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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



(Mark One)

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



For the quarterly period ended September 30, 2003



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)



|Delaware                                                      |  | 52-2255974                         
|------------------------------------------------------------- |  | -----------------------------------
|(State or Other Jurisdiction ofIncorporation or Organization) |  | (I.R.S. EmployerIdentification 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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Check whether the registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.  Yes  x  No ̈



The number of shares outstanding of the issuers common stock, as of
November 12, 2003, was 40,805,434 shares of common stock, $0.001 par value.



Check whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes ̈No  x



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INDEX



|                             |  |                                                                                              |  | Page
|---------------------------- |  | -------------------------------------------------------------------------------------------- |  | ----
|PART I.FINANCIAL INFORMATION |  |                                                                                             
|Item 1.                      |  | Consolidated Financial Statements                                                            |  | 3   
|                             |  | Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002                   |  | 15  
|                             |  | Consolidated Statements of Operations for the nine months ended September 30, 2003 and 2002  |  | 16  
|                             |  | Consolidated Statements of Operations for the three months ended September 30, 2003 and 2002 |  | 17  
|                             |  | Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and 2002  |  | 18  
|                             |  | Notes to Consolidated 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                                   |  | 11  
|Item 4.                      |  | Controls and Procedures                                                                      |  | 12  
|PART II.OTHER INFORMATION    |  |                                                                                             
|Item 1.                      |  | Legal Proceedings                                                                            |  | 13  
|Item 2.                      |  | Changes in Securities and Use of Proceeds                                                    |  | 13  
|Item 3.                      |  | Defaults Upon Senior Securities                                                              |  | 13  
|Item 4.                      |  | Submission of Matters to a Vote of Security Holders                                          |  | 13  
|Item 5.                      |  | Other Information                                                                            |  | 13  
|Item 6.                      |  | Exhibits and Reports on Form 8-K                                                             |  | 13  



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PART I



FINANCIAL INFORMATION



Item 1.Consolidated Financial Statements



See attached.



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



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 below. As a result,
our future operations involve a high degree of risk. Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.



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



Overview



We own and operate fiber-optic networks designed to provide comprehensive broadband
connectivity to other telecommunications service providers for their data, voice and video transmissions. Our networks provide an advanced, high-bandwidth, fiber-optic solution to support the demand for network capacity and to facilitate the
interconnection of multiple carriers networks. Our primary business is to provide optical and electrical broadband circuits within and between carrier hotels, which are industrial buildings where service providers house their communications
equipment to exchange and route communications traffic. Our networks support multiple domestic and international transmission protocols, including synchronous optical network, or SONET, synchronous digital hierarchy, or SDH, Ethernet, and Internet
Protocol, or IP, and can deliver broadband connections with bandwidth ranging from 1.5 megabits per second to 10.0 gigabits per second, as well as optical wavelengths. We are currently operating primarily in the two gateway markets of New York and
Los Angeles, focusing our services in the local loop of major metropolitan areas.



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



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



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



| |  | Transport services. Our transport services include the offering of broadband circuits on our metropolitan transport networks and FiberNet in-building networks, or FINs. Over
our metropolitan transport networks, we can provision circuits from one of our carrier 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 2003, we initiated a new type of transport service offering to provide our customers with circuits on networks that we do not own. We intend to sell this connectivity to
our customers and purchase the underlying circuits from other wholesale telecommunications carriers.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



Our services are typically sold under fixed price agreements. In the case of transport
services, we provide an optical circuit or other means of connectivity for a fixed price. Revenues from transport services are not dependent on customer usage or the distance between the origination point and termination point of a circuit. The
pricing of colocation services is based upon the size of the colocation space or the number of colocation units, such as cabinets, provided to the customer. Revenues from access management services are typically determined by the square footage of
the commercial office properties to which a customer purchases access. The pricing of all of our services has declined significantly over the past year, although we believe not to the extent that the pricing in other segments of the
telecommunications market has declined.



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



We typically begin our sales cycle by entering into a telecommunications services agreement. This telecommunications services agreement outlines the engineering
specifications and operating standards that are required of us by our customers. Customers can order a specific circuit or colocation space, or, alternatively, they can purchase general availability on our networks or in our facilities by
establishing minimum revenue commitments on a recurring basis.



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



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



Cost of Services. Cost of services is associated with the operation of our networks and facilities. The largest component of our cost of services is the occupancy
expenses at our carrier hotel facilities, on-net buildings and off-net buildings. Other specific costs include



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maintenance and repair costs and utility costs. Our license agreements for our on-net and off-net buildings require us to pay license fees to the owners of
these properties. In addition, our leases at 60 Hudson Street in New York City also 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. Other than
our license fees and costs associated with providing our customers with circuits on networks that we do not own, our cost of services is generally fixed in nature. Since we began providing off-net transport services, our cost of services also
include the costs that we incur by purchasing connectivity from other wholesale telecommunications carriers to provide our customers with transport services that are not on our networks.



Selling, General and Administrative Expense. Selling, general and administrative expenses generally include all of our personnel
costs, occupancy costs for our corporate offices, insurance costs, professional fees, sales and marketing expenses and other miscellaneous expenses. Personnel costs, including wages, benefits and sales commissions, are our largest component of
selling, general and administrative expenses. We have reduced the number of our employees from 76 as of September 30, 2002 to 70 as of September 30, 2003, and our personnel costs have decreased. Prospectively, we do not anticipate significant
changes in headcount, and we believe that our personnel costs will increase moderately. Other costs included in selling, general and administrative expenses may increase due to changes in the economic environment and telecommunications industry.



Stock Related Expense. Stock related expense relates to the granting of
stock options and restricted stock to our employees. We make equity grants to our employees in order to attract, retain and incentivize qualified personnel. These costs are non-cash charges that are amortized over the vesting term of each
employees equity agreement.



Depreciation and Amortization.
Depreciation and amortization expense includes the depreciation of our network equipment and infrastructure, computer hardware and software, furniture and fixtures, and leasehold improvements, as well as the amortization of certain deferred charges.
We commence the depreciation of network related fixed assets when they are placed into service and depreciate those assets over periods ranging from three to 20 years. As a result of the impairments of fixed assets that we recorded during 2002 and
2001, depreciation and amortization expense for existing assets will decrease in the future.



Critical Accounting Policies



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



We recognize revenues when earned as services are provided throughout the life of each contract with a customer. The majority of our
revenues are invoiced on a monthly recurring basis under contracts, typically one year in length. We record deferred revenue for the amount of an invoice that has not been earned.



We have one reciprocal agreement, whereby we purchase services from one of our customers. At the beginning of 2002 we had two such
reciprocal agreements, but one was terminated during the year. The services provided and obtained through these agreements were priced at fair value as of the date of the agreement. We recognized the transport and colocation revenues from these
agreements in accordance with our stated revenue recognition policy, and we concurrently recorded the expenses for colocation services as cost of services in our statements of operations. None of the expenses associated with our reciprocal
agreements is capitalized. All of the costs are expensed as incurred. For the nine months ended September 30, 2003, reciprocal agreements accounted for $0.4 million, or 1.8%, of revenues and $0.4 million of our cost of services. For the nine months
ended September 30, 2002, reciprocal agreements accounted for $0.7 million, or 3.4%, of revenues and $0.7 million of our cost of services. For the quarter ended September 30, 2003, reciprocal agreements accounted for $0.1 million, or 1.8%, of
revenues and $0.1 million of our cost of services. For the quarter ended September 30, 2002, reciprocal agreements accounted for $0.1 million, or 2.0%, of revenues and $0.1 million of our cost of services.



We continuously monitor collections and payments from our customers and maintain allowances
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 significant number of our customers have filed for bankruptcy or are otherwise in significant financial distress. A significant change in the liquidity or financial position
of any one of these customers, in particular, or a further deterioration in the economic environment or telecommunications industry, in general, could have a material adverse impact on the collectability of our accounts receivable and our future
operating results, including a reduction in future revenues and additional allowances for doubtful accounts. If we determine that collection of a receivable is not reasonably assured, we defer the revenue and recognize it at the time collection
becomes reasonably assured, which is generally upon receipt of payment.



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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 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.



Cost in excess of net assets of an acquired business, principally goodwill, is accounted for
under SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 142, which is applicable for fiscal years beginning after
December 15, 2001. SFAS No. 142, which we adopted effective January 1, 2002, requires that goodwill and certain intangible assets resulting from business combinations entered into prior to June 30, 2001 no longer be amortized, but instead be
reviewed for recoverability. We perform our annual impairment test in December, and there could be a potential impairment of goodwill in the fourth quarter of 2003.



During 2002, we recovered approximately $0.3 million from the sale of assets previously written off as impaired during 2001. The proceeds
were recorded as a recovery of the impairment that was recorded during the year ended December 31, 2001. Also during 2002, we recorded a write-off of property, plant and equipment of $0.7 million. We recorded this write-off of capital assets due to
the termination of several leases and license agreements for network facilities. There was no cost to us to abandon these assets, nor do we expect to receive any proceeds or other consideration from the abandonment of these assets.



During 2002, we determined that our forecasts for revenues at certain facilities would not be
achieved due to the ongoing difficulties in the overall business climate and the continued deterioration of the telecommunications industry. The dramatic change in the operating environment for our industry has resulted in significantly less demand
for our services in these facilities, and we also determined that a rebound in demand for our services would not occur in the near term. In fact, we concluded that the prospects for the industry, and our business in particular, were worse than we
had forecasted in 2001, because the economy had not rebounded as expected and many significant telecommunications business failures occurred in 2002. As a result, we revised our business plan and conducted extensive reviews of our assets and
operations. The revisions to the business plan primarily included further reductions in forecasts of revenues and capital expenditures. The projected amounts of certain cost of services and overhead expenses were reduced as well to reflect the
decrease in our expected business activity. We also determined that certain financial covenants in our credit facility would need to reflect the revised business plan, including our reduced revenue forecasts. Consequently, we amended our credit
facility in October 2002.



We used an undiscounted forecasted cash flow model
to determine if there was an impairment based on the cash flows expected to be generated from the assets related to these facilities, and used a discounted cash flow model to measure the impairment. As a result of this analysis, we recorded an asset
impairment of approximately $12.7 million in the fourth quarter of 2002, based on the amount by which the carrying amount of these assets exceeded their fair value.



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



Results of Operations



Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002



Revenues.Revenues for the nine months ended September 30, 2003 were $19.5 million compared to $19.3 million for the nine months ended September 30, 2002, an
increase of $0.2 million. We generated revenues by providing transport, colocation and communications access management services to our customers. For the nine months ended September 30, 2003, we recognized $13.1 million in transport services, $4.4
million in colocation and other services and $2.0 million in communications access management services. For the nine months ended September 30, 2002, we recognized $12.0 million in transport services, $4.1 million in colocation and other services
and $3.2 million in communications access management services.



The increase in
revenues was due to additional transport and colocation revenues, as we provide additional services to our existing customers and broaden our customer base to include many international carriers. The increase was partially offset by decreases in
access revenue due to the elimination of certain license agreements that were terminated during 2002 and the termination of services due to the bankruptcies of certain customers. Reciprocal agreements accounted for $0.4 million, or 1.8%, of our
revenues in the nine months ended September 30, 2003, down from $0.7 million, or 3.4%, of our revenues for the first nine months of 2002.



Cost of Services.Cost of services for the nine months ended September 30, 2003 and September 30, 2002 were $6.2 and $5.4



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million, respectively. The increase of $0.8 million was primarily due to a non-recurring savings that we recorded in the nine months ended September 30,
2002. We negotiated certain non-recurring concessions from vendors in the amount of $0.7 million, which reduced cost of services for the nine months ended September 30, 2002. These items were expensed in prior periods and included in our cost of
services. Additionally, license fees and utilities associated with our network facilities have increased. The increase of license fees and utilities was partially offset by the elimination of the costs associated with certain reciprocal agreements
during 2002. Our cost of services included building license fees, maintenance and repair costs, rent expense at carrier hotel facilities and on-net and off-net buildings, and related utility costs. Reciprocal agreements accounted for $0.4 million of
our cost of services in the first nine months of 2003 and $0.7 million for the same period in 2002.



Selling, General and Administrative Expenses.Selling, general and administrative expenses for the nine months ended September 30, 2003 were $11.2 million compared to $12.0 million for the nine months ended
September 30, 2002. The decrease is a result of our cost savings initiative to reduce corporate overhead in line with our outlook for business activity. Cost reductions were realized in nearly all components of selling, general and administrative
expenses, including advertising and marketing costs, and travel and entertainment expenses. Decreases in overhead came in personnel costs, as we reduced headcount from 76 employees as of September 30, 2002 to 70 employees as of September 30, 2003.
Professional fees rose by $0.2 million due primarily to increased legal costs. Also during the nine months ended September 30, 2002, we recorded $0.5 million in bad debt expense. As the allowance for bad debts was considered sufficient, there were
no additional bad debt expenses recorded during the nine months ended September 30, 2003.



Stock Related Expense.This non-cash expense relates to the amortization of granting stock options below fair market value and granting restricted stock to our employees. Stock related expense for the nine
months ended September 30, 2003 and 2002 was approximately $0.1 million and $0.2 million, respectively.



Loss on Early Extinguishment of Debt.We recorded a non-cash charge of $9.7 million related to the partial extinguishment of our credit facility on January 10, 2003. We recorded a loss for the fair value given
in excess of the amount of debt extinguished and related pro-rata write-off of original issue discount and deferred financing charges. The fair value given in exchange for $13.4 million in long term debt was 4.6 million shares of common stock, the
issuance of 2.2 million warrants with an exercise price of $3.60 per share and the re-pricing of the exercise price of 3.0 million existing warrants from $3.60 to $0.03 per share. Also included in this loss is $1.0 million in fees associated with
the consummation of the recapitalization. As this extinguishment of debt represented approximately 38.1% of our outstanding balance, we wrote-off the same percentage of deferred financing charges and original issue discount of $0.9 million and $1.8
million, respectively, which is also included in our calculation of loss on early extinguishment of debt.



On March 17, 2003, the Company entered into an agreement to terminate all of its capital lease obligations for a payment of $85,000. This termination of its capital lease obligations resulted in a gain on early
extinguishment of debt of approximately $0.8 million, recorded in the nine months ended September 30, 2003. This amount partially offset the loss on early extinguishments of debt, described above. There was no loss on early extinguishments of debt
recorded for the nine months ended September 30, 2002.



Write-off of
Property, Plant and Equipment.During the nine months ended September 30, 2002, we recorded a write-off of property, plant and equipment of $0.7 million. We recorded this write-off of capital assets due to the termination of several property
leases and license agreements for network facilities. There was no cost to us to abandon these assets, nor do we expect to receive any proceeds or other consideration from the abandonment of these assets. We recorded no other reserves, accruals or
other liabilities related to this write-off. During the nine months ended September 30, 2003, we did not record a write-off of property, plant and equipment.



Depreciation and Amortization.Depreciation and amortization expense for the nine months ended September 30, 2003 was $6.6 million compared to $7.8 million of
depreciation and amortization expense for the nine months ended September 30, 2002. The decrease resulted from a reduction in the fixed assets base due to an impairment of property, plant and equipment that we recorded in 2002.



Interest Expense, Net.Interest expense, net for the nine months ended September 30,
2003 was $1.7 million compared to $6.6 million, net for the nine months ended September 30, 2002. Interest expense was generated as a result of borrowings under our senior secured credit facility and our outstanding capital lease obligations and was
lower as a result of the reduced amount of our indebtedness from our recapitalization transactions and lower interest rates.



Preferred Stock Dividends.For the nine months ended September 30, 2002, we accrued approximately $44,000 in non-cash dividends on our Series H preferred stock,
payable in the form of additional shares of preferred stock, based on the closing price per share of our common stock at the end of the period. All outstanding preferred stock was converted into common stock as part of our recapitalization during
the fourth quarter of 2002, and as a result there were no preferred stock dividends recorded for the nine months ended September 30, 2003.



Net Loss Applicable to Common Stockholders.We reported a net loss applicable to common stockholders of $15.3 million for the nine months ended September 30, 2003
compared to a net loss of $13.4 million for the nine months ended September 30, 2002. The



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increase is a result of the aforementioned changes in our operations and charges recorded in the first quarter of 2003 of $9.0 million related to early
extinguishments of debt. This increase was also offset in part by a decrease in interest expense from our recapitalization transactions and a decrease in depreciation expense due to an impairment recorded in 2002.



Three Months Ended September 30, 2003 Compared to Three Months Ended September 30, 2002



Revenues.Revenues for the three months ended September 30,
2003 were $6.7 million compared to $5.9 million for the three months ended September 30, 2002, an increase of $0.8 million. We generated revenues by providing transport, colocation and communications access management services to our customers. For
the three months ended September 30, 2003, we recognized $4.6 million in transport services, $1.5 million in colocation and other services and $0.6 million in communications access management services. For the three months ended September 30, 2002,
we recognized $3.7 million in transport services, $1.4 million in colocation and other services and $0.8 million in communications access management services.



The increase in revenues was due to additional transport and colocation revenues, as we provide additional services to our existing customers and broaden our customer
base to include many international carriers. The increase was partially offset by decreases in access revenue from the termination of services due to the bankruptcies of certain customers. Reciprocal agreements accounted for $0.1 million, or 1.8%,
of our revenues in the third quarter of 2003, compared to $0.1 million, or 2.0%, of our revenues for the third quarter of 2002.



Cost of Services.Cost of services for the three months ended September 30, 2003 and September 30, 2002 were $2.2 and $2.0 million, respectively. The increase of
$0.2 million was primarily due to increased license fees and utilities associated with our network facilities. Reciprocal agreements accounted for $0.1 million of our cost of services in the third quarter of 2003 and $0.1 million of our cost of
services in the third quarter of 2002.



Selling, General and Administrative
Expense.Selling, general and administrative expense for the three months ended September 30, 2003 were $3.8 million compared to $3.7 million for the three months ended September 30, 2002. Professional fees have increased by $0.2 million due to
increased legal costs.



Stock Related Expense.This non-cash expense
relates to the amortization of granting stock options below fair market value and granting restricted stock to our employees. Stock related expense recorded for the three months ended September 30, 2003 and 2002 was $0.1 million and $46,000,
respectively.



Depreciation and Amortization.Depreciation and
amortization expense for the three months ended September 30, 2003 was $2.2 million compared to $2.6 million of depreciation and amortization expense for the three months ended September 30, 2002. The decrease resulted from the impairment of
property, plant and equipment that we recorded in 2002.



Interest Expense,
Net.Interest expense, net for the three months ended September 30, 2003 was $0.5 million compared to $2.3 million, net for the three months ended September 30, 2002. Interest expense was generated as a result of borrowings under our senior
secured credit facility and our outstanding capital lease obligations and was lower as a result of the reduced amount of our indebtedness from our recapitalization transactions and lower interest rates.



Preferred Stock Dividends.For the three months ended September 30, 2002, we recorded
an accrual in the amount of approximately $13,000 in non-cash dividends on our Series H preferred stock based on the closing price per share at the end of period. All outstanding preferred stock was converted into common stock as part of our
recapitalization during the fourth quarter of 2002, and as a result there were no preferred stock dividends recorded during the three months ended September 30, 2003.



Net Loss Applicable to Common Stockholders.We reported a net loss applicable to common stockholders of $2.1 million for the three
months ended September 30, 2003, compared to a loss of $4.7 million for the three months ended September 30, 2002. The decrease is a result of reduction of interest expense due to the reduced amount of our indebtedness from our recapitalization and
increased revenues due to additional transport and colocation services recorded for the three months period ended September 30, 2003.



Liquidity and Capital Resources



To date, we have financed our operations through direct equity investments from our stockholders, the issuance of additional debt and equity securities in private
transactions and by arranging a senior secured credit facility with a group of lenders. We incurred a loss from operations and a net loss applicable to common stockholders for the first nine months of 2003 of $13.6 million and $15.3 million,
respectively, compared to a loss from operations and a net loss applicable to common stockholders of $6.8 million and $13.4 million, respectively, for the first nine months of 2002. During the first nine months of 2003, cash provided by operating
activities was $1.8 million, and cash purchases of property, plant and equipment were $1.8 million, compared to cash used to fund operations of $2.4 million and $2.1 million for cash purchases of property, plant and equipment for the first nine
months of 2002.



On May 12, 2003, we completed our 1-for-30 reverse stock split
previously approved by stockholders. The share information discussed below has been adjusted to reflect the reverse stock split.



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##### Table of Contents

During the nine months ended September 30, 2003, we received $2.2 million in net cash proceeds from financing activities,
primarily in connection with our recapitalization on January 10, 2003. During the nine months ended September 30, 2002, we received $2.4 million in net cash proceeds from financing activities. Proceeds from the issuance of equity securities during
the nine months ended September 30, 2003 were $3.5 million, of which $2.3 million is restricted cash used to collateralize outstanding letters of credit.



On January 10, 2003, we completed a series of transactions with the lenders under our credit facility. Pursuant to the terms of three debt exchange agreements between us
and each of Bank One, N.A., Nortel Networks Inc. and TD Securities (USA) Inc., we issued 4,617,151 shares of our common stock to these lenders at a price of $3.00 per share, in satisfaction of approximately $13.4 million of indebtedness,
representing all of the outstanding principal indebtedness and accrued interest owing to these lenders under our credit facility.



We also entered into a common stock purchase agreement, dated as of January 10, 2003, with certain investors, pursuant to which we issued to the investors in a private
offering an aggregate of 972,222 shares of common stock at a price of $3.60 per share, for an aggregate cash consideration of $3.5 million. Pursuant to the terms of the purchase agreement, we also issued warrants to purchase an additional 1,895,652
shares of common stock at an exercise price of $3.60 per share with a term of five years. Concurrently with the other transactions occurring on January 10, 2003, the investors also purchased 9,820,061 shares of common stock from the three lenders
departing from the credit facility in a privately negotiated transaction for an aggregate cash consideration of $9.0 million.



In connection with the purchase agreement with the investors, we entered into a registration rights agreement, dated as of January 10, 2003, with the investors, which
required us to file a resale registration statement with the Securities and Exchange Commission with respect to the registration of all of the shares of common stock issued under the purchase agreement and the shares that the investors purchased
from the departing lenders. These shares were included in the registration statement that was declared effective on February 20, 2003.



In connection with the transactions contemplated by the debt exchange agreements, we executed a ninth amendment to our senior secured credit agreement, pursuant to which,
among other things, the rights and obligations of the departing lenders under the senior secured credit facility terminated, subject to standard reinstatement and survival provisions. As a condition to the lenders entering into this amendment, we
agreed to reduce the exercise price of certain warrants previously issued to and held by the lenders to purchase approximately 2,544,974 shares of common stock from $3.60 per share to $0.03 per share. All of the repriced warrants were immediately
exercised by the lenders. In addition pursuant to a security agreement and a securities account control agreement, we agreed to deposit approximately $2.3 million in a restricted account as cash collateral to secure the assumption by Deutsche Bank
AG New York Branch of the departing lenders funding obligations for our outstanding letters of credit, which totaled approximately $6.1 million.



As of September 30, 2003, we had $22.3 million of indebtedness outstanding under our credit facility, which reflects the total amount available under the credit facility.
The weighted average interest rate on our outstanding borrowings under the facility is 4.78%, and we were in full compliance with all of the covenants contained in the credit agreement underlying the facility as of September 30, 2003. Non-compliance
with any of the covenants, requirements, or other terms and conditions under the credit agreement constitutes an event of default and potentially accelerates the outstanding balance of the credit facility for immediate payment.



On March 17, 2003, we entered into an agreement to terminate all of our capital lease
obligations for a payment of $85,000. This termination of our capital lease obligations resulted in a gain on early extinguishments of debt of approximately $0.8 million, recorded in the nine months ended September 30, 2003.



On June 13, 2003, we executed the loan documentation necessary to establish a subordinated
credit facility to provide the funding for the purchase of up to $3.0 million of our common stock, under a stock repurchase program. Repurchases may be made from time to time until December 31, 2003 through open market purchases, privately
negotiated transactions, block trades or otherwise. Repurchases are subject to the availability of stock, prevailing market conditions, trading price of the stock and our financial performance. The repurchase program does not obligate us to acquire
any specific number of shares and may be discontinued or suspended at any time. Any shares repurchased in the program will be treated as shares of common stock held in treasury. All purchases will be made in accordance with all applicable rules and
regulations, including Rule 10b-18 promulgated under the Securities Exchange Act of 1934.



In addition, we amended our senior credit facility in order to permit us to obtain the subordinated credit facility. As of September 30, 2003, there were no outstanding amounts under this subordinated credit facility
and no repurchases of common stock had been made.



On June 27, 2003, we
commenced our previously approved exchange offer for certain of our outstanding warrants. Holders of certain of our outstanding warrants were given the opportunity to exchange their currently outstanding warrants for shares of our common stock as if
the exercise price of their warrants was $0.001 per share if such warrants were exercised in full on a cashless basis. The offer was implemented to, among other things, satisfy certain of our obligations undertaken with respect to our
recapitalization transactions, which occurred in October 2002 and January 2003. The offer expired on August 29, 2003. The warrants issued in connection with the recapitalization transactions that we completed in October 2002 and January 2003 did not
participate in the offer to exchange. In connection with this offer we exchanged 695,828 warrants for 695,147 shares of common stock.



As of November 12, 2003, we had approximately 40.8 million shares of common stock outstanding, or approximately 46.9 million shares of common stock outstanding on a fully
diluted basis, assuming the exercise of all outstanding options and warrants.



We anticipate spending approximately $2.5 million in capital expenditures during 2003, primarily for the implementation of customer



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##### Table of Contents

orders. We have substantially completed the deployment of our FINs, carrier hotel facilities and metropolitan transport networks. We may expend additional
capital for the selected expansion of our network infrastructure, depending upon market conditions, customer demand and our liquidity and capital resources.



We believe that the completion of the transactions that constituted our recapitalization significantly enhanced our liquidity and improved our financial position. Under
our current operating plan, we do not anticipate requiring any external sources of capital to fund our operations in the coming year. However if actual results vary from the anticipated results of our operating plan, we may not be able to fund our
operating and investing activities with internally generated cash flows, and we may require external sources of capital. 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 finance the continued operations of our business. There can be no assurance that we will be able to successfully consummate any such financing on acceptable terms, if at all. We do not have any
off-balance sheet financing arrangements, nor do we anticipate entering into any.



Recent Accounting Pronouncements



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



In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements 4, 44 and 64, Amendment of FASB Statement 13, and Technical Corrections. SFAS
No. 145 rescinds the provisions of SFAS No. 4 that requires companies to classify certain gains and losses from debt extinguishments as extraordinary items, eliminates the provisions of SFAS No. 44 regarding transition to the Motor Carrier Act of
1980 and amends the provisions of SFAS No. 13 to require that certain lease modifications be treated as sale leaseback transactions. The provisions of SFAS No. 145 related to classification of debt extinguishment are effective for fiscal years
beginning after May 15, 2002. As a result of the adoption of this statement, we classified debt extinguishment costs incurred during the first quarter of 2003 within income from operations and have reclassified previously reported debt
extinguishments as such. The provisions of SFAS No. 145 related to lease modification are effective for transactions occurring after May 15, 2002.



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



In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosurean Amendment of FASB Statement No.
123, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of Statement No. 123 to
require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The adoption of the provisions of SFAS No. 148
did not have a material impact on our financial position or results of operations.



In April 2003, the FASB issued Statement No. 149, Amendments of Statement 133 on Derivative Instruments and Hedging Activities (SFAS No. 149). SFAS No. 149 amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities. The changes included in SFAS No. 149 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. In particular, SFAS No. 149 (1) clarifies under what circumstances a contract
with an initial net investment meets the characteristic of a derivative



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##### Table of Contents

discussed in paragraph 6(b) of SFAS No. 133, (2) clarifies when a derivative contains a financing component, (3) amends the definition of an underlying
derivative to conform it to language used in FIN No. 45, and (4) amends certain other existing pronouncements. Those changes will result in more consistent reporting of contracts as either derivatives or hybrid instruments. SFAS No. 149 is effective
for contracts entered into or modified after June 30, 2003, with certain exceptions for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 did not have a material impact on our results of operations, financial
position or cash flows.



In June 2003, the FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (SFAS No. 150). SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. This statement requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS No.150 is effective for financial instruments
entered into or modified after May 31, 2003, and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material impact on our consolidated financial statements.



In November 2002, the FASB issued FIN No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and rescission of FASB Interpretation No. 34. FIN No. 45 elaborates on the
disclosures to be made by the guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. The initial recognition and measurement provisions of FIN 45 are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. The adoption of this interpretation did not have a material impact on our financial position or results of operations.



In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest Entities (FIN No. 46). FIN No. 46
addresses whether certain types of entities, referred to as variable interest entities (VIEs), should be consolidated in a companys financial statements. A VIE is an entity that either (1) has equity investors that lack certain
essential characteristics of a controlling financial interest (including the ability to control the entity, the obligation to absorb the entitys expected losses and the right to receive the entitys expected residual returns), or (2)
lacks sufficient equity to finance its own activities without financial support provided by other entities, which in turn would be expected to absorb at least some of the expected losses of the VIE. An entity should consolidate a VIE if it stands to
absorb a majority of the VIEs expected losses or to receive a majority of the VIEs expected residual returns. We have evaluated the impact of the adoption of FIN No. 46, effective January 1, 2003, and the adoption did not have a material
impact on our consolidated financial position or consolidated results of operations.



Certain Facts That May Affect Future Results of Operations



This report contains certain forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such statements are based on managements current expectations and are subject to a number of
factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Investors are cautioned that there can be no assurance that actual results or business conditions will not differ
materially from those projected or suggested in such forward-looking statements as a result of various factors, including, but not limited to, those described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2002. As a
result, our future operations involve a high degree of risk. Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.



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, 2003, we had borrowed $22.3 million under our credit facility, with a current weighted average interest rate of 4.78%.



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



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



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##### Table of Contents

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 adequate and effective to ensure that material information relating to FiberNet,
including our consolidated subsidiaries, was made known to them by others within those entities, particularly during the period in which this Quarterly Report on Form 10-Q was being prepared.



Changes in Internal Controls. There were no significant changes in our internal
controls over financial reporting or in other factors that could significantly affect these controls during the quarter ended September 30, 2003, nor were there any significant deficiencies or material weaknesses in our internal controls over
financial reporting. Accordingly, no corrective actions were required or undertaken.



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##### Table of Contents

Table of Contents



PART II



OTHER INFORMATION



Item 1. Legal Proceedings



None.



Item 2. Changes in Securities and Use of Proceeds



None



Item 3. Defaults Upon Senior Securities



None.



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



None.



Item 5. Other Information



None.



Item 6. Exhibits and Reports on Form 8-K



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



Exhibit
10.58  Amendment of Lease, between Westport Communications, LLC and us, dated as of October 31, 2003



Exhibit 31.1  Section 302 Certification of Chief Executive Officer



Exhibit 31.2  Section 302 Certification of Chief Financial Officer



Exhibit 32  Section 906 Certification



(b) The following reports were filed on Form 8-K during the quarter ended September 30, 2003.



On July 31, 2003 we filed a current report on Form 8-K, under Item 5, announcing the resignation of a director and the appointment of a new director.



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##### Table of Contents

Table of Contents



SIGNATURES



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



Date: November 12, 2003



FIBERNET TELECOM GROUP, INC.By:

/ s / JON A. DELUCAName:

Jon A. DeLucaTitle:

Senior Vice PresidentFinance Chief Financial Officer*


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|* | 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.



CONSOLIDATED BALANCE SHEETS



(DOLLARS IN
000S)



|                                                                                                                                                                                      |  | September 30,2003 |          |   | December 31,2002 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ---------------- | -
|                                                                                                                                                                                      |  | (unaudited)       |          |   | (audited)        |  
|ASSETS                                                                                                                                                                                |  |                   |          |   |                  |  
|Current Assets:                                                                                                                                                                       |  |                   |          |   |                  |  
|Cash and cash equivalents                                                                                                                                                             |  | $                 | 3,722    |   |                  | $
|Restricted cash                                                                                                                                                                       |  |                   | 2,333    |   |                  |  
|Accounts receivable, net of allowance of $773 and $1,005 at September 30, 2003 and December 31, 2002, respectively                                                                    |  |                   | 3,372    |   |                  |  
|Prepaid expenses and other                                                                                                                                                            |  |                   | 745      |   |                  |  
|                                                                                                                                                                                      |  |                   |          |   |                  |  
|Total current assets                                                                                                                                                                  |  |                   | 10,172   |   |                  |  
|Property, plant and equipment, net                                                                                                                                                    |  |                   | 90,093   |   |                  |  
|Other Assets:                                                                                                                                                                         |  |                   |          |   |                  |  
|Goodwill                                                                                                                                                                              |  |                   | 7,509    |   |                  |  
|Deferred charges, net of accumulated amortization of $1,256 and $1,405 at September 30, 2003 and December 31, 2002,
respectively                                                      |  |                   | 2,088    |   |                  |  
|Other assets                                                                                                                                                                          |  |                   | 251      |   |                  |  
|                                                                                                                                                                                      |  |                   |          |   |                  |  
|Total other assets                                                                                                                                                                    |  |                   | 9,848    |   |                  |  
|                                                                                                                                                                                      |  |                   |          |   |                  |  
|TOTAL ASSETS                                                                                                                                                                          |  | $                 | 110,113  |   |                  | $
|                                                                                                                                                                                      |  |                   |          |   |                  |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                  |  |                   |          |   |                  |  
|Current Liabilities:                                                                                                                                                                  |  |                   |          |   |                  |  
|Accounts payable                                                                                                                                                                      |  | $                 | 3,531    |   |                  | $
|Accrued expenses                                                                                                                                                                      |  |                   | 4,108    |   |                  |  
|Deferred revenues                                                                                                                                                                     |  |                   | 5,539    |   |                  |  
|Notes payablecurrent portion                                                                                                                                                         |  |                   | 2,790    |   |                  |  
|Capital lease obligationcurrent portion                                                                                                                                              |  |                   |         |   |                  |  
|                                                                                                                                                                                      |  |                   |          |   |                  |  
|Total current liabilities                                                                                                                                                             |  |                   | 15,968   |   |                  |  
|                                                                                                                                                                                      |  |                  
|Long-Term Liabilities:                                                                                                                                                                |  |                   |          |   |                  |  
|Notes payable, less original issue discount of $2,486 and $4,880 at September 30, 2003 and December 31, 2002,
respectively                                                            |  |                   | 17,047   |   |                  |  
|Capital lease obligation                                                                                                                                                              |  |                   |         |   |                  |  
|                                                                                                                                                                                      |  |                   |          |   |                  |  
|Total liabilities                                                                                                                                                                     |  |                   | 33,015   |   |                  |  
|                                                                                                                                                                                      |  |                  
|Stockholders Equity:                                                                                                                                                                 |  |                   |          |   |                  |  
|Common stock, $0.001 par value, 2,000,000,000 shares authorized and 40,624,730 and 26,405,482 shares issued and outstanding at
September 30, 2003 and December 31, 2002, respectively |  |                   | 41       |   |                  |  
|Additional paid-in-capital and other                                                                                                                                                  |  |                   | 430,290  |   |                  |  
|Deferred compensation                                                                                                                                                                 |  |                   | (5,229   | ) |                  |  
|Accumulated deficit                                                                                                                                                                   |  |                   | (348,004 | ) |                  |  
|                                                                                                                                                                                      |  |                   |          |   |                  |  
|Total stockholders equity                                                                                                                                                            |  |                   | 77,098   |   |                  |  
|                                                                                                                                                                                      |  |                   |          |   |                  |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                            |  | $                 | 110,113  |   |                  | $
|                                                                                                                                                                                      |  |                   |          |   |                  |  



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



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##### Table of Contents

FIBERNET TELECOM GROUP, INC.



CONSOLIDATED STATEMENTS OF OPERATIONS



(UNAUDITED)



(DOLLARS IN 000S, EXCEPT
PER SHARE AMOUNTS)



|                                                                            |  | Nine Months EndedSeptember 30, |        
|--------------------------------------------------------------------------- |  | ------------------------------ | -------
|                                                                            |  | 2003                           |        
|Revenues                                                                    |  | $                              | 19,508 
|                                                                            |  |                                |        
|Operating expenses:                                                         |  |                                |        
|Cost of services (exclusive of items shown separately below)                |  |                                | 6,209  
|Selling, general and administrative expense excluding stock related expense |  |                                | 11,225 
|Stock related expense for selling, general, and administrative matters      |  |                                | 89     
|Loss on early extinguishment of debt, net                                   |  |                                | 8,951  
|Write-off of property, plant and equipment                                  |  |                                |       
|Depreciation and amortization                                               |  |                                | 6,602  
|                                                                            |  |                                |        
|Total operating expenses                                                    |  |                                | 33,076 
|                                                                            |  |                                |        
|Loss from operations                                                        |  |                                | (13,568
|Interest expense, net                                                       |  |                                | (1,710 
|                                                                            |  |                                |        
|Net loss                                                                    |  |                                | (15,278
|Preferred stock dividends                                                   |  |                                |       
|                                                                            |  |                                |        
|Net loss applicable to common stockholders                                  |  | $                              | (15,278
|                                                                            |  |                                |        
|Net loss applicable to common stockholders per sharebasic and diluted      |  | $                              | (0.42  
|Weighted average common shares outstandingbasic and diluted                |  |                                | 36,016 



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



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##### Table of Contents

FIBERNET TELECOM GROUP, INC.



CONSOLIDATED STATEMENTS OF OPERATIONS



(UNAUDITED)



(DOLLARS IN 000S, EXCEPT
PER SHARE AMOUNTS)



|                                                                            |  | Three Months EndedSeptember 30, |       
|--------------------------------------------------------------------------- |  | ------------------------------- | ------
|                                                                            |  | 2003                            |       
|Revenues                                                                    |  | $                               | 6,680 
|                                                                            |  |                                 |       
|Operating expenses:                                                         |  |                                 |       
|Cost of services (exclusive of items shown separately below)                |  |                                 | 2,152 
|Selling, general and administrative expense excluding stock related expense |  |                                 | 3,786 
|Stock related expense for selling, general, and administrative matters      |  |                                 | 89    
|Depreciation and amortization                                               |  |                                 | 2,223 
|                                                                            |  |                                 |       
|Total operating expenses                                                    |  |                                 | 8,250 
|                                                                            |  |                                 |       
|Loss from operations                                                        |  |                                 | (1,570
|Interest expense, net                                                       |  |                                 | (542  
|                                                                            |  |                                 |       
|Net loss                                                                    |  |                                 | (2,112
|Preferred stock dividends                                                   |  |                                 |      
|                                                                            |  |                                 |       
|Net loss applicable to common stockholders                                  |  | $                               | (2,112
|                                                                            |  |                                 |       
|Net loss applicable to common stockholders per sharebasic and diluted      |  | $                               | (0.05 
|Weighted average common shares outstandingbasic and diluted                |  |                                 | 38,663



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



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##### Table of Contents

FIBERNET TELECOM GROUP, INC.



CONSOLIDATED STATEMENTS OF CASH FLOWS



(UNAUDITED)



(DOLLARS IN 000S)



|                                                                                          |  | Nine Months EndedSeptember 30, |        
|----------------------------------------------------------------------------------------- |  | ------------------------------ | -------
|                                                                                          |  | 2003                           |        
|Cash flows from operating activities:                                                     |  |                                |        
|Net loss applicable to common stockholders                                                |  | $                              | (15,278
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |                                |        
|Depreciation and amortization                                                             |  |                                | 6,602  
|Preferred stock dividends                                                                 |  |                                |       
|Stock related expense                                                                     |  |                                | 89     
|Write-down of property plant and equipment                                                |  |                                |       
|Loss on early extinguishment of debt, non-cash portion                                    |  |                                | 8,899  
|Other non-cash items                                                                      |  |                                | 1,373  
|Change in assets and liabilities:                                                         |  |                                |        
|Increase in accounts receivable, prepaid expenses and other assets                        |  |                                | (427   
|Increase in accounts payable, accrued expenses and deferred revenues                      |  |                                | 542    
|                                                                                          |  |                                |        
|Cash provided by (used in) operating activities                                           |  |                                | 1,800  
|Cash flows from investing activities:                                                     |  |                                |        
|Capital expenditures                                                                      |  |                                | (1,775 
|Increase in restricted cash                                                               |  |                                | (2,333 
|                                                                                          |  |                                |        
|Cash used in investing activities                                                         |  |                                | (4,108 
|                                                                                          |  |                                |        
|Cash flows from financing activities:                                                     |  |                                |        
|Payments of financing fees                                                                |  |                                | (1,173 
|Proceeds from debt financings                                                             |  |                                |       
|Proceeds from issuance of equity securities                                               |  |                                | 3,500  
|Proceeds from subordinated notes payable                                                  |  |                                |       
|Repayment of capital lease obligation                                                     |  |                                | (85    
|                                                                                          |  |                                |        
|Cash provided by financing activities                                                     |  |                                | 2,242  
|                                                                                          |  |                                |        
|Net decrease in cash and cash equivalents                                                 |  |                                | (66    
|                                                                                          |  |                                |        
|Cash and cash equivalents at beginning of period                                          |  |                                | 3,788  
|Cash and cash equivalents at end of period                                                |  | $                              | 3,722  
|                                                                                          |  |                                |        
|Supplemental disclosures of cash flow information:                                        |  |                                |        
|Interest paid                                                                             |  | $                              | 274    
|Non-cash financing activities:                                                            |  |                                |        
|Conversion of accrued interest into notes payable                                         |  | $                              | 385    
|Conversion of notes payable into common stock                                             |  |                                | 13,382 



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



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Table of Contents



FIBERNET TELECOM GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(UNAUDITED)



1. ORGANIZATION AND OPERATIONS



FiberNet Telecom Group, Inc. (hereinafter referred to as the Company or
FiberNet) is an optical, facilities-based communications service provider focused on providing wholesale broadband connectivity for data, voice and video transmission on its state-of-the-art fiber optic networks in major metropolitan
areas. The Company offers an advanced high bandwidth, fiber optic solution to support the demand for network capacity in the intra-city market, or local loop. The Company has established its primary operations in the New York and Los Angeles
metropolitan areas.



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



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



The Companys operations and ability to grow may be affected by numerous factors, including the state of the telecommunications
industry, the difficulty inherent in operating an early-stage company in a new and rapidly evolving market; its history of operating losses and cash flow deficits; its limited financial resources and uncertainty as to the availability of additional
capital to fund its operations on acceptable terms, if at all; its success in maintaining carrier hotel lease agreements and license agreements with building owners and in obtaining additional agreements; the financial difficulties and instability
that its customers and vendors are experiencing; the lack of growth in demand for its services or the failure to manage the growth of its operations; the frequency of service interruptions on its networks and the scalability and reliability of its
networks; the potential occurrence of a natural disaster of 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. The failure of the Company to achieve certain operational results would violate certain debt covenants thereby potentially accelerating the outstanding balance of certain indebtedness for immediate payment.



The Company believes that the completion of the transactions that constituted
its recapitalization, as discussed in Note 4, significantly enhanced its liquidity and improved its financial position. Under FiberNets current operating plan, it does not anticipate requiring any external sources of capital to fund its
operations in the coming year. However if actual results vary from the anticipated results of its operating plan, it may not be able to fund operating and investing activities with internally generated cash flows, and the Company may require
external sources of capital. From time to time, FiberNet may consider private or public sales of additional equity or debt securities and other financings, depending upon market conditions, in order to finance the continued operations of its
business. There can be no assurance that the Company will be able to successfully consummate any such financing on acceptable terms, or at all. The Company does not have any off-balance sheet financing arrangements, nor does it anticipate entering
into any.



2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



Basis of Presentation



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



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



Use of Estimates



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



Cash
and Cash Equivalents



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



Property, Plant and Equipment



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



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



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



Impairment of Long-Lived Assets



The
Company reviews the carrying value of long-lived assets for impairment whenever events and circumstances indicate the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual
disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss would be recognized equal to an amount by which the carrying value exceeds the fair value of the assets.



On January 1, 2002, the Company adopted Statement of Financial Accounting Standard
(SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144). SFAS No. 144 replaced SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed of (SFAS No. 121), and establishes accounting and reporting standards for long-lived assets to be disposed of by sale. SFAS No. 144 requires that long-lived assets be measured at the lower of carrying amount or fair
value less cost to sell. SFAS No. 144 also broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity that will be eliminated from the ongoing
operations of the entity in a disposal transaction. In 2003, the Company reviewed its long-lived assets for impairment in accordance with SFAS No. 144 and determined that no events or changes in circumstances have indicated that asset carrying
values were no longer recoverable and that no impairment charge was necessary.



Revenue Recognition



FiberNet generates revenues from selling
network capacity and related services to other communications service providers. The Company recognizes revenues when earned as services are provided throughout the life of each contract with a customer. The majority of the Companys revenues
are generated on a monthly recurring basis under contracts of various lengths, ranging from one month to fifteen years. Revenue is recognized over the service contract period for all general services. Deferred revenues consist primarily of payments
received in advance of revenue being earned under the service contracts. Some of its customers are obligated to make minimum payments for the utilization of its networks and facilities. Customers may elect to purchase additional services in excess
of minimum contractual requirements.



Revenues are derived from three general
types of services:



Transport services. FiberNets transport services
include the offering of broadband circuits on its metropolitan transport networks



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and FINs. Over the Companys metropolitan transport networks, it can provision circuits from one of its carrier hotel facilities to another carrier
hotel facility or to an on-net building via an interconnection with its FIN in that building. The Company can also provision circuits vertically between floors in a carrier hotel facility or an on-net building. In 2003, the Company also initiated a
new type of transport service offering to provide its customers with circuits on networks that it does not own. The Company intends to sell this connectivity to its customers and purchase the underlying circuits from other wholesale
telecommunications carriers.



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



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



As of September 30, 2003 the Company had one reciprocal agreement. During the nine months
ended September 30, 2002 the Company had two such reciprocal agreements, one of which was terminated during that period. The services provided and obtained through this agreement were priced at fair market value as of the date of the agreement and
are included in revenues and cost of services in the accompanying consolidated statements of operations. The Company recorded revenues from these reciprocal agreements for transport services and colocation services in the amount of approximately
$0.4 million and $0.7 million for the nine months ended September 30, 2003 and 2002, respectively, and $0.1 million and $0.1 million for the three month ended September 30, 2003 and September 30, 2002, respectively. The Company leased colocation
facilities under these agreements. The total amounts expensed for services rendered under the reciprocal agreements for the nine months ended September 30, 2003 and September 30, 2002 were approximately $0.4 million and $0.7 million, respectively,
and $0.1 million and $0.1 million for the three months ended September 30, 2003 and September 30, 2002, respectively.



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.



Goodwill



Cost in excess of net assets of an acquired business, principally goodwill, is accounted for
under SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 142, which is applicable for fiscal years beginning after
December 15, 2001. SFAS No. 142, which was adopted by the Company effective January 1, 2002, requires that goodwill and certain intangible assets resulting from business combinations entered into prior to June 30, 2001 no longer be amortized, but
instead be reviewed for recoverability. The Company performs its annual impairment test in December, and there could be a potential impairment of goodwill in the the fourth quarter.



Deferred Charges



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



Earnings Per Share



Basic earnings per
share have been computed using the weighted average number of shares 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. Dilutive options, warrants and other securities did not have an effect on the computation of diluted earnings per share for the nine months and the six months ended September 30, 2003 and 2002, as they were
anti-dilutive due to the fact that the Company was in a loss position for the respective periods.



On May 12, 2003, the Company completed its 1-for-30 reverse stock split previously approved by stockholders. The earnings per share information as presented in these financial statements has been adjusted to reflect
the reverse stock split.



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##### Table of Contents

Concentration of Credit Risk



The Company has concentration of credit risk among its customer base. The Company performs ongoing credit evaluations of its customers
financial conditions. As of September 30, 2003, there were no individual customers that accounted for over 10% of the Companys total accounts receivable, and as of December 31, 2002, one customer accounted for 15.2% of the Companys total
accounts receivable.



For the nine months ended September 30, 2002, one
customer accounted for 11.0% of the Companys total revenues. For the nine months ended September 30, 2003, there were no individual customers that accounted for over 10% of the Companys total revenues. For the three months ended
September 30, 2002, two customers in the aggregate accounted for 21.1% of the Companys total revenues. For the three months ended September 30, 2003, there were no individual customers that accounted for over 10% of the Companys total
revenues.



As of September 30, 2003, the Company had an allowance for doubtful
accounts of $0.7 million. During the nine months ended September 30, 2003, the Company wrote-off $0.3 million of accounts receivable which reduced the allowance for doubtful accounts. As the allowance for bad debts was considered sufficient, there
were no additional bad debt expenses recorded during the nine months ended September 30, 2003. For the nine months ended September 30, 2002, the Company recorded $0.5 million of bad debt expense.



Equity Incentive Plan



The Company accounts for stock-based employee compensation arrangements in accordance with provisions of Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees, and complies with the disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation as amended by SFAS No. 148 (SFAS No.
123). Under APB Opinion No. 25, compensation expense is based on the difference, if any, on the date of grant, between the fair value of the Companys stock and the exercise price. The Company accounts for stock options issued to
non-employees in accordance with the provisions of SFAS No. 123.



The resulting
expense is charged against operations ratably over the vesting period of the options.



|                                                                                                                             |  | Nine Months EndedSeptember 30, |         |   | Three Months EndedSeptember 30, |  
|---------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ------------------------------- | -
|(Dollars in thousands, except per share amounts)                                                                             |  | 2003                           |         |   | 2002                            |  
|Net loss applicable to common stockholders, as reported                                                                      |  | $                              | (15,278 | ) |                                 | $
|Add: Stock-based employee compensation expense included in reported net loss, net of related tax effects                     |  |                                |        |   |                                 |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method, net of related tax
effects |  |                                | (3,104  | ) |                                 |  
|                                                                                                                             |  |                                |         |   |                                 |  
|Pro forma net loss                                                                                                           |  | $                              | (18,382 | ) |                                 | $
|                                                                                                                             |  |                                |         |   |                                 |  
|Net loss per share applicable to common stockholders:                                                                        |  |                                |         |   |                                 |  
|As reported: Basic and diluted                                                                                               |  | $                              | (0.42   | ) |                                 | $
|Pro forma: Basic and diluted                                                                                                 |  | $                              | (0.51   | ) |                                 | $



On July 30, 2003, the Company issued
4.7 million shares of restricted stock and 0.4 million stock options at an exercise price of $1.13 per share to employees and directors under its Equity Incentive Plan. All shares of restricted stock vest on the tenth anniversary of the grant date,
and the stock options vest in three equal annual installments, commencing on July 30, 2004, subject to the terms and conditions of the Equity Incentive Plan. The Company recorded $5.4 million of deferred compensation for this issuance.



Accounting for Income Taxes



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



Accounting for Derivative Instruments



The Company accounts for derivative instruments in accordance with SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended (SFAS No. 133). SFAS No. 133 establishes standards of accounting and reporting for derivative



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instruments and hedging activities, and requires that all derivatives be recognized on the balance sheet at fair value. Changes in the fair value of
derivatives that do not meet the hedge accounting criteria are to be reported in earnings. SFAS No. 133 did not have a material impact on the Companys consolidated financial statements, as the Company did not have any derivative instrument
contracts outstanding as of December 31, 2002, or September 30, 2003.



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



Reclassifications



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



Segment Reporting



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



Recent Accounting Pronouncements



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



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



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



In April 2003, the FASB issued Statement No. 149, Amendments of Statement 133 on Derivative Instruments and Hedging Activities (SFAS No. 149).
SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133). The changes included in SFAS No. 149 improve financial reporting by requiring that contracts with comparable characteristics be
accounted for similarly. In particular, SFAS No. 149 (1) clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative discussed in paragraph 6(b) of SFAS No. 133, (2) clarifies when a
derivative contains a financing component, (3) amends the definition of an underlying to conform it to language used in FIN No. 45, and (4) amends certain other existing pronouncements. Those changes will result in more consistent reporting of
contracts as either derivatives or hybrid instruments. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, with certain exceptions for hedging relationships designated after June 30, 2003. The adoption of SFAS No.
149 did not have a material impact on the Companys results of operations, financial position or cash flows.



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In June 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of
Both Liabilities and Equity (SFAS No. 150). SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement requires
that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at
the beginning of the first interim period beginning after June 15, 2003. The adoption of this statement did not have a material impact on the Companys consolidated financial statements.



In November 2002, the FASB issued Financial Interpretation Number (FIN) 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others (FIN 45), an interpretation of FASB Statements No. 5, 57 and 107 and rescission of FASB
Interpretation No. 34. FIN 45 elaborates on the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. The initial recognition and measurement
provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of this statement did not have a material impact on the Companys financial position or results of operations.



In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest
Entities (FIN 46). FIN 46 addresses whether certain types of entities, referred to as variable interest entities (VIEs), should be consolidated in a companys financial statements. A VIE is an entity that either (1) has
equity investors that lack certain essential characteristics of a controlling financial interest (including the ability to control the entity, the obligation to absorb the entitys expected losses and the right to receive the entitys
expected residual returns), or (2) lacks sufficient equity to finance its own activities without financial support provided by other entities, which in turn would be expected to absorb at least some of the expected losses of the VIE. An entity
should consolidate a VIE if it stands to absorb a majority of the VIEs expected losses or to receive a majority of the VIEs expected residual returns. The Company has evaluated the impact of the adoption of FIN 46, effective January 1,
2003, and the adoption did not have a material impact on the Companys consolidated financial position or consolidated results of operations.



3. PROPERTY, PLANT AND EQUIPMENT



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



|                                     |  | September 30,2003 |         |   | December 31,2002 |  
|------------------------------------ |  | ----------------- | ------- | - | ---------------- | -
|                                     |  | (unaudited)       |         |   | (audited)        |  
|Computer software                    |  | $                 | 200     |   |                  | $
|Computer equipment                   |  |                   | 253     |   |                  |  
|Leasehold improvements               |  |                   | 31      |   |                  |  
|Office equipment and furniture       |  |                   | 146     |   |                  |  
|Network equipment and infrastructure |  |                   | 115,232 |   |                  |  
|                                     |  |                   |         |   |                  |  
|Subtotal                             |  |                   | 115,862 |   |                  |  
|Accumulated depreciation             |  |                   | (25,769 | ) |                  |  
|                                     |  |                   |         |   |                  |  
|Property, plant and equipment, net   |  | $                 | 90,093  |   |                  | $
|                                     |  |                   |         |   |                  |  



Depreciation expense on property,
plant and equipment was $6.6 million and $7.8 million for the nine months ended September 30, 2003 and 2002, respectively, and $2.2 million and $2.6 million for the three months ended September 30, 2003 and 2002, respectively.



4. SIGNIFICANT EVENTS



On January 10, 2003, the Company completed certain transactions with the lenders under its credit facility. Pursuant to the terms of three
debt exchange agreements between the Company and each of Bank One, N.A., Nortel Networks Inc. and TD Securities (USA) Inc., the Company has issued 4,617,151 shares of its common stock to these three lenders at a price of $3.00 per share, in
satisfaction of approximately $13.4 million of indebtedness, representing all of the outstanding principal indebtedness and accrued interest owing to these departing lenders under the Companys credit agreement.



The Company also entered into a common stock purchase agreement, dated as of January 10,
2003, with certain investors, pursuant to which the Company issued to the investors in a private offering an aggregate of 972,222 shares of common stock for a price of $3.60 per share, for an aggregate cash consideration of $3.5 million. Pursuant to
the terms of the investor purchase agreement, the Company also issued to such investors warrants to purchase an additional 1,895,652 shares of common stock at an exercise price of $3.60 per share with a term of five years. The Company recorded a
$0.7 million charge to additional paid-in-capital which represented the costs incurred to complete this offering. Concurrently with the transactions described above, the investors also purchased 9,820,061 shares of common stock from the departing
lenders in a privately negotiated transaction for an aggregate cash consideration of $9.0 million.



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In connection with the investor purchase agreement, the Company entered into a registration rights agreement, dated as of
January 10, 2003, with the investors which required the Company to file a resale registration statement with the Securities and Exchange Commission with respect to the registration of all of the shares of common stock issued under the investor
purchase agreement and the shares that the investors purchased from the departing lenders. This registration statement was declared effective on February 20, 2003.



In connection with the transactions contemplated by the debt exchange agreements, the Company and the lenders executed a ninth amendment to
the senior secured credit agreement, pursuant to which, among other things, the rights and obligations of the departing lenders under the senior secured credit facility terminated, subject to standard reinstatement and survival provisions. As a
condition to the lenders entering into this amendment, the Company agreed to reduce the exercise price of certain warrants previously issued to and held by the lenders to purchase approximately 2,544,974 shares of common stock from $3.60 per share
to $0.03 per share. All of the repriced warrants were immediately exercised by the lenders. In addition pursuant to a security agreement and a securities account control agreement, the Company agreed to deposit approximately $2.3 million in a
restricted account as cash collateral to secure the assumption by Deutsche Bank AG New York Branch of the departing lenders funding obligations for the Companys outstanding letters of credit, which total approximately $6.1 million.



The Company evaluated the above transactions under the guidance of Financial
Technical Bulletin (FTB) No. 80-1 Early Extinguishment of Debt through Exchange for Common or Preferred Stock. During January 2003, the Company recorded a charge of $9.7 million related to the early extinguishment of debt for
the difference between the net carrying amount of debt that was extinguished and the reacquisition price represented by the total fair market value of the common stock issued and the fair market value of the warrants that were repriced and
exercised. The fair value given in exchange for $13.4 million in long term debt was 4.6 million shares of common stock with a fair market value of $3.60 per share on the date of issuance, the issuance of 2.2 million warrants with an exercise price
of $3.60 per share with terms between one and five years valued at $7.9 million using the Black-Scholes option pricing model on the date of issuance, and the repricing of 3.0 million existing warrants from $3.60 to $0.03 valued at $2.0 million using
the Black-Scholes option pricing model on the date of issuance. Also included in this loss is $1.0 million in fees associated with the consummation of the recapitalization. As this extinguishment of debt represented approximately 38.1% of the
outstanding balance, the Company wrote-off the same percentage of deferred financing charges and original issue discount of $0.9 million and $1.8 million, respectively, which is also included in its calculation of loss on early extinguishment of
debt. The Company also recorded certain non-recurring expenses incurred in connection with the recapitalization transactions. These expenses included compensation to financial advisors in the form of a cash fee of approximately $0.8 million and the
issuance of 0.3 million warrants with an exercise price of $0.03 and with a term of five years valued at $1.2 million using the Black-Scholes option pricing model on the date of issuance.



As of September 30, 2003, the Company had $22.3 million of indebtedness outstanding under its senior secured credit facility which reflected
the total amount available under the credit facility. As of such date, the three remaining lenders under the Companys credit facility owned approximately 30% of the outstanding shares of the Companys common stock.



In February 2003, the Company settled certain litigation matters by issuing approximately
43,000 shares of common stock, 0.2 million warrants to purchase common stock with an exercise price of $0.03 per share and a term of five years and approximately 0.2 million warrants to purchase common stock with an exercise price of $3.60 per share
and a term of five years. The Company also repriced 17,000 of existing warrants to purchase common stock from exercise prices of $15.00 and $20.10 per share to $0.03 per share. These warrants also have a term of five years. The Company had
previously accrued for the settlement of these certain outstanding litigation matters, and recorded a $0.6 million expense in selling, general and administration in the fourth quarter of the year ended December 31, 2002.



On March 17, 2003, the Company entered into an agreement to terminate all of its capital
lease obligations for a payment of $85,000. This termination of its capital lease obligations resulted in a gain on early extinguishment of debt of approximately $0.8 million, recorded in the three months ended March 31, 2003. This amount partially
offset the loss on early extinguishments of debt, discussed above.



As of April
1, 2003, FiberNet amended a real estate lease to reduce the rent payments thereunder indefinitely. Upon reaching a revenue threshold, the rent expense will increase by approximately $3.0 million on an annual basis. Due to the uncertainty in
forecasting future revenues, the Company does not have a reasonable basis to estimate when the revenue threshold will be reached and has not accrued for a contingent increase in rent as of September 30, 2003.



In a definitive Information Statement filed on April 17, 2003, a majority of the
Companys stockholders approved the amendment and restatement of the Companys Equity Incentive Plan (the Plan) to, among other things (i) increase the number of shares available for awards under the Plan to 5,500,000, (ii)
eliminate a provision that limited awards of restricted stock to 10% of the shares available for issuance under the Plan, and (iii) increase to 3,333,333 the maximum number of shares of common stock subject to awards that may be granted to an
individual in any given fiscal year. The Information Statement became effective on May 7, 2003.



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On May 12, 2003, the Company completed its 1-for-30 reverse stock split previously approved by stockholders. The
financial statements have been adjusted to reflect the reverse stock split as of September 30, 2003.



On June 13, 2003, the Company executed the loan documentation necessary to establish a subordinated credit facility to provide the funding for the purchase of up to $3.0 million of the Companys common stock,
under a stock repurchase program. Repurchases may be made from time to time until December 31, 2003 through open market purchases, privately negotiated transactions, block trades or otherwise. Repurchases are subject to the availability of stock,
prevailing market conditions, trading price of the stock and the Companys financial performance. The repurchase program does not obligate the Company to acquire any specific number of shares and may be discontinued or suspended at any time.
Any shares repurchased in the program will be treated as shares of common stock held in treasury. All purchases will be made in accordance with all applicable rules and regulations, including Rule 10b-18 promulgated under the Securities Exchange Act
of 1934. In addition, the Company amended its senior credit facility. As of September 30, 2003, there were no outstanding amounts under this subordinated credit facility and no repurchases of common stock had been made.



On June 27, 2003, the Company commenced its previously approved exchange offer for its
outstanding warrants. Holders of certain outstanding warrants were given the opportunity to exchange their currently outstanding warrants for shares of the Companys common stock as if the exercise price of their warrants is $0.001 per share if
such warrants were exercised in full on a cashless basis. The offer was implemented to, among other things, satisfy certain of our obligations undertaken with respect to our recapitalization transactions, which occurred in October 2002 and January
2003. The offer expired on August 29, 2003. The warrants issued in connection with the recapitalization transactions we completed in October 2002 and January 2003 did not participate in the offer to exchange. In connection with this offer we
exchanged 695,828 warrants for 695,147 shares of common stock.



On July 30,
2003, the Company issued a press release to announce that Robert E. La Blanc has been appointed as a member of FiberNets Board of Directors. The Company also announced that Philip L. DiGennaro has stepped down as a Board member.



On July 30, 2003, the Company issued 4.7 million shares of restricted stock and 0.4 million
stock options at an exercise price of $1.13 per share to employees and directors under its Equity Incentive Plan. All shares of restricted stock vest on the tenth anniversary of the grant date, and the stock options vest in three equal annual
installments, commencing on July 30, 2004, subject to the terms and conditions of the Equity Incentive Plan. The Company recorded $5.4 million of deferred compensation for this issuance.



5. SUBSEQUENT EVENTS



As of October 31, 2003, FiberNet entered into a second amendment to a real estate lease to reduce the rent payments thereunder indefinitely. Upon reaching a revenue
threshold, the rent expense will increase by approximately $3.0 million on an annual basis. Due to the uncertainty in forecasting future revenues, the Company does not have a reasonable basis to estimate when the revenue threshold will be reached
and has not accrued for a contingent increase in rent as of September 30, 2003.