##### Table of Contents

SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

|x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934.
|- | ---------------------------------------------------------------------------------

For the quarterly period ended September 30, 2002

OR

|o | 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)              

Check whether the
issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 | o
|--- | - | -- | -

The number of shares outstanding of the issuers common stock, as of November 13, 2002, was 788,515,187 shares of
common stock, $.001 par value.

Check whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

|Yes | o | No | x
|--- | - | -- | -

---



---

##### Table of Contents

INDEX

|        |                                                                                              | Page
|------- | -------------------------------------------------------------------------------------------- | ----
|        |                                                                                              |     
|PART I. | FINANCIAL INFORMATION                                                                        | 1   
|Item 1. | Consolidated Financial Statements                                                            |     
|        | Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001                   | 17  
|        | Consolidated Statements of Operations for the nine months ended September 30, 2002 and 2001  | 18  
|        | Consolidated Statements of Operations for the three months ended September 30, 2002 and 2001 | 19  
|        | Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and 2001  | 20  
|        | Notes to Consolidated Financial Statements                                                   | 21  
|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations        | 1   
|Item 3. | Quantitative and Qualitative Disclosures About Market Risk                                   | 12  
|Item 4. | Controls and Procedures                                                                      | 12  
|PART II | OTHER INFORMATION                                                                            | 13  
|Item 1. | Legal Proceedings                                                                            | 13  
|Item 2. | Changes in Securities and Use of Proceeds                                                    | 13  
|Item 3. | Defaults Upon Senior Securities                                                              | 13  
|Item 4. | Submission of Matters to a Vote of Security Holders                                          | 13  
|Item 5. | Other Information                                                                            | 13  
|Item 6. | Exhibits and Reports on Form 8-K                                                             | 13  
|        |                                                                                              |     

i



---

##### Table of Contents

PART I

FINANCIAL INFORMATION

Item 1.
Consolidated Financial Statements

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, the following:  the difficulty inherent in operating an early-stage company in a new and rapidly evolving market; our history of operating losses and accumulated deficit; our limited
financial resources and uncertainty as to the availability of additional capital to fund our operations on acceptable terms, if at all; our success in obtaining additional carrier hotel lease agreements and license agreements with building owners;
growth in demand for our services; the frequency of service interruptions on our networks; the potential development by competitors of competing products and technologies; restrictions imposed on us as a result of our debt; and changes in the
regulatory environment.  As a result, our future operations involve a high degree of risk.  Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of new information, future
events or otherwise.

Overview

We deploy, own and operate fiber-optic networks designed to provide comprehensive broadband connectivity for
data, voice and video transmission to service providers in major metropolitan areas.  These networks provide an advanced, high bandwidth fiber-optic solution to support the demand for network capacity in the local loop.  We provide optical
transport within and between carrier hotels, which are facilities where service providers exchange and route communications traffic, as well as optical transport from carrier hotels to tenants in commercial office buildings.  Our networks
support multiple transmission protocols including synchronous optical network, or SONET, Ethernet, Frame Relay, asynchronous transfer mode, or ATM and Internet Protocol, or IP.  We have lit multiple strands of fiber on a redundant and diversely
routed SONET ring and IP architecture throughout New York City.  In addition, we also provide services in Chicago and Los Angeles.

We have experienced significant operating losses, net losses
and negative cash flows from operating activities.  We expect to continue to experience such losses and negative cash flows as we continue to operate our business.  We also have a limited operating history.  Consequently, prospective
investors have limited operating history and financial data upon which to evaluate our performance.

The telecommunications industry is currently experiencing a period of uncertainty and
rationalization.  Many companies in our industry are in financial distress, and some of our largest customers have filed for bankruptcy.  We have been negatively impacted by the general economic environment and by the difficulties that are
impacting our industry.  Most significantly, customer contracts and services have been cancelled, resulting in a loss of recurring revenues to us.  We are unable to determine the extent to which additional contracts or services that we
provide to our customers will be cancelled, and we cannot forecast our ability to replace those cancelled contracts with new contracts.  As a result, our revenues, business operations and liquidity may continue to be negatively affected by the
market environment.

Factors Affecting Future Operations

Revenues.  We generate revenues from selling network capacity and
related services to other communications service providers.  We recognize revenues when earned as services are provided throughout the life of each contract with a customer.  Revenues are derived from three general types of services:

  Transport services. Our transport services include the offering of broadband circuits on our metropolitan transport networks and FiberNet In-building Networks, or FINs. Over
our metropolitan transport networks, we can provision circuits from one of our carrier point facilities to another carrier point 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 point facility or an on-net building.

  Colocation services. Our colocation services include providing customers with the ability to
locate their communications and networking equipment at our carrier point facilities in a secure technical operating environment. We can also provide our customers with colocation services in the central equipment rooms of certain of our on-net and
off-net buildings. Typically, if a customer colocates its equipment at our facilities, our agreement with them may include a minimum commitment to use our transport services.

1



---

##### Table of Contents

  Communications access management services. Our access management services include providing our customers
with the non-exclusive right to market and provide their retail services to tenants in our on-net and off-net buildings. Customers typically enter into an agreement with us to gain access to all or a significant number of our properties. For certain
of our on-net and off-net buildings, we have the exclusive right to manage communications access. Once a customer has entered into an agreement with us for access services, we typically require that customer to utilize our in-building networking
infrastructure for connectivity to its retail customers, if such networking infrastructure is available.

Our revenues are generated on a monthly recurring basis under contracts with our
customers.  The terms of these contracts typically range from month-to-month to five years in length. During the past year, we experienced a trend of entering into shorter-term contracts with our customers. Previously, our customers typically
entered into contracts with terms of three to five years. Increasingly, our customers are electing to purchase services on a month-to-month basis or for a contracted period of only one year.

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. The pricing of all of our services have declined significantly over the past year, although we
believe not to the extent that the pricing in other segments of the telecommunications market has declined.

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

We typically begin our sales cycle by entering into a non-binding business services agreement with a customer. This agreement establishes our
mutual interest in exploring a business relationship and the general parameters upon which we will proceed. As a next step, we execute a telecommunications services agreement, also known as an interconnection agreement. This is a technical document
that outlines the engineering specifications and operating standards that are required of us by the customer. With the technical requirements complete, we finalize a sales contract. Customers can order a specific circuit or colocation space, or,
alternatively, they can purchase general availability on our networks or in our facilities by establishing minimum revenue commitments on a recurring basis.

Currently our colocation and access
services produce approximately one-third of our revenues. In the future we anticipate generating significantly more of our revenues from transport services than from colocation or access management services. The scalability of our network
architecture allows us to increase transport capacity to a greater degree than is possible with our colocation and access management services.

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 point facilities, on-net buildings and off-net buildings. Other specific costs include maintenance
and repair costs and utility costs. Our license agreements for our on-net and off-net buildings require us to pay license fees to the owners of these properties. In addition, our lease for our meet-me-room at 60 Hudson Street in New York City also
requires us to pay a license fee. These license fees typically are calculated as a percentage of the revenues that we generate in each particular building. Other than our license fees, our cost of services is generally fixed in nature. We do not
anticipate that cost of services will change commensurately with any change in our revenues.

Selling, General and Administrative Expenses.  Selling, general and administrative expenses
generally include all of our personnel 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. We have reduced the number of our employees from 116 as of September 30, 2001 to 76 as of September 30, 2002, and our personnel costs have decreased
significantly. Prospectively, we do not anticipate significant changes in headcount, and we believe that our personnel costs will increase moderately.

Stock Related Expense.  Stock
related expense relates to the granting of certain stock options to our employees. We grant stock options to our employees as a form of equity-based compensation to attract, retain and incentivize qualified personnel. These costs are non-cash
charges that are amortized over the vesting term of each employees option agreement. Certain options granted to employees are accounted for using variable plan accounting. Under variable plan accounting, the stock related expense is adjusted
for changes in the market price of the underlying common stock.

2



---

##### Table of Contents

Depreciation and Amortization.  Depreciation and amortization expense includes the depreciation of our network
equipment and infrastructure, computer hardware and software, furniture and fixtures, 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. As a result of the impairment to fixed assets that we recorded during 2001, depreciation and amortization expense has decreased in 2002 as compared to 2001.

We review the carrying value of our assets for impairment 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 the fourth quarter of 2001, we determined that our forecasts for revenues for certain of our facilities would not be achieved due to the
significant adverse change in the business climate. We further determined that the dramatic change in the operating environment for the telecommunications industry resulted in a significantly less demand for our services in these facilities. We
believe that the decrease in demand was a result of the significant number of bankruptcies of telecommunications companies that were existing or potential customers of ours and the overall economic recession. We also determined that a rebound in
demand for our services would not occur in the near term. As a result, we revised our business plan and conducted extensive reviews of our assets and operations. The revisions to the business plan primarily included reductions in forecasts of
revenues and capital expenditures. The projected amounts of certain cost of services and overhead expenses were reduced as well to reflect the decrease in our expected business activity. We also determined that certain financial covenants in our
credit facility would need to reflect the revised business plan, including our reduced revenue forecasts. Consequently, we amended our credit facility in December 2001.

We used an undiscounted
forecasted cash flow model to determine if there was an impairment based on the cash flows expected to be generated from these assets, and used a discounted cash flow model to measure the impairment. As a result of this analysis, we have recorded an
asset impairment of approximately $51.8 million in the fourth quarter of 2001, based on the amount by which the carrying amount of these assets exceeded their fair value. Of this amount, $40.4 million relates to assets held for use, and $11.4
million represents assets to be disposed of.

The assets that we identified for disposition were abandoned, as we determined that these assets had no value. Consequently, there was no cost to us for
this abandonment, nor do we expect to receive any proceeds or other consideration from this abandonment. We recorded no reserves, accruals or other liabilities related to this abandonment. These assets primarily related to engineering and network
architecture design costs and general contracting and project management costs for facilities that we are no longer pursuing.

During the third quarter of 2001, we evaluated the carrying value of
certain long-lived assets and acquired equity investments, consisting primarily of goodwill resulting from our acquisition of Devnet, LLC. Pursuant to APB Opinion No. 16, Business Combinations, the purchase price was determined and
goodwill was recorded based on the stock price at the time the merger agreement was executed and announced. An assessment of the goodwill related to the Devnet acquisition was performed pursuant to SFAS No. 121, due to the negative industry and
economic trends affecting certain of our current operations and expected future revenues, as well as the general decline in the valuations of telecommunications companies. The conclusion of that assessment was that the decline in market conditions
within the telecommunications industry was significant and other than temporary.

Devnet had entered into exclusive license agreements to manage communications access to commercial office properties,
and we associated the related goodwill primarily to those agreements. We used an undiscounted forecasted cash flow model to determine if there was an impairment based on the cash flows expected to be generated from business activities in the
commercial office properties underlying the license agreements and used a discounted cash flow model to measure the impairment. As a result, we recorded a charge of $56.5 million during the third quarter of 2001 to reduce goodwill associated with
the purchase of Devnet. The charge was based on the amount by which the carrying amount of the asset exceeded its fair value. In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets, applicable for fiscal years
beginning after December 15, 2001. SFAS No. 142, which we adopted effective January 1, 2002, requires that goodwill and certain intangible assets resulting from business combinations entered into prior to June 30, 2001 no longer be amortized, but
instead be reviewed for recoverability. Any write-down of goodwill would be charged to results of operations as accumulative change in accounting principle upon adoption of the new accounting standard if the recorded value of goodwill and certain
intangibles exceeds its fair value. Any write-down of goodwill up to and including December 31, 2001 would not be subject to the rules of this new standard. We are evaluating the impact of the adoption of SFAS No. 142 and have completed the first
step of the goodwill impairment test during the quarter ended June 30, 2002, which has indicated an impairment of the goodwill. We will perform the second step of the impairment test during the fourth quarter of 2002 to determine whether any
adjustment is necessary.

Summary of Critical Accounting Policies

The preparation of financial statements in conformity with accounting
principals generally accepted in the United States of America requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported in the unaudited interim consolidated financial statements. The critical
accounting polices and related adjustments underlying our unaudited interim consolidated financial statements are summarized below. In applying these policies, which are common in the telecommunications

3



---

##### Table of Contents

industry, management makes subjective complex judgments that frequently require estimates about matters that are inherently
uncertain.

Impairment of Long-Lived Assets.  We review the carrying value of long-lived assets including property, plant and equipment for impairment 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 is recognized equal to an amount by which the carrying value exceeds the fair value of the assets, based upon discounted expected future cash flows. The financial statement risk is that the outcome of the facts and circumstances of
the related projections used to estimate future cash flows are uncertain and subject to managements judgment and estimates.

Impairment of Goodwill.  We are in the process of adopting
SFAS No. 142, Goodwill and Intangible Assets. In accordance with SFAS No. 142, we evaluate goodwill for potential impairment by comparing the fair value of the lowest determinable reporting unit to the net book value of that reporting
unit. The financial statement risks entail the determination of the reporting unit and the determination of the fair value of that unit.

Restatement of Financial Statements

We restated our consolidated financial statements for the quarter ended March 31, 2001 to record a beneficial conversion feature of $21.0 million in connection with the reduction of the conversion price on our
series H and I preferred stock on February 9, 2001. Other than with respect to the consolidated financial statements for the quarter ended March 31, 2001, this restatement has no impact on our assets or total stockholders equity, and it
resulted in an increase in additional paid-in-capital and an increase in net loss. The change increased net loss by $21.0 million and increased net loss applicable to common stockholders per share by $0.54 for the nine months ended September 30,
2001. The change has no impact on our cash flows. This change was already reflected in our annual report on Form 10-K for the fiscal year ended December 31, 2001, as amended.

Results of
Operations

Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30, 2001

Revenues. Revenues for the nine
months ended September 30, 2002 were $19.3 million compared to $23.2 million for the nine months ended September 30, 2001, a decrease of $3.9 million. We generated revenues by providing transport, colocation and communications access management
services to our customers. For the nine months ended September 30, 2002 and 2001, we recognized $12.0 million and $15.1 million in transport services, $4.1 million and $3.1 million in colocation services and $3.2 million and $5.0 million in
communications access management and other services, respectively. During this nine-month period ending September 30, 2002, two of our customers, Qwest and 360networks, accounted for approximately 27.3% of our revenues, and for the nine months ended
September 30, 2001, three of our customers, Qwest, 360networks and Network Plus, accounted for approximately 57.1% of our revenues.

The decrease in revenues was partially due to the
elimination of certain reciprocal agreements that were terminated during the first quarter of 2002. Reciprocal agreements accounted for $0.7 million, or 3.4%, of our revenues in the first nine months of 2002, down from $3.9 million, or 16.6%, of our
revenues for the same period in 2001.

Revenues continue to be negatively impacted by the general economic environment and by the difficulties that are impacting our industry. Customer contracts and
services have been cancelled, resulting in a loss of recurring revenues to us. Losses in revenues have been partially offset by customer orders for new services. There can be no assurance that to the extent we continue to incur losses of revenues,
they will be offset by orders for new services, if any.

In July 2002 we negotiated a revised pricing structure with a significant customer for the services that we provided to it, although we
previously were not obligated to do so. In addition, this customer subsequently terminated certain services that we were providing. The impact to revenues attributable to these two events was equal to approximately a $0.5 million reduction in
revenues for the nine months ended September 30, 2002.  We anticipate that the impact to revenues attributable to these two events for the full year of fiscal 2002 will be equal to approximately a $1.4 million reduction in revenues.  The
impact of these events does not put us in a loss position with respect to the remaining services with this customer.

In September 2002, we amended our services agreement with a significant customer,
which amendment provided for, among other things, the reduction of services to that customer at our option.  We exercised that option in October 2002 and immediately began providing those same services to another customer.  As a result,
this transfer in services did not entail any reduction in revenues.

Cost of Services. Cost of services for the nine months ended September 30, 2002 were $5.4 million compared to $10.5 million
for the

4



---

##### Table of Contents

nine months ended September 30, 2001. The decrease of $5.1 million was due to reduction in expenses associated with our network
facilities and the elimination of certain reciprocal agreements that were terminated during the first quarter of 2002. In addition, cost of services for the nine months ended September 30, 2002 was reduced by $0.7 million due to certain,
non-recurring concessions that we negotiated from vendors, thereby reducing accounts payable. These items were expensed in prior periods and included in our cost of services.

Cost of services
included on-net building license fees, maintenance and repair costs, rent expense at carrier hotel facilities and on-net and off-net buildings, and related utility costs. Reciprocal agreements accounted for $0.7 million of our cost of services in
the first nine months of 2002 and $4.0 million of our cost of services for the same period in 2001.

Selling, General and Administrative Expenses. Selling, general and administrative expenses
for the nine months ended September 30, 2002 were $12.0 million compared to $27.9 million for the nine months ended September 30, 2001. This decrease is a result of our aggressive cost savings initiatives to reduce corporate overhead in line with
our current outlook for business activity. Cost reductions were realized in nearly all components of selling, general and administrative expenses, including advertising and marketing costs, professional fees and travel and entertainment expenses.
The greatest decrease in overhead came in personnel costs, as we reduced headcount from 116 employees as of September 30, 2001 to 76, as of September 30, 2002.

Stock Related Expense. Stock
related expense for the nine months ended September 30, 2002 was approximately $0.2 million compared to $(1.3) million for the same period ending September 30, 2001. This non-cash expense relates to the granting of stock options to our employees.
The amount recorded for the nine months ended September 30, 2001 was a reversal of an expense incurred during 2000 due to a decline in the public market price of our common stock during the first nine months of 2001.

Write-off of Property, Plant and Equipment. During the nine months ended September 30, 2002, we recorded a write-off of property, plant and equipment of $0.7 million. We recorded this write-off of capital assets due to
the termination of several property leases and license agreements for network facilities. There was no cost to us to abandon these assets, nor do we expect to receive any proceeds or other consideration from the abandonment of these assets. We
recorded no other reserves, accruals or other liabilities related to this write-off. During the nine months ended September 30, 2001, we did not record a write-off of property, plant and equipment.

Impairment of Goodwill. During the nine months ended September 30, 2001, we recorded a non-cash, non-recurring charge for the impairment of goodwill, relating to our acquisition of Devnet, LLC in July 2000, in the
amount of $56.5 million. We recorded this write down of goodwill in accordance with Statement of Financial Accounting Standards No. 121 Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. No
impairment of goodwill was recorded during the nine months ended September 30, 2002

Depreciation and Amortization. Depreciation and amortization expense for the nine months ended September 30,
2002 was $7.8 million compared to $11.4 million for the nine months ended September 30, 2001. The decrease resulted from the impairment of property, plant and equipment that we recorded in 2001 and the adoption of SFAS No. 142, Goodwill and
Other Intangible Assets, applicable for fiscal years beginning after December 15, 2001. SFAS No. 142, which we adopted effective January 1, 2002, requires that goodwill and certain intangible assets resulting from business combinations entered
into prior to June 30, 2001 no longer be amortized, but instead be reviewed for recoverability.

Interest Expense, Net. Interest expense, net for the nine months ended September 30, 2002 was
$6.6 million compared to $6.5 million of interest expense, net for the nine months ended September 30, 2001. Interest expense was generated as a result of borrowings under our senior secured credit facility, outstanding capital lease obligations and
other notes payable.

Preferred Stock Dividends. For the nine months ended September 30, 2002, we paid and accrued approximately $44,000 in non-cash dividends on our preferred stock in the
form of additional shares of series H preferred stock, based on the closing price per share of our common stock at the end of the period. For the nine months ended September 30, 2001, we paid and accrued $0.7 million in non-cash dividends on our
preferred stock in the form of additional shares of series D, E, F, H and I preferred stock, based on the closing price per share of our common stock at the end of the period. The liquidation value of all of the dividends paid and accrued on
September 30, 2002 was $0.6 million. Our series J preferred stock does not pay a dividend. Both the series H and J preferred stock are convertible into shares of common stock.

Preferred Stock -
Beneficial Conversion. In February 2001, the conversion price of our series H and series I preferred stock was reduced to $4.38, in accordance with the original terms of the issuance transactions. The certificates of designation of the series H
and series I include provisions requiring the conversion prices to be lowered to the per share price at which we issue any shares of common stock, subject to certain exceptions, subsequent to the initial issuance of the series H and series I. In
February 2001, we issued shares of common stock in a directed public offering at a price of $4.38 per share, resulting in the reduction of the conversion price. We recorded a beneficial conversion charge of $21.0 million as a result of the reduction
of the conversion price. Additionally, in connection with the conversion of the series H and series I, the conversion price of the remaining 100,000 shares of series H was reduced to $1.31. However, as all of the proceeds from the issuances of the
series H and series I had been allocated to beneficial conversion features, no additional proceeds were allocated upon the reset of the conversion price of the series H to $1.31. No

5



---

##### Table of Contents

additional beneficial conversion feature was recorded during the first nine months of 2002 on our series J preferred stock based upon
our evaluation of changes in the conversion price of the series J and the public market price of our common stock.

Net Loss Applicable to Common Stockholders. We reported a net loss
applicable to common stockholders of $13.4 million for the nine months ended September 30, 2002 compared to a net loss of $117.4 million for the nine months ended September 30, 2001. The decrease is a result of the aforementioned changes in our
operations, including $0.7 million in non-recurring concessions from vendors recorded in the second quarter of 2002 and three non-recurring charges recorded in the first nine months of 2001: a non-cash charge of $7.4 million related to an early
extinguishment of debt from the modification of our credit facility on February 9, 2001, a $56.5 million impairment of goodwill, and the preferred stock-beneficial conversion of $21.0 million recorded in February 2001.

Three Months Ended September 30, 2002 Compared to Three Months Ended September 30, 2001

Revenues. Revenues for the three months ended September 30, 2002 were
$5.9 million compared to $7.7 million for the three months ended September 30, 2001, a decrease of $1.8 million. We generated revenues by providing transport, colocation and communications access management services to our customers. For the three
months ended September 30, 2002 and September 30, 2001, we recognized $3.7 million and $4.7 million in transport services, $1.4 million and $1.4 million in colocation services and $0.8 million and $1.6 million in communications access management and
other services, respectively. During the three-month period ending September 30, 2002, two of our customers, Qwest and 360networks, accounted for approximately 21.1% of our revenues, and for the three months ended September 30, 2001, three of our
customers, Qwest, 360networks and Network Plus, accounted for approximately 50.6% of our revenues.

The decrease in revenues was partially due to the elimination of certain reciprocal agreements that
were terminated during the first quarter of 2002 and the cancellation of services from certain of our customers. Reciprocal agreements accounted for $0.1 million, or 2.0%, of our revenues in the third quarter of 2002, down from $1.3 million, or
16.5%, of our revenues for the third quarter of 2001.

Revenues continue to be negatively impacted by the general economic environment and by the difficulties that are impacting our industry.
Customer contracts and services have been cancelled, resulting in a loss of recurring revenues to us. Losses in revenues have been partially offset by customer orders for new services. There can be no assurance that to the extent we continue to
incur losses of revenues, they will be offset by orders for new services, if any.

In July 2002 we negotiated a revised pricing structure with a significant customer for the services that we provided
to it, although we previously were not obligated to do so. In addition, this customer subsequently terminated certain services that we were providing. The impact to revenues attributable to these two events was equal to approximately a $0.5 million
reduction in revenues for the three months ended September 30, 2002.  We anticipate that the impact to revenues attributable to these two events for the full year of fiscal 2002 will be equal to approximately a $1.4 million reduction in
revenues.  The impact of these events does not put us in a loss position with respect to the remaining services with this customer.

In September 2002, we amended our services agreement with a
significant customer, which amendment provided for, among other things, the reduction of services to that customer at our option.  We exercised that option in October 2002 and immediately began providing those same services to another
customer.  As a result, this transfer in services did not entail any reduction in revenues.

Cost of Services. Cost of services for the three months ended September 30, 2002 were $2.0
million compared to $3.7 million for the three months ended September 30, 2001. The decrease of $1.7 million was due to reduction in expenses associated with our network facilities and the elimination of certain reciprocal agreements that were
terminated during the first quarter of 2002.  Cost of services included on-net building license fees, maintenance and repair costs, rent expense at carrier hotel facilities and on-net and off-net buildings, and related utility costs. Reciprocal
agreements accounted for $0.1 million of our cost of services in the third quarter of 2002 and $1.4 million of our cost of services for the same period in 2001.

Selling, General and
Administrative Expenses. Selling, general and administrative expenses for the three months ended September 30, 2002 were $3.7 million compared to $8.2 million for the three months ended September 30, 2001. This decrease is a result of our
aggressive cost savings initiatives to reduce corporate overhead in line with our current outlook for business activity. Cost reductions were realized in nearly all components of selling, general and administrative expenses, including advertising
and marketing costs, professional fees and travel and entertainment expenses. The greatest decrease in overhead came in personnel costs, as we reduced headcount from 116 employees as of September 30, 2001 to 76, as of September 30, 2002.

Stock Related Expense. Stock related expense for the three months ended September 30, 2002 was approximately $46,000 compared to $7,000 for the three months ended September 30, 2001. This non-cash
expense relates to the granting of stock options to our employees

Impairment of Goodwill. During the three months ended September 30, 2001, we recorded a non-cash, non-recurring charge for the
impairment of goodwill, relating to our acquisition of Devnet, LLC in July 2000, in the amount of $56.5 million. We recorded this write down of goodwill in accordance with Statement of Financial Accounting Standards No. 121 Accounting for the
Impairment of

6



---

##### Table of Contents

Long-Lived Assets and for Long-Lived Assets to be Disposed Of. No impairment of goodwill was recorded during the three months
ended September 30, 2002

Depreciation and Amortization. Depreciation and amortization expense for the three months ended September 30, 2002 was $2.6 million compared to $4.9 million of
depreciation and amortization expense for the three months ended September 30, 2001. The decrease resulted from the impairment of property, plant and equipment that we recorded in 2001 and the adoption of SFAS No. 142, Goodwill and Other
Intangible Assets, applicable for fiscal years beginning after December 15, 2001. SFAS No. 142, which we adopted effective January 1, 2002, requires that goodwill and certain intangible assets resulting from business combinations entered into
prior to June 30, 2001 no longer be amortized, but instead be reviewed for recoverability.

Interest Expense, Net. Interest expense, net for the three months ended September 30, 2002 was $2.3
million compared to $2.3 million of interest expense, net for the three months ended September 30, 2001. Interest expense was generated as a result of borrowings under our senior secured credit facility, outstanding capital lease obligations and
other notes payable.

Preferred Stock Dividends. For the three months ended September 30, 2002, we recorded an accrual in the amount of approximately $13,000 in non-cash dividends on our
series H preferred stock based on the closing price per share at the end of the period.  For the three months ended September 30, 2001, we recorded an accrual in the amount of $0.1 million, based on the closing price per share of our common
stock at the end of the period. For the period ending September 30, 2002 the liquidation value of all of the dividends accrued was $0.2 million. Our series J preferred stock does not pay a dividend. Both the series H and J preferred stock are
convertible into shares of common stock.

Net Loss Applicable to Common Stockholders. We reported a net loss applicable to common stockholders of $4.7 million for the three months ended
September 30, 2002 compared to a net loss of $68.0 million for the three months ended September 30, 2001. The decrease is a result of the aforementioned changes in our operations and due to the recording of a $56.5 million impairment of
goodwill in the three months ended September 30, 2001.

Liquidity and Capital Resources

As a result of our developmental activities and the
deployment of our networks and facilities, we have incurred significant losses from inception to date. We expect such losses to continue, as we further execute our business plan and expand our operations. Consequently, we have been dependent upon
external sources of capital to fund our operations. Prospectively, we will continue to incur losses and may not be able to fund our operations with internally generated funds. Therefore we may require additional, external capital. Additionally, we
have no relevant operating history upon which an evaluation of our performance and prospects can be made. We are subject to unforeseen capital requirements, failure to achieve market acceptance, failure to establish and maintain business
relationships, and competitive disadvantages against larger and more established companies.

To date, we have financed our operations through direct equity investments from our stockholders, the
issuance of additional debt and equity securities in private transactions and by arranging a senior secured credit facility with a group of lenders. We recorded an EBITDA (as defined) profit and a net loss applicable to common stockholders for the
nine months ended September 30, 2002 of $1.9 million and $13.4 million, respectively, compared to an EBITDA (as defined) loss of $15.2 million and net loss applicable to common stockholders of $117.4 million, respectively, for the nine months ended
September 30, 2001. During the nine months ended September 30, 2002, cash used to fund operating activities was $2.4 million, and cash purchases of property, plant and equipment were $2.1 million, compared to $16.1 million and $43.7 million,
respectively, for the nine months ended September 30, 2001. During the nine months ended September 30, 2002, we received $2.4 million in net cash proceeds from financing activities, primarily representing $2.0 million in gross proceeds from the
issuance of a promissory note.

On March 15, 2002, we received gross proceeds of $2.0 million from the issuance of a promissory note to an existing investor. The issuance of the note was in lieu of a
second and third closing on our series J preferred stock, as was previously contemplated. The promissory note had an original maturity date of June 14, 2002 and bore interest, which was due and payable on the maturity date, at an annual rate of 8%.
Additionally, in connection with this note issuance, the lenders under our credit facility agreed to extend the due date of the quarterly interest payment due on March 14, 2002 to April 15, 2002.

Subsequently, our lenders have periodically agreed to extend the due dates of our interest payments. Most recently on October 18, 2002, our lenders agreed to extend the due dates of our interest payments to
November 1, 2002, and on October 30, 2002 our lenders further agreed to extend the due dates of certain interest payments to November 8, 2002.  The holder of our $2.0 million promissory note also subsequently agreed to amend certain terms
of the note, resulting in periodic extensions of the notes term, most recently to November 8, 2002.

On October 30, 2002 we completed a series of transactions with the lenders under our senior
credit facility as well as certain investors to undertake the recapitalization of our company. These transactions are described below.

Pursuant to the terms of a common stock purchase agreement
dated as of October 30, 2002 by and among us and our lenders under our

7



---

##### Table of Contents

credit facility, we issued 440,000,000 shares of our common stock to the lenders at a price of $0.15 per share, as prepayment of an
aggregate of $66.0 million of outstanding indebtedness under our credit facility. We also issued warrants to purchase 110,000,000 shares of common stock at an exercise price of $0.12 per share with a term of five years to the lenders. These warrants
are immediately exercisable and contain standard anti-dilution protection. As of October 30, 2002, the 440,000,000 shares issued to the lenders constituted approximately 61% of the total number of outstanding shares of common stock. Such shares,
together with shares issuable upon exercise of the warrants, also constituted approximately 61% of the shares of common stock outstanding on a fully diluted basis, assuming the exercise of all outstanding options and warrants.

In connection with this transaction, we and certain of our lenders also entered into a stockholders agreement dated as of October 30, 2002. Under the terms of this stockholders agreement, such lenders have the right to
designate two independent persons to be members of our board of directors, along with other certain rights and privileges. Together with the lenders, we also executed a seventh amendment to our credit agreement which, among other things, amends
certain terms of the credit agreement in conjunction with the transactions that were consummated on October 30, 2002.

As part of the seventh amendment, the term loan commitments and revolving loan
commitments available under the credit facility were reduced to a total of $40.5 million from a total of $105.0 million.  The term loan commitments were reduced to $26.2 million, all of which was drawn and outstanding, and the revolving loan
commitments were reduced to $14.4 million.  All of our revolving loan commitments were utilized with drawn, outstanding borrowings of $7.3 million and outstanding letter of credit issued in the amount of $7.1 million.  As of October 30,
2002, we had no additional availability under our credit facility.

In addition, the effective applicable margin on our borrowings was reduced from LIBOR+450 basis points to LIBOR+375 basis points
until December 31, 2003.  Furthermore, the payment of all accrued interest on borrowings during the period beginning on October 30, 2002 and ending on June 30, 2003 will be capitalized and added to the outstanding principal amount of the term
loan indebtedness. Prior to October 30, 2002, there was $5.2 million of interest due and payable on the indebtedness outstanding under the credit facility.  As part of this transaction, accrued interest of $3.2 million was capitalized and
added to the outstanding principal amount of the term loan indebtedness, included above. Subsequently on November 11, 2002, we issued to our lenders in exchange for the remaining $2.0 million of accrued interest 20,000,000 shares of common stock and
warrants to purchase 20,000,000 shares of common stock at an exercise price of $0.12 per share with a term of five years. These warrants are immediately exercisable and contain standard anti-dilution protection.

Other amendments to our credit facility include modifications to the automatic reduction of commitments and to financial covenants.  Previously the first automatic reduction in the availability under our credit facility
was to have occurred on June 30, 2003.  However as amended, the automatic reduction of commitments begin on a quarterly basis on March 31, 2004.  We are also now subject to amended financial covenants.  Beginning with the quarter
ended September 30, 2002, we must now comply with financial covenants that include minimum consolidated revenue, minimum consolidated EBITDA (as defined) and maximum cumulative capital expenditures.  Beginning on December 31, 2003 in addition
to those requirements, our financial covenants will also include a maximum consolidated leverage ratio, a minimum consolidated interest coverage ratio and a minimum consolidated fixed charge coverage ratio.  The compliance levels and
calculation of such levels with respect to those covenants are as defined in the credit agreement underlying our credit facility, as amended.

Pursuant to the terms of an investors rights
agreement entered into on October 30, 2002 by and among us and our lenders, we have also agreed to file a resale registration statement with respect to all of the shares issued to our lenders, including shares issuable upon exercise of the warrants.
We expect that this registration statement will also include shares issued in the other recapitalization transactions described below.

On October 30, 2002, we also entered into a common stock
purchase agreement with certain investors, pursuant to which we issued to the investors in a private offering an aggregate of 38,000,000 shares of common stock for a price of $0.10 per share, or an aggregate cash consideration of $3.8 million.
Pursuant to the terms of this purchase agreement, we also issued to such investors warrants to purchase an additional 38,000,000 shares of common stock at an exercise price of $0.12 per share with a term of five years. These warrants are also
immediately exercisable and contain standard anti-dilution protection.

Immediately prior to the private offering of common stock and warrants, we consummated certain related transactions with the
investors.  In one such transaction, we issued to one of the investors, SDS Merchant Partners, L.P. (SDS), 9,002,040 shares of common stock in exchange for the surrender by SDS of a promissory note originally issued on December 7,
2001 by us to a related party, which promissory note had been assigned by such related party to SDS immediately prior to such exchange for $150,000 in cash. This exchange was consummated pursuant to the terms of a note exchange agreement dated as of
October 30, 2002 by and among us and SDS. Such promissory note, at the time of surrender, had an outstanding principal amount of $450,102 owing thereon.

In a second related transaction, we issued an
aggregate of 104,581,425 shares of common stock to the investors pursuant to the terms of a share exchange agreement dated as of October 30, 2002 by and among us and the investors. Such shares were issued upon the conversion of all 104,578
outstanding shares of our Series H convertible preferred stock. Such investors had, immediately prior to such exchange and conversion, acquired these Series H preferred shares, along with shares of common stock, from a related party for

8



---

##### Table of Contents

cash consideration of $735,000. The shares of Series H preferred stock so surrendered had an aggregate liquidation preference,
including accrued dividends thereon, of $10.7 million.

In a third related transaction, the holders of all 303 outstanding shares of our Series J-1 convertible preferred stock surrendered such shares
to us in exchange for 60,600,000 shares of common stock. This transaction was effected pursuant to a Series J-1 exchange agreement dated as of October 30, 2002 by and among us and the Series J-1 holders. The Series J-1 preferred stock so surrendered
had an aggregate liquidation preference of $3.0 million.

We entered into a registration rights agreement dated as of October 30, 2002 with these investors which requires us to file a resale
registration statement with the Securities and Exchange Commission no later than 30 days after such date, with respect to the registration of all of the shares of common stock issued on October 30, 2002 and all shares issuable upon the exercise of
the warrants issued to investors.  As described above, we expect that this registration statement will also include shares issued to our lenders.

In total, 652,183,465 shares of common stock and
warrants to purchase an aggregate of 148,000,000 shares of common stock were issued on October 30, 2002, as part of these transactions.

On November 11, 2002 in addition to the issuance of common
stock and warrants to our lenders in satisfaction of $2.0 million of accrued interest as discussed above, we issued to SDS 52,000,000 shares of common stock in exchange for the surrender by SDS of the promissory note issued by us on March 14, 2002
in the initial principal amount of $2.0 million, pursuant to the terms of a note exchange agreement.  Such promissory note, at the time of surrender, had outstanding principal and accrued interest of $2.1 million owing thereon. 
Furthermore, we also agreed to include such shares issued to our lenders and SDS within the terms of agreements previously entered into on October 30, 2002, including the registration rights agreement. Other than the inclusion of such additional
shares, the terms of such amended and restated agreements are unchanged from those of their respective predecessors.   We, together with our lenders, also executed an eighth amendment to the credit agreement dated as of November 11, 2002
to amend certain terms in conjunction with the transactions occurring on such day.

A total of 72,000,000 shares of common stock and warrants to purchase an aggregate of 20,000,000 shares of common
stock were issued on November 11, 2002, representing the issuance of approximately 10% of the common stock outstanding, on a fully diluted basis, as of that day.  As a result, we had 788,515,187 shares of common stock outstanding, or
approximately 1,000,000,000 shares of common stock outstanding on a fully diluted basis, assuming the exercise of all outstanding options and warrants.

In connection with the transactions
consummated on October 30, 2002 and November 11, 2002, we paid a fee of $0.4 million to a financial advisory firm and issued to that firm warrants to purchase an additional 6,200,000 shares of common stock at an exercise price of $0.001 per share
with a term of one year. In addition, Michael Liss, our Chief Executive Officer, was compensated in the amount of $0.4 million for his efforts in negotiating and completing the transactions described above.

As of September 30, 2002, the outstanding borrowings under our credit facility were $96.2 million, and the weighted average interest rate on our outstanding borrowings under the facility was 6.4%.  However as of November
13, 2002, the outstanding borrowings under our credit facility were $33.4 million, and there were no events of default under our credit agreement.  We have evaluated the transactions of our recapitalization under Statement of Financial
Accounting Standards No. 6, Classification of Short-Term Obligations Expected to Be Refinanced, and determined that the related debt should be classified as a long-term liability as of September 30, 2002 because, subsequent to the
balance sheet date of September 30, 2002 but prior to the issuance of this Form 10-Q, we refinanced the debt on a long-term basis.  In addition, under Statement of Financial Accounting Standards No. 6, Classification of
Short-Term Obligations Expected to Be Refinanced, we determined that the subordinated note payable of $2.0 million and note payable to an affiliate of $0.4 million should be classified as a long-term liability as of September 30, 2002 because,
subsequent to the balance sheet date of September 30, 2002 but prior to the issuance of this Form 10-Q, we converted these notes into equity.

We anticipate spending $2.0 million to $3.0
million during fiscal year 2002 on capital expenditures for the implementation of customer orders and the maintenance of our networks.  We have substantially completed the deployment of our FINs, carrier hotel facilities and metropolitan
transport networks.  We may expend additional capital for the selected expansion of our network infrastructure, depending upon market conditions, customer demand and our liquidity and capital resources.

Our planned operations continue to require additional capital to fund equipment purchases, engineering and construction costs, marketing costs, administrative expenses and other operating activities. Although we reported that
we generated positive EBITDA (as defined) for the nine months ended September 30, 2002, there can be no assurance that we will be able to achieve such a result prospectively. We may not be able to fund our operating and investing activities with
internally generated cash flows. We may continue to require external sources of capital.  Despite the completion of the transactions comprising our recapitalization, as discussed above, we continue to be subject to restrictive provisions and
covenants under our credit facility, and the failure to comply with any of the restrictive provisions or covenants could have a material adverse effect on our liquidity and business operations. In addition, the issuances of equity securities as a
result of the transactions comprising our recapitalization were substantially dilutive to our stockholders.

From time to time, we may consider other private or public sales of additional equity or
debt securities and other financings,

9



---

##### Table of Contents

depending upon market conditions, in order to finance the continued operations of our business. There can be no assurance that we
will be able to successfully consummate any such financing on acceptable terms, or at all. We do not have any off-balance sheet financing arrangements, nor do we anticipate entering into any.

EBITDA
(as defined), as discussed above, is defined as net loss before income taxes, interest expense, interest income, depreciation and amortization, stock related expense and other non-cash, non-recurring charges. EBITDA (as defined) is commonly used in
the communications industry and by financial analysts, and others who follow the industry, to measure operating performance. EBITDA (as defined) should not be construed as an alternative to operating income or cash flows from operating activities,
both of which are determined in accordance with accounting principles generally accepted in the United States of America, or as a measure of liquidity. Because it is not calculated under accounting principles generally accepted in the United States
of America, our EBITDA (as defined) may not be comparable to similarly titled measures used by other companies.

|                                                                         |  | Consolidated Financial Data(in thousands) (unaudited) Nine months Ended September 30, |         | Consolidated Financial Data(in thousands) (unaudited) Three months Ended September 30, |  
|------------------------------------------------------------------------ |  | ------------------------------------------------------------------------------------- | ------- | -------------------------------------------------------------------------------------- | -
|                                                                         |  |                                                                                       |         |                                                                                        |  
|                                                                         |  | 2002                                                                                  |         | 2001                                                                                   |  
|                                                                         |  |                                                                                       |         |                                                                                        |  
|                                                                         |  |                                                                                       |         |                                                                                        |  
|Calculation of EBITDA (as defined):                                      |  |                                                                                       |         |                                                                                        |  
|Net loss                                                                 |  | $                                                                                     | (13,378 | )                                                                                      | $
|Plus:                                                                    |  |                                                                                       |         |                                                                                        |  
|Operating expenses:                                                      |  |                                                                                       |         |                                                                                        |  
|Stock related expense for selling,general, and    administrative matters |  |                                                                                       | 194     |                                                                                        |  
|Write-off of property, plant and equipment                               |  |                                                                                       | 685     |                                                                                        |  
|Depreciation and amortization                                            |  |                                                                                       | 7,795   |                                                                                        |  
|Impairment of Goodwill                                                   |  |                                                                                       |        |                                                                                        |  
|Extraordinary loss on early extinguishments of debt                      |  |                                                                                       |        |                                                                                        |  
|Interest expense, net                                                    |  |                                                                                       | 6,611   |                                                                                        |  
|                                                                         |  |                                                                                       |         |                                                                                        |  
|EBITDA (as defined)                                                      |  | $                                                                                     | 1,907   |                                                                                        | $
|                                                                         |  |                                                                                       |         |                                                                                        |  

(1)  See Footnote 5 to the notes of the consolidated financial statements for a discussion of the restatement of our financial
results for the quarter ended March 31, 2001.

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board
(FASB) issued SFAS No. 141, Business Combinations, applicable for fiscal years beginning after December 15, 2001. SFAS No. 141 establishes new standards of accounting for business combinations, eliminating the use of the
pooling-of-interests method and requires that the purchase method be used for business combinations initiated at June 30, 2001.

In June 2001, the FASB issued SFAS No. 142, Goodwill and Other
Intangible Assets, applicable for fiscal years beginning after December 15, 2001. SFAS No. 142, which was adopted by us effective January 1, 2002, requires that goodwill and certain intangible assets resulting from business combinations
entered into prior to June 30, 2001 no longer be amortized, but instead be reviewed for recoverability. Any write-down of goodwill would be charged to results of operations as accumulative change in accounting principle upon adoption of the new
accounting standard if the recorded value of goodwill and certain intangibles exceeds its fair value. Any write-down of goodwill up to and including December 31, 2001 would not be subject to the rules of this new standard. We are evaluating the
impact of the adoption of SFAS No. 142 and have completed the first step of the goodwill impairment test during the quarter ended June 30, 2002, which has indicated a possible impairment of the goodwill. We will perform the second step of the
impairment test during the fourth quarter of 2002 to determine whether any adjustment is necessary.

The following table presents the impact of SFAS No. 142 as if it had been in effect for the nine
months ended September 30, 2001 and the three months ended September 30, 2001 (in thousands, except per share amounts):

10



---

##### Table of Contents

|                                                    |                                                     | Nine Months Ended September 30 |         | Three Months Ended September 30 |  
|--------------------------------------------------- | --------------------------------------------------- | ------------------------------ | ------- | ------------------------------- | -
|                                                    |                                                     |                                |         |                                 |  
|                                                    |                                                     | 2002                           |         | 2001                            |  
|                                                    |                                                     |                                |         |                                 |  
|                                                    |                                                     |                                |         |                                 |  
|Net loss applicable to common stockholders          |                                                     | $                              | (13,422 | )                               | $
|Plus: Goodwill amortization                         |                                                     |                                |        |                                 |  
|                                                    |                                                     |                                |         |                                 |  
|Adjusted net loss applicable to common stockholders |                                                     | $                              | (13,422 | )                               | $
|Basic and diluted earnings per share                |                                                     |                                |         |                                 |  
|                                                    | Net loss applicable to common stockholders          |                                | $       | (0.21                           | )
|                                                    | Plus: Goodwill amortization                         |                                |         |                                |  
|                                                    |                                                     |                                |         |                                 |  
|                                                    | Adjusted net loss applicable to common stockholders |                                | $       | (0.21                           | )
|                                                    |                                                     |                                |         |                                 |  

(1)  See Footnote 5 to the notes of the consolidated financial statements for a discussion of the restatement of our financial
results for the quarter ended March 31, 2001.

In July 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. The Statement requires entities to record the fair
value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the
liability is accreted to its then present value, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or
loss upon settlement. The Statement is effective for fiscal years beginning after June 15, 2002, with earlier application encouraged. We do not expect the adoption of the Statement to have a material impact on our results of operations.

In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The Statement replaces SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, although it retains the impairment testing methodology used in SFAS No. 121. The accounting and reporting provisions of Accounting Principals Board Opinion (APB) 30,
Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, are superceded by SFAS No. 144, except that the Statement
preserves the requirement of APB 30 to report discontinued operations separately from continuing operations. The Statement covers a variety of implementation issues inherent in SFAS No. 121, unifies the framework used in accounting for assets to be
disposed of and discontinued operations, and broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing
operations of the entity in a disposal transaction. The Statement is effective for fiscal years beginning after December 15, 2001. We adopted SFAS No. 144 on January 1, 2002. The adoption of SFAS No. 144 did not have a material impact on our
financial statements.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements 4, 44 and 64, Amendment of FASB Statement 13, and Technical Corrections. SFAS No. 145
rescinds the provisions of SFAS No. 4 that requires companies to classify certain gains and losses from debt extinguishments as extraordinary items, eliminates the provisions of SFAS No. 44 regarding transition to the Motor Carrier Act of 1980 and
amends the provisions of SFAS No. 13 to require that certain lease modifications be treated as sale leaseback transactions. The provisions of SFAS No. 145 related to classification of debt extinguishment are effective for fiscal years beginning
after May 15, 2002. Commencing January 1, 2003, we will classify debt extinguishment costs within income from operations and will reclassify previously reported debt extinguishments as such.  The provisions of SFAS No. 145 related to lease
modification are effective for transactions occurring after May 15, 2002.  We are currently evaluating the impact of the provisions of SFAS No. 145 on our financial position and results of operations.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 nullifies Emerging Issues Task Force (EITF) No. 94-3, Liability
Recognition for certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in as Restructuring). The principal difference between SFAS No. 146 and EITF No. 94-3 relates to its requirements for
recognition of a liability for a cost associated with an exit or disposal activity. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF No. 94-3, a
liability for an exit cost was recognized at the date of an entitys commitment to an exit plan. SFAS No. 146 is effective for exit and disposal activities that are initiated after December 31, 2002. We do not expect the provisions of SFAS No.
146 to have a material impact on our financial position or results of operations.

11



---

##### Table of Contents

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 September 30, 2002, we had borrowed $96.2 million under our credit facility, with a weighted average interest rate of 6.4%.

On January 2, 2002 we entered into an interest rate swap transaction with Deutsche Bank AG for a notional amount of $25.0 million and a term of two years. Pursuant to this transaction, we were obligated to make
quarterly interest payments at a fixed, annual interest rate of 3.7%. Because such interest rate excludes the applicable margin of 4.5% that we pay on our credit facility, the total interest rate for us on this swap transaction was 8.2%. As part of
this agreement, Deutsche Bank AG was obligated to pay to us on a quarterly basis a floating rate of interest based upon LIBOR with a designated maturity of three months. On March 20, 2002 we terminated this interest rate swap transaction with
Deutsche Bank AG with no payments of other amounts owed by either party. As a result, all of our outstanding borrowings under our credit facility bear interest at a floating rate.

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

Item 4.
Controls and Procedures

Evaluation of Disclosure Controls and Procedures.  The companys principal executive officer and principal financial officer, after
evaluating the effectiveness of the companys disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) on November 12, 2002, have concluded that, based on such evaluation, the companys disclosure
controls and procedures were adequate and effective to ensure that material information relating to the company, including its consolidated subsidiaries, was made known to them by others within those entities, particularly during the period in which
this Quarterly Report on Form 10-Q was being prepared.

Changes in Internal Controls.  There were no significant changes in the companys internal controls or in other factors that
could significantly affect these controls subsequent to the date of their evaluation, nor were there any significant deficiencies or material weaknesses in the companys internal controls.  Accordingly, no corrective actions were required
or undertaken.

12



---

##### Table of Contents

PART IIOTHER INFORMATION

Item 1.  
Legal Proceedings

None

Item 2.  
Changes in Securities and Use of Proceeds

None.

Item 3.  
Defaults Upon Senior Securities

None.

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

None.

Item 5.  
Other Information

None.

Item 6.  
Exhibits and Reports on Form 8-K

(a)   Exhibits

None.

(b)  The following reports were filed on Form 8-K during the quarter ended September 30, 2002:

1.  A report was filed on July 1, 2002, under Item 5,
regarding an extension of the due date of interest payments under our credit facility and an extension of our $2.0 million promissory notes term.

2.  A report was filed on July 16,
2002, under Item 5, regarding an extension of the due date of interest payments under our credit facility and an extension of our $2.0 million promissory notes term.

3.  A report
was filed on Aug 1, 2002, under Item 4, regarding the effective termination of Arthur Andersen LLP as the Companys external auditor.

4.  A report was filed on Aug 9, 2002,
under Item 4, regarding our appointment of Deloitte & Touche LLP as our companys new external auditor.

5.  A report was filed on Aug 14, 2002, under Item 5, regarding
an extension of the due date of interest payments under our credit facility and an extension of our $2.0 million promissory notes term.

6.  A report was filed on Aug 20, 2002,
under Item 4, amending the report filed on Aug 1, 2002.

7.  A report was filed on Sept 4, 2002, under Item 5, regarding an extension of the due date of interest payments
under our credit facility and an extension of our $2.0 million promissory notes term.

13



---

##### Table of Contents

SIGNATURES

Pursuant to 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: November 14, 2002 | FIBERNET TELECOM GROUP, INC.
|                        |                             
|                        | By:                         
|                        |                             
|                        | Name:                       
|                        | Title:                      

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

14



---

##### Table of Contents

CERTIFICATIONS

I, Michael S. Liss, certify that:

1.  I have reviewed this quarterly report on Form 10-Q of FiberNet Telecom Group, Inc.;

2.  Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly
report;

3.  Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.  The registrants other certifying officers and I
are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

| | a)  designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                    
| | b)  evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(the Evaluation Date); and                                                                                                  
| |                                                                                                                                                                                                                                                                                                    
| | c)  presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;                                                                                                                        

5.  The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the equivalent functions):

| | a)  all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                   
| | b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and                                                                                                                                        

6.  The registrants other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

|Date: November 14, 2002                                               |  |  | 
|--------------------------------------------------------------------- |  |  | 
|                                                                      |  |  | 
|/s/ MICHAEL S. LISS                                                   |  |  | 
|                                                                      |  |  | 
|Michael S. Liss Chief Executive Officer (Principal Executive Officer) |  |  | 

15



---

##### Table of Contents

CERTIFICATIONS

I, Jon A. DeLuca, certify that:

1.  I have reviewed this quarterly report on Form 10-Q of FiberNet Telecom Group, Inc.;

2.  Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly
report;

3.  Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.  The registrants other certifying officers and I
are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

| | a)  designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                    
| | b)  evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the
Evaluation Date); and                                                                                                  
| |                                                                                                                                                                                                                                                                                                    
| | c)  presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;                                                                                                                        

5.  The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the equivalent functions):

| | a)  all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and
report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                   
| | b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and                                                                                                                                        

6.  The registrants other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

|Date: November 14, 2002                                                                       |  |  | 
|--------------------------------------------------------------------------------------------- |  |  | 
|                                                                                              |  |  | 
|/s/ JON A. DELUCA                                                                             |  |  | 
|                                                                                              |  |  | 
|Jon A. DeLuca Senior Vice President and Chief Financial Officer (Principal Financial Officer) |  |  | 

16



---

##### Table of Contents

FIBERNET TELECOM GROUP, INC.CONSOLIDATED BALANCE SHEETS(DOLLARS IN 000S, EXCEPT PER SHARE AMOUNTS)

|                                                                                                                                          |                                                                                                                                                                                                                                      | September 30, 2002 |         | December 31, 2001 |  
|----------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------ | ------- | ----------------- | -
|                                                                                                                                          |                                                                                                                                                                                                                                      |                    |         |                   |  
|                                                                                                                                          |                                                                                                                                                                                                                                      | (Unaudited)        |         |                   |  
|ASSETS                                                                                                                                    |                                                                                                                                                                                                                                      |                    |         |                   |  
|Current assets:                                                                                                                           |                                                                                                                                                                                                                                      |                    |         |                   |  
|                                                                                                                                          | Cash and cash equivalents                                                                                                                                                                                                            |                    | $       | 1,305             |  
|                                                                                                                                          | Accounts receivable, net of allowance of $2,309 and $2,245 at September 30,       2002 and December 31, 2001, respectively                                                                                                           |                    |         | 2,222             |  
|                                                                                                                                          | Prepaid expenses and other                                                                                                                                                                                                           |                    |         | 766               |  
|                                                                                                                                          |                                                                                                                                                                                                                                      |                    |         |                   |  
|                                                                                                                                          | Total current assets                                                                                                                                                                                                                 |                    |         | 4,293             |  
|Property, plant and equipment, net                                                                                                        |                                                                                                                                                                                                                                      |                    | 102,451 |                   |  
|Goodwill, net of accumulated amortization of $1,159 at September 30,         2002 and December 31, 2001                                   |                                                                                                                                                                                                                                      |                    | 7,509   |                   |  
|Deferred charges, net of accumulated amortization of $3,066 and $1,937 at September 30,          2002 and December 31, 2001,
respectively |                                                                                                                                                                                                                                      |                    | 11,707  |                   |  
|Other assets                                                                                                                              |                                                                                                                                                                                                                                      |                    | 408     |                   |  
|                                                                                                                                          |                                                                                                                                                                                                                                      |                    |         |                   |  
|                                                                                                                                          | Total other assets                                                                                                                                                                                                                   |                    |         | 19,624            |  
|                                                                                                                                          |                                                                                                                                                                                                                                      |                    |         |                   |  
|TOTAL ASSETS                                                                                                                              |                                                                                                                                                                                                                                      | $                  | 126,368 |                   | $
|                                                                                                                                          |                                                                                                                                                                                                                                      |                    |         |                   |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                      |                                                                                                                                                                                                                                      |                    |         |                   |  
|Current liabilities:                                                                                                                      |                                                                                                                                                                                                                                      |                    |         |                   |  
|                                                                                                                                          | Accounts payable                                                                                                                                                                                                                     |                    | $       | 6,165             |  
|                                                                                                                                          | Accrued expenses                                                                                                                                                                                                                     |                    |         | 9,267             |  
|                                                                                                                                          | Deferred revenues                                                                                                                                                                                                                    |                    |         | 4,854             |  
|                                                                                                                                          | Capital lease obligation--current portion                                                                                                                                                                                            |                    |         | 253               |  
|                                                                                                                                          | Note payable, affiliate                                                                                                                                                                                                              |                    |         |                  |  
|                                                                                                                                          |                                                                                                                                                                                                                                      |                    |         |                   |  
|                                                                                                                                          | Total current liabilities                                                                                                                                                                                                            |                    |         | 20,539            |  
|Subordinated note payable                                                                                                                 |                                                                                                                                                                                                                                      |                    | 2,000   |                   |  
|Note payable, affiliate                                                                                                                   |                                                                                                                                                                                                                                      |                    | 450     |                   |  
|Notes payable, less original issue discount of $5,178 and $6,071 at September 30, 2002 and          December 31,
2001,  respectively      |                                                                                                                                                                                                                                      |                    | 91,070  |                   |  
|Capital lease obligation                                                                                                                  |                                                                                                                                                                                                                                      |                    | 281     |                   |  
|                                                                                                                                          |                                                                                                                                                                                                                                      |                    |         |                   |  
|                                                                                                                                          | Total liabilities                                                                                                                                                                                                                    |                    |         | 114,340           |  
|Stockholders equity:                                                                                                                     |                                                                                                                                                                                                                                      |                    |         |                   |  
|                                                                                                                                          | Series H Preferred Stock $.001 par value, 104,578 and 100,556 shares issued and        outstanding at September 30,
2002 and December 31, 2001, respectively (Preference in        involuntary liquidation value, $100.00 per share) |                    |         | 17,127            |  
|                                                                                                                                          | Series J preferred stock $.001 par value, 303 and 356 shares issued and outstanding        at September 30, 2002 and December 31, 2001, respectively
(Preference in        involuntary liquidation value, $10,000.00 per share)      |                    |         | 912               |  
|                                                                                                                                          | Common Stock, $.001 par value, 150,000,000 shares authorized and 64,331,722 and          61,572,613 shares issued and
outstanding at September 30, 2002          and December 31, 2001, respectively                                 |                    |         | 64                |  
|                                                                                                                                          | Subscription receivable from series J preferred stock                                                                                                                                                                                |                    |         |                  |  
|                                                                                                                                          | Additional paid in capital                                                                                                                                                                                                           |                    |         | 297,172           |  
|                                                                                                                                          | Accumulated deficit                                                                                                                                                                                                                  |                    |         | (303,247          | )
|                                                                                                                                          |                                                                                                                                                                                                                                      |                    |         |                   |  
|                                                                                                                                          | Total stockholders equity                                                                                                                                                                                                           |                    |         | 12,028            |  
|                                                                                                                                          |                                                                                                                                                                                                                                      |                    |         |                   |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                |                                                                                                                                                                                                                                      | $                  | 126,368 |                   | $
|                                                                                                                                          |                                                                                                                                                                                                                                      |                    |         |                   |  
|                                                                                                                                          |                                                                                                                                                                                                                                      |                    |         |                   |  

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

17



---

##### Table of Contents

FIBERNET TELECOM GROUP, INC.CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)  (DOLLARS IN 000S, EXCEPT PER SHARE AMOUNTS)

|                                                                        |                                                                             | Nine Months Ended September 30, |           
|----------------------------------------------------------------------- | --------------------------------------------------------------------------- | ------------------------------- | ----------
|                                                                        |                                                                             |                                 |           
|                                                                        |                                                                             | 2002                            |           
|                                                                        |                                                                             |                                 |           
|                                                                        |                                                                             |                                 |           
|Revenues                                                                |                                                                             | $                               | 19,316    
|Operating expenses:                                                     |                                                                             |                                 |           
|                                                                        | Cost of services (exclusive of items shown separately below)                |                                 |           
|                                                                        | Selling, general and administrative expense excluding stock related expense |                                 |           
|                                                                        | Stock related expense for selling, general, and administrative matters      |                                 |           
|                                                                        | Write-off of property, plant and equipment                                  |                                 |           
|                                                                        | Impairment of Goodwill                                                      |                                 |           
|                                                                        | Depreciation and amortization                                               |                                 |           
|                                                                        |                                                                             |                                 |           
|Total operating expenses                                                |                                                                             |                                 | 26,083    
|                                                                        |                                                                             |                                 |           
|Loss from operations                                                    |                                                                             |                                 | (6,767    
|Interest expense, net                                                   |                                                                             |                                 | (6,611    
|                                                                        |                                                                             |                                 |           
|Net loss before extraordinary item                                      |                                                                             |                                 | (13,378   
|Extraordinary loss on early extinguishment of debt                      |                                                                             |                                 |          
|                                                                        |                                                                             |                                 |           
|Net loss                                                                |                                                                             |                                 | (13,378   
|Preferred stock dividends                                               |                                                                             |                                 | (44       
|Preferred stock - beneficial conversion                                 |                                                                             |                                 |          
|                                                                        |                                                                             |                                 |           
|Net loss applicable to common stockholders                              |                                                                             | $                               | (13,422   
|                                                                        |                                                                             |                                 |           
|Net loss applicable to common stockholders per share--basic and diluted |                                                                             | $                               | (0.21     
|Weighted average shares outstanding                                     |                                                                             |                                 | 63,345,723

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

18



---

##### Table of Contents

FIBERNET TELECOM GROUP, INC.CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)  (DOLLARS IN 000S, EXCEPT PER SHARE AMOUNTS)

|                                                                        |                                                                             | Three Months Ended September 30, |           
|----------------------------------------------------------------------- | --------------------------------------------------------------------------- | -------------------------------- | ----------
|                                                                        |                                                                             |                                  |           
|                                                                        |                                                                             | 2002                             |           
|                                                                        |                                                                             |                                  |           
|Revenues                                                                |                                                                             | $                                | 5,875     
|Operating expenses:                                                     |                                                                             |                                  |           
|                                                                        | Cost of services (exclusive of items shown separately below)                |                                  |           
|                                                                        | Selling, general and administrative expense excluding stock related expense |                                  |           
|                                                                        | Stock related expense for selling, general, and administrative matters      |                                  |           
|                                                                        | Impairment of Goodwill                                                      |                                  |           
|                                                                        | Depreciation and amortization                                               |                                  |           
|                                                                        |                                                                             |                                  |           
|Total operating expenses                                                |                                                                             |                                  | 8,276     
|                                                                        |                                                                             |                                  |           
|Loss from operations                                                    |                                                                             |                                  | (2,401    
|Interest expense, net                                                   |                                                                             |                                  | (2,335    
|                                                                        |                                                                             |                                  |           
|Net loss                                                                |                                                                             |                                  | (4,736    
|Preferred stock dividends                                               |                                                                             |                                  | (13       
|                                                                        |                                                                             |                                  |           
|Net loss applicable to common stockholders                              |                                                                             | $                                | (4,749    
|                                                                        |                                                                             |                                  |           
|Net loss applicable to common stockholders per share--basic and diluted |                                                                             | $                                | (0.07     
|Weighted average shares outstanding                                     |                                                                             |                                  | 64,331,722

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

19



---

##### Table of Contents

FIBERNET TELECOM GROUP, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)  (DOLLARS IN 000S)

|                                                     |                                                                                 | Nine Months Ended September 30, |       
|---------------------------------------------------- | ------------------------------------------------------------------------------- | ------------------------------- | ------
|                                                     |                                                                                 |                                 |       
|                                                     |                                                                                 | 2002                            |       
|                                                     |                                                                                 |                                 |       
|                                                     |                                                                                 |                                 |       
|Cash flows from operating activities:                |                                                                                 |                                 |       
|                                                     | Net loss applicable to common stockholders                                      |                                 | $     
|                                                     | Adjustments to reconcile net loss to net cash used in operating activities:     |                                 |       
|                                                     | Extraordinary item                                                              |                                 |       
|                                                     | Depreciation and amortization                                                   |                                 |       
|                                                     | Preferred stock dividends                                                       |                                 |       
|                                                     | Preferred stock - beneficial conversion                                         |                                 |       
|                                                     | Stock related expense                                                           |                                 |       
|                                                     | Write-down of property plant and equipment                                      |                                 |       
|                                                     | Impairment of property, plant and equipment                                     |                                 |       
|                                                     | Other non-cash expense                                                          |                                 |       
|                                                     | Change in assets and liabilities:                                               |                                 |       
|                                                     | (Increase) decrease in accounts receivable, prepaid expenses and other assets   |                                 |       
|                                                     | Increase (decrease) in accounts payable, accrued expenses and deferred revenues |                                 |       
|                                                     |                                                                                 |                                 |       
|Cash used in operating activities                    |                                                                                 |                                 | (2,364
|Cash flows from investing activities:                |                                                                                 |                                 |       
|                                                     | Capital expenditures                                                            |                                 |       
|                                                     |                                                                                 |                                 |       
|Cash used in investing activities                    |                                                                                 |                                 | (2,073
|Cash flows from financing activities:                |                                                                                 |                                 |       
|                                                     | Net proceeds from debt financings                                               |                                 |       
|                                                     | Net proceeds from issuance of equity securities                                 |                                 |       
|                                                     | Net proceeds from subordinated note payable                                     |                                 |       
|                                                     | Repayment of capital lease obligation                                           |                                 |       
|                                                     |                                                                                 |                                 |       
|Cash provided by financing activities                |                                                                                 |                                 | 2,404 
|                                                     |                                                                                 |                                 |       
|Net (decrease) increase in cash and cash equivalents |                                                                                 |                                 | (2,033
|Cash and cash equivalents at beginning of period     |                                                                                 |                                 | 3,338 
|                                                     |                                                                                 |                                 |       
|Cash and cash equivalents at end of period           |                                                                                 | $                               | 1,305 
|                                                     |                                                                                 |                                 |       
|Supplemental disclosures of cash flow information:   |                                                                                 |                                 |       
|                                                     | Interest paid                                                                   |                                 | $     
|                                                     | Income taxes paid                                                               |                                 |       
|                                                     |                                                                                 |                                 |       

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

20



---

##### Table of Contents

FIBERNET TELECOM GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. ORGANIZATION AND OPERATIONS

FiberNet Telecom, Inc.
(Original FiberNet) was organized under the laws of the State of Delaware on August 10, 1994. On November 24, 1997, an existing public company, Desert Native Design, Inc. (DND), acquired Original FiberNet, pursuant to an
agreement and plan of merger dated that date (the Original Merger). To effect the Original Merger, DND effectuated a 3.5 for 1 forward stock split, which entitled DND shareholders to 3.5 shares of DND stock for every one share held by
them and issued 11,500,000 shares of common stock and 80,000 Series B Preferred Stock in exchange for all of the outstanding shares of Original FiberNet. Upon consummation of the Original Merger, Original FiberNet became a wholly-owned subsidiary of
DND, which subsequently changed its name to FiberNet Telecom Group, Inc., a Nevada corporation (FiberNet Nevada). For accounting purposes, the acquisition was treated as a recapitalization of DND with Original FiberNet as the acquirer
(reverse acquisition). On December 9, 1999, FiberNet Nevada changed its state of incorporation to Delaware (hereinafter referred to as FiberNet or the Company).

FiberNet is a
facilities-based communications provider focused on providing wholesale broadband connectivity for data, voice and video transmission on its state-of-the-art fiber optic networks in major metropolitan areas. The Company offers an advanced high
bandwidth, fiber-optic solution to support the growing demand for network capacity in the intra-city market, or local loop. The Company has lit multiple strands of fiber on a redundant and diversely routed SONET ring and IP architecture throughout
New York City.  In addition, the Company also provides services in Chicago and Los Angeles.

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

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The
consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, FiberNet Operations, Inc., Devnet, FiberNet Telecom, Inc., Equal Access and Local Fiber. The accompanying unaudited consolidated 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 consolidated financial statements. All significant intercompany 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.

The Companys operations and ability to grow may be affected by numerous factors, including the difficulty inherent in operating an early-stage company in a new and rapidly evolving market; its history of
operating losses and accumulated deficit; its limited financial resources and uncertainty as to the availability of additional capital to fund its operations on acceptable terms, if at all; its success in obtaining additional carrier hotel lease
agreements and license agreements with building owners; growth in demand for its services; the frequency of service interruptions on its networks; the potential development by competitors of competing products and technologies; restrictions imposed
on it as a result of its debt; and changes in the regulatory environment. The failure of the Company to achieve certain operational results would violate certain debt covenants thereby potentially accelerating the outstanding balance for immediate
payment.

21



---

##### Table of Contents

Cash and Cash Equivalents

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

Property, Plant and
Equipment

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

|Computer software             |  | 3-5 Years  | 
|----------------------------- |  | ---------- | 
|Computer equipment            |  | 3-5 Years  | 
|Office equipment and fixtures |  | 5-10 Years | 
|Leasehold improvements        |  | 9-15 Years | 
|Network equipment             |  | 5-10 Years | 
|Network infrastructure        |  | 5-20 Years | 

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

Impairment of Long-Lived Assets

The Company reviews the carrying value of long-lived assets
including property, plant and equipment for impairment 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, based upon discounted expected future
cash flows.

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 contract 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 five years. Revenue is recognized over the service contract period for all general services. Deferred revenues consist primarily of payments received in advance of revenue being earned under the service
contracts. Most of its customers are obligated to make minimum payments for the utilization of its networks and facilities. Customers may elect to purchase additional services in excess of minimum contractual requirements.

Revenues are derived from three general types of services:

Transport services. FiberNets transport services include the offering of broadband circuits on its
metropolitan transport networks and vertically on its in-building networks. The Company also offers vertical dark fiber in certain of its carrier hotel facilities and on-net and off-net buildings. In addition, the Company operates a meet-me-room
facility that offers customers a single location within the carrier hotel to facilitate network cross connections.

Colocation services. FiberNets colocation services include providing
customers with the ability to locate their communications and networking equipment at its carrier point facilities in a secure technical operating environment. The Company also can provide its customers with colocation services in the central
equipment rooms of certain of its on-net and off-net buildings. If a customer purchases colocation services, the Company may require the customer to make a minimum commitment for transport services, as well.

Communications access management services. FiberNets access management services include providing its customers with the non-exclusive right to market and provide their retail services to tenants in its on-net and
off-net buildings. Customers typically enter into an agreement with the Company to gain access to all or a significant number of its properties. For certain of its on-net and off-net buildings, the Company has the exclusive right to manage
communications access. Once a customer has entered into an agreement with the Company for access services, FiberNet typically requires that customer to utilize its in-building network infrastructure for connectivity to end-user tenants, if such
networking infrastructure is available.

22



---

##### Table of Contents

As of September 30, 2002 the Company had one reciprocal agreement. The services provided and obtained through this agreement were
priced at fair market value as of the date of the agreement and is included in revenues and cost of services in the accompanying consolidated statements of operations. The Company recorded revenues from these reciprocal agreements for transport
services and colocation services in the amount of approximately $0.7 million and $3.9 million for the nine months ended September 30, 2002 and September 30, 2001, respectively, and approximately $0.1 million and $1.3 million for the three months
ended September 30, 2002 and September 30, 2001, respectively. The Company leased colocation facilities under these agreements. The total amounts expensed for services rendered under the reciprocal agreements for the nine months ended September 30,
2002 and September 30, 2001 were approximately $0.7 million and $4.0 million, respectively, and for the three months ended September 30, 2002 and September 30, 2001 were approximately $0.1 million and $1.4 million, respectively.

Goodwill

Cost in excess of net assets of acquired business, principally goodwill, is accounted for under SFAS No. 142, Goodwill and Other Intangible
Assets. In June 2001, the FASB issued SFAS No. 142, which is applicable for fiscal years beginning after December 15, 2001. SFAS No. 142, which was adopted by the Company effective January 1, 2002, requires that goodwill and certain intangible
assets resulting from business combinations entered into prior to June 30, 2001 no longer be amortized, but instead be reviewed for recoverability. Any write-down of goodwill would be charged to results of operations as accumulative change in
accounting principle upon adoption of the new accounting standard if the recorded value of goodwill and certain intangibles exceeds its fair value. Any write-down of goodwill up to and including December 31, 2001 would not be subject to the rules of
this new standard.

Deferred Charges

Deferred charges include the cost to access buildings and deferred financing costs. Costs to access
buildings are amortized over 15 years, which represents the term of the related contracts. Deferred financing costs are amortized over the term of the related debt instrument.

Earnings Per Share

Basic earnings per share have been computed using the weighted average number of shares during the period. Diluted earnings per share are computed by including the dilutive effect on common
stock that would be issued assuming conversion of stock options, warrants and other dilutive securities. Dilutive options, warrants and other securities did not have an effect on the computation of diluted earnings per share in 2002 and 2001, as
they were anti-dilutive.

Concentration of Credit Risk

The Company has concentration of credit risk among its customer base. The Company
performs ongoing credit evaluations of its customers financial condition. As of September 30, 2002, one customer accounted for 11.0% of the Companys total accounts receivable, and as of December 31, 2001 one customer accounted for 19.4%
of the Companys total accounts receivable.

For the nine months ended September 30, 2002, two customers in the aggregate accounted for 27.3% of the Companys total revenue, and for the
nine months ended September 30, 2001, three customers in the aggregate accounted for 57.1% of the Companys total revenue. For the three months ended September 30, 2002, two customers in the aggregate accounted for 21.1% of the Companys
total revenue, and for the three months ended September 30, 2001, three customers in the aggregate accounted for 50.6% of the Companys total revenue.

As of December 31, 2001, the Company had
an allowance for doubtful accounts of $2.2 million. During the nine months ended September 30, 2002, FiberNet wrote off $0.4 million of this allowance and recorded $0.5 million of bad debt expense, resulting in an allowance for doubtful accounts of
$2.3 million, as of September 30, 2002. For the nine months ended September 30, 2001, the Company recorded $2.1 million of bad debt expense.

Stock Option Plan

The Company accounts for stock option grants in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and, accordingly, recognizes expense for stock option grants to
the extent that the estimated fair value of the stock exceeds the exercise price of the option at the measurement date. Stock option grants to non-employees are accounted in accordance with Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation. The compensation expense is charged against operations ratably over the vesting period of the options.

Accounting
for Income Taxes

The Company follows SFAS No. 109, Accounting for Income Taxes, which requires the use of the liability method of accounting

23



---

##### Table of Contents

for deferred income taxes. Under this method, deferred income taxes represent the net tax effect of temporary differences between the
carrying amount of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. Additionally, if it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation
allowance is required to be recognized.

Accounting for Derivative Instruments

The Company accounts for derivative instruments in accordance
with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. SFAS No. 133 establishes standards of accounting and reporting for derivative instruments and hedging activities, and requires that all
derivatives be recognized on the balance sheet at fair value. Changes in the fair value of derivatives that do not meet the hedge accounting criteria are to be reporting in earnings. The adoption of SFAS No. 133 did not have a material impact on the
Companys consolidated financial statements for the nine months ended September 30, 2002 and September 30, 2001.

Reclassifications

Certain balances have been reclassified in the consolidated financial statements to conform to current presentation.

Segment Reporting

The Company is a single segment operating company providing telecommunications services.

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, Business Combinations, applicable for fiscal years beginning after December 15, 2001. SFAS No. 141 establishes new
standards of accounting for business combinations, eliminating the use of the pooling-of-interests method and requires that the purchase method be used for business combinations initiated at June 30, 2001.

In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets, applicable for fiscal years beginning after December 15, 2001. SFAS No. 142, which was adopted by the Company effective January 1,
2002, requires that goodwill and certain intangible assets resulting from business combinations entered into prior to June 30, 2001 no longer be amortized, but instead be reviewed for recoverability. Any write-down of goodwill would be charged to
results of operations as accumulative change in accounting principle upon adoption of the new accounting standard if the recorded value of goodwill and certain intangibles exceeds its fair value. Any write-down of goodwill up to and including
December 31, 2001 would not be subject to the rules of this new standard. The Company is evaluating the impact of the adoption of SFAS No. 142 and has completed the first step of the goodwill impairment test during the quarter ended June 30, 2002,
which has indicated a possible impairment of the goodwill. The Company will perform the second step of the impairment test during the fourth quarter of 2002 to determine whether any adjustment is necessary.

The following table presents the impact of SFAS No. 142 as if it had been in effect for the nine months ended September 30, 2001 and the three months ended September 30, 2001 (in thousands, except per share amounts):

|                                                    |                                                     | Nine Months EndedSeptember 30, |         | Three Months EndedSeptember 30, |                         
|--------------------------------------------------- | --------------------------------------------------- | ------------------------------ | ------- | ------------------------------- | ------------------------
|                                                    |                                                     |                                |         |                                 |                         
|                                                    |                                                     | 2002                           |         | 2001                            |                         
|                                                    |                                                     |                                |         |                                 |                         
|                                                    |                                                     |                                |         |                                 | As Restated - See Note 5
|Net loss applicable to common stockholders          |                                                     | $                              | (13,422 | )                               | $                       
|Plus: Goodwill amortization                         |                                                     |                                |        |                                 |                         
|                                                    |                                                     |                                |         |                                 |                         
|Adjusted net loss applicable to common stockholders |                                                     | $                              | (13,422 | )                               | $                       
|Basic and diluted earnings per share                |                                                     |                                |         |                                 |                         
|                                                    | Net loss applicable to common stockholders          |                                | $       | (0.21                           | )                       
|                                                    | Plus: Goodwill amortization                         |                                |         |                                |                         
|                                                    |                                                     |                                |         |                                 |                         
|                                                    | Adjusted net loss applicable to common stockholders |                                | $       | (0.21                           | )                       
|                                                    |                                                     |                                |         |                                 |                         

In July 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. The Statement requires entities to
record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset.
Over time, the liability is

24



---

##### Table of Contents

accreted to its then present value, and the capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The Statement is effective for fiscal years beginning after June 15, 2002, with earlier application encouraged.
The Company does not expect the adoption of the Statement to have a material impact on its results of operations.

In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. The Statement replaces SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, although it retains the impairment testing methodology used in
SFAS No. 121. The accounting and reporting provisions of Accounting Principals Board Opinion (APB) 30, Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions, are superceded by SFAS No. 144, except that the Statement preserves the requirement of APB 30 to report discontinued operations separately from continuing operations. The Statement covers a
variety of implementation issues inherent in SFAS No. 121, unifies the framework used in accounting for assets to be disposed of and discontinued operations, and broadens the reporting of discontinued operations to include all components of an
entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. The Statement is effective for fiscal years beginning after December 15,
2001. FiberNet adopted SFAS No. 144 on January 1, 2002. The adoption of SFAS No. 144 did not have a material impact on the Companys financial statements.

In April 2002, the FASB issued SFAS
No. 145, Rescission of FASB Statements 4, 44 and 64, Amendment of FASB Statement 13, and Technical Corrections. SFAS No. 145 rescinds the provisions of SFAS No. 4 that requires companies to classify certain gains and losses from debt
extinguishments as extraordinary items, eliminates the provisions of SFAS No. 44 regarding transition to the Motor Carrier Act of 1980 and amends the provisions of SFAS No. 13 to require that certain lease modifications be treated as sale leaseback
transactions. The provisions of SFAS No. 145 related to classification of debt extinguishment are effective for fiscal years beginning after May 15, 2002. Commencing January 1, 2003, the Company will classify debt extinguishment costs within income
from operations and will reclassify previously reported debt extinguishments as such. The provisions of SFAS No. 145 related to lease modification are effective for transactions occurring after May 15, 2002.  The Company is currently evaluating
the impact of the provisions of SFAS No. 145 on its financial position and results of operations.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities. SFAS No. 146 nullifies Emerging Issues Task Force (EITF) No. 94-3, Liability Recognition for certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in
as Restructuring). The principal difference between SFAS No. 146 and EITF No. 94-3 relates to its requirements for recognition of a liability for a cost associated with an exit or disposal activity. SFAS No. 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF No. 94-3, a liability for an exit cost was recognized at the date of an entitys commitment to an exit plan. SFAS No. 146 is effective
for exit and disposal activities that are initiated after December 31, 2002. The Company does not expect the provisions of SFAS No. 146 to have a material impact on its financial position or results of operations.

3. PROPERTY, PLANT AND EQUIPMENT

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

|                                     |  | September 30, 2002 |         | December 31, 2001 |  
|------------------------------------ |  | ------------------ | ------- | ----------------- | -
|                                     |  |                    |         |                   |  
|Computer software                    |  | $                  | 137     |                   | $
|Computer equipment                   |  |                    | 293     |                   |  
|Leasehold improvements               |  |                    | 30      |                   |  
|Office equipment and furniture       |  |                    | 146     |                   |  
|Network equipment and infrastructure |  |                    | 124,803 |                   |  
|                                     |  |                    |         |                   |  
|Total                                |  |                    | 125,409 |                   |  
|Accumulated depreciation             |  |                    | (22,958 | )                 |  
|                                     |  |                    |         |                   |  
|                                     |  |                    | 102,451 |                   |  
|Construction in progress             |  |                    |        |                   |  
|                                     |  |                    |         |                   |  
|Property, plant and equipment, net   |  | $                  | 102,451 |                   | $
|                                     |  |                    |         |                   |  

During the nine months ended September 30, 2002, the Company recorded a write-off of property, plant
and equipment of $0.7 million. FiberNet recorded this write-off of capital assets due to the termination of several property leases and license agreements for

25



---

##### Table of Contents

network facilities. There was no cost to FiberNet to abandon these assets, nor does it expect to receive any proceeds or other
consideration from the abandonment of these assets. Management had the authority to write-off these assets, in the ordinary course of business, and recorded no other reserves, accruals or other liabilities related to this write-off.

4. SIGNIFICANT EVENTS

On March 15, 2002, the lenders under the Companys senior secured credit facility agreed to extend the due date of the quarterly
interest payment due on March 14, 2002 to April 15, 2002, as part of the initiation of the Companys proposed recapitalization. Subsequently, as the ongoing negotiations continued, FiberNets lenders periodically agreed to extend the due
dates of their interest payments. Most recently on October 18, 2002, the lenders agreed to extend the due dates to November 1, 2002.  Concurrently with the closing of the restructuring transactions on October 30, 2002, the
lenders agreed to extend the due dates of certain of their interest payments to November 8, 2002 (see Note 6).  During this period, the Company was not in default with respect to its senior secured credit facility (see Note 6).

On June 14, 2002, the holder of the Companys $2.0 million promissory note that was issued on March 15, 2002, also as part of the initiation of the Companys proposed recapitalization,
agreed to amend certain terms of the note, resulting in an extension of the notes term to June 28, 2002. The Company has also received subsequent periodic extensions of the notes term, most recently extending the notes term to
November 8, 2002 on October 30, 2002.  During this period, the Company was not in default with respect to the promissory note (see Note 6).

During the second quarter of 2002, the
Company negotiated non-recurring concessions of $1.3 million related to amounts owed to certain vendors, and as a result the Company reduced accounts payable by such an amount. This reduction corresponded to a $0.6 million reduction in property,
plant, and equipment and a $0.7 million reduction in cost of services, as these amounts were capitalized and expensed, respectively, in prior periods. The concessions included the termination of a master services agreement with a significant vendor
governing telecommunications licenses for 121 commercial office properties. In addition, during the nine months ended September 30, 2002 the Company reached a similar concession with a related party that resulted in forgiveness of a portion of a
note payable in the amount of $0.6 million that was recorded as additional paid in capital, in accordance with APB No. 26, Early Extinguishment of Debt.

In July 2002 the Company
negotiated a revised pricing structure with a significant customer for the services that the Company provides to it, although the Company previously was not obligated to do so. In addition, this customer subsequently terminated certain services that
the Company was providing. The impact to revenues attributable to these two events was equal to approximately a $0.5 million reduction in revenues for the three and nine months ended September 30, 2002.  We anticipate that the impact to
revenues attributable to these two events for the full year of fiscal 2002 will be equal to approximately a $1.4 million reduction in revenues.  The impact of these events does not put the Company in a loss position with respect to the
remaining services with this customer.

In August 2002 the Company defaulted on product orders for dark fiber laterals to certain facilities. As a result, FiberNet lost inter-building connectivity to
certain of its facilities, thereby limiting the services that it is able to provide. The Company believes this event will not have a material impact on its business operations or financial results.

In September 2002, we amended our services agreement with a significant customer, which amendment provided for, among other things, the reduction of services to that customer at our option.  We exercised that option in
October 2002 and immediately began providing those same services to another customer.  As a result, this transfer in services did not entail any reduction in revenues.

5. RESTATEMENT

The Company restated its consolidated financial statements for the quarter ended March 31, 2001 to record a beneficial conversion feature of $21.0 million in connection with the reduction of the conversion
price on series H and series I preferred stock on February 9, 2001. The conversion price of the series H and series I preferred stock was reduced to $4.38, in accordance with the original terms of the issuance transactions. The certificates of
designation of the series H and series I preferred stock include provisions requiring the conversion prices to be lowered to the per share price at which the Company issues any shares of common stock, subject to certain exceptions, subsequent to the
initial issuance of the series H and series I. In February 2001, the Company issued shares of common stock in a directed public offering at a price of $4.38 per share, resulting in the reduction of the conversion price. The amount of the charge
assumes the market price per share of the underlying common stock, as of the date the charge is incurred, in accordance with EITF Issue 98-05, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratio.

Other than with respect to the consolidated financial statements for the quarter ended March 31, 2001, this restatement has no impact on the Companys assets or total
stockholders equity, and it resulted in an increase in additional paid-in-capital and an increase in net loss. The change increased net loss applicable to common stockholders by $21.0 million and increased net loss applicable to common
stockholders per share by $0.54 for the nine months ended September 30, 2001. The change has no impact on the Companys cash flows. This change was previously reflected in the Companys annual report on Form 10-K for the fiscal year ended
December 31,

26



---

##### Table of Contents

2001, as amended.

6. SUBSEQUENT EVENTS

On October 30, 2002 the Company completed a series of transactions with the lenders under its senior credit facility as well as certain investors to undertake the recapitalization of the Company.  These transactions are
described below.

Pursuant to the terms of a common stock purchase agreement dated as of October 30, 2002 by and among FiberNet and the lenders under the Companys credit facility, FiberNet
issued 440,000,000 shares of its common stock to the lenders at a price of $0.15 per share, as prepayment of an aggregate of $66.0 million of outstanding indebtedness under the Companys credit facility. The Company also issued warrants to
purchase 110,000,000 shares of common stock at an exercise price of $0.12 per share with a term of five years to the lenders. These warrants are immediately exercisable and contain standard anti-dilution protection. As of October 30, 2002, the
440,000,000 shares issued to the lenders constituted approximately 61% of the total number of outstanding shares of common stock. Such shares, together with shares issuable upon exercise of the warrants, also constituted approximately 61% of the
shares of common stock outstanding on a fully diluted basis, assuming the exercise of all outstanding options and warrants.

In connection with this transaction, FiberNet and certain of its lenders
also entered into a stockholders agreement dated as of October 30, 2002. Under the terms of this stockholders agreement, such lenders have the right to designate two independent persons to be members of the Companys board of directors,
along with other certain rights and privileges. Together with the lenders, the Company also executed a seventh amendment to its credit agreement which, among other things, amends certain terms of the credit agreement in conjunction with the
transactions that were consummated on October 30, 2002.

As part of the seventh amendment, the term loan commitments and revolving loan commitments available under the credit facility were reduced to
a total of $40.5 million from a total of $105.0 million.  The term loan commitments were reduced to $26.2 million, all of which was drawn and outstanding, and the revolving loan commitments were reduced to $14.4 million.  All of the
Companys revolving loan commitments were utilized with drawn, outstanding borrowings of $7.3 million and outstanding letter of credit issued in the amount of $7.1 million.  As of October 30, 2002, the Company had no additional
availability under its credit facility.

In addition, the effective applicable margin on FiberNets borrowings was reduced from LIBOR+450 basis points to LIBOR+375 basis points until December 31,
2003.  Furthermore, the payment of all accrued interest on borrowings during the period beginning on October 30, 2002 and ending on June 30, 2003 will be capitalized and added to the outstanding principal amount of the term loan indebtedness.
Prior to October 30, 2002, there was $5.2 million of interest due and payable on the indebtedness outstanding under the credit facility.  As part of this transaction, accrued interest of $3.2 million was capitalized and added to the
outstanding principal amount of the term loan indebtedness, included above. Subsequently on November 11, 2002, the Company issued to its lenders in exchange for the remaining $2.0 million of accrued interest 20,000,000 shares of common stock and
warrants to purchase 20,000,000 shares of common stock at an exercise price of $0.12 per share with a term of five years. These warrants are immediately exercisable and contain standard anti-dilution protection.

Other amendments to the Companys credit facility include modifications to the automatic reduction of commitments and to financial covenants.  Previously the first automatic reduction in the availability under the
credit facility was to have occurred on June 30, 2003.  However as amended, the automatic reduction of commitments begin on a quarterly basis on March 31, 2004.  The Company is also now subject to amended financial covenants. 
Beginning with the quarter ended September 30, 2002, the Company must now comply with financial covenants that include minimum consolidated revenue, minimum consolidated EBITDA and maximum cumulative capital expenditures.  Beginning on December
31, 2003 in addition to those requirements, the Companys financial covenants will also include a maximum consolidated leverage ratio, a minimum consolidated interest coverage ratio and a minimum consolidated fixed charge coverage ratio. 
The compliance levels and calculation of such levels with respect to those covenants are as defined in the credit agreement underlying the Companys credit facility, as amended.

Pursuant to the
terms of an investors rights agreement entered into on October 30, 2002 by and among FiberNet and its lenders, the Company has also agreed to file a resale registration statement with respect to all of the shares issued to its lenders,
including shares issuable upon exercise of the warrants. The Company expects that this registration statement will also include shares issued in the other recapitalization transactions described below.

On October 30, 2002, the Company also entered into a common stock purchase agreement with certain investors, pursuant to which the Company issued to the investors in a private offering an aggregate of 38,000,000 shares of
common stock for a price of $0.10 per share, or an aggregate cash consideration of $3.8 million. Pursuant to the terms of this purchase agreement, the Company also issued to such investors warrants to purchase an additional 38,000,000 shares of
common stock at an exercise price of $0.12 per share with a term of five years. These warrants are also immediately exercisable and contain standard anti-dilution protection.

Immediately prior to the
private offering of common stock and warrants, FiberNet consummated certain related transactions with the investors.  In one such transaction, the Company issued to one of the investors, SDS Merchant Partners, L.P. (SDS), 9,002,040
shares of

27



---

##### Table of Contents



common stock in exchange for the surrender by SDS of a promissory note originally issued on December 7, 2001 by the Company
to a related party, which promissory note had been assigned by such related party to SDS immediately prior to such exchange for $150,000 in cash. This exchange was consummated pursuant to the terms of a note exchange agreement dated as of October
30, 2002 by and among the Company and SDS. Such promissory note, at the time of surrender, had an outstanding principal amount of $450,102 owing thereon.

In a second related transaction, the Company
issued an aggregate of 104,581,425 shares of common stock to the investors pursuant to the terms of a share exchange agreement dated as of October 30, 2002 by and among the Company and the investors. Such shares were issued upon the conversion of
all 104,578 outstanding shares of the Companys Series H convertible preferred stock. Such investors had, immediately prior to such exchange and conversion, acquired these Series H preferred shares, along with shares of common stock, from a
related party for cash consideration of $735,000. The shares of Series H preferred stock so surrendered had an aggregate liquidation preference, including accrued dividends thereon, of $10.7 million.

In a third related transaction, the holders of all 303 outstanding shares of the Companys Series J-1 convertible preferred stock surrendered such shares to the Company in exchange for 60,600,000 shares of common stock.
This transaction was effected pursuant to a Series J-1 exchange agreement dated as of October 30, 2002 by and among the Company and the Series J-1 holders. The Series J-1 preferred stock so surrendered had an aggregate liquidation preference of $3.0
million.

The Company entered into a registration rights agreement dated as of October 30, 2002 with these investors which requires the Company to file a resale registration statement with the
Securities and Exchange Commission no later than 30 days after such date, with respect to the registration of all of the shares of common stock issued on October 30, 2002 and all shares issuable upon the exercise of the warrants issued to
investors.  As described above, FiberNet expects that this registration statement will also include shares issued to its lenders.

In total, 652,183,465 shares of common stock and warrants to
purchase an aggregate of 148,000,000 shares of common stock were issued on October 30, 2002, as part of these transactions.

On November 11, 2002 in addition to the issuance of common stock and
warrants to the Companys lenders in satisfaction of $2.0 million of accrued interest as discussed above, FiberNet issued to SDS 52,000,000 shares of common stock in exchange for the surrender by SDS of the promissory note issued by the Company
on March 14, 2002 in the initial principal amount of $2.0 million, pursuant to the terms of a note exchange agreement.  Such promissory note, at the time of surrender, had outstanding principal and accrued interest of $2.1 million owing
thereon.  Furthermore, the Company also agreed to include such shares issued to its lenders and SDS within the terms of agreements previously entered into on October 30, 2002, including the registration rights agreement. Other than the
inclusion of such additional shares, the terms of such amended and restated agreements are unchanged from those of their respective predecessors.  The Company, together with its lenders, also executed an eighth amendment to the credit agreement
dated as of November 11, 2002 to amend certain terms in conjunction with the transactions occurring on such day.

A total of 72,000,000 shares of common stock and warrants to purchase an aggregate of
20,000,000 shares of common stock were issued on November 11, 2002, representing the issuance of approximately 10% of the common stock outstanding, on a fully diluted basis, as of that day.  As a result, the Company had 788,515,187 shares of
common stock outstanding, or approximately 1,000,000,000 shares of common stock outstanding on a fully diluted basis, assuming the exercise of all outstanding options and warrants.

In
connection with the transactions consummated on October 30, 2002 and November 11, 2002, the Company paid a fee of $0.4 million to a financial advisory firm and issued to that firm warrants to purchase an additional 6,200,000 shares of common stock
at an exercise price of $0.001 per share with a term of one year. In addition, Michael Liss, the Companys Chief Executive Officer, was compensated in the amount of $0.4 million for his efforts in negotiating and completing the transactions
described above.

As of September 30, 2002, the outstanding borrowings under the Companys credit facility were $96.2 million, and the weighted average interest rate on its outstanding borrowings
under the facility was 6.4%.  However as of November 13, 2002, the outstanding borrowings under the Companys credit facility were $33.4 million, and there were no events of default under its credit agreement.  The Company has
evaluated the transactions of its recapitalization under Statement of Financial Accounting Standards No. 6, Classification of Short-Term Obligations Expected to Be Refinanced, and determined that the related debt should be classified as
a long-term liability as of September 30, 2002 because, subsequent to the balance sheet date of September 30, 2002 but prior to the issuance of this Form 10-Q, the Company refinanced the debt on a long-term basis.  In addition, under
Statement of Financial Accounting Standards No. 6, Classification of Short-Term Obligations Expected to Be Refinanced, the Company determined that the subordinated note payable of $2.0 million and note payable to an affiliate of $0.4
million should be classified as a long-term liability as of September 30, 2002 because, subsequent to the balance sheet date of September 30, 2002 but prior to the issuance of this Form 10-Q, the Company converted these notes into
equity.

28