there were no individual customers that accounted for over 10.0% of our revenues.

Cost of
Services. Cost of services, associated with the operation of our networks and facilities, were $6.9 million for the quarter ended March 31, 2008, compared to $5.9 million for the quarter ended March 31, 2007. The majority of our cost
of services is occupancy expenses, consisting of rent, license fees, and utility costs, for our carrier hotel facilities and commercial office buildings. Other cost of services includes off-net connectivity charges and maintenance and repair costs.



|                                       |  |                                     |       |        |   |       |  |   |    
|-------------------------------------- |  | ----------------------------------- | ----- | ------ | - | ----- |  | - | ---
|                                       |  | For the three months endedMarch 31, |       | Change
|(amounts in thousands)                 |  | 2008                                |       | 2007   |  
|Occupancy expenses                     |  | $                                   | 3,847 |        | $ | 3,296 |  | $ | 551
|Off-net connectivity charges           |  |                                     | 2,822 |        |   | 2,456 |  |   | 366
|Maintenance and repair and other costs |  |                                     | 220   |        |   | 146   |  |   | 74 
|                                       |  |                                     |       |        |   |       |  |   |    
|Total Cost of Services                 |  | $                                   | 6,889 |        | $ | 5,898 |  | $ | 991
|                                       |  |                                     |       |        |   |       |  |   |    



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Occupancy expenses represented 55.8% of cost of services or $3.8 million for the quarter ended
March 31, 2008, an increase of $0.6 million as compared to 55.9% or $3.3 million for the quarter ended March 31, 2007. This increase was due to increases in colocation and cross-connection charges associated with new order installations in
existing facilities and an increase in utility usage. On March 1, 2007, we entered into a lease modification with the landlord of the building located at 60 Hudson Street, New York, New York to extend the term of one of our leases to July, 2022
and to lease an additional 11,315 square feet of space.

Off-net connectivity charges were 41.0% of cost of services or $2.8 million for
the quarter ended March 31, 2008, compared to 41.6% of the cost of services or $2.5 million for the quarter ended March 31, 2007. We expect these connectivity charges to increase commensurately with our increase in revenues from off-net
transport.

Maintenance and repair and other costs were 3.2% or $0.2 million of cost of services for the quarter ended March 31, 2008,
compared to 2.5% or $0.1 million for the quarter ended March 31, 2007. These costs will continue to represent a relatively small and fixed component of cost of services.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the quarter ended March 31, 2008 were $4.5
million compared to $4.2 million for the quarter ended March 31, 2007. Personnel costs represented 64.4%, or $2.9 million, of selling, general and administrative expenses for the quarter ended March 31, 2008 compared to 62.7%, or $2.6
million for the quarter ended March 31, 2007. Professional fees for the quarter ended March 31, 2008 were $0.3 million, as compared to $0.4 million for the same period in 2007.

Stock related expenses for the quarter ended March 31, 2008 and 2007 were $0.3 million and $0.2 million, respectively. This non-cash expense related
to the amortization of restricted stock and stock options granted to our employees. The restricted shares that were granted prior to 2006 become unrestricted on the tenth anniversary of the grant date, while the restricted shares granted during 2006
and 2007 become unrestricted on the fourth anniversary of the grant date, and the related expenses are amortized on a straight-line basis over their respective restricted period. All other selling, general and administrative items, which include
insurance and operating expenses, were $1.0 million for each of the quarters ended March 31, 2008 and 2007.

Loss on early
extinguishment of debt. In the first quarter of 2007, we recorded a charge of $1.1 million related to the early extinguishment of our former credit facility on March 21, 2007, including the write-off of unamortized financing related charges
that were associated with the former credit facility.

Depreciation and Amortization.Depreciation and amortization expenses for the
quarter ended March 31, 2008 were $2.4 million compared to $2.3 million for the quarter ended March 31, 2007.

Interest
Income.Interest income for the quarter ended March 31, 2008 was approximately $47,000, compared to approximately $63,000 for the quarter ended March 31, 2007. Interest income is generated on our cash balances, which are invested in
short-term, highly liquid investments at variable rates of interest.

Interest Expense.Interest expense for the quarter ended
March 31, 2008 was $0.4 million, compared to $0.6 million for the quarter ended March 31, 2007. On March 21, 2007 we entered into a new credit facility with a floating interest rate of LIBOR plus 350 basis points on drawn balances.
Our interest rate was 7.75% as of March 31, 2008, and 8.94% as of March 31, 2007. Also included in interest expense is the amortization of original issuance discounts and deferred charges that amounted to $0.1 million and $0.2 million
for the three months ended March 31, 2008 and 2007, respectively.



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Liquidity and Capital Resources

To date, we have financed our operations through revenues collected from our customers, the issuance of equity securities in private transactions and by
arranging credit facilities. We incurred a loss from operations and a net loss for the quarter ended March 31, 2008 of $0.2 million and $0.6 million, respectively, compared to a loss from operations and a net loss of $0.7 million and $2.4
million, respectively, for the quarter ended March 31, 2007. During the quarter ended March 31, 2008, cash provided by operating activities was approximately $1.2 million, and cash purchases of property, plant and equipment were $1.1
million, compared to cash used in operating activities and cash purchases of property, plant and equipment of $0.7 million and $0.4 million, respectively, for the quarter ended March 31, 2007.

For the quarter ended March 31, 2008, we used $22,000 in net cash for financing related activities. For the quarter ended March 31, 2007, we
used $0.7 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 operations.

On March 1, 2007, we entered into a Lease Modification and Extension Agreement (the Amendment), with 60 Hudson Owner LLC, which is the
landlord of the building located at 60 Hudson Street, New York, New York where we had leased 15,239 square feet of the nineteenth floor of the building. Under the terms of the Amendment, we agreed to lease an additional 11,315 square feet of space
at the building, primarily on the twelfth floor, and to extend the term of the lease until July 31, 2022.

On March 21, 2007, we
entered into a Credit Agreement with CapitalSource Finance LLC pursuant to which we and our subsidiaries established a $25.0 million credit facility (the Credit Facility), consisting of (i) a $14.0 million term loan, (ii) a
$6.0 million revolving loan and letter of credit facility and (iii) a $5.0 million capital expenditure loan facility, which was unfunded at closing. The $14.0 million term loan was used to pay off our former credit facility, which was set to
mature in March 2008. The Credit Facility bears interest at floating rates, depending on the type of borrowing and based on either a Prime Rate or LIBOR Rate, as such terms are defined under the Credit Facility. The $14.0 million term loan is
repayable in increasing quarterly installments commencing in July 2008. The Credit Facility matures in March 2012. The Credit Facility is secured by a first lien on all of our and our subsidiaries existing and future real assets and personal
property. The Credit Facility is guaranteed by us and certain of our subsidiaries, and contains restrictive covenants, operating restrictions and other terms and conditions.

On November 7, 2007, we entered into an Amended and Restated Credit Agreement by and among us, our subsidiaries, CapitalSource Finance LLC and
CapitalSource CF LLC pursuant to which we and our subsidiaries established a new $5.0 million loan facility (the New Loan ) solely to enable us to repurchase outstanding shares of our capital stock pursuant to our recently announced
stock repurchase program. The New Loan, which was unfunded at closing, supplements and is made a part of our existing $25.0 million credit facility with CapitalSource (the Credit Facility). The New Loan will bear interest at floating
rates, depending on the type of borrowing and based on either a Prime Rate or LIBOR Rate, as such terms are defined under the Credit Facility. The applicable margin based upon a LIBOR Rate is 4.50%, and the applicable margin based on a Prime Rate is
3.25%. In addition, the parties adjusted certain of the financial covenants under the Credit Facility. The New Loan will be payable in equal quarterly installments of 3.75% of the principal amount commencing in April 2010, with the entire Credit
Facility maturing in March 2012.

On November 8, 2007, we announced that our Board of Directors had authorized the repurchase of up to
$5.0 million of our common stock, either through open market purchases or in privately negotiated transactions. The timing and amount of the shares to be repurchased will be based on market conditions and other factors, including price, corporate
and regulatory requirements and alternative investment opportunities. Any shares repurchased in the program will be cancelled. The repurchase program is scheduled to terminate on December 31, 2008, and may be modified or discontinued at any
time. As of March 31, 2008, 276,266 shares of our common stock had been purchased in repurchase program at an average price of $8.01, of which 189,978 was purchased during the three months ended March 31, 2008 at an average price of $8.02.
As of March 31 ,2008 the remaining maximum dollar value of share that may yet be purchased under the program is $2.8 million.

As of
March 31, 2008, we had $14.0 million of indebtedness outstanding under our Credit Facility and $5.4 million of outstanding letters of credit. In addition, we had $0.6 million of availability on a revolving loan facility, $5.0 million of
availability in a capital expenditure loan facility, and $5.0 million of availability under the New Loan, which is solely to enable us to repurchase outstanding shares of our capital stock pursuant to our previously announced stock repurchase
program subject to compliance with the terms of the credit agreement. The interest rate on our outstanding borrowings under the facility are variable at LIBOR plus 350 basis points on the term loan, at LIBOR plus 300 basis points on the revolving
facility and at LIBOR plus 350 basis points on the capital expenditures loan. We were in full compliance with all of the covenants contained in the credit agreement as of March 31, 2008. Our financial covenants include minimum consolidated
EBITDA (as defined in the credit agreement underlying the Credit Facility), maximum capital expenditures, minimum fixed



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charge coverage ratio, maximum leverage ratio and minimum consolidated interest coverage ratio. The compliance levels and calculation of such levels with
respect to those covenants are as defined in the credit agreement, 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
$1.1 million in capital expenditures during the quarter ended March 31, 2008, of which $0.7 million was primarily for the implementation of customer orders, including the purchase of network equipment to increase capacity and to interconnect
with customers, and $0.4 million related to our colocation expansion projects noted below. Our capital expenditures totaled $0.4 million for the quarter ended March 31, 2007. In 2008, we expect to invest approximately $3.5 million in capital
expenditures for customer order activity, expansion of certain facilities, new product initiatives and an upgrade to certain information technology systems and key operating systems. We also expect to invest approximately $3.0 million to
complete the construction of the two colocation expansion projects that we began last year. These include our new facility at 60 Hudson Street in New York City and our power upgrade at our facility at 165 Halsey Street in Newark, New Jersey. In
addition, we intend to invest approximately $2.0 million for the national network expansion projects that we recently announced. These projects include capacity expansions to our metro networks in New York / New Jersey and Los Angeles, a
capacity expansion to our metro Ethernet network and extending our network reach to the new markets of Chicago, San Francisco and Miami.

During the quarter ended March 31, 2007, 560 shares of restricted stock were returned to us as the result of employee terminations. For the quarter ended March 31, 2008 there were no shares of restricted stock returned to us.

As of May 8, 2008, we had 7.5 million shares of common stock outstanding, or 8.2 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, and we may also consider potential
strategic alternatives, such as acquisitions or the sale of all or a portion of our business, although there can be no assurance that we would be able to successfully consummate any such financing or other transaction on acceptable terms, if at all.
For additional disclosure and risks regarding future financings and funding our ongoing operations, please see Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007 as filed on
March 28, 2008. 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

See Note 2 , Summary of Significant Accounting Policies to the accompanying
condensed consolidated financial statements for a full description of recently issued accounting pronouncements including the date of adoption and effects on results of operations and financial condition.



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

Our exposure to financial market risk, including changes in interest rates, relates primarily to our credit facility and marketable security investments. Borrowings under our credit facility bear interest at floating rates, based upon LIBOR
or a base rate plus an applicable margin. As a result, we are subject to fluctuations in interest rates. A 100 basis point increase in LIBOR would increase our annual interest expense by less than $1.0 million per year. As of March 31, 2008, we
had borrowed $14.0 million under our credit facility, with a current weighted average interest rate of 7.75%.

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 six months. 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.



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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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##### Table of Contents

PART II

OTHER INFORMATION



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

None.



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

There were no material changes to the risk factors
contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007.



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

There are no recent sales of unregistered securities during the period covered by this report, which have not been previously disclosed in our public filings.



|Item 2A. | Issuer Purchases of Equity Securities
|-------- | -------------------------------------



|                                      |  |                                |  |                            |      |                                                                                |        |                                                                                   |   |          
|------------------------------------- |  | ------------------------------ |  | -------------------------- | ---- | ------------------------------------------------------------------------------ | ------ | --------------------------------------------------------------------------------- | - | ---------
|Period*                               |  | Total Number ofSharesPurchased |  | AveragePrice Paid perShare |      | Total Number of SharesPurchased as Part of PubliclyAnnounced Plans or Programs |        | Maximum Dollar Value ofShares that May Yet
bePurchased Under the Plans orPrograms
|January 1, 2008 to January 31, 2008   |  | 76,852                         |  | $                          | 7.82 |                                                                                | 76,852 |                                                                                   | $ | 3,703,810
|February 1, 2008 to February 29, 2008 |  | 60,126                         |  | $                          | 8.53 |                                                                                | 60,126 |                                                                                   | $ | 3,188,854
|March 1, 2008 to March 31, 2008       |  | 53,000                         |  | $                          | 7.73 |                                                                                | 53,000 |                                                                                   | $ | 2,777,592



|* | On November 6, 2007, we publicly announced the authorization to repurchase up to $5.0 million of our common stock.
|- | ------------------------------------------------------------------------------------------------------------------



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

None.



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

None.



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

None.



|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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##### Table of Contents

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 9, 2008



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



|* | The Chief Financial 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

(in thousands)



|                                                                                                                          |  |               |          |   |                  |   |          |  
|------------------------------------------------------------------------------------------------------------------------- |  | ------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                          |  | March 31,2008 |          |   | December 31,2007 |  
|                                                                                                                          |  | (unaudited)   |          |   |                  |  
|ASSETS                                                                                                                    |  |               |          |   |                  |   |          |  
|Current Assets:                                                                                                           |  |               |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                 |  | $             | 6,729    |   |                  | $ | 8,220    |  
|Accounts receivable, net of allowance of $361                                                                             |  |               | 4,049    |   |                  |   | 3,818    |  
|Prepaid expenses                                                                                                          |  |               | 553      |   |                  |   | 612      |  
|                                                                                                                          |  |               |          |   |                  |   |          |  
|Total current assets                                                                                                      |  |               | 11,331   |   |                  |   | 12,650   |  
|Property, plant and equipment, net                                                                                        |  |               | 54,931   |   |                  |   | 54,921   |  
|Other Assets:                                                                                                             |  |               |          |   |                  |   |          |  
|Deferred charges, net of accumulated amortization of $210 and $160                                                        |  |               | 817      |   |                  |   | 845      |  
|Goodwill                                                                                                                  |  |               | 1,613    |   |                  |   | 1,613    |  
|Other assets                                                                                                              |  |               | 867      |   |                  |   | 883      |  
|                                                                                                                          |  |               |          |   |                  |   |          |  
|Total other assets                                                                                                        |  |               | 3,297    |   |                  |   | 3,341    |  
|                                                                                                                          |  |               |          |   |                  |   |          |  
|TOTAL ASSETS                                                                                                              |  | $             | 69,559   |   |                  | $ | 70,912   |  
|                                                                                                                          |  |               |          |   |                  |   |          |  
|                                                                                                                          |  |              
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                      |  |               |          |   |                  |   |          |  
|Current Liabilities:                                                                                                      |  |               |          |   |                  |   |          |  
|Accounts payable                                                                                                          |  | $             | 5,172    |   |                  | $ | 3,553    |  
|Accrued expenses                                                                                                          |  |               | 4,479    |   |                  |   | 7,227    |  
|Notes payable, current portion                                                                                            |  |               | 1,050    |   |                  |   | 700      |  
|Deferred revenues, current portion                                                                                        |  |               | 1,165    |   |                  |   | 1,282    |  
|                                                                                                                          |  |               |          |   |                  |   |          |  
|Total current liabilities                                                                                                 |  |               | 11,866   |   |                  |   | 12,762   |  
|Long Term Liabilities:                                                                                                    |  |               |          |   |                  |   |          |  
|Notes payable                                                                                                             |  |               | 12,950   |   |                  |   | 13,300   |  
|Deferred revenue, long term                                                                                               |  |               | 3,248    |   |                  |   | 3,351    |  
|Other long term liabilities                                                                                               |  |               | 2,338    |   |                  |   | 2,201    |  
|                                                                                                                          |  |               |          |   |                  |   |          |  
|Total Long Term Liabilities                                                                                               |  |               | 18,536   |   |                  |   | 18,852   |  
|                                                                                                                          |  |               |          |   |                  |   |          |  
|Total Liabilities                                                                                                         |  |               | 30,402   |   |                  |   | 31,614   |  
|                                                                                                                          |  |              
|Stockholders Equity:                                                                                                     |  |               |          |   |                  |   |          |  
|Common stock, $0.001 par value, 2,000,000,000 shares authorized and 7,569,178 and 7,554,309 shares issued and outstanding |  |               | 8        |   |                  |   | 8        |  
|Additional paid-in-capital                                                                                                |  |               | 445,798  |   |                  |   | 445,368  |  
|Deferred rent (warrants)                                                                                                  |  |               | (1,343   | ) |                  |   | (1,386   | )
|Accumulated deficit                                                                                                       |  |               | (405,306 | ) |                  |   | (404,692 | )
|                                                                                                                          |  |               |          |   |                  |   |          |  
|Total stockholders equity                                                                                                |  |               | 39,157   |   |                  |   | 39,298   |  
|                                                                                                                          |  |               |          |   |                  |   |          |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                |  | $             | 69,559   |   |                  | $ | 70,912   |  
|                                                                                                                          |  |               |          |   |                  |   |          |  

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 endedMarch 31, |       
|                                                             |  | 2008                        |        |   | 2007 |  
|Revenues                                                     |  | $                           | 13,556 |   |      | $ | 11,634 |  
|Operating expenses:                                          |  |                             |        |   |      |   |        |  
|Cost of services                                             |  |                             | 6,889  |   |      |   | 5,898  |  
|Selling, general and administrative expense                  |  |                             | 4,472  |   |      |   | 4,160  |  
|Depreciation and amortization                                |  |                             | 2,439  |   |      |   | 2,296  |  
|                                                             |  |                             |        |   |      |   |        |  
|Total operating expenses                                     |  |                             | 13,800 |   |      |   | 12,354 |  
|                                                             |  |                             |        |   |      |   |        |  
|Loss from operations                                         |  |                             | (244   | ) |      |   | (720   | )
|Loss on early extinguishment of debt                         |  |                             |       |   |      |   | (1,146 | )
|Interest income                                              |  |                             | 47     |   |      |   | 63     |  
|Interest expense                                             |  |                             | (417   | ) |      |   | (594   | )
|                                                             |  |                             |        |   |      |   |        |  
|Net loss                                                     |  | $                           | (614   | ) |      | $ | (2,397 | )
|                                                             |  |                             |        |   |      |   |        |  
|Net loss per sharebasic and diluted                         |  | $                           | (0.08  | ) |      | $ | (0.33  | )
|Weighted average common shares outstandingbasic and diluted |  |                             | 7,578  |   |      |   | 7,271  |  

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



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##### Table of Contents

FIBERNET TELECOM GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)



|                                                                                |  |                             |        |   |      |   |         |  
|------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------- | -
|                                                                                |  | Three months endedMarch 31, |       
|                                                                                |  | 2008                        |        |   | 2007 |  
|Cash flows from operating activities:                                           |  |                             |        |   |      |   |         |  
|Net loss                                                                        |  | $                           | (614   | ) |      | $ | (2,397  | )
|Adjustments to reconcile net loss to net cash provided by operating activities: |  |                             |        |   |      |   |         |  
|Depreciation and amortization                                                   |  |                             | 2,439  |   |      |   | 2,296   |  
|Stock related expense                                                           |  |                             | 347    |   |      |   | 227     |  
|Deferred rent expense                                                           |  |                             | 43     |   |      |   | 43      |  
|Loss on early extinguishment of debt                                            |  |                             |       |   |      |   | 1,146   |  
|Other non-cash items                                                            |  |                             | 49     |   |      |   | 229     |  
|Change in assets and liabilities:                                               |  |                             |        |   |      |   |         |  
|Increase in accounts receivables                                                |  |                             | (232   | ) |      |   | (212    | )
|Decrease in prepaid expenses                                                    |  |                             | 59     |   |      |   | 71      |  
|Decrease in other assets                                                        |  |                             | 1      |   |      |   | 22      |  
|Increase (decrease) in accounts payable                                         |  |                             | 51     |   |      |   | (965    | )
|Decrease in accrued expenses and other long-term liabilities                    |  |                             | (733   | ) |      |   | (770    | )
|Decrease in deferred revenues                                                   |  |                             | (220   | ) |      |   | (352    | )
|                                                                                |  |                             |        |   |      |   |         |  
|Cash provided by (used in) operating activities                                 |  |                             | 1,190  |   |      |   | (662    | )
|Cash flows from investing activities:                                           |  |                             |        |   |      |   |         |  
|Common stock repurchases                                                        |  |                             | (1,529 | ) |      |   |        |  
|Capital expenditures                                                            |  |                             | (1,130 | ) |      |   | (435    | )
|                                                                                |  |                             |        |   |      |   |         |  
|Cash used in investing activities                                               |  |                             | (2,659 | ) |      |   | (435    | )
|Cash flows from financing activities:                                           |  |                             |        |   |      |   |         |  
|Proceeds from debt financings                                                   |  |                             |       |   |      |   | 14,000  |  
|Proceeds from warrant exercises                                                 |  |                             |       |   |      |   | 522     |  
|Repayment of debt financings                                                    |  |                             |       |   |      |   | (14,160 | )
|Payment of financing costs of debt financings                                   |  |                             | (22    | ) |      |   | (1,054  | )
|                                                                                |  |                             |        |   |      |   |         |  
|Cash used in financing activities                                               |  |                             | (22    | ) |      |   | (692    | )
|                                                                                |  |                             |        |   |      |   |         |  
|Net decrease in cash and cash equivalents                                       |  |                             | (1,491 | ) |      |   | (1,789  | )
|Cash and cash equivalents at beginning of period                                |  |                             | 8,220  |   |      |   | 6,802   |  
|                                                                                |  |                             |        |   |      |   |         |  
|Cash and cash equivalents at end of period                                      |  | $                           | 6,729  |   |      | $ | 5,013   |  
|                                                                                |  |                             |        |   |      |   |         |  
|Supplemental disclosures of cash flow information:                              |  |                             |        |   |      |   |         |  
|Interest paid                                                                   |  | $                           | 662    |   |      | $ | 699     |  

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



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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, video and data traffic between 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 delivers 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. (Operations), 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. Operations owns all of the outstanding common stock of FiberNet Telecom, Inc.
(FTI), a Delaware corporation, and the remaining 4% of Devnet. FTI 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, L.L.C. (Equal Access), also a New York limited liability company. FTI also owns all of the outstanding membership interests of Availius, LLC (Availius), a New York limited
liability company. 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.

Under FiberNets current operating plan, including its new credit facility (see Note 5), the Company does not anticipate requiring any additional external sources of capital to fund its operations in the near term. However, from time
to time, the Company 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. The Company does not have any off-balance sheet financing arrangements, except for outstanding letters of credit.

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, as identified in Note 1 above. 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, 2007, as filed with the Securities and Exchange Commission on
March 28, 2008.

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 six months or less when purchased. The carrying amount approximates fair value because of the short maturity of the instruments.



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##### Table of Contents

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

Maintenance and repairs are expensed as incurred. 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 services are purchased for a contract period of one year. Revenue is recognized over the
service contract period for all general services. If the Company determines that collection of a receivable is not reasonably assured, it defers the revenue and recognizes it at the time collection becomes reasonably assured, which is generally upon
receipt of payment. Deferred revenues consist primarily of payments received in advance of revenue being earned under the service contracts.

Allowance
for Doubtful Accounts

The Company maintains an allowance for uncollectible accounts receivable for estimated losses resulting from
customers failure to make payments. Management determines the estimate of the allowance for uncollectible accounts receivable by considering a number of factors, including: (1) historical experience; (2) aging of the accounts
receivable; and (3) specific information obtained by the Company on the financial condition and the current creditworthiness of its customers.

Fair Value of Financial Instruments

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

Goodwill

Cost in excess of net assets of an acquired business, principally goodwill, is accounted for under SFAS No. 142, Goodwill and Other Intangible
Assets (SFAS No. 142). SFAS No. 142 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.

Deferred Charges

Deferred charges include the cost to access buildings and deferred financing costs. Costs to access
buildings are being amortized over 12 years, which was the term of the related contracts at their inception. Deferred financing costs are amortized over the term of the related credit facility.



17



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##### Table of Contents

Earnings Per Share

Basic earnings per share has been computed using the weighted average number of shares outstanding during the period. Diluted earnings per share is computed by including the dilutive effect on common stock that would
be issued assuming conversion of stock options, warrants and other dilutive securities. Options, warrants and other securities did not have an effect on the computation of diluted earnings per share for the quarter ended March 31, 2008 and
March 31 2007, 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 provides trade credit to its customers. The Company performs ongoing credit evaluations of its customers
financial conditions, in an attempt to mitigate this risk. As of March 31, 2008, two customers accounted for 35.3% of the Companys total accounts receivable. As of December 31, 2007, one customer accounted for 32.3% of the
Companys total accounts receivable.

For each of the three months ended March 31 2008 and 2007, there was no individual customer
that accounted for more than 10.0% 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.

Stock Based Compensation

The Company 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, 2008, the Company has approximately 1.6 million shares authorized for issuance under the plan. Stock options are typically granted to vest in three equal annual installments, commencing on the grant date, and expire ten
years from the date of grant. Restricted stock is typically granted with a four or ten year period before it becomes unrestricted. Equity grants under the plan are made at the discretion of the Compensation Committee of the Board of Directors.

Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), Share Based Payment (SFAS
No. 123(R)), applying the modified prospective method. 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 three months ended March 31, 2008 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.

Accounting for Income Taxes

The Company accounts for
income taxes in accordance with SFAS No. 109, Accounting for Income Taxes (SFAS No. 109) 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.

Effective January 1, 2007,
the Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN No. 48). FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in a
companys financial statements in accordance with SFAS No. 109. FIN No. 48 requires a company to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of
the position. If the more-likely-than-not threshold is met, a company must measure the tax position to determine the amount to recognize in the financial statements. At March 31, 2008, the Company has no unrecognized tax benefits. As of
March 31, 2008, the Company has no accrued interest or penalties related to uncertain tax positions. The tax years 2000 through 2007 remain open to examination by all taxing jurisdictions to which the Company is subject.



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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. All
revenues are generated in the United States of America.

Recent Accounting Pronouncements

In March 2008, the Financial Accounting Standards Board (FASB) issued SFAS No. 161, Disclosures About Derivative Instruments and
Hedging Activities - an amendment of FASB Statement No. 133 (SFAS 161). SFAS 161 requires enhanced disclosures related to derivative and hedging activities, and thereby seeks to improve the transparency of financial reporting. Under
SFAS 161, entities are required to provide enhanced disclosures relating to a) how and why an entity uses derivative instruments; b) how derivative instruments and related hedge items are accounted for under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities (SFAS 133), and its related interpretations; and c) how derivative instruments and related hedged items affect and entitys financial positions, financial performance, and cash flows.
SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This statement shall be effective for the Company beginning January 1, 2009.
The Company is currently evaluating the potential impact of the adoption of SFAS 161 on its consolidated financial statements.

In December
2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS 141R). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures its financial statements the identifiable
assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business
combination. This statement is effective for the Company beginning January 1, 2009. The Company is currently evaluating the potential impact of the adoption of SFAS on its consolidated financial statements.

In December 2007, the FSAB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statementsan amendment of Accounting
Research Bulletin No. 51 (SFAS 160). SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent
and to the noncontrolling interest, changes in a parents ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also established disclosure requirements that clearly
identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This statement is effective for the Company beginning January 1, 2009. The Company is currently evaluating the potential impact of the
adoption of SFAS 160 on its consolidated financial statements.

3. EQUITY INCENTIVE PLAN

On 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 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 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 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. The Company recognizes the cost of all employee stock awards on a straight-line basis over
their respective vesting period, net of estimated forfeitures.

The Black-Scholes option-pricing model is used to value options when
issued. The expected volatility assumption used is based solely on historical volatility, calculated using the daily price changes of the Companys common stock over the most recent period equal to the expected life of the stock option on the
date of grant. The risk-free interest rate is determined using the implied yield for zero-coupon U.S. government issues with a remaining term equal to the expected life of the stock option. The Company does not currently intend to pay cash
dividends, and thus assumes a 0% dividend yield. Beginning on January 1, 2006, the expected life of an option is calculated using the simplified method set out in SEC Staff Accounting Bulletin No. 107, Share Based Payment,
using the vesting term of 3 years and the contractual term of 10 years. The simplified method defines the expected life as the average of the contractual term of the options and the weighted average vesting period for all option tranches.

As part of the requirements of SFAS No. 123(R), the Company is required to estimate potential forfeitures of stock grants and adjust
compensation cost recorded accordingly. The forfeiture rate was estimated based on relevant historical



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forfeitures. The estimate of forfeitures will be adjusted over the requisite service period to the extent that the actual forfeitures differ, or are expected
to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of stock compensation expense to be recognized in future periods.

A summary of stock option activity within the Companys stock-based compensation plans for the three months ended March 31, 2008
is as follows:



|                               |  |                 |   |  |                               |        |                                                 |     |                          |   |        
|------------------------------ |  | --------------- | - |  | ----------------------------- | ------ | ----------------------------------------------- | --- | ------------------------ | - | -------
|                               |  | Number ofShares |   |  | WeightedAverageExercise Price |        | WeightedAverageRemainingContractualTerm (Years) |     | AggregateIntrinsic Value
|Outstanding at January 1, 2008 |  | 140,063         |   |  | $                             | 145.66 |                                                 |     |                          |   |        
|Granted                        |  |                |   |  |                               |       |                                                 |     |                          |   |        
|Exercised                      |  |                |   |  |                               |       |                                                 |     |                          |   |        
|Forfeited                      |  | (585            | ) |  |                               | 630.98 |                                                 |     |                          |   |        
|                               |  |                 |   |  |                               |        |                                                 |     |                          |   |        
|Outstanding at March 31, 2008  |  | 139,478         |   |  | $                             | 143.63 |                                                 | 6.4 |                          | $ | 380,258
|                               |  |                 |   |  |                               |        |                                                 |     |                          |   |        
|Exercisable at March 31, 2008  |  | 89,478          |   |  | $                             | 222.71 |                                                 | 5.3 |                          | $ | 126,758

A summary of stock based compensation activity within the Companys stock-based compensation
plans for the three months ended March 31, 2007 is as follows:



|                               |  |                 |   |  |                               |        |                                                 |     |                          |   |        
|------------------------------ |  | --------------- | - |  | ----------------------------- | ------ | ----------------------------------------------- | --- | ------------------------ | - | -------
|                               |  | Number ofShares |   |  | WeightedAverageExercise Price |        | WeightedAverageRemainingContractualTerm (Years) |     | AggregateIntrinsic Value
|Outstanding at January 1, 2007 |  | 142,070         |   |  | $                             | 151.58 |                                                 |     |                          |   |        
|Granted                        |  |                |   |  |                               |       |                                                 |     |                          |   |        
|Exercised                      |  |                |   |  |                               |       |                                                 |     |                          |   |        
|Forfeited                      |  | (49             | ) |  | $                             | 121.99 |                                                 |     |                          |   |        
|                               |  |                 |   |  |                               |        |                                                 |     |                          |   |        
|Outstanding at March 31, 2007  |  | 142,021         |   |  | $                             | 151.59 |                                                 | 7.3 |                          | $ | 458,274
|                               |  |                 |   |  |                               |        |                                                 |     |                          |   |        
|Exercisable at March 31, 2007  |  | 66,974          |   |  | $                             | 319.09 |                                                 | 5.0 |                          | $ |       

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.

The following is a summary of nonvested stock option activity:



|                             |  |                 |  |                                     |     
|---------------------------- |  | --------------- |  | ----------------------------------- | ----
|                             |  | Number ofShares |  | WeightedAverageGrant-Date FairValue
|Nonvested at January 1, 2008 |  | 50,000          |  | $                                   | 2.11
|Granted                      |  |                |  |                                     |    
|Vested                       |  |                |  |                                     |    
|Forfeited                    |  |                |  |                                     |    
|                             |  |                 |  |                                     |     
|Nonvested at March 31, 2008  |  | 50,000          |  | $                                   | 2.11
|                             |  |                 |  |                                     |     



|                             |  |                 |   |  |                                     |      
|---------------------------- |  | --------------- | - |  | ----------------------------------- | -----
|                             |  | Number ofShares |   |  | WeightedAverageGrant-Date FairValue
|Nonvested at January 1, 2007 |  | 75,339          |   |  | $                                   | 2.17 
|Granted                      |  |                |   |  |                                     |     
|Vested                       |  | (292            | ) |  | $                                   | 15.52
|Forfeited                    |  |                |   |  |                                     |     
|                             |  |                 |   |  |                                     |      
|Nonvested at March 31, 2007  |  | 75,047          |   |  | $                                   | 2.11 
|                             |  |                 |   |  |                                     |      



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As of March 31, 2008, there was approximately $0.1 million of total unrecognized compensation cost
related to nonvested stock options. The cost is expected to be recognized over a weighted average period of 1.3 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 any restricted stock awards during the first quarter of 2008.

As of March 31, 2008 the total amount of unrecognized compensation expense related to restricted stock awards was approximately $5.1 million, which is expected to be recognized over a weighted-average period of approximately 3.8 years.
The Company recognized compensation expense of approximately $0.3 million during the first quarter of 2008 on existing restricted stock awards.

During the quarter ended March 31, 2008, there were no shares of restricted stock returned to the Company as the result of employee terminations, and during the quarter ended March 31 2007, 560 shares of restricted stock were
returned. All shares of restricted stock granted before 2006 become unrestricted on the tenth anniversary of the grant date, or on the fourth anniversary for restricted stock granted in 2007 and 2006. 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, 2008 and December 31, 2007 the outstanding shares of restricted stock totaled 1,386,718.

For the quarter ended March 31, 2008 and 2007, total stock-based compensation was $0.3 and $0.2 million, respectively.

4. PROPERTY, PLANT AND EQUIPMENT

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



|                                                   |  |               |         |   |                   |   |         |  
|-------------------------------------------------- |  | ------------- | ------- | - | ----------------- | - | ------- | -
|                                                   |  | March 31 2008 |         |   | December 31, 2007 |  
|                                                   |  | (unaudited)   |         |   |                   |  
|Computer software                                  |  | $             | 1,062   |   |                   | $ | 1,037   |  
|Computer equipment                                 |  |               | 934     |   |                   |   | 887     |  
|Leasehold improvements                             |  |               | 31      |   |                   |   | 31      |  
|Office equipment and furniture                     |  |               | 357     |   |                   |   | 348     |  
|Network equipment and infrastructure               |  |               | 111,246 |   |                   |   | 110,549 |  
|                                                   |  |               |         |   |                   |   |         |  
|Subtotal                                           |  |               | 113,630 |   |                   |   | 112,852 |  
|Accumulated depreciation                           |  |               | (61,137 | ) |                   |   | (58,715 | )
|                                                   |  |               |         |   |                   |   |         |  
|Property, plant and equipment, net of depreciation |  | $             | 52,493  |   |                   | $ | 54,137  |  
|Construction-in-progress                           |  |               | 2,438   |   |                   |   | 784     |  
|                                                   |  |               |         |   |                   |   |         |  
|Total property, plant and equipment, net           |  | $             | 54,931  |   |                   | $ | 54,921  |  
|                                                   |  |               |         |   |                   |   |         |  

5. CREDIT FACILITY

On March 21, 2007, the Company entered into a Credit Agreement by and among the Company, its subsidiaries and CapitalSource Finance LLC pursuant to which the Company and its subsidiaries established a $25.0
million credit facility (the Credit Facility), consisting of (i) a $14.0 million term loan, (ii) a $6.0 million revolving loan and letter of credit facility and (iii) a $5.0 million capital expenditure loan facility, which
was unfunded at closing. The $14.0 million term loan was used to pay off the Companys existing credit facility with Deutsche Bank A.G. discussed below, which was set to mature in March 2008. The Credit Facility bears interest at floating
rates, depending on the type of borrowing and based on either a Prime Rate or LIBOR Rate, as such terms are defined under the Credit Facility. Borrowings on the $14.0 million term loan are payable in increasing quarterly installments commencing in
July 2008. The Credit Facility matures in March 2012. The Credit Facility is secured by a first lien on all of the Companys and its subsidiaries existing and future real assets and personal property. The Credit Facility is guaranteed by
the Company and certain of its subsidiaries, and contains restrictive covenants, operating restrictions and other terms and conditions. The Credit Agreement prohibits the payment of cash dividends on common stock. As of March 31, 2008, the
outstanding balance under the Credit Facility was $14.0 million. In addition, as of March 31, 2008, the Company had $5.4 million of outstanding letters of credit and $0.6 million of availability under its revolving loan credit facility, again
subject to compliance with the terms of the credit agreement. As of March 31, 2008, the interest rate on its outstanding borrowings under the facility was at 7.75%. There were no events of default under its credit agreement.



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On November 7, 2007, the Company entered into an Amended and Restated Credit Agreement by and among
the Company, its subsidiaries, CapitalSource Finance LLC and CapitalSource CF LLC pursuant to which the Company and its subsidiaries established a new $5.0 million loan facility (the New Loan ) solely to enable the Company to repurchase
outstanding shares of its capital stock pursuant to its recently announced stock repurchase program. The New Loan, which was unfunded at closing, supplements and is made a part of the Companys existing $25.0 million credit facility with
CapitalSource (the Credit Facility). The New Loan will bear interest at floating rates, depending on the type of borrowing and based on either a Prime Rate or LIBOR Rate, as such terms are defined under the Credit Facility. The
applicable margin based upon a LIBOR Rate is 4.50%, and the applicable margin based on a Prime Rate is 3.25%. In addition, the parties adjusted certain of the financial covenants under the Credit Facility. The New Loan will be payable in equal
quarterly installments of 3.75% of the principal amount commencing in April 2010, with the entire Credit Facility maturing in March 2012. This facility was undrawn as of March 31, 2008.

The Company recorded a charge of $1.1 million related to the early extinguishment of its former credit facility on March 21, 2007, including the
write-off of unamortized financing related charges that were associated with the former credit facility.

6. EQUITY TRANSACTIONS

On November 8, 2007, the Company announced that its Board of Directors has authorized the repurchase of up to $5.0 million of the Companys
common stock, either through open market purchases or in privately negotiated transactions. The timing and amount of the shares to be repurchased will be based on market conditions and other factors, including price, corporate and regulatory
requirements and alternative investment opportunities. Any shares repurchased in the program will be cancelled. The repurchase program is scheduled to terminate on December 31, 2008, and may be modified or discontinued at any time. As of
March 31, 2008, the Company repurchased 276,266 shares of common stock under the program for an average price of $8.01 per share, and has approximately $2.8 million available for future repurchase. For the three months ended March 31
,2008, the Company repurchased 189,978 shares of common stock for an average price of $8.02 per share.

On January 31, 2008, the
Company received written notice from Gateway Colocation pursuant to the terms of the earn out provision acknowledging that the financial objectives had been achieved and, in accordance with such provisions, issued to Gateway Colocation
204,847 shares of its common stock on February 5, 2008. FiberNet recorded goodwill of $1.6 million as of December 31, 2007 to account for the fair value of the earn-out.



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