##### Table of Contents





SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q





(Mark One)

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

For the quarterly period ended June 30, 2009

OR



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

For the transition period from              to
            .

Commission file number 000-24661





FiberNet Telecom Group, Inc.

(Exact Name of Registrant as Specified in its
Charter)







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

220 West 42ndStreet, New York, NY 10036

(Address of Principal Executive Offices)

(212) 405-6200

(Registrants Telephone Number, Including Area Code)





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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    No   ̈

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



|                        |  |                                                  |  |                           |  |  
|----------------------- |  | ------------------------------------------------ |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈                                                |  | Accelerated filer         |  |  ̈
|                        |  |                                                  | 
|Non-accelerated filer   |  |  ̈  (Do not check if a smaller reporting company) |  | Smaller reporting company |  | x

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

As of August 12, 2009, the registrant had 7,858,715 shares of common stock outstanding.









---

##### Table of Contents

INDEX



|                              |  |                                                                                                   |  |     
|----------------------------- |  | ------------------------------------------------------------------------------------------------- |  | ----
|                              |  |                                                                                                   |  | Page
|PART I. FINANCIAL INFORMATION |  |                                                                                                  
|Item 1.                       |  | Condensed Consolidated Interim Financial Statements (unaudited)                                   |  | 3   
|                              |  | Condensed Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008                   |  | 16  
|                              |  | Condensed Consolidated Statements of Operations for the six months ended June 30, 2009 and 2008   |  | 17  
|                              |  | Condensed Consolidated Statements of Operations for the three months ended June 30, 2009 and 2008 |  | 18  
|                              |  | Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and 2008   |  | 19  
|                              |  | Notes to Condensed Consolidated Interim Financial Statements                                      |  | 20  
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations             |  | 3   
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                        |  | 12  
|Item 4T.                      |  | Controls and Procedures                                                                           |  | 12  
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                  
|                              |  |                                                                                                  
|Item 1.                       |  | Legal Proceedings                                                                                 |  | 13  
|Item 1A.                      |  | Risk Factors                                                                                      |  | 13  
|Item 2.                       |  | Unregistered Sales of Equity 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                                                                                 |  | 14  
|Item 6.                       |  | Exhibits                                                                                          |  | 14  



2



---

##### Table of Contents

PART I

FINANCIAL INFORMATION



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

See attached.



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

This report contains certain forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such statements
are based on managements current expectations and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Investors are cautioned that
there can be no assurance that actual results or business conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of various factors, including, but not limited to, those discussed in
our annual report on Form 10-K for the fiscal year ended December 31, 2008. Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.

Overview

We own and operate
integrated colocation facilities and diverse transport routes in the gateway markets of New York/New Jersey, Los Angeles, Chicago, Miami and San Francisco, designed to provide comprehensive broadband interconnectivity enabling the exchange of
traffic over multiple networks. Our customized connectivity infrastructure provides an advanced, high bandwidth, fiber-optic solution to support the demand for network capacity and to facilitate the interconnection of multiple carriers and
customers networks.

Factors Affecting Future Operations

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



| |  |  | On-net transport services.Our transport services include the offering of broadband circuits on our metropolitan transport networks and FiberNet in-building
networks, or FINs. Over our metropolitan transport networks, we can provision circuits from one of our carrier hotel facilities to another carrier hotel facility or to an on-net building via an interconnection with our FIN in that building. We can
also provision circuits vertically between floors in a carrier hotel facility or an on-net building. In addition, we provide other interconnection services, including hubbing to aggregate lower bandwidth endlink circuits into a single, higher
bandwidth circuit as well as protocol and signaling conversion to exchange traffic between domestic and international circuits and next generation Ethernet, IP and VoIP technologies.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | Colocation services. Our colocation services include providing customers with customized cages, cabinets and racks to locate their communications and
networking equipment at certain of our carrier hotel facilities in a secure, technical operating environment. We can also provide our customers with colocation services in the central equipment rooms of certain of our commercial office buildings.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Communications access management services.Our access management services entail providing our customers with access to provide their retail communications
services to tenants in certain commercial office buildings.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our revenues are typically generated on a monthly recurring
basis under contracts with our customers. The terms of these contracts can range from month-to-month to 15 years in length. Our customers typically elect to purchase network services for an initial contract period of one year with month-to-month
renewals. All of our revenues are generated in the United States of America.

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



3



---

##### Table of Contents

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

The growth of
our on-net transport and colocation revenues is also dependent in part upon our ability to provide additional services in our existing facilities and our current markets. We are currently expanding our colocation footprint in the New York City
market, and over the long term, we intend to derive additional colocation revenues, as well as increased transport revenues, from this expansion. As a result, within each of our facilities and markets, our revenues will depend upon the demand for
our services, the competition that we face and our customer service.

We typically begin our sales cycle by entering into a master services
agreement. This document outlines the legal and business terms, operating specifications and commercial standards that are required of us by the customer. After entering into the master service agreement, customers can order specific services from
us through individual sales orders.

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

Our on-net transport services primarily provide network core connectivity to our customers, enabling them to exchange traffic between their own points of
presence or from one of their points of presence to that of another carrier or service provider. These services accounted for 45.2% of our total revenues in the first six months of 2009. We can provide on-net transport services utilizing multiple
transmission protocols, including North American standards, international standards and new technologies, such as Ethernet, IP and VoIP. Our ability to provide service using varying standards, as well as to interconnect traffic between standards, is
an important factor in the growth of our on-net transport business.

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

Our off-net transport services constitute network connectivity that we provide to our customers, utilizing circuits
that we purchase from other wholesale telecommunications carriers. These services produced 31.2% of our total revenues in the first six months of 2009. In providing these services to our customers, we manage all aspects of the service delivery,
including network design, procurement, installation, monitoring and troubleshooting. Our ability to bundle these services with our other offerings allows our customers to utilize a single vendor for their network requirements. We offer these
services in markets that we currently serve with our own infrastructure, in other metropolitan markets that we do not serve with our own networks, and on a long-haul basis to connect metropolitan areas, significantly increasing our addressable
market beyond the metropolitan markets in which we own network infrastructure and facilities.

Historically, our transport services have
been negatively impacted by customers disconnecting higher-bandwidth circuits and replacing them with lower-bandwidth circuits to more efficiently manage the access costs of their networks. The new transport services that we are providing typically
are also for lower-bandwidth circuits, as our customers expand their network connections on a more prudent basis. The growth in transport revenues that we experienced on a quarterly basis in 2008 and in the first six months of 2009 is a result of an
increase in the number of circuits that we have provisioned which more than offset disconnections and price declines. In the future, we anticipate generating significantly more of our revenues from transport services than from the other services we
provide.



4



---

##### Table of Contents

Our colocation services produced 23.0% of our total revenues in the first six months of 2009. Colocation
revenues are generally stable in nature, as customers tend to maintain a more consistent need for a location to house their networking equipment and therefore typically enter into three to five years contracts for colocation services. Upon
purchasing colocation space from us, customers secure their network equipment in our highly conditioned facilities and establish connectivity to exchange traffic with other networks. Our facilities maintain rigorous standards for power, cooling,
security, reliability and other environmental controls. It is the physical constraints of available colocation space in our facilities and our competitors facilities that have created a favorable market environment for colocation services. The
continued growth prospects of our colocation services are a function of the space that we have available to sell to our customers. Many of our existing colocation facilities are approaching stabilized occupancy rates. As a result, we constructed a
new 11,000 square foot facility at 60 Hudson Street in New York City. We also converted 8,000 square feet of currently unoccupied colocation space at our location at 165 Halsey Street in Newark, New Jersey into an Internet-grade facility with
enhanced power capacity to also expand our offering capabilities.

Our access management services business accounted for 0.6% of our total
revenues in the first six months of 2009 and has been steadily declining. We expect that trend to continue. The revenues that we are generating from this type of service are from long-term contracts entered into in prior years. We do not expect to
sign any new contracts for access management in the near future. The remaining terms of our existing access management service contracts range from a month-to-month basis to expiration in 2012.

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

Selling, General and Administrative Expenses. Selling, general and administrative expenses include all of our personnel costs, stock related costs, occupancy costs for our corporate offices, insurance costs, professional fees, sales
and marketing expenses and other miscellaneous expenses. Personnel costs, including wages, benefits and sales commissions, are our largest component of selling, general and administrative expenses. Stock related expenses relate to the granting of
stock options and restricted stock to our employees. We make equity grants to our employees in order to attract, retain and incentivize qualified personnel. These costs are non-cash charges that are amortized over the vesting term of each
employees equity agreement, based on the fair value on the date of the grant. We do not allocate any personnel cost relating to network operations or sales activities to our cost of services. We had 72 employees as of June 30, 2009
compared to 73 as of June 30, 2008. Prospectively, we believe that our personnel costs will increase moderately. Professional fees, including legal and accounting expenses and consulting fees, represent the second largest component of our
selling, general and administrative expenses. These legal and accounting fees are primarily attributed to our required activities as a publicly traded company, such as Securities and Exchange Commission (SEC) filings and financial
statement audits, and could increase prospectively due to the enhanced regulations regarding corporate governance and compliance matters. Other costs included in selling, general and administrative expenses, such as insurance costs, occupancy costs
related to our office space, and marketing costs, may increase due to changes in the economic environment and telecommunications industry.

Depreciation and Amortization Expenses. Depreciation and amortization expense includes the depreciation of our network equipment and infrastructure, computer hardware and software, office equipment and furniture, and leasehold
improvements, as well as the amortization of certain deferred charges. We commence the depreciation of network related fixed assets when they are placed into service and depreciate those assets over periods ranging from three to 20 years.



5



---

##### Table of Contents

Critical Accounting Policies

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

Results of Operations

Six Months Ended June 30, 2009
Compared to Six Months Ended June 30, 2008

Revenues.Revenues for the six months ended June 30, 2009 were $31.4
million as compared to $28.0 million for the six months ended June 30, 2008. We increased the number of our customers from 284 at June 30, 2008 to 290 as of June 30, 2009. We believe that there are greater opportunities to serve
domestic subsidiaries of foreign telecommunications companies in our gateway markets, as domestic carriers consolidate and rationalize. Revenues were generated by providing transport, colocation and communications access management services to our
customers and are quantified as follows:



|                          |  |                                  |        |      |   |        |  |   |       |  
|------------------------- |  | -------------------------------- | ------ | ---- | - | ------ |  | - | ----- | -
|                          |  | For the six months endedJune 30, |        |      |  
|(amounts in thousands)    |  | 2009                             |        | 2008 |   | Change | 
|On-net transport revenue  |  | $                                | 14,212 |      | $ | 12,739 |  | $ | 1,473 |  
|Off-net transport revenue |  |                                  | 9,818  |      |   | 8,658  |  |   | 1,160 |  
|Colocation revenue        |  |                                  | 7,228  |      |   | 6,238  |  |   | 990   |  
|Access revenue            |  |                                  | 185    |      |   | 325    |  |   | (140  | )
|                          |  |                                  |        |      |   |        |  |   |       |  
|Total Revenue             |  | $                                | 31,443 |      | $ | 27,960 |  | $ | 3,483 |  
|                          |  |                                  |        |      |   |        |  |   |       |  

The majority of our transport and colocation services are provided within and between our carrier
hotel facilities in the New York/New Jersey market. On-net transport revenues increased as we provided a greater number of circuits to our customers. The growth in new on-net transport services more than offset the disconnections and price
decreases that we experienced. Off-net transport revenues increased over the same period last year as we continued to leverage our current customer base by providing services outside our gateway markets of New York/New Jersey and Los Angeles.
Colocation revenues increased as we licensed additional caged space, cabinets and racks in our facilities. Our network infrastructure has significant capacity to provide additional transport connectivity, and we also have the network capabilities to
deliver connectivity utilizing new technologies, such as Ethernet and IP services. Our access management services business has been steadily declining, and we expect that trend to continue throughout 2009. The revenues that we are generating from
this type of service are from long-term contracts entered into in prior years. The remaining terms of our existing access management service contracts range from month-to-month to expiration in 2012. We do not expect to sell any additional access
services, and we believe our existing contracts for access services may not be renewed when they expire.

For the six months ended
June 30, 2009 there was one customer that accounted for 10.3% of our revenues. For the six months ended June 30, 2008, there was no individual customer that accounted for over 10.0% of our revenues.

Cost of Services. Cost of services, associated with the operation of our networks and facilities, were $16.3 million for the six months ended
June 30, 2009, compared to $14.3 million for the six months ended June 30, 2008. The majority of our cost of services is occupancy expenses, consisting of rent, license fees and utility costs, for our carrier hotel facilities and
commercial office buildings. Other cost of services includes off-net connectivity charges and maintenance and repair costs.



|                                       |  |                                  |        |        |   |        |  |   |      
|-------------------------------------- |  | -------------------------------- | ------ | ------ | - | ------ |  | - | -----
|                                       |  | For the six months endedJune 30, |        | Change
|(amounts in thousands)                 |  | 2009                             |        | 2008   |  
|Occupancy expenses                     |  | $                                | 8,774  |        | $ | 7,803  |  | $ | 971  
|Off-net connectivity charges           |  |                                  | 7,015  |        |   | 6,027  |  |   | 988  
|Maintenance and repair and other costs |  |                                  | 473    |        |   | 453    |  |   | 20   
|                                       |  |                                  |        |        |   |        |  |   |      
|Total Cost of Services                 |  | $                                | 16,262 |        | $ | 14,283 |  | $ | 1,979
|                                       |  |                                  |        |        |   |        |  |   |      



6



---

##### Table of Contents

Occupancy expenses represented 54.0% of cost of services or $8.8 million for the six months ended
June 30, 2009, an increase of $1.0 million as compared to 54.6% or $7.8 million for the six months ended June 30, 2008. This increase was due to increases in colocation and cross-connection charges associated with new order installations
in existing facilities and an increase in utility usage.

Off-net connectivity charges were 43.1% of cost of services or $7.0 million for
the six months ended June 30, 2009, compared to 42.2% of the cost of services or $6.0 million for the six months ended June 30, 2008. We expect these connectivity charges to increase commensurately with our increase in revenues from
off-net transport.

Maintenance and repair and other costs were 2.9% or $0.5 million of cost of services for the six months ended
June 30, 2009, compared to 3.2% or $0.5 million for the six months ended June 30, 2008. These costs will continue to represent a relatively small and fixed component of cost of services.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the six months ended June 30, 2009 were $9.5
million compared to $9.1 million for the six months ended June 30, 2008. Personnel costs, represented 64.1%, or $6.1 million, of selling, general and administrative expenses for the six months ended June 30, 2009 compared to 63.2%, or $5.8
million, for the six months ended June 30, 2008. Professional fees for each of the six months ended June 30, 2009 and 2008 were $0.8 million.

Stock related expenses for the six months ended June 30, 2009 and 2008 were $0.8 million and $0.9 million, respectively. This non-cash expense related to the amortization of restricted stock and stock options
granted to our employees. The restricted shares that were granted prior to 2006 become unrestricted on the tenth anniversary of the grant date, while the restricted shares granted during 2006 and thereafter become unrestricted on the fourth
anniversary of the grant date, and the related expenses are amortized on a straight-line basis over their respective restricted period. During the first six months of 2008, 40,000 shares of restricted stock, which were originally granted on
July 30, 2003, were granted early vesting by the Compensation Committee of the Board of Directors. As a result, we recorded a one-time charge of $0.2 million related to the amortization of such stock for the balance of the original restriction
(i.e. 10 years). All other selling, general and administrative expenses, which include insurance and operating expenses, were $1.8 and $1.7 million for the six months ended June 30, 2009 and 2008, respectively.

Depreciation and Amortization Expenses.Depreciation and amortization expenses for the six months ended June 30, 2009 were $5.3 million
compared to $5.0 million for the six months ended June 30, 2008.

Interest Income.Interest income for the six months
ended June 30, 2009 and 2008 was approximately $1,000 and $70,000, respectively. Interest income is generated on our cash balances, which are at variable rates of interest and are invested in short-term, highly liquid investments.

Interest Expense.Interest expense for the six months ended June 30, 2009 was $0.6 million, compared to $0.8 million for the six
months ended June 30, 2008. Also included in interest expense is the amortization of deferred charges that amounted to $.01 million for each of the six months ended June 30, 2009 and 2008.

Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008

Revenues.Revenues for the quarter ended June 30, 2009 were $15.8 million as compared to $14.4 million for the quarter ended June 30,
2008. We increased the number of our customers from 284 at June 30, 2008 to 290 as of June 30, 2009. We believe that there are greater opportunities to serve domestic subsidiaries of foreign telecommunications companies in our gateway
markets, as domestic carriers consolidate and rationalize. Revenues were generated by providing transport, colocation and communications access management services to our customers and are quantified as follows:



|                          |  |                                    |        |      |   |        |  |   |       |  
|------------------------- |  | ---------------------------------- | ------ | ---- | - | ------ |  | - | ----- | -
|                          |  | For the three months endedJune 30, |        |      |  
|(amounts in thousands)    |  | 2009                               |        | 2008 |   | Change | 
|On-net transport revenue  |  | $                                  | 7,136  |      | $ | 6,467  |  | $ | 669   |  
|Off-net transport revenue |  |                                    | 4,907  |      |   | 4,600  |  |   | 307   |  
|Colocation revenue        |  |                                    | 3,687  |      |   | 3,181  |  |   | 506   |  
|Access revenue            |  |                                    | 95     |      |   | 157    |  |   | (62   | )
|                          |  |                                    |        |      |   |        |  |   |       |  
|Total Revenue             |  | $                                  | 15,825 |      | $ | 14,405 |  | $ | 1,420 |  
|                          |  |                                    |        |      |   |        |  |   |       |  

The majority of our transport and colocation services are provided within and between our carrier
hotel facilities in the New York/New Jersey market. On-net transport revenues increased as we provided a greater number of circuits to our customers. The growth in new on-net transport services more than offset the disconnections and price
decreases that we experienced. Off-net transport revenues increased over the same period last year as we continued to leverage our current customer base by providing services outside our gateway markets of New York/New Jersey and Los Angeles.
Colocation revenues increased as we licensed additional caged space, cabinets and racks in our facilities. Our network infrastructure has significant capacity to provide additional transport



7



---

##### Table of Contents

connectivity, and we also have the network capabilities to deliver connectivity utilizing new technologies, such as Ethernet and IP services. Our access
management services business has been steadily declining, and we expect that trend to continue throughout 2009. The revenues that we are generating from this type of service are from long-term contracts entered into in prior years. The remaining
terms of our existing access management service contracts range from month-to-month to expiration in 2012. We do not expect to sell any additional access services, and we believe our existing contracts for access services may not be renewed when
they expire.

For the quarter ended June 30, 2009 there was one customer that accounted for 10.3% of our revenues. For the quarter
ended June 30, 2008, there was no individual customer that accounted for over 10.0% of our revenues.

Cost of Services. Cost of
services, associated with the operation of our networks and facilities, were $8.2 million for the quarter ended June 30, 2009, compared to $7.4 million for the quarter ended June 30, 2008. The majority of our cost of services is occupancy
expenses, consisting of rent, license fees and utility costs, for our carrier hotel facilities and commercial office buildings. Other cost of services includes off-net connectivity charges and maintenance and repair costs.



|                                       |  |                                    |       |        |   |       |  |   |     |  
|-------------------------------------- |  | ---------------------------------- | ----- | ------ | - | ----- |  | - | --- | -
|                                       |  | For the three months endedJune 30, |       | Change |  
|(amounts in thousands)                 |  | 2009                               |       | 2008   |  
|Occupancy expenses                     |  | $                                  | 4,462 |        | $ | 3,956 |  | $ | 506 |  
|Off-net connectivity charges           |  |                                    | 3,456 |        |   | 3,205 |  |   | 251 |  
|Maintenance and repair and other costs |  |                                    | 232   |        |   | 233   |  |   | (1  | )
|                                       |  |                                    |       |        |   |       |  |   |     |  
|Total Cost of Services                 |  | $                                  | 8,150 |        | $ | 7,394 |  | $ | 756 |  
|                                       |  |                                    |       |        |   |       |  |   |     |  

Occupancy expenses represented 54.7% of cost of services or $4.5 million for the quarter ended
June 30, 2009, an increase of $0.5 million as compared to 53.5% or $4.0 million for the quarter ended June 30, 2008. This increase was due to increases in colocation and cross-connection charges associated with new order installations in
existing facilities and an increase in utility usage.

Off-net connectivity charges were 42.4% of cost of services or $3.5 million for the
quarter ended June 30, 2009, compared to 43.3% of the cost of services or $3.2 million for the quarter ended June 30, 2008. We expect these connectivity charges to increase commensurately with our increase in revenues from off-net
transport.

Maintenance and repair and other costs were 2.9% or $0.2 million of cost of services for the quarter ended June 30, 2009,
compared to 3.1% or $0.2 million for the three months ended June 30, 2008. These costs will continue to represent a relatively small and fixed component of cost of services.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $4.7 million for each of the quarters ended
June 30, 2009 and 2008. Personnel costs, represented 64.2%, or $3.0 million, of selling, general and administrative expenses for the quarter ended June 30, 2009 compared to 61.2%, or $2.9 million for the quarter ended June 30, 2008.
Professional fees were $0.4 million for each of the quarters ended June 30, 2009 and 2008.

Stock related expenses for the quarter
ended June 30, 2009 and 2008 were $0.4 million and $0.6 million, respectively. This non-cash expense related to the amortization of restricted stock and stock options granted to our employees. The restricted shares that were granted prior to
2006 become unrestricted on the tenth anniversary of the grant date, while the restricted shares granted during 2006 and thereafter become unrestricted on the fourth anniversary of the grant date, and the related expenses are amortized on a
straight-line basis over their respective restricted period. During the second quarter of 2008, 40,000 shares of restricted stock, which were originally granted on July 30, 2003, were granted early vesting by the Compensation Committee of the
Board of Directors. As a result, we recorded a one-time charge of $0.2 million related to the amortization of such stock for the balance of the original restriction (i.e. 10 years). All other selling, general and administrative expenses, which
include insurance and operating expenses, were $0.9 and $0.8 million for the quarters ended June 30, 2009 and 2008, respectively.

Depreciation and Amortization Expenses.Depreciation and amortization expenses for the quarter ended June 30, 2009 were $2.7 million compared to $2.5 million for the quarter ended June 30, 2008.

Interest Income.Interest income for the quarter ended June 30, 2008 was approximately $23,000. Interest income is generated on our cash
balances, which are at variable rates of interest and are invested in short-term, highly liquid investments.

Interest
Expense.Interest expense for the quarter ended June 30, 2009 was $0.3 million, compared to $0.4 million for the quarter ended June 30, 2008. Also included in interest expense is the amortization of deferred charges of $0.01
million for each of the quarters ended June 30, 2009 and 2008.



8



---

##### Table of Contents

Liquidity and Capital Resources

To date, we have financed our operations through revenues collected from our customers, the issuance of equity securities in private transactions and by
arranging credit facilities. We generated an income from operations and incurred a net loss for the six months ended June 30, 2009 of $0.4 million and $0.3 million, respectively, compared to a loss from operations and a net loss of $0.4 million
and $1.3 million, respectively, for the six months ended June 30, 2008. During the six months ended June 30, 2009, cash provided by operating activities was $5.9 million, and cash purchases of property, plant and equipment were $2.9
million, compared to cash provided by operating activities of $4.8 million and $4.3 million of cash purchases of property, plant and equipment for the six months ended June 30, 2008.

For the six months ended June 30, 2009, we received $0.6 million in net cash for financing related activities. For the six months ended
June 30, 2008, we used approximately $22,000 in net cash for financing activities. We believe we will be able to generate sufficient cash flow from operations in order to sustain our current and long-term operations. In 2009, we expect to
invest approximately $4.0 million in general capital expenditures and $1.5 million in colocation expansion projects.

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

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

On November 8, 2007, we announced that our Board of Directors had authorized the repurchase of up to $5.0 million of our common
stock, either through open market purchases or in privately negotiated transactions. On May 15, 2008, we announced that our Board of Directors had authorized the increase of our stock repurchase program to $7.5 million from $5.0 million. The
timing and amount of the shares to be repurchased will be based on market conditions and other factors, including price, corporate and regulatory requirements and alternative investment opportunities. Any shares repurchased in the program were
cancelled. The repurchase program was suspended on April 15, 2009. As of June 30, 2009, 595,933 shares of our common stock had been purchased in the repurchase program at an average price of $8.29.

As of June 30, 2009, we had $13.9 million of indebtedness outstanding under our Credit Facility and $5.4 million of outstanding letters of credit.
In addition, we had $0.6 million of availability on a revolving loan facility, $3.5 million of availability in a capital expenditure loan facility and $5.0 million of availability under the New Loan, which is solely to enable us to repurchase
outstanding shares of our capital stock pursuant to our previously announced stock repurchase program subject to compliance with the terms of the credit agreement. The interest rate on our outstanding borrowings under the Credit Facility are
variable at LIBOR plus 350 basis points on the term loan, at LIBOR plus 300 basis points on the revolving loan facility and at LIBOR plus 350 basis points on the capital expenditure loan facility. We were in full compliance with all of the covenants
contained in the Credit Facility as of June 30, 2009. Our financial covenants include minimum consolidated EBITDA (as defined in the credit agreement underlying the Credit Facility), maximum capital expenditures, minimum fixed charge coverage
ratio, maximum leverage ratio and minimum consolidated interest coverage ratio. The compliance levels and calculation of such levels with respect to those covenants are as defined in the Credit Facility, which is on file with the SEC. Non-compliance
with any of the covenants, requirements, or other terms and conditions under the credit agreement constitutes an event of default and potentially accelerates the outstanding balance of the Credit Facility for immediate payment. On January 16,
2009, we made a draw of $1.5 million under our capital expenditure loan facility to fund the expansion of our 165 Halsey Street colocation facility.

We spent $2.9 million in capital expenditures during the six months ended June 30, 2009, of which $1.6 million was primarily for the implementation of customer orders and general network improvements, including
the purchase of network equipment to increase capacity and to interconnect with customers. We also spent $0.1 million related to our national network expansion projects



9



---

##### Table of Contents

and $1.2 million in colocation expansion projects. Our capital expenditures totaled $4.3 million for the six months ended June 30, 2008. We may expend
additional capital for the selected expansion of our network infrastructure, depending upon market conditions, customer demand and our liquidity and capital resources.

During the six months ended June 30, 2009, 62,040 shares of restricted stock were granted. During the six months ended June 30, 2008, 17,500 shares of restricted stock were granted. During the six months
ended June 30, 2008, 460 shares of restricted stock were returned to us as a result of employee termination.

As of August 12,
2009, we had approximately 7.9 million shares of common stock outstanding or approximately 8.0 million shares of common stock outstanding on a fully diluted basis, assuming the exercise of all outstanding options and warrants.

From time to time, we may consider private or public sales of additional equity or debt securities and other financings, depending upon market
conditions, in order to provide additional working capital or finance the continued operations of our business, and we may also consider potential strategic alternatives, such as acquisitions or the sale of all or a portion of our business, although
there can be no assurance that we would be able to successfully consummate any such financing or other transaction on acceptable terms, if at all. For additional disclosure and risks regarding future financings and funding our ongoing operations,
please see Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008, as filed on March 18, 2009. We do not have any off-balance sheet financing arrangements, except for outstanding
letters of credit, nor do we anticipate entering into any.

Recent Developments

On May 28, 2009, we entered into an Agreement and Plan of Merger (the Merger Agreement), by and among us, Zayo Group, LLC
(Parent) and Zayo Merger Sub, Inc., a wholly owned subsidiary of Parent (Purchaser), pursuant to which, and subject to the terms and conditions set forth therein, at the Effective Time (as defined in the Merger Agreement),
Purchaser will merge with and into us (the Merger) and we will continue as the surviving corporation and a wholly owned subsidiary of Parent. Our Board of Directors have unanimously determined that the Merger Agreement and the
transactions provided for therein (including the Merger) are advisable, fair to, and in the best interests of us and our stockholders, and has unanimously approved the Merger Agreement and recommended the adoption of the Merger Agreement by our
stockholders.

Pursuant to the terms of the Merger Agreement and subject to the conditions thereof, at the Effective Time, each of our
shares of common stock issued and outstanding immediately prior to the Effective Time (other than (i) shares owned by Parent, Purchaser or us or any of the respective direct or indirect wholly owned subsidiaries or (ii) Dissenting Shares
(as defined in the Merger Agreement)) will be converted into the right to receive $11.45 in cash (subject to potential downward adjustment under the Merger Agreement). In addition, in the event that Parents aggregate payment under the Merger
Agreement is increased by more than $10,000 as a result of our breach of our representations and warranties with respect to the our capitalization, the payments to be paid under Article III of the Merger Agreement shall be ratably and equitably
reduced so that Parents aggregate payment is reduced by the excess amount above $10,000.

The completion of the Merger is subject to
various conditions, including (i) approval of the Merger by the holders of a majority of the outstanding shares of our common stock, (ii) expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, (iii) no law or order enjoining or prohibiting the consummation of the Merger, (iv) receipt of certain regulatory consents, (v) Indebtedness (as defined in the Merger Agreement) of the Company not
exceeding $13,500,000 at closing, (vi) absence of a Company Material Adverse Effect (as defined in the Merger Agreement) and (vii) customary closing conditions, but is not subject to any financing condition.

The Merger Agreement also included a provision pursuant to which we could initiate, solicit and encourage competing bids from the date of the Merger
Agreement through June 17, 2009 (the Solicitation Period), and could negotiate beyond the Solicitation Period with certain excluded parties that submitted a takeover proposal during the Solicitation Period and
with whom we were engaged in discussions as of the expiration of the Solicitation Period, subject to certain terms set forth in the Merger Agreement. Except with respect to excluded parties, after June 17, 2009, we are subject to a
no-shop restriction on our ability to solicit third-party proposals and to provide information and engage in discussions with third parties regarding alternative acquisition proposals. During this time, however, we could respond to
certain unsolicited offers in accordance with the terms and conditions of the Merger Agreement to permit our Board of Directors to comply with its fiduciary duties.

On June 16, 2009, we received a proposal from RCN Corporation (RCN) to acquire all of our outstanding shares of common stock for $12.50 per share in cash. The proposal was non-binding and subject to
the completion of due diligence by RCN. Our board of directors determined the proposal qualified RCN as an excluded party under the terms of the pending Merger Agreement with Zayo Group, LLC.



10



---

##### Table of Contents

On July 9, 2009, we announced that RCN Corporation withdrew its proposal to acquire us for $12.50
per share of our common stock. Consequently, pursuant to the Merger Agreement, RCN Corporation is no longer an excluded party under the terms of the Merger Agreement. Accordingly, we will continue to proceed with the sale to Zayo Group
for $11.45 per share in cash under the Merger Agreement.

Recently Issued Accounting Pronouncements

In June 2008, the Emerging Issues Task Force (EITF) issued EITF 07-05, Determining Whether an Instrument (or Embedded Feature) Is
Indexed to an Entitys Own Stock. EITF 07-5 clarifies how to determine whether certain instruments or features were indexed to an entitys own stock under EITF 01-6, The Meaning of Indexed to a Companys Own
Stock. It also resolved issues related to proposed Statement 133 Implementation Issue No. C21, Scope Exceptions: Whether Options (Including Embedded Conversion Options) Are Indexed to both an Entitys Own Stock and Currency Exchange
Rates. EITF 07-5 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The consensus must be applied to all instruments outstanding on the date of
adoption and the cumulative effect of applying the consensus must be recognized as an adjustment to the opening balance of retained earnings at transition. The adoption of this Issue did not have a material effect on our financial condition, results
of operations, cash flows or disclosures.

In November 2008, the EITF issued EITF 08-6, Equity Method Investment Accounting
Considerations. EITF 08-6 clarifies the accounting for certain transactions and impairment consideration involving equity method investments. This Issue applies to all investments accounted for under the equity method and is effective for
fiscal years beginning on or after December 15, 2008, and interim periods within those fiscal years. This Issue shall only be applied prospectively. The adoption of this Issue did not have a material effect on our financial condition, results
of operations, cash flows or disclosures.

In November 2008, the EITF issued EITF 08-7, Accounting for Defensive Intangible
Assets. EITF 08-7 clarifies the accounting for defensive intangible assets subsequent to initial measurement. This Issue is effective for intangible assets acquired on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008 and shall be applied prospectively. The adoption of this Issue did not have a material effect on our financial condition, results of operations, cash flows or disclosures.

In April 2009, the FASB issued Staff Position No. (FSP) FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a
Business Combination That Arise from Contingencies (FSP 141R-1). FSP 141R-1amends the accounting in SFAS 141R for assets and liabilities arising from contingencies in a business combination. FSP 141R-1 requires that pre-acquisition
contingencies be recognized at fair value, if fair value can be reasonably determined. If fair value cannot be reasonably determined, measurement is based on the best estimate in accordance with SFAS No. 5, Accounting for
Contingencies. We adopted FSP 141R-1 as of January 1, 2009 in connection with the adoption of SFAS 141R.

In April 2009, the
FASB issued three FSPs in order to provide additional application guidance and enhance disclosures regarding fair value measurements and impairments of securities.



| |  |  | FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly (FSP 157-4). FSP 157-4 relates to determining fair values when there is no active market or where the price inputs being used represent distressed sales. It reaffirms the need to use judgment to
ascertain if a formerly active market has become inactive and in determining fair values when markets have become inactive. FSP 157-4 is effective for interim and annual periods ending after June 15, 2009. The implementation of this
Standard did not have a material impact on our consolidated position and results of operations.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | FSP FAS 115-2 and FAS 124-2 Recognition and Presentation of Other-Than-Temporary Impairments (FSP 115-2 and FSP 124-2). FSP 115-2 and FSP
124-2 are intended to bring consistency to the timing of impairment recognition, and provide improved disclosures about the credit and noncredit components of impaired debt securities that are not expected to be sold. The measure of impairment in
comprehensive income remains fair value. FSP 115-2 and FSP 124-2 also requires increased and more timely disclosures regarding expected cash flows, credit losses, and an aging of securities with unrealized losses. FSP 115-2 and FSP 124-2 are
effective for interim and annual periods ending after June 15, 2009. The implementation of this Standard did not have a material impact on our consolidated financial position and results of operations.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (FSP 107-1 and APB 28-1). FSP 107-1 and APB 28-1
relate to fair value disclosures for financial instruments that are not currently reflected on the balance sheet at fair value. Prior to issuing FSP 107-1 and APB 28-1, fair values for these assets and liabilities were only disclosed once a year.
FSP 107-1 and APB 28-1 now requires these disclosures on a quarterly basis, providing qualitative and quantitative information about fair value estimates for all those financial instruments not measured on the balance sheet at fair value. FSP 107-1
and APB 28-1 are effective for interim and annual periods ending after June 15, 2009. The implementation of this Standard did not have a material impact on our consolidated financial position and results of operations.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



11



---

##### Table of Contents

In May 2009, the FASB issued SFAS No. 165, Subsequent Events (FAS 165). SFAS
165 provides guidance on managements assessment of subsequent events and incorporates this guidance into accounting literature. SFAS 165 is effective prospectively for interim and annual periods ending after June 15, 2009. The
implementation of SFAS 165 did not have a material impact on our consolidated financial position and results of operations.

In June 2009,
the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles  a replacement of FASB Statement No. 162 (SFAS 168). SFAS 168 stipulates
the FASB Accounting Standards Codification is the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. SFAS 168 is effective for financials statements issued for interim and annual periods ending after
September 15, 2009. We believe that the implementation of SFAS 168 will not have a material impact on our consolidated financial position and results of operations.



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

Not applicable to smaller reporting companies.



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

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

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



12



---

##### Table of Contents

PART II

OTHER INFORMATION



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

On May 28, 2009, we, Zayo Group, LLC, a
Delaware limited liability company (Zayo Group) and Zayo Merger Sub, Inc., a Delaware corporation and direct wholly-owned subsidiary of Zayo Group (Merger Sub), entered into an Agreement and Plan of Merger, pursuant to which
Merger Sub will merge with and into us (the Merger), with us continuing after the Merger as the surviving corporation. As a result of the Merger, we will become a wholly owned subsidiary of Zayo Group. On June 19, 2009, a putative
class action complaint captioned Masucci v. FiberNet Telecom Group, Inc., et al., was filed in the Court of Chancery of the State of Delaware against us, our directors, Zayo Group and Merger Sub (the Delaware Litigation). On
July 10, 2009, a putative class action complaint captioned Chen v. DeLuca, et al., was filed in the Supreme Court of New York naming the same defendants. Each of these actions was brought by a purported stockholder of us on behalf of a
putative class of our stockholders and each action seeks, among other things, to enjoin the consummation of the Merger and an award of monetary damages and costs. The plaintiffs in these actions allege that our directors breached their respective
fiduciary duties by, among other things, failing to conduct an adequate sale process and failing to disclose material facts regarding the Merger. The plaintiffs in these actions also contend that we, Zayo Group and Merger Sub aided and abetted the
alleged breaches of fiduciary duties by our directors.

On July 23, 2009, all parties to the Delaware Litigation executed a Memorandum of
Understanding (MOU), pursuant to which, inter alia, we would make additional public disclosures (which were incorporated into the Revised Preliminary Proxy Statement filed with the Securities and Exchange Commission on
July 24, 2009), and all claims in the Delaware Litigation would be dismissed in accordance with the terms of the MOU. The settlement of the Delaware Litigation is subject to approval of the Delaware Court of Chancery and is conditional on
consummation of the Merger. We intend to defend the remaining action vigorously but can provide no assurance as to the manner or timing of the resolution of the action.



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

Not applicable to smaller reporting companies.



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

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

Issuer Purchases of Equity Securities



|                                |  |                                |  |                            |       |                                                                                |        |                                                                                   |   |          
|------------------------------- |  | ------------------------------ |  | -------------------------- | ----- | ------------------------------------------------------------------------------ | ------ | --------------------------------------------------------------------------------- | - | ---------
|Period*                         |  | Total Number ofSharesPurchased |  | AveragePrice Paid perShare |       | Total Number of SharesPurchased as Part of PubliclyAnnounced Plans or Programs |        | Maximum Dollar Value ofShares that May Yet
bePurchased Under the Plans orPrograms
|April 1, 2009 to April 30, 2009 |  | 11,211                         |  | $                          | 11.04 |                                                                                | 11,211 |                                                                                   | $ | 2,542,889



|* | On November 6, 2007, we publicly announced the authorization to repurchase up to $5.0 million of our common stock. On May 15, 2008, we publicly announced the authorization
to increase the repurchase up to $7.5 million of our common stock. The repurchase program was suspended on April 15, 2009.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

None.



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

At our Annual
Meeting of Stockholders held on June 9, 2009, our stockholders elected the following nine members to the Board of Directors:



| | 1. | Mr. Bradley, 5,053,278 shares were voted in favor, 119,530 shares were withheld;
| | -- | --------------------------------------------------------------------------------



| | 2. | Mr. Brecher, 4,573,326 shares were voted in favor, 599,482 shares were withheld;
| | -- | --------------------------------------------------------------------------------



| | 3. | Mr. Brodsky, 5,079,774 shares were voted in favor, 93,034 shares were withheld;
| | -- | -------------------------------------------------------------------------------



| | 4. | Mr. DeLuca, 5,088,228 shares were voted in favor, 84,580 shares were withheld;
| | -- | ------------------------------------------------------------------------------



| | 5. | Mr. Farmer, 5,079,833 shares were voted in favor, 92,975 shares were withheld;
| | -- | ------------------------------------------------------------------------------



13



---

##### Table of Contents

| | 6. | Mr. La Blanc, 4,505,680 shares were voted in favor, 667,128 shares were withheld;
| | -- | ---------------------------------------------------------------------------------



| | 7. | Mr. Liss, 3,936,600 shares were voted in favor, 1,236,208 shares were withheld;
| | -- | -------------------------------------------------------------------------------



| | 8. | Mr. Mahoney, 4,633,355 shares were voted in favor, 539,453 shares were withheld; and
| | -- | ------------------------------------------------------------------------------------



| | 9. | Mr. Sayers 4,951,995 shares were voted in favor, 220,813 shares were withheld.
| | -- | ------------------------------------------------------------------------------

In addition, the following matters were voted on and approved by the stockholders:



| |  |  | To approve a proposed amendment to our 2003 Equity Incentive Plan to increase the number of shares available for issuance thereunder in an amount of 250,000,
1,613,518 shares were voted in favor of the proposal, 619,951 shares were voted against, and 432 abstained.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | To ratify the appointment of Friedman LLP, as our independent public accountants for the fiscal year ending December 31, 2009, 5,103,641 shares were voted in
favor of the proposal, 68,381 shares were voted against, and 787 abstained.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

None.



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

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

Exhibit 2.1 Agreement and Plan of Merger, dated as of May 28, 2009, by and among FiberNet Telecom Group, Inc., Zayo Group, LLC and
Zayo Merger Sub, Inc. (1)

Exhibit 10.1 Amendment of Lease dated as of the 26th day of May, 2009 by and between 60 Hudson Owner LLC and FiberNet Equal
Access, LLC

Exhibit 10.2 Letter Agreement dated May 26, 2009 between FiberNet Telecom Group, Inc and Burnham Hill Partners LLC

Exhibit 10.3 Amended 2003 Equity Incentive Plan

Exhibit 99.1 Letter from
RCN Corporation to FiberNet Telecom Group, Inc., dated June 16, 2009 (2)

Exhibit 99.2 Verified Class Action Complaint captioned Masucci v. FiberNet
Telecom Group, Inc., et al., filed with the Court of Chancery of the State of Delaware on June 19, 2009. (3)

Exhibit 99.3 Press release of FiberNet
Telecom Group, Inc., issued July 9, 2009 (4)

Exhibit 31.1  Section 302 Certification of Principal Executive Officer

Exhibit 31.2  Section 302 Certification of Principal Financial Officer

Exhibit 32  Section 906 Certification



|(1) | Incorporated by reference from Exhibit 2.1 of Form 8-K, filed on May 26, 2009
|--- | -----------------------------------------------------------------------------

|(2) | Incorporated by reference from Exhibit 99. 1 of Form 8-K, filed on June 16, 2009
|--- | --------------------------------------------------------------------------------

|(3) | Incorporated by reference from Exhibit 99.1 of Form 8-K, filed on June 19, 2009
|--- | -------------------------------------------------------------------------------

|(4) | Incorporated by reference from Exhibit 99.1 of Form 8-K filed on July 9, 2009
|--- | -----------------------------------------------------------------------------



14



---

##### 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: August 13, 2009



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



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



15



---

##### Table of Contents

FIBERNET TELECOM GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)



|                                                                                                                          |  |              |          |   |                  |   |          |  
|------------------------------------------------------------------------------------------------------------------------- |  | ------------ | -------- | - | ---------------- | - | -------- | -
|                                                                                                                          |  | June 30,2009 |          |   | December 31,2008 |  
|                                                                                                                          |  | (unaudited)  |          |   |                  |  
|ASSETS                                                                                                                    |  |              |          |   |                  |   |          |  
|Current Assets:                                                                                                           |  |              |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                 |  | $            | 8,960    |   |                  | $ | 5,992    |  
|Accounts receivable, net of allowance of $861                                                                             |  |              | 4,144    |   |                  |   | 4,841    |  
|Prepaid expenses                                                                                                          |  |              | 737      |   |                  |   | 587      |  
|                                                                                                                          |  |              |          |   |                  |   |          |  
|Total current assets                                                                                                      |  |              | 13,841   |   |                  |   | 11,420   |  
|Property, plant and equipment, net                                                                                        |  |              | 50,361   |   |                  |   | 52,579   |  
|Other Assets:                                                                                                             |  |              |          |   |                  |   |          |  
|Deferred charges, net of accumulated amortization of $464 and $362                                                        |  |              | 564      |   |                  |   | 665      |  
|Goodwill                                                                                                                  |  |              | 1,613    |   |                  |   | 1,613    |  
|Other assets                                                                                                              |  |              | 1,009    |   |                  |   | 900      |  
|                                                                                                                          |  |              |          |   |                  |   |          |  
|TOTAL ASSETS                                                                                                              |  | $            | 67,388   |   |                  | $ | 67,177   |  
|                                                                                                                          |  |              |          |   |                  |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                      |  |              |          |   |                  |   |          |  
|Current Liabilities:                                                                                                      |  |              |          |   |                  |   |          |  
|Accounts payable                                                                                                          |  | $            | 3,765    |   |                  | $ | 3,064    |  
|Accrued expenses                                                                                                          |  |              | 4,655    |   |                  |   | 5,572    |  
|Notes payable, current portion                                                                                            |  |              | 2,061    |   |                  |   | 1,750    |  
|Deferred revenues, current portion                                                                                        |  |              | 1,198    |   |                  |   | 1,200    |  
|                                                                                                                          |  |              |          |   |                  |   |          |  
|Total current liabilities                                                                                                 |  |              | 11,679   |   |                  |   | 11,586   |  
|Long-Term Liabilities:                                                                                                    |  |              |          |   |                  |   |          |  
|Notes payable                                                                                                             |  |              | 11,805   |   |                  |   | 11,550   |  
|Deferred revenue, long-term                                                                                               |  |              | 3,370    |   |                  |   | 3,578    |  
|Other long-term liabilities                                                                                               |  |              | 2,946    |   |                  |   | 2,783    |  
|                                                                                                                          |  |              |          |   |                  |   |          |  
|Total Long-Term Liabilities                                                                                               |  |              | 18,121   |   |                  |   | 17,911   |  
|                                                                                                                          |  |              |          |   |                  |   |          |  
|Total Liabilities                                                                                                         |  |              | 29,800   |   |                  |   | 29,497   |  
|                                                                                                                          |  |             
|Stockholders Equity:                                                                                                     |  |              |          |   |                  |   |          |  
|Common stock, $0.001 par value, 2,000,000,000 shares authorized and 7,667,368 and 7,422,918 shares issued and outstanding |  |              | 8        |   |                  |   | 7        |  
|Additional paid-in-capital                                                                                                |  |              | 445,329  |   |                  |   | 445,238  |  
|Deferred rent (warrants)                                                                                                  |  |              | (1,126   | ) |                  |   | (1,213   | )
|Accumulated deficit                                                                                                       |  |              | (406,623 | ) |                  |   | (406,352 | )
|                                                                                                                          |  |              |          |   |                  |   |          |  
|Total stockholders equity                                                                                                |  |              | 37,588   |   |                  |   | 37,680   |  
|                                                                                                                          |  |              |          |   |                  |   |          |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                |  | $            | 67,388   |   |                  | $ | 67,177   |  
|                                                                                                                          |  |              |          |   |                  |   |          |  

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



16



---

##### Table of Contents

FIBERNET TELECOM GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except for per share amounts)



|                                                             |  |                          |        |   |      |   |        |  
|------------------------------------------------------------ |  | ------------------------ | ------ | - | ---- | - | ------ | -
|                                                             |  | Six months endedJune 30, |       
|                                                             |  | 2009                     |        |   | 2008 |  
|Revenues                                                     |  | $                        | 31,443 |   |      | $ | 27,960 |  
|Operating expenses:                                          |  |                          |        |   |      |   |        |  
|Cost of services (exclusive of items shown separately below) |  |                          | 16,262 |   |      |   | 14,283 |  
|Selling, general and administrative expense                  |  |                          | 9,451  |   |      |   | 9,115  |  
|Depreciation and amortization                                |  |                          | 5,322  |   |      |   | 4,988  |  
|                                                             |  |                          |        |   |      |   |        |  
|Total operating expenses                                     |  |                          | 31,035 |   |      |   | 28,386 |  
|                                                             |  |                          |        |   |      |   |        |  
|Income (Loss) from operations                                |  |                          | 408    |   |      |   | (426   | )
|Interest income                                              |  |                          | 1      |   |      |   | 69     |  
|Interest expense                                             |  |                          | (556   | ) |      |   | (801   | )
|                                                             |  |                          |        |   |      |   |        |  
|Net loss before provision for income taxes                   |  | $                        | (147   | ) |      | $ | (1,158 | )
|Provision for income taxes                                   |  |                          | (124   | ) |      |   | (123   | )
|                                                             |  |                          |        |   |      |   |        |  
|Net loss                                                     |  | $                        | (271   | ) |      | $ | (1,281 | )
|                                                             |  |                          |        |   |      |   |        |  
|Net loss per sharebasic and diluted                         |  | $                        | (0.04  | ) |      | $ | (0.17  | )
|Weighted average shares outstandingbasic and diluted        |  |                          | 7,589  |   |      |   | 7,540  |  

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



17



---

##### Table of Contents

FIBERNET TELECOM GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except for per share amounts)



|                                                             |  |                            |        |   |      |   |        |  
|------------------------------------------------------------ |  | -------------------------- | ------ | - | ---- | - | ------ | -
|                                                             |  | Three months endedJune 30, |       
|                                                             |  | 2009                       |        |   | 2008 |  
|Revenues                                                     |  | $                          | 15,825 |   |      | $ | 14,405 |  
|Operating expenses:                                          |  |                            |        |   |      |   |        |  
|Cost of services (exclusive of items shown separately below) |  |                            | 8,150  |   |      |   | 7,394  |  
|Selling, general and administrative expense                  |  |                            | 4,718  |   |      |   | 4,705  |  
|Depreciation and amortization                                |  |                            | 2,669  |   |      |   | 2,549  |  
|                                                             |  |                            |        |   |      |   |        |  
|Total operating expenses                                     |  |                            | 15,537 |   |      |   | 14,648 |  
|                                                             |  |                            |        |   |      |   |        |  
|Income (Loss) from operations                                |  |                            | 288    |   |      |   | (243   | )
|Interest income                                              |  |                            |       |   |      |   | 23     |  
|Interest expense                                             |  |                            | (268   | ) |      |   | (385   | )
|                                                             |  |                            |        |   |      |   |        |  
|Net income (loss) before provision for income taxes          |  | $                          | 20     |   |      | $ | (605   | )
|Provision for income taxes                                   |  |                            | (62    | ) |      |   | (62    | )
|                                                             |  |                            |        |   |      |   |        |  
|Net loss                                                     |  | $                          | (42    | ) |      | $ | (667   | )
|                                                             |  |                            |        |   |      |   |        |  
|Net loss per sharebasic and diluted                         |  | $                          | (0.01  | ) |      | $ | (0.09  | )
|Weighted average shares outstandingbasic and diluted        |  |                            | 7,676  |   |      |   | 7,501  |  

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



18



---

##### Table of Contents

FIBERNET TELECOM GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)



|                                                                                |  |                          |        |   |      |   |        |  
|------------------------------------------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | -
|                                                                                |  | Six months endedJune 30, |       
|                                                                                |  | 2009                     |        |   | 2008 |  
|Cash flows from operating activities:                                           |  |                          |        |   |      |   |        |  
|Net loss                                                                        |  | $                        | (271   | ) |      | $ | (1,281 | )
|Adjustments to reconcile net loss to net cash provided by operating activities: |  |                          |        |   |      |   |        |  
|Depreciation and amortization                                                   |  |                          | 5,322  |   |      |   | 4,988  |  
|Stock related expense                                                           |  |                          | 780    |   |      |   | 928    |  
|Deferred rent expense                                                           |  |                          | 87     |   |      |   | 87     |  
|Other non-cash items                                                            |  |                          | (119   | ) |      |   | 99     |  
|Change in assets and liabilities:                                               |  |                          |        |   |      |   |        |  
|Decrease (Increase) in accounts receivables                                     |  |                          | 697    |   |      |   | (522   | )
|Increase in prepaid expenses                                                    |  |                          | (150   | ) |      |   | (81    | )
|Increase in other assets                                                        |  |                          | (138   | ) |      |   | (130   | )
|Increase in accounts payable                                                    |  |                          | 701    |   |      |   | 382    |  
|(Decrease) Increase in accrued expenses and other long-term liabilities         |  |                          | (754   | ) |      |   | 170    |  
|(Decrease) Increase in deferred revenues                                        |  |                          | (210   | ) |      |   | 115    |  
|                                                                                |  |                          |        |   |      |   |        |  
|Cash provided by operating activities                                           |  |                          | 5,945  |   |      |   | 4,755  |  
|Cash flows from investing activities:                                           |  |                          |        |   |      |   |        |  
|Common stock repurchases                                                        |  |                          | (689   | ) |      |   | (2,470 | )
|Capital expenditures                                                            |  |                          | (2,854 | ) |      |   | (4,338 | )
|                                                                                |  |                          |        |   |      |   |        |  
|Cash used in investing activities                                               |  |                          | (3,543 | ) |      |   | (6,808 | )
|Cash flows from financing activities:                                           |  |                          |        |   |      |   |        |  
|Proceeds from debt financings                                                   |  |                          | 1,500  |   |      |   |       |  
|Repayment of debt financings                                                    |  |                          | (934   | ) |      |   |       |  
|Payment of financing costs of debt financings                                   |  |                          |       |   |      |   | (22    | )
|                                                                                |  |                          |        |   |      |   |        |  
|Cash provided by (used in) financing activities                                 |  |                          | 566    |   |      |   | (22    | )
|                                                                                |  |                          |        |   |      |   |        |  
|Net increase (decrease) in cash and cash equivalents                            |  |                          | 2,968  |   |      |   | (2,075 | )
|Cash and cash equivalents at beginning of period                                |  |                          | 5,992  |   |      |   | 8,220  |  
|                                                                                |  |                          |        |   |      |   |        |  
|Cash and cash equivalents at end of period                                      |  | $                        | 8,960  |   |      | $ | 6,145  |  
|                                                                                |  |                          |        |   |      |   |        |  
|                                                                                |  |                         
|Supplemental disclosures of cash flow information:                              |  |                          |        |   |      |   |        |  
|Interest paid                                                                   |  | $                        | 456    |   |      | $ | 810    |  
|Income taxes paid                                                               |  | $                        | 353    |   |      | $ | 295    |  
|Acquisition of property, plant, and equipment not paid                          |  | $                        | 219    |   |      | $ | 223    |  

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



19



---

##### Table of Contents

FIBERNET TELECOM GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(UNAUDITED)

1. ORGANIZATION AND OPERATIONS

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

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

The Company has agreements with other entities, including telecommunications license agreements with building landlords, interconnection agreements with other telecommunications service providers and leases with
carrier hotel property owners. FiberNet also has entered into contracts with suppliers for the components of its telecommunications networks.

Under FiberNets current operating plan, including its credit facility (see Note 5), the Company does not anticipate requiring any additional external sources of capital to fund its operations in the near term.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of
Presentation

The condensed consolidated interim financial statements include the accounts of the Company and its wholly-owned
subsidiaries, as identified in Note 1 above. The accompanying unaudited condensed consolidated interim financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and
footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America (GAAP). However, in the opinion of
management, all adjustments consisting of normal recurring accruals necessary for a fair presentation of the operating results have been included in the condensed consolidated interim financial statements.

These condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements and
accompanying notes included in the Companys Annual Report on Form 10-K for the year ended December 31, 2008, as filed with the Securities and Exchange Commission on March 18, 2009.

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

Use of Estimates

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

Cash and Cash Equivalents

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



20



---

##### Table of Contents

Property, Plant and Equipment

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



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

Maintenance and repairs are expensed as incurred. Improvements are capitalized as additions to
property, plant and equipment.

Impairment of Long-Lived Assets

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

Revenue Recognition

FiberNet generates revenues from
selling network capacity and related services to other communications service providers. The Company recognizes revenues when earned as services are provided throughout the life of each sales order with a customer. The majority of the Companys
revenues are generated on a monthly recurring basis under contracts of various lengths, ranging from one month to fifteen years. Most of the Companys services are purchased for a contract period of one year. Revenue is recognized over the
service contract period for all general services. If the Company determines that collection of a receivable is not reasonably assured, it defers the revenue and recognizes it at the time collection becomes reasonably assured, which is generally upon
receipt of payment. Deferred revenues consist primarily of payments received in advance of revenue being earned under the service contracts.

Allowance
for Doubtful Accounts

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

Fair Value of Financial Instruments

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

Effective January 1, 2008, the
Company adopted Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements. This standard defines fair value, provides guidance for
measuring fair value and requires certain disclosures. The standard utilizes a fair value hierarchy which is categorized into three levels based on the inputs to the valuation techniques used to measure fair value. The standard does not require any
new fair value measurements, but discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flows) and the cost approach (cost to replace the service capacity
of an asset or replacement cost).

In 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157).
SFAS 157 defines fair value, establishes a market-based framework or hierarchy for measuring fair value and expands disclosures about fair value measurements. SFAS 157 is applicable whenever another accounting pronouncement requires or permits
assets and liabilities to be measured at fair value. SFAS 157 does not expand or require any new fair value measures, however the application of SFAS 157 may change current practice. The Company adopted SFAS 157 for financial assets and liabilities
effective January 1, 2008 and for non financial assets and liabilities effective January 1, 2009. The adoption of SFAS 157, which primarily affected the valuation of cash equivalents and marketable securities, did not have a material
effect on its consolidated financial position or results of operations.

Fair value is defined under SFAS 157 as the price that would be
received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. SFAS 157 also establishes a three-level hierarchy, which requires
an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.



21



---

##### Table of Contents

The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or
liability on the measurement date. The three levels are defined as follows:



| |  |  | Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for an identical asset or liability in an active market
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 2 - inputs other than Level 1 that are based on observable market data. These include quoted prices for similar assets in active markets, quoted prices
for identical assets in inactive markets, inputs that are observable that are not prices (such as interest rates, credit risks, etc.) and inputs that are derived from or corroborated by observable markets.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value measurement of the asset or liability
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------

The following table presents assets measured at fair value on a recurring basis as of June 30, 2009 by SFAS 157 valuation hierarchy:



|                   |  |         |  |         |  |         |        |               |   |       
|------------------ |  | ------- |  | ------- |  | ------- | ------ | ------------- | - | ------
|                   |  | Level 1 |  | Level 2 |  | Level 3 |        | CarryingValue
|Long-term debt (1) |  |        |  |        |  | $       | 11,805 |               | $ | 11,805



|(1) | Long-term debt consist of borrowings against the $30.0 million lending facility with CapitalSource Finance LLC.
|--- | ---------------------------------------------------------------------------------------------------------------

Goodwill

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

Deferred Charges

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

Earnings Per Share

Basic earnings per share has been computed using the weighted average number of shares outstanding during the period. Diluted earnings per share is computed by including the dilutive effect on common stock that would
be issued assuming conversion of stock options, warrants and other dilutive securities. Options, warrants and other securities did not have an effect on the computation of diluted earnings per share for the six months ended June 30, 2009 and
June 30 2008, as they were anti-dilutive due to the fact that the Company was in a loss position for the respective periods.

Concentration of
Credit Risk

The Company provides trade credit to its customers. The Company performs ongoing credit evaluations of its customers
financial conditions, in an attempt to mitigate this risk. As of June 30, 2009, one customer accounted for 12.6% of the Companys total accounts receivable. As of December 31, 2008, one customer accounted for 24.5% of the
Companys total accounts receivable.

For the six months ended June 30, 2009, one customer accounted for 10.3% of the
Companys total revenue. For the six months ended June 30, 2008, there was no individual customer that accounted for more than 10.0% of the Companys total revenue.

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



22



---

##### Table of Contents

Stock Based Compensation

The Company makes equity grants comprising of stock options or shares of restricted stock to its employees as part of its employee equity incentive plan. As of June 30, 2009, the Company had approximately
1.9 million shares authorized for issuance under the plan. Stock options are typically granted to vest in three equal annual installments, commencing on the grant date, and expire ten years from the date of grant. Restricted stock is typically
granted with a four year period before it becomes unrestricted. Equity grants under the plan are made at the discretion of the Compensation Committee of the Board of Directors.

Accounting for Income Taxes

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

Effective January 1, 2007, the Company adopted the provisions of
FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN No. 48). FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in a companys financial statements in
accordance with SFAS No. 109. FIN No. 48 requires a company to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If the more-likely-than-not
threshold is met, a company must measure the tax position to determine the amount to recognize in the financial statements. At June 30, 2009, the Company has no unrecognized tax benefits. As of June 30, 2009, the Company had no accrued
interest or penalties related to uncertain tax positions. The tax years 2000 through 2008 remain open to examination by all taxing jurisdictions to which the Company is subject.

Reclassifications

Certain balances have been reclassified in the condensed consolidated interim
financial statements to conform to current quarter presentation. Specifically, income taxes previously included in selling, general and administrative expenses were reclassified to the provision for income taxes.

Segment Reporting

The Company is a single segment
operating company providing telecommunications services. Revenues were generated by providing transport, colocation and communications access management services to customers. All revenues are generated in the United States of America.

Recently Issued Accounting Pronouncements

In
December 2007, the Financial Accounting Standards Board (FASB) issued FASB No. 141 (R), Business Combinations. FASB 141 (R) was issued to improve the relevance, representational faithfulness, and comparability of
the information that a reporting entity provides in its financial reports about a business combination and its effects. This Statement applies to a transaction or other event that meets the definition of a business combination. It does not apply to
the formation of a joint venture, the acquisition of an asset or a group of assets that do not constitute a business, a combination between entities or businesses under common control, or a combination between not-for-profit organizations or the
acquisition or a for-profit business by a not-for-profit organization. This Statement shall be applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2008. The adoption of this Statement did not have a material effect on the Companys financial condition, results of operations, cash flows or disclosures.

In June 2008, the Emerging Issues Task Force (EITF) issued EITF 07-05, Determining Whether an Instrument (or Embedded Feature) Is
Indexed to an Entitys Own Stock. EITF 07-5 clarifies how to determine whether certain instruments or features were indexed to an entitys own stock under EITF 01-6, The Meaning of Indexed to a Companys Own
Stock. It also resolved issues related to proposed Statement 133 Implementation Issue No. C21, Scope Exceptions: Whether Options (Including Embedded Conversion Options) Are Indexed to both an Entitys Own Stock and Currency Exchange
Rates. EITF 07-5 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The consensus must be applied to all instruments outstanding on the date of
adoption and the cumulative effect of applying the consensus must be recognized as an adjustment to the opening balance of retained earnings at transition. The adoption of this Issue did not have a material effect on the Companys financial
condition, results of operations, cash flows or disclosures.

In November 2008, the EITF issued EITF 08-6, Equity Method Investment
Accounting Considerations. EITF 08-6 clarifies the accounting for certain transactions and impairment consideration involving equity method investments. This Issue applies to all investments accounted for under the equity method and is
effective for fiscal years beginning on or after December 15, 2008, and interim periods within those fiscal years. This Issue shall only be applied prospectively. The adoption of this Issue did not have a material effect on the Companys
financial condition, results of operations, cash flows or disclosures.



23



---

##### Table of Contents

In November 2008, the EITF issued EITF 08-7, Accounting for Defensive Intangible Assets. EITF
08-7 clarifies the accounting for defensive intangible assets subsequent to initial measurement. This Issue is effective for intangible assets acquired on or after the beginning of the first annual reporting period beginning on or after
December 15, 2008 and shall be applied prospectively. The adoption of this Issue did not have a material effect on the Companys financial condition, results of operations, cash flows or disclosures.

In April 2009, the FASB issued Staff Position No. (FSP) FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a
Business Combination That Arise from Contingencies (FSP 141R-1). FSP 141R-1amends the accounting in SFAS 141R for assets and liabilities arising from contingencies in a business combination. FSP 141R-1 requires that pre-acquisition
contingencies be recognized at fair value, if fair value can be reasonably determined. If fair value cannot be reasonably determined, measurement is based on the best estimate in accordance with SFAS No. 5, Accounting for
Contingencies. The Company adopted FSP 141R-1 as of January 1, 2009 in connection with the adoption of SFAS 141R.

In April
2009, the FASB issued three FSPs in order to provide additional application guidance and enhance disclosures regarding fair value measurements and impairments of securities.



| |  |  | FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly (FSP 157-4). FSP 157-4 relates to determining fair values when there is no active market or where the price inputs being used represent distressed sales. It reaffirms the need to use judgment to
ascertain if a formerly active market has become inactive and in determining fair values when markets have become inactive. FSP 157-4 is effective for interim and annual periods ending after June 15, 2009. The implementation of this
Standard did not have a material impact on the Companys financial condition, results of operations.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | FSP FAS 115-2 and FAS 124-2 Recognition and Presentation of Other-Than-Temporary Impairments (FSP 115-2 and FSP 124-2). FSP 115-2 and FSP
124-2 are intended to bring consistency to the timing of impairment recognition, and provide improved disclosures about the credit and noncredit components of impaired debt securities that are not expected to be sold. The measure of impairment in
comprehensive income remains fair value. FSP 115-2 and FSP 124-2 also requires increased and more timely disclosures regarding expected cash flows, credit losses, and an aging of securities with unrealized losses. FSP 115-2 and FSP 124-2 are
effective for interim and annual periods ending after June 15, 2009. The implementation of this Standard did not have a material impact on the Companys financial condition, results of operations.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (FSP 107-1 and APB 28-1). FSP 107-1 and APB 28-1
relate to fair value disclosures for financial instruments that are not currently reflected on the balance sheet at fair value. Prior to issuing FSP 107-1 and APB 28-1, fair values for these assets and liabilities were only disclosed once a year.
FSP 107-1 and APB 28-1 now requires these disclosures on a quarterly basis, providing qualitative and quantitative information about fair value estimates for all those financial instruments not measured on the balance sheet at fair value. FSP 107-1
and APB 28-1 are effective for interim and annual periods ending after June 15, 2009. The implementation of this standard did not have a material impact on the Companys financial condition, results of operations.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In May 2009, the FASB issued SFAS No. 165, Subsequent Events (FAS 165). SFAS 165 provides
guidance on managements assessment of subsequent events and incorporates this guidance into accounting literature. SFAS 165 is effective prospectively for interim and annual periods ending after June 15, 2009. The implementation of SFAS
165 did not have a material impact on the Companys financial condition, results of operations.

In June 2009, the FASB issued SFAS
No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles  a replacement of FASB Statement No. 162 (SFAS 168). SFAS 168 stipulates the FASB Accounting
Standards Codification is the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. SFAS 168 is effective for financials statements issued for interim and annual periods ending after September 15,
2009. The Company believes that the implementation of SFAS 168 will not have a material impact on its consolidated financial position and results of operations.

3. EQUITY INCENTIVE PLAN

The Company follows the requirements of SFAS No. 123(R), utilizing the modified prospective
method. Prior to the adoption of SFAS No. 123(R), the Company applied the provisions of APB No. 25, in accounting for its stock-based awards, and accordingly, recognized no compensation cost for its stock plans other than for its
restricted stock awards. The Company recognizes the cost of all employee stock awards on a straight-line basis over their respective vesting period, net of estimated forfeitures.



24



---

##### Table of Contents

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

As part of the requirements of SFAS No. 123(R), the Company is required to estimate potential forfeitures of stock grants and adjust compensation
cost recorded accordingly. The forfeiture rate was estimated based on relevant historical forfeitures. The estimate of forfeitures will be adjusted over the requisite service period to the extent that the actual forfeitures differ, or are expected
to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of stock compensation expense to be recognized in future periods.

A summary of stock option activity within the Companys stock-based compensation plans for the six months ended June 30, 2009 is
as follows:



|                               |  |                 |   |  |                               |        |                                                 |     |                          |   |        
|------------------------------ |  | --------------- | - |  | ----------------------------- | ------ | ----------------------------------------------- | --- | ------------------------ | - | -------
|                               |  | Number ofShares |   |  | WeightedAverageExercise Price |        | WeightedAverageRemainingContractualTerm (Years) |     | AggregateIntrinsic Value
|Outstanding at January 1, 2009 |  | 136,367         |   |  | $                             | 119.49 |                                                 |     |                          |   |        
|Granted                        |  |                |   |  |                               |       |                                                 |     |                          |   |        
|Exercised                      |  |                |   |  |                               |       |                                                 |     |                          |   |        
|Forfeited                      |  | (2,198          | ) |  | $                             | 744.36 |                                                 |     |                          |   |        
|                               |  |                 |   |  |                               |        |                                                 |     |                          |   |        
|Outstanding at June 30, 2009   |  | 134,169         |   |  | $                             | 109.25 |                                                 | 5.4 |                          | $ | 812,086
|                               |  |                 |   |  |                               |        |                                                 |     |                          |   |        
|Exercisable at June 30, 2009   |  | 109,169         |   |  | $                             | 133.78 |                                                 | 5.0 |                          | $ | 554,336

A summary of stock option activity within the Companys stock-based compensation plans for
the six months ended June 30, 2008 is as follows:



|                               |  |                 |   |  |                               |          |                                                 |     |                          |   |        
|------------------------------ |  | --------------- | - |  | ----------------------------- | -------- | ----------------------------------------------- | --- | ------------------------ | - | -------
|                               |  | Number ofShares |   |  | WeightedAverageExercise Price |          | WeightedAverageRemainingContractualTerm (Years) |     | AggregateIntrinsic Value
|Outstanding at January 1, 2008 |  | 140,063         |   |  | $                             | 145.66   |                                                 |     |                          |   |        
|Granted                        |  |                |   |  |                               |         |                                                 |     |                          |   |        
|Exercised                      |  |                |   |  |                               |         |                                                 |     |                          |   |        
|Forfeited                      |  | (1,064          | ) |  | $                             | 1,022.20 |                                                 |     |                          |   |        
|                               |  |                 |   |  |                               |          |                                                 |     |                          |   |        
|Outstanding at June 30, 2008   |  | 138,999         |   |  | $                             | 138.95   |                                                 | 6.2 |                          | $ | 474,779
|                               |  |                 |   |  |                               |          |                                                 |     |                          |   |        
|Exercisable at June 30, 2008   |  | 88,999          |   |  | $                             | 215.83   |                                                 | 5.1 |                          | $ | 158,279

The aggregate intrinsic value for stock options outstanding and exercisable is defined as the
difference between the market value of the Companys stock as of the end of the period and the exercise price of the stock options.

The following is a summary of nonvested stock option activity:



|                             |  |                 |  |                                     |     
|---------------------------- |  | --------------- |  | ----------------------------------- | ----
|                             |  | Number ofShares |  | WeightedAverageGrant-Date FairValue
|Nonvested at January 1, 2009 |  | 25,000          |  | $                                   | 2.11
|Granted                      |  |                |  |                                     |    
|Vested                       |  |                |  |                                     |    
|Forfeited                    |  |                |  |                                     |    
|                             |  |                 |  |                                     |     
|Nonvested at June 30, 2009   |  | 25,000          |  | $                                   | 2.11
|                             |  |                 |  |                                     |     



25



---

##### Table of Contents

|                             |  |                 |  |                                     |     
|---------------------------- |  | --------------- |  | ----------------------------------- | ----
|                             |  | Number ofShares |  | WeightedAverageGrant-Date FairValue
|Nonvested at January 1, 2008 |  | 50,000          |  | $                                   | 2.11
|Granted                      |  |                |  |                                     |    
|Vested                       |  |                |  |                                     |    
|Forfeited                    |  |                |  |                                     |    
|                             |  |                 |  |                                     |     
|Nonvested at June 30, 2008   |  | 50,000          |  | $                                   | 2.11
|                             |  |                 |  |                                     |     

As of June 30, 2009, there was approximately $4,400 of total unrecognized compensation cost
related to nonvested stock options. The cost is expected to be recognized over a weighted average period of 0.08 years.

The Company also
grants restricted stock awards to its employees. Restricted stock awards are valued at the closing market value of the Companys common stock on the day of the grant, and the total value of the award is recognized as expense ratably over the
vesting period of the employees receiving the grants. During the six months ended June 30, 2009, the Company issued 62,040 shares of restricted stock that will become unrestricted four years after the grant date. The Company granted 17,500
shares of restricted stock during the first six months ended June 30, 2008.

As of June 30, 2009, the total amount of
unrecognized compensation expense related to restricted stock awards was approximately $4.0 million, which is expected to be recognized over a weighted-average period of approximately 2.6 years.

During the six months ended June 30, 2009, no shares of restricted stock were returned. During the six months ended June 30, 2008, there were
460 shares of restricted returned to the Company as the result of employee termination. All shares of restricted stock granted before 2006 become unrestricted on the tenth anniversary of the grant date, or on the fourth anniversary for restricted
stock granted during and after 2006. Stock options vest in three equal annual installments, commencing on the issuance date, subject to the terms and conditions of the equity incentive plan. As of June 30, 2009 and December 31, 2008, the
outstanding shares of restricted stock totaled 1,441,648 and 1,387,478, respectively.

For the six months ended June 30, 2009 and
2008, total stock-based compensation was $0.8 million and $0.9 million, respectively. During the first six months of 2008, 40,000 shares of restricted stock, which were originally granted on July 30, 2003, were granted early vesting by the
Compensation Committee of the Board of Directors. As a result, the Company recorded a one-time charge of $0.2 million related to the amortization of such stock for the balance of the original restriction (i.e. 10 years).

4. PROPERTY, PLANT AND EQUIPMENT

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



|                                         |  |               |         |   |                   |   |         |  
|---------------------------------------- |  | ------------- | ------- | - | ----------------- | - | ------- | -
|                                         |  | June 30, 2009 |         |   | December 31, 2008 |  
|                                         |  | (unaudited)   |         |   |                   |  
|Computer software                        |  | $             | 1,127   |   |                   | $ | 993     |  
|Computer equipment                       |  |               | 1,012   |   |                   |   | 985     |  
|Leasehold improvements                   |  |               | 31      |   |                   |   | 31      |  
|Office equipment and furniture           |  |               | 748     |   |                   |   | 417     |  
|Network equipment and infrastructure     |  |               | 121,338 |   |                   |   | 118,755 |  
|                                         |  |               |         |   |                   |   |         |  
|Subtotal                                 |  |               | 124,256 |   |                   |   | 121,181 |  
|Accumulated depreciation                 |  |               | (73,895 | ) |                   |   | (68,602 | )
|                                         |  |               |         |   |                   |   |         |  
|Total property, plant and equipment, net |  | $             | 50,361  |   |                   | $ | 52,579  |  
|                                         |  |               |         |   |                   |   |         |  

5. CREDIT FACILITY

On March 21, 2007, the Company entered into a Credit Agreement by and among the Company, its subsidiaries and CapitalSource Finance LLC pursuant to which the Company and its subsidiaries established a $25.0
million credit facility (the Credit



26



---

##### Table of Contents

Facility), consisting of (i) a $14.0 million term loan, (ii) a $6.0 million revolving loan and letter of credit facility and (iii) a
$5.0 million capital expenditure loan facility, which was unfunded at closing. The $14.0 million term loan was used to pay off a credit facility with Deutsche Bank A.G. The Credit Facility bears interest at floating rates, depending on the type of
borrowing and based on either a Prime Rate or LIBOR Rate, as such terms are defined under the Credit Facility. Borrowings on the $14.0 million term loan are payable in increasing quarterly installments commencing in July 2008. The Credit Facility
matures in March 2012. The Credit Facility is secured by a first lien on all of the Companys and its subsidiaries existing and future real assets and personal property. The Credit Facility is guaranteed by the Company and certain of its
subsidiaries, and contains restrictive covenants, operating restrictions and other terms and conditions. The Credit Agreement prohibits the payment of cash dividends on common stock. As of June 30, 2009, the outstanding balance under the Credit
Facility was $13.9 million. In addition, as of June 30, 2009, the Company had $5.4 million of outstanding letters of credit and $0.6 million of availability under its revolving loan credit facility, again subject to compliance with the terms of
the credit agreement. As of June 30, 2009, the interest rate on its outstanding borrowings under the facility was at 4.71%. There were no events of default under its credit agreement.

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

6. EQUITY TRANSACTIONS

On November 8, 2007, the Company announced that its Board of Directors has authorized the repurchase of up to $5.0 million of the Companys
common stock, either through open market purchases or in privately negotiated transactions. On May 15, 2008, the Company announced that its Board of Directors had authorized the increase of the Companys stock repurchase program to $7.5
million from $5.0 million. The timing and amount of the shares to be repurchased will be based on market conditions and other factors, including price, corporate and regulatory requirements and alternative investment opportunities. Any shares
repurchased in the program were cancelled. The repurchase program was terminated on June 30, 2009. As of June 30, 2009, the Company had repurchased 595,933 shares of common stock under the program for an average price of $8.29 per share.
For the six months ended June 30, 2008, the Company had repurchased 306,690 shares of common stock for an average price of $8.02 per share. For the six months ended June 30, 2009, the Company had repurchased 68,808 shares of common stock
for an average price of $9.99 per share.

7. MERGER AGREEMENT

On May 28, 2009, the Company entered into an Agreement and Plan of Merger by and among the Company, Zayo Group, LLC (Parent) and Zayo Merger Sub, Inc., a wholly owned subsidiary of Parent
(Purchaser), pursuant to which, and subject to the terms and conditions set forth therein, at the Effective Time (as defined in the Merger Agreement), Purchaser will merge with and into the Company (the Merger)
and the Company will continue as the surviving corporation and a wholly owned subsidiary of Parent. The Board of Directors of the Company has unanimously determined that the Merger Agreement and the transactions provided for therein (including the
Merger) are advisable, fair to, and in the best interests of the Company and its stockholders, and has unanimously approved the Merger Agreement and recommended the adoption of the Merger Agreement by the Companys stockholders.

Pursuant to the terms of the Merger Agreement and subject to the conditions thereof, at the Effective Time, each share of common stock of the Company
issued and outstanding immediately prior to the Effective Time (other than (i) shares owned by Parent, Purchaser or the Company or any of their respective direct or indirect wholly owned subsidiaries or (ii) Dissenting Shares (as defined
in the Merger Agreement)) will be converted into the right to receive $11.45 in cash (subject to potential downward adjustment under the Merger Agreement).

On June 16, 2009, the Company received a proposal from RCN Corporation (RCN) to acquire all of its outstanding shares of common stock for $12.50 per share in cash. The proposal was non-binding and
subject to the completion of due diligence by RCN. The Companys board of directors determined the proposal qualified RCN as an excluded party under the terms of the pending Merger Agreement with Parent.

On July 9, 2009, the Company announced that RCN Corporation withdrew its proposal to acquire itself for $12.50 per share of its common stock.
Consequently, pursuant to the Merger Agreement, RCN Corporation is no longer an excluded party under the terms of the Merger Agreement. Accordingly, the Company will continue to proceed with the sale to Purchaser for $11.45 per share in
cash under the Merger Agreement.



27



---

##### Table of Contents

On June 19, 2009, a putative class action captioned Masucci v. FiberNet Telecom Group, Inc., et
al., was filed in the Court of Chancery of the State of Delaware against the Company and its directors, as well as Parent and Purchaser (Delaware Litigation). The action was brought by a purported stockholder of the Company, on
behalf of a putative class of Company stockholders and, among other things, seeks to enjoin the consummation of the merger of Purchaser with and into the Company (the Merger) and seeks an award of monetary damages, costs and
disbursements. Plaintiff alleges that the decisions by the Companys directors to approve the Merger constituted breaches of their respective fiduciary duties because they did not engage in a fair process to ensure the highest possible purchase
price for the Companys stockholders, did not properly value the Company and failed to disclose material facts regarding the proposed Merger. Plaintiff also contends that the Company, Parent and Purchaser aided and abetted the alleged breaches
of fiduciary duties by the Companys directors. Plaintiff has also filed a motion for preliminary injunction and for expedited proceedings. The Company intends to defend the action vigorously but can provide no assurance as to the manner or
timing of the resolution of the action.

On July 23, 2009, all parties to the Delaware Litigation executed a Memorandum of
Understanding (MOU), pursuant to which, inter alia, the Company would make additional public disclosures (which were incorporated into the Revised Preliminary Proxy Statement filed with the Securities and Exchange Commission on
July 24, 2009), and all claims in the Delaware Litigation would be dismissed in accordance with the terms of the MOU. The settlement of the Delaware Litigation is subject to approval of the Delaware Court of Chancery and is conditional on
consummation of the Merger.

8. SUBSEQUENT EVENTS

See Note 7.

On July 10, 2009, a putative class action captioned Chen v. DeLuca, et al. was
filed in the Supreme Court of New York for the County of New York against the Company and its directors, as well as Parent and Purchaser. The action was brought by a purported stockholder of the Company, on behalf of a putative class of Company
stockholders, and, among other things, seeks to enjoin the consummation of the Merger and seeks an award of monetary damages, costs and an accounting for all profits and any special benefits obtained by the defendants as a result of the proposed
Merger. Plaintiff alleges that the decisions by the Companys directors to approve the Merger constituted breaches of their respective fiduciary duties because they failed to engage in an honest and fair sales process and failed to disclose
material facts regarding the proposed Merger. Plaintiff also contends that the Company, Parent and Purchaser aided and abetted the alleged breaches of fiduciary duties by the Companys directors. The Company intends to defend the action
vigorously but can provide no assurance as to the manner or timing of the resolution of the action.



28