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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 September 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)



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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
October 30, 2006, the registrant had 7,008,849 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 September 30, 2006 and December 31, 2005                   |  | 16  
|         |  | Condensed Consolidated Statements of Operations for the nine months ended September 30, 2006 and 2005  |  | 17  
|         |  | Condensed Consolidated Statements of Operations for the three months ended September 30, 2006 and 2005 |  | 18  
|         |  | Condensed Consolidated Statements of Cash Flows for the nine months ended September 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                                             |  | 12  
|Item 4.  |  | Controls and Procedures                                                                                |  | 12  
|PART II. |  | OTHER INFORMATION                                                                                      |  |     
|Item 1.  |  | Legal Proceedings                                                                                      |  | 13  
|Item 1A  |  | Risk Factors                                                                                           |  | 13  
|Item 2.  |  | Unregistered Sales of Equity Securities and Use of Proceeds                                            |  | 13  
|Item 3.  |  | Defaults Upon Senior Securities                                                                        |  | 13  
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                    |  | 13  
|Item 5.  |  | Other Information                                                                                      |  | 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.

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. Our customized connectivity infrastructure provides an advanced, high bandwidth, fiber-optic solution to support the demand for network capacity and to
facilitate the interconnection of multiple carriers and customers networks.

Factors Affecting Future Operations

Revenues. We generate revenues from selling network capacity 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.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



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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 consolidation. 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 also experience disconnections of transport services, as customers groom their networks to eliminate excess capacity. This loss of revenues may have a significant negative impact on our financial results.

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 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 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 65 employees as of September 30, 2006 compared to 71 as of September 30, 2005. Prospectively, we believe that



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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
nine months ended September 30, 2006, our reciprocal agreement accounted for $0.4 million, or 1.2%, of revenues and $0.4 million of our cost of services. For the nine months ended September 30, 2005, our reciprocal agreement accounted for
$0.4 million, or 1.4%, of revenues and $0.4 million of our cost of services.

For the quarter ended September 30, 2006, our reciprocal agreement
accounted for $0.1 million, or 1.2%, of revenues and $0.1 million of our cost of services. For the quarter ended September 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.



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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

Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30,
2005

Revenues. Revenues for the nine months ended September 30, 2006 were $28.9 million compared to $25.0 million for the nine months
ended September 30, 2005. We increased the number of our customers from 225 as of September 30, 2005 to 242 as of September 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 nine months ended September 30 |        | $ Change |  
|(amounts in thousands)    |  | 2006                                   |        | 2005     |  
|On-net transport revenue  |  | $                                      | 16,229 |          | $ | 14,916 |  | $ | 1,313 |  
|Off-net transport revenue |  |                                        | 5,878  |          |   | 3,933  |  |   | 1,945 |  
|Colocation revenue        |  |                                        | 6,296  |          |   | 5,417  |  |   | 879   |  
|Access revenue            |  |                                        | 490    |          |   | 685    |  |   | (195  | )
|                          |  |                                        |        |          |   |        |  |   |       |  
|Total Revenue             |  | $                                      | 28,893 |          | $ | 24,951 |  | $ | 3,942 |  
|                          |  |                                        |        |          |   |        |  |   |       |  

We recognized $16.2 million in on-net transport service revenues for the nine months ended September 30,
2006, up from $14.9 million for the nine months ended September 30, 2005. Off-net transport service revenues for the nine months ended September 30, 2006 were $5.9 million, up from $3.9 million for the nine months ended September 30,
2005. Revenues from colocation services were $6.3 million for the nine months ended September 30, 2006 compared to $5.4 million for the nine months ended September 30, 2005, and revenues from communications access management services
declined to $0.5 million for the nine months ended September 30, 2006 from $0.7 million for the nine months ended September 30, 2005.

The
majority of our transport and colocation services are provided within and between our carrier hotel facilities in the New York/New Jersey market. On-net transport revenues increased as we provided a greater number of 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 and increase our addressable market
by being able to provide services outside our gateway markets of New York/New Jersey and Los Angeles. Colocation revenues increased 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 nine months ended September 30, 2006 and 2005, there were no individual customers that accounted for over 10.0% of our revenues. Our reciprocal agreement accounted for $0.4 million, or 1.2%, of revenues for the nine months
ended September 30, 2006, consistent with $0.4 million, or 1.4%, of revenues for the nine months ended September 30, 2005.



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Cost of Services. Cost of services, associated with the operation of our networks and facilities, were $14.5
million for the nine months ended September 30, 2006, compared to $12.2 million for the nine months ended September 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 nine months ended September 30 |        | $ Change |  
|(amounts in thousands)                 |  | 2006                                   |        | 2005     |  
|Occupancy expenses                     |  | $                                      | 9,278  |          | $ | 8,705  |  | $ | 573   |  
|Off-net connectivity charges           |  |                                        | 4,745  |          |   | 3,048  |  |   | 1,697 |  
|Maintenance and repair and other costs |  |                                        | 432    |          |   | 449    |  |   | (17   | )
|                                       |  |                                        |        |          |   |        |  |   |       |  
|Total Cost of Services                 |  | $                                      | 14,455 |          | $ | 12,202 |  | $ | 2,253 |  
|                                       |  |                                        |        |          |   |        |  |   |       |  

Occupancy expenses, which represented 64.2% of cost of services or $9.3 million for the nine months ended
September 30, 2006, increased $0.6 million as compared to 71.3%, or $8.7 million, for the nine months ended September 30, 2005. This increase was due to increases in colocation and cross-connection charges and an increase in electric
utility usage.

Off-net connectivity charges were 32.8% of cost of services or $4.7 million for the nine months ended September 30, 2006, versus 25.0%
of cost of services or $3.0 million for the nine months ended September 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 3.0% or $0.4 million of cost of services for the nine months ended September 30, 2006, compared to 3.7% or $0.4 million
for the nine months ended September 30, 2005. These costs will continue to represent a relatively small and fixed component of cost of services.

Our
reciprocal agreement accounted for $0.4 million of our cost of services for each of the nine months ended September 30, 2006 and 2005.

Selling,
General and Administrative Expenses. Selling, general and administrative expenses for the nine months ended September 30, 2006 were $11.5 million compared to $13.4 million for the nine months ended September 30, 2005. Personnel costs,
which were consistent over the period, represented 63.1% or $7.3 million of selling, general and administrative expenses for the nine months ended September 30, 2006 compared to 54.7% or $7.3 million for the nine months ended September 30,
2005. Professional fees for the nine months ended September 30, 2006 were $0.9 million, as compared to $1.3 million for the same period in 2005, due to on going cost containment initiatives. Marketing expenses decreased by $0.2 million from the
nine months ended September 30, 2005 also due to on going cost containment initiatives. During the nine months ended September 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 nine
months ended September 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 nine months ended September 30, 2006 and 2005 were $0.6 million and $0.4 million, respectively. This non-cash expense relates to the amortization of restricted stock and stock options granted to our employees. The restricted
shares that have been granted prior to 2006 become unrestricted on the tenth anniversary of the grant date while share granted during 2006 become unrestricted on the fourth anniversary of the grant date, and the related expenses are amortized on a
straight-line basis over their respective restricted period. Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share Based Payment (SFAS No. 123(R)),
applying the modified prospective method. An incremental stock compensation expense increase of approximately $0.1 million was recognized during the first nine months of 2006 on existing unvested and newly issued stock options. As a result of our
decision to adopt the modified prospective method, prior period results have not been restated, as permitted by SFAS No. 123(R).

Depreciation and
Amortization.Depreciation and amortization expense for the nine months ended September 30, 2006 was approximately $6.7 million, compared to approximately $6.6 million for the nine months ended September 30, 2005.

Interest Income.Interest income for the nine months ended September 30, 2006 was approximately $100,000, compared to approximately $62,000 for the nine
months ended September 30, 2005. Interest income is generated on our cash balances which are invested in short-term, highly liquid investments at variable rates of interest.

Interest Expense. Interest expense for the nine months ended September 30, 2006 was $1.9 million, compared to $1.7 million for the nine months ended September 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.



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Net Loss.We reported a net loss of $5.6 million for the nine months ended September 30, 2006 compared to a
net loss of $11.7 million for the nine months ended September 30, 2005. This change is a result of the aforementioned changes in our operations.

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

Revenues.Revenues for the
quarter ended September 30, 2006 were $10.4 million as compared to $8.6 million for the quarter ended September 30, 2005. We increased the number of our customers from 225 at September 30, 2005 to 242 as of September 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 September 30 |        | $ Change |  
|(amounts in thousands)    |  | 2006                                    |        | 2005     |  
|On-net transport revenue  |  | $                                       | 5,652  |          | $ | 5,176 |  | $ | 476   |  
|Off-net transport revenue |  |                                         | 2,401  |          |   | 1,305 |  |   | 1,096 |  
|Colocation revenue        |  |                                         | 2,163  |          |   | 1,949 |  |   | 214   |  
|Access revenue            |  |                                         | 161    |          |   | 204   |  |   | (43   | )
|                          |  |                                         |        |          |   |       |  |   |       |  
|Total Revenue             |  | $                                       | 10,377 |          | $ | 8,634 |  | $ | 1,743 |  
|                          |  |                                         |        |          |   |       |  |   |       |  

We recognized $5.7 million in on-net transport service revenues for the quarter ended September 30, 2006, up
from $5.2 million for the quarter ended September 30, 2005. Off-net transport service revenues for the quarter ended September 30, 2006 were $2.4 million, up from $1.3 million for the quarter ended September 30, 2005. Revenues from
colocation services were $2.2 million for the quarter ended September 30, 2006 compared to $1.9 million for the quarter ended September 30, 2005, and revenues from communications access management services remained at $0.2 million for each
of the quarters ended September 30, 2006 and 2005.

The majority of our transport and colocation services are provided within and between our carrier
hotel facilities in the New York/New Jersey market. On-net transport revenues increased as we provided a greater number of 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 and increase our addressable market by being able to provide services outside our gateway markets of New York/New Jersey and Los
Angeles. Colocation revenues increased 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 September 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 1.2%, of revenues for the quarter ended September 30, 2006, compared to $0.1 million, or 1.4%, of revenues for the
quarter ended September 30, 2005.

Cost of Services.Cost of services, associated with the operation of our networks and facilities, were $5.3
million for the quarter ended September 30, 2006, compared to $4.3 million for the quarter ended September 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 three months ended September 30 |       | $ Change
|(amounts in thousands)                 |  | 2006                                    |       | 2005     |  
|Occupancy expenses                     |  | $                                       | 3,142 |          | $ | 2,993 |  | $ | 149  
|Off-net connectivity charges           |  |                                         | 1,952 |          |   | 1,099 |  |   | 853  
|Maintenance and repair and other costs |  |                                         | 172   |          |   | 168   |  |   | 4    
|                                       |  |                                         |       |          |   |       |  |   |      
|Total Cost of Services                 |  | $                                       | 5,266 |          | $ | 4,260 |  | $ | 1,006
|                                       |  |                                         |       |          |   |       |  |   |      



8



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##### Table of Contents

Occupancy expenses represented 59.7% of cost of services or $3.1 million for the quarter ended September 30, 2006,
an increase of $0.1 million as compared to 70.3% or $3.0 million for the quarter ended September 30, 2005. This increase was due to increases in colocation and cross-connection charges and an increase in electric utility usage.

Off-net connectivity charges were 37.1% of cost of services or $2.0 million for the quarter ended September 30, 2006, compared to 25.8% of the cost of services or
$1.1 million for the quarter ended September 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 3.3% or $0.2 million of cost of services for the quarter ended September 30, 2006, compared to 3.9% or $0.2 million for the quarter ended September 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 September 30, 2006 and 2005.

Selling, General and Administrative Expenses. Selling, general
and administrative expenses for the quarter ended September 30, 2006 were $3.8 million compared to $4.1 million for the quarter ended September 30, 2005. Personnel costs, which were consistent over the periods, represented 62.6%, or $2.4
million, of selling, general and administrative expenses for the quarter ended September 30, 2006 compared to 57.6%, or $2.4 million, for the quarter ended September 30, 2005. Professional fees were $0.3 million for the quarter ended
September 30, 2006, compared to $0.4 million for the quarter ended September 30, 2005, due to on going cost containment initiatives. Marketing expenses decreased by $0.1 million from the three months ended September 30, 2005 also due
to on going cost containment initiatives. 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 September 30, 2006 and 2005 were $0.2 million and $0.1 million, respectively. This non-cash expense
relates to the amortization of restricted stock and stock options granted to our employees. The restricted shares that have been granted prior to 2006 become unrestricted on the tenth anniversary of the grant date while share granted during 2006
become unrestricted on the fourth anniversary of the grant date, and the related expenses are amortized on a straight-line basis over their respective restricted period. Effective January 1, 2006, we adopted SFAS No. 123(R) applying the
modified prospective method. An incremental stock compensation expense increase of approximately $30,000 was recognized during the third quarter of 2006 on existing unvested and newly issued stock options. As a result of our decision to adopt the
modified prospective method, prior period results have not been restated, as permitted by SFAS No. 123(R).

Depreciation and
Amortization.Depreciation and amortization expense for the quarter ended September 30, 2006 was $2.3 million, compared to $2.2 million for the quarter ended September 30, 2005.

Interest Income.Interest income for the quarter ended September 30, 2006 was approximately $47,000, compared to approximately $21,000 for the quarter
ended September 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 September 30, 2006 and 2005 was $0.6 million and $0.7 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 $1.5 million for the quarter ended September 30, 2006 compared to a net loss of $2.5 million for the quarter ended September 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 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
nine months ended September 30, 2006 of $3.8 million and $5.6 million, respectively, compared to a loss from operations and a net loss of $10.1 million and $11.7 million, respectively, for the nine months ended September 30, 2005. During
the nine months ended September 30, 2006, cash provided by operating activities was approximately $3.0 million, and cash purchases of property, plant and equipment were $1.9 million, compared to cash provided by operating activity and cash
purchases of property, plant and equipment of $0.9 million and $1.9 million, respectively, for the nine months ended September 30, 2005.

For the nine
months ended September 30, 2006, we received $2.0 million in net cash from financing related activities. For the nine months ended September 30, 2005, we used $1.4 million in net cash for financing activities. We believe we will be able to
generate sufficient cash flows from operations in order to sustain our operations



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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, was (and 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, extended 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 (i) required us on or before May 15, 2006,
to engage a financial advisor to assist us in preparing a comprehensive strategic business plan and (ii) requires us 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 yield 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 September 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 September 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, maximum consolidated leverage ratio, 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 necessary. 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.

We spent $1.7 million in capital expenditures during the nine months ended September 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 $1.9 million for the nine months ended September 30, 2005. We have substantially completed the



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

As of October 30, 2006, we had 7,008,849 million shares of common stock outstanding, or 8,547,770 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.

Other Factors

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.

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.

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 may be experiencing; a 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.

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.



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

Item 4. Controls and Procedures

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

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

None.

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 10.1  Change in Control Plan

Exhibit 10.2  Form of Restricted Stock Agreement

Exhibit 10.3  Form of Incentive Stock Option Agreement

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: November 2, 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)



|                                                                                                                                                                                    |  |                    |          |   |                   |   |          |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | -------- | - | ----------------- | - | -------- | -
|                                                                                                                                                                                    |  | September 30, 2006 |          |   | December 31, 2005 |  
|ASSETS                                                                                                                                                                              |  |                    |          |   |                   |   |          |  
|Current Assets:                                                                                                                                                                     |  |                    |          |   |                   |   |          |  
|Cash and cash equivalents                                                                                                                                                           |  | $                  | 5,136    |   |                   | $ | 1,899    |  
|Accounts receivable, net of allowance of $412 at September 30, 2006 and $508 at December 31, 2005                                                                                   |  |                    | 2,810    |   |                   |   | 2,299    |  
|Prepaid expenses                                                                                                                                                                    |  |                    | 581      |   |                   |   | 449      |  
|                                                                                                                                                                                    |  |                    |          |   |                   |   |          |  
|Total current assets                                                                                                                                                                |  |                    | 8,527    |   |                   |   | 4,647    |  
|Property, plant and equipment, net                                                                                                                                                  |  |                    | 61,183   |   |                   |   | 66,135   |  
|Other Assets:                                                                                                                                                                       |  |                    |          |   |                   |   |          |  
|Deferred charges, net of accumulated amortization of $2,566 at September 30, 2006 and $2,080 at December 31, 2005                                                                   |  |                    | 909      |   |                   |   | 828      |  
|Other assets                                                                                                                                                                        |  |                    | 796      |   |                   |   | 1,625    |  
|                                                                                                                                                                                    |  |                    |          |   |                   |   |          |  
|Total other assets                                                                                                                                                                  |  |                    | 1,705    |   |                   |   | 2,453    |  
|                                                                                                                                                                                    |  |                    |          |   |                   |   |          |  
|TOTAL ASSETS                                                                                                                                                                        |  | $                  | 71,415   |   |                   | $ | 73,235   |  
|                                                                                                                                                                                    |  |                    |          |   |                   |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                |  |                    |          |   |                   |   |          |  
|Current Liabilities:                                                                                                                                                                |  |                    |          |   |                   |   |          |  
|Accounts payable                                                                                                                                                                    |  | $                  | 3,592    |   |                   | $ | 3,762    |  
|Accrued expenses                                                                                                                                                                    |  |                    | 3,895    |   |                   |   | 4,251    |  
|Notes Payable, current portion                                                                                                                                                      |  |                    | 300      |   |                   |   |         |  
|Deferred revenues, current portion                                                                                                                                                  |  |                    | 1,726    |   |                   |   | 1,194    |  
|                                                                                                                                                                                    |  |                    |          |   |                   |   |          |  
|Total current liabilities                                                                                                                                                           |  |                    | 9,513    |   |                   |   | 9,207    |  
|Long-Term Liabilities:                                                                                                                                                              |  |                    |          |   |                   |   |          |  
|Notes payable, less original issue discount of $518 and $888 at September 30, 2006 and December 31, 2005,
respectively                                                              |  |                    | 13,342   |   |                   |   | 13,298   |  
|Deferred revenues, long term                                                                                                                                                        |  |                    | 3,661    |   |                   |   | 3,786    |  
|Other long-term liabilities                                                                                                                                                         |  |                    | 1,226    |   |                   |   | 946      |  
|                                                                                                                                                                                    |  |                    |          |   |                   |   |          |  
|Total Long-Term Liabilities                                                                                                                                                         |  |                    | 18,229   |   |                   |   | 18,030   |  
|                                                                                                                                                                                    |  |                    |          |   |                   |   |          |  
|Total Liabilities                                                                                                                                                                   |  |                    | 27,742   |   |                   |   | 27,237   |  
|Stockholders Equity:                                                                                                                                                               |  |                    |          |   |                   |   |          |  
|Common stock, $0.001 par value, 2,000,000,000 shares authorized and 7,008,849 and 5,274,600 shares issued and outstanding at
September 30, 2006 and December 31, 2005, respectively |  |                    | 7        |   |                   |   | 5        |  
|Additional paid-in-capital                                                                                                                                                          |  |                    | 443,739  |   |                   |   | 440,555  |  
|Deferred rent (warrants)                                                                                                                                                            |  |                    | (1,602   | ) |                   |   | (1,732   | )
|Accumulated deficit                                                                                                                                                                 |  |                    | (398,471 | ) |                   |   | (392,830 | )
|                                                                                                                                                                                    |  |                    |          |   |                   |   |          |  
|Total stockholders equity                                                                                                                                                          |  |                    | 43,673   |   |                   |   | 45,998   |  
|                                                                                                                                                                                    |  |                    |          |   |                   |   |          |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                          |  | $                  | 71,415   |   |                   | $ | 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)



|                                                             |  |                                 |        |   |      |   |         |  
|------------------------------------------------------------ |  | ------------------------------- | ------ | - | ---- | - | ------- | -
|                                                             |  | Nine Months Ended September 30, |       
|                                                             |  | 2006                            |        |   | 2005 |  
|Revenues                                                     |  | $                               | 28,893 |   |      | $ | 24,951  |  
|Operating expenses:                                          |  |                                 |        |   |      |   |         |  
|Cost of services (exclusive of items shown separately below) |  |                                 | 14,455 |   |      |   | 12,202  |  
|Selling, general and administrative expense                  |  |                                 | 11,525 |   |      |   | 13,368  |  
|Impairment of property, plant and equipment                  |  |                                 |       |   |      |   | 2,812   |  
|Depreciation and amortization                                |  |                                 | 6,742  |   |      |   | 6,644   |  
|                                                             |  |                                 |        |   |      |   |         |  
|Total operating expenses                                     |  |                                 | 32,722 |   |      |   | 35,026  |  
|                                                             |  |                                 |        |   |      |   |         |  
|Loss from operations                                         |  |                                 | (3,829 | ) |      |   | (10,075 | )
|Interest income                                              |  |                                 | 100    |   |      |   | 62      |  
|Interest expense                                             |  |                                 | (1,912 | ) |      |   | (1,717  | )
|                                                             |  |                                 |        |   |      |   |         |  
|Net loss                                                     |  | $                               | (5,641 | ) |      | $ | (11,730 | )
|                                                             |  |                                 |        |   |      |   |         |  
|Net loss per sharebasic and diluted                         |  | $                               | (0.92  | ) |      | $ | (2.28   | )
|Weighted average common shares outstandingbasic and diluted |  |                                 | 6,116  |   |      |   | 5,139   |  

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 September 30, |       
|                                                             |  | 2006                             |        |   | 2005 |  
|Revenues                                                     |  | $                                | 10,377 |   |      | $ | 8,634  |  
|Operating expenses:                                          |  |                                  |        |   |      |   |        |  
|Cost of services (exclusive of items shown separately below) |  |                                  | 5,266  |   |      |   | 4,260  |  
|Selling, general and administrative expense                  |  |                                  | 3,821  |   |      |   | 4,104  |  
|Depreciation and amortization                                |  |                                  | 2,267  |   |      |   | 2,153  |  
|                                                             |  |                                  |        |   |      |   |        |  
|Total operating expenses                                     |  |                                  | 11,354 |   |      |   | 10,517 |  
|                                                             |  |                                  |        |   |      |   |        |  
|Loss from operations                                         |  |                                  | (977   | ) |      |   | (1,883 | )
|Interest income                                              |  |                                  | 47     |   |      |   | 21     |  
|Interest expense                                             |  |                                  | (610   | ) |      |   | (650   | )
|                                                             |  |                                  |        |   |      |   |        |  
|Net loss                                                     |  | $                                | (1,540 | ) |      | $ | (2,512 | )
|                                                             |  |                                  |        |   |      |   |        |  
|Net loss per sharebasic and diluted                         |  | $                                | (0.23  | ) |      | $ | (0.49  | )
|Weighted average common shares outstandingbasic and diluted |  |                                  | 6,650  |   |      |   | 5,179  |  

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)



|                                                                                |  |                                 |        |   |      |   |         |  
|------------------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ---- | - | ------- | -
|                                                                                |  | Nine Months Ended September 30, |       
|                                                                                |  | 2006                            |        |   | 2005 |  
|Cash flows from operating activities:                                           |  |                                 |        |   |      |   |         |  
|Net loss                                                                        |  | $                               | (5,641 | ) |      | $ | (11,730 | )
|Adjustments to reconcile net loss to net cash provided by operating activities: |  |                                 |        |   |      |   |         |  
|Depreciation and amortization                                                   |  |                                 | 6,742  |   |      |   | 6,644   |  
|Stock related expense                                                           |  |                                 | 571    |   |      |   | 386     |  
|Deferred rent expense                                                           |  |                                 | 130    |   |      |   | 130     |  
|Impairment of property, plant and equipment                                     |  |                                 |       |   |      |   | 2,812   |  
|Other non-cash items                                                            |  |                                 | 830    |   |      |   | 930     |  
|Change in assets and liabilities:                                               |  |                                 |        |   |      |   |         |  
|(Increase) decrease in accounts receivables                                     |  |                                 | (511   | ) |      |   | 2,286   |  
|(Increase) in prepaid expenses                                                  |  |                                 | (132   | ) |      |   | (9      | )
|Decrease in deferred charges                                                    |  |                                 |       |   |      |   | 525     |  
|Decrease in other assets                                                        |  |                                 | 755    |   |      |   |        |  
|(Decrease) in accounts payable                                                  |  |                                 | (170   | ) |      |   | (348    | )
|Increase in accrued expenses and other long-term liabilities                    |  |                                 | 60     |   |      |   | 760     |  
|Increase (decrease) in deferred revenues                                        |  |                                 | 407    |   |      |   | (1,491  | )
|                                                                                |  |                                 |        |   |      |   |         |  
|Cash provided by operating activities                                           |  |                                 | 3,041  |   |      |   | 895     |  
|                                                                                |  |                                
|Cash flows from investing activities:                                           |  |                                 |        |   |      |   |         |  
|Decrease in restricted cash                                                     |  |                                 |       |   |      |   | 1,881   |  
|Capital expenditures                                                            |  |                                 | (1,850 | ) |      |   | (1,934  | )
|                                                                                |  |                                 |        |   |      |   |         |  
|Cash used in investing activities                                               |  |                                 | (1,850 | ) |      |   | (53     | )
|Cash flows from financing activities:                                           |  |                                 |        |   |      |   |         |  
|Proceeds from debt financings                                                   |  |                                 |       |   |      |   | 1,000   |  
|Payment of financing costs of debt financings                                   |  |                                 | (7     | ) |      |   | (427    | )
|Payment of financing costs of equity financings                                 |  |                                 | (152   | ) |      |   |        |  
|Repayment of notes payable                                                      |  |                                 |       |   |      |   | (1,975  | )
|Proceeds from issuance of equity securities                                     |  |                                 | 2,205  |   |      |   |        |  
|                                                                                |  |                                 |        |   |      |   |         |  
|Cash provided by (used in) financing activities                                 |  |                                 | 2,046  |   |      |   | (1,402  | )
|                                                                                |  |                                 |        |   |      |   |         |  
|Net increase (decrease) in cash and cash equivalents                            |  |                                 | 3,237  |   |      |   | (560    | )
|Cash and cash equivalents at beginning of period                                |  |                                 | 1,899  |   |      |   | 2,909   |  
|                                                                                |  |                                 |        |   |      |   |         |  
|Cash and cash equivalents at end of period                                      |  | $                               | 5,136  |   |      | $ | 2,349   |  
|                                                                                |  |                                 |        |   |      |   |         |  
|Supplemental disclosures of cash flow information:                              |  |                                 |        |   |      |   |         |  
|Interest paid                                                                   |  | $                               | 1,421  |   |      | $ | 871     |  

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



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##### Table of Contents

FIBERNET TELECOM GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(UNAUDITED)

1. ORGANIZATION AND OPERATIONS

FiberNet Telecom Group, Inc. (hereinafter referred to as the Company or FiberNet) is a communications service provider focused
on providing complex interconnection services enabling the exchange of voice, video and data traffic between global networks. The Company owns and operates integrated colocation facilities and diverse transport routes in the two gateway markets of
New York/New Jersey and Los Angeles. FiberNets network infrastructure and facilities are designed to provide comprehensive broadband interconnectivity for the worlds largest network operators, including leading domestic and international
telecommunications carriers, service providers and enterprises. The Company 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, 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 a company in a 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 may be experiencing; a 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. However, from time to time, the Company may consider private or public sales of additional equity or debt
securities and other financings, depending upon market conditions, in order to provide additional working capital or finance the continued operations of our business. The Company does not have any off-balance sheet financing arrangements, except for
outstanding letters of credit, 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 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 September 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 $0.4 million for each of the nine months ended
September 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 September 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 nine months ended September 30, 2006 and 2005 was approximately $0.4 million. The total amount expensed for services
rendered under the reciprocal agreement for each of the three months ended September 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 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 September 30, 2006.

Deferred Charges

Deferred charges are primarily comprised of deferred financing costs, which are amortized over the term of the related credit facility.

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 nine months and the three months ended September 30, 2006 and September 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 September 30, 2006, there was one customer that accounted for 10.1% 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 nine months ended September 30, 2006 and 2005, there was no individual customer that accounted for over 10.0% of the Companys
total revenue.

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

As of September 30, 2006, the Company had an allowance for doubtful accounts of $0.4 million. During the nine months ended September 30, 2006, the Company
wrote off $0.1 million of unrecoverable accounts to the allowance for doubtful accounts, and $40,000 was recorded to bad debt expense. As of September 30, 2005, the Company had an allowance for doubtful accounts of $0.5 million. During the nine
months ended September 30, 2005, the Company wrote off approximately $0.2 million in the allowance for doubtful accounts, and there were no charges to the 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 September 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 to vest in three equal annual installments, commencing on the grant date, and expire ten years from the date of grant.
Restricted stock is typically granted with a four or ten year period before it becomes unrestricted.

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 Accounting
Principles Board 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 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



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31, 2005 that are subsequently vested, modified, repurchased or cancelled. Compensation expense recognized during the
first nine 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, 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.

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 nine months ended September 30,
|(amounts in thousands)    |  | 2006                                    |        | 2005
|On-net transport revenue  |  | $                                       | 16,229 |      | $ | 14,916
|Off-net transport revenue |  |                                         | 5,878  |      |   | 3,933 
|Colocation revenue        |  |                                         | 6,296  |      |   | 5,417 
|Access revenue            |  |                                         | 490    |      |   | 685   
|                          |  |                                         |        |      |   |       
|Total Revenue             |  | $                                       | 28,893 |      | $ | 24,951
|                          |  |                                         |        |      |   |       

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

In December 2004, the FASB issued SFAS
No. 123(R), which establishes accounting for shares-based awards exchanged for employee services and requires companies to expense the estimated fair value of these awards over the requisite employee service period. On April 14, 2005, the
SEC adopted a new rule amending the effective dates for SFAS No. 123(R).

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



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SFAS No. 123(R), the Company applied the provisions of APB No. 25, in accounting for its stock-based awards,
and accordingly, recognized no compensation cost for its stock plans other than for its restricted stock awards. Under the modified prospective method, SFAS No. 123(R) applies to new awards and to awards that were outstanding as of
December 31, 2005 that are subsequently vested, modified, repurchased or cancelled. Compensation expense recognized during the three quarters 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. The Company will
recognize the cost of all employee stock awards on a straight-line basis over their respective vesting period, net of estimated forfeitures.

Prior to the
adoption of SFAS No. 123(R), the Company applied APB No. 25 to account for its stock-based awards. Under the provisions of APB No. 25, the Company was not required to recognize compensation expense for the cost of stock options issued
under its equity compensation plans as all options were granted with an exercise price equal to the market value of the underlying common stock on the date of grant. The Company has not changed its valuation model used for estimating the fair value
of options granted after January 1, 2006, from the Black-Scholes option-pricing model previously used for pro forma presentation purposes as required under SFAS No. 123, as amended by SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosures.

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 nine and three months ended September 30, 2005:



|                                                                                                                             |  |                                     |         |   |                                      |   |        |  
|---------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------- | ------- | - | ------------------------------------ | - | ------ | -
|                                                                                                                             |  | Nine Months EndedSeptember 30, 2005 |         |   | Three Months EndedSeptember 30, 2005 |  
|(in thousands, except per share data) (unaudited)                                                                            |  |                                     |         |   |                                      |  
|Net loss, as reported                                                                                                        |  | $                                   | (11,730 | ) |                                      | $ | (2,512 | )
|Deduct: Total stock-based employee compensation expense determined under fair value based method, net of related tax effects |  |                                     | (111    | ) |                                      |   | (37    | )
|                                                                                                                             |  |                                     |         |   |                                      |   |        |  
|Pro forma net loss                                                                                                           |  | $                                   | (11,841 | ) |                                      | $ | (2,549 | )
|Net loss per share:                                                                                                          |  |                                     |         |   |                                      |   |        |  
|As reported: Basic and diluted                                                                                               |  | $                                   | (2.28   | ) |                                      | $ | (0.49  | )
|Pro forma: Basic and diluted                                                                                                 |  | $                                   | (2.30   | ) |                                      | $ | (0.49  | )

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 year ended December 31, 2005.

On August 17, 2006, the
Company issued 703,000 shares of restricted stock that become unrestricted four years after the grant date, and 75,000 stock options with a strike price of $2.11 per share and that vest in three equal annual installments. The Company determined the
fair value of the options issued to be $0.1 million using the Black-Scholes option-pricing model, with the following assumptions: risk-free interest rate of 4.82%, expected dividend yield of 0%, expected life of six years to expiration and expected
volatility of 133%.

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

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



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During the first nine 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, as permitted by SFAS No. 123(R).

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



|                                  |  |                 |   |  |                                |        |                                                  |     |                          |   |        
|--------------------------------- |  | --------------- | - |  | ------------------------------ | ------ | ------------------------------------------------ | --- | ------------------------ | - | -------
|                                  |  | Number ofShares |   |  | WeightedAverage Exercise Price |        | WeightedAverage RemainingContractualTerm (Years) |     | AggregateIntrinsic Value
|Outstanding at December 31, 2005  |  | 71,108          |   |  | $                              | 322.26 |                                                  |     |                          |   |        
|Granted                           |  | 75,000          |   |  |                                | 2.11   |                                                  |     |                          |   |        
|Exercised                         |  |                |   |  | $                              |       |                                                  |     |                          |   |        
|Forfeited                         |  | (3,716          | ) |  | $                              | 345.78 |                                                  |     |                          |   |        
|                                  |  |                 |   |  |                                |        |                                                  |     |                          |   |        
|Outstanding at September 30, 2006 |  | 142,392         |   |  | $                              | 152.63 |                                                  | 7.8 |                          | $ | $59,250
|                                  |  |                 |   |  |                                |        |                                                  |     |                          |   |        
|Exercisable at September 30, 2006 |  | 67,043          |   |  | $                              | 321.73 |                                                  | 5.5 |                          | $ |       

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 exercisable and cancelled options during the first nine months of 2006 had no intrinsic value.

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                         |  | 75,000          |   |  |                                     | 2.11 
|Vested                          |  | (11,845         | ) |  | $                                   | 11.34
|Forfeited                       |  | (546            | ) |  |                                     | 11.19
|                                |  |                 |   |  |                                     |      
|Nonvested at September 30, 2006 |  | 75,349          |   |  | $                                   | 2.17 
|                                |  |                 |   |  |                                     |      

At September 30, 2006, there was approximately $0.1 million of total unrecognized compensation cost related
to nonvested stock options. The cost is expected to be recognized over a weighted average period of 2.9 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 granted 703,000 shares of restricted stock during the first nine months of 2006 that become unrestricted four years after the grant date.

As of September 30, 2006, the total amount of unrecognized compensation expense related to restricted stock awards was approximately $4.8 million, which is expected to be recognized over a weighted-average period
of approximately 5.0 years. The Company recognized compensation expense of approximately $0.4 million during the first nine months of 2006 on existing restricted stock awards.

During the nine months ended September 30, 2006, 18,750 shares of restricted stock were returned to the Company as the result of employee terminations, and during the nine months ended September 30, 2005,
3,098 shares of restricted stock were returned. All shares of restricted stock granted before 2006 become unrestricted on the tenth anniversary of the grant date, or on the fourth anniversary for restricted stock granted in 2006. Stock options vest
in three equal annual installments, commencing on the issuance date, subject to the terms and conditions of the Equity Incentive Plan. As of September 30, 2006 and December 31, 2005 the outstanding shares of restricted stock totaled
1,127,678 and 443,428, respectively.

For the nine months ended September 30, 2006 and 2005, total stock-based compensation was $0.6 million and $0.4
million, respectively. For the three months ended September 30, 2006 and 2005, total stock-based compensation was $0.2 million and $0.1 million, respectively.



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4. PROPERTY, PLANT AND EQUIPMENT

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



|                                     |  |                    |         |   |                   |   |         |  
|------------------------------------ |  | ------------------ | ------- | - | ----------------- | - | ------- | -
|                                     |  | September 30, 2006 |         |   | December 31, 2005 |  
|Computer software                    |  | $                  | 537     |   |                   | $ | 350     |  
|Computer equipment                   |  |                    | 736     |   |                   |   | 534     |  
|Leasehold improvements               |  |                    | 31      |   |                   |   | 30      |  
|Office equipment and furniture       |  |                    | 174     |   |                   |   | 146     |  
|Network equipment and infrastructure |  |                    | 106,892 |   |                   |   | 105,596 |  
|                                     |  |                    |         |   |                   |   |         |  
|Subtotal                             |  |                    | 108,370 |   |                   |   | 106,656 |  
|Accumulated depreciation             |  |                    | (47,187 | ) |                   |   | (40,521 | )
|                                     |  |                    |         |   |                   |   |         |  
|Property, plant and equipment, net   |  | $                  | 61,183  |   |                   | $ | 66,135  |  
|                                     |  |                    |         |   |                   |   |         |  

Depreciation expense on property, plant and equipment was $6.7 million and $6.5 million for the nine months ended
September 30, 2006 and 2005, respectively. Depreciation expense on property, plant and equipment was $2.2 million for the three months ended September 30, 2006 and $2.1 million for the three months ended September 30, 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 included
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 duration of the earn-out
provision for an additional twenty-four months retroactive to January 30, 2006. As of September 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 nine months ended September 30, 2005.

7. SIGNIFICANT EVENTS

On August 17, 2006, the Company adopted
the FiberNet Telecom Group, Inc. Change in Control Plan (the Plan). Pursuant to the terms of the Plan, members of senior management are entitled to certain benefits upon a termination of employment (other than a termination by FiberNet
for Cause or by an employee without Good Reason as such terms are defined in the Plan) that occurs within one year after a Change in Control event (as defined in the Plan). Specifically, each Vice President and Senior Vice
President shall be entitled to a cash payment of 50% of his or her current base salary and the President shall be entitled to a cash payment of 100% of his or her current base salary, plus a pro-rated portion of his or her annual bonus. FiberNet
shall also pay the premiums for continued health care coverage for six months for each Vice President and Senior Vice President and for 12 months for the President.

In addition, the Plan provides that if the benefits payable in connection with a Change in Control event are subject to an Excise Tax (as defined in the Plan), then (i) for the President, FiberNet agrees to make
such individual whole by making a gross-up payment, such that the net total amount of benefits actually received is equal to those benefits calculated as if only standard income taxes, and not the Excise Tax, had applied, and (ii) for each Vice
President and Senior Vice President, FiberNet shall pay to such individual the greater of (A) the total value of the benefits payable if reduced to avoid triggering the Excise Tax or (B) the total value of the benefits payable even if the
Excise Tax applies, such that the net total amount of benefits actually received by such individual is maximized.

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.



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##### Table of Contents

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 was (and 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. 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, 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 (i) required the Company on or before May 15, 2006, to engage a
financial advisor to assist the Company in preparing a comprehensive strategic business plan and (ii) requires the Company 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. On April 24, 2006, the Company 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, the Company entered into a warrant agreement with the lenders on March 22, 2006 (the
Warrant Agreement), pursuant to which the Company agreed to issue warrants (with an expiration date three and one-half years after closing) to the lenders to purchase an aggregate of 0.3 million shares of common stock at an exercise
price of $2.64 per share. 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. 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 registration statement was filed on April 21, 2006 and declared effective by the Securities and Exchange
Commission on May 10, 2006.



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