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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, 2007

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 November 7 2007, the registrant had
7,640,597 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, 2007 and December 31, 2006                   |  | 15  
|         |  | Condensed Consolidated Statements of Operations for the nine months ended September 30, 2007 and 2006  |  | 16  
|         |  | Condensed Consolidated Statements of Operations for the three months ended September 30, 2007 and 2006 |  | 17  
|         |  | Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2007 and 2006  |  | 18  
|         |  | Notes to Condensed Consolidated Interim Financial Statements                                           |  | 19  
|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                                                                                               |  | 13  



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PART I

FINANCIAL INFORMATION



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

See attached.



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

This report contains certain forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such statements
are based on managements current expectations and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Investors are cautioned that
there can be no assurance that actual results or business conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of various factors, including, but not limited to, those discussed in
our Annual Report on Form 10-K for the fiscal year ended December 31, 2006. Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.

Overview

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

Factors Affecting Future Operations

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



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



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



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



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

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

Our services are typically sold under fixed price agreements.
In the case of transport services, we provide an optical circuit or other means of connectivity for a fixed price. Revenues from transport services are not dependent on customer usage or the distance between the origination point and termination
point of a circuit. The pricing of colocation services is based upon the size of the colocation space or the number of colocation units, such as cabinets, provided to the customer. Revenues from access management services are typically determined by
the square footage of the commercial office



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properties to which a customer purchases access. We have experienced price declines for some of our services over the past year due to industry trends, with
transport services experiencing the greatest decreases. Our operating results may continue to be impacted by decreases in the prices of certain of our services.

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

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

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

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

Our on-net transport services primarily provide network core connectivity to our customers, enabling them to exchange traffic between their own points of presence or from one of their points of presence to that of
another carrier or service provider. These services accounted for 49.4% of our revenues in the first nine months of 2007. We can provide on-net transport services utilizing multiple transmission protocols, including legacy North American standards,
international standards and new technologies, such as Ethernet, IP and VoIP. Our ability to provide service using varying standards, as well as to interconnect traffic between standards, is an important factor in the growth of our on-net transport
business.

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

Our off-net transport services constitute network connectivity that we provide to our customers, utilizing circuits that we purchase from other wholesale
telecommunications carriers. These services produced 28.8% of our revenues in the first nine months of 2007 and are the fastest growing portion of our business. In providing these services to our customers, we manage all aspects of the service
delivery, including network design, installation, monitoring and troubleshooting. Our ability to bundle these services with our other offerings allows our customers to utilize a single vendor for their network requirements. We offer these services
in markets that we currently serve with our own infrastructure, in other metropolitan markets that we do not serve with our own networks, and on a long-haul basis to connect metropolitan areas, significantly increasing our addressable market beyond
the metropolitan markets in which we own network infrastructure and facilities.

Historically our transport services have been negatively
impacted by customers disconnecting higher-bandwidth circuits and replacing them with lower-bandwidth circuits to more efficiently manage the access costs of their networks. The new transport services that we are providing typically are also for
lower-bandwidth circuits, as our customers expand their network connections on a more prudent basis. The growth in transport revenues that we have experienced on a quarterly basis in 2006 and in the first nine months of 2007 is a result of an
increase in the number of circuits that we have provisioned, which more than offset disconnections and price declines. In the future, we anticipate generating significantly more of our revenues from transport services than from the other services we
provide.

Our colocation services produced 20.6% of our revenues in the first nine months of 2007. Colocation revenues are generally stable
in nature, as customers tend to maintain a more consistent need for a location to house their networking equipment and therefore typically enter into three to five years contracts for colocation services. Upon purchasing colocation space from us,
customers secure their network equipment in our highly conditioned facilities and establish connectivity to



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exchange traffic with other networks. Our facilities maintain rigorous standards for power, cooling, security, reliability and other environmental controls.
It is the physical constraints of available colocation space in our facilities and our competitors facilities that have created a favorable market environment for colocation services. The growth prospects of our colocation services are a
function of the space that we have available to sell to our customers. Many of our existing colocation facilities are approaching stabilized occupancy rates. As a result, we are currently constructing a new 11,000 square foot facility at 60 Hudson
Street in New York City. We also plan to convert 8,000 square feet of currently unoccupied colocation space at our location at 165 Halsey Street in Newark, New Jersey into an internet-grade facility with enhanced power capacity to also expand our
offering capabilities. Due to new sales activity and certain customer contract renewals, we expect revenues from colocation services to increase by approximately 12% in the fourth quarter of 2007, compared to the third quarter of 2007.

Our access management services business accounted for 1.2% of our revenues in the first nine months of 2007 and has been steadily declining. We expect
that trend to continue. The revenues that we are generating from this type of service are from long-term contracts entered into in prior years. We do not expect to sign any new contracts for access management in the near future. The remaining terms
of our existing access management service contracts range from a month-to-month basis to expiration in 2012.

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

Selling, General and Administrative Expenses. Selling, general and administrative expenses include all
of our personnel costs, stock related costs, occupancy costs for our corporate offices, insurance costs, professional fees, sales and marketing expenses and other miscellaneous expenses. Personnel costs, including wages, benefits and sales
commissions, are our largest component of selling, general and administrative expenses. Stock related expenses relate to the granting of stock options and restricted stock to our employees. We make equity grants to our employees in order to attract,
retain and incentivize qualified personnel. These costs are non-cash charges that are amortized over the vesting term of each employees equity agreement, based on the fair value on the date of the grant. We do not allocate any personnel cost
relating to network operations or sales activities to our cost of services. We had 69 employees as of September 30, 2007 compared to 65 as of September 30, 2006. Prospectively, we believe that our personnel costs will increase moderately.
Professional fees, including legal and accounting expenses and consulting fees, represent the second largest component of our selling, general and administrative expenses. These legal and accounting fees are primarily attributed to our required
activities as a publicly traded company, such as SEC filings and financial statement audits, and could increase prospectively due to the enhanced regulations regarding corporate governance and compliance matters. Other costs included in selling,
general and administrative expenses, such as insurance costs, occupancy costs related to our office space, and marketing costs, may increase due to changes in the economic environment and telecommunications industry.

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

Critical Accounting Policies

Our significant accounting policies are described in Note 2 to the condensed consolidated interim financial statements included in Item 1 of this
Form 10-Q. Our discussion and analysis of financial condition and results from operations are based upon our condensed consolidated interim financial statements, which have been prepared in accordance with accounting principles generally accepted in
the United States of America. The preparation of the condensed consolidated interim financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure
of contingent assets and liabilities. We evaluate the estimates that we have made on an on-going basis. These estimates have been based upon historical experience and on various other assumptions that we



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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.

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 deterioration in the economic environment or telecommunications industry, in general, could have a material adverse impact on the collectability of our
accounts receivable and our future operating results, including a reduction in future revenues and additional allowances for doubtful accounts. If we determine that collection of a receivable is not reasonably assured, we fully reserve the
receivable and reverse that reserve only when collection becomes reasonably assured, which is generally upon receipt of payment.

Impairment of
Long-Lived Assets

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

Recognition of Deferred Tax Assets and Liabilities

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

Effective January 1, 2007, we adopted the provisions of FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes (FIN No. 48). FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in our financial statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes, FIN No. 48 requires us to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If the more-likely-than-not
threshold is met, we must measure the tax position to determine the amount to recognize in the financial statements. The application of income tax law is inherently complex. Laws and regulation in this area are voluminous and are often ambiguous. As
such, we are required to make many subjective assumptions and judgments regarding our income tax exposures. Interpretations of and guidance surrounding income tax laws and regulations change over time. As such, changes in our subjective assumptions
and judgments can materially affect amounts recognized in the balance sheets and statements of income. At the adoption date of January 1, 2007, we had no unrecognized tax benefits which would affect our effective tax rate if recognized. At
September 30, 2007, we had no unrecognized tax benefits. We classify interest and penalties arising from the underpayment of income taxes in the statement of income under selling, general and administrative expenses. As of September 30,
2007, we had no accrued interest or penalties related to uncertain tax positions. The tax years 2000 through 2006 remain open to examination by all taxing jurisdictions to which we are subject.



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Results of Operations

Nine months ended September 30, 2007 Compared to Nine months ended September 30, 2006

Revenues.Revenues
for the nine months ended September 30, 2007 were $36.2 million as compared to $28.9 million for the nine months ended September 30, 2006. We increased the number of our customers to 247 as of September 30, 2007 from 242 at
September 30, 2006. 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, |        |      |  
|(amounts in thousands)    |  | 2007                                    |        | 2006 |   | Change | 
|On-net transport revenue  |  | $                                       | 17,873 |      | $ | 15,714 |  | $ | 2,159 |  
|Off-net transport revenue |  |                                         | 10,415 |      |   | 6,340  |  |   | 4,075 |  
|Colocation revenue        |  |                                         | 7,447  |      |   | 6,349  |  |   | 1,098 |  
|Access revenue            |  |                                         | 461    |      |   | 490    |  |   | (29   | )
|                          |  |                                         |        |      |   |        |  |   |       |  
|Total Revenue             |  | $                                       | 36,196 |      | $ | 28,893 |  | $ | 7,303 |  
|                          |  |                                         |        |      |   |        |  |   |       |  

We recognized $17.9 million in on-net transport service revenues for the nine months ended
September 30, 2007, up from $15.7 million for the nine months ended September 30, 2006. Off-net transport service revenues for the nine months ended September 30, 2007 were $10.4 million, up from $6.3 million for the nine months ended
September 30, 2006. Revenues from colocation and other services were $7.4 million for the nine months ended September 30, 2007 compared to $6.3 million for the nine months ended September 30, 2006, and revenues from communications
access management services were $0.5 million for each of the nine months ended September 30, 2007 and 2006. Due to new sales activity and certain customer contract renewals, we expect revenues from colocation services to increase by
approximately 12% in the fourth quarter of 2007, compared to the third quarter of 2007.

The majority of our transport and colocation
services are provided within and between our carrier hotel facilities in the New York/New Jersey market. On-net transport revenues increased as we provided a greater number of circuits to our customers. The growth in new on-net transport services
more than offset the disconnections and price decreases that we experienced. Off-net transport revenues increased over the same period last year as we continued to leverage our current customer base by providing services outside our gateway markets
of New York/New Jersey and Los Angeles. Colocation revenues increased as we licensed additional caged space, cabinets and racks in our facilities. Our network infrastructure has significant capacity to provide additional transport connectivity, and
we also have the network capabilities to deliver connectivity utilizing new technologies, such as Ethernet and IP services. Our access management services business has been steadily declining, and we expect that trend to continue throughout 2007.
The revenues that we are generating from this type of service are from long-term contracts entered into in prior years. The remaining terms of our existing access management service contracts range from month-to-month to expiration in 2012. We do
not expect to sell any additional access services, and we believe our existing contracts for access services may not be renewed when they expire.

For the nine months ended September 30, 2007 and 2006, there were no individual customers that accounted for over 10.0% of our revenues.

Cost of Services. Cost of services, associated with the operation of our networks and facilities, were $18.7 million for the nine months ended September 30, 2007, compared to $14.5 million for the nine
months ended September 30, 2006. The majority of our cost of services is occupancy expenses, consisting of rent, license fees, and utility costs, for our carrier hotel facilities and commercial office buildings. Other cost of services includes
off-net connectivity charges and maintenance and repair costs.



|                                       |  |                                         |        |      |   |        |  |   |       |  
|-------------------------------------- |  | --------------------------------------- | ------ | ---- | - | ------ |  | - | ----- | -
|                                       |  | For the nine months ended
September 30, |        |      |  
|(amounts in thousands)                 |  | 2007                                    |        | 2006 |   | Change | 
|Occupancy expenses                     |  | $                                       | 10,634 |      | $ | 9,278  |  | $ | 1,356 |  
|Off-net connectivity charges           |  |                                         | 7,530  |      |   | 4,684  |  |   | 2,846 |  
|Maintenance and repair and other costs |  |                                         | 490    |      |   | 493    |  |   | (3    | )
|                                       |  |                                         |        |      |   |        |  |   |       |  
|Total Cost of Services                 |  | $                                       | 18,654 |      | $ | 14,455 |  | $ | 4,199 |  
|                                       |  |                                         |        |      |   |        |  |   |       |  



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Occupancy expenses represented 57.0% of cost of services or $10.6 million for the nine months ended
September 30, 2007, an increase of $1.4 million as compared to 64.2% or $9.3 million for the nine months ended September 30, 2006. This increase was due to increases in colocation and cross-connection charges associated with new order
installations in existing facilities and an increase in utility usage. On March 1, 2007, we entered into a lease modification with the landlord of the building located at 60 Hudson Street, New York, New York to extend the term of one of our
leases to July 2022 and to lease an additional 11,315 square feet of space.

Off-net connectivity charges were 40.4% of cost of services or
$7.5 million for the nine months ended September 30, 2007, compared to 32.4% of the cost of services or $4.7 million for the nine months ended September 30, 2006. We expect these connectivity charges to increase commensurately with our
increase in revenues from off-net transport.

Maintenance and repair and other costs were 2.6% or $0.5 million of cost of services for the
nine months ended September 30, 2007, compared to 3.4% or $0.5 million for the nine months ended September 30, 2006. These costs will continue to represent a relatively small and fixed component of cost of services.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the nine months ended September 30, 2007 were
$12.5 million compared to $11.5 million for the nine months ended September 30, 2006. Personnel costs represented 62.5%, or $7.8 million, of selling, general and administrative expenses for the nine months ended September 30, 2007 compared
to 63.1%, or $7.3 million for the nine months ended September 30, 2006. Professional fees for the nine months ended September 30, 2007 were $1.1 million, as compared to $0.9 million for the same period in 2006. During the nine months ended
September 30, 2006, we expensed $0.1 million for fees related to the twentieth amendment of our former credit agreement with Deutsche Bank. Stock related expenses for the nine months ended September 30, 2007 and 2006 were $0.8 million and
$0.6 million, respectively. This non-cash expense related to the amortization of restricted stock and stock options granted to our employees. The restricted shares that were granted prior to 2006 become unrestricted on the tenth anniversary of the
grant date, while the restricted shares granted during 2006 and 2007 become unrestricted on the fourth anniversary of the grant date, and the related expenses are amortized on a straight-line basis over their respective restricted period. All other
selling, general and administrative items, which include insurance and operating expenses, were $2.8 and $2.7 million for the nine months ended September 30, 2007 and 2006, respectively.

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

Depreciation and Amortization.Depreciation and amortization expenses for the nine months ended September 30, 2007 were $7.0 million compared
to $6.7 million for the nine months ended September 30, 2006.

Interest Income.Interest income for the nine months ended
September 30, 2007 was approximately $0.2 million, compared to approximately $0.1 million for the nine months ended September 30, 2006. 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, 2007 was
$1.4 million, compared to $1.9 million for the nine months ended September 30, 2006. 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
former credit facility. On March 21, 2007 we entered into a new credit facility with a floating interest rate of LIBOR plus 350 basis points on drawn balances. Our interest rate was 8.61% as of September 30, 2007.

Three months ended September 30, 2007 Compared to Three months ended September 30, 2006

Revenues.Revenues for the quarter ended September 30, 2007 were $12.5 million as compared to $10.4 million for the quarter ended
September 30, 2006. We increased the number of our customers to 247 as of September 30, 2007 from 242 at September 30, 2006. 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, |        |      |  
|(amounts in thousands)    |  | 2007                                     |        | 2006 |   | Change | 
|On-net transport revenue  |  | $                                        | 6,158  |      | $ | 5,419  |  | $ | 739   |  
|Off-net transport revenue |  |                                          | 3,647  |      |   | 2,594  |  |   | 1,053 |  
|Colocation revenue        |  |                                          | 2,554  |      |   | 2,203  |  |   | 351   |  
|Access revenue            |  |                                          | 142    |      |   | 161    |  |   | (19   | )
|                          |  |                                          |        |      |   |        |  |   |       |  
|Total Revenue             |  | $                                        | 12,501 |      | $ | 10,377 |  | $ | 2,124 |  
|                          |  |                                          |        |      |   |        |  |   |       |  



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We recognized $6.2 million in on-net transport service revenues for the quarter ended September 30,
2007, up from $5.4 million for the quarter ended September 30, 2006. Off-net transport service revenues for the quarter ended September 30, 2007 were $3.6 million, up from $2.6 million for the quarter ended September 30, 2006.
Revenues from colocation and other services were $2.6 million for the quarter ended September 30, 2007 compared to $2.2 million for the quarter ended September 30, 2006, and revenues from communications access management services for each
of the quarters ended September 30, 2007 and 2006 were $ 0.1 million and $0.2 million, respectively. Due to new sales activity and certain customer contract renewals, we expect revenues from colocation services to increase by approximately
12% in the fourth quarter of 2007, compared to the third quarter of 2007.

The majority of our transport and colocation services are
provided within and between our carrier hotel facilities in the New York/New Jersey market. On-net transport revenues increased as we provided a greater number of circuits to our customers. The growth in new on-net transport services more than
offset the disconnections and price decreases that we experienced. Off-net transport revenues increased over the same period last year as we continued to leverage our current customer base by providing services outside our gateway markets of New
York/New Jersey and Los Angeles. Colocation revenues increased as we licensed additional caged space, cabinets and racks in our facilities. Our network infrastructure has significant capacity to provide additional transport connectivity, and we also
have the network capabilities to deliver connectivity utilizing new technologies, such as Ethernet and IP services. Our access management services business has been steadily declining, and we expect that trend to continue throughout 2007. The
revenues that we are generating from this type of service are from long-term contracts entered into in prior years. The remaining terms of our existing access management service contracts range from month-to-month to expiration in 2012. We do not
expect to sell any additional access services, and we believe our existing contracts for access services may not be renewed when they expire.

For the quarters ended September 30, 2007 and 2006, there were no individual customers that accounted for over 10.0% of our revenues.

Cost of Services. Cost of services, associated with the operation of our networks and facilities, were $6.5 million for the quarter ended September 30, 2007, compared to $5.3 million for the quarter ended September 30,
2006. The majority of our cost of services is occupancy expenses, consisting of rent, license fees, and utility costs, for our carrier hotel facilities and commercial office buildings. Other cost of services includes off-net connectivity charges and
maintenance and repair costs.



|                                       |  |                                          |       |      |   |        |  |   |       |  
|-------------------------------------- |  | ---------------------------------------- | ----- | ---- | - | ------ |  | - | ----- | -
|                                       |  | For the three months ended
September 30, |       |      |  
|(amounts in thousands)                 |  | 2007                                     |       | 2006 |   | Change | 
|Occupancy expenses                     |  | $                                        | 3,732 |      | $ | 3,142  |  | $ | 590   |  
|Off-net connectivity charges           |  |                                          | 2,603 |      |   | 1,932  |  |   | 671   |  
|Maintenance and repair and other costs |  |                                          | 155   |      |   | 192    |  |   | (37   | )
|                                       |  |                                          |       |      |   |        |  |   |       |  
|Total Cost of Services                 |  | $                                        | 6,490 |      | $ | 5,266  |  | $ | 1,224 |  
|                                       |  |                                          |       |      |   |        |  |   |       |  

Occupancy expenses represented 57.5% of cost of services or $3.7 million for the quarter ended
September 30, 2007, an increase of $0.6 million as compared to 59.7% or $3.1 million for the quarter ended September 30, 2006. This increase was due to increases in colocation and cross-connection charges associated with new order
installations in existing facilities and an increase in utility usage. On March 1, 2007, we entered into a lease modification with the landlord of the building located at 60 Hudson Street, New York, New York to extend the term of one of our
leases to July 2022 and to lease an additional 11,315 square feet of space.

Off-net connectivity charges were 40.1% of cost of services or
$2.6 million for the quarter ended September 30, 2007, compared to 36.7% of the cost of services or $1.9 million for the quarter ended September 30, 2006. We expect these connectivity charges to increase commensurately with our increase in
revenues from off-net transport.

Maintenance and repair and other costs were 2.4% or $0.2 million of cost of services for the quarter
ended September 30, 2007, compared to 3.6% or $0.2 million for the quarter ended September 30, 2006. These costs will continue to represent a relatively small and fixed component of cost of services.



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Selling, General and Administrative Expenses. Selling, general and administrative expenses for the
quarter ended September 30, 2007 were $4.2 million compared to $3.8 million for the quarter ended September 30, 2006. Personnel costs represented 62.3%, or $2.6 million, for the quarter ended September 30, 2007 compared to 62.6%, or
$2.4 million, for the quarter ended September 30, 2006. Professional fees were $0.4 million for each of the quarters ended September 30, 2007 and 2006. Stock related expenses for the quarter ended September 30, 2007 were $0.3 million
compared to $0.2 million for the quarter ended September 30, 2006. This non-cash expense related to the amortization of restricted stock and stock options granted to our employees. The restricted shares that were granted prior to 2006 become
unrestricted on the tenth anniversary of the grant date, while the restricted shares granted during 2007 and 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. All other selling, general and administrative items, which include insurance and operating expenses, were $0.9 million for the quarter ended September 30, 2007 and $0.8 million for the quarter ended
September 30, 2006.

Depreciation and Amortization.Depreciation and amortization expenses for each of the quarters ended
September 30, 2007 and 2006 were $2.4 million and $2.3 million, respectively.

Interest Income.Interest income for the quarter
ended September 30, 2007 was approximately $63,000, compared to approximately $47,000 for the quarter ended September 30, 2006. 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 each of the quarters ended September 30, 2007 and 2006
was $0.4 million and $0.6 million, respectively. 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 former credit facility. On March 21,
2007 we entered into a new credit facility with a floating interest rate of LIBOR plus 350 basis points on drawn balances. Our interest rate was 8.61% as of September 30, 2007.

Liquidity and Capital Resources

To date, we have financed our operations through revenues collected
from our customers, the issuance of equity securities in private transactions and by arranging credit facilities. We incurred a loss from operations and a net loss for the nine months ended September 30, 2007 of $2.0 million and $4.4 million,
respectively, compared to a loss from operations and a net loss of $3.8 million and $5.6 million, respectively, for the nine months ended September 30, 2006. During the nine months ended September 30, 2007, cash provided by operating
activities was approximately $3.7 million, and cash purchases of property, plant and equipment were $2.8 million, compared to cash provided by operating activities and cash purchases of property, plant and equipment of $3.0 million and $1.9 million,
respectively, for the nine months ended September 30, 2006.

For the nine months ended September 30, 2007, we used $0.6 million
in net cash for financing related activities. For the nine months ended September 30, 2006, we received $2.0 million in net cash for financing activities. We believe we will be able to generate sufficient cash flows from operations in order to
sustain our current operations.

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

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

On November 7, 2007, we entered into an Amended and Restated Credit Agreement by and
among us, our subsidiaries, CapitalSource Finance LLC and CapitalSource CF LLC pursuant to which we and our subsidiaries established a new $5.0 million loan facility (the New Loan ) solely to enable us to repurchase outstanding shares of
our capital stock pursuant to our recently announced stock repurchase program. The New Loan, which was unfunded at closing, supplements and is made a part of our existing $25.0 million credit facility with CapitalSource (the Credit
Facility). The New Loan will bear interest



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at floating rates, depending on the type of borrowing and based on either a Prime Rate or LIBOR Rate, as such terms are defined under the Credit Facility.
The applicable margin based upon a LIBOR Rate is 4.50%, and the applicable margin based on a Prime Rate is 3.25%. In addition, the parties adjusted certain of the financial covenants under the Credit Facility. The New Loan will be payable in equal
quarterly installments of 3.75% of the principal amount commencing in April 2010, with the entire Credit Facility maturing in March 2012.

On November 8, 2007, we announced that our Board of Directors has authorized the repurchase of up to $5.0 million of our common stock, either through open market purchases or in privately negotiated transactions. The timing and amount
of the shares to be repurchased will be based on market conditions and other factors, including price, corporate and regulatory requirements and alternative investment opportunities. Any shares repurchased in the program will be cancelled. The
repurchase program is scheduled to terminate on December 31, 2008, and may be modified or discontinued at any time.

As of
September 30, 2007, we had $14.0 million of indebtedness outstanding under our Credit Facility and $5.4 million of outstanding letters of credit. In addition, we had $0.6 million of availability on a revolving loan facility and $5.0 million of
availability in a capital expenditure loan facility, subject to compliance with the terms of the credit agreement. The interest rate on our outstanding borrowings under the facility are variable at LIBOR plus 350 basis points on the term loan, at
LIBOR plus 300 basis points on the revolving facility and at LIBOR plus 350 basis points on the capital expenditures loan. We were in full compliance with all of the covenants contained in the credit agreement as of September 30, 2007. Our
financial covenants include minimum consolidated EBITDA (as defined in the credit agreement underlying the Credit Facility), maximum capital expenditures, minimum fixed charge coverage ratio, maximum leverage ratio and minimum consolidated interest
coverage ratio. The compliance levels and calculation of such levels with respect to those covenants are as defined in the credit agreement, which is on file with the Securities and Exchange Commission. Non-compliance with any of the covenants,
requirements, or other terms and conditions under the credit agreement constitutes an event of default and potentially accelerates the outstanding balance of the credit facility for immediate payment.

We spent $2.8 million in capital expenditures during the nine months ended September 30, 2007, of which $2.1 million was primarily for the
implementation of customer orders, including the purchase of network equipment to increase capacity and to interconnect with customers, and $0.7 million related to our colocation expansion projects noted below. Our capital expenditures totaled $1.9
million for the nine months ended September 30, 2006. For all of 2007, we expect to invest approximately $7.0 million in capital expenditures. We expect to invest approximately $3.0 million in 2007 for customer order activity, expansion of
certain facilities, new product initiatives and an upgrade to certain information technology systems and key operating systems. We also plan to invest approximately $4.0 million in 2007 for the construction of a new colocation facility at 60 Hudson
Street and the conversion of part of our facility at 165 Halsey Street. 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, 2007, 2,400 shares of restricted stock were returned to us as the result of
employee terminations.

As of November 7, 2007, we had 7.6 million shares of common stock outstanding, or 8.5 million shares
of common stock outstanding on a fully diluted basis, assuming the exercise of all outstanding options and warrants.

From time to time, we
may consider private or public sales of additional equity or debt securities and other financings, depending upon market conditions, in order to provide additional working capital or finance the continued operations of our business, and we may also
consider potential strategic alternatives, such as acquisitions or the sale of all or a portion of our business, although there can be no assurance that we would be able to successfully consummate any such financing or other transaction on
acceptable terms, if at all. For additional disclosure and risks regarding future financings and funding our ongoing operations, please see Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2006 as filed on April 2, 2007. We do not have any off-balance sheet financing arrangements, except for outstanding letters of credit, nor do we anticipate entering into any.

Recent Accounting Pronouncements

In June 2007, the
EITF reached a consensus on EITF Issue No. 06-11, Accounting for Income Tax Benefits on Dividends on Share-Based Payment Awards (EITF 06-11). EITF 06-11 addresses share-based payment arrangements with dividend protection
features that entitle employees to receive (a) dividends on equity-classified nonvested shares, (b) dividend equivalents on equity-classified nonvested share units, or (c) payments equal to the dividends paid on the underlying shares
while an equity-classified share option is outstanding, when those dividends or dividend equivalents are charged to retained earnings under Statement 123(R) and result in an income tax deduction for the employer. A realized income tax benefit from
dividends or dividend equivalents that are charged to retained earnings and are paid to employees for equity-classified nonvested shares, nonvested equity share units, and outstanding equity share options should be recognized



11



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as an increase in additional paid-in capital. The amount recognized in additional paid-in capital for the realized income tax benefit from dividends on those
awards should be included in the pool of excess tax benefits available to absorb potential future tax deficiencies on share-based payment awards. The provisions of EITF 06-11 are effective for FiberNet as of January 1, 2008. We do not expect
the adoption of this pronouncement to have a material impact on our financial position or results of operations.

In February 2007, FASB
issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115 (SFAS No. 159). SFAS No. 159 permits entities to choose to measure
many financial instruments and certain other items at fair value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Earlier adoption is permitted, provided the company also elects to apply the provisions of SFAS
No. 157. We are currently evaluating the impact of SFAS No. 159, but do not expect the adoption of SFAS No. 159 to have a material impact on our condensed consolidated interim 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 credit facility and marketable security investments. Borrowings under our credit facility bear interest at floating rates, based upon LIBOR
or a base rate plus an applicable margin. As a result, we are subject to fluctuations in interest rates. A 100 basis point increase in LIBOR would increase our annual interest expense by less than $1.0 million per year. As of September 30,
2007, we had borrowed $14.0 million under our credit facility, with a current weighted average interest rate of 8.61%.

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



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

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

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, 2006.



|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.



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

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

Exhibit 10.1  Amended and Restated 2007 Board of Directors Compensation Plan

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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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 8, 2007



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

---

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



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##### Table of Contents

FIBERNET TELECOM GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)



|                                                                                                                          |  |                    |          |   |                  |   |          |  
|------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | -------- | - | ---------------- | - | -------- | -
|                                                                                                                          |  | September 30, 2007 |          |   | December 31,2006 |  
|                                                                                                                          |  | (unaudited)        |          |   |                  |  
|ASSETS                                                                                                                    |  |                    |          |   |                  |   |          |  
|Current Assets:                                                                                                           |  |                    |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                 |  | $                  | 7,104    |   |                  | $ | 6,802    |  
|Accounts receivable, net of allowance of $311 and $452                                                                    |  |                    | 3,389    |   |                  |   | 3,208    |  
|Prepaid expenses                                                                                                          |  |                    | 665      |   |                  |   | 656      |  
|                                                                                                                          |  |                    |          |   |                  |   |          |  
|Total current assets                                                                                                      |  |                    | 11,158   |   |                  |   | 10,666   |  
|Property, plant and equipment, net                                                                                        |  |                    | 55,558   |   |                  |   | 59,534   |  
|                                                                                                                          |  |                   
|Other Assets:                                                                                                             |  |                    |          |   |                  |   |          |  
|Deferred charges, net of accumulated amortization of $113 and $2,722                                                      |  |                    | 792      |   |                  |   | 755      |  
|Other assets                                                                                                              |  |                    | 661      |   |                  |   | 777      |  
|                                                                                                                          |  |                    |          |   |                  |   |          |  
|Total other assets                                                                                                        |  |                    | 1,453    |   |                  |   | 1,532    |  
|                                                                                                                          |  |                    |          |   |                  |   |          |  
|TOTAL ASSETS                                                                                                              |  | $                  | 68,169   |   |                  | $ | 71,732   |  
|                                                                                                                          |  |                    |          |   |                  |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                      |  |                    |          |   |                  |   |          |  
|Current Liabilities:                                                                                                      |  |                    |          |   |                  |   |          |  
|Accounts payable                                                                                                          |  | $                  | 2,669    |   |                  | $ | 3,482    |  
|Accrued expenses                                                                                                          |  |                    | 4,541    |   |                  |   | 4,719    |  
|Notes payable, current portion                                                                                            |  |                    | 350      |   |                  |   |         |  
|Deferred revenues, current portion                                                                                        |  |                    | 1,367    |   |                  |   | 1,746    |  
|                                                                                                                          |  |                    |          |   |                  |   |          |  
|Total current liabilities                                                                                                 |  |                    | 8,927    |   |                  |   | 9,947    |  
|Long Term Liabilities:                                                                                                    |  |                    |          |   |                  |   |          |  
|Notes payable, less original issue discount of $0 and $432                                                                |  |                    | 13,650   |   |                  |   | 13,729   |  
|Deferred revenue, long term                                                                                               |  |                    | 3,402    |   |                  |   | 3,728    |  
|Other long term liabilities                                                                                               |  |                    | 2,008    |   |                  |   | 1,308    |  
|                                                                                                                          |  |                    |          |   |                  |   |          |  
|Total Long Term Liabilities                                                                                               |  |                    | 19,060   |   |                  |   | 18,765   |  
|                                                                                                                          |  |                    |          |   |                  |   |          |  
|Total Liabilities                                                                                                         |  |                    | 27,987   |   |                  |   | 28,712   |  
|                                                                                                                          |  |                   
|Stockholders Equity:                                                                                                     |  |                    |          |   |                  |   |          |  
|Common stock, $0.001 par value, 2,000,000,000 shares authorized and 7,640,597 and 7,144,464 shares issued and outstanding |  |                    | 8        |   |                  |   | 7        |  
|Additional paid-in-capital                                                                                                |  |                    | 445,714  |   |                  |   | 444,327  |  
|Deferred rent (warrants)                                                                                                  |  |                    | (1,429   | ) |                  |   | (1,559   | )
|Accumulated deficit                                                                                                       |  |                    | (404,111 | ) |                  |   | (399,755 | )
|                                                                                                                          |  |                    |          |   |                  |   |          |  
|Total stockholders equity                                                                                                |  |                    | 40,182   |   |                  |   | 43,020   |  
|                                                                                                                          |  |                    |          |   |                  |   |          |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                |  | $                  | 68,169   |   |                  | $ | 71,732   |  
|                                                                                                                          |  |                    |          |   |                  |   |          |  

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



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FIBERNET TELECOM GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except
for per share amounts)



|                                                             |  |                                |        |   |      |   |        |  
|------------------------------------------------------------ |  | ------------------------------ | ------ | - | ---- | - | ------ | -
|                                                             |  | Nine months endedSeptember 30, |       
|                                                             |  | 2007                           |        |   | 2006 |  
|Revenues                                                     |  | $                              | 36,196 |   |      | $ | 28,893 |  
|Operating expenses:                                          |  |                                |        |   |      |   |        |  
|Cost of services (exclusive of items shown separately below) |  |                                | 18,654 |   |      |   | 14,455 |  
|Selling, general and administrative expense                  |  |                                | 12,515 |   |      |   | 11,525 |  
|Depreciation and amortization                                |  |                                | 7,007  |   |      |   | 6,742  |  
|                                                             |  |                                |        |   |      |   |        |  
|Total operating expenses                                     |  |                                | 38,176 |   |      |   | 32,722 |  
|                                                             |  |                                |        |   |      |   |        |  
|Loss from operations                                         |  |                                | (1,980 | ) |      |   | (3,829 | )
|Loss on early extinguishment of debt                         |  |                                | (1,146 | ) |      |   |       |  
|Interest income                                              |  |                                | 177    |   |      |   | 100    |  
|Interest expense                                             |  |                                | (1,407 | ) |      |   | (1,912 | )
|                                                             |  |                                |        |   |      |   |        |  
|Net loss                                                     |  | $                              | (4,356 | ) |      | $ | (5,641 | )
|                                                             |  |                                |        |   |      |   |        |  
|Net loss per sharebasic and diluted                         |  | $                              | (0.59  | ) |      | $ | (0.92  | )
|Weighted average common shares outstandingbasic and diluted |  |                                | 7,365  |   |      |   | 6,116  |  

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 endedSeptember 30, |       
|                                                             |  | 2007                            |        |   | 2006 |  
|Revenues                                                     |  | $                               | 12,501 |   |      | $ | 10,377 |  
|Operating expenses:                                          |  |                                 |        |   |      |   |        |  
|Cost of services (exclusive of items shown separately below) |  |                                 | 6,490  |   |      |   | 5,266  |  
|Selling, general and administrative expense                  |  |                                 | 4,210  |   |      |   | 3,821  |  
|Depreciation and amortization                                |  |                                 | 2,369  |   |      |   | 2,267  |  
|                                                             |  |                                 |        |   |      |   |        |  
|Total operating expenses                                     |  |                                 | 13,069 |   |      |   | 11,354 |  
|                                                             |  |                                 |        |   |      |   |        |  
|Loss from operations                                         |  |                                 | (568   | ) |      |   | (977   | )
|Interest income                                              |  |                                 | 63     |   |      |   | 47     |  
|Interest expense                                             |  |                                 | (414   | ) |      |   | (610   | )
|                                                             |  |                                 |        |   |      |   |        |  
|Net loss                                                     |  | $                               | (919   | ) |      | $ | (1,540 | )
|                                                             |  |                                 |        |   |      |   |        |  
|Net loss per sharebasic and diluted                         |  | $                               | (0.12  | ) |      | $ | (0.23  | )
|Weighted average common shares outstandingbasic and diluted |  |                                 | 7,411  |   |      |   | 6,650  |  

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



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##### Table of Contents

FIBERNET TELECOM GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)



|                                                                                |  |                                |         |   |      |   |        |  
|------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------ | -
|                                                                                |  | Nine months endedSeptember 30, |        
|                                                                                |  | 2007                           |         |   | 2006 |  
|Cash flows from operating activities:                                           |  |                                |         |   |      |   |        |  
|Net loss                                                                        |  | $                              | (4,356  | ) |      | $ | (5,641 | )
|Adjustments to reconcile net loss to net cash provided by operating activities: |  |                                |         |   |      |   |        |  
|Depreciation and amortization                                                   |  |                                | 7,007   |   |      |   | 6,742  |  
|Stock related expense                                                           |  |                                | 761     |   |      |   | 571    |  
|Deferred rent expense                                                           |  |                                | 130     |   |      |   | 130    |  
|Loss on early extinguishment of debt                                            |  |                                | 1,146   |   |      |   |       |  
|Other non-cash items                                                            |  |                                | 364     |   |      |   | 830    |  
|Change in assets and liabilities:                                               |  |                                |         |   |      |   |        |  
|Increase in accounts receivables                                                |  |                                | (231    | ) |      |   | (511   | )
|Increase in prepaid expenses                                                    |  |                                | (9      | ) |      |   | (132   | )
|Decrease in other assets                                                        |  |                                | 52      |   |      |   | 755    |  
|Decrease in accounts payable                                                    |  |                                | (1,017  | ) |      |   | (170   | )
|Increase in accrued expenses and other long-term liabilities                    |  |                                | 535     |   |      |   | 60     |  
|(Decrease) increase in deferred revenues                                        |  |                                | (705    | ) |      |   | 407    |  
|                                                                                |  |                                |         |   |      |   |        |  
|Cash provided by operating activities                                           |  |                                | 3,677   |   |      |   | 3,041  |  
|Cash flows from investing activities:                                           |  |                                |         |   |      |   |        |  
|Capital expenditures                                                            |  |                                | (2,774  | ) |      |   | (1,850 | )
|                                                                                |  |                                |         |   |      |   |        |  
|Cash used in investing activities                                               |  |                                | (2,774  | ) |      |   | (1,850 | )
|Cash flows from financing activities:                                           |  |                                |         |   |      |   |        |  
|Proceeds from debt financings                                                   |  |                                | 14,000  |   |      |   |       |  
|Proceeds from warrant exercises                                                 |  |                                | 626     |   |      |   |       |  
|Repayment of debt financings                                                    |  |                                | (14,160 | ) |      |   |       |  
|Payment of financing costs of debt financings                                   |  |                                | (1,067  | ) |      |   | (7     | )
|Payment of financing costs of equity financings                                 |  |                                |        |   |      |   | (152   | )
|Proceeds from issuance of equity securities                                     |  |                                |        |   |      |   | 2,205  |  
|                                                                                |  |                                |         |   |      |   |        |  
|Cash (used in) provided by financing activities                                 |  |                                | (601    | ) |      |   | 2,046  |  
|                                                                                |  |                                |         |   |      |   |        |  
|Net increase in cash and cash equivalents                                       |  |                                | 302     |   |      |   | 3,237  |  
|Cash and cash equivalents at beginning of period                                |  |                                | 6,802   |   |      |   | 1,899  |  
|                                                                                |  |                                |         |   |      |   |        |  
|Cash and cash equivalents at end of period                                      |  | $                              | 7,104   |   |      | $ | 5,136  |  
|                                                                                |  |                                |         |   |      |   |        |  
|Supplemental disclosures of cash flow information:                              |  |                                |         |   |      |   |        |  
|Interest paid                                                                   |  | $                              | 1,386   |   |      | $ | 1,421  |  

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



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FIBERNET TELECOM GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(UNAUDITED)

1. ORGANIZATION AND OPERATIONS

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

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

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

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, including its new credit facility (see Note 5), the Company does not anticipate requiring any additional
external sources of capital to fund its operations in the near term. However, from time to time, the Company may consider private or public sales of additional equity or debt securities and other financings, depending upon market conditions, in
order to provide additional working capital or finance the continued operations of our business. The Company does not have any off-balance sheet financing arrangements, except for outstanding letters of credit, 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, as identified in Note 1 above. The accompanying unaudited condensed consolidated interim financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all
information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America. However, in the opinion of
management, all adjustments consisting of normal recurring accruals necessary for a fair presentation of the operating results have been included in the condensed consolidated interim financial statements.



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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, 2006, as filed with the Securities and Exchange Commission on April 2, 2007.

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

Use of Estimates

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

Cash and Cash
Equivalents

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

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 earlier
|Network equipment              |  | 10 Years                                                 
|Network infrastructure         |  | 20 Years                                                 

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

Impairment of Long-Lived Assets

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

Revenue Recognition

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

Allowance
for Doubtful Accounts

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



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##### Table of Contents

Fair Value of Financial Instruments

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

Deferred Charges

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

Earnings Per Share

Basic
earnings per share has been computed using the weighted average number of shares outstanding during the period. Diluted earnings per share is computed by including the dilutive effect on common stock that would be issued assuming conversion of stock
options, warrants and other dilutive securities. Options, warrants and other securities did not have an effect on the computation of diluted earnings per share for the nine months ended September 30, 2007 and September 30, 2006, as they
were anti-dilutive due to the fact that the Company was in a loss position for the respective periods.

Concentration of Credit Risk

The Company provides trade credit to its customers. The Company performs ongoing credit evaluations of its customers financial conditions, in an
attempt to mitigate this risk. As of September 30, 2007, one customer accounted for over 12.7% of the Companys total accounts receivable. As of December 31, 2006, one customer accounted for 21.1% of the Companys total accounts
receivable. For each of the nine months ended September 30, 2007 and 2006, there was no individual customer that accounted for more than 10.0% of the Companys total revenue.

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

As of September 30, 2007, the Company had an allowance for doubtful accounts of $0.3 million. During the nine months ended September 30, 2007,
there were $0.2 million write-offs to the allowance for doubtful accounts, and an additional $50,000 was recorded as a bad debt expense. 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 approximately $0.1 million in the allowance for doubtful accounts, and an additional $40,000 was recorded as a bad debt expense.

Stock Based Compensation

The Company makes equity
grants comprising of stock options or shares of restricted stock to its employees as part of its employee equity incentive plan. As of September 30, 2007, the Company has 1.6 million shares authorized for issuance under the plan. Stock
options are typically granted to vest in three equal annual installments, commencing on the grant date, and expire ten years from the date of grant. Restricted stock is typically granted with a four or ten year period before it becomes unrestricted.
Equity grants under the plan are made at the discretion of the Compensation Committee of the Board of Directors.

Effective January 1,
2006, the Company adopted SFAS No. 123 (revised 2004), Share Based Payment (SFAS No. 123(R)), applying the modified prospective method. Under the modified prospective method, SFAS No. 123(R) applies to new
awards and to awards that were outstanding as of December 31, 2005 that are subsequently vested, modified, repurchased or cancelled. Compensation expense recognized during the nine months ended September 30, 2007 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.



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Accounting for Income Taxes

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

Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN No. 48). FIN No. 48 clarifies
the accounting for uncertainty in income taxes recognized in a companys financial statements in accordance with SFAS No. 109. FIN No. 48 requires a company to determine whether it is more likely than not that a tax position will be
sustained upon examination based upon the technical merits of the position. If the more-likely-than-not threshold is met, a company must measure the tax position to determine the amount to recognize in the financial statements. The application of
income tax law is inherently complex. Laws and regulation in this area are voluminous and are often ambiguous. As such, the Company is required to make many subjective assumptions and judgments regarding its income tax exposures. Interpretations of
and guidance surrounding income tax laws and regulations change over time. As such, changes in the Companys subjective assumptions and judgments can materially affect amounts recognized in the balance sheets and statements of income. At the
adoption date of January 1, 2007, the Company had no unrecognized tax benefits which would affect its effective tax rate if recognized. At September 30, 2007, the Company has no unrecognized tax benefits. The Company classifies interest
and penalties arising from the underpayment of income taxes in the statement of income under general and administrative expenses. As of September 30, 2007, the Company has no accrued interest or penalties related to uncertain tax positions. The
tax years 2000 through 2006 remain open to examination by all taxing jurisdictions to which the Company is subject.

In June 2006, the EITF
reached a consensus on EITF Issue No. 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That is, Gross versus Net Presentation) (EIFT 06-3).
EITF 06-3 provides that the presentation of taxes assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer on either a gross basis (included in revenues and costs) or on a net
basis (excluded from revenues) is an accounting policy decision that should be disclosed. The Company presents these taxes on a net basis.

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)    |  | 2007                                    |        | 2006
|On-net transport revenue  |  | $                                       | 17,873 |      | $ | 15,714
|Off-net transport revenue |  |                                         | 10,415 |      |   | 6,340 
|Colocation revenue        |  |                                         | 7,447  |      |   | 6,349 
|Access revenue            |  |                                         | 461    |      |   | 490   
|                          |  |                                         |        |      |   |       
|Total Revenue             |  | $                                       | 36,196 |      | $ | 28,893
|                          |  |                                         |        |      |   |       

All revenues are generated in the United States of America.

Recent Accounting Pronouncements

In June 2007, the
EITF reached a consensus on EITF Issue No. 06-11, Accounting for Income Tax Benefits on Dividends on Share-Based Payment Awards (EITF 06-11). EITF 06-11 addresses share-based payment arrangements with dividend protection
features that entitle employees to receive (a) dividends on equity-classified nonvested shares, (b) dividend equivalents on equity-classified nonvested share units, or (c) payments equal to the dividends paid on the underlying shares
while an equity-classified share option is outstanding, when those dividends or dividend equivalents are charged to retained earnings under Statement 123(R) and result in an income tax deduction for the employer. A realized income tax benefit from
dividends or dividend equivalents that are charged to retained earnings and are paid to employees for equity-classified nonvested shares, nonvested equity share units, and outstanding equity share options should be recognized as an increase in
additional paid-in capital. The amount recognized in additional paid-in capital for the realized income tax benefit from dividends on those awards should be included in the pool of excess tax benefits available to absorb potential



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future tax deficiencies on share-based payment awards. The provisions of EITF 06-11 are effective for FiberNet as of January 1, 2008. The Company does
not expect the adoption of this pronouncement to have a material impact on its financial position or results of operations.

In February
2007, FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115 (SFAS No. 159). SFAS No. 159 permits entities to choose
to measure many financial instruments and certain other items at fair value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Earlier adoption is permitted, provided the company also elects to apply the
provisions of SFAS No. 157. The Companys management is currently evaluating the impact of SFAS No. 159, but does not expect the adoption of SFAS No. 159 to have a material impact on its condensed consolidated interim financial
statements.

3. EQUITY INCENTIVE PLAN

On January 1, 2006, the Company adopted SFAS No. 123(R), applying the modified prospective method. Prior to the adoption of SFAS No. 123(R), the Company applied the provisions of APB No. 25, in accounting for its
stock-based awards, and accordingly, recognized no compensation cost for its stock plans other than for its restricted stock awards. Under the modified prospective method, SFAS No. 123(R) applies to new awards and to awards that were
outstanding as of December 31, 2005 that are subsequently vested, modified, repurchased or cancelled. Compensation expense includes the portion vesting during the period for (1) all share-based payments granted prior to, but not yet vested
as of December 31, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123 and (2) all share-based payments granted subsequent to December 31, 2005, based on the grant-date
fair value estimated using the Black-Scholes option-pricing model. The Company recognizes the cost of all employee stock awards on a straight-line basis over their respective vesting period, net of estimated forfeitures.

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

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

A summary of stock option activity within the Companys stock-based compensation plans for the nine months ended September 30, 2007 is as
follows:



|                                  |  |                  |   |  |                                 |        |                                                     |     |                           |   |        
|--------------------------------- |  | ---------------- | - |  | ------------------------------- | ------ | --------------------------------------------------- | --- | ------------------------- | - | -------
|                                  |  | Number of Shares |   |  | Weighted Average Exercise Price |        | Weighted Average Remaining Contractual Term (Years) |     | Aggregate Intrinsic Value
|Outstanding at January 1, 2007    |  | 142,070          |   |  | $                               | 151.58 |                                                     |     |                           |   |        
|Granted                           |  |                 |   |  |                                 |       |                                                     |     |                           |   |        
|Exercised                         |  |                 |   |  |                                 |       |                                                     |     |                           |   |        
|Forfeited                         |  | (108             | ) |  | $                               | 121.99 |                                                     |     |                           |   |        
|                                  |  |                  |   |  |                                 |        |                                                     |     |                           |   |        
|Outstanding at September 30, 2007 |  | 141,962          |   |  | $                               | 151.54 |                                                     | 6.8 |                           | $ | 468,750
|                                  |  |                  |   |  |                                 |        |                                                     |     |                           |   |        
|Exercisable at September 30, 2007 |  | 91,962           |   |  | $                               | 232.79 |                                                     | 5.7 |                           | $ | 156,250



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



|                                  |  |                  |   |  |                                 |        |                                                     |     |                           |   |       
|--------------------------------- |  | ---------------- | - |  | ------------------------------- | ------ | --------------------------------------------------- | --- | ------------------------- | - | ------
|                                  |  | Number of Shares |   |  | Weighted Average Exercise Price |        | Weighted Average Remaining Contractual Term (Years) |     | Aggregate Intrinsic Value
|Outstanding at January 1, 2006    |  | 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 nine months ended September 30, 2007 had no intrinsic
value.

The following is a summary of nonvested stock option activity:



|                                |  |                  |   |  |                                        |     
|------------------------------- |  | ---------------- | - |  | -------------------------------------- | ----
|                                |  | Number of Shares |   |  | Weighted Average Grant-Date Fair Value
|Nonvested at January 1, 2007    |  | 75,339           |   |  | $                                      | 2.17
|Granted                         |  |                 |   |  |                                        |    
|Vested                          |  | (25,339          | ) |  | $                                      | 2.08
|Forfeited                       |  |                 |   |  |                                        |    
|                                |  |                  |   |  |                                        |     
|Nonvested at September 30, 2007 |  | 50,000           |   |  | $                                      | 2.11
|                                |  |                  |   |  |                                        |     



|                                |  |                  |   |  |                                        |      
|------------------------------- |  | ---------------- | - |  | -------------------------------------- | -----
|                                |  | Number of Shares |   |  | Weighted Average Grant-Date Fair Value
|Nonvested at January 1, 2006    |  | 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 
|                                |  |                  |   |  |                                        |      

As of September 30, 2007, there was approximately $0.1 million of total unrecognized
compensation cost related to nonvested stock options. The cost is expected to be recognized over a weighted average period of 1.8 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 261,440 shares of restricted stock during the first nine months of 2007.

As of September 30, 2007, the total amount of unrecognized compensation expense related to restricted stock awards was approximately $5.7 million,
which is expected to be recognized over a weighted-average period of approximately 4.3 years. The Company recognized compensation expense of approximately $0.7 million during the first nine months of 2007 on existing restricted stock awards.

During the nine months ended September 30, 2007, there were 2,400 shares of restricted stock returned to the Company as the result of
employee terminations, and during the nine months ended September 30, 2006, 18,750 shares of restricted stock were returned. All shares of restricted stock granted before 2006 become unrestricted on the tenth anniversary of the grant date, or
on the fourth anniversary for restricted stock granted in 2007 and 2006. Stock options vest in three equal annual installments, commencing on the issuance date, subject to the terms and conditions of the Equity Incentive Plan. As of
September 30, 2007 and December 31, 2006 the outstanding shares of restricted stock totaled 1,388,148 and 1,127,678, respectively.



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For the nine months ended September 30, 2007 and 2006, total stock-based compensation was $0.8 and
$0.6 million, respectively.

4. PROPERTY, PLANT AND EQUIPMENT

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



|                                                   |  |                    |         |   |                   |   |         |  
|-------------------------------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------- | -
|                                                   |  | September 30, 2007 |         |   | December 31, 2006 |  
|                                                   |  | (unaudited)        |         |   |                   |  
|Computer software                                  |  | $                  | 945     |   |                   | $ | 572     |  
|Computer equipment                                 |  |                    | 874     |   |                   |   | 749     |  
|Leasehold improvements                             |  |                    | 31      |   |                   |   | 31      |  
|Office equipment and furniture                     |  |                    | 228     |   |                   |   | 228     |  
|Network equipment and infrastructure               |  |                    | 109,079 |   |                   |   | 107,339 |  
|                                                   |  |                    |         |   |                   |   |         |  
|Subtotal                                           |  |                    | 111,157 |   |                   |   | 108,919 |  
|Accumulated depreciation                           |  |                    | (56,326 | ) |                   |   | (49,385 | )
|                                                   |  |                    |         |   |                   |   |         |  
|Property, plant and equipment, net of depreciation |  | $                  | 54,831  |   |                   | $ | 59,534  |  
|Construction-in-progress                           |  |                    | 727     |   |                   |   |        |  
|Total property, plant and equipment, net           |  | $                  | 55,558  |   |                   | $ | 59,534  |  
|                                                   |  |                    |         |   |                   |   |         |  

5. CREDIT FACILITY

On March 21, 2007, the Company entered into a Credit Agreement by and among the Company, its subsidiaries and CapitalSource Finance LLC pursuant to which the Company and its subsidiaries established a $25.0
million credit facility (the Credit Facility), consisting of (i) a $14.0 million term loan, (ii) a $6.0 million revolving loan and letter of credit facility and (iii) a $5.0 million capital expenditure loan facility, which
was unfunded at closing. The $14.0 million term loan was used to pay off the Companys existing credit facility with Deutsche Bank A.G. discussed below, which was set to mature in March 2008. The Credit Facility bears interest at floating
rates, depending on the type of borrowing and based on either a Prime Rate or LIBOR Rate, as such terms are defined under the Credit Facility. Borrowing on the $14.0 million term loan are payable in increasing quarterly installments commencing in
July 2008. The Credit Facility matures in March 2012. The Credit Facility is secured by a first lien on all of the Companys and its subsidiaries existing and future real assets and personal property. The Credit Facility is guaranteed by
the Company and certain of its subsidiaries, and contains restrictive covenants, operating restrictions and other terms and conditions. The Credit Agreement prohibits the payment of cash dividends on common stock. As of September 30, 2007, the
outstanding balance under the Credit Facility was $14.0 million. In addition, as of September 30, 2007, the Company had $5.4 million of outstanding letters of credit and $0.6 million of availability under its revolving loan credit facility,
again subject to compliance with the terms of the credit agreement. As of September 30, 2007, the interest rate on its outstanding borrowings under the facility was at 8.61%. There were no events of default under its credit agreement.

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

As of
December 31, 2006, the Company maintained a senior secured credit facility (the Former Credit Facility) with Deutsche Bank A.G. New York Branch, Wachovia Investors, Inc., and IBM Credit LLC (the Lenders). As of
December 31, 2006, the Former Credit Facility was to mature on March 7, 2008, and was secured by the Companys assets, and contained certain restrictive covenants. The Former Credit Facility prohibited the payment of cash dividends on
common stock. The total commitment under the Former Credit Facility was $19.8 million as of December 31, 2006. As of December 31, 2006, the outstanding balance under the Former Credit Facility was $14.2 million, before an original issue
discount of $0.4 million. These discounts represent the fair value of the warrants issued to the lenders in connection with the origination of the Former Credit Facility. In addition, as of December 31, 2006, the Company had $5.5 million of
outstanding letters of credit and $0.1 million of availability to issue letters of credit under its Former Credit Facility, again subject to compliance with the terms of the credit agreement. As of December 31, 2006, the interest rate on its
outstanding borrowings under the facility was at 9.0%. There were no events of default under the Former Credit Facility. As of such date, the lenders under the Companys Former Credit Facility owned approximately 10% of the outstanding shares
of the Companys common stock.



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6. SUBSEQUENT EVENTS

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

On November 8, 2007, the Company announced that its Board of Directors has authorized the repurchase of up to $5.0
million of the Companys common stock, either through open market purchases or in privately negotiated transactions. The timing and amount of the shares to be repurchased will be based on market conditions and other factors, including price,
corporate and regulatory requirements and alternative investment opportunities. Any shares repurchased in the program will be cancelled. The repurchase program is scheduled to terminate on December 31, 2008, and may be modified or discontinued
at any time.



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