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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q/A

(Amendment No. 1)



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(Mark One)

|x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
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For the quarterly period ended March 31, 2004



OR



| ̈ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
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For the transition period from  to
.



Commission file number 000-24661



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FiberNet Telecom Group, Inc.

(Exact Name of Registrant as Specified in its Charter)



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



570 Lexington
Avenue, New York, NY 10022

(Address of Principal Executive Offices)



(212) 405-6200

(Issuers Telephone Number, Including Area Code)



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



The number of shares outstanding of the registrants
common stock, as of July 6, 2004, was 51,064,872 shares of Common Stock, $.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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Explanatory Note



This Amendment No. 1 to our Quarterly Report on Form 10-Q for our fiscal quarter ended March 31, 2004 is being filed in
order to reflect the restatement of our consolidated financial statements for the quarter ended March 31, 2003 to reclassify loss from the early extinguishment of debt from operating expenses to other expenses. The reclassification was made based on
current guidance with respect to the treatment of early extinguishment of debt. This reclassification resulted in a reduction of loss from operations for the quarter ended March 31, 2003. The effects of the reclassifications and additional
disclosures discussed below had no impact on our previously reported net loss, net loss per share, statements of cash flows, assets, total liabilities or statements of stockholders equity for the quarters ended March 31, 2004 and March 31,
2003.



In addition, this amendment also reflects a
reclassification of a portion of current deferred revenue to a long-term liability. Subsequent to the issuance of our consolidated financial statements, we determined that certain prepayments from customers classified as current deferred revenue
were related to long-term contracts and should have been classified as a long-term liability. As a result, we have reclassified that portion of current deferred revenue as a long-term liability. This reclassification resulted in a reduction of
current liabilities and a corresponding increase in long-term liabilities of $2.0 million for the quarter ended March 31, 2004 and $1.4 million for the year ended December 31, 2003.



Finally, certain disclosures previously presented in Note 1 to the consolidated financial statements were moved to
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations in the section entitled Factors Affecting Future Operations.



The following document contains only parts that were affected by the aforementioned restatement. For the full document,
please refer to the Form 10-Q previously filed in addition to this Form 10-Q/A.



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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 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/A for the fiscal year ended December 31, 2003. As a result, our future operations involve a high degree of risk. Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of new
information, future events or otherwise.



Our operations and ability to grow
may be affected by numerous factors, including: the difficulty inherent in operating 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, if necessary, to fund our operations on acceptable terms, if at all; our success in maintaining carrier hotel lease agreements and license agreements with building owners and in obtaining additional
agreements; the financial difficulties and instability that 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 for
immediate payment.



Restatement



Subsequent to the issuance of our consolidated financial statements for the
quarter ended March 31, 2004, we restated our consolidated financial statements for the items discussed in Note 6. The effects of the restatement have been reflected in the accompanying Managements Discussion and Analysis of Financial
Condition and Results of Operations.



Overview



We deploy, own and operate fiber-optic networks designed to provide
comprehensive broadband connectivity for data, voice and video transmission to other telecommunications service providers in major metropolitan areas. We have experienced significant operating losses, net losses and negative cash flows from
operating activities. 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
continues to experience 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. Expectations for growth in demand for broadband services have not materialized, resulting in significant excess capacity in existing communications networks. This excess supply of
bandwidth and the intense competition among industry participants has produced substantial pressure on the pricing of our services with decreases of up to 50% in recurring monthly charges. In addition, customer contracts and services have been
cancelled, resulting in a loss of recurring revenues to us. We are unable to determine the extent to which additional contracts or services that we provide to our customers will be cancelled, and we cannot forecast our ability to replace those
cancelled contracts with new contracts. As a result, our revenues, business operations and liquidity may continue to be negatively affected by the market environment.



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Factors Affecting Future Operations



Revenues. We generate revenues from selling network capacity and related services to other communications 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
(FINs). Over our metropolitan transport networks, we can provision circuits from one of our carrier point facilities to another carrier point 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 point facility or an on-net building. In 2003, we also initiated a new type of transport service offering to provide our customers with circuits on networks that we do not own. We sell
this connectivity to our customers by purchasing the underlying circuits from other wholesale telecommunications carriers.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Colocation services. Our colocation services include providing customers with the ability to locate their communications and networking equipment at our carrier point
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. Typically, if a customer colocates its equipment at our
facilities, that customer also commits to use our transport services.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 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.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



All
our revenues are generated on a non-recurring and monthly recurring basis under contracts with our customers. The terms of these contracts can range from month-to-month to fifteen years in length. Throughout 2003 and in 2004, we continued 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 contracted period of only one year. Our revenues are generated in the United States of America.



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



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 domestic subsidiaries of internationally based carriers. However, we believe the
number of companies that are potential customers is decreasing, due to the industry rationalization. In addition, we currently do not anticipate expanding our network infrastructure to other carrier point 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 agreement outlines the
operating specifications and commercial standards that are required of us by the customer. 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 significant
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 expect this amount to decrease as we generate 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.



Our transport services have been negatively impacted by customers
disconnecting higher-bandwidth circuits they are purchasing from us and replacing them with lower-bandwidth circuits to more efficiently manage the access costs of their networks. The new transport services that we are providing typically are for
lower-bandwidth circuits, as our customers expand their network connections



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on a more limited basis. The growth in transport revenues that we experienced on a quarterly basis throughout 2003 and
continuing through the first quarter of 2004 was a result of an increase in the number of circuits we have provisioned, offsetting our disconnections and price declines.



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



Our access management services business
has been steadily declining, and we expect it to continue to decline. The demand for access to commercial office properties from carriers has declined precipitously. The revenues that we are generating from this type of service are from long-term
contracts entered into in prior years. We do not expect to sign any new contracts for access management in the near future. The remaining terms of our existing access management service contracts range from a month-to-month basis to expiration in
2008. As such, we did not extend certain building access licenses with our landlords when they reached their initial term and were up for extension.



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 point facilities, on-net buildings and off-net buildings. These occupancy expenses primarily represent rent expense under direct leases with landlords. They also include charges for colocation space in other
carriers facilities and cross connection fees to interconnect our networks with other carriers networks. Other specific cost of services include maintenance and repair costs, utility costs and license fees. 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. The license fees typically are calculated as a
percentage of the revenues that we generate in each particular building. Our cost of services also include the charges that we incur by purchasing connectivity from other wholesale telecommunications carriers to provide our customers with transport
services that are not on our networks. As we provide additional, off-net transport services, we will purchase more connectivity from other carriers. Other than our license fees and off-net connectivity charges, our cost of services is generally
fixed in nature. We do not anticipate that cost of services will change commensurately with any change in our revenues.



Selling, General and Administrative Expenses. 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. All of our personnel costs are included in selling, general and administrative expenses. We do not allocate any personnel cost relating to networks operations or sales activities to cost of services. We have slightly
increased the number of our employees from 66 at the beginning of 2004 to 69 as of March 31, 2004. Prospectively, we do not anticipate significant changes in headcount, and we believe that our personnel costs will increase moderately. Professional
fees, including legal and accounting expenses, typically represent the second largest component of our selling, general and administrative expenses. These fees, which primarily are attributed to our required activities as a publicly traded company,
such as SEC filings and financial statement audits, could increase prospectively due to the enhanced regulations regarding corporate governance and compliance matters. Other costs included in selling, general and administrative expenses, such as
insurance costs, may increase due to changes in the economic environment and telecommunications industry.



Stock Related Expense. Stock related expense relates to the granting of 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 2003, 2002 and 2001, depreciation and amortization expense may decrease going
forward.



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Critical Accounting Policies



Our significant accounting policies are described in Note 2 to the consolidated financial statements included in Item 1 of
this Form 10-Q/A. 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 and goodwill and the recognition of
deferred tax assets and liabilities.



Revenue Recognition



We recognize revenues when earned as services are provided throughout the
life of each contract with a customer. The majority of our revenues are invoiced on a monthly recurring basis, typically one year in length. Certain of our contracts require us to invoice our customers for the periods ranging from one year to the
full term of the contract. We record deferred revenue for the amount of an invoice that has not been recognized as revenue. If we are contractually entitled to invoice the customer for the full value of the contract and the customer had paid such
invoice, then deferred revenue is recorded for the full value of the contract at contract inception. 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.



We have one reciprocal agreement, whereby we purchase services from one of our customers under a single agreement. The services provided and obtained through this agreement were priced at fair value as of the date of the agreement. We
recognized the transport and colocation revenues from 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 agreement are capitalized. All of the costs are expensed as incurred. Reciprocal agreements accounted for $0.1 million, or 1.2%, of revenues for the quarter ended March 31, 2004, and $0.1 million
of our cost of services. For the quarter ended March 31, 2003, reciprocal agreements accounted for $0.1 million, or 1.9%, of revenues and $0.1 million of our cost of services.



Allowance for Doubtful Accounts



We continuously monitor collections and payments from our customers and maintain 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 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.



Impairment of Long-Lived Assets



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



During 2003, the economic environment and the telecommunications industry, in particular, did not rebound as expected. The dramatic change in the operating environment for our industry over the past few years has resulted in significantly
less demand and lower prices for our services than we had expected, and we also determined that the recovery in demand and pricing that we anticipated would not occur in the near term. Although we concluded that the prospects for the industry, and
our business in particular, were not worse than we had previously forecasted, we revised our forecasts for revenues at the end of 2003 at certain facilities, as we concluded that they would not be achieved. In conjunction with our reassessment of
certain revenue forecasts, we revised our business plan and conducted 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, although not commensurately with revenues and capital expenditures.



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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 $1.5 million in the
fourth quarter of 2003, based on the amount by which the carrying amount of these assets exceeded their fair value.



In addition, during 2003 we recovered approximately $0.2 million from the sale of assets previously written off as impaired. The proceeds were recorded as
a recovery of impairments previously recorded.



Impairment of Goodwill



In June 2001, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets (SFAS No. 142), 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. Any write-down of goodwill would be charged as a cumulative change in accounting principle upon adoption of the new
accounting standard if the recorded value of goodwill and certain intangibles exceeds its fair value. During the fourth quarter of 2003, we performed our annual impairment test and determined that we had an impairment of goodwill. Accordingly, we
recorded a charge of $7.5 million to eliminate our remaining goodwill.



On January 30, 2004, we completed the acquisition of the operating assets of gateway.realty.new jersey.llc, also known as Gateway Colocation, and we recorded $2.3 million in goodwill as a result of this transaction.



Recognition of Deferred Tax Assets and Liabilities



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



Results of Operations



Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003



Revenues. Revenues for the quarter ended March 31, 2004 were $10.3
million as compared to $6.4 million for the quarter ended March 31, 2003. We increased the number of our customers from 120 at March 31, 2003 to 152 at the end of 2003 and to 181 as of March 31, 2004, with the addition of international carriers to
our customer base and of customers from the acquisition of Gateway Colocation, which closed on January 30, 2004. We believe that there are greater opportunities to serve domestic subsidiaries of foreign telecommunications companies in our gateway
markets, as domestic carriers consolidate and rationalize.



During the quarter ended March 31, 2004, we recognized $2.7 million in revenues due to an award from an arbitration proceeding, in which we were the prevailing claimant. Revenues recognized in connection with this award accounted for 26.5%
of revenue for the quarter. Amounts disputed under the customer contract, which was the subject of the proceeding, were not recognized in prior periods as the collectability of amounts due under the contract was in doubt. Upon confirmation of the
award, we recognized this amount as revenue in the first quarter ended March 31, 2004 for services previously provided and earned. The payment of the award was received on April 9, 2004. Also in connection with this arbitration award, we recognized
an additional $0.3 million in revenues that were previously deferred. We did not recognize revenues related to this arbitration proceeding or the disputed contract in prior periods as the collectability of amounts due under the contract was in
doubt.



Revenues were generated by providing transport,
colocation and communications access management services to our customers. We recognized $5.6 million in transport service revenues for the quarter ended March 31, 2004, up from $4.2 million for the quarter ended March 31, 2003. Revenues from
colocation and other services remained $1.5 million for the quarter ended March 31, 2004 compared to $1.5 million for the quarter ended March 31, 2003, and revenues from communications access management services declined to $0.5 million for the
quarter ended March 31, 2004 from $0.7 million for the quarter ended March 31, 2003.



The vast majority of our transport and colocation services are provided within and between our carrier point facilities in the New York City market. Transport revenues increased as we provided a greater number of
lower-bandwidth circuits to our customers, offsetting the disconnections and price decreases that we have been experiencing. We benefited from growth in transport services from within our existing customer base, as well as through the addition of
new customers. Prospectively, we expect that the current trends in our transport services will continue. Colocation revenues were generated as we leased additional caged space, cabinets and racks in our facilities. Since we are approaching capacity
at some of our colocation facilities, we may have to invest in expanding these facilities to offer additional space to our customers. We expect transport services to grow at a faster rate than colocation. Our



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network infrastructure has significant capacity to provide additional broadband transport connectivity, and our
colocation facilities are approaching more stabilized utilization rates. The decrease in access revenues was due to the severe decline in the market for building-centric services and the resulting bankruptcies of many building-centric service
providers, many of whom were our customers. We do not expect to sell any additional access services, and we believe our existing contracts for access services may not be renewed when they expire.



For the quarters ended March 31, 2004 and 2003, there were no individual
customers that accounted for over 10.0% of our revenues, excluding revenues recognized in connection with the arbitration award. Reciprocal agreements accounted for $0.1 million, or 1.2%, of revenues for the quarter ended March 31, 2004, and
remained flat compared to $0.1 million, or 1.9%, of revenues for the quarter ended March 31, 2003.



Cost of Services. Cost of services, associated with the operation of our networks and facilities, were $3.0 million for the quarter ended March 31,
2004, compared to $2.1 million for the quarter ended March 31, 2003. The majority of our cost of services is occupancy expenses, consisting of rent and utility costs, for our carrier hotel facilities, on-net buildings and off-net buildings. Other
cost of services includes license fees, maintenance and repair costs and off-net connectivity charges.



Occupancy expenses represented 65.0% of cost of services for the quarter ended March 31, 2004 and increased by approximately 19.2% over the quarter ended
March 31, 2003. This was expected, as we consolidated the costs of the carrier point facility operated by Gateway Colocation that we acquired in the first quarter of 2004. License fees, which were 18.3% of cost of services for the quarter ended
March 31, 2004, increased by over 105% from the quarter ended March 31, 2003 because a greater proportion of our revenues were generated in facilities in which our agreements with the building owners mandate these license fees. License fees are
typically calculated as a percentage of the revenues we generate in the respective facility, as per our lease agreement with the facility, and they are expensed in cost of services as the corresponding services are provided. We expect license fees
to represent an equivalent percentage of cost of services, prospectively.



Maintenance and repair costs were 2.0% of cost of services for the quarter ended March 31, 2004, and although these costs decreased by 43.2% from the quarter ended March 31, 2003, they will continue to represent a
relatively small and fixed component of cost of services. Off-net connectivity charges also were 14.7% of cost of services the quarter ended March 31, 2004. We did not incur these expenses in the first quarter of 2003, as we did not provide this
type of transport service. Going forward, these charges will increase commensurately with our growth in off-net transport services.



Reciprocal agreements accounted for $0.1 million of our cost of services for the quarters ended March 31, 2004 and 2003.



Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the quarter ended March 31, 2004 and 2003 were $3.7 million. Personnel costs represented 76.0% of selling, general and administrative expenses for the quarter ended March 31, 2004 compared to 66.5% for the quarter ended
March 31, 2003. Professional fees for the quarter ended March 31, 2004, decreased by $0.3 million from the same period in 2003 due primarily to the reimbursement of legal costs in connection with our arbitration proceeding. We recorded this
reimbursement as a reversal of previously accrued expenses included in selling, general and administrative matters in 2003. We anticipate selling, general and administrative expenses to increase modestly throughout 2004 with the general growth of
our business.



Stock Related Expense. Stock related
expense for the quarter ended March 31, 2004 was $0.1 million. This non-cash expense relates to the amortization of restricted stock granted to our employees. There were no stock related expenses recorded for the quarter ended March 31, 2003. The
restricted shares that have been granted vest on the tenth anniversary of the grant date, and the related expenses are amortized on a straight line basis over the ten-year period.



Depreciation and Amortization. Depreciation and amortization expenses for the quarters ended March 31, 2004 and 2003
were $2.3 million and $2.2 million, respectively. The effects of prior period impairments were offset by the additional depreciation on newly acquired property, plant and equipment.



Loss on early extinguishment of debt, net. 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 indebtedness 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, 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, partially offsetting
our earlier loss.



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Interest Income. Interest income for the quarter ended March 31, 2004 was approximately $7,000,
compared to approximately $1,000 for the quarter ended March 31, 2003. Interest income is generated on our cash and restricted cash balances which are at variable rates of interest and are invested in short-term, highly liquid investments.



Interest Expense. Interest expense for the quarter
ended March 31, 2004 was $0.5 million, compared to $0.6 million for the quarter ended March 31, 2003. Interest expense decreased primarily due to the repayment of $5.6 million of principal on our outstanding debt during the quarter ended March 31,
2004. All of our indebtedness bears interest at a floating rate, so we are subject to fluctuations in interest rates. We anticipate that interest expense will continue to decrease, primarily due to the additional principal repayment of $1.6 million
on April 19, 2004.



Net Income (Loss). We reported net
income of $0.7 million for the quarter ended March 31, 2004 compared to a net loss of $11.2 million for the quarter ended March 31, 2003. This change is a result of the aforementioned changes in our operations, especially the $2.7 million in revenue
recognized in connection with the arbitration award granted during the quarter ended March 31, 2004, and the $8.9 million loss on early extinguishment of debt recorded during the quarter ended March 31, 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 credit facility with a group of lenders. We had income from operations and net income for the three months ended March 31, 2004
of $1.2 million and $0.7 million, respectively, compared to a loss from operations and a net loss of $1.6 million and $11.2 million, respectively, for the three months ended March 31, 2003. During the three months ended March 31, 2004, cash provided
by operating activities was approximately $2,000, and cash purchases of property, plant and equipment were $0.6 million, compared to cash used to fund operating activities of $1.9 million and $0.3 million of cash purchases of property, plant and
equipment for the three months ended March 31, 2003.



For the
quarter ended March 31, 2004 we received $1.9 million in net cash proceeds from financing activities. For the quarter ended March 31, 2003 we received $2.3 million in net cash proceeds from financing activities. We received these proceeds from
financing activities primarily in connection with our recapitalization transaction, which occurred in January 2003, and our private placement of equity securities in January 2004.



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 a 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
credit agreement, pursuant to which, among other things, the rights and obligations of the departing lenders under the 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.



9



---

The payment of all accrued interest on borrowings under our credit facility during the period beginning
on October 30, 2002 and ended on June 30, 2003 was capitalized and added to the outstanding principal amount of the term loan indebtedness.



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 2003.



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



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 could have been made from time
to time until December 31, 2003 through open market purchases, privately negotiated transactions, block trades or otherwise. Repurchases were subject to the availability of stock, prevailing market conditions, trading price of the stock and our
financial performance. The repurchase program did not obligate us to acquire any specific number of shares and could have been discontinued or suspended at any time. Any shares repurchased in the program would have been treated as shares of common
stock held in treasury. As of December 31, 2003, there were no outstanding amounts under this subordinated credit facility and no repurchases of common stock had been made. On December 31, 2003, this subordinated credit facility expired and was not
renewed.



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 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 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.



On January 30, 2004, we completed the acquisition of the operating assets of gateway.realty.new jersey.llc, also known as Gateway Colocation. Gateway
Colocation operates a 49,000 square foot communications hub and colocation facility located at 165 Halsey Street in Newark, New Jersey. The transaction was structured as an acquisition of assets, and the purchase price paid at closing consisted of
2.9 million shares of our common stock with a fair value of $4.6 million on the closing date and approximately $170,000 in cash. The purchase agreement also includes an earn-out payment based upon the achievement of certain financial
objectives with respect to the revenues generated by the facility. More specifically, the earn-out payment will be based on the gross revenues, on an annualized basis, for a particular month designated by Gateway Colocation during the
twenty-four month period immediately subsequent to closing. The earn-out payment, if payable, will be paid in shares of our common stock. However, the issuance of such additional shares, in the aggregate with the shares of common stock
issued on January 30, 2004, will not exceed 19.9% of the issued and outstanding shares of our common stock as of the closing date without first receiving stockholder approval. We agreed to file and subsequently filed with the Securities and Exchange
Commission a registration statement covering the resale of the shares issued at closing, and have agreed to file a registration statement with respect to the resale of shares issued, if any, pursuant to the terms of the earn-out
provision.



Also on January 30, 2004, in an unrelated
transaction, we entered into a common stock purchase agreement with certain investors, pursuant to which we issued to the investors, in a private offering, an aggregate of 6.4 million shares of common stock at a price of $1.25 per share, for gross
proceeds of $8.0 million. Pursuant to the terms of the purchase agreements, we also issued to such investors warrants to purchase an aggregate of 1.9 million shares of common stock at an exercise price of $1.75 per share with a term of three and
one-half years. In connection with the purchase agreements, we entered into a registration rights agreement with the investors, which required us to file a registration statement with the Securities and Exchange Commission with respect to the resale
of (i) the shares of common stock issued to the investors and (ii) the shares of common stock underlying the warrants issued to the investors. These shares were included in a registration statement that was declared effective on April 14, 2004.



We utilized a portion of the gross proceeds to permanently
repay $2.1 million of term loan indebtedness underlying the credit facility and to cancel $1.1 million of a letter of credit by providing cash securing deposits in lieu thereof. We also permanently reduced our availability to issue letters of credit
by $0.9 million. In doing so, we satisfied the mandatory automatic reductions of commitments of the credit facility for 2004, as discussed below. By canceling the letters of credit, $0.5 million of restricted cash previously held as cash collateral
was made available for general corporate purposes. Furthermore, we repaid $3.5 million of outstanding revolving loan indebtedness, which is available to be redrawn in the future subject to compliance with the terms of the credit agreement.



In connection with the consummation of both the acquisition
and equity financing on January 30, 2004, we entered into certain transactions with the lenders under our credit facility. We executed an eleventh amendment to the credit agreement, pursuant to which,



10



---

among other things, the lenders consented to the above-referenced transactions. The eleventh amendment also revised the
automatic reductions of the commitments underlying the credit facility that are required on a quarterly basis beginning on March 31, 2004. Expressed as a percentage of the aggregate, outstanding commitments, the automatic reductions were revised to
a total of 8% in 2004, 40% in 2005, 48% in 2006 and 4% at maturity on March 31, 2007. As of March 31, 2004 we had satisfied the entire 8% of the mandatory reduction of commitments for 2004. In addition, the eleventh amendment also incorporated
adjustments to the financial covenants of the credit facility. As a condition to the lenders entering into the eleventh amendment, we agreed to reduce the exercise price of certain previously issued outstanding warrants held by the lenders to
purchase approximately 379,230 shares of common stock from $3.60 per share to $0.001 per share, which were immediately exercised by the lenders. We compared the value of the warrants prior to repricing with the value of the warrants after the
repricing using the Black-Scholes option pricing model and determined that there was no difference in value. Therefore the re-pricing of warrants had no impact on our financial statements.



On February 12, 2004, we issued 200,000 shares of common stock and paid $0.3
million in cash to a stockholder in settlement of certain litigation matters. The price on the date of the grant was $1.61 per share. This settlement was accrued for as of December 31, 2003.



On March 10, 2004, we were notified that we prevailed in an arbitration
regarding a breach of contract. We were awarded approximately $2.7 million. Amounts disputed under this customer contract were not recognized in income in prior periods as the collectability of amounts due under the contract was in doubt. Upon the
settlement awarded to us in arbitration and the subsequent collection of our award on April 9, 2004, we recognized the amount as revenue in the first quarter ended March 31, 2004.



As of March 31, 2004, we had $16.8 million of indebtedness outstanding under our credit facility and $4.8 million of
outstanding letters of credit. In addition, we had $3.5 million of available borrowing capacity and $0.4 million of availability to issue letters of credit under the credit facility, subject to compliance with the terms of the credit agreement. The
weighted average interest rate on our outstanding borrowings under the facility was 5.51% at an applicable borrowing rate of LIBOR+450 basis points. We were in full compliance with all of the covenants contained in the credit agreement underlying
the facility as of March 31, 2004. We must comply with financial covenants that include minimum consolidated revenue, minimum consolidated EBITDA (as defined in the credit agreement underlying the credit facility), maximum cumulative capital
expenditures, a maximum consolidated leverage ratio, a minimum consolidated interest coverage ratio and a minimum consolidated fixed charge coverage ratio. The compliance levels and calculation of such levels with respect to those covenants are as
defined in the credit agreement underlying our credit facility, as amended, which is on file with the Securities and Exchange Commission. Non-compliance with any of the covenants, requirements, or other terms and conditions under the credit
agreement constitutes an event of default and potentially accelerates the outstanding balance of the credit facility for immediate payment.



On April 13, 2004 we repaid $1.6 million of outstanding revolving loan indebtedness, which is available to be redrawn in the future subject to compliance
with the terms of the credit agreement. As a result, we had $15.1 million of indebtedness outstanding under our credit facility, $4.8 million of outstanding letters of credit and $5.1 million of unutilized availability which is available to be
redrawn in the future subject to compliance with the terms of the credit agreement.



We spent approximately $0.6 million in capital expenditures during the quarter ended March 31, 2004, primarily for the implementation of customer orders. Our capital expenditures totaled $0.3 million for the quarter
ended March 31, 2003. We have substantially completed the deployment of our FINs, carrier hotel facilities and metropolitan transport networks. In 2004, we expect to invest $3.0 million to $4.0 million in capital expenditures, also primarily for
customer order activity. This includes purchasing networking equipment to provision connectivity and constructing extensions of our network to increase capacity and to interconnect with new customers. We also intend to upgrade certain information
technology systems and key operating systems at our carrier point facilities. We may expend additional capital for the selected expansion of our network infrastructure, depending upon market conditions, customer demand and our liquidity and capital
resources.



During the quarter ended March 31, 2004, holders of
warrants exercised warrants for 0.6 million shares of common stock with an exercise price ranging from $0.001 to $0.03 per share. During the quarter ended March 31, 2004, we granted options to purchase an aggregate of 10,800 shares of common stock
to employees with a weighted average exercise price of $1.53 per share. Also during the quarter ended March 31, 2004, we granted of 128,660 shares of restricted stock to employees with a weighted average price of $1.76 per share.



As of May 11, 2004, we had approximately 51.1 million shares of common stock
outstanding, or approximately 58.1 million shares of common stock outstanding on a fully diluted basis, assuming the exercise of all outstanding options and warrants.



We believe that the completion of the transactions that constituted our prior recapitalization in 2002 and 2003 and our
recent equity financing 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,
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



11



---

order to provide additional working capital or finance the continued operations of our business, although there can be no
assurance that we will be able to successfully consummate any such financing on acceptable terms, if at all. For additional disclosure and risks regarding future financings and funding of our ongoing operations, please see Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2003. We do not have any off-balance sheet financing arrangements, nor do we
anticipate entering into any.



Recent Accounting Pronouncements



In January 2003, the FASB issued FASB Interpretation
No. 46, Consolidation of Variable Interest Entities, (FIN 46), an interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements. FIN 46 establishes accounting guidance for consolidation
of variable interest entities that function to support the activities of the primary beneficiary. In December 2003, the FASB revised FIN 46 and issued FIN 46 (revised December 2003) (FIN 46R). In addition to conforming to previously
issued FASB Staff Positions, FIN 46R deferred the implementation date for certain variable interest entities. This revised interpretation is effective for all entities no later than the end of the first reporting period that ends after March 15,
2004. We do not have any investments in or contractual relationship or other business relationship with a variable interest entity and therefore the adoption of this interpretation will not have any impact on our consolidated financial position or
results of operations.



12



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SIGNATURES



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



Date: July 9, 2004



|                             |  |                                                       
|---------------------------- |  | ------------------------------------------------------
|FIBERNET TELECOM GROUP, INC.
|                             | 
|By:                          |  | /S/ JON A. DELUCA                                     
|Name:                        |  | Jon A. DeLuca                                         
|Title:                       |  | Senior Vice PresidentFinance Chief Financial Officer*

---

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



13



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FIBERNET TELECOM GROUP, INC.



CONSOLIDATED BALANCE SHEETS

(unaudited)



(DOLLARS
IN 000S)



|                                                                                                                                                                                  |  |                           |          |   |                   |   |          |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | -------- | - | ----------------- | - | -------- | -
|                                                                                                                                                                                  |  | March 31, 2004            |          |   | December 31, 2003 |  
|                                                                                                                                                                                  |  | (As restated  seeNote 6) |          |   |                   |  
|ASSETS                                                                                                                                                                            |  |                           |          |   |                   |   |          |  
|Current Assets:                                                                                                                                                                   |  |                           |          |   |                   |   |          |  
|Cash and cash equivalents                                                                                                                                                         |  | $                         | 4,388    |   |                   | $ | 3,488    |  
|Restricted cash                                                                                                                                                                   |  |                           | 1,862    |   |                   |   | 2,337    |  
|Accounts receivable, net of allowance of $716 and $721 at March 31, 2004 and December 31, 2003, respectively                                                                      |  |                           | 4,418    |   |                   |   | 3,785    |  
|Other receivable                                                                                                                                                                  |  |                           | 2,719    |   |                   |   |         |  
|Prepaid expenses and other                                                                                                                                                        |  |                           | 485      |   |                   |   | 754      |  
|                                                                                                                                                                                  |  |                           |          |   |                   |   |          |  
|Total current assets                                                                                                                                                              |  |                           | 13,872   |   |                   |   | 10,364   |  
|Property, plant and equipment, net                                                                                                                                                |  |                           | 87,666   |   |                   |   | 86,958   |  
|Other Assets:                                                                                                                                                                     |  |                           |          |   |                   |   |          |  
|Goodwill                                                                                                                                                                          |  |                           | 2,337    |   |                   |   |         |  
|Other intangible assets, net of accumulated amortization of $21 and $0 at March 31, 2004 and December 31, 2003, respectively                                                      |  |                           | 465      |   |                   |   |         |  
|Deferred charges, net of accumulated amortization of $1,083 and $1,402 at March 31, 2004 and December 31, 2003, respectively                                                      |  |                           | 1,890    |   |                   |   | 2,035    |  
|Other assets                                                                                                                                                                      |  |                           | 1,669    |   |                   |   | 261      |  
|                                                                                                                                                                                  |  |                           |          |   |                   |   |          |  
|Total other assets                                                                                                                                                                |  |                           | 6,361    |   |                   |   | 2,296    |  
|                                                                                                                                                                                  |  |                           |          |   |                   |   |          |  
|TOTAL ASSETS                                                                                                                                                                      |  | $                         | 107,899  |   |                   | $ | 99,618   |  
|                                                                                                                                                                                  |  |                           |          |   |                   |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                              |  |                           |          |   |                   |   |          |  
|Current Liabilities:                                                                                                                                                              |  |                           |          |   |                   |   |          |  
|Accounts payable                                                                                                                                                                  |  | $                         | 4,059    |   |                   | $ | 3,598    |  
|Accrued expenses                                                                                                                                                                  |  |                           | 4,214    |   |                   |   | 5,138    |  
|Deferred revenuescurrent portion                                                                                                                                                 |  |                           | 5,009    |   |                   |   | 4,584    |  
|Notes payablecurrent portion                                                                                                                                                     |  |                           | 1,017    |   |                   |   | 1,795    |  
|                                                                                                                                                                                  |  |                           |          |   |                   |   |          |  
|Total current liabilities                                                                                                                                                         |  |                           | 14,299   |   |                   |   | 15,115   |  
|Long-Term Liabilities:                                                                                                                                                            |  |                           |          |   |                   |   |          |  
|Notes payable, less original issue discount of $2,131 and $2,308 at March 31, 2004 and December 31, 2003, respectively                                                            |  |                           | 13,697   |   |                   |   | 18,330   |  
|                                                                                                                                                                                  |  |                           |          |   |                   |   |          |  
|Deferred revenues                                                                                                                                                                 |  |                           | 2,046    |   |                   |   | 1,439    |  
|Total liabilities                                                                                                                                                                 |  |                           | 30,042   |   |                   |   | 34,884   |  
|                                                                                                                                                                                  |  |                           |          |   |                   |   |          |  
|Stockholders Equity:                                                                                                                                                             |  |                           |          |   |                   |   |          |  
|Common stock, $0.001 par value, 2,000,000,000 shares authorized and 51,060,872 and 40,540,334 shares issued and outstanding at March 31, 2004
and December 31, 2003, respectively |  |                           | 51       |   |                   |   | 41       |  
|Additional paid-in-capital and other                                                                                                                                              |  |                           | 442,551  |   |                   |   | 429,991  |  
|Deferred compensation                                                                                                                                                             |  |                           | (4,896   | ) |                   |   | (4,797   | )
|Accumulated deficit                                                                                                                                                               |  |                           | (359,849 | ) |                   |   | (360,501 | )
|                                                                                                                                                                                  |  |                           |          |   |                   |   |          |  
|Total stockholders equity                                                                                                                                                        |  |                           | 77,857   |   |                   |   | 64,734   |  
|                                                                                                                                                                                  |  |                           |          |   |                   |   |          |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                        |  | $                         | 107,899  |   |                   | $ | 99,618   |  
|                                                                                                                                                                                  |  |                           |          |   |                   |   |          |  



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



14



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FIBERNET TELECOM GROUP, INC.



CONSOLIDATED STATEMENTS OF OPERATIONS



(UNAUDITED)



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



|                                                                            |  |                             |        |   |                           |   |         |  
|--------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ------------------------- | - | ------- | -
|                                                                            |  | Three Months Ended March31, |       
|                                                                            |  | 2004                        |        |   | 2003                      |  
|                                                                            |  |                             |        |   | (As restated - seeNote 6) |  
|Revenues                                                                    |  | $                           | 10,290 |   |                           | $ | 6,377   |  
|Operating expenses:                                                         |  |                             |        |   |                           |   |         |  
|Cost of services (exclusive of items shown separately below)                |  |                             | 2,996  |   |                           |   | 2,051   |  
|Selling, general and administrative expense excluding stock related expense |  |                             | 3,717  |   |                           |   | 3,746   |  
|Stock related expense for selling, general, and administrative matters      |  |                             | 128    |   |                           |   |        |  
|Depreciation and amortization                                               |  |                             | 2,279  |   |                           |   | 2,180   |  
|                                                                            |  |                             |        |   |                           |   |         |  
|Total operating expenses                                                    |  |                             | 9,120  |   |                           |   | 7,977   |  
|                                                                            |  |                             |        |   |                           |   |         |  
|Income (loss) from operations                                               |  |                             | 1,170  |   |                           |   | (1,600  | )
|Loss on early extinguishment of debt, net                                   |  |                             |       |   |                           |   | (8,951  | )
|Interest income                                                             |  |                             | 7      |   |                           |   | 1       |  
|Interest expense                                                            |  |                             | (525   | ) |                           |   | (626    | )
|                                                                            |  |                             |        |   |                           |   |         |  
|Net income (loss)                                                           |  | $                           | 652    |   |                           | $ | (11,176 | )
|                                                                            |  |                             |        |   |                           |   |         |  
|Net income (loss) per sharebasic                                           |  | $                           | 0.01   |   |                           | $ | (0.33   | )
|Weighted average common shares outstandingbasic                            |  |                             | 47,618 |   |                           |   | 34,119  |  
|Net income (loss) per sharediluted                                         |  | $                           | 0.01   |   |                           | $ | (0.33   | )
|Weighted average common shares outstandingdiluted                          |  |                             | 47,644 |   |                           |   | 34,119  |  



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



15



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FIBERNET TELECOM GROUP, INC.



CONSOLIDATED STATEMENTS OF CASH FLOWS



(UNAUDITED)



(DOLLARS IN 000S)



|                                                                                                   |  |                              |        |   |      |   |         |  
|-------------------------------------------------------------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------- | -
|                                                                                                   |  | Three Months Ended March 31, |       
|                                                                                                   |  | 2004                         |        |   | 2003 |  
|Cash flows from operating activities:                                                              |  |                              |        |   |      |   |         |  
|Net income (loss)                                                                                  |  | $                            | 652    |   |      | $ | (11,176 | )
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |                              |        |   |      |   |         |  
|Depreciation and amortization                                                                      |  |                              | 2,279  |   |      |   | 2,180   |  
|Stock related expense                                                                              |  |                              | 128    |   |      |   |        |  
|Loss on early extinguishment of debt, non-cash portion                                             |  |                              |       |   |      |   | 8,899   |  
|Capitalized accrued interest on notes payable                                                      |  |                              |       |   |      |   | 299     |  
|Decrease (increase) in restricted cash                                                             |  |                              | 474    |   |      |   | (2,317  | )
|Other non-cash items                                                                               |  |                              | 251    |   |      |   | 200     |  
|Change in assets and liabilities:                                                                  |  |                              |        |   |      |   |         |  
|(Increase) decrease in accounts receivable and other receivable                                    |  |                              | (3,375 | ) |      |   | 95      |  
|Decrease in prepaid expenses                                                                       |  |                              | 269    |   |      |   | 402     |  
|Increase in other assets                                                                           |  |                              | (1,073 | ) |      |   |        |  
|Increase (decrease) in accounts payable                                                            |  |                              | 495    |   |      |   | (713    | )
|Decrease in accrued expenses                                                                       |  |                              | (801   | ) |      |   | (303    | )
|Increase in deferred revenues                                                                      |  |                              | 703    |   |      |   | 513     |  
|                                                                                                   |  |                              |        |   |      |   |         |  
|Cash provided by (used in) operating activities                                                    |  |                              | 2      |   |      |   | (1,921  | )
|                                                                                                   |  |                              |        |   |      |   |         |  
|Cash flows from investing activities:                                                              |  |                              |        |   |      |   |         |  
|Acquisition of Gateway Colocation                                                                  |  |                              | (382   | ) |      |   |        |  
|Capital expenditures                                                                               |  |                              | (575   | ) |      |   | (347    | )
|                                                                                                   |  |                              |        |   |      |   |         |  
|Cash used in investing activities                                                                  |  |                              | (957   | ) |      |   | (347    | )
|                                                                                                   |  |                              |        |   |      |   |         |  
|Cash flows from financing activities:                                                              |  |                              |        |   |      |   |         |  
|Payment of financing costs of debt financings                                                      |  |                              | (42    | ) |      |   | (352    | )
|Payment of financing costs of equity securities                                                    |  |                              | (520   | ) |      |   | (811    | )
|Repayment of notes payable                                                                         |  |                              | (5,583 | ) |      |   |        |  
|Proceeds from issuance of equity securities                                                        |  |                              | 8,000  |   |      |   | 3,500   |  
|                                                                                                   |  |                              |        |   |      |   |         |  
|Cash provided by financing activities                                                              |  |                              | 1,855  |   |      |   | 2,337   |  
|                                                                                                   |  |                              |        |   |      |   |         |  
|Net increase in cash and cash equivalents                                                          |  |                              | 900    |   |      |   | 69      |  
|Cash and cash equivalents at beginning of period                                                   |  |                              | 3,488  |   |      |   | 3,788   |  
|                                                                                                   |  |                              |        |   |      |   |         |  
|Cash and cash equivalents at end of period                                                         |  | $                            | 4,388  |   |      | $ | 3,857   |  
|                                                                                                   |  |                              |        |   |      |   |         |  
|Supplemental disclosures of cash flow information:                                                 |  |                              |        |   |      |   |         |  
|Interest paid                                                                                      |  | $                            | 266    |   |      | $ |        |  
|Non-cash financing activities:                                                                     |  |                              |        |   |      |   |         |  
|Conversion of accrued interest into notes payable                                                  |  | $                            |       |   |      | $ | 385     |  
|Conversion of notes payable into common stock                                                      |  | $                            |       |   |      | $ | 13,382  |  
|Common stock issued for acquisition of Gateway Colocation                                          |  | $                            | 4,565  |   |      | $ |        |  



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



16



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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 a communications service provider focused on
providing wholesale broadband connectivity for data, voice and video transmission on its 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 all the outstanding membership interests of 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 Company believes that the
completion of the transactions that constituted its recapitalization, as discussed in Note 6 of the Companys consolidated financial statements included in its Annual Report on Form 10-K/A for the year ended December 31, 2003, as filed with the
Securities and Exchange Commission on July 9, 2004, significantly enhanced its liquidity and improved its financial position. Under FiberNets current operating plan, which reflects the events discussed in Note 5, it does not anticipate
requiring any additional external sources of capital to fund its operations in the coming year. 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.



These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and
accompanying notes included in the Companys Annual Report on Form 10-K/A for the year ended December 31, 2003, as filed with the Securities and Exchange Commission on July 9, 2004.



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



17



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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



Restricted Cash



Restricted cash is invested in 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. The Company has a restricted cash account used as collateral to secure the funding obligations for a portion of its outstanding letters of credit, which are in lieu of a cash
security deposits for real estate leases.



Property, Plant and Equipment



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



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



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



Impairment of Long-Lived Assets



The Company reviews the carrying value of long-lived assets for impairment 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 changes in circumstances indicated that asset carrying values were no longer recoverable and therefore, such assets were written down to fair value at that time.



18



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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. Most of the Companys services are for a contract period of one year. Revenue is recognized over the service contract period for all general services. If the Company determines that collection of a receivable is not reasonably assured,
it defers the revenue and recognizes it at the time collection becomes reasonably assured, which is generally upon receipt of payment. Deferred revenues consist primarily of payments received in advance of revenue being earned under the service
contracts. Most of the Companys 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 and FiberNet in-building networks (FINs). Over the Companys metropolitan transport networks, it can provision circuits from one of its carrier point facilities to another
carrier point 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 point 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.



Colocation services. FiberNets colocation services include providing customers with the ability to locate their communications and networking
equipment at its carrier point facilities in a secure technical operating environment. The Company also can provide its customers with colocation services in the central equipment rooms of certain of its on-net and off-net buildings. 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 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, FiberNet typically requires that customer to utilize its in-building network
infrastructure for connectivity to end-user tenants, if such networking infrastructure is available.



As of March 31, 2004 and 2003 the Company had one reciprocal agreement. The services provided and obtained through this agreement were priced at fair
market value as of the date of the agreement and is 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 $0.1 million for the quarters ended March 31, 2004 and 2003. The Company leased colocation facilities under this agreement. The total amount expensed for services rendered under the reciprocal
agreement for each of the quarters ended March 31, 2004 and 2003 was approximately $0.1 million.



Fair Value of Financial Instruments



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



Goodwill



Cost in
excess of net assets of an acquired business, principally goodwill, is accounted for under SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). SFAS No. 142 requires 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.



Other Intangible Assets



Other intangible assets include the value allocated to customer contracts acquired. Other intangible assets are amortized
over useful life, which is the term of the related contracts.



19



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Deferred Charges



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



Earnings Per Share



Basic net income or loss per share excludes dilution for potentially dilutive securities and is computed by dividing net income or loss attributable to
common shareholders by the weighted average number of common shares outstanding during the period. Diluted net income or loss per share reflects the potential dilution that could occur if securities or other instruments to issue common stock were
exercised or converted into common stock. Potentially dilutive securities are excluded from the computation of diluted net income or loss per share when their inclusion would be antidilutive. A summary of the computation of basic and diluted
earnings (losses) per share from continuing operations is as follows:



|                                                     |  |                                      |        |      |   |         |  
|---------------------------------------------------- |  | ------------------------------------ | ------ | ---- | - | ------- | -
|                                                     |  | Three Months EndedMarch 31,          |       
|                                                     |  | 2004                                 |        | 2003 |  
|                                                     |  | (in thousands, exceptper share data) |       
|Basic EPS from Continuing Operations Computation     |  |                                      |        |      |   |         |  
|Net income (loss):                                   |  | $                                    | 652    |      | $ | (11,176 | )
|Weighted average number of common shares outstanding |  |                                      | 47,618 |      |   | 34,119  |  
|                                                     |  |                                      |        |      |   |         |  
|Basic EPS                                            |  | $                                    | 0.01   |      | $ | (0.33   | )
|                                                     |  |                                      |        |      |   |         |  
|Diluted EPS from Continuing Operations Computation   |  |                                      |        |      |   |         |  
|Net income (loss):                                   |  | $                                    | 652    |      | $ | (11,176 | )
|                                                     |  |                                      |        |      |   |         |  
|Weighted average number of common shares outstanding |  |                                      | 47,618 |      |   | 34,119  |  
|Employee stock options                               |  |                                      |       |      |   |        |  
|Warrants                                             |  |                                      | 26     |      |   |        |  
|                                                     |  |                                      |        |      |   |         |  
|Total diluted common shares outstanding              |  |                                      | 47,644 |      |   | 34,119  |  
|                                                     |  |                                      |        |      |   |         |  
|Diluted EPS                                          |  | $                                    | 0.01   |      | $ | (0.33   | )
|                                                     |  |                                      |        |      |   |         |  



For the three months
ended March 31, 2004, 6.6 million shares were excluded from the calculation of diluted EPS because the exercise prices of the underlying securities exceeded the market price of the common stock at the end of the period. For the three months ended
March 31, 2003, since the Company incurred net losses, the computation of diluted EPS excludes the effects dilutive securities as their effects on EPS were antidilutive.



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



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
condition. As of March 31, 2004, one customer accounted for 11.1% of the Companys total accounts receivable, and as of December 31, 2003, one customer accounted for 12.2% of the Companys total accounts receivable.



For the three months ended March 31, 2004 and 2003, there were no individual
customers that accounted for over 10% of the Companys total revenue, excluding revenues recognized in connection with the Companys arbitration award during the three months ended March 31, 2004.



20



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The Company continuously monitors collections and payments from its customers and maintains allowances
for doubtful accounts based upon its historical experience and any specific customer collection issues that is has identified. While such credit losses have historically been within the Companys expectations, there can be no assurance that the
Company will continue to experience the same level of credit losses that it has in the past. A significant number of the Companys 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 or a further deterioration in the economic environment or telecommunications industry, in general, could have a material adverse impact on the collectability of the Companys
accounts receivable and its future operating results, including a reduction in future revenues and additional allowances for doubtful accounts. If the Company determines that collection of a receivable is not reasonably assured, the Company defers
the revenue and recognizes it at the time collection becomes reasonably assured, which is generally upon receipt of payment.



As of March 31, 2004, the Company had an allowance for doubtful accounts of $0.7 million. During the three months ended March 31, 2004, the Company wrote
off approximately $28,000 in the allowance for doubtful accounts and recovered approximately $24,000 due to the sale of securities received from a former bankrupt customer, and there were no charges to bad debt expense. During the three months ended
March 31, 2003, there were no write-offs in the allowance for doubtful accounts, and there were no charges to 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 (APB No. 25) and complies with the disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123) as amended by
SFAS No. 148. Under APB 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.



The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123
to stock-based employee compensation:



|                                                                                                                             |  |                              |      |   |      |   |         |  
|---------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ---- | - | ---- | - | ------- | -
|                                                                                                                             |  | Three Months Ended March 31, |     
|(in thousands, except per share data)                                                                                        |  | 2004                         |      |   | 2003 |  
|Net income (loss), as reported                                                                                               |  | $                            | 652  |   |      | $ | (11,176 | )
|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 |  |                              | (134 | ) |      |   | (1,197  | )
|                                                                                                                             |  |                              |      |   |      |   |         |  
|Pro forma net income (loss)                                                                                                  |  | $                            | 518  |   |      | $ | (12,373 | )
|Net income (loss) per share:                                                                                                 |  |                              |      |   |      |   |         |  
|As reported: Basic                                                                                                           |  | $                            | 0.01 |   |      | $ | (0.33   | )
|As reported: Diluted                                                                                                         |  | $                            | 0.01 |   |      | $ | (0.33   | )
|Pro forma: Basic                                                                                                             |  | $                            | 0.01 |   |      | $ | (0.36   | )
|Pro forma: Diluted                                                                                                           |  | $                            | 0.01 |   |      | $ | (0.36   | )



The fair value of each
option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants in March 31, 2004 and 2003: risk-free interest rates of 4.18%, expected dividend yields of 0%, expected life
of six years to expiration and expected volatility of 357%.



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. During 2003, 0.3 million shares were returned
to the Company as the result of employee terminations prior to vesting. 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 $5.3 million of deferred compensation for this issuance. In accordance with FASB Interpretation (FIN) No. 44, Accounting for Certain
Transactions Involving Stock Compensation (FIN No. 44), the deferred compensation is being amortized on a straight-line basis over the ten-year cliff vesting period.



During the quarter ended March 31, 2004, the Company granted 128,660 shares of restricted stock to employees with a weighted
average price of $1.76 per share and 10,800 stock options with an weighted average exercise price of $1.53 per share.



21



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Accounting for Income Taxes



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



Accounting for Derivative Instruments



The Company accounts for derivative instruments in accordance with SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities (SFAS No.133), as amended. SFAS No. 133 establishes standards of accounting and reporting for derivative instruments and hedging activities, and requires that
all derivatives be recognized on the balance sheet at fair value. Changes in the fair value of derivatives that do not meet the hedge accounting criteria are reported in earnings.



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.



Revenues were generated by providing transport, colocation and communications
access management services to our customers. We recognized $5.6 million in transport service revenues in the quarter ended March 31, 2004. Revenues from colocation and other services were $1.5 million in the quarter ended March 31, 2004, and
revenues from communications access management services were $0.5 million in the quarter ended March 31, 2004.



Recent Accounting Pronouncements



In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities, (FIN 46), an interpretation of Accounting Research Bulletin No. 51, Consolidated
Financial Statements. FIN 46 establishes accounting guidance for consolidation of variable interest entities that function to support the activities of the primary beneficiary. In December 2003, the FASB revised FIN 46 and issued FIN 46
(revised December 2003) (FIN 46R). In addition to conforming to previously issued FASB Staff Positions, FIN 46R deferred the implementation date for certain variable interest entities. This revised interpretation is effective for all
entities no later than the end of the first reporting period that ends after March 15, 2004. The Company does not have any investments in or contractual relationship or other business relationship with a variable interest entity and therefore the
adoption of this interpretation will not have any impact on the Companys consolidated financial position or results of operations.



3. PROPERTY, PLANT AND EQUIPMENT



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



|                                     |  |                |         |   |                   |   |         |  
|------------------------------------ |  | -------------- | ------- | - | ----------------- | - | ------- | -
|                                     |  | March 31, 2004 |         |   | December 31, 2003 |  
|Computer software                    |  | $              | 205     |   |                   | $ | 200     |  
|Computer equipment                   |  |                | 357     |   |                   |   | 256     |  
|Leasehold improvements               |  |                | 30      |   |                   |   | 30      |  
|Office equipment and furniture       |  |                | 146     |   |                   |   | 146     |  
|Network equipment and infrastructure |  |                | 116,696 |   |                   |   | 113,858 |  
|                                     |  |                |         |   |                   |   |         |  
|Subtotal                             |  |                | 117,434 |   |                   |   | 114,490 |  
|Accumulated depreciation             |  |                | (29,768 | ) |                   |   | (27,532 | )
|                                     |  |                |         |   |                   |   |         |  
|Property, plant and equipment, net   |  | $              | 87,666  |   |                   | $ | 86,958  |  
|                                     |  |                |         |   |                   |   |         |  



Depreciation expense on property,
plant and equipment was $2.3 million and $2.2 million for the three months ended March 31, 2004 and 2003, respectively.



4. SIGNIFICANT EVENTS



On January 30, 2004, the Company completed the acquisition of the operating assets of gateway.realty.new jersey.llc, also known as Gateway Colocation.
Gateway Colocation operates a 49,000 square foot communications hub and colocation facility located at 165 Halsey Street in Newark, New Jersey. The transaction was an acquisition of assets treated as a business combination subject to



22



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purchase accounting. The purchase agreement includes an earn-out payment based upon the achievement of
certain financial objectives with respect to the revenues generated by the facility. More specifically, the earn-out payment will be based on the gross revenues, on an annualized basis, for a particular month designated by Gateway
Colocation during the twenty-four month period immediately subsequent to closing. The earn-out payment, if payable, will be paid in shares of the Companys common stock. However, the issuance of such additional shares, in the
aggregate with the shares of common stock issued at closing, will not exceed 19.9% of the issued and outstanding shares of common stock of the Company as of the closing date without first receiving stockholder approval. FiberNet agreed to, and
subsequently filed with the Securities and Exchange Commission a registration statement covering the resale of the shares issued at closing, and has agreed to file a registration statement with respect to the resale of shares issued, if any,
pursuant to the terms of the earn-out provision. In connection with the closing of the acquisition, Oskar Brecher, a founder of Gateway Colocation, has been appointed to the board of directors of the Company.



In connection with the acquisition, the Company paid $432,000 in cash
(including acquisition costs of approximately $262,000), and issued to Gateway Colocation 2.9 million shares of common stock with fair value of approximately $4.6 million on the date issued. The acquisition was accounted for under the purchase
method of accounting. The assets acquired were recorded at their estimated fair values as determined by the Company based on information currently available and on current assumptions about future operations. Pro forma financial statements were not
presented as the acquisition was not deemed significant.



The
Company recorded $2.3 million of goodwill as a result of this acquisition. A summary of the allocation of the total transaction consideration is as follows (in thousands):



|                                |  |   |      
|------------------------------- |  | - | -----
|Total Transaction Consideration |  | $ | 4,998
|Less assets acquired:           |  |   |      
|Property, plant and equipment   |  |   | 2,370
|Other intangible assets         |  |   | 486  
|Other assets                    |  |   | 334  
|Plus liabilities assumed:       |  |   |      
|Accrued expenses                |  |   | 198  
|Deferred revenues               |  |   | 331  
|                                |  |   |      
|Goodwill                        |  | $ | 2,337
|                                |  |   |      



Also on January 30,
2004 in an unrelated transaction, the Company entered into a Common Stock Purchase Agreement (the Investor Purchase Agreement), with certain investors, pursuant to which the Company issued to the investors, in a private offering, an
aggregate of 6.4 million shares of common stock at a price of $1.25 per share, for gross proceeds to the Company of $8.0 million. Pursuant to the terms of the Investor Purchase Agreement, the Company also issued to such investors warrants (with an
expiration date three and one-half years after closing) to purchase an aggregate of 1.9 million shares of common stock at an exercise price of $1.75 per share. Additionally, the company issued 256,000 shares of common stock to the placement agent.



In connection with the Investor Purchase Agreement, the
Company entered into a Registration Rights Agreement with the investors, dated as of January 30, 2004, which required the Company to file a registration statement with the Securities and Exchange Commission with respect to the resale of (i) the
shares of common stock issued to the investors and (ii) the shares of common stock underlying the warrants issued to the investors. These shares were included in a registration statement that was declared effective on April 14, 2004.



In connection with the consummation of both the acquisition and equity
financing described above, the Company entered into certain transactions with the lenders under its credit facility. The Company and the lenders executed an eleventh amendment to the credit agreement, pursuant to which, among other things, the
lenders consented to the above-referenced transactions. The eleventh amendment also revised the automatic reductions of the commitments underlying the credit facility that are required on a quarterly basis beginning on March 31, 2004. Expressed as a
percentage of the aggregate, outstanding commitments, the automatic reductions were revised to a total of 8% in 2004, 40% in 2005, 48% in 2006 and 4% at maturity on March 31, 2007. As of March 31, 2004 the Company had satisfied the entire 8% of the
mandatory reduction of commitments for 2004. In addition, the eleventh amendment also incorporated adjustments to the financial covenants of the credit facility. As a condition to the lenders entering into the eleventh amendment, the Company agreed
to reduce the exercise price of certain previously issued outstanding warrants held by the lenders to purchase approximately 379,230 shares of common stock from $3.60 per share to $0.001 per share, which were immediately exercised by the lenders.
The Company compared the value of the warrants prior to repricing with the value of the warrants after the repricing using the Black-Scholes option pricing model and determined that there was no material difference in value. Therefore the re-pricing
of warrants had no impact on the Companys financial statements.



Unrelated to any transactions discussed above, during the quarter ended March 31, 2004, various investors exercised an aggregate of 249,000 warrants.



23



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In February 2004, the Company settled a threatened litigation matter by issuing 200,000 shares of common
stock, and a one-time cash payment of $0.3 million. As a result of the settlement of this outstanding litigation matter, FiberNet recorded a $0.5 million expense in selling, general and administration for the period ended December 31, 2003. A
portion of this settlement was covered by insurance, and the Company recorded an outstanding receivable of approximately $0.2 million related to the insurance coverage for this claim.



On March 10, 2004, the Company was notified that it prevailed as the claimant in an arbitration proceeding regarding a
breach of contract. FiberNet was awarded approximately $2.7 million in cash, payment of which was received on April 9, 2004. Of the total award, $2.4 million related to payment for services previously provided and earned, and the Company recognized
this amount as revenues in the quarter ended March 31, 2004. The remaining $0.3 million was for the reimbursement of expenses incurred in connection with the proceeding. The Company has recorded this reimbursement as a reversal of previously accrued
expenses included in selling, general and administrative expenses in 2003.



Also in connection with this arbitration award, the Company recognized an additional $0.3 million in revenues that were previously deferred. The Company did not recognize revenues related to this arbitration
proceeding or the disputed contract in prior periods as the collectability of amounts due under the contract was in doubt.



5. SUBSEQUENT EVENTS



On April 13, 2004, the Company repaid $1.6 million of outstanding revolving loan indebtedness, which is available to be redrawn in the future subject to
compliance with the terms of the credit agreement. As a result of these transactions, the Company had $15.1 million of outstanding indebtedness and $4.8 million of outstanding letters of credit as of May 10, 2004. In addition, the Company had $5.1
million of available borrowing capacity and $0.4 million of availability to issue letters of credit under the credit facility, again subject to compliance with the terms of the credit agreement.



6. RESTATEMENT



Subsequent to the issuance of its consolidated financial statements for the quarter ended March 31, 2004, the Company
determined that the loss on early extinguishment of debt should have been classified in other expenses rather than operating expenses in its consolidated statement of operations. This reclassification resulted in a reduction of loss from operations
of $9.0 million for the quarter ended March 31, 2003.



Subsequent to the issuance of its consolidated financial statements, the Company determined that certain prepayments from customers classified as current deferred revenue were related to long-term contracts and should have been classified
as a long-term liability. As a result, the Company has reclassified that portion of current deferred revenue as a long-term liability. This reclassification resulted in a reduction of current liabilities and a corresponding increase in long-term
liabilities of $2.0 million as of March 31, 2004 and $1.4 million as of December 31, 2003.



Finally, the Company has modified certain disclosures previously contained in Note 1. The effects of the reclassifications and additional disclosure discussed above had no impact on the Companys previously
reported net loss, net loss per share, assets, total liabilities, statements of cash flows or statements of stockholders equity for the quarters ended March 31, 2004 and March 31, 2003.



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