SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                              ---------------------

                                    FORM 10-K

    MARK ONE        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE

      [X]           SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
                    DECEMBER 31, 2001

      [ ]           TRANSITION REPORT PURSUANT TO SECTION 13 OR 5(D) OF THE
                    SECURITIES EXCHANGE ACT OF 1934

                        COMMISSION FILE NUMBER 000-31105

                                   LEXENT INC.
             (Exact name of registrant as specified in its charter)

           DELAWARE                                        13-3990223
(State or other jurisdiction of                (IRS Employer identification no.)
incorporation or organization)

                              THREE NEW YORK PLAZA
                            NEW YORK, NEW YORK 10004
          (Address of principal executive offices, including ZIP Code)

                                 (212) 981-0700
              (Registrant's telephone number, including area code)

        SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
           SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

                               TITLE OF EACH CLASS
                  ---------------------------------------------
                          Common Stock, $.001 par value
                       (including rights attached thereto)

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

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of  Registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. [ ]

         As of March 15, 2002, the aggregate market value of the Common Stock of
the Registrant held by non-affiliates of the Registrant,  based on the last sale
price of the Common Stock of the  Registrant  was  approximately  $56,517,697 on
that date.

         The number of shares of the Common Stock of the Registrant  outstanding
as of March 15, 2002 was 41,741,793.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the  Registrant's  Definitive  Proxy Statement for the 2001
Annual Meeting of Stockholders  to be held on May 13, 2002, are  incorporated by
reference into Part III of this Form 10-K.

--------------------------------------------------------------------------------

<PAGE>


--------------------------------------------------------------------------------

                                   LEXENT INC.

                           ANNUAL REPORT ON FORM 10-K
                      FOR THE YEAR ENDED DECEMBER 31, 2001

                                      INDEX


                                                                            PAGE
                                                                          NUMBER
                                                                          ------
PART I
Item 1.    Business..........................................................  3
Item 2.    Properties........................................................  7
Item 3.    Legal Proceedings.................................................  8
Item 4.    Submission of Matters to a Vote of Security Holders...............  8

PART II
Item 5.    Market for Registrant's Common Stock and Related
           Stockholder Matters...............................................  8
Item 6.    Selected Consolidated Financial Data..............................  9
Item 7.    Management's Discussion and Analysis of Financial
           Condition and Results of Operations............................... 10
Item  7A.  Quantitative and Qualitative Disclosures About Market Risk........ 16
Item 8.    Financial Statements and Supplementary Data....................... 17
Item 9.    Changes in and Disagreements with Accountants on Accounting and
           Financial Disclosures............................................. 17

PART III
Item 10.   Directors and Executive Officers of the Registrant................ 17
Item 11.   Executive Compensation............................................ 17
Item 12.   Security Ownership of Certain Beneficial Owners and Management.... 17
Item 13.   Certain Relationships and Related Transactions.................... 17

PART IV
Item 14.   Exhibits, Financial Statement Schedules, and Reports on Form 8-K.. 17

                                     Page 2
<PAGE>


                                     PART I

ITEM 1.  BUSINESS

GENERAL

         We are an infrastructure  services company, which designs,  deploys and
maintains  telecommunications,  electrical,  life safety and other  systems.  We
deliver  a  full  spectrum  of  services  including   engineering,   management,
deployment and installation in local metropolitan  markets.  Our principal focus
is to provide the expertise and resources our customers  need to design,  build,
and operate their  infrastructure  systems.  We generally  offer our services 24
hours a day, seven days a week.

         During our most recent fiscal years, our customers  included  primarily
competitive  local exchange  carriers,  internet service providers and carriers'
carriers.   Given  the  current  market  conditions  in  the  telecommunications
industry,  we have taken steps to broaden  our  customer  base to include  large
enterprise  customers,  the real estate community and government entities and to
diversify  our service  offerings  to include  systems  integration,  electrical
contracting,   installation  of  security  systems,   and  other  infrastructure
services.

         We have offices in New York,  Boston,  Washington  D.C.,  Philadelphia,
Miami,  Long  Island,  White  Plains and in New Jersey.  In 2001,  we closed our
offices in Atlanta,  Dallas, and San Jose to concentrate our efforts in our core
markets.   Some  of  our  key  customers  include  AT&T  Local  Services,   IBM,
Cablevision,  the  Dormitory  Authority  of the  State  of New  York,  WorldCom,
conEdison and Level 3 Communications.

         Our largest customers in 2001 were Level 3 Communications  and AT&T. We
generated  22.5% and 16.4%,  respectively,  of our  revenues  from each of these
customers during 2001.

         Lexent was  incorporated  in Delaware in January 1998. Our wholly owned
subsidiaries,  Hugh O'Kane Electric Co., LLC, National Network Technologies LLC,
Lexent Services,  Inc., HOK Datacom,  Inc., and Lexent Capital, Inc. were formed
in June 1998, August 1998, May 2000, November 2000 and July 2001 respectively.

         In July 1998, Hugh O'Kane Electric Co., Inc., our predecessor  company,
merged into Lexent,  and Lexent issued  22,716,600 shares of common stock to the
stockholders of our predecessor.  Following the merger, substantially all of our
assets were  contributed to our  subsidiary,  Hugh O'Kane Electric Co., LLC, and
that entity also assumed all of the  obligations of Lexent,  including  those of
our  predecessor  company.  On August 2, 2000,  we completed  an initial  public
offering  (IPO) of  6,900,000  shares of common  stock at a price of $15.00  per
share, resulting in our receipt of net proceeds of $96.3 Million Dollars.

INDUSTRY OVERVIEW

         The Telecommunications Act of 1996 opened the local telephone market to
competition by requiring the incumbent local exchange carriers (ILEC) to provide
competitive local exchange  carriers with conditional  access to their networks.
Competitive  local exchange  carriers (CLEC) were permitted to offer local, long
distance and data services to their customers  including high bandwidth services
to businesses and consumers.

         The   telecommunications   industry   grew  rapidly  with   competitive
telecommunications  companies  building  fiber  broadband  networks  in  various
locations  in  the  United  States.  The  proliferation  of   telecommunications
companies and new  technologies  created an environment in which speed to market
in the design and construction of the  telecommunication  network was a critical
component of many telecommunication companies' business plans.

         The expected demand for broadband services failed to materialize to the
extent anticipated. Along with the economic recession, the unmet expectations in
the  telecommunications  and  broadband  market  resulted in the supply of fiber
optic network capacity outstripping current demand.  Several  telecommunications
companies  faced  significant  economic  setbacks  in  2001,  and  some of these
companies filed for bankruptcy.  Most of the competitive local exchange carriers
announced  cutbacks in their expansion  plans and in their capital  expenditures
for 2001 and beyond.

                                     Page 3
<PAGE>


         We believe  that the  changing  environment  in the  telecommunications
industry has placed significant  challenges not only upon the  telecommunication
carriers but upon those  companies  that provide  services or equipment to those
carriers.  As a result,  we resized our operations  and closed  certain  offices
during 2001.

         Although a number of telecommunications carriers have ceased to operate
or have  significantly  reduced their operations and/or capital  expenditures in
2001, we believe that the need for telecommunication solutions at the enterprise
level  continues.  Accordingly,  we  offer  our  telecommunication  services  to
enterprise  customers,  the real estate community and governmental  entities. We
have   also   diversified   our   service   offerings   to   include   not  only
telecommunication  services  but  also  other  infrastructure  services  such as
systems integration, electrical contracting, security and closed circuit TV. Our
Hugh  O'Kane  Electric  Co.,  LLC  subsidiary  has a long  history of  providing
electrical   services  to  enterprise   customers,   and  we  believe  that  the
diversification  of our service offerings and the expansion of our customer base
is an appropriate strategy in today's market.

COMPETITION

         Our markets are highly  competitive  and  fragmented  and are served by
numerous   vendors.   We  believe   that  there  is  no  dominant   provider  of
infrastructure  services on a national level. Often the internal  departments of
our customers and  prospective  customers  are our primary  competitors  for the
services we offer.  We may also compete with  independent  vendors and equipment
manufacturers. Moreover, as there may be relatively few barriers to entry in the
market in which we operate,  any entity with  adequate  financial  resources and
access to technical expertise and personnel may become our competitor.

         We  believe  that the  principal  competitive  factors  in our  markets
include quality and responsiveness of service, industry experience,  reputation,
the ability to deliver  timely  results and pricing.  In addition,  expertise in
multiple   disciplines  and  in  new  and  evolving   technologies   has  become
increasingly  important.  Because some of our customers,  especially  government
entities, utilize bidding procedures to award contracts, price often becomes the
most significant  factor in the decision making process.  We believe that we can
compete effectively in our markets on the basis of our experience and reputation
in the  industries,  our knowledge of the multiple  disciplines  required by our
customers,   our  highly   trained  work  force,   our   knowledge  of  emerging
technologies, and our familiarity with equipment for multiple vendors.

STRATEGY

         Because  of  the  economic   difficulties   facing   telecommunications
carriers,  we altered our  business  strategy  during  2001.  We  broadened  our
infrastructure  offerings beyond  telecommunications  services.  We believe that
electrical   contracting,    systems   integration,    security,   and   related
infrastructure  services are a natural outgrowth of our core  telecommunications
services.  Since one of our  subsidiaries,  Hugh O'Kane Electric Co., LLC, has a
long  history  of  providing  electrical  services  in our  legacy New York City
metropolitan market, its reputation is well established.

         We often  utilize  our design and  engineering  services  to  establish
relationships  with customers as soon as a project is conceived.  Based on these
relationships,  we pursue  opportunities  for  program  management  and  network
deployment.  Once a network is deployed,  we offer ongoing  network  upgrade and
maintenance  services.  Our experience  with emerging  technologies  also offers
opportunities for network upgrades and deployment of a carrier's next generation
network. As technologies continue to evolve and networks become more complex, we
continue to broaden our services to meet the changing needs of our customers.

         In addition to the diversification of our service offerings, we seek to
broaden our customer base while still  maintaining  and  strengthening  our long
term and strategic relationships with stable  telecommunications  companies. Our
customer base currently includes cable television companies,  electric utilities
and    incumbent    telecommunications    carriers.    We   believe   that   the
telecommunications  needs of the enterprise  customers and  government  entities
continue  to  increase  in a world where  technology  is  changing  rapidly.  By
diversifying our  telecommunications  customer base beyond the competitive local
exchange carriers, we intend to reduce our exposure to the economic hardships of
the competitive  local exchange  carriers.  We believe that our  diversification
strategy  will  continue  to result in the  creation of  relationships  with new
customers and expanded relationships with existing customers.

                                     Page 4
<PAGE>


         As part of our  strategy  to deal with the  changing  telecommunication
environment,  we have taken steps to reduce our  operational  overhead  and head
count.  During 2001 and continuing into 2002, we significantly  reduced our work
force and closed offices which are no longer  strategically  consistent with our
business  plans.  We have  scaled back our plans to expand and will focus on our
core geographic markets. We are carefully  monitoring our expenses and intend to
utilize strict credit  practices to reduce  receivable  collection  risk. We are
focusing on leveraging  our  administrative  organization  to achieve other cost
savings and efficiencies.

         We continue to develop  and test a Web-based  work flow and  management
software  system  which is intended to enable us to process  orders and maintain
on-line  records of all work  performed at our  customers'  facilities.  We have
entered agreements with various  telecommunications  companies and a real estate
venture  to  offer   these   software   services   in   connection   with  their
telecommunication systems.

         We  believe  that  the  aforementioned  strategies  will  permit  us to
stabilize our business in 2002 and beyond. However, current economic conditions,
both nationally and in the telecommunications industry, may impact our abilities
to continue to maintain our business at recent levels.

ACQUISITIONS AND INVESTMENTS

         There were no significant acquisitions or investments during 2001.

SERVICES

         DESIGN, ENGINEERING AND PROGRAM MANAGEMENT

         DESIGN AND  ENGINEERING.  Our  engineers  and  technical  staff  design
telecommunication  and  other  types  of  infrastructure  systems  to  suit  our
customers' needs. Because of our knowledge of the areas where we operate and our
familiarity  with  different   technologies,   we  are  often  able  to  achieve
efficiencies  and avoid  disruptions  or delays in  installations  by  designing
networks and systems avoiding known or potential problem areas. In addition,  we
design layouts for facilities,  which include  equipment  configurations,  power
distribution systems and cable routes throughout building riser systems. We also
develop record keeping and maintenance procedures.

         PROGRAM  MANAGEMENT.  Our program  management  staff is responsible for
managing  all  aspects  of the  various  relationships  with our  infrastructure
customers.  Program  managers  oversee  the total  scope of services we provide,
including  supervision  and  coordinating  the  engineering  and design process,
securing building and zoning permits,  managing multiple vendors and documenting
the entire process for the customer.  The program  management  team provides our
customers  with a single  point of  contact  to  ensure  that  their  needs  are
continually being met.

         SPECIALIZED TELECOMMUNICATIONS SERVICES

         We believe  one of our  competitive  strengths  is that we are a single
source provider of vertically  integrated  services that have traditionally been
offered  separately by multiple vendors and coordinated by a carrier's  internal
deployment  staff.  We provide a wide range of services  for the  deployment  of
telecommunications  networks that allow for broadband  connectivity.  We install
fiber  backbone,  local SONET rings,  dense wave  division  multiplexing  (DWDM)
systems, fixed wireless systems,  digital subscriber line (DSL) and digital loop
carrier equipment,  digital cross connect systems,  routers,  power distribution
systems and telemetry  monitoring systems. We also provide daily circuit testing
of DS0,  DS1 and DS3  services  provided  by the  ILECs for our  customers.  Our
technicians  can install any of these and other  options for our  customers.  We
have the  expertise  to install  equipment  from most  major  telecommunications
equipment vendors.  Additionally,  we set up the interconnections between CLECs,
long  distance  carriers  and  ILECs,  which  allow  calls  and data to  install
equipment from most major telecommunications equipment vendors.

                                     Page 5
<PAGE>


         ELECTRICAL CONSTRUCTION, SYSTEMS INTEGRATION, SECURITY, AND MAINTENANCE
SERVICES

         We provide systems integration services,  electrical construction,  and
security system  installation  along with related  maintenance  services for our
customers.  Sometimes these services are performed as stand-alone  services.  At
other  times,   they  are   performed   in   conjunction   with  our   providing
telecommunications  services.  Our customers include enterprise  customers,  the
real estate community and government entities. The services also include premise
wiring services within buildings and among individual offices.

         UPGRADE AND MAINTENANCE SERVICES

         We provide daily upgrade and maintenance services to our customers.  As
usage  increases,  we install  new access  lines,  electrical  lines,  and other
telecommunications  and electrical  equipment to handle the additional capacity.
We also upgrade equipment and reconfigure as the technology changes or improves.
We  sometimes  have  technicians  based at  customers'  premises  to monitor any
service issues that may arise and perform routine  maintenance.  Our technicians
are  available 24 hours a day,  seven days a week to handle  emergency  repairs,
such as fiber cuts or equipment problems, while preventing or minimizing service
disruptions.  These services allow our customers to maintain the  reliability of
their networks  without  building a large workforce in all of their locations to
handle day-to-day problems.

RISK FACTORS

         In this section,  we describe several  significant  risks affecting our
Company. These risks and uncertainties are not the only ones facing our Company.
There are unknown risks and those that we currently consider immaterial.  Should
any of the risks set forth below occur, our business,  financial  condition,  or
results of operations could be materially and adversely affected.

         The telecommunications  industry has been in a state of rapid change in
2001 and 2002. Several of the competitive telecommunications carriers which have
supplied  significant  revenue to our company have suffered  significant losses,
and some have filed for bankruptcy  protection.  Most of our  telecommunications
customers  have   announced   reductions  in  their  future  plans  for  capital
expenditures.  The  telecommunications  industry  which had  projected  dramatic
growth in the need for  broadband  services has been  materially  and  adversely
impacted by the failure of such growth to materialize.  Companies that serve the
telecommunications   industry  by  providing   equipment,   engineering   and/or
installation  services have been adversely  affected by the deterioration of the
financial stability of their telecommunications  customers. It is uncertain when
and if the  telecommunications  industry  will recover and to what extent future
growth, if any, in the telecommunications industry will materialize.

         As a result of our telecommunications  customers experiencing financial
difficulties  and  curtailing  their capital  expenditures,  revenues from those
customers  have  declined.  We do not expect to  continue  to derive  historical
levels of revenue from those  customers.  We are  developing  a  diversification
strategy to diversify  both our services and our customer base because we do not
intend to be reliant upon the  competitive  telecommunications  carriers for the
bulk of our revenues. Since our diversification strategy is untested and may not
succeed,  there can be no assurance of our ability to replace  revenues from our
telecommunications carriers with revenues from new services and new customers.

         The economic  downturn has also reduced  demand for  telecommunications
services.  If the  general  level of economic  activity  does not  recover,  our
customers  may delay or not proceed with their  projects.  The  inability of our
customers,  particularly the competitive  telecommunications carriers, to obtain
capital may reduce the size or number of projects  undertaken by our  customers.
Many of the factors  affecting  our  customers  are beyond our  control,  and we
cannot be certain that our strategies will be successful.

         We have also taken  steps to lower  operational  overhead,  reduce head
count,  monitor  expenses and impose  stricter credit  guidelines.  We cannot be
certain  that our actions  will result in  profitability  for our company or the
improvement of our operating margins.  In addition,  because we have reduced our
overhead  and  the  number  of  employees,  our  business  may  not  operate  as
efficiently.  If we fail to properly  balance the goals of lowering  costs while
maintaining efficient  operations,  our results of operations will be negatively
affected.

         Our service  agreements do not assure the  continuation  of our revenue
and may be cancelled on short notice.  We may be unsuccessful in replacing those
agreements when they expire or if they are cancelled. We have also

                                     Page 6
<PAGE>


derived  a  significant  portion  of our  revenues  from  a  limited  number  of
customers, and the loss of a few customers could cause a significant decrease in
our revenues if we are not able to replace  those  customers  with new customers
for equivalent services. We also expect our quarterly results to fluctuate based
upon a mix of  factors.  Furthermore,  although we seek to enter into long term,
recurring revenue agreements, we cannot be certain these will materialize.

         Our  operating  results  may  suffer  because  of  competition  in  the
infrastructure services industries.  Both the telecommunications services market
and the other markets in which we compete are highly  competitive and are served
by  numerous  companies.  We believe  that our  ability to compete  depends on a
number of factors outside of our control,  including: the prices at which others
offer  competitive  services,  the  abilities  of our  customers  to perform the
services  themselves,  the general  economic  climate,  and the  downturn in the
telecommunications industry.

         The  departure  of  key  personnel  could  also  disrupt  our  business
operations.  Our success  depends to a  significant  degree  upon the  continued
contributions of our executive  officers,  both individually and as a group, and
upon our ability to attract and retain  qualified  technical  staff. The loss of
key  personnel or the  inability to hire and retain  qualified  employees  could
adversely affect our business.

         To the extent that our customers  suffer adverse  developments in their
financial  condition,  they may be unable to repay  some or all of our  accounts
receivable,  and as a result, our financial results would be adversely impacted.
Provision for doubtful  accounts  represents our estimates of the amounts of our
receivables  which will be  uncollectible.  If in any period  there are  adverse
developments in the financial  condition of our customers,  we may significantly
increase our provision for doubtful  accounts.  The amounts of our  receivables,
which will  ultimately be collected from each of our customers,  may differ from
our estimates,  and  accordingly,  our operating  results in any period may vary
significantly  depending  on changes in our  customers'  financial  condition or
changes in our estimates of the uncollectible amounts of our receivables.

EMPLOYEES

         As of December 31, 2001, we had 747 employees, 601 of whom are billable
employees  working directly on projects.  Approximately 431 of our employees are
represented  by a labor  union,  the  International  Brotherhood  of  Electrical
Workers or IBEW. We have not experienced any work stoppages in the past 25 years
and  we  believe  that  our   relationships   with  our   employees   and  union
representatives are excellent.

         TRAINING  AND CAREER  DEVELOPMENT.  We believe  that our  training  and
career  development helps us to retain our employees.  Employees  participate in
ongoing  educational  programs to enhance their technical and management  skills
through  classroom  and  field  training.  Manufacturers  of  telecommunications
equipment  also  sponsor  training   programs   covering  the  installation  and
maintenance of their equipment,  which our employees  regularly  attend. We also
provide  opportunities  for promotion and mobility within Lexent that we believe
are key components of employee retention.

         We believe our employee training, development and advancement structure
better aligns the  interests of our  employees  with our interests and creates a
cooperative,  entrepreneurial  atmosphere and shared vision. We are dedicated to
maintaining an innovative,  creative and empowering environment where we work as
a team to exceed the  expectations  of our  customers  and provide our employees
with personal and professional growth opportunities.

ITEM 2.  PROPERTIES

FACILITIES

         We  lease  space  at  31  separate  locations  throughout   California,
Connecticut,  Delaware, Florida, Georgia, Illinois,  Massachusetts,  New Jersey,
New York, Pennsylvania,  Texas and Virginia. Of these 31 locations, we currently
sublease  one location in each of  California,  Connecticut,  Massachusetts  and
Texas to unrelated third parties.  Additionally,  three of our leased  locations
are owned by Hugh J. O'Kane,  Jr., our Chairman,  and Kevin M. O'Kane,  our Vice
Chairman,  President  and  Chief  Executive  Officer,  and  two of  these  three
locations are also owned by Denis J. O'Kane,  a  stockholder  in Lexent Inc. and
the  brother  of each of Kevin and Hugh  O'Kane,  Jr.  Our  principal  executive
offices are located in approximately 20,000 square feet of office space at Three
New York Plaza in New York, New York. The lease for this office space expires in
February 2005.

                                     Page 7
<PAGE>


ITEM 3.  LEGAL PROCEEDINGS

         We are subject to various claims and  proceedings  that occur from time
to time. In particular,  several  employment  related lawsuits or administrative
complaints have been filed alleging wrongful termination,  breach of contract or
employment discrimination.  There was also a class action suit filed in the U.S.
District Court,  Southern  District of New York,  entitled  LABANSKY,  ET AL. V.
LEXENT  INC.,  ET AL. on October 26, 2001  against the  Company,  certain of its
senior executive and its underwriters, alleging violation of the Securities laws
in connection with the initial public offering. Based upon information currently
available  to us, we believe  that none of the  current  claims or  proceedings,
either  individually  or in the aggregate,  is likely to have a material  effect
upon our business.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         There were no matters  submitted to a vote of the  stockholders  during
the fourth quarter of the year ended December 31, 2001.


                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

         Our common stock is listed on the NASDAQ  National  Market System under
the symbol "LXNT." The following table sets forth,  for the quarters  indicated,
the high and low sale  prices  of the  Company's  common  stock as  reported  by
NASDAQ.

                                                             HIGH      LOW
                                                            ------   ------
         YEAR ENDED DECEMBER 31, 2000
           3rd Quarter ..................................   $37.81   $18.75
           4th Quarter ..................................   $30.94   $11.19

         YEAR ENDED DECEMBER 31, 2001
           1st Quarter ..................................   $24.13   $ 4.03
           2nd Quarter ..................................   $ 8.64   $ 2.60
           3rd Quarter ..................................   $ 7.69   $ 4.70
           4th Quarter ..................................   $ 7.60   $ 4.90

         YEAR ENDED DECEMBER 31, 2002
           1st Quarter (through March 15, 2002) .........   $ 6.68   $ 2.95

         On March 15, 2002, there were approximately 41,741,793 shares of Common
Stock outstanding which were held by approximately  3,100 stockholders of record
of the  Company's  common  stock.  The last sale price for the  common  stock as
reported by NASDAQ was $3.44 per share on that date.

DIVIDEND POLICY

         We currently intend to retain any future earnings to finance the growth
and development of our business and therefore do not anticipate  paying any cash
dividends  in the  foreseeable  future.  Any  future  determination  to pay cash
dividends  will be at the  discretion  of the  board  of  directors  and will be
dependent  upon  our  financial  condition,   results  of  operations,   capital
requirements,  general  business  conditions and other factors that the board of
directors may deem relevant.

RECENT SALES OF UNREGISTERED SECURITIES

         In 2001, the Company did not sell or issue any securities that were not
registered under the Securities Act.

                                     Page 8
<PAGE>


ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

         The following table sets forth certain selected consolidated  financial
data of the Company for the years ended December 31, 2001, 2000, 1999, 1998, and
1997. The selected consolidated data is derived from our consolidated  financial
statements.  You should read the following selected consolidated  financial data
together with our consolidated  financial  statements and their notes as well as
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations."

<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                               ------------------------------------------------------
                                                 2001        2000        1999       1998       1997
                                               --------    --------    --------   --------   --------
                                                       (in thousands, except per share amounts)
<S>                                            <C>         <C>         <C>        <C>        <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues                                       $240,578    $295,993    $150,862   $ 70,959   $ 53,718
Cost of revenues                                195,001     222,754     119,577     55,752     42,801
General and administrative expenses              20,237      20,340       9,012      6,815      6,907
Depreciation and amortization                     5,803       3,628       1,495        779        510
Non-cash stock-based compensation                 6,058      26,159       2,191         --         --
Provision for doubtful accounts                  32,286       2,551       2,373      1,096         --
Restructuring charges                            13,564          --          --         --         --
                                               --------    --------    --------   --------   --------
Operating income (loss)                         (32,371)     20,561      16,214      6,517      3,500
Interest expense                                  1,077       1,252       1,104      1,143      1,151
Interest income                                  (2,334)     (1,966)         --         --         --
Other (income) expense, net                       2,002          (5)         27        166          9
                                               --------    --------    --------   --------   --------
Income (loss) before income taxes               (33,116)     21,280      15,083      5,208      2,340
Income tax provision (benefit)                  (13,856)     12,704       7,131      1,380        151
                                               --------    --------    --------   --------   --------
Net income (loss)                              $(19,260)   $  8,576    $  7,952   $  3,828   $  2,189
                                               ========    ========    ========   ========   ========
Net income (loss) per share:
     Basic                                     $  (0.46)   $   0.27    $   0.32   $   0.16   $   0.10
                                               ========    ========    ========   ========   ========
     Diluted                                   $  (0.46)   $   0.22    $   0.24   $   0.15   $   0.10
                                               ========    ========    ========   ========   ========
Weighted average number of common shares
    outstanding:
    Basic                                        41,449      30,839      22,721     22,717     22,717
                                               ========    ========    ========   ========   ========
    Diluted                                      41,449      38,266      33,531     26,390     22,717
                                               ========    ========    ========   ========   ========
PRO FORMA INFORMATION (UNAUDITED):
Income before income taxes                                                        $  5,208   $  2,340
Pro forma provision for income taxes (1)                                             2,344      1,053
                                                                                  --------   --------
Pro forma net income (1)                                                          $  2,864   $  1,287
                                                                                  ========   ========
Pro forma net income per share (2):
    Basic                                                  $   0.21    $   0.24   $   0.11   $   0.06
                                                           ========    ========   ========   ========
    Diluted                                                $   0.20    $   0.23   $   0.11   $   0.06
                                                           ========    ========   ========   ========
Pro forma weighted average number of shares:
    Basic                                                   40,654      32,536      27,025     22,717
                                                          ========    ========    ========   ========
    Diluted                                                 42,356      34,606      27,025     22,717
                                                          ========    ========    ========   ========

                                                                  AS OF DECEMBER 31,
                                               ------------------------------------------------------
                                                 2001        2000        1999       1998       1997
                                               --------    --------    --------   --------   --------
                                                                    (in thousands)
CONSOLIDATED BALANCE SHEET DATA:
Cash                                           $ 75,839    $ 63,690    $  1,158   $  1,495   $  2,312
Working capital                                 128,996     140,811      25,697     10,691      2,516
Total assets                                    168,515     199,001      60,379     32,309     18,212
Total debt                                        5,593      10,807      18,812     13,985     15,460
Total stockholders' equity (deficit)            137,969     150,481       3,715     (6,388)    (4,676)
</TABLE>

(1)  Through July 23, 1998, we elected to be taxed as an S corporation under the
     Internal  Revenue  Code of  1986.  Accordingly,  we did not  recognize  any
     provision for federal income tax expense during periods prior to that

                                     Page 9
<PAGE>


     time. The pro forma provision for income taxes and pro forma net income for
     1998 and 1997 reflect the amounts we would have recorded if we had been a C
     corporation during these periods.

(2)  Pro forma net income per share for 2000,  1999 and 1998 assumes  conversion
     of redeemable  convertible preferred stock at the rate of 1.77209 shares of
     common stock for each share of redeemable  convertible  preferred stock, at
     the later of the beginning of the period  presented or the date of issuance
     of the redeemable  convertible  preferred  stock.  For a description of the
     computation of pro forma net income per share and the number of shares used
     in the pro forma  calculations  for the years 2000 and 1999,  see Note 1 of
     "Notes to Consolidated Financial Statements."

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

OVERVIEW

         We are an infrastructure  services company, which designs,  deploys and
maintains  telecommunications,  electrical,  life safety and other  systems.  We
deliver  a  full  spectrum  of  services  including   engineering,   management,
deployment and installation in local metropolitan  markets.  Our principal focus
is to provide the expertise and resources our customers  need to design,  build,
and operate their  infrastructure  systems.  We generally  offer our services 24
hours a day, seven (7) days a week.

         During our most recent fiscal years, our customers  included  primarily
competitive  local exchange  carriers,  internet service providers and carriers'
carriers.   Given  the  current  market  conditions  in  the  telecommunications
industry,  we have taken steps to broaden  our  customer  base to include  large
enterprise  customers,  the real estate community and government entities and to
diversify  our service  offerings  to include  systems  integration,  electrical
contracting,   installation  of  security  systems,   and  other  infrastructure
services.

         We have offices in New York,  Boston,  Washington  D.C.,  Philadelphia,
Miami, Long Island, White Plains and in New Jersey. For the years 2001 and 2000,
approximately  79% and  75%,  respectively,  of our  revenues  was  earned  from
services provided in the New York metropolitan region,  including New York City,
New Jersey, Long Island and White Plains.

         Our cost of revenues  includes  compensation  and benefits of employees
working directly on projects;  overhead costs including supervision and support,
vehicles,   facilities   expenses,   tools  and  equipment,   and  other  direct
project-related  expenses.  Labor and  related  benefits  comprise  the  largest
portion of our cost of revenues because our customers  generally furnish most of
the  materials  required for each  project.  However,  where we provide  program
management services,  we may be responsible for providing the required materials
as well as any subcontracting services.

         General and administrative  expenses include compensation and benefits,
facilities  expenses,  and other expenses not related to supervision and support
of employees working directly on projects.

         Depreciation  and  amortization  expenses  include  depreciation of our
property  and  equipment  and  amortization  related  to  capitalized  leases of
equipment,  leasehold  improvements and computer software purchased for internal
use.

         As of December  31,  2001,  we had 601  employees  working  directly on
projects  and  146  employees  providing  supervision,   support,  and  general,
administrative and marketing functions.

         Our  customers  for the design  and  deployment  of  telecommunications
networks include large, well-established  telecommunications carriers as well as
smaller, early stage  telecommunications  carriers. We have derived, and believe
that we will continue to derive,  a  significant  portion of our revenues from a
limited  number  of  customers.   For  the  years  2001  and  2000,  we  derived
approximately  23% and 25%,  respectively,  of our  revenues  from  our  largest
customer, and 16% and 8%, respectively,  of our revenues from our second largest
customer.  The volume of work performed for specific customers is likely to vary
from period to period,  and a major  customer in one period may require a lesser
amount   of   our   services   in  a   subsequent   period.   Several   of   our
telecommunications-carrier  customers who provided us with significant  revenues
in 1999,  2000,  and/or 2001 have  experienced  financial  difficulties and have
curtailed their capital expenditures. As a result, revenues from those customers
have  declined  and we do not expect to continue to derive  future  revenue from
those customers. We intend to derive other revenues

                                    Page 10
<PAGE>


by providing our services to new  customers,  but no assurance of our success in
replacing those revenues can be given.

         On January 1, 1997, we repurchased common shares owned by a stockholder
and issued a subordinated promissory note in the amount of $10.2 million bearing
interest  at 6% per  year.  We make  quarterly  payments  of $0.4  million  plus
interest on that note and as of December 31, 2001, a balance of $3.6 million was
outstanding.

         On  July  23,  1998,  we  converted  from  an  S  corporation  to  a  C
corporation.  Prior to becoming a C  corporation,  our  stockholders  were taxed
individually for their share of our profits.  Until July 23, 1998, our financial
statements did not reflect a provision for federal  income taxes.  Subsequent to
that date, we have  recorded  federal  income taxes at the standard  statutory C
corporation  rates based on pre-tax  income.  For the year 1998,  our  financial
statements  reflect an income tax provision  based on pre-tax income earned from
July 23, 1998 to December 31, 1998.

         On August 2, 2000,  we completed an initial  public  offering  (IPO) of
6,900,000  shares of common  stock at a price of $15.00 per share,  resulting in
our receipt of net proceeds of $96.3 million.

CRITICAL ACCOUNTING POLICIES

         For most of our projects,  revenue and expense is recognized  under the
completed  contract method,  in which we recognize  revenue and expense when our
services have been performed and the projects have been completed.  For projects
which have been completed but not yet billed to customers,  we recognize revenue
based on our  estimates  of the amounts to be realized.  When such  projects are
billed,  any  differences  between our initial  estimates and the actual amounts
billed are recorded as increases or decreases to revenue.

         For  cost-plus  projects,  in each period we  recognize  expense as the
costs are  incurred  and we  recognize  revenue in an amount  equal to the costs
incurred plus the contractual markup.

         For larger  projects other than  cost-plus  projects,  generally  those
whose  duration is expected to exceed 90 days, we recognize  revenue and expense
using the  percentage-of-completion  method. Under the  percentage-of-completion
method,  in each period we  recognize  expense as the costs are  incurred and we
recognize  revenue based on the ratio of the costs  incurred for each project to
our currently  estimated total costs to be incurred for the project,  multiplied
by the estimated revenue to be earned for the project.  Accordingly, the revenue
we  recognize in a given  period  depends on our current  estimates of the total
remaining costs to complete  individual projects and the total estimated revenue
to be earned for those projects. If in any period we significantly  increase our
estimate  of the  total  remaining  costs to  complete  a  project  or lower our
estimate of revenue to be earned for a project,  we may  recognize no additional
revenue  or we may  reduce  previously  recorded  revenue  with  respect to that
project.  As a result, our gross margin in such period and in future periods may
be significantly reduced and in some cases we may recognize a loss on individual
projects prior to their completion.  Provisions for estimated losses on projects
are made in the period in which such losses are  determined.  The  projects  for
which we use the  percentage-of-completion  method of  accounting  are typically
structured with milestone  events that dictate the timing of payments to us from
our customers. Accordingly, there may be a significant delay between the date we
record the  revenue  and the date we receive  payment  from our  customers.  Our
customers  for these  projects may withhold a certain  percentage  (usually 10%)
from each billing until after the project has been completed and final approvals
have been obtained.

         Non-cash stock-based  compensation  expense represents  amortization of
deferred  stock-based  compensation  resulting primarily from the grant of stock
options or sale of  restricted  stock at exercise  or sale  prices  subsequently
deemed, for financial reporting purposes,  to be less than the fair value of the
common stock on the grant or sale date. Deferred  stock-based  compensation also
includes the fair value at grant date of options  granted to  non-employees.  To
the extent that unvested  options are forfeited,  previously  recorded  deferred
stock-based  compensation  is reversed.  Deferred  stock-based  compensation  is
amortized  to  expense  over  the  applicable   vesting   periods  ranging  from
immediately to up to four years.  Deferred tax assets are recorded in connection
with  amortization of stock-based  compensation  expense related to nonqualified
options.  To the  extent  that  vested  nonqualified  options  for which we have
recorded deferred tax assets expire  unexercised or are exercised at a time when
the fair value of the stock is lower than the deemed fair value of the stock for
financial  reporting  purposes on the date the options were granted  ($22.80 per
share),  a portion or all of such  deferred tax assets would not be realized and
such portion would be charged to expense.

                                    Page 11
<PAGE>


         Provision for doubtful accounts represents our estimates of the amounts
of our  receivables  which will be  uncollectible.  If in any  period  there are
adverse  developments  in  the  financial  condition  of our  customers,  we may
significantly  increase our provision for doubtful accounts.  The amounts of our
receivables  which will  ultimately be collected  from each of our customers may
differ from our estimates, and accordingly,  our operating results in any period
may  vary  significantly  depending  on  changes  in  our  customers'  financial
condition  or  changes  in our  estimates  of the  uncollectible  amounts of our
receivables.

RESULTS OF OPERATIONS

         The following  table sets forth,  for the periods  indicated,  selected
statement of operations data as a percentage of total  revenues.  Our results of
operations are reported as a single  business  segment.  The percentages may not
add due to rounding.

                                                        AS OF DECEMBER 31,
                                                   ----------------------------
                                                    2001       2000       1999
                                                   ------     ------     ------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues                                            100.0%     100.0%     100.0%
Cost of revenues                                     81.1       75.3       79.3
General and administrative expenses                   8.4        6.9        6.0
Depreciation and amortization                         2.4        1.2        1.0
Non-cash stock-based compensation                     2.5        8.8        1.5
Provision for doubtful accounts                      13.4        0.9        1.6
Restructuring charges                                 5.6        0.0        0.0
                                                   ------     ------     ------
Operating income (loss)                             (13.5)       6.9       10.7
Interest expense                                      0.4        0.4        0.7
Interest income                                      (1.0)      (0.7)       0.0
Other (income) expense, net                           0.8        0.0        0.0
                                                   ------     ------     ------
Income (loss) before income taxes                   (13.8)       7.2       10.0
Income tax provision (benefit)                       (5.8)       4.3        4.7
                                                   ------     ------     ------
Net income (loss)                                    (8.0)%      2.9%       5.3%
                                                   ======     ======     ======

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

         REVENUES.  Our revenues decreased by 19% to $240.6 million in 2001 from
$296.0 million in 2000. The decrease in revenues was primarily a result of lower
capital expenditures by several of our large telecommunications customers due to
changing  conditions  in the  telecommunications  industry and to the filing for
bankruptcy  by a number of our  telecommunications  customers  during 2001. As a
result, we do not expect to continue to derive our historical levels of revenues
from telecommunications  customers. During 1999, we entered into an engineering,
procurement  and  construction  contract (the "EPC  contract")  with our largest
customer,  Level 3 Communications,  under which we recorded  approximately $47.3
million and $69.2 million of revenues for 2001 and 2000,  respectively.  The EPC
contract was completed  for all markets  except New York and Boston during 2001,
and is expected to be fully  completed  during 2002, and  accordingly,  revenues
from the EPC contract will be lower in 2002 than in 2001.

         COST OF REVENUES.  Our cost of revenues  represented 81% of revenues in
2001 compared to 75% of revenues in 2000.  The increased  percentage  was due in
part to fixed  overhead costs which  represented a higher  percentage of a lower
level of revenues,  and in part to pricing pressure.  We anticipate that pricing
pressure will continue  during 2002.  Costs of  approximately  $41.3 million and
$60.7 million were incurred in 2001 and 2000,  respectively,  in connection with
the EPC contract.

         GENERAL   AND   ADMINISTRATIVE   EXPENSES.   Our  total   general   and
administrative  expenses were approximately the same in 2001 and 2000.  Expenses
for salaries were higher in 2001 because of a higher  average  number of general
and  administrative  personnel and rent expense was higher because of additional
office  premises  occupied in mid 2000 and early 2001, but those higher expenses
were offset by a lower provision for incentive compensation in 2001.

                                    Page 12
<PAGE>


         DEPRECIATION  AND  AMORTIZATION.   Our  depreciation  and  amortization
expense  increased  to $5.8  million  in 2001 from  $3.6  million  in 2000.  The
increase  reflects  additional  equipment  acquired and  leasehold  improvements
installed in newly occupied premises  primarily in the last half of 2000 and the
first quarter of 2001.

         NON-CASH STOCK-BASED COMPENSATION. Amortization of deferred stock-based
compensation  declined  to $6.1  million  in 2001 from  $26.2  million  in 2000,
primarily  because  amortization in 2000 reflected  up-front  vesting of options
granted to certain executives in the first quarter of 2000. The decrease in 2001
was also due in part to the  reversals of $1.3  million of deferred  stock-based
compensation  for unvested  options which were forfeited,  and $7.6 million with
respect to an optionee  whose status was changed from  employee to consultant on
April 1, 2001. The latter's  unvested  options were  remeasured at their current
fair  value of $1.3  million  on April 1, 2001,  which was  charged to  deferred
compensation  and is being  amortized  to  expense  over the  remaining  vesting
period.

         PROVISION FOR DOUBTFUL  ACCOUNTS.  Our provision for doubtful  accounts
increased to $32.3  million in 2001 from $2.6  million in 2000.  The increase in
2001 was due to adverse  developments  in the financial  condition of several of
our  customers  during  2001,   primarily   telecommunications   carriers  which
experienced  adverse  changes in their  financial  condition  during  2001,  and
accordingly,  we increased our estimates of the amount of receivables which will
not be collectible from those customers.

         RESTRUCTURING   CHARGES.   In  2001,  we  recorded   $13.6  million  in
restructuring charges, primarily in connection with the closing of seven offices
and  reduction  in  our  workforce.  The  restructuring  charges  are  comprised
primarily of $9.1 million for  obligations  under leases for premises  which the
Company  has  vacated,  $3.3  million  for  severance  and  related  contractual
obligations  for  approximately  115  non-unionized  personnel and executives in
areas being  closed or scaled back,  and $1.2 million for  writeoffs of property
and equipment.  During the year we scaled back our expansion  plans and closed a
number of offices,  and changed our  business  plans to focus  primarily  on our
traditional  markets,  including the New York  metropolitan  region,  Washington
D.C., Philadelphia and Boston, among others.

         We expect the  implementation of our  restructuring  plan to reduce our
pretax  operating  expenses  by $10.7  million in the year  2002,  of which $5.3
million would  represent  cash savings.  These  anticipated  cash savings result
primarily  from reduced  headcount,  fewer  vehicles,  and sublease  income from
vacated premises.

         Total cash outlays under the  restructuring  program are expected to be
approximately $12.4 million, of which approximately $3.0 million was paid during
2001.  Of the  balance  of  $9.3  million,  severance  and  related  contractual
obligations  of $1.8  million  are  expected  to be paid by the end of 2002  and
obligations  under  leases  of $7.6  million  are  expected  to be paid over the
remaining  terms of the  leases up to nine  years.  We expect  to  complete  the
restructuring plan by the end of 2002.

         INTEREST  EXPENSE.  Interest expense  decreased to $1.1 million in 2001
from $1.3 million in 2000.  The decrease was  primarily  due to a lower  average
level of debt outstanding in 2001. On August 1, 2001, we repaid the loan of $2.0
million  outstanding  under our revolving  credit  facility,  and during 2001 we
repaid $1.5 million of our subordinated note payable to a stockholder.

         INTEREST INCOME. Interest income increased to $2.3 million in 2001 from
$2.0  in  2000.  Interest  income  is  earned  on  our   interest-bearing   cash
equivalents.  The increased income in 2001 was due to a higher average amount of
cash equivalents, partially offset by lower prevailing interest rates.

         OTHER (INCOME)  EXPENSE,  NET. Other  (income)  expense,  net, was $2.0
million of  expense,  comprised  primarily  of a writeoff  of an  investment  in
securities  of $1.6  million  and costs of $0.3  million  related to a potential
acquisition not consummated.

         INCOME TAX  PROVISION  (BENEFITS).  Excluding  tax benefits  related to
amortization  of deferred  stock-based  compensation,  our effective tax rate in
2001 was  approximately  46% because a significant  portion of our operations is
concentrated  in New York  City,  which  subjects  us to a local  tax on  income
derived in that jurisdiction.  Amortization of deferred stock-based compensation
relates to both incentive stock options and  nonqualified  options,  however tax
benefits are not available for incentive stock options.  Therefore, tax benefits
recorded in connection with  amortization of deferred  stock-based  compensation
represent a lower  effective rate compared with the effective rate for all other
income (loss). As a result, our total effective tax rate for financial reporting
purposes was 42% and 60% for 2001 and 2000, respectively.

                                    Page 13
<PAGE>


YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

         REVENUES.  Our revenues increased by 96% to $296.0 million in 2000 from
$150.9  million in 1999.  The  increase  in  revenues  was a result of  expanded
business from existing key customers, revenue generation from a growing customer
base  and  expansion  into  new  markets.   During  1999,  we  entered  into  an
engineering,  procurement and construction  contract with a customer, or the EPC
contract,  under which we recorded approximately $69.2 million and $34.6 million
of revenues for 2000 and 1999, respectively.

         COST OF  REVENUES.  Our cost of  revenues  increased  by 86% to  $222.8
million in 2000 from $119.6  million in 1999.  The  increase  was due in part to
increased technical personnel in support of additional demand from customers for
our services, an increase in rent expense for additional premises and equipment,
and an  increase  in our  fleet  of  vehicles.  In  addition,  we  expanded  our
operations into new geographic  markets in 2000, where we incurred costs for new
supervisory and support personnel,  tools and equipment,  vehicles and leasehold
improvements.  Cost of revenues declined to 75.3% of total revenues in 2000 from
79.3% in the same period of 1999,  because the rate of increase in our  revenues
was higher  than the rate of increase in our  expenses.  Costs of  approximately
$60.7 million and $31.0 million were incurred in 2000 and 1999, respectively, in
connection with the EPC contract.

         GENERAL AND  ADMINISTRATIVE  EXPENSES.  Our general and  administrative
expenses  increased 126% to $20.3 million in 2000 from $9.0 million in 1999. The
increase was primarily due to additional  compensation  and related benefits for
new executive  and  administrative  personnel  required to support our increased
revenues.

         DEPRECIATION  AND  AMORTIZATION.   Our  depreciation  and  amortization
expense  increased  143% to $3.6 million in 2000 from $1.5 million in 1999.  The
increase reflects the depreciation of additional equipment acquired during 2000.

         NON-CASH STOCK-BASED COMPENSATION. We recorded amortization of non-cash
stock-based compensation of $26.2 million in 2000, compared with $2.2 million in
1999,  related to options  and  restricted  stock  granted  at  exercise  prices
determined  by our Board of  Directors at dates of grant to be equal to the fair
value of the  underlying  stock,  but  with  respect  to  which,  for  financial
reporting purposes, the exercise or sales prices were subsequently determined to
be lower than the deemed fair values of the underlying  common stock at dates of
grant.

         INTEREST  EXPENSE.  Interest expense  increased to $1.3 million in 2000
from $1.1 million in 1999. The increase was due to higher  interest rates on our
revolving   line  of  credit  and  increases  in  equipment  and  capital  lease
obligations,  offset by lower  interest  expense on  subordinated  notes payable
because of a lower average level of such  subordinated  notes  outstanding  as a
result of repayments of $2.0 million during 2000.

         INTEREST  INCOME.  Interest  income was $2.0 million for the year 2000,
representing  interest earned on our interest-bearing  cash equivalents acquired
in August 2000 with the proceeds from the Company's initial public offering.

         INCOME TAX PROVISION  (BENEFITS).  Excluding the effect of amortization
of  deferred  stock-based  compensation,  our  effective  tax  rate for 2000 was
approximately   43%  because  a  significant   portion  of  our   operations  is
concentrated  in New York  City,  which  subjects  us to a local  tax on  income
derived in that jurisdiction.  Amortization of deferred stock-based compensation
relates to both incentive stock options and nonqualified stock options, however,
tax benefits are not available  for  incentive  stock  options.  Therefore,  tax
benefits  recorded in  connection  with  amortization  of  deferred  stock-based
compensation  represent a lower  effective rate compared with the effective rate
for all other income.  As a result,  our total  effective tax rate for financial
reporting purposes was 60% and 47% for the years 2000 and 1999, respectively.

LIQUIDITY AND CAPITAL RESOURCES

         Our  primary  liquidity  needs  are for  working  capital  and  capital
expenditures.  Our primary  sources of liquidity are cash flows from  operations
and the net proceeds from our IPO. As of December 31, 2001, we had cash and cash
equivalents of $75.8 million.

         On August 2, 2000,  we completed  an IPO of 6,900,000  shares of common
stock at a price of $15.00 per share.  We received net proceeds of $96.3 million
after  underwriting  discounts  and before  expenses  of the  offering.  We used
approximately  $10.1  million  of  the  net  proceeds  to pay a  portion  of the
borrowings outstanding under our

                                    Page 14
<PAGE>

revolving credit facility.  We also used $1.1 million of the net proceeds to pay
dividends  accrued after December 31, 1998 on redeemable  convertible  preferred
stock which was converted to common stock upon consummation of our IPO, and $0.4
million  to  repay  subordinated  notes  payable  to our  two  principal  common
stockholders.  The  remaining  net  proceeds of the IPO,  after  expenses of the
offering, were invested in interest-bearing cash equivalents.

         In June 1999, we obtained a $10 million  revolving credit facility from
two banks,  which was subsequently  increased to $12.5 million in December 1999,
and to $20 million in March 2000.  In November  2000, we completed a $50 million
bank credit facility with five banks, which was to be used for general corporate
purposes including working capital and potential  acquisitions.  In August 2001,
we repaid the $2.0 million loan outstanding  under the credit  facility,  and in
December  2001  we  terminated  the  credit  facility  as  we do  not  currently
anticipate that borrowings  under the credit facility would be required in order
to meet our projected needs for liquidity for the foreseeable future.

         Cash  used in  operations  is  required  primarily  to  carry  accounts
receivable   and  to  fund  projects  in  process  and  other  working   capital
requirements.  To the extent that our customers  suffer adverse  developments in
their  financial  condition,  they may be unable to provide  us with  additional
revenues  and they also may be unable to repay  some or all of our  receivables,
and as a result our cash  receipts  would be  adversely  impacted.  In 2001,  we
recorded a provision for uncollectible receivables of $32.3 million representing
our  estimate  of the  portion of our  receivables  which will be  uncollectible
because of adverse  developments  in the  financial  condition of several of our
customers. Net cash provided by operations was $25.1 million for 2001, resulting
from net collections of receivables offset by payments made for accounts payable
and income  taxes.  Net cash used in operations  was $15.1 million in 2000,  and
$0.0 million in 1999.

         We invoice our customers for large  projects on a monthly basis as work
is performed  and/or when milestones are achieved.  Unattained  milestones would
result in a delay in billing  the  customers,  which  would in turn  result in a
delay in cash  receipts.  For certain  projects,  customers  hold back a certain
percentage  (usually  10%) until the project is  completed.  As of December  31,
2001, these hold-backs aggregated $0.7 million.

         If revenues  increase in future  years,  we would likely be required to
finance an increased  level of working  capital,  primarily  comprised of higher
levels of accounts  receivable  and projects in process.  Alternatively,  to the
extent we are not  successful  in  replacing  revenues  previously  derived from
several of our large  telecommunications-carrier  customers  with other revenues
from  existing or new  customers,  our  liquidity  position  would be  adversely
impacted  if we are unable to reduce our costs at a rate  commensurate  with the
reduction in revenues, and we could incur a net loss.

         Cash used in investing activities,  primarily capital expenditures, was
$7.9 million for 2001, $11.3 million for 2000, and $2.9 million for 1999.

         Net cash  used in  financing  activities  for  2001  was $5.0  million,
primarily for debt  repayments.  Net cash provided by financing  activities  for
2000 was $88.9 million,  comprised of $96.3 million in proceeds from our IPO and
$6.6 million  proceeds  from  exercises of stock options and sales of restricted
stock,  offset by costs of the IPO of $2.3 million,  preferred dividends of $1.1
million, and net debt repayments. Net cash provided from financing activities in
1999 was $2.6 million, representing net borrowings.

         We have no  material  commitments  other than  installment  obligations
related to equipment  purchases,  leases for facilities,  computer equipment and
vehicles,  and a subordinated note payable to a stockholder.  We anticipate that
available  cash and cash  equivalents  and cash  flows from  operations  will be
sufficient  to satisfy  our working  capital  requirements  for the  foreseeable
future.  Our future working capital  requirements and liquidity will depend upon
many factors,  including our customers' financial condition and their ability to
pay amounts owing to us, our ability to replace the revenues  previously derived
from several of our large telecommunications-carrier customers with revenue from
other customers, and our ability to reduce costs at a rate commensurate with any
reduction in revenues which we are unable to replace with new revenues.

         A summary of our contractual  cash  obligations as of December 31, 2001
is as follows:

                                    Page 15
<PAGE>

--------------------------------------------------------------------------------
                                          Payments Due By Period
--------------------------------------------------------------------------------
                                                                       2005 and
                            Total        2002       2003       2004     beyond
------------------------ ----------- ----------- ---------- ---------- ---------
                                             (in  thousands)
------------------------ ----------- ----------- ---------- ---------- ---------
Long-term debt             $ 4,586     $ 2,215     $1,880     $  491     $    --
------------------------ ----------- ----------- ---------- ---------- ---------
Capital leases               1,007         717        280         10          --
------------------------ ----------- ----------- ---------- ---------- ---------
Operating leases            27,972       7,832      5,793      3,882      10,465
------------------------ ----------- ----------- ---------- ---------- ---------
Total contractual
  cash obligations         $33,565     $10,764     $7,953     $4,383     $10,465
--------------------------------------------------------------------------------

     On October 2, 2001 we received  publicly  traded  shares of common stock of
Metromedia Fiber Network Inc. ("MFN") with a value of $4.8 million at that date,
in partial  settlement of a  receivable.  As of December 31, 2001 the MFN common
stock had a market value of $4.9 million.  The MFN common stock is classified as
an  "available  for sale"  security  and is  included  in current  assets on our
balance sheet. Realization of the recorded value of the MFN common stock depends
on the market price on the date the shares are sold. One half of such shares may
be sold on or after  January  2, 2002 and the other half may be sold on or after
April 2,  2002.  During  January  2002 we sold  half of such  shares  for  total
proceeds of $3.0 million.

EFFECTS OF RECENTLY ISSUED ACCOUNTING STANDARDS

         In June 2001, the Financial  Accounting Standards Board issued SFAS 141
"Business  Combinations"  and SFAS 142 "Goodwill and Other  Intangible  Assets,"
which are effective for us beginning January 1, 2002. SFAS 141 requires that all
business  combinations  initiated after June 30, 2001 be accounted for under the
purchase  method of accounting.  SFAS 142 provides that  intangible  assets with
finite lives must be amortized over their estimated  useful life, and intangible
assets  with  indefinite  lives  will not be  amortized  but  will be  evaluated
annually for impairment.

         In October 2001, the Financial  Accounting  Standards Board issued SFAS
144  "Accounting  for the  Impairment  or Disposal of  Long-Lived  Assets." This
statement  defines the  accounting and reporting for the impairment and disposal
of  long-lived  assets and is  effective  for us on  January 1, 2002.  We do not
expect this statement to have a material  effect on our results of operations or
financial position.

FORWARD LOOKING STATEMENTS

         This  Annual   Report  on  Form  10-K,   including  the  Notes  to  the
Consolidated Financial Statements and this Management's  Discussion and Analysis
of Financial  Condition and Results of Operations,  contains both historical and
forward-looking  statements.  All statements other than statements of historical
fact are, or may be deemed to be, forward-looking  statements within the meaning
of section 27A of the  Securities  Act of 1933 and section 21E of the Securities
Exchange Act of 1934. These forward-looking  statements are only predictions and
generally can be identified  by use of statements  that include  phrases such as
"believe," "expect," "anticipate," "intend," "plan," "foresee" or other words or
phrases of similar  import.  Similarly,  statements  that describe the Company's
objectives,  plans or goals also are forward-looking  statements.  The Company's
operations  are  subject to certain  risks and  uncertainties  that could  cause
actual  results to differ  materially  from those  contemplated  by the relevant
forward-looking  statement.  The forward-looking  statements included herein are
made only as of the date of this  Annual  Report  on Form  10-K and the  Company
undertakes no obligation to publicly update such  forward-looking  statements to
reflect  subsequent  events or  circumstances.  No assurances  can be given that
projected results or events will be achieved.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         The following  discusses our exposure to market risk related to changes
in interest rates, equity prices and foreign currency exchange rates.

         At  December  31,  2001,  we had  cash and  cash  equivalents  of $75.8
million.  Cash equivalents are  interest-bearing  investment  grade  securities,
primarily  short-term,  highly liquid investments with maturities at the date of
purchase of less than 90 days.  These  investments  are subject to interest rate
risk  and  will  decrease  in  value  if  market  interest  rates  increase.   A
hypothetical  increase in the market  interest rates by 10 basis points over the
rates in  effect on  December  31,  2001  would  cause  the fair  value of these
short-term  investments  to  decline  by an  insignificant  amount.  We have the
ability to hold these investments until maturity, and therefore we do not expect
the value of these  investments to be affected to any significant  degree by the
effect of a sudden change in market interest  rates.  Declines in interest rates
over time will, however, reduce our interest income.

         At December 31, 2001, we owned common shares of MFN with a market value
of $4.9 million.  The shares are traded on NASDAQ,  and we are subject to market
price risk with respect to the shares.  During January 2002 we sold half of such
shares for total proceeds of $3.0 million.  We are  restricted  from selling the
remaining shares until April 2, 2002.

         We currently do not have any international operations, and we currently
do not enter into forward exchange contracts or other financial instruments with
respect to foreign currency.  Accordingly,  we currently do not have any foreign
currency exchange rate risk.

                                    Page 16
<PAGE>


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         See  Item 14 and the  index  therein  for a  listing  of the  Financial
Statements included as a part of this report.

ITEM 9.  CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
         FINANCIAL DISCLOSURE.

         None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The  information   concerning  the  Company's  directors  and  officers
required by Item 10 is incorporated by reference to the information set forth in
Lexent's Definitive Proxy Statement for the 2002 Annual Meeting of Stockholders.

ITEM 11. EXECUTIVE COMPENSATION

         The  information   concerning  the  Company's  directors  and  officers
required by Item 11 is incorporated by reference to the information set forth in
Lexent's Proxy Statement for the 2002 Annual Meeting of Stockholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The  information   concerning  the  Company's  directors  and  officers
required by Item 12 is incorporated by reference to the information set forth in
Lexent's Definitive Proxy Statement for the 2002 Annual Meeting of Stockholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The  information   concerning  the  Company's  directors  and  officers
required by Item 13 is incorporated by reference to the information set forth in
Lexent's Definitive Proxy Statement for the 2002 Annual Meeting of Stockholders.


                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

         The  information   concerning  the  Company's  directors  and  officers
required by Item 14 is incorporated by reference to the information set forth in
Lexent's Definitive Proxy Statement for the 2002 Annual Meeting of Stockholders.

                                    Page 17
<PAGE>

         (a) The  following  financial  statements,  schedules  and exhibits are
filed as part of this Report:

                  (1) Financial  Statements.  Reference is made to the Financial
Statements commencing on page 21 of this Report.

                  (2) All schedules are omitted  because they are not applicable
or the required information is shown in the financial statements or the notes to
the financial statements.

                  (3) Exhibits:

EXHIBIT NO.     DESCRIPTION
-----------     -----------
     3.1        Second  Amended  and  Restated   Certificate  of   Incorporation
                (incorporated   herein  by  reference  to  Exhibit  3.6  to  the
                Company's   Registration   Statement   on  Form  S-1  (File  No.
                333-30660))

     3.2        Amended and Restated By-Laws

     4.1        Specimen  certificate  for shares of Common Stock  (incorporated
                herein by reference to Exhibit 4.1 to the Company's Registration
                Statement on Form S-1 (File No. 333-30660))

     4.2        Registration Rights Agreement,  dated as of July 23, 1998, among
                Lexent Inc. and the investors named therein (incorporated herein
                by  reference  to  Exhibit  4.2  to the  Company's  Registration
                Statement on Form S-1 (File No. 333-30660))

     4.3        Agreement,  dated July 20, 1998, by and among Lexent Inc.,  Hugh
                O'Kane  Electric  Co.,  Inc.  and Denis J. O'Kane  (incorporated
                herein by reference to Exhibit 4.4 to the Company's Registration
                Statement on Form S-1 (File No. 333-30660))

     4.4        Voting  Agreement,  dated February 11, 2000, by and among Lexent
                Inc.,  Hugh J.  O'Kane,  Jr. and Kevin M.  O'Kane  (incorporated
                herein by reference to Exhibit 4.5 to the Company's Registration
                Statement on Form S-1 (File No. 333-30660))

     10.1*      Lexent Inc.  and Its  Subsidiaries  Amended and  Restated  Stock
                Option and Restricted Stock Purchase Plan  (incorporated  herein
                by  reference  to  Exhibit  4.1  to the  Company's  Registration
                Statement on Form S-8 (File No. 333-61958))

     10.2*      Form of Stock Option Agreement  pursuant to the Stock Option and
                Restricted Stock Purchase Plan (incorporated herein by reference
                to Exhibit 10.2 to the Company's  Registration Statement on Form
                S-1 (File No. 333-30660))

     10.3       Amended  and  Restated  Promissory  Note,  dated July 23,  1998,
                between Lexent Inc. and Denis J. O'Kane  (incorporated herein by
                reference  to  Exhibit  10.4  to  the   Company's   Registration
                Statement on Form S-1 (File No. 333-30660))

     10.4       Form of  Indemnification  Agreement  between Lexent Inc. and the
                executive officers and directors thereof (incorporated herein by
                reference  to  Exhibit  10.5  to  the   Company's   Registration
                Statement on Form S-1 (File No. 333-30660))

     10.5*      Employment  Agreement,  dated July 23, 1998, as amended February
                14, 2000, between Hugh O'Kane Jr. and Lexent Inc.  (incorporated
                herein  by   reference   to  Exhibit   10.6  to  the   Company's
                Registration Statement on Form S-1 (File No. 333-30660))

     10.6*      Employment  Agreement,  dated July 23, 1998, as amended February
                14, 2000,  between  Kevin  O'Kane and Lexent Inc.  (incorporated
                herein  by   reference   to  Exhibit   10.7  to  the   Company's
                Registration Statement on Form S-1 (File No. 333-30660))

     10.7*      Employment Agreement, dated August 20, 1998, as amended February
                14,   2000,   between   Jonathan   H.  Stern  and  Lexent   Inc.
                (incorporated  herein  by  reference  to  Exhibit  10.8  to  the
                Company's   Registration   Statement   on  Form  S-1  (File  No.
                333-30660))

     10.8*      Employment Agreement, dated December 23, 1999, between Victor P.
                DeJoy, Sr. and Lexent Inc.  (incorporated herein by reference to
                Exhibit  10.11 to the Company's  Registration  Statement on Form
                S-1 (File No. 333-30660))

     10.9*      Lexent Inc. Employee Stock Purchase Plan (incorporated herein by
                reference to Exhibit 4.2 to the Company's Registration Statement
                on Form S-8 (File No. 333-61958))

     10.10+     Engineer,  Procure and Construct  Contract,  dated  December 28,
                1998,  between  Level  3  Communications,  LLC and  Lexent  Inc.
                (incorporated  herein  by  reference  to  Exhibit  10.14  to the
                Company's   Registration   Statement   on  Form  S-1  (File  No.
                333-30660))

     11.1**     Statement Regarding Computation of Per Share Earnings

     21.1       Subsidiaries of Lexent Inc.

     23.1       Consent of independent accountants, PriceWaterhouseCoopers LLP

                                   Page 18
<PAGE>


----------
 *  Constitutes a management contract or compensatory plan or arrangement.

** Information  is  provided  in  Note  1 of  Notes  to  Consolidated  Financial
   Statements

+  Portions of this exhibit have been filed  confidentially  with the Commission
   pursuant to a confidential treatment request filed by the Company

         (b) Reports on Form 8 - K:

                  (1)  Lexent  filed a Form 8-K on  October  1, 2001 in which it
         announced the appointment of Kathleen Perone to the Board of Directors,
         effective October 1, 2001

                                    Page 19
<PAGE>


                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange  Act of 1934,  Lexent Inc.  has duly caused this Report to be signed on
its behalf by the  undersigned,  thereunto duly  authorized,  in the City of New
York, New York, on March 19, 2002.

                                           LEXENT INC.

                                           By:

                                           ----------------------------------
                                           Hugh J. O'Kane, Jr.
                                           Chairman of the Board of Directors



         Pursuant  to the  requirements  of the  Securities  Act of  1934,  this
Registration  Statement  has  been  signed  by  the  following  persons  in  the
capacities held on the dates indicated.

         SIGNATURES                          TITLE                    DATE
         ----------                          -----                    ----

                                    Vice Chairman, President      March 19, 2002
                                    and Chief Executive
--------------------------------    Officer (Principal
         Kevin M. O'Kane            Executive Officer);
                                    Director

                                    Chairman of the Board of      March 19, 2002
--------------------------------    Directors
       Hugh J. O'Kane, Jr.

                                    Executive Vice President      March 19, 2002
--------------------------------    and Chief Financial Officer
        Jonathan H. Stern           (Principal Financial and
                                    Accounting Officer)


                                    Director                      March 19, 2002
--------------------------------
      L. White Matthews III

                                    Director                      March 19, 2002
--------------------------------
         Kathleen Perone

                                    Director                      March 19, 2002
--------------------------------
        Richard L. Schwob

                                    Director                      March 19, 2002
--------------------------------
        Richard W. Smith

                                    Director and Executive        March 19, 2002
--------------------------------    Vice President
      Walter C. Teagle III

                                    Page 20
<PAGE>


                   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                                TABLE OF CONTENTS


                                                                        PAGE NO.
                                                                        --------

Report of Independent Accountants                                          22

Consolidated Balance Sheets as of December 31, 2001 and 2000               23

Consolidated Statements of Operations for the Years Ended                  24
  December 31, 2001, 2000 and 1999

Consolidated Statements of Changes in Stockholders' Equity
  (Deficit) for the Years Ended December 31, 2001, 2000, and 1999          25

Consolidated Statements of Cash Flows for the Years Ended
  December 31, 2001, 2000, and 1999                                        26

Notes to Consolidated Financial Statements                                 27

                                    Page 21
<PAGE>


REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Lexent Inc.:

         In our opinion,  the accompanying  consolidated  balance sheets and the
related consolidated  statements of operations,  changes in stockholders' equity
(deficit)  and of cash flows  present  fairly,  in all  material  respects,  the
financial  position of Lexent Inc.  and  Subsidiaries  at December  31, 2001 and
2000,  and the results of their  operations and their cash flows for each of the
three years in the period ended December 31, 2001 in conformity  with accounting
principles  generally accepted in the United States of America.  These financial
statements   are  the   responsibility   of  the   Company's   management;   our
responsibility  is to express an opinion on these financial  statements based on
our audits.  We conducted  our audits of these  statements  in  accordance  with
auditing  standards  generally  accepted in the United States of America,  which
require that we plan and perform the audit to obtain reasonable  assurance about
whether the financial  statements  are free of material  misstatement.  An audit
includes  examining  on a  test  basis,  evidence  supporting  the  amounts  and
disclosures in the financial  statements,  assessing the  accounting  principles
used and  significant  estimates made by management,  and evaluating the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.




/S/ PRICEWATERHOUSECOOPERS LLP

New York, New York
February 7, 2002

                                    Page 22
<PAGE>


                          LEXENT INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

                                                              DECEMBER 31,
                                                           2001          2000
                                                         --------      --------
                          ASSETS:
Current Assets:
  Cash and cash equivalents                              $ 75,839      $ 63,690
  Available-for-sale securities                             4,932            --
  Receivables, net                                         41,171       105,253
  Prepaid expenses and other current assets                 5,220           400
  Deferred tax asset, net                                  25,627        12,359
                                                         --------      --------
       Total current assets                               152,789       181,702

Property and equipment, net                                12,896        14,614
Other assets                                                2,830         2,685
                                                         --------      --------
       Total assets                                      $168,515      $199,001
                                                         ========      ========

           LIABILITIES AND STOCKHOLDERS' EQUITY:

Current liabilities:
  Accounts payable                                       $  6,751      $ 11,124
  Accrued liabilities                                      13,635        17,881
  Income taxes payable                                         --         3,628
  Billings in excess of costs and estimated
    earnings on uncompleted projects                          474         5,080
  Subordinated note payable to stockholder                  1,582         1,582
  Equipment and capital lease obligations                   1,351         1,596
                                                         --------      --------
       Total current liabilities                           23,793        40,891

Subordinated note payable to stockholder                    1,978         3,561
Accrued liabilities - noncurrent                            4,093            --
Note payable to banks                                          --         2,000
Equipment and capital lease obligations                       682         2,068
                                                         --------      --------
    Total liabilities                                      30,546        48,520
                                                         --------      --------

Commitments and Contingencies

Stockholders' equity:
  Common stock, $.001 par value, 120,000,000
    shares authorized, 41,612,372 and 41,084,300
    shares outstanding at 2001 and 2000,
    respectively                                               42            41
  Additional paid-in capital                              158,986       165,919
  Deferred stock-based compensation                        (9,085)      (22,705)
  Accumulated other comprehensive income                       60            --
  Retained earnings (accumulated deficit)                 (12,034)        7,226
                                                         --------      --------
    Total stockholders' equity                            137,969       150,481
                                                         --------      --------
    Total liabilities and stockholders' equity           $168,515      $199,001
                                                         ========      ========


          See accompanying notes to consolidated financial statements.

                                    Page 23
<PAGE>


                          LEXENT INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

                                                     YEAR ENDED DECEMBER 31,
                                                  2001        2000        1999
                                                --------    --------    --------
Revenues                                        $240,578    $295,993    $150,862
Cost of revenues                                 195,001     222,754     119,577
General and administrative expenses               20,237      20,340       9,012
Depreciation and amortization                      5,803       3,628       1,495
Non-cash stock-based compensation*                 6,058      26,159       2,191
Provision for doubtful accounts*                  32,286       2,551       2,373
Restructuring charges                             13,564          --          --
                                                --------    --------    --------
Operating income (loss)                          (32,371)     20,561      16,214
Interest expense                                   1,077       1,252       1,104
Interest income                                   (2,334)     (1,966)         --
Other (income) expense, net                        2,002          (5)         27
                                                --------    --------    --------
Income (loss) before income taxes                (33,116)     21,280      15,083
Income tax provision (benefit)                   (13,856)     12,704       7,131
                                                --------    --------    --------
Net income (loss)                               $(19,260)   $  8,576    $  7,952
                                                ========    ========    ========

Net income (loss) per share:
  Basic                                         $  (0.46)   $   0.27    $   0.32
                                                ========    ========    ========
  Diluted                                       $  (0.46)   $   0.22    $   0.24
                                                ========    ========    ========

Weighted average number of common
shares outstanding:
  Basic                                           41,449      30,839      22,721
                                                ========    ========    ========
  Diluted                                         41,449      38,266      33,531
                                                ========    ========    ========


Pro forma net income per share:
  Basic                                                     $   0.21    $   0.24
                                                            ========    ========
  Diluted                                                   $   0.20    $   0.23
                                                            ========    ========

Pro forma weighted average number of shares:
  Basic                                                       40,654      32,536
                                                            ========    ========
  Diluted                                                     42,356      34,606
                                                            ========    ========


*  Substantially  all of these amounts would have been classified as general and
   administrative expenses


          See accompanying notes to consolidated financial statements.

                                    Page 24
<PAGE>



<TABLE>
<CAPTION>
                                                    LEXENT INC. AND SUBSIDIARIES
                                CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
                                                       (DOLLARS IN THOUSANDS)


                                                                                  STOCKHOLDERS' EQUITY
                                                    -------------------------------------------------------------------------------
                                                                                       ACCUMULATED
                                      REDEEMABLE                                          OTHER    RETAINED                 STOCK-
                                      CONVERTIBLE             ADDITIONAL    DEFERRED     COMPRE-   EARNINGS     COMPRE-    HOLDERS
                                       PREFERRED     COMMON     PAID-IN    STOCK-BASED   HENSIVE (ACCUMULATED   HENSIVE    EQUITY
                                         STOCK        STOCK     CAPITAL   COMPENSATION    INCOME    DEFICIT)     LOSS     (DEFICIT)
                                      -----------   --------  ----------  ------------ ---------- -----------  --------   ---------
<S>                                     <C>         <C>        <C>          <C>          <C>       <C>         <C>           <C>
Balance at January 1, 1999 ............ $ 11,801    $     23   $   1,804    $     --     $    --   $ (8,215)   $     --      (6,388)
Net income ............................       --          --          --          --          --      7,952          --       7,952
Issuance of 202,500 common shares .....       --          --          68          --          --         --          --          68
Tax benefit from exercise of
  nonqualified stock options ..........       --          --         582          --          --         --          --         582
Deferred stock-based compensation .....       --          --       9,333      (9,333)         --         --          --          --
Amortization of deferred
  stock-based compensation ............       --          --          --       2,191          --         --          --       2,191
Dividends accrued on preferred
  shares ..............................      690          --          --          --          --       (690)         --        (690)
                                        --------    --------   ---------    --------    --------   --------    --------   ---------
Balance at December 31, 1999 .......... $ 12,491    $     23   $  11,787    $ (7,142)   $     --   $   (953)   $     --   $   3,715
Net income ............................       --          --          --          --          --      8,576          --       8,576
Issuance of 1,450,576 common
  shares ..............................       --           1       6,576          --          --         --          --       6,577
Issuance of 6,900,000 common shares
  in initial public offering ..........       --           7      96,248          --          --         --          --      96,255
Conversion of 5,538,458 preferred
  shares to 9,814,624 common upon
  initial public offering .............  (11,801)         10      11,791          --          --         --          --      11,801
Costs of initial public offering ......       --          --      (2,309)         --          --         --          --      (2,309)
Tax benefit from exercise of
  nonqualified stock options ..........       --          --         104          --          --         --          --         104
Deferred stock-based compensation .....       --          --      41,722     (41,722)         --         --          --          --
Amortization of deferred
  stock-based compensation ............       --          --          --      26,159          --         --          --      26,159
Dividends accrued on preferred
  shares ..............................      397          --          --          --          --       (397)         --        (397)
Dividends paid on preferred shares ....   (1,087)         --          --          --          --         --          --          --
                                        --------    --------   ---------    --------    --------   --------    --------   ---------
Balance at December 31, 2000 .......... $     --    $     41   $ 165,919    $(22,705)   $     --   $  7,226    $     --   $ 150,481
Comprehensive income (loss), year
  ended December 31, 2001:
Net loss ..............................       --                                                    (19,260)    (19,260)    (19,260)
Other comprehensive income, net
  of tax: .............................
  Unrealized gain on available-
    for-sale securities, net of
    income tax provision ..............       --          --         --          --          60         --          60          60
                                                                                                              ---------
Comprehensive loss ....................       --          --         --          --          --         --    $(19,200)         --
                                                                                                              =========
Reversal of unvested deferred stock
  based compensation ..................       --          --      (8,860)      8,860         --         --                      --
Tax benefit from exercise of
  nonqualified stock options ..........       --          --         376          --         --         --                     376

Deferred stock-based compensation .....       --          --       1,298      (1,298)        --         --                      --

Amortization of deferred stock-
  based compensation ..................       --          --          --       6,058         --         --                   6,058

Issuance of 528,072 common shares .....       --           1         253          --         --         --                     254
                                        --------    --------   ---------    --------        ---   --------                --------
Balance at December 31, 2001 .......... $     --    $     42   $ 158,986    $ (9,085)       $60   $(12,034)               $137,969
                                        ========    ========   =========    ========        ===   ========                ========
</TABLE>


          See accompanying notes to consolidated financial statements.

                                    Page 25
<PAGE>


                          LEXENT INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)

                                                     YEAR ENDED DECEMBER 31,
                                                   2001       2000       1999
                                                 --------    -------    -------
Cash flows from operating activities:
  Net income (loss)                              $(19,260)   $ 8,576    $ 7,952
  Adjustments to reconcile net income (loss)
    to net cash provided by (used in)
    operating activities:
      Provision for uncollectible amounts, net     32,286      2,551      2,373
      Restructuring charges                        13,564         --         --
      Depreciation and amortization                 5,803      3,628      1,495
      Loss on impairment/disposal of assets         1,662         21         71
      Non-cash stock-based compensation             6,058     26,159      2,191
      Provision for deferred tax benefits         (12,944)    (8,767)    (1,896)
      Changes in working capital items:
        Receivables                                26,596    (59,056)   (24,779)
        Prepaid expenses and other current
          assets                                     (287)      (244)       379
        Other assets                                 (308)      (784)      (391)
        Accounts payable                           (4,373)     2,690      3,065
        Accrued liabilities                       (11,315)     8,244      5,464
        Income taxes payable and prepaid taxes     (7,781)    (2,066)     3,304
        Billings in excess of costs and
          estimated earnings on uncompleted
          projects                                 (4,606)     3,996        778
                                                 --------    -------    -------
            Net cash provided by (used in)
              operating activities                 25,095    (15,052)         6
                                                 --------    -------    -------
Cash flows from investing activities:
  Capital expenditures and acquisitions, net
  of equipment loans and capital leases            (6,256)   (11,294)    (2,908)
  Investments in securities                        (1,655)        --         --
                                                 --------    -------    -------
            Net cash used in investing
              activities                           (7,911)   (11,294)    (2,908)
                                                 --------    -------    -------
Cash flows from financing activities:
  Proceeds from exercise of stock options
    and sales of restricted stock                     254      6,576         68
  Preferred dividends paid                             --     (1,087)        --
  Proceeds from initial public offering of
    common stock                                       --     96,255         --
  Costs of initial public offering                     --     (2,309)        --
  Repayment of subordinated notes payable
    to stockholders                                (1,583)    (1,972)    (1,581)
  Net (repayments to) borrowings from banks        (2,000)    (6,841)     4,341
  Net (payments) borrowings (to) from
    related parties                                    --       (408)       421
  Repayment of equipment loans and
    capital leases                                 (1,706)    (1,336)      (684)
                                                 --------    -------    -------
            Net cash (used in) provided by
              financing activities                 (5,035)    88,878      2,565
                                                 --------    -------    -------

Net increase (decrease) in cash and cash
  equivalents                                      12,149     62,532       (337)
Cash and cash equivalents at beginning
  of period                                        63,690      1,158      1,495
                                                 --------    -------    -------

Cash and cash equivalents at end of period       $ 75,839    $63,690    $ 1,158
                                                 ========    =======    =======
Supplemental cash flow information:
  Cash paid for:
            Interest                             $    854    $ 1,307    $ 1,009
            Income taxes                            7,756     23,541      3,532
Supplemental disclosures of noncash investing
  and financing activities:
  Property and equipment additions financed
    by equipment loans and capital leases        $     74    $ 2,143    $ 2,751
  Accrued dividends on preferred shares                --         --        690
  Tax benefit from exercise of nonqualified
    stock options                                     376        104        582
  Common stock received in settlement of
    accounts receivable                             4,820         --         --


          See accompanying notes to consolidated financial statements.

                                    Page 26
<PAGE>


                          LEXENT INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

FORMATION OF COMPANY

         Lexent Inc.  ("Lexent") was  incorporated  in Delaware in January 1998.
Lexent's  wholly  owned  subsidiaries,  Hugh O'Kane  Electric  Co., LLC ("HOK"),
National Network  Technologies LLC ("NNT"),  Lexent Services,  Inc. ("LSI"), HOK
Datacom,  Inc. ("HOK Datacom"),  and Lexent Capital, Inc. ("LCI") were formed in
June 1998,  August 1998,  May 2000,  November 2000 and July 2001,  respectively.
Lexent and its subsidiaries are together referred to herein as "the Company."

DESCRIPTION OF BUSINESS

         The  Company is an  infrastructure  services  company,  which  designs,
deploys  and  maintains  telecommunications,  electrical,  life safety and other
systems. The Company delivers a full spectrum of services including engineering,
management,  deployment and  installation  in local  metropolitan  markets.  The
Company's key customers include AT&T Local Services,  Cablevision,  WorldCom and
Level 3 Communications.

         The  Company  has  offices  in  New  York,  Boston,   Washington  D.C.,
Philadelphia,  Miami, Long Island, White Plains and in New Jersey. For the years
2001,  2000, and 1999, 79%, 75% and 80% of revenues,  respectively,  were earned
from services provided in the New York metropolitan  region,  including New York
City, New Jersey, Long Island and Westchester County.

PRINCIPLES OF CONSOLIDATION

         The consolidated  financial  statements  include the accounts of Lexent
and its wholly owned  subsidiaries.  All significant  intercompany  accounts and
transactions have been eliminated in consolidation.

REVENUE AND COST RECOGNITION

         Design and engineering services are generally performed on a unit price
basis  or on a  time  and  materials  basis.  Program  management  services  are
generally  performed on a cost-plus-fee  basis.  Network deployment services are
generally  performed on a unit price or fixed price basis.  Network  upgrade and
maintenance  services are generally performed on a unit price basis or on a time
and materials basis.

         For  projects  whose  duration is  generally  expected to be 90 days or
less,  revenues and related expenses are recognized using the completed contract
method.  Under this method,  revenues and expenses are recognized  when services
have been  performed and the projects have been  completed.  For projects  which
have been completed but not yet billed to customers, revenue is recognized based
on management's estimates of the amounts to be realized.  When such projects are
billed,  any  differences  between the initial  estimates and the actual amounts
billed are recorded as increases or decreases to revenue.

         For  cost-plus  projects,  in each period  expense is recognized as the
costs are  incurred  and revenue is  recognized  in an amount equal to the costs
incurred plus the contractual markup.

         For larger  projects other than  cost-plus  projects,  generally  those
whose  duration  is  expected  to  exceed 90 days,  revenues  and  expenses  are
recognized    using    the    percentage-of-completion    method.    Under   the
percentage-of-completion method, in each period expenses are recognized as costs
are  incurred,  and  revenues  are  recognized  based on the  ratio of the costs
incurred for each project to the currently  estimated total costs to be incurred
for the  project,  multiplied  by the  estimated  revenue  to be earned  for the
project.  Accordingly,  the  revenue  recognized  in a given  period  depends on
management's  current  estimates  of  the  total  remaining  costs  to  complete
individual  projects  and the total  estimated  revenue  to be earned  for those
projects.  If in any period management  significantly  increases its estimate of
the total  remaining  costs to  complete  a project or lowers  its  estimate  of
revenue to be earned for a project,  the Company  may  recognize  no  additional
revenue or the Company may reduce previously  recognized revenue with respect to
that  project.  As a result,  in some cases the Company may  recognize a loss on
individual  projects prior to their completion.  Provisions for estimated losses
on projects are made in the period in which such

                                    Page 27
<PAGE>


                          LEXENT INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

losses are determined. Project costs include all direct material, equipment, and
labor costs and  allocated  indirect  costs,  such as fringe  benefits,  payroll
taxes, supervision and support, depreciation,  maintenance,  supplies, and small
tools.  Certain  projects  whose  duration  is expected to exceed 90 days may be
structured  with  milestone  events  that  dictate the timing of  payments,  and
customers  for these  projects may withhold a certain  percentage  (usually 10%)
from each billing until after the project has been completed and  satisfactorily
accepted.

         General and administrative costs are charged to expense as incurred.

CASH AND CASH EQUIVALENTS

         Cash   equivalents   consist  of   interest-bearing   investment  grade
securities that are readily  convertible into cash and have original  maturities
of 3 months or less.

PROPERTY AND EQUIPMENT

         Property and equipment is stated at cost, less accumulated depreciation
and  amortization.  Depreciation  and  amortization of property and equipment is
calculated  on a  straight-line  basis over the  estimated  useful  lives of the
assets. Useful lives of property and equipment are as follows:  motor vehicles -
5 years,  tools  and  equipment - 4-7  years,  furniture,  office  and  computer
equipment - 3-5 years, leasehold improvements - term of lease.  Expenditures for
repairs  and  maintenance  are  expensed  as  incurred;  expenditures  for major
renewals  and  betterments  are  capitalized.  When assets are sold or otherwise
disposed of, any gain or loss on disposition is reflected in current operations.
Property and equipment is reviewed for impairment  whenever events or changes in
circumstances  indicate that the related carrying amount may not be recoverable.
If such assets are  considered to be impaired,  the  impairment is recognized as
the amount by which the carrying  amount of the assets exceeds their fair value.
Fair value is determined  using current market prices or anticipated  cash flows
discounted  at  a  rate  commensurate  with  the  risks  involved.  The  Company
capitalizes  the costs of  purchased  software and related  implementation,  and
amortizes such costs over three years. Management does not believe there are any
impairments in property and equipment at December 31, 2001.

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 at
the date of the consolidated  financial statements,  and the reported amounts of
revenues and expenses during the reporting period. Significant estimates include
estimated  revenues  to be  earned on  uncompleted  projects,  realizability  of
accounts  receivable  including  unbilled  receivables  and costs of uncompleted
projects,   percentages  of  completion  of  projects  in  progress,  contracts,
realizability  of property  and  equipment  and  deferred  tax  assets,  accrued
expenses,  and the ultimate  outcome of contingent  liabilities.  Actual results
could differ from those estimates.

DEFERRED INCOME TAXES

         The Company  recognizes  deferred income taxes for the tax consequences
in future years of differences  between the tax basis of assets and  liabilities
and their financial reporting amounts at each year-end based on enacted tax laws
and statutory tax rates  applicable to the periods in which the  differences are
expected to affect  taxable  income.  Valuation  allowances  are  established in
accordance with and as permitted under specific rules within generally  accepted
accounting  principles to reduce deferred tax assets to the amount  estimated to
be realized.

STOCK-BASED COMPENSATION

         The Company  accounts for  stock-based  compensation in accordance with
SFAS 123,  "Accounting  for Stock-Based  Compensation."  Under SFAS 123 the fair
value at grant date of all stock-based awards is recognized

                                    Page 28
<PAGE>


                          LEXENT INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

as expense over the vesting period, except that options granted to employees and
directors  may be accounted for under the  provisions  of Accounting  Principles
Board Opinion 25,  "Accounting for Stock Issued to Employees"  ("APB 25"). Under
APB 25, no compensation  expense is recorded for options granted to employees or
directors  unless  the  exercise  price is lower  than the  market  value of the
underlying  stock at grant date. The Company has elected to apply APB 25, and to
provide  disclosures of pro forma net income as if the fair value method in SFAS
123 had been applied.

         For certain  options  and  restricted  stock  granted to  employees  or
directors in 2000 and 1999,  the exercise or sale prices were  determined by the
Board of  Directors  at  dates  of  grant  to be equal to the fair  value of the
underlying  stock;  however  such  exercise  or sale  prices  were  subsequently
determined  to be lower than the deemed  fair  values  for  financial  reporting
purposes  of  the  underlying  common  stock  on the  date  of  grant.  Deferred
stock-based  compensation also includes the fair value at grant dates of options
granted to  non-employees.  Accordingly,  for those options and restricted stock
grants,  the Company has recorded deferred  stock-based  compensation,  which is
amortized over the applicable  vesting periods ranging from immediately to up to
four  years.  To the extent that  unvested  options  are  forfeited,  previously
recorded deferred stock-based compensation is reversed.  Deferred tax assets are
recorded in connection with  amortization of deferred  stock-based  compensation
related to nonqualified options. See Note 13.

FAIR VALUE OF FINANCIAL INSTRUMENTS

         The  carrying  amounts  of  cash  and  cash  equivalents,  receivables,
accounts  payable,  and accrued  expenses  approximate fair value because of the
short-term  nature of these  instruments.  The  carrying  amounts  of  equipment
obligations  approximate  fair value  because the  underlying  instruments  bear
interest  at rates  comparable  to  current  terms  offered to the  Company  for
instruments  of similar risk. The fair values of  subordinated  notes payable to
stockholders are not estimable due to their related party nature.

SEGMENT REPORTING

         All of the  Company's  business  activities  are  aggregated  into  one
reportable  segment given the similarities of economic  characteristics  between
the activities and the common nature of the Company's services and customers.

RECENT ACCOUNTING PRONOUNCEMENTS

         In June 2001, the Financial  Accounting Standards Board issued SFAS 141
"Business  Combinations"  and SFAS 142 "Goodwill and Other  Intangible  Assets,"
which are effective for the Company beginning January 1, 2002. SFAS 141 requires
that all business  combinations  initiated  after June 30, 2001 be accounted for
under the  purchase  method of  accounting.  SFAS 142 provides  that  intangible
assets with finite lives must be amortized over their estimated useful life, and
intangible  assets  with  indefinite  lives  will not be  amortized  but will be
evaluated annually for impairment.

         Amortization of goodwill,  calculated  using the  straight-line  method
over its  estimated  life of 10 years was $0.2  million and $0.1 million in 2001
and 2000, respectively.  Adoption of SFAS 142 will not have a material effect on
the Company's results of operations or financial position.

         In October 2001, the Financial  Accounting  Standards Board issued SFAS
144  "Accounting  for the  Impairment  or Disposal of  Long-Lived  Assets." This
statement  defines the  accounting and reporting for the impairment and disposal
of long-lived  assets and is effective  for the Company on January 1, 2002.  The
Company does not expect this statement to have a material  effect on its results
of operations or financial position.

                                    Page 29
<PAGE>


                          LEXENT INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NET INCOME (LOSS) PER SHARE

         Basic net income  (loss) per share is computed  by dividing  net income
(loss) (after  deducting  dividends on preferred  stock) by the weighted average
number of common shares  outstanding for the period.  Diluted earnings per share
reflects the potential  dilution of other  securities by assuming the redeemable
convertible  preferred  stock had been  converted  into  common  stock as of the
beginning of the fiscal period presented (and without  deducting from net income
(loss) dividends on preferred  stock),  and by including in the weighted average
number of common shares the dilutive effect of stock options and shares issuable
under the employee  stock  purchase  plan.  Details of the  calculations  are as
follows:

                                                    YEAR ENDED DECEMBER 31,
                                                 2001        2000        1999
                                               --------    --------    --------
                                                       (IN THOUSANDS,
                                                  EXCEPT PER SHARE AMOUNTS)
NET INCOME (LOSS) PER SHARE-BASIC:
Net income (loss) ..........................   $(19,260)   $  8,576    $  7,952

Less: preferred dividends ..................         --        (397)       (690)
                                               --------    --------    --------
Net income (loss) available to
  common stockholders ......................   $(19,260)   $  8,179    $  7,262
                                               ========    ========    ========
Weighted average shares-basic ..............     41,449      30,839      22,721
                                               ========    ========    ========
Net income (loss) per share-basic ..........   $  (0.46)   $   0.27    $   0.32
                                               ========    ========    ========
NET INCOME (LOSS) PER SHARE-DILUTED:
Net income (loss) ..........................   $(19,260)   $  8,576    $  7,952
                                               ========    ========    ========
Weighted average shares outstanding-basic ..     41,449      30,839      22,721

Assumed conversion of preferred stock ......         --       5,725       8,740
Dilutive effect of stock options ...........      1,214       1,702       2,070
Dilutive effect of employee stock
  purchase plan ............................          7          --          --
                                               --------    --------    --------
Weighted average shares-diluted ............     42,670      38,266      33,531
                                               ========    ========    ========

Net income per share-diluted ...............          *    $   0.22    $   0.24
                                                           ========    ========

*  Inclusion of common stock equivalent  shares would result in an anti-dilutive
   net loss per share.  As a result,  the diluted  loss per share is the same as
   basic loss per share.

PRO FORMA INFORMATION FOR INITIAL PUBLIC OFFERING ("IPO") -  (UNAUDITED)

         Pro forma  information for the IPO reflects the pro forma effect of the
conversion of redeemable  convertible  preferred  stock into common stock at the
rate of 1.77209 shares of common stock for each share of preferred  stock at the
beginning  of the  period  presented.  The  calculation  of pro forma  basic and
diluted  income per share after giving effect to the foregoing  assumption is as
follows:

                                    Page 30
<PAGE>


                          LEXENT INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                                         YEAR ENDED DECEMBER 31,
                                                            2000         1999
                                                          -------      -------
                                                          (IN THOUSANDS EXCEPT
                                                           PER SHARE AMOUNTS)
PRO FORMA NET INCOME PER SHARE - BASIC:
Net income ...........................................    $ 8,576      $ 7,952
                                                          =======      =======
Weighted average shares - actual .....................     30,839       22,721
Assumed conversion of preferred stock ................      9,815        9,815
                                                          -------      -------
Pro forma weighted average shares - basic ............     40,654       32,536
                                                          =======      =======
Pro forma net income per share - basic ...............    $  0.21      $  0.24
                                                          =======      =======
PRO FORMA NET INCOME PER SHARE - DILUTED:
Dilutive effect of stock options .....................      1,702        2,070
                                                          -------      -------
Pro forma weighted average shares - diluted ..........     42,356       34,606
                                                          =======      =======
Pro forma net income per share - diluted .............    $  0.20      $  0.23
                                                          =======      =======

RECLASSIFICATIONS

         Certain prior period amounts have been  reclassified  to conform to the
current year presentation.

ACCUMULATED OTHER COMPREHENSIVE INCOME

         Statement  of Financial  Accounting  Standards  (SFAS) 130,  "Reporting
Comprehensive  Income," requires that financial  statements report comprehensive
income and its components.  Comprehensive  income includes,  among other things,
net  income  (loss)  and  unrealized   gains  and  losses  from  investments  in
available-for-sale  securities, net of income tax effect. The Company has chosen
to present Comprehensive Income (Loss) in the Consolidated Statements of Changes
in Stockholders' Equity (Deficit).

         Changes in the components of accumulated other comprehensive income for
2001 were as follows:

                                        UNREALIZED GAIN ON
                                        AVAILABLE-FOR-SALE    ACCUMULATED OTHER
                                           SECURITIES       COMPREHENSIVE INCOME
                                        ------------------  --------------------
                                                    (IN THOUSANDS)
         Balance, December 31, 2000 ...      $   --                $   --
         Change for 2001 ..............          60                    60
                                             ------                ------
         Balance, December 31, 2001 ...      $   60                $   60
                                             ======                ======

2. ACQUISITIONS

         In  September   2000,   the  Company   purchased   certain   assets  of
Communications  Planning and Services,  Inc.,  which provides certain design and
implementation   services  for  communications   systems.  The  acquisition  was
accounted for under the purchase  method of  accounting.  The purchase price was
$0.7  million,  of which $0.4  million was  allocated  to goodwill  and is being
amortized over ten years.

         In October  2000,  the  Company  purchased  certain  assets of Magnetic
Electric  Construction  Corp., which provides certain electrical  services.  The
purchase  price was $1.3  million,  comprised of $0.7 million in cash and 23,077
common  shares of the Company  valued at  approximately  $0.6 million on date of
closing.  The  acquisition  was  accounted  for  under  the  purchase  method of
accounting, and $1.2 million of the purchase price was allocated to goodwill and
is being amortized over ten years.

                                    Page 31
<PAGE>


                          LEXENT INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         Beginning  January  1,  2002,  in  accordance  with SFAS 142,  goodwill
associated with acquisitions will no longer be amortized to expense, but will be
evaluated at least annually for impairment.

3. RECEIVABLES, NET

                                                       DECEMBER 31, DECEMBER 31,
                                                           2001        2000
                                                         --------    --------
                                                            (IN THOUSANDS)
Accounts receivable - billed to customers ............   $ 42,237    $ 73,009
Unbilled receivables on completed projects accounted
  for under the completed contract method ............      3,734      16,839
Costs and estimated earnings in excess of billings
  on projects accounted for under the percentage-
  of-completion method ...............................      2,852       4,238
Unbilled receivables on cost-plus contracts ..........      4,793       5,426
Costs of uncompleted projects accounted for under
  the completed contract method ......................      2,457      10,572
Retainage ............................................        736       2,446
                                                         --------    --------
                                                           56,809     112,530
Less: allowance for uncollectible amounts ............    (15,638)     (7,277)
                                                         --------    --------
                                                         $ 41,171    $105,253
                                                         ========    ========

         For 2001, 2000, and 1999, the provision for  uncollectible  amounts was
$32.3 million, $2.6 million, and $2.4 million, respectively. Amounts written off
against the allowance for 2001, 2000, and 1999 were $24.0 million, $2.1 million,
and $0.6 million, respectively.

         Amounts   retained  by   customers   related  to   projects   that  are
progress-billed may be outstanding for periods that exceed one year.

4. PROPERTY AND EQUIPMENT

         Property and equipment consists of the following:

                                                       DECEMBER 31, DECEMBER 31,
                                                           2001        2000
                                                         --------    --------
                                                            (IN THOUSANDS)
Motor vehicles .......................................   $  4,000    $  4,765
Tools and equipment ..................................      9,489       7,749
Office equipment and furniture .......................      1,224       1,015
Computer equipment ...................................      5,896       4,465
Leasehold improvements ...............................      1,418       1,017
Purchased software ...................................        933       1,109
                                                         --------    --------
    Property and equipment ...........................     22,960      20,120
Less: accumulated depreciation and amortization ......    (10,064)     (5,506)
                                                         --------    --------
    Property and equipment, net ......................   $ 12,896    $ 14,614
                                                         ========    ========

         Depreciation and amortization expense for 2001, 2000, and 1999 was $5.8
million, $3.6 million, and $1.5 million,  respectively. The above table includes
assets and related amortization in connection with capitalized leases - see Note
16 for additional information.

                                    Page 32
<PAGE>


                          LEXENT INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. INVESTMENTS

         In February 2001, the Company  purchased  1,000,000  shares of Series C
Preferred  Stock of Telseon  Inc.  for an  aggregate  cost of $1.6  million.  In
January 2002, Telseon consummated a financial restructuring in which the Company
did not  participate.  As a result of  Telseon's  restructuring,  the  Company's
preferred  shares were converted into common stock,  and its interest in Telseon
was  substantially  diluted.  The  Company  determined  that  the  value  of its
investment  was  permanently  impaired and recorded a charge to other expense of
$1.6 million in 2001.

         Available-for-sale  securities  at December  31, 2001  represented  the
market value at that date of publicly  traded  shares of common  stock  received
from  a  customer  in  October  2001  in  partial  settlement  of a  receivable.
Realization  of the carrying value of such shares depends on the market price on
the date the shares are sold.  The Company is exposed to the risk of market loss
with  respect to such  shares.  One half of such  shares may be sold on or after
January  2, 2002 and the other half may be sold on or after  April 2, 2002.  Net
realized gains and losses will be included in "Other income (expense), net."

6. ACCRUED LIABILITIES

         Accrued liabilities (including noncurrent portion) are comprised of:

                                                         DECEMBER 31,
                                                       2001       2000
                                                     -------    -------
                                                       (IN THOUSANDS)
         Accrued payroll and related benefits        $ 3,155    $13,016
         Accrued project costs                         1,674      1,270
         Restructuring charges                         9,342         --
         Other                                         3,557      3,595
                                                     -------    -------
            Total                                    $17,728    $17,881
                                                     =======    =======

7. PROVISION FOR RESTRUCTURING CHARGES

         During  2001,  the  Company  recorded  $13.6  million in  restructuring
charges  primarily  in  connection  with  the  closing  of seven  offices  and a
reduction of the  workforce.  The  restructuring  charges are  comprised of $9.1
million of  obligations  under leases for premises which the Company has vacated
to be paid over the  various  lease  terms up to nine  years,  $3.3  million  of
severance and related contractual obligations to be paid over various periods up
to one year for  approximately  115  non-unionized  personnel and  executives in
areas being  closed or scaled back,  and $1.2 million for  writeoffs of property
and  equipment,  which will not require  future cash  outlays.  A summary of the
restructuring reserve at December 31, 2001, is as follows:

                                                                    RESERVE
                                                                  BALANCE AT
                                                               DECEMBER 31, 2001
                                      INITIAL       AMOUNTS       (INCLUDING
                                      RESERVE     CHARGED TO      NONCURRENT
                                      BALANCE     THE RESERVE      PORTION)
                                      -------     -----------  -----------------
                                                 (IN THOUSANDS)
Severance and related contractual
    obligations ...................   $ 3,304        (1,553)        $1,751

Lease obligations .................     9,070        (1,479)         7,591

Property and equipment ............     1,190        (1,190)            --
                                      -------        ------         ------
    Total .........................   $13,564        (4,222)        $9,342
                                      =======        ======         ======

The Company estimates that $5.2 million of the remaining reserve at December 31,
2001 will be paid during  2002,  and the balance of $4.1 million will be paid in
future years.

                                    Page 33
<PAGE>


                          LEXENT INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


8. NOTES PAYABLE AND OTHER FINANCING ARRANGEMENTS

         In  November  2000,  the Company  completed  a $50 million  bank credit
facility  with five banks to be used for general  corporate  purposes  including
working capital and potential  acquisitions.  During 2001, the $2.0 million loan
outstanding was repaid and the credit facility was terminated.

         At December  31, 2001 and 2000,  the Company had $1.0  million and $2.4
million,  respectively,  of installment loans payable,  primarily related to its
fleet  of  vehicles.   Of  those   amounts,   $0.6  million  and  $1.0  million,
respectively,  were  classified  as  current,  with the  balance  classified  as
noncurrent.  The loans bear  interest at rates  ranging  between 0.9% and 11.3%,
have terms averaging three years, and are collateralized by the vehicles.

         At December  31,  2001 and 2000,  the  balance of a  subordinated  note
payable to a stockholder  was $3.6 million and $5.1 million,  respectively - see
Note 9.

         The  following  are  the  maturities  of  long-term   debt   (excluding
capitalized lease obligations - see Note 16) for the next five years:

         MATURITY                                                AMOUNT
         --------                                                ------
                                                             (IN THOUSANDS)
         2002 ................................................   $2,215
         2003 ................................................    1,880
         2004 ................................................      491
                                                                 ------
         Total ...............................................   $4,586
                                                                 ======

9. RELATED PARTY TRANSACTIONS

         On January 1, 1997,  the Company  repurchased  common shares owned by a
stockholder  and issued a  subordinated  promissory  note in the amount of $10.2
million.  The note bears interest at the rate of 6%. As of December 31, 2001 and
2000, the  outstanding  principal  balance of the note was $3.6 million and $5.1
million,  respectively,  of which $1.6 million is  classified as current at both
dates, and the balance is classified as noncurrent.  The note is subordinated to
all senior debt. The note is payable in quarterly  installments  of $0.4 million
plus accrued  interest  starting  October 1, 1998, with the final payment due on
January 1, 2004.

         As of December  31,  1999,  the Company  had  outstanding  subordinated
promissory  notes  payable  to its  two  principal  common  stockholders  in the
aggregate amount of $0.4 million, which were classified as noncurrent. The notes
bore  interest at 6% and were  subordinated  to all senior  debt.  On August 31,
2000, the Company repaid those notes to its two principal common stockholders.

         From time to time prior to 2000,  the Company's  two  principal  common
stockholders  advanced  money to the Company for its  operating  needs,  and the
Company made repayments of such advances.  At December 31, 1999, the amount owed
by the  Company  to its two  principal  common  stockholders  for such  advances
aggregated  $0.2 million,  which was repaid in November  2000. The advances bore
interest  at the rate of 6%,  were not  subordinated,  and  were  classified  as
current because there were no formal repayment terms.

         The Company leases a building for office and warehouse  purposes in New
York City and a warehouse  building in South Plainfield,  NJ from entities owned
by its two principal common stockholders and another common stockholder.  Annual
rentals for office and warehouse  premises in New York City are $0.3 million for
calendar  years 1998 through  2001,  and $0.4  million for  calendar  year 2002.
Annual  rentals for office and warehouse  premises in South  Plainfield,  NJ are
$0.1 million for the twelve-month periods April through March,  commencing April
1998 through March 2008.

                                    Page 34
<PAGE>


                          LEXENT INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         On May 1, 2000, the Company  entered into a ten-year lease for a garage
and warehouse  facility in Long Island City,  New York.  The lease  payments are
$0.6 million per year commencing May 1, 2000 through April 2010. The facility is
leased  from an  entity  that is owned by the  Company's  two  principal  common
stockholders.

         During  1999,  the Company  purchased  services for total costs of $1.4
million from Metro Design Systems,  Inc.  ("MDS"),  an entity which was owned by
three of the Company's then principal common  stockholders and a director of the
Company.  In September  1999,  the Company  acquired the property and equipment,
trade name, and goodwill of MDS for a purchase price of $0.2 million,  which was
paid in cash.  As of  December  31 1999,  amounts  payable by the Company to MDS
amounted to $0.2 million, which was paid in 2000.

         On July 20, 1998, the Company agreed to provide a former  officer,  who
is  currently  a common  stockholder  with  lifetime  medical,  dental  and life
insurance  benefits,  and also,  while he  remains a common  stockholder,  a new
automobile every three years and an office at his primary  residence.  Costs for
such  benefits  are  charged to expense as  incurred,  and  amounted to $34,000,
$33,000 and $45,000 for 2001,  2000 and 1999,  respectively.  In addition,  such
former officer provided  consulting  services  pursuant to an agreement with the
Company for the period  December 1, 2000 through  November 30, 2001 for a fee of
$83,000.

         Walter  C.  Teagle  III,  a  director  and  currently   Executive  Vice
President,  was on leave from his employment  duties during the period  February
2001 through December 2001. He performed  various services for the Company while
on leave. He received $183,500 during 2001.

         The Company  has agreed to pay its founder an annual  pension for life,
which  amounted to $75,000  for 2001,  2000 and 1999,  respectively.  The annual
pension amount has been increased to $100,000 effective March 1, 2002.

         Interest  expense incurred by the Company to related parties during the
years 2001, 2000, and 1999 amounted to $0.2 million, $0.4 million, $0.5 million,
respectively.  Accrued  interest  payable to related  parties as of December 31,
2001, 2000 and 1999 was $0.1 million for all three years, respectively.

10. REDEEMABLE CONVERTIBLE PREFERRED STOCK

         On July 23,  1998,  the Company  sold  5,538,458  shares of  redeemable
convertible  preferred stock for proceeds of $11.5 million.  The preferred stock
was entitled to cumulative  dividends at the rate of 6% per annum. At the option
of the holders,  dividends may be paid in the form of additional preferred stock
or in cash. For 2000 and 1999,  dividends  were accrued as additional  preferred
stock in the amounts of $0.4 million and $0.7 million, respectively, offset by a
charge to  retained  earnings  (accumulated  deficit).  Upon  completion  of the
Company's public offering of common stock on August 2, 2000, preferred dividends
accrued from January 1, 1999 through August 2, 2000 of $1.1 million were paid in
cash.  On  August 2,  2000,  all  outstanding  shares of  preferred  stock  were
converted into 9,814,624 shares of common stock.

11. STOCKHOLDERS' EQUITY

         On July 31,  2000,  the Company  filed a Second  Amended  and  Restated
Certificate of  Incorporation  which  increased the shares of authorized  common
stock from 50,000,000 to 120,000,000 shares and authorized the issuance of up to
5,000,000  shares  of  preferred  stock,  the  terms  of  which  are  set at the
discretion of the Board of Directors.

         On August 2, 2000, the Company  completed an initial public offering of
6,900,000 shares of its common stock at a price of $15.00 per share. The Company
received net proceeds of $96.3 million after  underwriting  discounts and before
expenses of the offering.

                                    Page 35
<PAGE>


                          LEXENT INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


12. STOCK-BASED COMPENSATION PLANS

STOCK OPTIONS AND AWARDS

         In 2000,  the  Company  adopted a Stock  Option  and  Restricted  Stock
Purchase Plan, pursuant to which up to 8,700,000 common shares are available for
option grants. In May 2001, at the annual  stockholders  meeting,  the number of
shares  allocated  to the stock option plan was  increased  to 9,900,000  common
shares.  Stock options  granted under the plan may be incentive stock options or
nonqualified stock options and are exercisable for up to ten years following the
date of grant.  Vesting provisions are determined by the Board of Directors on a
case by case basis. Options granted become exercisable over periods ranging from
immediately to up to four years after the date of grant.

         On September 24, 2001,  pursuant to an offer by the Company to exchange
outstanding  options with exercise prices of $13.50 or higher for new options, a
total of 1,743,700  options were tendered and were canceled.  On March 25, 2002,
the Company  will grant new  options to  optionees  still  employed at that date
equal to the  number  of  options  previously  tendered  by each  optionee.  The
exercise  price of the new options will be the closing market price on March 25,
2002,  and the new  options  will vest as if the  tendered  options had not been
canceled.

         Stock option transactions are summarized in the following table:

                                                 NUMBER OF    WEIGHTED AVERAGE
                                                   SHARES      EXERCISE PRICE
                                                 ----------        ------
         Outstanding at December 31, 1999 ....    3,572,250        $ 2.35
           Granted ...........................    4,758,850        $12.53
           Exercised .........................   (1,075,000)       $ 3.38
           Canceled or expired ...............     (194,125)       $ 9.52
                                                 ----------
         Outstanding at December 31, 2000 ....    7,061,975        $ 8.87
           Granted ...........................      539,850        $13.53
           Exercised .........................     (528,070)       $ 0.48
           Canceled or expired ...............   (3,155,194)       $15.82
                                                 ----------
         Outstanding at December 31, 2001 ....    3,918,561        $ 5.55
                                                 ==========

         The following table summarizes  options  outstanding and exercisable at
December 31, 2001:

                            OPTIONS OUTSTANDING            OPTIONS EXERCISABLE
                    -----------------------------------   ---------------------
                                    WEIGHTED    WEIGHTED               WEIGHTED
   RANGE OF                          AVERAGE     AVERAGE                AVERAGE
   EXERCISE            NUMBER       REMAINING   EXERCISE    NUMBER     EXERCISE
    PRICES          OUTSTANDING        LIFE       PRICE   EXERCISABLE    PRICE
---------------     ----------      ---------   -------   -----------  --------
$ 0.33 - $ 0.49      1,107,587         7.0       $ 0.47      628,374    $ 0.47
         $ 1.01        163,218         7.7       $ 1.01       79,957    $ 1.01
$ 2.60 - $ 3.71         77,467         9.1       $ 3.39       11,667    $ 3.00
$ 5.00 - $ 7.33      2,244,500         8.1       $ 6.70    1,107,194    $ 6.69
$ 7.60 - $10.00         75,000         9.0       $ 8.80       25,782    $10.00
$15.00 - $16.38         94,289         8.5       $15.17       32,107    $15.11
$23.25 - $30.00        156,500         9.0       $23.49       61,335    $23.70
                     ---------                             ---------
                     3,918,561                   $ 5.55    1,946,416    $ 5.15
                     =========                             =========

         The following table summarizes  options  outstanding and exercisable at
December 31, 2000:

                                    Page 36
<PAGE>


                          LEXENT INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


                            OPTIONS OUTSTANDING            OPTIONS EXERCISABLE
                    -----------------------------------   ---------------------
                                    WEIGHTED    WEIGHTED               WEIGHTED
   RANGE OF                          AVERAGE     AVERAGE                AVERAGE
   EXERCISE            NUMBER       REMAINING   EXERCISE    NUMBER     EXERCISE
    PRICES          OUTSTANDING        LIFE       PRICE   EXERCISABLE    PRICE
---------------     ----------      ---------   -------   -----------  --------
$ 0.33 - $ 1.01      1,853,875          8.1      $ 0.53      664,902    $ 0.50
$ 6.67 - $10.00      2,274,000          9.0      $ 6.76      488,649    $ 6.85
$12.00 - $17.13      2,654,100          9.5      $14.62      279,177    $13.99
$19.38 - $28.38        159,100          9.8      $24.85           --        --
$29.13 - $30.00        120,900          9.7      $29.20        2,334    $30.00
                     ---------                             ---------
                     7,061,975                   $ 8.87    1,435,062    $ 5.34
                     =========                             =========

         The following table summarizes  options  outstanding and exercisable at
December 31, 1999:

                            OPTIONS OUTSTANDING            OPTIONS EXERCISABLE
                    -----------------------------------   ---------------------
                                    WEIGHTED    WEIGHTED               WEIGHTED
   RANGE OF                          AVERAGE     AVERAGE                AVERAGE
   EXERCISE            NUMBER       REMAINING   EXERCISE    NUMBER     EXERCISE
    PRICES          OUTSTANDING        LIFE       PRICE   EXERCISABLE    PRICE
---------------     ----------      ---------   -------   -----------  --------
$0.33 - $1.01        2,522,250          9.1      $ 0.56      565,625    $ 0.50
$        6.67        1,050,000         10.0      $ 6.67      300,000    $ 6.67
                     ---------                               -------
                     3,572,250                   $ 2.36      865,625    $ 2.64
                     =========                               =======

         During 2000,  the Company  issued rights to purchase  352,500 shares of
restricted stock at $6.67 per share, all of which were exercised.

         For certain options and restricted  stock granted in 1999 and the first
quarter of 2000,  the  exercise or sale prices were  determined  by the Board of
Directors  at dates of  grant  to be equal to the fair  value of the  underlying
stock, however, such exercise or sale prices were subsequently  determined to be
lower than the  deemed  fair  values for  financial  reporting  purposes  of the
underlying common stock on the date of grant. Deferred stock-based  compensation
also includes the fair value at grant date of options granted to  non-employees.
Deferred  stock-based  compensation  of $1.3 million,  $41.7  million,  and $9.3
million was recorded in 2001,  2000 and 1999,  respectively,  in connection with
stock options granted and restricted  stock issued during those periods.  To the
extent  that  unvested  options  are  forfeited,  previously  recorded  deferred
stock-based  compensation  is reversed.  In 2001,  $1.3 million was reversed for
unvested  options  which were  forfeited,  and $7.6  million was  reversed  with
respect to an optionee  whose status was changed from  employee to consultant on
April 1, 2001. The latter's  unvested  options were  remeasured at their current
fair  value of $1.3  million on April 1, 2001,  and that  amount was  charged to
deferred   stock-based   compensation.   Amortization  of  deferred  stock-based
compensation was $6.1 million,  $26.2 million,  and $2.2 million for 2001, 2000,
and 1999,  respectively.  Deferred tax assets were recorded in  connection  with
amortization of stock-based compensation expense related to nonqualified options
in the amounts of $1.4 million,  $8.1 million,  and $0.8 million in 2001,  2000,
and 1999, respectively. See Note 13.

EMPLOYEE STOCK PURCHASE PLAN

         On August 1, 2001,  the Company  established an employee stock purchase
plan  ("ESPP")  through  which  employees  may  purchase  shares of common stock
through payroll  deductions.  The price paid by an employee is 85% of the lesser
of the market value on the offering date or the last day of the purchase period.
There are two 6-month purchase periods in each year,  commencing August 1, 2001.
The  market  value on the first  offering  date  (August  1, 2001) was $5.38 per
share.  Employees may purchase up to 1,000 shares in each purchase period. Under


                                    Page 37
<PAGE>


                          LEXENT INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


the ESPP,  2,500,000  shares were  authorized  and available  for  issuance.  At
December 31, 2001,  53,771  shares were  issuable to employees  based on payroll
deductions of $0.2 million through that date.

PRO FORMA DISCLOSURE

         In  accordance  with APB 25,  compensation  expense is not recorded for
options  granted to employees or  directors  unless the exercise  price is lower
than the market value of the underlying  stock at grant date,  and  compensation
expense is not recognized in connection with the ESPP. Had compensation  expense
been recognized  based on the fair value of options at grant dates as determined
under the Black-Scholes  option pricing model, pro forma net loss for 2001 would
have increased,  and pro forma net income for 2000 and 1999 would have decreased
by approximately $1.3 million, $2.4 million and $0.2 million,  respectively.  In
making that calculation, the following assumptions were used:

         STOCK OPTIONS

                                                    2001       2000       1999
                                                   ------     ------     ------
               Expected volatility factor:
                  Pre IPO .....................      n/a          0%         0%
                  Post IPO ....................       66%        66%
               Risk free interest rate ........      4.6%      6.27%      6.04%
               Expected life ..................  4 years    4 years    4 years
               Expected dividend rate .........        0%         0%         0%
               Weighted average fair value:
                  Pre IPO .....................              $ 2.10     $ 0.55
                  Post IPO ....................              $ 9.19
                  Average .....................    $ 7.29    $ 5.20     $ 0.55
               Weighted average grant price:
                  Pre IPO .....................              $ 9.32     $ 2.60
                  Post IPO ....................              $16.66
                  Average .....................    $13.53    $12.53     $ 2.60

         ESPP


                                                   2001
                                                  ------
               Expected volatility factor .....       66%
               Weighted average fair value ....   $ 5.38
               Weighted average grant price ...   $ 4.57

         For  purposes of pro forma  disclosures,  the  estimated  fair value of
stock  options at grant date is amortized to pro forma  expense over the vesting
period. Pro forma information for the years 2001, 2000 and 1999 is as follows:

                                    Page 38
<PAGE>


                          LEXENT INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


                                                  2001        2000      1999
                                                --------     ------    ------
                                                         (IN THOUSANDS,
                                                   EXCEPT PER SHARE AMOUNTS)
         Net income (loss):
            As reported ....................    $(19,260)    $8,576    $7,952
            Pro forma ......................     (20,598)    $6,138    $7,759
         Basic and diluted net income
           per share as reported:
            Basic ..........................    $  (0.46)    $ 0.27    $ 0.32
            Diluted ........................    $  (0.46)    $ 0.22    $ 0.24
         Basic and diluted pro forma net
           income per share:
            Basic ..........................    $  (0.50)    $ 0.19    $ 0.24
            Diluted ........................    $  (0.50)    $ 0.16    $ 0.23

13. INCOME TAXES

         The Company  files a  consolidated  federal  income tax return with its
subsidiaries. The income tax provision (benefit) consists of:

                                                          DECEMBER 31,
                                                  2001        2000       1999
                                                --------     ------     ------
                                                         (IN THOUSANDS)
         Current:
            Federal ........................    $     --     $17,345    $7,950
            State and local ................          --       4,327     2,360
         Deferred provision (benefit) ......     (13,856)     (8,968)   (3,179)
                                                --------     -------    ------
         Income tax provision (benefit) ....    $(13,856)    $12,704    $7,131
                                                ========     =======    ======

         The components of deferred tax assets and liabilities are as follows:

                                                            DECEMBER 31,
                                                          2001      2000
                                                        -------   -------
                                                          (IN THOUSANDS)
         Deferred tax assets related to:

           Net operating loss .......................   $ 8,061   $    --
           Allowance for uncollectible amounts ......     6,929     2,742
           Amortization of deferred stock-based
             compensation related to nonqualified
             options ................................     9,794     8,387
           Deferred costs on uncompleted projects ...       185     1,076
           Other reserves ...........................     1,595       527

           Accrued liabilities ......................        33        48
                                                        -------   -------
               Total deferred tax assets ............    26,597    12,780
         Deferred tax liability:
           Depreciation and amortization ............       970       421
                                                        -------   -------
         Net deferred tax asset .....................   $25,627   $12,359
                                                        =======   =======

         In  assessing  the  realizability  of deferred  tax assets,  management
considers  whether  it is more  likely  than  not that a  portion  or all of the
deferred  tax  assets  will  not  be  realized.  Generally  accepted  accounting
principles  provide that for a deferred tax asset  recognized in connection with
stock-based  compensation,  a valuation  allowance may not

                                    Page 39
<PAGE>


                          LEXENT INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


be established  solely based on a subsequent  decline in the market price of the
stock.  Therefore,  the Company's  assessment of  realizability  is based on the
level of historical  taxable  income (loss) and  projections  of future  taxable
income.  Accordingly,  management  believes  it is more likely than not that the
deferred tax assets will be realized and no valuation  allowance was established
during 2001 and 2000. Realization of $9.8 million of deferred tax assets depends
upon  the  market  price of the  Company's  common  stock  at the  time  certain
nonqualified stock options are exercised. To the extent that such options expire
unexercised or are exercised at a time when the fair value of the stock is lower
than the deemed fair value of the stock for financial  reporting purposes on the
date the options  were  granted  ($22.80  per  share),  a portion or all of such
deferred tax assets  would not be realized and such portion  would be charged to
expense

         A  reconciliation   of  the  statutory  federal  income  tax  provision
(benefit) rate to the Company's tax provision (benefit) is as follows:

                                                       2001      2000     1999
                                                      ------    ------   ------
Federal statutory rate applied to pre-tax income ...   (35.0)%    35.0%    35.0%
State and local taxes, net of federal benefit ......    (9.3)      9.5     10.4
Tax effect of non-deductible items .................     2.3      15.2      1.9
                                                      ------    ------   ------
Total tax provision (benefit) ......................   (42.0)%    59.7%    47.3%
                                                      ======    ======   ======

14. RETIREMENT PLANS AND 401K SAVINGS PLAN

         Effective  January 1, 1999,  the Company  adopted a 401(k) savings plan
covering all employees who are not subject to collective bargaining  agreements.
Each covered employee is eligible to become a participant, and may contribute up
to 15% of salary on a  tax-deferred  basis.  The Company  contributes 3% of each
covered  employee's  salary up to the maximum  annual  amount  permitted  by IRS
regulations.  The Company's contributions vest ratably over the employees' first
five years of service.  For 2001, 2000 and 1999, $0.9 million,  $0.6 million and
$0.2 million, respectively, was charged to expense for the 401(k) plan.

15. CONTINGENCIES

         From time to time,  the Company is involved in various  suits and legal
proceedings which arise in the ordinary course of business.  Several  employment
related lawsuits or administrative  complaints have been filed alleging wrongful
termination,  breach of contract or employment discrimination.  There was also a
class  action suit filed in October  2001  against the  Company,  certain of its
senior executive and its underwriters,  alleging violation of the Securities law
in connection with the initial public offering.  The Company believes that these
claims are without  merit and is vigorously  defending its position.  Management
currently believes that resolving these matters will not have a material adverse
impact on the Company's  financial  position or results of operations,  although
the ultimate outcome of these matters cannot be determined at this time.

16. LEASE COMMITMENTS

         The Company leases equipment, motor vehicles and real estate (including
real estate  leased from  related  parties  referred to in Note 9) under  leases
accounted  for as  operating  leases with terms  ranging  from one to ten years.
Total rent expense for operating leases was $7.8 million, $4.4 million, and $1.6
million for 2001, 2000 and 1999, respectively.

         Future minimum lease payments under operating leases as of December 31,
2001 are as follows:

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<PAGE>


                          LEXENT INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


                                                                 AMOUNT
                                                             --------------
                                                             (IN THOUSANDS)
         2002 ................................................  $ 7,832
         2003 ................................................    5,793
         2004 ................................................    3,882
         2005 ................................................    2,783
         2006 ................................................    1,703
         After 2006 ..........................................    5,979
                                                                -------
         Total ...............................................  $27,972
                                                                =======

         The Company has also leased equipment under  capitalized  leases. As of
December 31, 2001 and 2000, assets recorded under  capitalized  leases were $2.5
million  and  $2.4  million,  respectively,  accumulated  amortization  was $1.4
million and $0.7 million,  respectively,  and the total liability recorded under
such  capitalized  leases was $1.0 million and $1.3 million,  respectively.  The
weighted  average  interest  rate  for  capitalized  leases  is 6.9%  and  6.7%,
respectively.  Following are minimum lease payments under capitalized leases and
the present value of the net minimum lease payments as of December 31, 2001:

                                                                AMOUNT
                                                            --------------
                                                            (IN THOUSANDS)
         2002 ...............................................  $   756
         2003 ...............................................      290
         2004 ...............................................       10
                                                               -------
         Total minimum lease payments .......................    1,056
         Less: amount representing interest .................      (49)
                                                               -------
         Present value of net minimum lease payments ........    1,007
                                                               =======

17. CONCENTRATION OF CREDIT RISK

         Financial  instruments which potentially  subject the Company to credit
risk consist  primarily of cash, cash  equivalents and trade  receivables.  Cash
balances may at times,  exceed amounts  covered by FDIC  insurance.  The Company
believes it mitigates  its risk by  depositing  cash  balances with high quality
financial institutions that it believes are financially sound. Recoverability is
dependent  upon  the  performance  of  the   institution.   The  Company's  cash
equivalents are diversified and consist primarily of investment grade securities
with  original  maturities  of three  months  or less.  Investments  are made in
obligations of high-quality  financial  institutions,  government and government
agencies and corporations, thereby reducing credit risk concentrations. Interest
rate fluctuations impact the carrying value of the portfolio.

         Trade   receivables   are   primarily   short-term   receivables   from
telecommunications  companies and general  contractor  companies.  To attempt to
reduce credit risk, the Company performs credit evaluations of its customers but
does not generally require collateral and, therefore,  the majority of its trade
receivables  are  unsecured.  Credit risk is affected by  conditions  within the
economy.  The Company  establishes an allowance for doubtful accounts based upon
its  evaluation of factors  surrounding  the credit risk of specific  customers,
historical trends, and other information.

         For 2001,  the Company had revenues from two separate  customers  which
comprised  23% and  16%,  respectively,  of the  Company's  total  revenues.  At
December 31, 2001, accounts receivable from these customers totaled $0.9 million
and $10.9  million,  respectively.  For 2000,  the Company had revenues from one
customer,  which comprised 25% of the Company's total revenues.  At December 31,
2000, accounts receivable from this

                                    Page 41
<PAGE>


                          LEXENT INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


customer totaled $2.1 million.  For the year 1999, the Company had revenues from
two  separate  customers,  which  comprised  26% and 13%,  respectively,  of the
Company's total revenues. If in any period there are adverse developments in the
financial  condition of customers,  the provision for doubtful accounts could be
significantly  increased.  The amounts of the Company's  receivables  which will
ultimately  be  collected  from each  customer  may  differ  from the  Company's
estimates,  in which event the  provision  for doubtful  accounts  could also be
significantly increased.

18. UNAUDITED QUARTERLY FINANCIAL DATA

<TABLE>
<CAPTION>
                                               MAR. 31,   JUNE 30,  SEPT. 30,   DEC. 31,   MAR. 31,   JUNE 30,  SEPT. 30,   DEC. 31,
                                                2000        2000       2000       2000       2001       2001       2001       2001
                                              --------    -------    -------    -------    -------    -------    -------    -------
                                                                                  (IN THOUSANDS)
<S>                                           <C>         <C>        <C>        <C>        <C>        <C>        <C>        <C>
Statement of Operations Data:
   Revenues ...............................   $ 56,210    $65,027    $82,412    $92,344    $72,105    $67,044    $49,189    $52,240
   Cost of revenues .......................     42,149     47,898     61,030     71,677     58,663     52,199     40,938     43,201
   General and administrative
   expenses ...............................      3,521      5,440      5,712      5,667      6,432      5,877      4,366      3,562
   Depreciation and amortization ..........        658        789        892      1,289      1,311      1,440      1,527      1,525
   Non-cash stock-based
      compensation ........................     19,427      2,244      2,244      2,244      2,244      1,287      1,269      1,258
   Provision for doubtful accounts ........        590        494        632        835     15,775      7,709        475      8,327
   Restructuring charges ..................         --         --         --         --      5,946         --         --      7,618
                                              --------    -------    -------    -------    -------    -------    -------    -------
   Operating income (loss) ................    (10,135)     8,162     11,902     10,632    (18,266)    (1,468)       614    (13,251)
   Interest expense .......................        391        343        283        235        284        172        253        368
   Interest income ........................         --         (3)      (877)    (1,076)      (799)      (541)      (575)      (419)
   Other expense (income), net ............        (10)         7         (6)        (6)       393        126        (72)     1,555
                                              --------    -------    -------    -------    -------    -------    -------    -------
   Income (loss) before income
     taxes ................................    (10,516)     7,815     12,502     11,479    (18,144)    (1,225)     1,008    (14,755)
Provision for (benefit from)
      income taxes ........................     (1,611)     3,605      5,762      4,948     (8,202)      (117)       714     (6,251)
                                              --------    -------    -------    -------    -------    -------    -------    -------
   Net income (loss) ......................   $ (8,905)   $ 4,210    $ 6,740    $ 6,531    $(9,942)   $(1,108)   $   294    $(8,504)
                                              ========    =======    =======    =======    =======    =======    =======    =======
NET  INCOME (LOSS) PER SHARE:
   Basic ..................................   $  (0.39)   $  0.17    $  0.19    $  0.16    $ (0.24)   $ (0.03)   $  0.01    $ (0.20)
                                              ========    =======    =======    =======    =======    =======    =======    =======
   Diluted ................................   $  (0.39)   $  0.12    $  0.16    $  0.15    $ (0.24)   $ (0.03)   $  0.01    $ (0.20)
                                              ========    =======    =======    =======    =======    =======    =======    =======
</TABLE>

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