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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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(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, 2006

OR



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

For the transition period from  to
.

Commission file number
000-24661



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FiberNet Telecom Group, Inc.

(Exact Name of Registrant as Specified in its Charter)



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

570 Lexington Avenue, New York, NY 10022

(Address of Principal Executive Offices)

(212) 405-6200

(Issuers Telephone Number, Including Area Code)

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

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

Large accelerated filer ̈Accelerated filer ̈Non-accelerated
filer  x

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

As of August 11, 2006, the registrant had 6,305,849 shares of common stock outstanding.



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INDEX



|         |  |                                                                                                   |  |     
|-------- |  | ------------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                                   |  | Page
|PART I.  |  | FINANCIAL INFORMATION                                                                             |  |     
|         |  |                                                                                                  
|Item 1.  |  | Condensed Consolidated Interim Financial Statements (unaudited)                                   |  |     
|         |  |                                                                                                  
|         |  | Condensed Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005                   |  | 16  
|         |  |                                                                                                  
|         |  | Condensed Consolidated Statements of Operations for the six months ended June 30, 2006 and 2005   |  | 17  
|         |  |                                                                                                  
|         |  | Condensed Consolidated Statements of Operations for the three months ended June 30, 2006 and 2005 |  | 18  
|         |  |                                                                                                  
|         |  | Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and 2005   |  | 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                                        |  | 11  
|         |  |                                                                                                  
|Item 4.  |  | Controls and Procedures                                                                           |  | 11  
|         |  |                                                                                                  
|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                                                                                 |  | 13  
|         |  |                                                                                                  
|Item 6.  |  | Exhibits                                                                                          |  | 14  



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PART I

FINANCIAL INFORMATION

Item 1.Condensed Consolidated Interim Financial Statements (unaudited)

See attached.

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

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

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

Overview

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

Factors Affecting Future Operations

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



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



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



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



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



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Our revenues are typically generated on a monthly recurring basis under contracts with our customers. The terms of these
contracts can range from month-to-month to fifteen years in length. We continue to experience a trend of entering into shorter term contracts with our customers. Our customers typically elect to purchase services for an initial contracted 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 are based upon the size of the colocation space or the number of colocation units, such as cabinets, provided to the customer. Revenues from access management services are
typically determined by the square footage of the commercial office properties to which a customer purchases access. We have experienced price declines for some of our services over the past year due to industry trends, with transport services
experiencing the greatest decreases. We expect our operating results to continue to be impacted by decreases in the prices of our services.

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

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

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

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

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

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

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

Cost of Services. Cost of services is associated with the operation of our networks and facilities. The largest component of our cost of services is the occupancy
expenses at our carrier hotel facilities, on-net and off-net buildings. These occupancy expenses primarily represent rent expense, utility costs and license fees under direct leases with landlords. They also include charges for colocation space in
other carriers facilities and cross connection fees to interconnect our networks with other carriers networks. Most of our license agreements for our on-net and off-net buildings require us to pay license fees to the owners of these
properties. In addition, our two



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leases at 60 Hudson Street in New York City require us to pay license fees. These license fees typically are calculated
as a percentage of the revenues that we generate in each particular building. In addition, we incur off-net connectivity charges for the costs of purchasing connectivity from other wholesale telecommunications carriers to provide our customers with
transport services on networks that we do not own. As we provide additional off-net transport services, we will purchase more connectivity from other carriers. Other specific costs of services include maintenance and repair costs. With the exception
of off-net connectivity charges and license fees, we do not anticipate that cost of services will change commensurately with any change in our revenues as our cost of services is generally fixed in nature.

Selling, General and Administrative Expenses. Selling, general and administrative expenses include all of our personnel costs including stock related costs,
occupancy costs for our corporate offices, insurance costs, professional fees, sales and marketing expenses and other miscellaneous expenses. Personnel costs, including wages, benefits and sales commissions, are our largest component of selling,
general and administrative expenses. Stock related expenses relates to the granting of stock options and restricted stock to our employees. We make equity grants to our employees in order to attract, retain and incentivize qualified personnel. These
costs are non-cash charges that are amortized over the vesting term of each employees equity agreement, based on the fair value on the date of the grant. We do not allocate any personnel cost relating to networks operations or sales activities
to cost of services. We had 67 employees as of June 30, 2006 compared to 68 as of June 30, 2005. Prospectively, we believe that our personnel costs will increase moderately. Professional fees, including legal and accounting expenses and
consulting fees, represent the second largest component of our selling, general and administrative expenses. These legal and accounting fees are primarily attributed to our required activities as a publicly traded company, such as SEC filings and
financial statement audits, and could increase prospectively due to the enhanced regulations regarding corporate governance and compliance matters. Other costs included in selling, general and administrative expenses, such as insurance costs,
occupancy costs related to our office space, and marketing costs, may increase due to changes in the economic environment and telecommunications industry.

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

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

Critical Accounting
Policies

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

Revenue Recognition

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

We have one reciprocal agreement, whereby we purchase services from one of our customers under a single agreement. The services
provided and obtained through this agreement were priced at fair value as of the date of the agreement. We recognized the transport and colocation revenues from this agreement in accordance with our stated revenue recognition policy, and we
concurrently recorded the expenses for colocation services as cost of services in our consolidated statements of operations. None of the expenses associated with our reciprocal agreement are capitalized. These costs are expensed as incurred. For the
six months ended June 30, 2006, our reciprocal agreement accounted for $0.2 million, or 1.3%, of revenues and $0.2 million of our cost of services. For the six months ended June 30, 2005, our reciprocal agreement accounted for $0.2
million, or 1.5%, of revenues and $0.2 million of our cost of services.



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For the quarter ended June 30, 2006, our reciprocal agreement accounted for $0.1 million, or 1.3%, of revenues and
$0.1 million of our cost of services. For the quarter ended June 30, 2005, our reciprocal agreement accounted for $0.1 million, or 1.4%, of revenues and $0.1 million of our cost of services.

Allowance for Doubtful Accounts

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

Impairment of Long-Lived Assets

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

Recognition of Deferred Tax Assets and Liabilities

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

Results of Operations

Six Months Ended
June 30, 2006 Compared to Six Months Ended June 30, 2005

Revenues. Revenues for the six months ended June 30, 2006 were $18.5
million compared to $16.3 million for the six months ended June 30, 2005. We increased the number of our customers from 219 as of June 30, 2005 to 240 as of June 30, 2006, primarily with the addition of domestic subsidiaries of
internationally based carriers to our customer base. 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 ended June 30, |        |      |  
|(amounts in thousands)    |  | 2006                              |        | 2005 |   | $Change | 
|On-net transport revenue  |  | $                                 | 10,578 |      | $ | 9,740   |  | $ | 838   |  
|Off-net transport revenue |  |                                   | 3,477  |      |   | 2,628   |  |   | 849   |  
|Colocation revenue        |  |                                   | 4,133  |      |   | 3,468   |  |   | 665   |  
|Access revenue            |  |                                   | 329    |      |   | 481     |  |   | (152  | )
|                          |  |                                   |        |      |   |         |  |   |       |  
|Total Revenue             |  | $                                 | 18,517 |      | $ | 16,317  |  | $ | 2,200 |  
|                          |  |                                   |        |      |   |         |  |   |       |  

We recognized $10.6 million in on-net transport service revenues for the six months ended June 30, 2006, up
from $9.7 million for the six months ended June 30, 2005. Off-net transport service revenues for the six months ended June 30, 2006 were $3.5 million, up from $2.6 million for the six months ended June 30, 2005. Revenues from
colocation services were $4.1 million for the six months ended June 30, 2006 compared to $3.5 million for the six months ended June 30, 2005, and revenues from communications access management services declined to $0.3 million for the six
months ended June 30, 2006 from $0.5 million for the six months ended June 30, 2005.



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The vast majority of our transport and colocation services are provided within and between our carrier hotel facilities
in the New York/New Jersey market. On-net transport revenues increased as we provided a greater number of lower-bandwidth circuits to our customers, offsetting the disconnections and price decreases that we have been experiencing. Off-net transport
revenues increased over the same period last year as we continue to leverage our current customer base. Colocation revenues were generated as we leased additional caged space, cabinets and racks in our facilities. Since we are approaching capacity
at some of our colocation facilities, we may have to invest in expanding these facilities to offer additional space to our customers. We expect transport services to grow at a faster rate than colocation. Our network infrastructure has significant
capacity to provide additional broadband transport connectivity, and our colocation facilities are approaching more stabilized utilization rates. Our access management services business has been steadily declining, and we expect that trend to
continue throughout 2006. The revenues that we are generating from this type of service are from long-term contracts entered into in prior years. The remaining terms of our existing access management service contracts range from month-to-month to
expiration in 2008. We do not expect to sell any additional access services, and we believe our existing contracts for access services may not be renewed when they expire.

For the six months ended June 30, 2006 and 2005, there were no individual customers that accounted for over 10.0% of our revenues. Our reciprocal agreement accounted for $0.2 million, or 1.3%, of revenues for the
six months ended June 30, 2006, consistent with $0.2 million, or 1.5%, of revenues for the six months ended June 30, 2005.

Cost of
Services. Cost of services, associated with the operation of our networks and facilities, were $9.2 million for the six months ended June 30, 2006, compared to $7.9 million for the six months ended June 30, 2005. The majority of our
cost of services is occupancy expenses, consisting of rent, license fees, and utility costs, for our carrier hotel facilities, on-net buildings and off-net buildings. Other cost of services includes off-net connectivity charges and maintenance and
repair costs.



|                                       |  |                                   |       |      |   |         |  |   |       |  
|-------------------------------------- |  | --------------------------------- | ----- | ---- | - | ------- |  | - | ----- | -
|                                       |  | For the six months ended June 30, |       |      |  
|(amounts in thousands)                 |  | 2006                              |       | 2005 |   | $Change | 
|Occupancy expenses                     |  | $                                 | 6,136 |      | $ | 5,712   |  | $ | 424   |  
|Off-net connectivity charges           |  |                                   | 2,793 |      |   | 1,949   |  |   | 844   |  
|Maintenance and repair and other costs |  |                                   | 260   |      |   | 281     |  |   | (21   | )
|                                       |  |                                   |       |      |   |         |  |   |       |  
|Total Cost of Services                 |  | $                                 | 9,189 |      | $ | 7,942   |  | $ | 1,247 |  
|                                       |  |                                   |       |      |   |         |  |   |       |  

Occupancy expenses, which represented 66.8% of cost of services or $6.1 million for the six months ended
June 30, 2006, increased $0.4 million as compared to 71.9%, or $5.7 million, for the six months ended June 30, 2005. This increase was due to increases in colocation and cross-connection charges and an increase in utility usage.

Off-net connectivity charges were 30.4% of cost of services or $2.8 million for the six months ended June 30, 2006, versus 24.5% of the cost of
services or $1.9 million for the six months ended June 30, 2005. We expect these connectivity charges to increase commensurately with our increase in revenues from off-net transport.

Maintenance and repair and other costs were 2.8% or $0.3 million of cost of services for the six months ended June 30, 2006, compared to 3.5% or $0.3 million for
the six months ended June 30, 2005. These costs will continue to represent a relatively small and fixed component of cost of services.

Our reciprocal
agreement accounted for $0.2 million of our cost of services for the six months ended June 30, 2006 and 2005.

Selling, General and Administrative
Expenses. Selling, general and administrative expenses for the six months ended June 30, 2006 were $7.7 million compared to $9.3 million for the six months ended June 30, 2005. Personnel costs represented 63.3% or $4.9 million of
selling, general and administrative expenses for the six months ended June 30, 2006 compared to 53.4% or $4.9 million for the six months ended June 30, 2005. Professional fees for the six months ended June 30, 2006 were $0.6 million,
as compared to $2.0 million for the same period in 2005. During the six months ended June 30, 2006, we expensed $0.1 million for fees related to the twentieth amendment of our credit agreement which was determined to represent a modification of
terms under the guidelines set forth in Emerging Issues Task Force Issue (EITF) 96-19, Debtors Accounting for a Modification or Exchange of Debt Instruments. During the six months ended June 30, 2005, we expensed
$1.2 million of deferred transaction costs related to the termination of our stock purchase agreement with Consolidated Edison, Inc. We anticipate selling, general and administrative expenses to increase modestly throughout 2006 with the general
growth of our business.

Stock related expenses, included in selling, general and administrative expenses, for the six months ended June 30, 2006 and
2005 were $0.4 million and $0.3 million, respectively. This non-cash expense relates to the amortization of restricted stock granted to our employees. The restricted shares that have been granted become unrestricted on the tenth anniversary of the
grant date, and the related expenses are amortized on a straight-line basis over the ten-year period. Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share Based
Payment (SFAS 123(R)), applying the modified prospective method. An incremental stock compensation expense increase of approximately $0.1 million was recognized during the first six months of 2006 on existing stock options. As a
result of the Companys decision to adopt the modified prospective method, prior period results have not been restated.



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Depreciation and Amortization.Depreciation and amortization expense for each of the six months ended
June 30, 2006 and 2005 was $4.5 million.

Interest Income.Interest income for the six months ended June 30, 2006 was
approximately $52,000, compared to approximately $41,000 for the six months ended June 30, 2005. Interest income is generated on our cash and restricted 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, 2006 was $1.3 million, compared to $1.1
million for the six months ended June 30, 2005. As of March 22, 2006, our loans were converted to a fixed rate of 9.0% in connection with the twentieth amendment to the credit agreement underlying our credit facility.

Net Loss.We reported a net loss of $4.1 million for the six months ended June 30, 2006 compared to a net loss of $9.2 million for the six months ended
June 30, 2005. This change is a result of the aforementioned changes in our operations.

Three Months Ended June 30, 2006 Compared to Three
Months Ended June 30, 2005

Revenues.Revenues for the quarter ended June 30, 2006 were $9.5 million as compared to $8.4 million
for the quarter ended June 30, 2005. We increased the number of our customers from 219 at June 30, 2005 to 240 as of June 30, 2006, primarily with the addition of domestic subsidiaries of internationally based carriers. We believe
that there are greater opportunities to serve domestic subsidiaries of foreign telecommunications companies in our gateway markets, as domestic carriers consolidate and rationalize. Revenues were generated by providing transport, colocation and
communications access management services to our customers and are quantified as follows:



|                          |  |                                     |       |      |   |         |  |   |       |  
|------------------------- |  | ----------------------------------- | ----- | ---- | - | ------- |  | - | ----- | -
|                          |  | For the three months ended June 30, |       |      |  
|(amounts in thousands)    |  | 2006                                |       | 2005 |   | $Change | 
|On-net transport revenue  |  | $                                   | 5,356 |      | $ | 4,946   |  | $ | 410   |  
|Off-net transport revenue |  |                                     | 1,896 |      |   | 1,442   |  |   | 454   |  
|Colocation revenue        |  |                                     | 2,073 |      |   | 1,764   |  |   | 309   |  
|Access revenue            |  |                                     | 164   |      |   | 216     |  |   | (52   | )
|                          |  |                                     |       |      |   |         |  |   |       |  
|Total Revenue             |  | $                                   | 9,489 |      | $ | 8,368   |  | $ | 1,121 |  
|                          |  |                                     |       |      |   |         |  |   |       |  

We recognized $5.4 million in on-net transport service revenues for the quarter ended June 30, 2006, up from
$4.9 million for the quarter ended June 30, 2005. Off-net transport service revenues for the quarter ended June 30, 2006 were $1.9 million, up from $1.4 million for the quarter ended June 30, 2005. Revenues from colocation services
were $2.1 million for the quarter ended June 30, 2006 compared to $1.8 million for the quarter ended June 30, 2005, and revenues from communications access management services remained at $0.2 million for each of the quarters ended
June 30, 2006 and 2005.

The vast majority of our transport and colocation services are provided within and between our carrier hotel facilities in
the New York/New Jersey market. On-net transport revenues increased as we provided a greater number of lower-bandwidth circuits to our customers, offsetting the disconnections and price decreases that we have been experiencing. Off-net transport
revenues increased over the same period last year as we continue to leverage our current customer base. Colocation revenues were generated as we leased additional caged space, cabinets and racks in our facilities. Since we are approaching capacity
at some of our colocation facilities, we may have to invest in expanding these facilities to offer additional space to our customers. We expect transport services to grow at a faster rate than colocation. Our network infrastructure has significant
capacity to provide additional broadband transport connectivity, and our colocation facilities are approaching more stabilized utilization rates. Our access management services business has been steadily declining, and we expect that trend to
continue throughout 2006. The revenues that we are generating from this type of service are from long-term contracts entered into in prior years. The remaining terms of our existing access management service contracts range from month-to-month to
expiration in 2008. We do not expect to sell any additional access services, and we believe our existing contracts for access services may not be renewed when they expire.

For the quarters ended June 30, 2006 and 2005, there were no individual customers that accounted for over 10.0% of our revenues. Our reciprocal agreement accounted for $0.1 million, or 1.3 %, of revenues for
the quarter ended June 30, 2006, compared to $0.1 million, or 1.4%, of revenues for the quarter ended June 30, 2005.

Cost of Services.Cost of services, associated with the operation of our networks and facilities, were $4.7 million for the quarter ended June 30, 2006, compared to $4.1 million for the quarter ended June 30, 2005. The majority of our cost of services
is occupancy expenses, consisting of rent, license fees, and utility costs, for our carrier hotel facilities, on-net buildings and off-net buildings. Other cost of services includes off-net connectivity charges and maintenance and repair costs.



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|                                       |  |                                     |       |      |   |          |  |   |     |  
|-------------------------------------- |  | ----------------------------------- | ----- | ---- | - | -------- |  | - | --- | -
|                                       |  | For the three months ended June 30, |       |      |  
|(amounts in thousands)                 |  | 2006                                |       | 2005 |   | $ Change | 
|Occupancy expenses                     |  | $                                   | 3,081 |      | $ | 2,878    |  | $ | 203 |  
|Off-net connectivity charges           |  |                                     | 1,532 |      |   | 1,087    |  |   | 445 |  
|Maintenance and repair and other costs |  |                                     | 136   |      |   | 154      |  |   | (18 | )
|                                       |  |                                     |       |      |   |          |  |   |     |  
|Total Cost of Services                 |  | $                                   | 4,749 |      | $ | 4,119    |  | $ | 630 |  
|                                       |  |                                     |       |      |   |          |  |   |     |  

Occupancy expenses represented 64.9% of cost of services or $3.1 million for the quarter ended June 30, 2006,
an increase of $0.2 million as compared to 69.9% or $2.9 million for the quarter ended June 30, 2005. This increase was due to increases in colocation and cross-connection charges and an increase in utility usage.

Off-net connectivity charges were 32.3% of cost of services or $1.5 million for the quarter ended June 30, 2006, compared to 26.4% of the cost of services or $1.1
million for the quarter ended June 30, 2005. 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 $0.1 million of cost of services for the quarter ended June 30, 2006, compared to 3.6% or $0.2 million for the quarter ended June 30, 2005. These costs
will continue to represent a relatively small and fixed component of cost of services.

Our reciprocal agreement accounted for $0.1 million of our cost of
services for each of the quarters ended June 30, 2006 and 2005.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the quarter ended June 30, 2006 were $3.8 million compared to $4.5 million for the quarter ended June 30, 2005. Personnel costs represented 64.2%, or $2.4 million, of selling, general and administrative expenses
for the quarter ended June 30, 2006 compared to 52.9%, or $2.4 million, for the quarter ended June 30, 2005. Professional fees were $0.3 million for the quarter ended June 30, 2006, compared to $1.0 million for the quarter ended
June 30, 2005. During the quarter ended June 30, 2005, we expensed $0.5 million of deferred transaction costs related to the termination of our stock purchase agreement with Consolidated Edison, Inc. We anticipate selling, general and
administrative expenses to increase modestly throughout 2006 with the general growth of our business.

Stock related expenses, included in selling, general
and administrative expenses, for each of the quarters ended June 30, 2006 and 2005 were $0.2 million and $0.1 million, respectively. This non-cash expense relates to the amortization of restricted stock granted to our employees. The restricted
shares that have been granted become unrestricted on the tenth anniversary of the grant date, and the related expenses are amortized on a straight-line basis over the ten-year period. Effective January 1, 2006, the Company adopted SFAS 123(R)
applying the modified prospective method. An incremental stock compensation expense increase of approximately $58,000 was recognized during the second quarter of 2006 on existing stock options. As a result of the Companys decision to adopt the
modified prospective method, prior period results have not been restated.

Depreciation and Amortization.Depreciation and amortization expense
for each of the quarters ended June 30, 2006 and 2005 was $2.3 million.

Interest Income.Interest income for the quarter ended
June 30, 2006 was approximately $38,000, compared to approximately $23,000 for the quarter ended June 30, 2005. Interest income is generated on our cash balances, which are at variable rates of interest and are invested in short-term,
highly liquid investments.

Interest Expense.Interest expense for each of the quarters ended June 30, 2006 and 2005 was $0.6 million and
$0.5 million respectively. As of March 22, 2006, our loans were converted to a fixed rate of 9.0%, and this interest rate change is included in the twentieth amendment to the credit agreement underlying our credit facility.

Net Loss.We reported a net loss of $1.8 million for the quarter ended June 30, 2006 compared to a net loss of $5.9 million for the quarter ended
June 30, 2005. This change is a result of the aforementioned changes in our operations.

Liquidity and Capital Resources

To date, we have financed our operations through revenues collected from our customers, the issuance of additional debt and equity securities in private transactions and
by arranging a credit facility with a group of lenders. We had a loss from operations and a net loss for the six months ended June 30, 2006 of $2.9 million and $4.1 million, respectively, compared to a loss from operations and a net loss of
$8.2 million and $9.2 million, respectively, for the six months ended June 30, 2005. During the six months ended June 30,



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2006, cash provided by operating activities was approximately $1.6 million, and cash purchases of property, plant and
equipment were $1.3 million, compared to cash used in operating activities and cash purchases of property, plant and equipment of $0.5 million and $1.1 million, respectively, for the six months ended June 30, 2005.

For the six months ended June 30, 2006, we received $2.1 million in net cash from financing related activities. For the six months ended June 30, 2005, we
received $0.9 million in net cash from financing activities. We believe we will be able to generate sufficient cash flows from operations in order to sustain our current and long term operations.

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

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

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

As a condition to the lenders entering into the twentieth amendment, we entered into a warrant agreement with the lenders on March 22, 2006 (the Warrant
Agreement), pursuant to which we agreed to issue warrants (with an expiration date three and one-half years after closing) to the lenders to purchase an aggregate of 0.3 million shares of common stock at an exercise price of $2.64 per
share. We determined the fair value of the warrants issued in connection with the twentieth amendment to be $0.6 million using the Black-Scholes option-pricing model, with the following assumptions: risk-free interest rate of 4.72%, expected
dividend yields of 0%, expected life of three and one half years to expiration and expected volatility of 121%. The fair value amount was included in deferred charges and will be amortized over the remaining life of the credit facility. In
connection with the Warrant Agreement, we entered into a registration rights agreement with the lenders, dated as of March 22, 2006, which required us to file a registration statement with the Securities and Exchange Commission with respect to
the resale of the shares of common stock underlying the warrants issued to the lenders. The registration statement was filed on April 21, 2006 and declared effective by the Securities and Exchange Commission on May 10, 2006.

On May 16, 2006, we issued $0.7 million in letters of credit under our current credit facility to replace cash security deposits previously placed with landlords.

As of June 30, 2006, we had $14.2 million of indebtedness outstanding under our credit facility and $5.5 million of outstanding letters of credit. In
addition, we had $0.1 million of availability to issue letters of credit under the credit facility, subject to compliance with the terms of the credit agreement. The interest rate on our outstanding borrowings under the facility was fixed at 9.0%.
We were in full compliance with all of the covenants contained in the credit agreement as of June 30, 2006. Our financial covenants include minimum consolidated revenue, minimum consolidated EBITDA (as defined in the credit agreement underlying
the credit facility), maximum cumulative capital expenditures, minimum consolidated interest coverage ratio, and a minimum cash balance. The compliance levels and calculation of such levels with respect to those covenants are as defined in the
credit agreement, as amended, which is on file with the Securities and Exchange Commission. Non-compliance with any of the covenants, requirements, or other terms and conditions under the credit agreement constitutes an event of default and
potentially accelerates the outstanding balance of the credit facility for immediate payment.

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



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##### Table of Contents

We spent $1.3 million in capital expenditures during the six months ended June 30, 2006, primarily for the
implementation of customer orders, including the purchase of network equipment to increase capacity and to interconnect with new customers. Our capital expenditures totaled $1.1 million for the six months ended June 30, 2005. We have
substantially completed the deployment of our FINs, carrier hotel facilities and metropolitan transport networks. In 2006, we expect to invest a total of $2.5 million to $3.0 million in capital expenditures, primarily for customer order activity,
the expansion of certain of our facilities and new product initiatives. We also intend to upgrade certain information technology systems and key operations systems. We may expend additional capital for the selected expansion of our network
infrastructure, depending upon market conditions, customer demand and our liquidity and capital resources.

During the six months ended June 30, 2006,
18,750 shares of restricted stock were returned to us as the result of employee terminations.

As of August 11, 2006, we had 6,305,849 million
shares of common stock outstanding, or 7,768,221 million shares of common stock outstanding on a fully diluted basis, assuming the exercise of all outstanding options and warrants.

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

Recent Accounting Pronouncements

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

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

In June 2006,
FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, of FASB Statement No. 109, Accounting for Income Taxes. This interpretation prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It is effective for fiscal years beginning after December 15, 2006. We are currently assessing the impact that the adoption
of FIN No. 48 will have on our consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

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



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



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##### Table of Contents

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

There were no material changes to the risk factors contained in our Annual Report on Form 10-K for
the fiscal year ended December 31, 2005.

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

None.

Item 3. Defaults Upon Senior Securities

None.

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

On June 14, 2006, the Annual Meeting of Stockholders was
held and the shares present voted on the following matters:

(1) The stockholders approved the election of the following nominees to serve on the Board of
Directors:



|                   |  |           |  |         
|------------------ |  | --------- |  | --------
|                   |  | For       |  | Withheld
|Timothy P. Bradley |  | 3,760,107 |  | 185,654 
|Oskar Brecher      |  | 3,758,641 |  | 187,120 
|Adam Brodsky       |  | 3,849,332 |  | 96,429  
|Jon A. DeLuca      |  | 3,849,175 |  | 96,586  
|Roy D. Farmer III  |  | 3,825,155 |  | 120,606 
|Robert La Blanc    |  | 3,882,355 |  | 63,379  
|Michael S. Liss    |  | 3,849,333 |  | 96,428  
|Charles Mahoney    |  | 3,759,195 |  | 186,566 
|Richard Sayers     |  | 3,825,368 |  | 120,393 

(2) Authorization of the Board of Directors, in its discretion, to amend the Companys Equity Incentive Plan
to increase the number of shares of common stock available for issuance under the plan from 785,924 shares to 1,285,924 shares was approved with 721,629 votes FOR, 252,154 votes AGAINST, and 3,088 votes ABSTAINING.

(3) The appointment of Deloitte & Touche LLP as auditors for the Company for the fiscal year ended December 31, 2006 was approved with 3,621,397 votes FOR,
319,183 votes AGAINST, and 5,179 votes ABSTAINING.

Item 5. Other Information

None.



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##### Table of Contents

Item 6. Exhibits

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

Exhibit 31.1  Section 302

Certification of Principal Executive Officer

Exhibit 31.2  Section 302

Certification of Principal Financial Officer

Exhibit 32  Section 906 Certification



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##### Table of Contents

SIGNATURES

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

Date: August 14, 2006



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

---

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



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##### Table of Contents

FIBERNET TELECOM GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands, except
per share amounts)



|                                                                                                                                                                               |  |               |          |   |                   |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------- | -------- | - | ----------------- | - | -------- | -
|                                                                                                                                                                               |  | June 30, 2006 |          |   | December 31, 2005 |  
|ASSETS                                                                                                                                                                         |  |               |          |   |                   |   |          |  
|Current Assets:                                                                                                                                                                |  |               |          |   |                   |   |          |  
|Cash and cash equivalents                                                                                                                                                      |  | $             | 4,277    |   |                   | $ | 1,899    |  
|Accounts receivable, net of allowance of $528 at June 30, 2006 and $508 at December 31, 2005                                                                                   |  |               | 2,132    |   |                   |   | 2,299    |  
|Prepaid expenses                                                                                                                                                               |  |               | 529      |   |                   |   | 449      |  
|                                                                                                                                                                               |  |               |          |   |                   |   |          |  
|Total current assets                                                                                                                                                           |  |               | 6,938    |   |                   |   | 4,647    |  
|Property, plant and equipment, net                                                                                                                                             |  |               | 62,984   |   |                   |   | 66,135   |  
|Other Assets:                                                                                                                                                                  |  |               |          |   |                   |   |          |  
|Deferred charges, net of accumulated amortization of $2,410 at June 30, 2006 and $2,080 at December 31, 2005                                                                   |  |               | 1,057    |   |                   |   | 828      |  
|Other assets                                                                                                                                                                   |  |               | 924      |   |                   |   | 1,625    |  
|                                                                                                                                                                               |  |               |          |   |                   |   |          |  
|Total other assets                                                                                                                                                             |  |               | 1,981    |   |                   |   | 2,453    |  
|                                                                                                                                                                               |  |               |          |   |                   |   |          |  
|TOTAL ASSETS                                                                                                                                                                   |  | $             | 71,903   |   |                   | $ | 73,235   |  
|                                                                                                                                                                               |  |               |          |   |                   |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                           |  |               |          |   |                   |   |          |  
|Current Liabilities:                                                                                                                                                           |  |               |          |   |                   |   |          |  
|Accounts payable                                                                                                                                                               |  | $             | 2,820    |   |                   | $ | 3,762    |  
|Accrued expenses                                                                                                                                                               |  |               | 3,989    |   |                   |   | 4,251    |  
|Notes Payable, current portion                                                                                                                                                 |  |               | 100      |   |                   |   |         |  
|Deferred revenuescurrent portion                                                                                                                                              |  |               | 1,628    |   |                   |   | 1,194    |  
|                                                                                                                                                                               |  |               |          |   |                   |   |          |  
|Total current liabilities                                                                                                                                                      |  |               | 8,537    |   |                   |   | 9,207    |  
|Long-Term Liabilities:                                                                                                                                                         |  |               |          |   |                   |   |          |  
|Notes payable, less original issue discount of $604 and $888 at June 30, 2006 and December 31, 2005, respectively                                                              |  |               | 13,456   |   |                   |   | 13,298   |  
|Deferred revenuelong term                                                                                                                                                     |  |               | 3,820    |   |                   |   | 3,786    |  
|Other long term liabilities                                                                                                                                                    |  |               | 1,135    |   |                   |   | 946      |  
|                                                                                                                                                                               |  |               |          |   |                   |   |          |  
|Total Long Term Liabilities                                                                                                                                                    |  |               | 18,411   |   |                   |   | 18,030   |  
|                                                                                                                                                                               |  |               |          |   |                   |   |          |  
|Total Liabilities                                                                                                                                                              |  |               | 26,948   |   |                   |   | 27,237   |  
|Stockholders Equity:                                                                                                                                                          |  |               |          |   |                   |   |          |  
|Common stock, $0.001 par value, 2,000,000,000 shares authorized and 6,305,849 and 5,274,600 shares issued and outstanding at June 30,
2006 and December 31, 2005, respectively |  |               | 6        |   |                   |   | 5        |  
|Additional paid-in-capital                                                                                                                                                     |  |               | 443,526  |   |                   |   | 440,555  |  
|Deferred rent (warrants)                                                                                                                                                       |  |               | (1,646   | ) |                   |   | (1,732   | )
|Accumulated deficit                                                                                                                                                            |  |               | (396,931 | ) |                   |   | (392,830 | )
|                                                                                                                                                                               |  |               |          |   |                   |   |          |  
|Total stockholders equity                                                                                                                                                     |  |               | 44,955   |   |                   |   | 45,998   |  
|                                                                                                                                                                               |  |               |          |   |                   |   |          |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                     |  | $             | 71,903   |   |                   | $ | 73,235   |  
|                                                                                                                                                                               |  |               |          |   |                   |   |          |  

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



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##### Table of Contents

FIBERNET TELECOM GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except
for per share amounts)



|                                                             |  |                           |        |   |      |   |        |  
|------------------------------------------------------------ |  | ------------------------- | ------ | - | ---- | - | ------ | -
|                                                             |  | Six months Ended June 30, |       
|                                                             |  | 2006                      |        |   | 2005 |  
|Revenues                                                     |  | $                         | 18,517 |   |      | $ | 16,317 |  
|Operating expenses:                                          |  |                           |        |   |      |   |        |  
|Cost of services (exclusive of items shown separately below) |  |                           | 9,189  |   |      |   | 7,942  |  
|Selling, general and administrative expense                  |  |                           | 7,703  |   |      |   | 9,263  |  
|Impairment of property, plant and equipment                  |  |                           |       |   |      |   | 2,812  |  
|Depreciation and amortization                                |  |                           | 4,476  |   |      |   | 4,491  |  
|                                                             |  |                           |        |   |      |   |        |  
|Total operating expenses                                     |  |                           | 21,368 |   |      |   | 24,508 |  
|                                                             |  |                           |        |   |      |   |        |  
|Loss from operations                                         |  |                           | (2,851 | ) |      |   | (8,191 | )
|Interest income                                              |  |                           | 52     |   |      |   | 41     |  
|Interest expense                                             |  |                           | (1,302 | ) |      |   | (1,067 | )
|                                                             |  |                           |        |   |      |   |        |  
|Net loss                                                     |  | $                         | (4,101 | ) |      | $ | (9,217 | )
|                                                             |  |                           |        |   |      |   |        |  
|Net loss per sharebasic and diluted                         |  | $                         | (0.70  | ) |      | $ | (1.80  | )
|Weighted average common shares outstandingbasic and diluted |  |                           | 5,844  |   |      |   | 5,119  |  

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



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##### Table of Contents

FIBERNET TELECOM GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except
for per share amounts)



|                                                             |  |                             |        |   |      |   |        |  
|------------------------------------------------------------ |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                             |  | Three months Ended June 30, |       
|                                                             |  | 2006                        |        |   | 2005 |  
|Revenues                                                     |  | $                           | 9,489  |   |      | $ | 8,368  |  
|Operating expenses:                                          |  |                             |        |   |      |   |        |  
|Cost of services (exclusive of items shown separately below) |  |                             | 4,749  |   |      |   | 4,119  |  
|Selling, general and administrative expense                  |  |                             | 3,768  |   |      |   | 4,537  |  
|Impairment of property, plant and equipment                  |  |                             |       |   |      |   | 2,812  |  
|Depreciation and amortization                                |  |                             | 2,250  |   |      |   | 2,251  |  
|                                                             |  |                             |        |   |      |   |        |  
|Total operating expenses                                     |  |                             | 10,767 |   |      |   | 13,719 |  
|Loss from operations                                         |  |                             | (1,278 | ) |      |   | (5,351 | )
|Interest income                                              |  |                             | 38     |   |      |   | 23     |  
|Interest expense                                             |  |                             | (601   | ) |      |   | (549   | )
|                                                             |  |                             |        |   |      |   |        |  
|Net loss                                                     |  | $                           | (1,841 | ) |      | $ | (5,877 | )
|                                                             |  |                             |        |   |      |   |        |  
|Net loss per sharebasic and diluted                         |  | $                           | (0.29  | ) |      | $ | (1.14  | )
|Weighted average common shares outstandingbasic and diluted |  |                             | 6,306  |   |      |   | 5,140  |  

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



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FIBERNET TELECOM GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)



|                                                                                          |  |                           |        |   |      |   |        |  
|----------------------------------------------------------------------------------------- |  | ------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                          |  | Six months Ended June 30, |       
|                                                                                          |  | 2006                      |        |   | 2005 |  
|Cash flows from operating activities:                                                     |  |                           |        |   |      |   |        |  
|Net loss                                                                                  |  | $                         | (4,101 | ) |      | $ | (9,217 | )
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |                           |        |   |      |   |        |  
|Depreciation and amortization                                                             |  |                           | 4,476  |   |      |   | 4,491  |  
|Stock related expense                                                                     |  |                           | 359    |   |      |   | 257    |  
|Deferred rent expense                                                                     |  |                           | 87     |   |      |   | 87     |  
|Impairment of property, plant and equipment                                               |  |                           |       |   |      |   | 2,812  |  
|Other non-cash items                                                                      |  |                           | 594    |   |      |   | 613    |  
|Change in assets and liabilities:                                                         |  |                           |        |   |      |   |        |  
|Decrease in accounts receivables                                                          |  |                           | 167    |   |      |   | 2,195  |  
|(Increase) decrease in prepaid expenses                                                   |  |                           | (80    | ) |      |   | 26     |  
|Decrease in deferred charges                                                              |  |                           |       |   |      |   | 525    |  
|Decrease in other assets                                                                  |  |                           | 641    |   |      |   |       |  
|(Decrease) in accounts payable                                                            |  |                           | (942   | ) |      |   | (603   | )
|(Decrease) increase in accrued expenses and other long-term liabilities                   |  |                           | (24    | ) |      |   | 376    |  
|Increase (decrease) in deferred revenues                                                  |  |                           | 468    |   |      |   | (2,012 | )
|                                                                                          |  |                           |        |   |      |   |        |  
|Cash provided by (used in) operating activities                                           |  |                           | 1,645  |   |      |   | (450   | )
|                                                                                          |  |                          
|Cash flows from investing activities:                                                     |  |                           |        |   |      |   |        |  
|Decrease in restricted cash                                                               |  |                           |       |   |      |   | (23    | )
|Capital expenditures                                                                      |  |                           | (1,320 | ) |      |   | (1,130 | )
|                                                                                          |  |                           |        |   |      |   |        |  
|Cash used in investing activities                                                         |  |                           | (1,320 | ) |      |   | (1,153 | )
|                                                                                          |  |                          
|Cash flows from financing activities:                                                     |  |                           |        |   |      |   |        |  
|Proceeds from debt financings                                                             |  |                           |       |   |      |   | 1,000  |  
|Payment of financing costs of debt financings                                             |  |                           |       |   |      |   | (108   | )
|Payment of financing costs of equity financings                                           |  |                           | (152   | ) |      |   |       |  
|Proceeds from issuance of equity securities                                               |  |                           | 2,205  |   |      |   |       |  
|                                                                                          |  |                           |        |   |      |   |        |  
|Cash provided by financing activities                                                     |  |                           | 2,053  |   |      |   | 892    |  
|                                                                                          |  |                           |        |   |      |   |        |  
|Net increase (decrease) in cash and cash equivalents                                      |  |                           | 2,378  |   |      |   | (711   | )
|Cash and cash equivalents at beginning of period                                          |  |                           | 1,899  |   |      |   | 2,909  |  
|                                                                                          |  |                           |        |   |      |   |        |  
|Cash and cash equivalents at end of period                                                |  | $                         | 4,277  |   |      | $ | 2,198  |  
|                                                                                          |  |                           |        |   |      |   |        |  
|Supplemental disclosures of cash flow information:                                        |  |                           |        |   |      |   |        |  
|Interest paid                                                                             |  | $                         | 1,057  |   |      | $ | 433    |  

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



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##### Table of Contents

FIBERNET TELECOM GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(UNAUDITED)

1. ORGANIZATION AND OPERATIONS

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

FiberNet is a holding company that owns all of the outstanding common stock of FiberNet Operations, Inc. (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, LLC (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, recently created in November 2005. The Company conducts its primary business operations through its operating subsidiaries, Devnet, Availius, Local Fiber and Equal Access.

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

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

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

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



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##### Table of Contents

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

Use of Estimates

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

Cash and Cash Equivalents

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

Property, Plant and
Equipment

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



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

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

Impairment of Long-Lived Assets

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

Revenue Recognition

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

As of June 30, 2006 and 2005, the Company had one reciprocal agreement. The services provided and obtained through this agreement were priced at fair market value as of the date of the agreement and are included in revenues and cost of
services in the accompanying condensed consolidated statements of operations. The Company recorded revenues from this reciprocal agreement for transport services of approximately $0.2 million for each of the six months ended June 30, 2006 and
2005. The Company recorded revenues from this reciprocal agreement for transport services of approximately $0.1 million for each of the three months ended June 30, 2006 and 2005. The Company leased colocation facilities under this agreement.
The total amount expensed for services rendered under the reciprocal agreement for each of the six months ended June 30, 2006 and 2005 was approximately $0.2 million. The total amount expensed for services rendered under the reciprocal
agreement for each of the three months ended June 30, 2006 and 2005 was approximately $0.1 million.

Fair Value of Financial Instruments

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



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Goodwill

Cost in
excess of net assets of an acquired business, principally goodwill, is accounted for under Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets (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. The Company had no goodwill as of June 30, 2006.

Deferred Charges

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

Earnings Per Share

Basic earnings per share have been computed using the weighted average number of shares outstanding during the period.
Diluted earnings per share are computed by including the dilutive effect of common stock that would be issued assuming conversion of stock options, warrants and other dilutive securities. Dilutive options, warrants and other securities did not have
an effect on the computation of diluted earnings per share for the six months and the three months ended June 30, 2006 and June 30, 2005, as they were anti-dilutive due to the fact that the Company was in a loss position for the respective
periods.

Concentration of Credit Risk

The Company may
have concentration of credit risk among its customer base. The Company performs ongoing credit evaluations of its customers financial conditions. As of June 30, 2006, there was no individual customer accounted for over 10% of the
Companys total accounts receivable. As of December 31, 2005, one customer accounted for over 15.1% of the Companys total accounts receivable.

For the three and six months ended June 30, 2006 and 2005, there was no individual customer that accounted for over 10% of the Companys total revenue.

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

As of
June 30, 2006, the Company had an allowance for doubtful accounts of $0.5 million. During the six months ended June 30, 2006, the Company did not write off any unrecoverable accounts in the allowance for doubtful accounts, but an
additional $20,000 was recorded as a bad debt expense. As of June 30, 2005, the Company had an allowance for doubtful accounts of $0.5 million. During the six months ended June 30, 2005, the Company wrote off approximately $0.2 million in
the allowance for doubtful accounts, and there were no charges to bad debt expense.

Equity Incentive Plan

The Company occasionally makes equity grants comprising of stock options or shares of restricted stock to its employees as part of its employee equity incentive plan. As
of June 30, 2006, the Company has 1,285,924 shares authorized for issuance under our Equity Incentive Plan, which includes the increase of 500,000 shares approved by shareholder vote at the Annual Stockholders Meeting on June 14, 2006.
Stock options are typically granted with a three year vesting period from the date of grant, and expire ten years from the date of grant. Restricted stock is typically granted with a ten year period before it becomes unrestricted.

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



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Accounting for Stock-Based Compensation (SFAS No. 123) and (2) all share-based payments
granted subsequent to December 31, 2005, based on the grant-date fair value estimated using the Black-Scholes option-pricing model.

Accounting for
Income Taxes

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

Accounting for Derivative Instruments

The Company accounts for
derivative instruments in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No.133), as amended. SFAS No. 133 establishes standards of accounting and reporting for
derivative instruments and hedging activities, and requires that all derivatives be recognized on the balance sheet at fair value. Changes in the fair value of derivatives that do not meet the hedge accounting criteria are reported in earnings. The
Company did not have any derivative contracts during the six months ended June 30, 2006 or in the year ended December 31, 2005.

Segment
Reporting

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



|                          |  |                                   |        |      |   |       
|------------------------- |  | --------------------------------- | ------ | ---- | - | ------
|                          |  | For the six months ended June 30,
|(amounts in thousands)    |  | 2006                              |        | 2005
|On-net transport revenue  |  | $                                 | 10,578 |      | $ | 9,740 
|Off-net transport revenue |  |                                   | 3,477  |      |   | 2,628 
|Colocation revenue        |  |                                   | 4,133  |      |   | 3,468 
|Access revenue            |  |                                   | 329    |      |   | 481   
|                          |  |                                   |        |      |   |       
|Total Revenue             |  | $                                 | 18,517 |      | $ | 16,317
|                          |  |                                   |        |      |   |       

Recent Accounting Pronouncements

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

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

In June 2006, FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, of FASB Statement
No. 109, Accounting for Income Taxes. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax
return. It is effective for fiscal years beginning after December 15, 2006. The Company is currently assessing the impact the adoption of FIN No. 48 will have on its consolidated financial statements.

3. EQUITY INCENTIVE PLAN

Effective January 1, 2006, the Company
adopted SFAS No. 123(R), applying the modified prospective method. Prior to the adoption



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##### Table of Contents

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

During the first
six months of 2006 the adoption of SFAS No. 123(R) resulted in incremental stock-based compensation expense of approximately $0.1 million. The incremental stock-based compensation expense caused net loss to increase by approximately $0.1
million, and basic and diluted earnings per share to decrease by $0.01 per share. As a result of the Companys decision to adopt the modified prospective method, prior period results have not been restated.

Prior to the adoption of SFAS No. 123(R), the Company applied APB No. 25 to account for its stock-based awards. The following table illustrates the effect on
net loss and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 for the six and three months ended June 30, 2005:



|                                                                                                                             |  |                                |        |   |                                  |   |        |  
|---------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | ------ | - | -------------------------------- | - | ------ | -
|(in thousands, except per share data) (unaudited)                                                                            |  | Six Months Ended June 30, 2005 |        |   | Three Months Ended June 30, 2005 |  
|Net loss, as reported                                                                                                        |  | $                              | (9,217 | ) |                                  | $ | (5,877 | )
|Deduct: Total stock-based employee compensation expense determined under fair value based method, net of related tax effects |  |                                | (74    | ) |                                  |   | (37    | )
|                                                                                                                             |  |                                |        |   |                                  |   |        |  
|Pro forma net loss                                                                                                           |  | $                              | (9,291 | ) |                                  | $ | (5,914 | )
|Net loss per share:                                                                                                          |  |                                |        |   |                                  |   |        |  
|As reported: Basic and diluted                                                                                               |  | $                              | (1.80  | ) |                                  | $ | (1.14  | )
|Pro forma: Basic and diluted                                                                                                 |  | $                              | (1.82  | ) |                                  | $ | (1.15  | )

Before adoption of SFAS No. 123(R), pro forma disclosures reflected the fair value of each option grant
estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants that occurred during 2004: risk-free interest rate of 4.29%, expected dividend yield of 0%, expected life of seven years to
expiration and expected volatility of 295%. There were no stock option grants during the six months ended June 30, 2006 or for the year ended December 31, 2005.

A summary of stock based compensation activity within the Companys stock-based compensation plans for the six months ended June 30, 2006 is as follows:



|                                 |  |                 |   |  |                               |        |                                                 |     |                          |   |  
|-------------------------------- |  | --------------- | - |  | ----------------------------- | ------ | ----------------------------------------------- | --- | ------------------------ | - | -
|                                 |  | Number ofShares |   |  | WeightedAverageExercise Price |        | WeightedAverageRemainingContractualTerm (Years) |     | AggregateIntrinsic Value
|Outstanding at December 31, 2005 |  | 71,108          |   |  | $                             | 322.26 |                                                 |     |                          |   |  
|Granted                          |  |                |   |  |                               |       |                                                 |     |                          |   |  
|Exercised                        |  |                |   |  | $                             |       |                                                 |     |                          |   |  
|Forfeited                        |  | (3,683          | ) |  | $                             | 348.93 |                                                 |     |                          |   |  
|                                 |  |                 |   |  |                               |        |                                                 |     |                          |   |  
|Outstanding at June 30, 2006     |  | 67,425          |   |  | $                             | 319.99 |                                                 | 5.7 |                          | $ | 
|                                 |  |                 |   |  |                               |        |                                                 |     |                          |   |  
|Exercisable at June 30, 2006     |  | 55,510          |   |  | $                             | 386.23 |                                                 | 5.4 |                          | $ | 

The aggregate intrinsic value for stock options outstanding and exercisable is defined as the difference between
the market value of the Companys stock as of the end of the period and the exercise price of the stock options. All outstanding, exercisable and cancelled options during the first six months of 2006 had no intrinsic value.



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The following is a summary of nonvested stock option activity:



|                               |  |                 |   |  |                                     |      
|------------------------------ |  | --------------- | - |  | ----------------------------------- | -----
|                               |  | Number ofShares |   |  | WeightedAverageGrant-Date FairValue
|Nonvested at December 31, 2005 |  | 12,740          |   |  | $                                   | 11.34
|Granted                        |  |                |   |  |                                     |     
|Vested                         |  | (312            | ) |  | $                                   | 14.74
|Forfeited                      |  | (513            | ) |  |                                     | 11.30
|                               |  |                 |   |  |                                     |      
|Nonvested at June 30, 2006     |  | 11,915          |   |  | $                                   | 11.39
|                               |  |                 |   |  |                                     |      

At June 30, 2006, there was approximately $24,000 of total unrecognized compensation cost related to
nonvested stock options. The cost is expected to be recognized over a weighted average period of 0.5 years.

The Company also grants restricted stock
awards to its employees. Restricted stock awards are valued at the closing market value of the Companys common stock on the day of the grant, and the total value of the award is recognized as expense ratably over the vesting period of the
employees receiving the grants. The Company did not grant restricted stock awards during the first quarter of 2006. As of June 30, 2006, the total amount of unrecognized compensation expense related to restricted stock awards was approximately
$3.5 million, which is expected to be recognized over a weighted-average period of approximately 7.2 years. The Company recognized compensation expense of approximately $243,000 during the first six months of 2006 on existing restricted stock
awards.

During the six months ended June 30, 2006, 18,750 shares of restricted stock were returned to the Company as the result of employee
terminations, and during the six months ended June 30, 2005, 2,550 shares of restricted stock were returned. All shares of restricted stock become unrestricted on the tenth anniversary of the grant date, and the stock options vest in three
equal annual installments, commencing on the issuance date, subject to the terms and conditions of the Equity Incentive Plan. As of June 30, 2006 and December 31, 2005 the outstanding shares of restricted stock totaled 424,678 and
443,428, respectively.

For the six months ended June 30, 2006 and 2005, total stock-based compensation was $0.4 million and $0.3 million,
respectively. For the three months ended June 30, 2006 and 2005, total stock-based compensation was $0.2 million and $0.1 million, respectively.

4. PROPERTY, PLANT AND EQUIPMENT

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



|                                     |  |               |         |   |                   |   |         |  
|------------------------------------ |  | ------------- | ------- | - | ----------------- | - | ------- | -
|                                     |  | June 30, 2006 |         |   | December 31, 2005 |  
|Computer software                    |  | $             | 463     |   |                   | $ | 350     |  
|Computer equipment                   |  |               | 725     |   |                   |   | 534     |  
|Leasehold improvements               |  |               | 31      |   |                   |   | 30      |  
|Office equipment and furniture       |  |               | 174     |   |                   |   | 146     |  
|Network equipment and infrastructure |  |               | 106,534 |   |                   |   | 105,596 |  
|                                     |  |               |         |   |                   |   |         |  
|Subtotal                             |  |               | 107,927 |   |                   |   | 106,656 |  
|Accumulated depreciation             |  |               | (44,943 | ) |                   |   | (40,521 | )
|                                     |  |               |         |   |                   |   |         |  
|Property, plant and equipment, net   |  | $             | 62,984  |   |                   | $ | 66,135  |  
|                                     |  |               |         |   |                   |   |         |  

Depreciation expense on property, plant and equipment was $4.4 million for each of the six months ended
June 30, 2006 and 2005. Depreciation expense on property, plant and equipment was $2.2 million for each of the three months ended June 30, 2006 and 2005.

5. ACQUISITION OF GATEWAY COLOCATION

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

On
March 22, 2006, the Company entered into an amendment to the purchase agreement. The terms of the amendment extend the



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duration of the earn-out provision for an additional twenty-four months retroactive to January 30, 2006.
As of June 30, 2006, there have been no additional costs recorded in connection with the extension and no additional shares have been earned in accordance with the terms of the earn-out provision.

6. TERMINATION OF CONSOLIDATED EDISON COMMUNICATIONS STOCK PURCHASE AGREEMENT

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

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

On May 4, 2005, the Company entered into a Mutual Termination and Release Agreement (the Termination Agreement),
with Consolidated Edison, Inc., which terminated the Con Ed Agreement. The Con Ed Agreement was terminated because of the parties inability to resolve certain contractual issues. As a result of the termination of the Con Ed Agreement, on
May 4, 2005, the Investor Purchase Agreement, which the Company entered into to finance the acquisition of CEC, terminated pursuant to its terms. The Termination Agreement contains mutual releases of liability. The Company did not incur any
early termination penalties in connection with the termination of the Con Ed Agreement or the Investor Purchase Agreement. As a result of the termination of the Con Ed Agreement and the Investor Purchase Agreement the Company included a total of
$1.1 million of transaction costs in selling, general and administrative expenses for the six months ended June 30, 2005.

7. SIGNIFICANT EVENTS

On May 16, 2006, the Company issued $0.7 million in letters of credit under its current credit facility to replace cash security deposits
previously placed with landlords.

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

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

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

As a condition
to the lenders entering into the twentieth amendment, the Company entered into a warrant agreement with the lenders on March 22, 2006 (the Warrant Agreement), pursuant to which the Company agreed to issue warrants (with an
expiration date



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



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