##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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Form 10-K

|                                                |  |                                                                                                 
|----------------------------------------------- |  | ------------------------------------------------------------------------------------------------
|Mark One                                        |  |                                                                                                 
|þ                                               |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
|                                               
|For the fiscal year ended December 31,
    2002
|                                               
|o                                               |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 000-31105



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Lexent Inc.

(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                      
|------------------------------------------------------------------ |  | -------------------------------------
|Delaware                                                           |  | 13-3990223                           
|(State or other jurisdiction of
    incorporation or organization) |  | (IRS Employer
    Identification No.)

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 þ          No o

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.     o

Indicate by check mark whether the registrant is
an accredited filer (as defined in Rule 12b-2 of the
Act.)     Yes o          No þ

The aggregate market value of common stock held
by non-affiliates at June 30, 2002 was $58,355,804.

As of March 12, 2003, 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
$25,552,260 on that date.

The number of shares of the Common Stock of the
Registrant outstanding as of March 12, 2003 was 42,204,935.



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TABLE OF CONTENTS



|                     |                                                                                                         |  |  |  |  |  |  | 
|-------------------- | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I              
|                     | Item 1. Business                                                                                       
|                     | Item 2. Properties                                                                                     
|                     | Item 3. Legal Proceedings                                                                              
|                     | Item 4. Submission of Matters to a Vote of Security Holders                                            
|PART II             
|                     | Item 5. Market for Registrants Common Stock and Related Stockholder Matters                           
|                     | Item 6. Selected Consolidated Financial Data                                                           
|                     | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations          
|                     | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                                    
|                     | Item 8. Financial Statements and Supplementary Data                                                    
|                     | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures          
|PART III            
|                     | Item 10. Directors And Executive Officers of the Registrant                                            
|                     | Item 11. Executive Compensation                                                                        
|                     | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|                     | Item 13. Certain Relationships and Related Transactions                                                
|                     | Item 14. Controls and Procedures                                                                       
|PART IV             
|                     | Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                              
|SIGNATURES          
|CERTIFICATION       
|EMPLOYMENT AGREEMENT
|EMPLOYMENT AGREEMENT
|EMPLOYMENT AGREEMENT
|SUBSIDIARIES        
|CERTIFICATION       
|CERTIFICATION       



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##### Table of Contents



LEXENT INC.

ANNUAL REPORT ON FORM 10-K

For the Year Ended December 31,
2002


INDEX

|               |  |                                                                                           |    |        |    | 
|-------------- |  | ----------------------------------------------------------------------------------------- | -- | ------ | -- | 
|               |  |                                                                                           |    | Page  
|               |  |                                                                                           |    | Number
|               |  |                                                                                           |    |       
|PART I        
|Item 1.        |  | Business                                                                                  |    |        | 2  | 
|Item 2.        |  | Properties                                                                                |    |        | 7  | 
|Item 3.        |  | Legal Proceedings                                                                         |    |        | 8  | 
|Item 4.        |  | Submission of Matters to a Vote of Security
    Holders                                   |    |        | 9  | 
|PART II       
|Item 5.        |  | Market for Registrants Common Stock and
    Related Stockholder Matters                  |    |        | 9  | 
|Item 6.        |  | Selected Consolidated Financial Data                                                      |    |        | 10 | 
|Item 7.        |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |    |        | 11 | 
|Item 7A.       |  | Quantitative and Qualitative Disclosures About
    Market Risk                            |    |        | 21 | 
|Item 8.        |  | Financial Statements and Supplementary Data                                               |    |        | 21 | 
|Item 9.        |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosures |    |        | 21 | 
|PART III      
|Item 10.       |  | Directors and Executive Officers of the Registrant                                        |    |        | 21 | 
|Item 11.       |  | Executive Compensation                                                                    |    |        | 23 | 
|Item 12.       |  | Security Ownership of Certain Beneficial Owners
    and Management                        |    |        | 29 | 
|Item 13.       |  | Certain Relationships and Related Transactions                                            |    |        | 30 | 
|Item 14.       |  | Controls and Procedures                                                                   |    |        | 31 | 
|PART IV       
|Item 15.       |  | Exhibits, Financial Statement Schedules, and
    Reports on Form 8-K                      |    |        | 32 | 
|Signatures     |  |                                                                                           | 35 |       
|Certifications |  |                                                                                           | 36 |       

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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, program management, deployment
and installation in certain 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 City, Washington D.C.
metro, Boston metro, Long Island, and in the states of Florida,
North Carolina and New Jersey.

Our largest customers in 2002 were AT&T and
Level 3 Communications. We generated 22.9% and 18.3%,
respectively, of our revenues from each of these customers
during 2002. Some of our key customers include IBM, general
contractors in the New York metro area, Dormitory Authority of
the State of New York, Con Edison Communications and WorldCom.

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., Lexent Capital, Inc., and Lexent Metro
Connect LLC, were formed in June 1998, August 1998, May 2000,
November 2000, July 2001 and March 2002, respectively. On
August 22, 2002, Lexent Metro Connect was awarded a
15 year Franchise for Local High Capacity
Telecommunications Services for the City of New York, which
expires on or about August 22, 2017, unless terminated
earlier.

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.

Industry Overview



| |                                                     
| | ----------------------------------------------------
| | Telecommunications and Infrastructure
    Industries

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. In
accordance with applicable law, 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.

In the early years following the adoption of the
Telecommunications Act of 1996, 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 telecommunications
network was a critical component of many telecommunications
companies business plans.

After an initial surge in the growth in the
development of telecommunications networks, 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

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fiber optic network capacity surpassing demand.
Several competitive telecommunications companies faced
significant economic setbacks in 2001 and 2002, 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.


We believe that the changing environment in the
telecommunications industry has placed significant challenges
not only upon the competitive telecommunications carriers but
also upon those companies that provide services and equipment to
those carriers. As a result, we resized our operations and
closed certain offices during 2001 and 2002.

Although a number of telecommunications carriers
have ceased to operate or have significantly reduced their
operations and/or capital expenditures, we believe that the need
for telecommunications solutions at the enterprise level will
continue. Accordingly, we offer our telecommunications services
not only to telecommunications customers but also to enterprise
customers, the real estate community and governmental entities.
In addition, we have diversified our service offerings to
include not only telecommunications services but also other
infrastructure services such as systems integration, electrical
contracting, security and closed circuit TV. Specifically, Hugh
OKane Electric Co., LLC subsidiary has a long history of
providing electrical services to enterprise customers. Our
Lexent Metro Connect subsidiary will offer telecommunications
services along certain routes in New York City, in accordance
with the term of its franchise. We believe that the
diversification of our service offerings and the expansion of
our customer base is an appropriate strategy in todays
difficult telecommunications market.

Competition

Our markets are highly competitive and fragmented
and are served by numerous vendors. We believe that there is not
a dominant provider of infrastructure services or
telecommunications services on a national level. Often the
internal divisions of our customers and prospective customers
may be competitors for the services we offer. We may also
compete with independent vendors and equipment manufacturers.
Moreover, as there are 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 pricing, quality and responsiveness of
service, industry experience, reputation, and the ability to
deliver timely results. In addition, expertise in multiple
disciplines and in new and evolving technologies is often
significant. Because some of our customers, especially
government entities, utilize bidding procedures to award
contracts, price often becomes the most dominant 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, our familiarity
with equipment for multiple vendors, and our competitive pricing.

Strategy

Because of the economic difficulties facing
telecommunications carriers, we altered our business strategy
during 2001, and continued this approach in 2002. We have
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. In 2002, we formed our Lexent Metro Connect
subsidiary, which has been granted a franchise to offer certain
telecommunications services in New York City.

In addition to the diversification of our service
offerings, we continue to seek to broaden our customer base
while still maintaining and strengthening our long term and
strategic relationships with stable telecommunications
companies. Our customer base has included 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

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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 may result in the creation of relationships with new
customers and expanded relationships with existing customers.


We have utilized our design and engineering
services to establish relationships with customers when a
project is conceived. Based on these relationships, we may
pursue additional opportunities for program management and
network deployment. Upon completion of a network, we offer
ongoing network upgrade and maintenance services. Our experience
with emerging technologies may offer 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.

As part of our strategy to deal with the changing
telecommunications environment, we have taken steps to reduce
our operational overhead and headcount. During 2001 and
continuing into 2002, we significantly reduced our work force
and closed offices, which were no longer strategically
consistent with our business plans. We have been impacted by the
bankruptcies of some of our large customers and have incurred
significant exposure to uncollectible amounts. We are also
affected by the intense price competition in a shrinking
telecommunications and infrastructure services market.
Accordingly, 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 continue to
focus on leveraging our administrative organization to achieve
other cost savings and efficiencies.

We believe that the aforementioned strategies
should permit us to reduce costs, diversify our customer base
and service offerings and to stabilize our business in 2003 and
beyond. However, current economic conditions, both nationally
and in the telecommunications industry, will impact negatively
our ability to maintain our business at historic levels in the
near term future.

Acquisitions and Investments

There were no significant acquisitions or
investments during 2002.

Services



| |                                            
| | -------------------------------------------
| | Specialized Telecommunications
    Services

We believe our ability to compete effectively is
often based upon our ability to be 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 have
installed 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 ILECs
for our customers. Our technicians have been trained to perform
any of these services and other options for our customers. We
have developed expertise to install equipment from most major
telecommunications equipment vendors. Additionally, we have set
up the interconnections between CLECs, long distance carriers
and ILECs, which allow for the transfer of calls and data among
most major telecommunications providers.



| |                                                                                   
| | ----------------------------------------------------------------------------------
| | Electrical Construction, System
    Integration, Security and Maintenance Services

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

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| |                       
| | ----------------------
| | Design and Engineering

Our engineers and technical staff design
telecommunication and infrastructure systems to suit our
customers needs. Because of our knowledge of the areas
where we operate and our familiarity with different
technologies, we may be 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 supervising and
coordinating the engineering and design process, securing
building and zoning permits, managing multiple vendors and
documenting the entire process for the customer. Our program
management teams can provide our customers with a single point
of contact to ensure that their needs are continually being met.



| |                                     
| | ------------------------------------
| | Upgrade and Maintenance
    Services

We provide upgrade and maintenance services to
our customers. As usage increases, we can install
telecommunications access lines, electrical lines and
telecommunications and electrical equipment to provide
additional capacity if required by our customers. We can upgrade
equipment and reconfigure equipment, if appropriate, as a result
of a change in technology or a change in the needs of our
customers. We can have technicians based at customers
premises to monitor service issues that may arise and to 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 telecommunications systems and
other networks without building a large workforce in all of
their locations to handle day-to-day problems.



| |                                                                     
| | --------------------------------------------------------------------
| | Local High Capacity Telecommunications
    Services in New York City

In accordance with the terms of our Franchise
issued by the New York City Department of Information Technology
and Telecommunications in August 2002, we intend to offer
certain telecommunications services to customers who may want
specialized services supplied from an entity different from the
incumbent local exchange carrier. We have not yet constructed
our system in New York City.

Risk Factors

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

In 2001 and 2002, the telecommunications industry
has been in a state of rapid change. Several of the competitive
telecommunications carriers, which have historically supplied
significant revenue to our Company, have suffered significant
losses, have filed for bankruptcy protection, or have ceased to
exist. Most of our telecommunications customers have announced
reductions in their future plans for capital expenditures. The
emerging competitive 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. As a result, many 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 unknown when and if
the telecommunications industry will recover and to what extent
future growth, if any, in the telecommunications industry will
materialize.

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The effect of our telecommunications customers
experiencing financial difficulties and curtailing their capital
expenditures has been that our total revenues from those
customers have significantly declined. We do not expect to
continue to derive historical levels of revenue from those
customers. We implemented 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 in its early stages 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 national economic downturn has also reduced
demand for all of the Companys service offerings. 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
further the size and 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 headcount, monitor expenses and impose stricter
credit guidelines. We cannot be certain that our actions will
result in increasing profitability for our Company or the
improvement of our operating margins. Controlling expenses in
some of our infrastructure service projects is especially
important given low margins that occur in such projects. 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 may 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. Historically, we have
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 telecommunications and infrastructure
services industries. Both the telecommunications services market
and the infrastructure service markets in which we compete are
highly competitive and are served by numerous companies. Price
competition affects both our ability to be awarded projects and
our profit margins. We believe that our ability to compete
depends on a number of factors outside of our control, including
but not limited to, market pricing, the ability of our customers
to perform the services themselves, the downturn in the
telecommunications industry, and the overall economic downturn.

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 that 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.

Our Lexent Metro Connect strategy may not be
successful. We are new to the business of offering high capacity
telecommunications services, and we are uncertain if we will be
able to attract customers and achieve profitable margins. The
construction of a telecommunications network in New York City
may be costly. If we are unable to meet our franchise
commitments, our franchise may be terminated. In addition, if
the Lexent

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Metro Connect strategy is successful, we might be
competing with some of our current telecommunications customers
for revenues. This may adversely affect our relationships with
such customers.


In January and February 2003 four members of our
Board of Directors resigned. The development leaves only Hugh J.
OKane and Kevin M. OKane as the remaining members of
our Board. Lexent has received a letter, dated March 3,
2003, from the NASDAQ Stock Market notifying Lexent that, as a
result of the previously announced resignations of the four
independent directors, Lexent does not currently meet the
independent director and auditor committee requirements for the
continued listing on NASDAQ. NASDAQ rules require Lexent to have
an audit committee composed of at least 3 independent directors.
NASDAQ is currently reviewing Lexents eligibility for
continued listing on NASDAQ and has requested that Lexent submit
a specific plan and timetable to achieve compliance with NASDAQ
rules. The requested plan has been submitted. NASDAQ has not yet
issued a formal notice for the delisting of Lexents
securities from NASDAQ. Lexent intends to request an extension
time from NASDAQ pending the evaluation of the proposed
management offer. In the event that NASDAQ declines such
request, Lexent may receive a formal delisting notice from
NASDAQ. If a formal notification of delisting is received,
Lexent intends to appeal such determination and will request a
formal hearing with NASDAQs Listing Qualifications Panel.
However, if Lexent is not successful in maintaining the listing
of its common stock on NASDAQ, its common stock will trade on
the over-the-counter bulletin board, which may impact upon the
liquidity of our securities.

Employees

As of December 31, 2002, we had 566
employees, 454 of whom are billable employees working directly
on projects. Approximately 392 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 satisfactory.



| |                                    
| | -----------------------------------
| | 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 the Company 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 corporate 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

As of December 31, 2002, we leased space at
20 separate locations throughout California, Connecticut,
Florida, Illinois, Massachusetts, New Jersey, New York, North
Carolina, Pennsylvania, Texas and Virginia. Of these 20
locations, we currently sublease one location in each of
California, Connecticut, and Illinois 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, 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. Since
December 31, 2002, we terminated our lease in Pennsylvania
and signed a lease for another location in New York, therefore,
the number of leased locations remains at 20. 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.

7



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|        |                  
|------- | -----------------
|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.

A shareholder class action suit filed on
October 26, 2001, Labansky, et al. v. Lexent Inc. et
al., in the Southern District of New York against
the Company, certain of its present and former senior executives
and its underwriters continues. All individual present and
former senior executive defendants have been dismissed from the
case without prejudice. The complaint alleges that the
registration statement and prospectus relating to the
Companys initial public offering contained material
misrepresentations and/or omissions in that those documents did
not disclose that (1) certain underwriters had solicited
and received undisclosed fees and commissions and other economic
benefits from some investors in connection with the distribution
of the Companys stock in the initial public offering; and
(2) certain underwriters had entered into arrangements with
some investors that were designed to distort and/or inflate the
market price for the Companys stock in the aftermarket
following the initial public offering. The suit against the
Company is part of a number of initial public offering
securities claims against multiple issuers and underwriters
presently pending before the Judge. No discovery has occurred in
the suit involving the Company. On February 19, 2003, U.S.
District Court Judge Scheindlin issued an opinion denying the
Motion to Dismiss the Section 11 claims against the Company
but granting said motion, without prejudice, with respect to the
Section 10 (b) (5) claims. As indicated in previous
filings, the Company intends to defend itself vigorously.
Management currently believes that the resolution of this
litigation will not have a material adverse impact on the
Companys financial position or the results of operations,
although the ultimate outcome of this matter cannot be
determined at this time.

On July 9, 2002, the Companys
subsidiary, Hugh OKane Electric Co., LLC
(HOK), was served with a Complaint filed in the
District of Maryland by several former employees, Yemele
T. William Nestor et al. v. Hugh OKane Electric Company,
LLC (Employee Action), alleging violations
of Title VII of the Civil Rights Act of 1964, as amended.
Plaintiffs in the Employee Action seek compensatory and punitive
damages. In addition, on September 9, 2002, HOK was served
with a second Complaint filed in the District of Maryland by the
U.S. Equal Employment Opportunity Commission on behalf of other
employees, Equal Employment Opportunity Commission v. Hugh
OKane Electric Company, LLC (EEOC
Action), alleging violations of Title VII of the
Civil Rights Act of 1964, as amended. The EEOC Action seeks
compensatory damages and injunctive relief. The Employee Action
and the EEOC Action arise from the same core of allegations. HOK
intends to defend itself vigorously in both actions. HOKs
Answers in both actions have been filed, and limited discovery
has been conducted in anticipation of mediation, which has been
scheduled for March 2003. It is too early to assess the ultimate
outcome of the above-referenced matters served upon HOK.
Therefore, at present, it cannot be determined whether the
ultimate outcome of these matters, individually or cumulatively,
will have a material impact on the Companys financial
position or results of operations.

On or about July 22, 2002, the Company was
served with a complaint in the Northern District of Illinois,
Annecca Inc. et al. v. Lexent Inc., brought by
several plaintiffs associated with U.S. Electric LLC, alleging
that the Companys decisions neither to complete the
purchase of U.S. Electric nor to employ certain of
U.S. Electrics principals constitute a breach of
contract. Plaintiffs seek damages for lost profits, salaries,
etc. The Company believes that the complaint is without merit
and will vigorously defend itself. The Companys Answer has
been filed, and the Company has asserted several counterclaims.
The parties are currently engaged in discovery. It is too early
to assess the ultimate outcome of the litigation. Therefore, at
present, it cannot be determined whether the ultimate outcome
will have a material impact on the Companys financial
position or results of operations.

HOK continues to be involved in litigation in the
Southern District of New York, U.S. Information Systems,
Inc. et al. v. International Brotherhood of Electrical Workers
Local Union 3, AFL-CIO et al., served on or about
March 10, 2002, brought by three electrical contractors
alleging a conspiracy among certain other contractors (including
HOK) and the International Brotherhood of Electrical Workers,
Local Union Number 3, AFL-CIO (IBEW). The suit
alleges violations of the federal Sherman Antitrust Act and
state laws and claims that the defendants exercise market power
restricting the ability of plaintiffs, who employ

8



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##### Table of Contents



workers from the Communication Workers of America
(CWA), from performing telecommunications services
work in the New York metropolitan area. Plaintiffs seek treble
damages. The Company believes that this suit is part of an
ongoing labor dispute between the IBEW and the CWA and that the
allegations against HOK are without merit. HOK intends to defend
itself vigorously in this litigation. Discovery is complete, but
it is too early to assess the ultimate outcome of the
litigation. Notwithstanding, a damage judgment against HOK could
have a material adverse effect on the Companys business
operating results and financial condition.


On February 18, 2003, the Company announced
that it had received an offer from a buying group, which
included Hugh J. OKane, Jr. and Kevin M. OKane
(Buying Group), to purchase all outstanding shares
of the Company (not owned by the Buying Group) for $1.25 per
share (Offer). The Companys Board of Directors
currently consists solely of Hugh J. OKane, Jr. and
Kevin M. OKane. As a result of the absence of independent
members from the Companys Board of Directors, the Company
retained Rodman & Renshaw, Inc., a New York based investment
banking firm as an independent advisor to assist in evaluating
and responding to the Offer. As of March 15, 2003, the
Company was aware of six (6) class action lawsuits that had
been filed in the State of Delaware. All of the lawsuits have
named Lexent Inc., Hugh J. OKane, Jr. and Kevin M.
OKane as defendants. At least one of the lawsuits,
Robert Ramsey v. Lexent Inc. et al., has
also named, as defendants, several former members of the
Companys Board of Directors. The suits allege, inter alia,
that the Offer is unfair and inadequate, the Buying Group has
engaged in self-dealing and has not acted in good faith, and
that Lexent Inc. and its Board of Directors, present and former,
have breached their fiduciary duty to shareholders. The
plaintiffs seek damages, including, but not limited to,
enjoining the Company and the Buying Group from proceeding with,
consummating or closing the proposed transaction. Answers have
not yet been filed on behalf of the Company and its present and
former Board Members. It is too early to assess the outcome of
the above referenced matters. Therefore, at present it cannot be
determined whether the ultimate outcome of these matters will
have a material impact on the Companys financial position
or results of operations.






|        |                                                        
|------- | -------------------------------------------------------
|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, 2002.




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, 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                          |      | $ | 6.70  |  |  | $ | 2.82 | 
|                             | 2nd Quarter                          |      | $ | 3.30  |  |  | $ | 1.55 | 
|                             | 3rd Quarter                          |      | $ | 2.24  |  |  | $ | 1.30 | 
|                             | 4th Quarter                          |      | $ | 1.50  |  |  | $ | 0.82 | 
|YEAR ENDED DECEMBER 31, 2003 |                                      |      |   |       |  |  |   |     
|                             | 1st Quarter (through March 12, 2003) |      | $ | 1.29  |  |  | $ | 0.75 | 

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##### Table of Contents



On March 12, 2003, there were approximately
42,204,935 shares of Common Stock outstanding, which were
held by approximately 1,875 stockholders of record of the
Companys common stock. The last sale price for the common
stock as reported by NASDAQ was $1.25 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 2002, the Company did not sell or issue any
securities that were not registered under the Securities Act.






|        |                                         
|------- | ----------------------------------------
|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, 2002, 2001, 2000, 1999, and 1998. The selected
consolidated financial 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.

|                                               |         |                                          |         |       |   |      |         |       |   |      |         |      |  |   |         |      |  |   |        |      | 
|---------------------------------------------- | ------- | ---------------------------------------- | ------- | ----- | - | ---- | ------- | ----- | - | ---- | ------- | ---- |  | - | ------- | ---- |  | - | ------ | ---- | 
|                                               |         |                                         
|                                               |         | Year Ended December 31,                 
|                                               |         |                                         
|                                               |         | 2002                                     |         | 2001  |   | 2000 |         | 1999  |   | 1998
|                                               |         |                                          |         |       |   |      |         |       |   |     
|                                               |         |                                         
|                                               |         | (In thousands, except per share amounts)
|Consolidated Statement of Operations
    Data: |         |                                          |         |       |   |      |         |       |   |      |         |      |  |   |         |      |  |   |        |     
|Revenues                                       |         | $                                        | 123,842 |       |   | $    | 240,578 |       |   | $    | 295,993 |      |  | $ | 150,862 |      |  | $ | 70,959 |     
|Cost of revenues                               |         |                                          | 130,524 |       |   |      | 195,001 |       |   |      | 222,754 |      |  |   | 119,577 |      |  |   | 55,752 |     
|                                               |         |                                          |         |       |   |      |         |       |   |      |         |      |  |   |         |      |  |   |        |     
|Gross margin                                   |         |                                          | (6,682  | )     |   |      | 45,577  |       |   |      | 73,239  |      |  |   | 31,285  |      |  |   | 15,207 |     
|General and administrative expenses            |         |                                          | 15,906  |       |   |      | 20,237  |       |   |      | 20,340  |      |  |   | 9,012   |      |  |   | 6,815  |     
|Depreciation and amortization                  |         |                                          | 4,787   |       |   |      | 5,803   |       |   |      | 3,628   |      |  |   | 1,495   |      |  |   | 779    |     
|Non-cash stock-based compensation              |         |                                          | 3,301   |       |   |      | 6,058   |       |   |      | 26,159  |      |  |   | 2,191   |      |  |   |       |     
|Provision for doubtful accounts                |         |                                          | 126     |       |   |      | 32,286  |       |   |      | 2,551   |      |  |   | 2,373   |      |  |   | 1,096  |     
|Restructuring charges, net                     |         |                                          | 9,132   |       |   |      | 13,564  |       |   |      |        |      |  |   |        |      |  |   |       |     
|Impairment of goodwill                         |         |                                          | 1,514   |       |   |      |        |       |   |      |        |      |  |   |        |      |  |   |       |     
|                                               |         |                                          |         |       |   |      |         |       |   |      |         |      |  |   |         |      |  |   |        |     
|Operating income (loss)                        |         |                                          | (41,448 | )     |   |      | (32,371 | )     |   |      | 20,561  |      |  |   | 16,214  |      |  |   | 6,517  |     
|Interest expense                               |         |                                          | 244     |       |   |      | 1,077   |       |   |      | 1,252   |      |  |   | 1,104   |      |  |   | 1,143  |     
|Interest income                                |         |                                          | (1,350  | )     |   |      | (2,334  | )     |   |      | (1,966  | )    |  |   |        |      |  |   |       |     
|Other (income) expense, net                    |         |                                          | 3,743   |       |   |      | 2,002   |       |   |      | (5      | )    |  |   | 27      |      |  |   | 166    |     
|                                               |         |                                          |         |       |   |      |         |       |   |      |         |      |  |   |         |      |  |   |        |     
|Income (loss) before income taxes              |         |                                          | (44,085 | )     |   |      | (33,116 | )     |   |      | 21,280  |      |  |   | 15,083  |      |  |   | 5,208  |     
|Income tax provision (benefit)                 |         |                                          | 6,212   |       |   |      | (13,856 | )     |   |      | 12,704  |      |  |   | 7,131   |      |  |   | 1,380  |     
|                                               |         |                                          |         |       |   |      |         |       |   |      |         |      |  |   |         |      |  |   |        |     
|Net income (loss)                              |         | $                                        | (50,297 | )     |   | $    | (19,260 | )     |   | $    | 8,576   |      |  | $ | 7,952   |      |  | $ | 3,828  |     
|                                               |         |                                          |         |       |   |      |         |       |   |      |         |      |  |   |         |      |  |   |        |     
|Net income (loss) per share:                   |         |                                          |         |       |   |      |         |       |   |      |         |      |  |   |         |      |  |   |        |     
|                                               | Basic   |                                          | $       | (1.20 | ) |      | $       | (0.46 | ) |      | $       | 0.27 |  |   | $       | 0.32 |  |   | $      | 0.16 | 
|                                               |         |                                          |         |       |   |      |         |       |   |      |         |      |  |   |         |      |  |   |        |     
|                                               | Diluted |                                          | $       | (1.20 | ) |      | $       | (0.46 | ) |      | $       | 0.22 |  |   | $       | 0.24 |  |   | $      | 0.15 | 
|                                               |         |                                          |         |       |   |      |         |       |   |      |         |      |  |   |         |      |  |   |        |     

10



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|                                                          |         |                                          |  |        |  |      |  |        |  |      |   |        |  |  |   |        |  |   |       |        | 
|--------------------------------------------------------- | ------- | ---------------------------------------- |  | ------ |  | ---- |  | ------ |  | ---- | - | ------ |  |  | - | ------ |  | - | ----- | ------ | 
|                                                          |         |                                         
|                                                          |         | Year Ended December 31,                 
|                                                          |         |                                         
|                                                          |         | 2002                                     |  | 2001   |  | 2000 |  | 1999   |  | 1998
|                                                          |         |                                          |  |        |  |      |  |        |  |     
|                                                          |         |                                         
|                                                          |         | (In thousands, except per share amounts)
|Weighted average number of common shares
    outstanding: |         |                                          |  |        |  |      |  |        |  |      |   |        |  |  |   |        |  |   |       |       
|                                                          | Basic   |                                          |  | 41,945 |  |      |  | 41,449 |  |      |   | 30,839 |  |  |   | 22,721 |  |   |       | 22,717 | 
|                                                          |         |                                          |  |        |  |      |  |        |  |      |   |        |  |  |   |        |  |   |       |       
|                                                          | Diluted |                                          |  | 41,945 |  |      |  | 41,449 |  |      |   | 38,266 |  |  |   | 33,531 |  |   |       | 26,390 | 
|                                                          |         |                                          |  |        |  |      |  |        |  |      |   |        |  |  |   |        |  |   |       |       
|Pro Forma Information (unaudited):                        |         |                                          |  |        |  |      |  |        |  |      |   |        |  |  |   |        |  |   |       |       
|Income before income taxes                                |         |                                          |  |        |  |      |  |        |  |      |   |        |  |  |   |        |  | $ | 5,208 |       
|Pro forma provision for income taxes(1)                   |         |                                          |  |        |  |      |  |        |  |      |   |        |  |  |   |        |  |   | 2,344 |       
|                                                          |         |                                          |  |        |  |      |  |        |  |      |   |        |  |  |   |        |  |   |       |       
|Pro forma net income(1)                                   |         |                                          |  |        |  |      |  |        |  |      |   |        |  |  |   |        |  | $ | 2,864 |       
|                                                          |         |                                          |  |        |  |      |  |        |  |      |   |        |  |  |   |        |  |   |       |       
|Pro forma net income per share                            |         |                                          |  |        |  |      |  |        |  |      |   |        |  |  |   |        |  |   |       |       
|                                                          | Basic   |                                          |  |        |  |      |  |        |  |      | $ | 0.21   |  |  | $ | 0.24   |  |   | $     | 0.11   | 
|                                                          |         |                                          |  |        |  |      |  |        |  |      |   |        |  |  |   |        |  |   |       |       
|                                                          | Diluted |                                          |  |        |  |      |  |        |  |      | $ | 0.20   |  |  | $ | 0.23   |  |   | $     | 0.11   | 
|                                                          |         |                                          |  |        |  |      |  |        |  |      |   |        |  |  |   |        |  |   |       |       
|Pro forma weighted average number of shares:              |         |                                          |  |        |  |      |  |        |  |      |   |        |  |  |   |        |  |   |       |       
|                                                          | Basic   |                                          |  |        |  |      |  |        |  |      |   | 40,654 |  |  |   | 32,536 |  |   |       | 27,025 | 
|                                                          |         |                                          |  |        |  |      |  |        |  |      |   |        |  |  |   |        |  |   |       |       
|                                                          | Diluted |                                          |  |        |  |      |  |        |  |      |   | 42,356 |  |  |   | 34,606 |  |   |       | 27,025 | 
|                                                          |         |                                          |  |        |  |      |  |        |  |      |   |        |  |  |   |        |  |   |       |       

|                                     |  |                    |         |      |  |      |         |      |  |      |         |  |  |   |        |  |  |   |        |  
|------------------------------------ |  | ------------------ | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------ |  |  | - | ------ | -
|                                     |  |                   
|                                     |  | As of December 31,
|                                     |  |                   
|                                     |  | 2002               |         | 2001 |  | 2000 |         | 1999 |  | 1998
|                                     |  |                    |         |      |  |      |         |      |  |     
|                                     |  |                   
|                                     |  | (In thousands)    
|Consolidated Balance Sheet Data:     |  |                    |         |      |  |      |         |      |  |      |         |  |  |   |        |  |  |   |        |  
|Cash and investments                 |  | $                  | 74,423  |      |  | $    | 75,839  |      |  | $    | 63,690  |  |  | $ | 1,158  |  |  | $ | 1,495  |  
|Working capital                      |  |                    | 94,444  |      |  |      | 128,996 |      |  |      | 140,811 |  |  |   | 25,697 |  |  |   | 10,691 |  
|Total assets                         |  |                    | 124,445 |      |  |      | 168,515 |      |  |      | 199,001 |  |  |   | 60,379 |  |  |   | 32,309 |  
|Total debt                           |  |                    | 2,499   |      |  |      | 5,593   |      |  |      | 10,807  |  |  |   | 18,812 |  |  |   | 13,985 |  
|Total stockholders equity (deficit) |  |                    | 91,725  |      |  |      | 137,969 |      |  |      | 150,481 |  |  |   | 3,715  |  |  |   | (6,388 | )






|    |                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 time.
    The pro forma provision for income taxes and pro forma net
    income for 1998 reflect the amounts we would have recorded if we
    had been a C corporation during this period.






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|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.

11



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##### Table of Contents



We have offices in New York City,
Washington D.C. metro, Boston metro, Long Island, and in
the states of Florida, North Carolina and New Jersey. For the
years 2002 and 2001, approximately 77% and 79%, respectively, of
our revenue 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, 2002, we had
454 employees working directly on projects and
112 employees providing supervision, support, and general,
administrative and marketing functions.

Our customers for the design and deployment of
telecommunications networks have historically included 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 2002 and 2001, we derived approximately 23% and 16%,
respectively, of our revenues from our largest customer, and 18%
and 23%, respectively, of our revenues from our second largest
customer. A significant portion of our revenues from the second
largest customer in 2002 was derived from a contract, which was
completed during 2002. Additionally, 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, 2001, and 2002, 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
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, 2002, a balance of $2.0 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 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

12



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##### Table of Contents



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.


For projects whose duration is not expected to
exceed 90 days, 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.

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.

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.

As of December 31, 2002, we provided for a
full valuation allowance on our net deferred tax asset of
$26.7 million. A valuation allowance is required when it is
more likely than not that all or a portion of a deferred tax
asset will not be realized. A review of all available positive
and negative evidence needs to be considered, including, but not
limited to, our performance, the market environment in which we
operate and the length of carryback and carryforward periods.
Based on our performance in the past few years and the current
challenging economic environment that has negatively impacted
our operating results, we concluded that it was appropriate to
establish a full valuation allowance for our net deferred tax
assets. In addition, we expect to provide a full valuation
allowance on future tax benefits until we can substantiate a
level of

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profitability that demonstrates our ability to
utilize the assets. Adjustments to increase or decrease the
valuation allowance are charged or credited, respectively, to
income tax expense.


During 2002 and 2001, we recorded significant
charges in connection with our restructuring plan. The related
reserves reflect many estimates, including those pertaining to
severance and related contractual obligations, write-offs of
property and equipment and obligations under leases for
premises, which we have vacated. We reassess the reserve
requirements to complete our restructuring plan at the end of
each reporting period. Actual experience has been and may
continue to be different from these estimates. For example, we
revised our estimates for certain fiscal 2001 restructuring
plans during fiscal 2002, which resulted in a net credit of
$0.4 million. As of December 31, 2002 and 2001,
liabilities associated with our restructuring program were
$10.6 million and $9.3 million, respectively. For more
information, see Note 8 of Notes to Consolidated
Financial Statements.

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,
|                                               |  |                   
|                                               |  | 2002               |       | 2001 |  | 2000 |       | 1999
|                                               |  |                    |       |      |  |      |       |     
|Consolidated Statement of Operations
    Data: |  |                    |       |      |  |      |       |      |  |  |       |   |  |  |       |  
|Revenues                                       |  |                    | 100.0 | %    |  |      | 100.0 | %    |  |  | 100.0 | % |  |  | 100.0 | %
|Cost of revenues                               |  |                    | 105.4 |      |  |      | 81.1  |      |  |  | 75.3  |   |  |  | 79.3  |  
|                                               |  |                    |       |      |  |      |       |      |  |  |       |   |  |  |       |  
|Gross margin                                   |  |                    | (5.4  | )    |  |      | 18.9  |      |  |  | 24.7  |   |  |  | 20.7  |  
|General and administrative expenses            |  |                    | 12.8  |      |  |      | 8.4   |      |  |  | 6.9   |   |  |  | 6.0   |  
|Depreciation and amortization                  |  |                    | 3.9   |      |  |      | 2.4   |      |  |  | 1.2   |   |  |  | 1.0   |  
|Non-cash stock-based compensation              |  |                    | 2.7   |      |  |      | 2.5   |      |  |  | 8.8   |   |  |  | 1.5   |  
|Provision for doubtful accounts                |  |                    | 0.1   |      |  |      | 13.4  |      |  |  | 0.9   |   |  |  | 1.6   |  
|Restructuring charges                          |  |                    | 7.4   |      |  |      | 5.6   |      |  |  |      |   |  |  |      |  
|Impairment of goodwill                         |  |                    | 1.2   |      |  |      |      |      |  |  |      |   |  |  |      |  
|                                               |  |                    |       |      |  |      |       |      |  |  |       |   |  |  |       |  
|Operating (loss) income                        |  |                    | (33.5 | )    |  |      | (13.5 | )    |  |  | 6.9   |   |  |  | 10.7  |  
|Interest expense                               |  |                    | 0.2   |      |  |      | 0.4   |      |  |  | 0.4   |   |  |  | 0.7   |  
|Interest income                                |  |                    | (1.1  | )    |  |      | (1.0  | )    |  |  | (0.7  | ) |  |  |      |  
|Other expense, net                             |  |                    | 3.0   |      |  |      | 0.8   |      |  |  |      |   |  |  |      |  
|                                               |  |                    |       |      |  |      |       |      |  |  |       |   |  |  |       |  
|Income (loss) before income taxes              |  |                    | (35.6 | )    |  |      | (13.8 | )    |  |  | 7.2   |   |  |  | 10.0  |  
|Income tax provision (benefit)                 |  |                    | 5.0   |      |  |      | (5.8  | )    |  |  | 4.3   |   |  |  | 4.7   |  
|                                               |  |                    |       |      |  |      |       |      |  |  |       |   |  |  |       |  
|Net income (loss)                              |  |                    | (40.6 | )%   |  |      | (8.0  | )%   |  |  | 2.9   | % |  |  | 5.3   | %
|                                               |  |                    |       |      |  |      |       |      |  |  |       |   |  |  |       |  



| |                                                                          
| | -------------------------------------------------------------------------
| | Year Ended December 31, 2002 Compared
    to Year Ended December 31, 2001

Revenues.Our
revenues decreased by 49% to $123.8 million in 2002 from
$240.6 million in 2001. 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 one of our largest customers, Level 3
Communications, under which we recorded approximately
$16.3 million and $47.3 million of revenues for 2002
and 2001, respectively. The EPC contract was completed for all
markets during 2002.

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Cost of revenues.Our cost of revenues represented 105%
of revenues in 2002 compared to 81% of revenues in 2001. The
increased percentage was due in part to fixed overhead costs,
which represented a higher percentage of a lower level of
revenues, the establishment of job loss provisions due to
revisions in estimates on certain electrical contracting
projects, and in part to pricing pressure. We anticipate that
pricing pressure will continue during 2003. Costs of
approximately $14.2 million and $41.3 million were
incurred in 2002 and 2001, respectively, in connection with the
EPC contract.

General and administrative expenses.Our general and administrative
expenses decreased 21% to $15.9 million in 2002 from
$20.2 million in 2001. The decrease is primarily attributed
to compensation and related benefits for administrative
personnel as a result of rightsizing the Company during 2002.

Depreciation and amortization.Our depreciation and amortization
expense decreased to $4.8 million in 2002 from
$5.8 million in 2001. The decrease reflects a reduction in
equipment and leasehold improvements resulting from the closing
of offices in 2002.

Non-cash stock-based
compensation.Amortization of deferred
stock-based compensation declined to $3.3 million in 2002
from $6.1 million in 2001. The decrease was due to the
reversal in the first quarter of 2002 of $3.8 million of
deferred stock-based compensation for unvested options forfeited
during that period, and the reversal on April 1, 2001 of
$7.6 million with respect to an optionee whose status was
changed from employee to consultant on that date.

Provision for doubtful accounts.Our provision for doubtful accounts
decreased to $0.1 million in 2002 from $32.3 million
in 2001. The decrease is due to the reduction in the receivable
balance resulting from, an increase in collection and the
write-off of uncollectible receivable balances throughout 2002.

Restructuring charges, net.In 2002, we recorded $9.1 million
in restructuring charges, primarily in connection with the
closing of eleven offices and reduction in our workforce. The
restructuring charges are comprised primarily of
$6.5 million for obligations under leases for premises
which the Company has vacated, $0.7 million for severance
and related contractual obligations for approximately fifteen
non-unionized personnel and executives in areas being closed or
scaled back, and $2.3 million for write-offs of property
and equipment offset against $0.4 million for the unused
restructure reserve for severance from 2001. 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., and Florida.

We expect the implementation of our restructuring
plan to reduce our pre-tax operating expenses by
$6.7 million in the year 2003, of which $1.9 million
would represent cash savings. The 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 $10.6 million. Of
the balance of $10.6 million, severance and related
contractual obligations of $0.5 million are expected to be
paid by the first quarter of 2003 and obligations under leases
of $10.1 million are expected to be paid over the remaining
terms of the leases up to eight years.

Impairment of goodwill.During the fourth quarter of 2002, we
conducted the required annual impairment review of our goodwill.
Due to a significant decrease in demand for services from
telecommunications carriers and uncertainty as to the timing of
any improvement in industry conditions, we determined that the
implied fair value of our reporting unit, based on quoted market
prices, is less than recorded goodwill for our reporting unit.
As a result we recorded a goodwill impairment charge of
$1.5 million.

Interest expense.Interest expense decreased to $0.2 million in 2002 from
$1.1 million in 2001. The decrease was primarily due to a
lower average level of debt outstanding in 2002. During 2002 we
repaid $1.5 million of our subordinated note payable to a
stockholder.

Interest income.Interest income decreased to
$1.4 million in 2002 from $2.3 million in 2001.
Interest income is earned on our interest-bearing cash
equivalents. The decreased income in 2002 was attributed to
lower prevailing interest rates.

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Other (income) expense, net.Other (income) expense, net, was
$3.7 million of expense, comprised primarily of
$2.3 million for losses on the disposal of fixed assets and
$1.4 million for a net loss on publicly traded shares of
common stock received from a customer in October 2001 in
partial settlement of a receivable.

Income tax provision
(benefit).Based on our performance in
the past few years and the current challenging economic
environment that has negatively impacted our operating results,
we concluded that it was appropriate to establish a full
valuation allowance on our deferred tax asset at
December 31, 2002. Accordingly the effective tax rate of
14.1% in 2002 is principally due to the establishment of the
valuation allowance. The effective tax rate was (42%) in 2001,
because a significant portion of our operation is concentrated
in New York City, which subjects us to local tax on income
derived in that jurisdiction.

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.

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 that 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.

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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 write-offs 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.

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 million 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 write-off
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.

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.

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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, 2002, we had cash and cash
equivalents, a certificate of deposit and available-for-sale
investments of $74.4 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 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 did not 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. Net cash used by operations was
$1.6 million for 2002, representing net collections of
receivables offset by payments made for accrued liabilities. 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.

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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, 2002, these holdbacks aggregated
$2.6 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 by investing activities for 2002 of
$43.6 million was primarily for the purchase of
available-for-sale investments of $44.1 million, the
investment in a certificate of deposit of $2.0 million and
$0.9 million for capital expenditures, net of
$3.4 million from proceeds on the sale of publicly traded
common stock received from a customer in October 2001 in a
partial settlement of a receivable. Cash used for investing
activities, primarily capital expenditures, was
$7.9 million for 2001, and $11.3 million for 2000.

Net cash used in financing activities for 2002
was $2.5 million, and $5.0 million for 2001 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.

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, 2002 is as follows:

|                                   |  |                        |        |      |  |      |       |      |  |            |       |  |  |   |       |  |  |   |       | 
|---------------------------------- |  | ---------------------- | ------ | ---- |  | ---- | ----- | ---- |  | ---------- | ----- |  |  | - | ----- |  |  | - | ----- | 
|                                   |  |                       
|                                   |  | Payments Due By Period
|                                   |  |                       
|                                   |  |                        |        | 2006
|                                   |  | Total                  |        | 2003 |  | 2004 |       | 2005 |  | and Beyond
|                                   |  |                        |        |      |  |      |       |      |  |           
|                                   |  |                       
|                                   |  | (In thousands)        
|Long-term debt                     |  | $                      | 2,235  |      |  | $    | 1,776 |      |  | $          | 459   |  |  | $ |      |  |  | $ |      | 
|Capital leases                     |  |                        | 264    |      |  |      | 258   |      |  |            | 6     |  |  |   |      |  |  |   |      | 
|Operating leases                   |  |                        | 19,546 |      |  |      | 4,793 |      |  |            | 3,330 |  |  |   | 2,712 |  |  |   | 8,711 | 
|                                   |  |                        |        |      |  |      |       |      |  |            |       |  |  |   |       |  |  |   |       | 
|Total contractual cash obligations |  | $                      | 22,045 |      |  | $    | 6,827 |      |  | $          | 3,795 |  |  | $ | 2,712 |  |  | $ | 8,711 | 
|                                   |  |                        |        |      |  |      |       |      |  |            |       |  |  |   |       |  |  |   |       | 

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. During January and
April 2002 the MFN common stock was sold for
$3.4 million, resulting in a net loss of $1.4 million.
See Note 6 of Notes to Consolidated Financial
Statements.

Effects of Recently Issued Accounting
Standards

On January 1, 2002, we adopted Statement of
Financial Accounting Standards
No. (SFAS) 142, which requires goodwill to
be tested for impairment on an annual basis, and written down
when impaired,

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rather than amortized, as previously required. If
an impairment loss exists as a result of the transitional
goodwill impairment test, the implementation of SFAS 142
could result in a one-time charge to earnings as a cumulative
effect of accounting change. We did not identify an impairment
charge upon implementation.


During the fourth quarter of 2002, we conducted
the required annual impairment review. Due to a significant
decrease in demand for services from telecommunications carriers
and uncertainty as to the timing of any improvement in industry
conditions, we determined that the implied fair value of our
reporting unit, based on quoted market prices, is less than
recorded goodwill for our reporting unit. As a result we
recorded a goodwill impairment charge of $1.5 million.

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 was effective
for us on January 1, 2002. The adoption of this Statement
did not have a material effect on our results of operations or
financial position.

In April 2002, the FASB issued SFAS 145
Rescission of FAS Nos. 4, 44, and 64, Amendment of
SFAS No. 13, and Technical Corrections as of
April 2002. This Statement amends SFAS 13,
Accounting for Leases, to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the
required accounting for certain lease modifications that have
economic effects that are similar to sale-leaseback transactions
as well as other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe
their applicability under changed conditions. SFAS 145 is
effective for fiscal years beginning after December 31,
2002. We do not anticipate that the adoption of SFAS 145
will have a material impact on the consolidated financial
statements.

In June 2002, the FASB issued SFAS 146
Accounting for Costs Associated with Exit or Disposal
Activities. This Statement addresses financial accounting
and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force
(EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). SFAS 146 is effective for fiscal
years beginning after December 31, 2002. This statement
could impact the accounting for restructuring charges that the
Company might incur in the future.

In December 2002, the FASB issued
SFAS 148 Accounting for Stock-Based
Compensation  Transition and Disclosure that
amends SFAS 123 Accounting for Stock-Based
Compensation. SFAS 148 provides alternative methods
of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation.
SFAS 148 amends the disclosure requirements of APB Opinion
No. 28, Interim Financial Reporting and
Statement 123 to require prominent disclosures in both
annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect
of the method used on reporting results. SFAS 148 is
effective for fiscal years ending after December 15, 2002.
The adoption of SFAS 148 except for the disclosure
requirements had no impact on the consolidated financial
statements. The additional required disclosure is found in
Note 13 of Notes to Consolidated Financial
Statements.

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

20



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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, 2002, we had cash and cash
equivalents of $28.1 million, and available-for-sale
investments of $44.3 million. Cash equivalents are
interest-bearing investment grade securities, primarily
short-term, highly liquid investments with original maturities
at the date of purchase of less than 90 days. The
available-for-sale investments are investment grade securities
backed by U.S. government and Federal Agency bonds, which have a
maturity in excess of 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, 2002 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.

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.






|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

See Item 15 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
    Disclosures

None.




PART III






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors And Executive Officers of the
    Registrant

Information Regarding the Board of Directors
and Committees

The following individuals currently serve as
members of the Companys Board of Directors: Hugh J.
OKane, Jr., who is the Chairman of the Board, and his
brother Kevin M. OKane, who is the Vice Chairman of the
Board and our Chief Executive Officer.

Hugh J. OKane, Jr. has approximately
17 years experience in the telecommunications industry and
29 years in the electrical contracting industry. He has
been Chairman of the Board of Directors since our inception. In
addition, he served as our President and Chief Executive Officer
from our inception until February, 2000. Prior to our founding,
Mr. OKane held various positions in our predecessor
Company, most recently as its President, since joining his
familys business in 1973. Mr. OKane holds a
B.S. in Finance from Boston College.

Kevin M. OKane has approximately
17 years experience in the telecommunications industry and
26 years in the electrical contracting industry. He was our
President and Chief Executive Officer from March 31, 2001
through September 8, 2002. Since that date, he has served
as our Chief Executive Officer. Prior to March 31, 2001,
Mr. OKane was our Chief Operating Officer, and he has
been a Director since our inception. In February 2000, he was
appointed Vice Chairman of our Board of Directors. Prior to our
founding, Mr. OKane held various positions in our
predecessor Company, most recently as its Chief

21



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Executive Officer, since joining his
familys business in 1976. Mr. OKane holds a
B.S. in Accounting from Boston College.


The following individuals do not currently serve
as members of the Companys Board of Directors, but had
served in such capacity for all or a portion of the calendar
year ending December 31, 2002: Peter Crisp served as a
Class III Director and as a member of the Audit Committee
from January 1, 2002 through March 3, 2002. Walter C.
Teagle III, served as a Class I Director and as
Executive Vice President, Administration, from January 1,
2002 through July 15, 2002. L. White
Matthews III, served as a Class I Director and a
member of the Audit Committee and Compensation Committee during
2002, but resigned from all such positions effective
January 27, 2003. Kathleen Perone served as a Class II
Director and as a member of the Compensation Committee during
2002. Ms. Perone also served on the Audit Committee from
April 17, 2002. Ms. Perone resigned from all positions
with the Company, effective February 10, 2003. Richard L.
Schwob served as a Class II Director during 2002, and
Mr. Schwob also served on the Audit Committee throughout
2002. Mr. Schwob resigned from all positions with the
Company, effective February 7, 2003. Mr. Richard W.
Smith served as a Class II Director and as a member of the
Compensation Committee during 2002. Mr. Smith resigned from
all positions with the Company, effective February 17, 2003.

Due to the resignation of four directors during
January and February 2003, our Board now consists solely of
Mr. Hugh J. OKane and Mr. Kevin M. OKane.

Compensation Committee Interlocks and Insider
Participation

Prior to January 1999, all compensation decisions
relating to our executive officers were made solely by our Board
of Directors. Upon formation of our Compensation Committee and
through December 31, 2002, the Compensation Committee made
recommendations regarding the compensation of our executive
officers.

Compensation Committee Report on Executive
Compensation

L. White Matthews, Kathleen A. Perone, and
Richard W. Smith resigned from the Companys Board of
Directors and Compensation Committee on January 27, 2003,
February 10, 2003 and February 17, 2003, respectively.
They did not prepare a report prior to their resignation.

Report of the Audit Committee

L. White Matthews, Richard L. Schwob, and
Kathleen A. Perone resigned from the Companys Board of
Directors and Audit Committee on January 27, 2003,
February 7, 2003 and February 10, 2003 respectively.
They did not prepare a report prior to their resignation.

Executive Officers

The current executive officers of the Company are
as follows:

|                     |  |     |    |          |  |                                                  
|-------------------- |  | --- | -- | -------- |  | -------------------------------------------------
|Name                 |  | Age |    | Position
|                     |  |     |    |         
|Hugh J. OKane, Jr.  |  |     | 52 |          |  | Chairman of the Board                            
|Kevin M. OKane      |  |     | 50 |          |  | CEO, Vice Chairman and Director                  
|Bruce Levy           |  |     | 47 |          |  | President and Chief Operating Officer            
|Norman Fornella      |  |     | 54 |          |  | Executive Vice President, Chief Financial Officer
|Victor P. DeJoy, Sr. |  |     | 34 |          |  | Executive Vice President, Engineering            
|Noah Franzblau       |  |     | 34 |          |  | Vice President, Secretary and General Counsel    

For biographical information concerning
Mr. Hugh J. OKane, Jr. and Kevin M. OKane see
Information Regarding the Board of Directors and
Committees above.

Bruce Levy, President and Chief Operating
Officer, joined Lexent in September 2002. Mr. Levy held a
variety of senior management positions at GPU, Inc., an electric
utility holding company and at GPU International Group, a wholly
owned subsidiary of GPU, Inc., including President and Chief
Executive Officer

22



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##### Table of Contents



(GPU International Group) and Sr. Vice President
and Chief Financial Officer (GPU, Inc.). Mr. Levy holds an
MBA in Finance from New York University and a Bachelor of
Engineering from City College of New York.


Norman Fornella, Executive Vice President and
Chief Financial Officer, joined Lexent in September 2002.
Mr. Fornella was Executive Vice President-Chief Financial
Officer and Treasurer of Provant, Inc., a provider of
performance improvement and training services. Prior to that,
Mr. Fornella served as Executive Vice President, Chief
Financial Officer and Treasurer of Morse Diesel International, a
wholly owned subsidiary of AMEC, a firm specializing in project
management, general contracting, and construction consulting
services. Mr. Fornella was also V.P. of Finance for Gibbs
and Hill, Inc., an electrical engineering and design
construction firm. Mr. Fornella holds an M.B.A. in Business
Administration from Duquesne University as well as a BS in
Accounting and Economics from Indiana University of
Pennsylvania. He is a certified public accountant in
Pennsylvania and New Jersey.

Victor P. DeJoy, Sr. has approximately
12 years experience in the telecommunications industry and
has been the Executive Vice President of our Company in charge
of design, engineering and program management services since
December 1999. Prior to joining our Company, he served as the
Northeastern Regional Vice President of Engineering and
Operations at Nextlink Communications since March 1998. From May
1992 through March 1998, Mr. DeJoy held various positions
with TCG, most recently as its Vice President of National
Provisioning Center. Mr. DeJoy holds a BS in electrical
engineering from Rutgers College of Engineering.

Noah Franzblau has been the Secretary of the
Company since January 1, 2002. He also serves as General
Counsel and has been employed by the Company since August 2000.
Prior to joining our Company, he served as an Associate Attorney
with the law firm of Riker, Danzig, Scherer, Hyland &
Peretti, LLP. Mr. Franzblau holds a B.A. from Tufts
University and a JD/MBA from the University of Denver.

Section 16(a) Beneficial Ownership
Reporting Compliance

Section 16(a) of the Securities Exchange Act
of 1934, as amended, requires the Companys officers and
directors, and persons who own more than 10% of the
Companys Common Stock, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission
(SEC). Officers, directors and greater than 10%
stockholders are required by SEC regulation to furnish the
Company with copies of all Section 16(a) forms they file.

Based solely on its review of Forms 3 and 4
and amendments thereto furnished to the Company during its most
recent fiscal year, Forms 5 and amendments thereto
furnished to the Company with respect to its most recent fiscal
year, and written representations from certain reporting persons
that no Forms 5 were required for those persons, the
Company believes that through December 31, 2002, all filing
requirements applicable to its officers, directors and greater
than 10% beneficial owners were met, with the exception of the
following:

Victor P. Dejoy, Sr. filed reports late with
respect to 22,500 options issued in March 2002 and 22,500
options issued in December 2002. These issuances were reported
on a Form 5 in March 2003.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

Set forth below is the aggregate compensation for
services rendered in all capacities to the Company during its
fiscal years ended December 31, 2000, 2001, and 2002 by its
Chief Executive Officer and the five other highest-paid
executive officers whose compensation exceeded $100,000 during
its fiscal year ended December 31, 2002. These individuals
are referred to as the Named Executive Officers. The
compensation described in this table does not include medical or
other benefits that are available generally to all of our

23



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##### Table of Contents



salaried employees or certain perquisites or
other personal benefits received that do not exceed the lesser
of $50,000 or 10% of any such officers salary and bonus:


Summary Compensation Table

|                            |                                                          |        |      |        |  |       |         |                 |  |              |   |              |     |   |       |       |  |  |         |        |     |  |   |   | 
|--------------------------- | -------------------------------------------------------- | ------ | ---- | ------ |  | ----- | ------- | --------------- |  | ------------ | - | ------------ | --- | - | ----- | ----- |  |  | ------- | ------ | --- |  | - | - | 
|                            |                                                          |        |      |        |  |       |         |                 |  | Long Term    |   |             
|                            |                                                          |        |      |        |  |       |         |                 |  | Compensation |   |             
|                            |                                                          |        |      |        |  |       |         |                 |  | Securities   |   |             
|                            |                                                          | Fiscal |      |        |  |       |         | Other Annual    |  | Underlying   |   | All Other   
|Name and Principal Position |                                                          | Year   |      | Salary |  | Bonus |         | Compensation(1) |  | Options      |   | Compensation
|                            |                                                          |        |      |        |  |       |         |                 |  |              |   |             
|Hugh OKane                 |                                                          |        | 2002 |        |  | $     | 280,000 |                 |  |              |  | (3)          |     | $ | 6,000 |       |  |  |        |        |     |  |  |  
|                            | Chairman of the Board                                    |        |      | 2001   |  |       | $       | 280,000         |  |              |   |             | (3) |   | $     | 5,100 |  |  |         |       |     |  |   |  | 
|                            |                                                          |        |      | 2000   |  |       | $       | 265,000         |  |              | $ | 350,000      | (2) |   | $     | 5,100 |  |  |         | 60,000 |     |  |   |  | 
|Kevin OKane                |                                                          |        | 2002 |        |  | $     | 280,000 |                 |  |              |  | (3)          |     | $ | 6,000 |       |  |  |        |        |     |  |  |  
|                            | CEO, Vice Chairman                                       |        |      | 2001   |  |       | $       | 280,000         |  |              |   |             | (3) |   | $     | 5,100 |  |  |         |       |     |  |   |  | 
|                            | and Director                                             |        |      | 2000   |  |       | $       | 265,000         |  |              | $ | 350,000      | (2) |   | $     | 5,100 |  |  |         | 60,000 |     |  |   |  | 
|Bruce Levy                  |                                                          |        | 2002 |        |  | $     | 81,000  |                 |  |              |  |              |     | $ | 2,400 |       |  |  | 600,000 |        |     |  |  |  
|                            | President and Chief Operating Officer                    |        |      |        |  |       |         |                 |  |              |   |              |     |   |       |       |  |  |         |        |     |  |   |   | 
|Norman Fornella             |                                                          |        | 2002 |        |  | $     | 63,000  |                 |  |              |  |              |     | $ | 1,900 |       |  |  | 225,000 |        |     |  |  |  
|                            | Executive Vice President and Chief Financial
    Officer |        |      |        |  |       |         |                 |  |              |   |              |     |   |       |       |  |  |         |        |     |  |   |   | 
|Victor DeJoy                |                                                          |        | 2002 |        |  | $     | 255,000 |                 |  |              |  | (3)          |     | $ | 6,000 |       |  |  | 70,000  | (5)    |     |  |  |  
|                            | Executive Vice                                           |        |      | 2001   |  |       | $       | 255,000         |  |              |   |             | (3) |   | $     | 5,100 |  |  |         |       |     |  |   |  | 
|                            | President, Engineering                                   |        |      | 2000   |  |       | $       | 226,200         |  |              | $ | 185,000      | (2) |   | $     | 5,100 |  |  |         |       | (4) |  |   |  | 
|Noah Franzblau(7)           |                                                          |        | 2002 |        |  | $     | 159,000 |                 |  |              |  | (3)          |     | $ | 4,800 |       |  |  | 15,000  | (6)    |     |  |  |  
|                            | Vice President,                                          |        |      | 2001   |  |       | $       | 123,000         |  |              |   |             | (3) |   | $     | 3,700 |  |  |         |       |     |  |   |  | 
|                            | Secretary and                                            |        |      | 2000   |  |       | $       | 38,000          |  |              | $ | 9,500        | (2) |   | $     | 1,100 |  |  |         |       | (4) |  |   |  | 
|                            | General Counsel                                          |        |      |        |  |       |         |                 |  |              |   |              |     |   |       |       |  |  |         |        |     |  |   |   | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Compensation in this column reflects
    contributions made by us to our 401(k) plan on behalf of each of
    the Named Executive Officers.                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(2) | Bonuses for the year 2000 were paid in 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|(3) | Bonuses were not paid for the years 2001 and 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(4) | Excludes 25,000 and 15,000 options, for
    Messrs. Dejoy and Franzblau, respectively, granted in 2000
    which were tendered and canceled 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
    to be granted on March 25, 2002 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 was the
    closing market price on March 25, 2002, which was $3.03.
|   
|(5) | Includes 25,000 options granted in 2000 which
    were tendered and cancelled on 9/24/01 and were re-priced on
    March 25, 2002, 22,500 options granted on 3/25/02, and
    22,500 options granted on 12/20/02.                                                                                                                                                                                                                                                                                                                                                          
|   
|(6) | Includes 15,000 options granted in 2000 which
    were tendered and cancelled on 9/24/01 and were re-priced on
    March 25, 2002. The exercise price of the new options was
    the closing market price on March 25, 2002, which was $3.03.                                                                                                                                                                                                                                                                                                                              
|   
|(7) | As of January 1, 2003, Noah Franzblaus
    annual compensation for fiscal year 2003 was increased to
    $190,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                        

24



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##### Table of Contents



Option Grants in Year Ended December 31,
2002

The following table sets forth information
regarding stock options granted by the Company during the fiscal
year ended December 31, 2002 to each or any of the Named
Executive Officers:

|                   |  |                   |         |                            |  |                         |      |                             |  |    |      |     |  |  |          |  |  |   |         |  |  |   |           | 
|------------------ |  | ----------------- | ------- | -------------------------- |  | ----------------------- | ---- | --------------------------- |  | -- | ---- | --- |  |  | -------- |  |  | - | ------- |  |  | - | --------- | 
|                   |  |                   |         |                            |  |                        
|                   |  | Individual Grants |         |                           
|                   |  |                   |         | Potential Realizable Value
|                   |  | Number of         |         |                            |  | at Assumed Annual Rates
|                   |  | Securities        |         | Percentage of              |  |                         |      | of Stock Price Appreciation
|                   |  | Underlying        |         | Total Options              |  |                         |      | for Option Term(2)         
|                   |  | Options           |         | Granted in                 |  | Exercise Price          |      | Expiration                  |  |   
|Name               |  | Granted           |         | Fiscal 2002(1)             |  | ($/Share)               |      | Date                        |  | 5% |      | 10%
|                   |  |                   |         |                            |  |                         |      |                             |  |    |      |    
|Victor DeJoy(3)    |  |                   | 25,000  |                            |  |                         | 0.9  | %                           |  | $  | 3.03 |     |  |  | 12/20/10 |  |  | $ | 47,600  |  |  | $ | 120,700   | 
|Victor DeJoy(4)    |  |                   | 22,500  |                            |  |                         | 0.8  | %                           |  | $  | 3.03 |     |  |  | 03/25/12 |  |  | $ | 42,900  |  |  | $ | 108,700   | 
|Victor Dejoy(5)    |  |                   | 22,500  |                            |  |                         | 0.8  | %                           |  | $  | 0.88 |     |  |  | 12/20/12 |  |  | $ | 12,450  |  |  | $ | 31,500    | 
|Norman Fornella(6) |  |                   | 225,000 |                            |  |                         | 7.8  | %                           |  | $  | 1.58 |     |  |  | 09/23/12 |  |  | $ | 223,650 |  |  | $ | 566,550   | 
|Bruce Levy(7)      |  |                   | 600,000 |                            |  |                         | 20.7 | %                           |  | $  | 1.67 |     |  |  | 09/09/12 |  |  | $ | 630,000 |  |  | $ | 1,597,000 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Based on a total of 2,899,425 options granted in
    2002.                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(2) | The fair market value (FMV) was
    determined as the closing price on the date of grant. The
    potential realizable values under such options are shown based
    on assumed rates of annual compound stock price appreciation of
    5% and 10% over the full option term from the date the option
    was granted. These rates represent assumed rates of appreciation
    only. Actual gains, if any, on stock option exercises will
    depend upon the future performance of our common stock.
|   
|(3) | Mr. Dejoy received 25,000 options in 2000,
    which were tendered and cancelled on September 24, 2001
    pursuant to an offer by the Company to exchange outstanding
    options with exercise prices of $13.50 or higher for 25,000 of
    new options granted on March 25, 2002 with an exercise
    price of $3.03 per share. The new options vest as if the
    tendered options had not been cancelled.                                                                                          
|   
|(4) | Mr. Dejoy was granted 22,500 options on
    March 25, 2002. The options vest in 25% increments over
    4 years with the first 25% to vest on the first anniversary
    of the date of the grant.                                                                                                                                                                                                                                                                                                       
|   
|(5) | Mr. Dejoy was granted 22,500 options on
    December 20, 2002. The options vest in 25% increments over
    4 years with the first 25% to vest on the first anniversary
    of the date of the grant.                                                                                                                                                                                                                                                                                                    
|   
|(6) | Options vested at 25% on September 23, 2002
    (Commencement Date) for Mr. Fornella, and remaining options
    shall vest in thirty-six equal increments over the thirty-six
    month period beginning at the end of the month following the
    first anniversary of the Commencement Date.                                                                                                                                                                                                          
|   
|(7) | Options vested at 25% on September 9, 2002
    (Commencement Date) for Mr. Levy, and remaining options
    shall vest in thirty-six equal increments over the thirty-six
    month period beginning at the end of the month following the
    first anniversary of the Commencement Date.                                                                                                                                                                                                               

25



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##### Table of Contents



2002 Stock Option Exercises and Year-End
Option Values

The following table sets forth for each of the
Named Executive Officers information concerning the exercise of
options during fiscal year 2002 and the number and value of
securities underlying unexercised options held by the Named
Executive Officers at December 31, 2002:

|                |  |             |   |          |  |                        |   |                      |  |             |         |               |  |  |         |  |  |  |   |  |  |  |   | 
|--------------- |  | ----------- | - | -------- |  | ---------------------- | - | -------------------- |  | ----------- | ------- | ------------- |  |  | ------- |  |  |  | - |  |  |  | - | 
|                |  |             |   |          |  |                        |   |                      |  |            
|                |  |             |   |          |  | Number of              |   |                     
|                |  |             |   |          |  | Securities Underlying  |   | Value of Unexercised
|                |  |             |   |          |  | Unexercised Options at |   | In the Money Options
|                |  | Shares      |   |          |  | December 31, 2002      |   | December 31, 2002(1)
|                |  | Acquired on |   | Value    |  |                        |   |                     
|Name            |  | Exercise    |   | Realized |  | Exercisable            |   | Unexercisable        |  | Exercisable |         | Unexercisable
|                |  |             |   |          |  |                        |   |                      |  |             |         |              
|Hugh OKane     |  |             |  |          |  |                        |  |                      |  |             | 45,230  |               |  |  | 14,770  |  |  |  |  |  |  |  |  | 
|Kevin OKane    |  |             |  |          |  |                        |  |                      |  |             | 45,230  |               |  |  | 14,770  |  |  |  |  |  |  |  |  | 
|Bruce Levy      |  |             |  |          |  |                        |  |                      |  |             | 150,000 |               |  |  | 450,000 |  |  |  |  |  |  |  |  | 
|Norman Fornella |  |             |  |          |  |                        |  |                      |  |             | 56,250  |               |  |  | 168,750 |  |  |  |  |  |  |  |  | 
|Victor Dejoy    |  |             |  |          |  |                        |  |                      |  |             | 422,543 |               |  |  | 166,457 |  |  |  |  |  |  |  |  | 
|Noah Franzblau  |  |             |  |          |  |                        |  |                      |  |             | 8,438   |               |  |  | 6,562   |  |  |  |  |  |  |  |  | 



---



|    |                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Value of unexercised in-the-money options are
    based on a value of $0.86 per share, the closing price on
    December 31, 2002, minus the per share exercise price,
    multiplied by the number of shares underlying the option.

Employment Arrangements

In July 1998, the Company entered into
substantially similar employment agreements with Hugh
OKane, Jr. and Kevin OKane. Under such agreements,
Hugh OKane, Jr. agreed to initially serve as our President
and Chief Operating Officer and Kevin OKane agreed to
initially serve as our Executive Vice President, and, in each
case in any other capacity as requested by our Board of
Directors through July 2003. Each agreement shall be
automatically renewed for successive one year periods until
terminated by either party. In February 2000, these agreements
were amended to provide each individual an annual salary of
$265,000, subject to periodic increases as approved by the
Compensation Committee, and an annual bonus targeted at
$300,000, subject to adjustment by the Compensation Committee.
In connection with these amendments, each individual was granted
options to purchase 60,000 shares of common stock at an exercise
price of $7.33 per share. In the event either individual is
terminated without cause, that individual is entitled to receive
severance payments equal to 100% of his base salary through the
end of his employment term.

In December 1999, the Company entered into an
employment agreement with Mr. DeJoy in which he agreed to
serve as an Executive Vice President through December 2003. In
addition, under his agreement, Mr. DeJoy agreed to serve as
President of one of our subsidiaries. This agreement may be
extended according to its terms. Under this agreement,
Mr. DeJoy is paid compensation in an amount not less than
$240,000 per year, subject to periodic increases as approved by
the Compensation Committee, and, in the event we achieve
targeted performance standards, he is entitled to receive a
bonus of 40% of his base salary. In addition, Mr. DeJoy
received options to purchase 525,000 shares, of our common stock
at an exercise price of $6.67 per share upon execution of his
agreement. These options vested as to the first 150,000 shares
on the date of grant and, as to the balance, in equal monthly
installments over the 36 months after the first anniversary
of the date of grant. In the future, Mr. DeJoy is eligible
to receive options to purchase at least 22,500 shares of common
stock each year at an exercise price equal to the fair market
value of our common stock on the date of grant. In the event
Mr. DeJoy is terminated without cause or terminates his
employment for good reason under the agreement, he is entitled
to severance payments equal to 100% of his base salary for
varying periods up to but not exceeding 18 months.

In September 2002, the Company entered into a
four year employment agreement with Mr. Bruce Levy in which
he agreed to serve as President and Chief Operating Officer.
This agreement may be extended according to its terms. Under
this agreement, Mr. Levy is paid compensation in an amount
not less than $280,000 per year, subject to periodic increases
as approved by the Board, and, in the event we achieve

26



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##### Table of Contents



targeted performance standards, he is entitled to
receive a bonus of 80% of his base salary. Mr. Levy shall
receive a bonus of at least $100,000 in 2003. In addition,
Mr. Levy received options to purchase 600,000 shares of our
common stock at an exercise price of $1.67 per share upon
execution of his agreement. These options vested as to the first
150,000 shares on the date of grant, and the balance vest in
equal monthly installments over the 36 months after the
first anniversary of the date of grant. In the future,
Mr. Levy shall receive options to purchase at least 25,000
shares of common stock each year at an exercise price equal to
the fair market value of our common stock on the date of grant.
In the event Mr. Levy is terminated without cause, he is
entitled to severance payments equal to 100% of his base salary
for (i) two years, if the termination occurs in the first
year of employment and (ii) one year, if the termination
occurs thereafter.


In September, 2002, the Company entered into a
four year employment agreement with Mr. Norman Fornella in
which he agreed to serve as Executive Vice-President and Chief
Financial Officer. This agreement may be extended according to
its terms. Under this agreement, Mr. Fornella is paid
compensation in an amount not less than $250,000 per year,
subject to periodic increases as approved by the Board, and, in
the event we achieve targeted performance standards, he is
entitled to receive a bonus of 40% of his base salary.
Mr. Fornella shall receive a bonus of at least $50,000 in
2003. In addition, Mr. Fornella received options to
purchase 225,000 shares of our common stock at an exercise price
of $1.58 per share upon execution of his agreement. Twenty-five
percent of these options vested on the date of grant, and the
balance vest in equal monthly installments over the
36 months after the first anniversary of the date of grant.
In the event Mr. Fornella is terminated without cause, he
is entitled to severance payments equal to 100% of his base
salary for one year.

In February 2003, the Company entered into an
employment agreement with Mr. Noah Franzblau in which he
agreed to serve as Vice President and General Counsel, effective
January 1, 2003. Under this agreement, Mr. Franzblau
is paid compensation in an amount not less than $190,000 per
year, and, in the event we achieve targeted performance
standards, he is entitled to receive a bonus of 30% of his base
salary. In the event Mr. Franzblau is terminated without
cause, he is entitled to severance payments equal to 100% of his
base salary for a period of six months.

Ten Year Option SAR Re-Pricing

The following table reflects the re-pricing of
shares for the Named Executive Officers, as a result of the
offer by the Company to exchange outstanding options with an
exercise price of $13.50 or higher for new options to be granted
on March 25, 2002 equal to the number of options previously
tendered by each optionee.

|                  |                                       |            |         |            |  |            |        |           |  |             |      |                |  |   |       |  |  |   |      |  |  |  |            |  | 
|----------------- | ------------------------------------- | ---------- | ------- | ---------- |  | ---------- | ------ | --------- |  | ----------- | ---- | -------------- |  | - | ----- |  |  | - | ---- |  |  |  | ---------- |  | 
|                  |                                       |            |         |            |  |            |        |           |  |             |      | Amount of Time
|                  |                                       |            |         |            |  | Per Share  |        | Original  |  |             |      | Remaining     
|                  |                                       |            |         | Number of  |  | Market     |        | Exercise  |  | Exercise    |      | Before the    
|                  |                                       | Date of    |         | Options    |  | Price @    |        | Price     |  | Price of    |      | Cancelled     
|                  |                                       | Option     |         | Subject to |  | Time of    |        | Cancelled |  | Replacement |      | Option Would  
|Name and Position |                                       | Re-pricing |         | Re-pricing |  | Re-pricing |        | Option    |  | Option      |      | Have Expired  
|                  |                                       |            |         |            |  |            |        |           |  |             |      |               
|Victor DeJoy      |                                       |            | 3/25/02 |            |  |            | 25,000 |           |  | $           | 3.03 |                |  | $ | 17.13 |  |  | $ | 3.03 |  |  |  | 111 months | 
|                  | Executive Vice President, Engineering |            |         |            |  |            |        |           |  |             |      |                |  |   |       |  |  |   |      |  |  |  |            |  | 
|Noah Franzblau    |                                       |            | 3/25/02 |            |  |            | 15,000 |           |  | $           | 3.03 |                |  | $ | 15.00 |  |  | $ | 3.03 |  |  |  | 106 months | 
|                  | Secretary and General Counsel         |            |         |            |  |            |        |           |  |             |      |                |  |   |       |  |  |   |      |  |  |  |            |  | 

27



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##### Table of Contents



PERFORMANCE GRAPH

The following graph compares, for the period from
July 28, 2000, the date of the IPO, to December 31,
2002 the cumulative total shareholder return on Lexents
Common Stock with the cumulative total return on the Standard
and Poors 500 Index (The S&P 500 Index), the NASDAQ
Composite Index (NASDAQ Composite), and a peer group index
selected by the Companys management, which includes three
public companies within the Companys industry (the
Peer Group). The comparison assumes that $100 was
invested on July 28, 2000 in the Companys Common
Stock, the S&P 500 Index, the NASDAQ Composite and the Peer
Group. The companies that comprise the Peer Group are: Dycom
Industries, Inc., MasTec, Inc., and Quanta Services, Inc. The
stock price performance on the following graph is not
necessarily indicative of future stock price performance.

Comparison of Cumulative Total Return
Performance Graph

(Performance Graph)

Ratification of the Selection of the
Independent Auditors

The Board of Directors has selected
PricewaterhouseCoopers LLP, to audit the financial statements
for the fiscal year ending December 31, 2003.
PricewaterhouseCoopers LLP has served as the Companys
auditors since August 1998.

PricewaterhouseCoopers LLP has billed the Company
and it subsidiaries fees as set forth in the table below of
(i) the audit of the Companys 2002 and 2001 annual
financial statements and reviews of quarterly

28



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##### Table of Contents



financial statements and other audit services,
and (ii) other audit services described below that were
billed in 2002 and 2001.


|                      |  |                |     |      |  |   |     | 
|--------------------- |  | -------------- | --- | ---- |  | - | --- | 
|                      |  |               
|                      |  | Year Ended    
|                      |  | December 31,  
|                      |  |               
|                      |  | 2002           |     | 2001
|                      |  |                |     |     
|                      |  |               
|                      |  | (In thousands)
|Audit fees(1)         |  | $              | 161 |      |  | $ | 165 | 
|Audit-related fees(2) |  |                | 35  |      |  |   | 280 | 
|Tax fees(3)           |  |                | 7   |      |  |   |    | 
|All other fees(4)     |  |                |    |      |  |   | 22  | 
|                      |  |                |     |      |  |   |     | 
|                      |  | $              | 203 |      |  | $ | 467 | 
|                      |  |                |     |      |  |   |     | 



---



|    |                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Consists of $0.1 million in 2002 of fees
    that will be invoiced in 2003 relating to the audits of the
    consolidated financial statements and review of documents filed
    with the SEC.
|   
|(2) | Consists of fees for the audit related to the
    employee benefit plan, and fees related to the audit and due
    diligence of an unconsummated acquisition in 2001.                         
|   
|(3) | Consists of fees for services related to income
    tax compliance and related tax services.                                                                                                  
|   
|(4) | All other fees were for non-audit related
    services. The fees relate to a field exam for the Companys
    line of credit in 2001.                                                         






|         |                                                                                                       
|-------- | ------------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder
    Matters

The following table contains information, as of
March 12, 2003, about the beneficial ownership of our
common stock for:



| |   |                                                                                  
| | - | ---------------------------------------------------------------------------------
| |  | Each person who beneficially owns more than five
    percent of the common stock;
|
| |  | Each of our directors;                                                           
|
| |  | The Named Executive Officers; and                                                
|
| |  | All directors and executive officers as a group.                                 

Except as indicated by footnote, and subject to
community property laws where applicable, the persons named in
the table below have sole voting and investment power with
respect to all shares of common stock shown as beneficially
owned by them. The percentage of beneficial ownership is based
on 42,991,174 shares of common stock outstanding, options
currently exercisable, and options exercisable within the next
60 days, as of March 12, 2003. Fractional shares have
been rounded to the nearest whole number.

|                                       |                                         |              |            |             |  |  |       |   | 
|-------------------------------------- | --------------------------------------- | ------------ | ---------- | ----------- |  |  | ----- | - | 
|                                       |                                         | Number       |            |            
|                                       |                                         | of Shares    |            | Percentage 
|Name and Address of                    |                                         | Beneficially |            | of Shares  
|Beneficial Owner(1)                    |                                         | Owned        |            | Outstanding
|                                       |                                         |              |            |            
|Kevin M. OKane(2)                     |                                         |              | 11,431,680 |             |  |  | 26.59 | %
|Hugh J. OKane, Jr.(3)                 |                                         |              | 10,526,954 |             |  |  | 24.49 | %
|Abbott Capital Management              |                                         |              | 6,827,564  |             |  |  | 15.88 | %
|                                       | 1211 Avenue of the Americas, Suite 4300 |              |            |             |  |  |       |   | 
|                                       | New York, New York 10036                |              |            |             |  |  |       |   | 
|Allegra Capital Partners III,
    L.P. |                                         |              | 3,837,060  |             |  |  | 8.93  | %
|                                       | 515 Madison Avenue 29th Floor           |              |            |             |  |  |       |   | 
|                                       | New York, New York 10022                |              |            |             |  |  |       |   | 
|Bruce Levy(4)                          |                                         |              | 164,400    |             |  |  | *     |  
|Norman Fornella(5)                     |                                         |              | 56,250     |             |  |  | *     |  
|Victor DeJoy(6)                        |                                         |              | 468,169    |             |  |  | 1.09  | %

29



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##### Table of Contents



|                                                                           |  |              |            |             |  |  |       |  
|-------------------------------------------------------------------------- |  | ------------ | ---------- | ----------- |  |  | ----- | -
|                                                                           |  | Number       |            |            
|                                                                           |  | of Shares    |            | Percentage 
|Name and Address of                                                        |  | Beneficially |            | of Shares  
|Beneficial Owner(1)                                                        |  | Owned        |            | Outstanding
|                                                                           |  |              |            |            
|Noah Franzblau(7)                                                          |  |              | 10,000     |             |  |  | *     |  
|All current directors and executive officers as a
    group (6 persons)(8) |  |              | 22,657,453 |             |  |  | 52.70 | %



---



| |   |                                                 
| | - | ------------------------------------------------
| | * | Represents beneficial ownership of less than 1%.



|    |                                                                                                                                                                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Unless otherwise indicated, the address for each
    person or entity named above is c/o Lexent Inc., Three New York
    Plaza, New York, New York 10004.                                                                                                                                                                
|   
|(2) | Includes 50,910 shares subject to options
    exercisable within 60 days of March 12, 2003, an
    aggregate 600,000 shares held in trust for Kevin
    OKanes children for which Mrs. OKane is
    co-trustee and 894,326 shares held in trust for Hugh
    OKanes family for which Kevin OKane is
    co-trustee.
|   
|(3) | Includes 50,910 shares subject to options
    exercisable within 60 days of March 12, 2003, an
    aggregate 600,000 shares held in trust for Hugh
    OKanes children for which Hugh OKane is
    co-trustee and 894,326 shares held in trust for Hugh
    OKanes family for which Kevin OKane is
    co-trustee. 
|   
|(4) | Includes 150,000 shares subject to options
    exercisable within 60 days of March 12, 2003.                                                                                                                                                                                                                             
|   
|(5) | Includes 56,250 shares subject to options
    exercisable within 60 days of March 12, 2003.                                                                                                                                                                                                                              
|   
|(6) | Includes 468,169 shares subject to options
    exercisable within 60 days of March 12, 2003.                                                                                                                                                                                                                             
|   
|(7) | Includes 10,000 shares subject to options
    exercisable within 60 days of March 12, 2003.                                                                                                                                                                                                                              
|   
|(8) | Includes 786,239 shares subject to options
    exercisable within 60 days of March 12, 2003.                                                                                                                                                                                                                             

Equity Compensation Plan Information

The following table summarizes the Companys
equity compensation plan as of December 31, 2002.

|                                                           |  |                      |           |                      |  |                         |      |  |  |  |           | 
|---------------------------------------------------------- |  | -------------------- | --------- | -------------------- |  | ----------------------- | ---- |  |  |  | --------- | 
|                                                           |  |                      |           |                      |  | (c)                    
|                                                           |  | (a)                  |           |                      |  | Number Of Securities   
|                                                           |  | Number Of            |           |                      |  | Remaining Available For
|                                                           |  | Securities           |           | (b)                  |  | Future Issuance Under  
|                                                           |  | To Be Issued Upon    |           | Weighted-Average     |  | Equity Compensation    
|                                                           |  | Exercise Of          |           | Exercise Price Of    |  | Plans (Excluding       
|                                                           |  | Outstanding Options, |           | Outstanding Options, |  | Securities Reflected in
|Plan Category                                              |  | Warrants and Rights  |           | Warrants and Rights  |  | Column (a))            
|                                                           |  |                      |           |                      |  |                        
|Equity Compensation Plans Approved by Shareholders         |  |                      | 5,125,767 |                      |  | $                       | 5.05 |  |  |  | 2,487,082 | 
|                                                           |  |                      |           |                      |  |                         |      |  |  |  |           | 
|Equity Compensation Plans Not Approved by
    Shareholders |  |                      |          |                      |  |                         |      |  |  |  |           | 
|                                                           |  |                      |           |                      |  |                         |      |  |  |  |           | 
|TOTAL                                                      |  |                      | 5,125,767 |                      |  | $                       | 5.05 |  |  |  | 2,487,082 | 
|                                                           |  |                      |           |                      |  |                         |      |  |  |  |           | 






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

On January 1, 1997, Hugh OKane
Electric Co., Inc., our predecessor Company repurchased common
shares owned by Denis J. OKane, a stockholder and brother
of Hugh J. OKane Jr., our Chairman, and Kevin M.
OKane, our Vice Chairman and Chief Executive Officer. In
consideration for the repurchase, Denis OKane was issued a
subordinated promissory note in the amount of
$10.2 million. The note bears interest at the rate of 6%
per year. The Company made the first payment on the note on
July 23,1998 in connection with the merger of the Hugh
OKane Electric Co., Inc. with and into our Company. The
payment was for $1.5 million plus accrued interest. As of
December 31, 2002 and 2001, the outstanding principal
balance of the note was $2.0 million and $3.6 million,
respectively, of which $1.6 million is classified as
current at both dates, and the balance is classified as
non-current. 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.

30



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##### Table of Contents



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 non-current. 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 our initial public
offering in July 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.

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 Denis OKane 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 $31,000, $34,000 and
$33,000 for 2002, 2001 and 2000, 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.

The Company has agreed to pay its founder, Hugh
OKane, Sr., an annual pension for life, which amounted to
$75,000 for 2001, 2000 and 1999, respectively. In February 2002,
the Board of Directors approved an increase in his annual
pension to $100,000 effective March 1, 2002.

Interest expense incurred by the Company to
related parties during the years 2002, 2001, and 2000, amounted
to $0.2 million, $0.2 million, and $0.4 million,
respectively. Accrued interest payable to related parties as of
December 31, 2002, and 2001 was $0.03 million and
$0.05 million, respectively.

On February 18, 2003, the Company announced
that it had received an offer from a buying group, which
included Hugh J. OKane, Jr. and Kevin M. OKane
(Buying Group), to purchase all outstanding shares
of the Company (not owned by the Buying Group) for $1.25 per
share (Offer). The Companys Board of Directors
currently consists solely of Hugh J. OKane, Jr. and Kevin
M. OKane. As a result of the absence of independent
members from the Companys Board of Directors, the Company
retained Rodman & Renshaw, Inc., a New York based investment
banking firm as independent advisors to assist in evaluating and
responding to the Offer.




Item 14.     Controls
and Procedures

Management, including the Chief Executive Officer
and the Chief Financial Officer, evaluated our disclosure
controls and procedures (as defined in Rules 13a-14 and
15d-14 under the Securities Exchange Act

31



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##### Table of Contents



of 1934, as amended) within 90 days prior to
the filing date of this annual report. Based on this evaluation,
the Chief Executive Officer and the Chief Financial Officer
concluded that our disclosure controls and procedures were
effective, as of December 31, 2002. In January and February
2003, our independent Board members resigned from the Company
and from their positions on the Audit Committee. These
resignations constitute significant changes in our internal
controls that could significantly affect those controls since
the date of the evaluation. The Company has not named new
directors since the resignations.





PART IV




Item 15.     Exhibits,
Financial Statement Schedules, and Reports on
Form 8-K

The information concerning the Companys
directors and officers required by Item 15 is incorporated
in this 10-K.

(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 40 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          |  | Second Amended and Restated By-Laws (incorporated
    herein by reference to Exhibit 3.2 to the Companys
    Form 10-K (File No. 000-31105))                                                                                                           
|        | 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, between 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))      

32



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##### Table of Contents



|        |    |             |  |                                                                                                                                                                                                                                                                    
|------- | -- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 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))
|        | 10 | .11*        |  | Employment Agreement, dated September 9,
    2002, between Bruce Levy and Lexent Inc.                                                                                                                                                                              
|        | 10 | .12*        |  | Employment Agreement, dated September 23,
    2002, between Norman G. Fornella and Lexent Inc.                                                                                                                                                                     
|        | 10 | .13*        |  | Employment Agreement, dated January 1, 2003,
    between Noah Franzblau and Lexent Inc.                                                                                                                                                                            
|        | 11 | .1**        |  | Statement Regarding Computation of Per Share
    Earnings                                                                                                                                                                                                          
|        | 21 | .1          |  | Subsidiaries of Lexent Inc.                                                                                                                                                                                                                                        
|        | 23 | .1          |  | Consent of independent accountants,
    PricewaterhouseCoopers LLP., (incorporated herein by reference
    to Exhibit 23.1 to the Companys Registration
    Statement on Form S-1 (File No. 333-30660)                                                            
|        | 99 | .1          |  | Kevin OKane, Chief Executive Officer
    certification                                                                                                                                                                                                            
|        | 99 | .2          |  | Norman G. Fornella, Chief Financial Officer
    certification                                                                                                                                                                                                      



---



|   |                                                                                     
|-- | ------------------------------------------------------------------------------------
|*  | 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 March 11,
    2002 in which it announced the resignation of Joseph Haines as
    the Companys Executive Vice President of Operations, whose
    resignation was effective as of March 6, 2002.                 
|
| | (2) | Lexent filed a Form 8-K on May 29, 2002
    in which it announced the resignation of Jonathan Stern as the
    Companys Executive Vice President and Chief Financial
    Officer, whose resignation was effective as of June 17,
    2002.
|
| | (3) | Lexent filed a Form 8-K on July 16,
    2002 in which it announced the resignation of Walter C. Teagle,
    III from the Companys Board of Directors, whose
    resignation was effective as of July 15, 2002.                            
|
| | (4) | Lexent filed a Form 8-K on September 9,
    2002 in which it announced the appointment of Bruce E. Levy as
    the Companys President and Chief Operating Officer.                                                                        
|
| | (5) | Lexent filed a Form 8-K on
    September 23, 2002 in which it announced the appointment of
    Norman G. Fornella as the Companys Executive Vice
    President and Chief Financial Officer.                                               

33



---



##### Table of Contents





| |     |                                                                                                                                                                                                                       
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (6) | Lexent filed a Form 8-K on February 5,
    2003 in which it announced the resignation of L. White Matthews,
    III from the Companys Board of Directors, which
    resignation was effective as of January 27, 2003.
|
| | (7) | Lexent filed a Form 8-K on February 13,
    2003 in which it announced the resignation of Richard L. Schwob
    from the Companys Board of Directors, which resignation
    was effective as of February 7, 2003.    
|
| | (8) | Lexent filed a Form 8-K on February 13,
    2003 in which it announced the resignation of Kathleen A. Perone
    from the Companys Board of Directors, which resignation
    was effective as of February 10, 2003.  
|
| | (9) | Lexent filed a Form 8-K on February 20,
    2003 in which it announced the resignation of Richard W. Smith
    from the Companys Board of Directors, which resignation
    was effective as of February 17, 2003.    



| |      |                                                                                                                                                                                                                                                                                                                                                                                           
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (10) | Lexent filed a Form 8-K on March 4,
    2003 in which it announced the retention of Rodman & Renshaw
    Inc., a New York based investment banking firm, to assist the
    Company in analyzing and evaluating a buyout offer received from
    members of management.                                                                                                                    
|
| | (11) | Lexent filed a Form 8-K on March 12,
    2003 in which it announced its receipt of a letter from NASDAQ
    notifying it that, as a result of previously announced
    resignations of independent members of the Companys Board
    of Directors, the Company does not currently meet the
    independent director and audit committee requirements for
    continued listing on NASDAQ.

34



---



##### Table of Contents






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 27, 2003.



| |            
| | -----------
| | LEXENT INC.



| |     | 
| | --- | 
| | By: | 

| |                                   
| | ----------------------------------
| | /s/ HUGH J. OKANE, JR.           
| | 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          
|                                           |  |                                                                                                               |  |               
|                                          
|/s/ KEVIN M. OKANEKevin M. OKane         |  | Vice Chairman, and
    Chief Executive Officer
    (Principal Executive Officer)
    Director                 |  | March 27, 2003
|                                          
|/s/ HUGH J. OKANE, JR.Hugh J. OKane, Jr. |  | Chairman of the Board of Directors                                                                            |  | March 27, 2003
|                                          
|/s/ NORMAN G. FORNELLANorman G. Fornella   |  | Executive Vice President and
    Chief Financial Officer
    (Principal Financial and
    Accounting Officer) |  | March 27, 2003

35



---



##### Table of Contents






CERTIFICATION

I, Kevin OKane, certify that:



| |                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this annual report on Form 10-K of Lexent Inc.;                                                                                                                                                                                                                                                                             
|
| | 2.     Based on my
    knowledge, this annual report does not contain any untrue
    statement of a material fact or omit to state a material fact
    necessary to make the statements made, in light of the
    circumstances under which such statements were made, not
    misleading with respect to the period covered by this annual
    report;
|
| | 3.     Based on my
    knowledge, the financial statements, and other financial
    information included in this annual report, fairly present in
    all material respects the financial condition, results of
    operations and cash flows of the registrant as of, and for, the
    periods presented in this annual report;                       
|
| | 4.     The
    registrants other certifying officers and I are
    responsible for establishing and maintaining disclosure controls
    and procedures (as defined in Exchange Act Rules 13a-14 and
    15d-14) for the registrant and we have:                                                                                                       



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5.     The
    registrants other certifying officers and I have
    disclosed, based on our most recent evaluation, to the
    registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    



| |                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6.     The
    registrants other certifying officers and I have indicated
    in this annual report whether or not there were significant
    changes in internal controls or in other factors that could
    significantly affect internal controls subsequent to the date of
    our most recent evaluation, including any corrective actions
    with regard to significant deficiencies and material weaknesses.



| |                        
| | -----------------------
| | /s/ KEVIN OKANE       
| |                        
| | Kevin OKane           
| | Chief Executive Officer

Date: March 27, 2003

A signed original of this written statement
required by Section 906 has been provided to Lexent Inc.
and will be retained by Lexent Inc. and furnished to the
Securities and Exchange Commission or its staff upon request.

36



---



##### Table of Contents



CERTIFICATION

I, Norman Fornella, certify that:



| |                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this annual report on Form 10-K of Lexent Inc.;                                                                                                                                                                                                                                                                             
|
| | 2.     Based on my
    knowledge, this annual report does not contain any untrue
    statement of a material fact or omit to state a material fact
    necessary to make the statements made, in light of the
    circumstances under which such statements were made, not
    misleading with respect to the period covered by this annual
    report;
|
| | 3.     Based on my
    knowledge, the financial statements, and other financial
    information included in this annual report, fairly present in
    all material respects the financial condition, results of
    operations and cash flows of the registrant as of, and for, the
    periods presented in this annual report;                       
|
| | 4.     The
    registrants other certifying officers and I are
    responsible for establishing and maintaining disclosure controls
    and procedures (as defined in Exchange Act Rules 13a-14 and
    15d-14) for the registrant and we have:                                                                                                       



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5.     The
    registrants other certifying officers and I have
    disclosed, based on our most recent evaluation, to the
    registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    



| |                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6.     The
    registrants other certifying officers and I have indicated
    in this annual report whether or not there were significant
    changes in internal controls or in other factors that could
    significantly affect internal controls subsequent to the date of
    our most recent evaluation, including any corrective actions
    with regard to significant deficiencies and material weaknesses.



| |                                                       
| | ------------------------------------------------------
| | /s/ NORMAN G. FORNELLA                                
| |                                                       
| | Norman G. Fornella                                    
| | Executive Vice President & Chief Financial
    Officer

Date: March 27, 2003

A signed original of this written statement
required by Section 906 has been provided to Lexent Inc.
and will be retained by Lexent Inc. and furnished to the
Securities and Exchange Commission or its staff upon request.

37



---



##### Table of Contents



FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA

TABLE OF CONTENTS

|                                                                                                                         |  |      |    | 
|------------------------------------------------------------------------------------------------------------------------ |  | ---- | -- | 
|                                                                                                                         |  | Page
|                                                                                                                         |  | No. 
|                                                                                                                         |  |     
|Report of Independent Accountants                                                                                        |  |      | 39 | 
|Consolidated Balance Sheets as of
    December 31, 2002 and 2001                                                         |  |      | 40 | 
|Consolidated Statements of Operations for the
    Years Ended December 31, 2002, 2001 and 2000                           |  |      | 41 | 
|Consolidated Statements of Changes in
    Stockholders Equity for the Years Ended December 31,
    2002, 2001, and 2000 |  |      | 42 | 
|Consolidated Statements of Cash Flows for the
    Years Ended December 31, 2002, 2001, and 2000                          |  |      | 43 | 
|Notes to Consolidated Financial Statements                                                                               |  |      | 44 | 

39



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##### Table of Contents



REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and

Stockholders of Lexent Inc.:


In our opinion, the consolidated financial
statements listed in the index appearing under
Item 15(a)(1) on page 32 present fairly, in all
material respects, the financial position of Lexent Inc. and
Subsidiaries at December 31, 2002 and 2001, and the results
of their operations and their cash flows for each of the three
years in the period ended December 31, 2002 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.

As discussed in Note 1, the Company changed
the manner in which it accounts for goodwill and other
intangible assets upon adoption of Statement of Financial
Accounting Standards No. 142, Goodwill and Other
Intangible Assets, on January 1, 2002.

/s/ PRICEWATERHOUSECOOPERS LLP

New York, New York

February 7, 2003, except for Note 19,


as to which the date is March 15, 2003


40



---



##### Table of Contents



LEXENT INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                         |                                                                                                                                                   |                                            |       |         |         |  |        |         |         | 
|---------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----- | ------- | ------- |  | ------ | ------- | ------- | 
|                                         |                                                                                                                                                   |                                           
|                                         |                                                                                                                                                   | December 31,                              
|                                         |                                                                                                                                                   |                                           
|                                         |                                                                                                                                                   | 2002                                       |       | 2001   
|                                         |                                                                                                                                                   |                                            |       |        
|                                         |                                                                                                                                                   |                                           
|                                         |                                                                                                                                                   | (Dollars in thousands,                    
|                                         |                                                                                                                                                   | except per share amounts)                 
|ASSETS                                  
|Current Assets:                          |                                                                                                                                                   |                                            |       |         |         |  |        |        
|                                         | Cash and cash equivalents                                                                                                                         |                                            | $     | 28,109  |         |  | $      | 75,839  |        
|                                         | Certificate of deposit (restricted cash)                                                                                                          |                                            |       | 2,012   |         |  |        |        |        
|                                         | Available-for-sale investments                                                                                                                    |                                            |       | 44,302  |         |  |        | 4,932   |        
|                                         | Receivables, net                                                                                                                                  |                                            |       | 28,311  |         |  |        | 41,171  |        
|                                         | Prepaid expenses and other current assets                                                                                                         |                                            |       | 2,048   |         |  |        | 1,067   |        
|                                         | Income taxes receivable                                                                                                                           |                                            |       | 14,750  |         |  |        | 4,153   |        
|                                         | Deferred tax asset, net                                                                                                                           |                                            |       |        |         |  |        | 25,627  |        
|                                         |                                                                                                                                                   |                                            |       |         |         |  |        |        
|                                         |                                                                                                                                                   | Total Current Assets                       |       |         | 119,532 |  |        |         | 152,789 | 
|Property and equipment, net              |                                                                                                                                                   |                                            | 4,033 |         |         |  | 12,896 |        
|Other assets                             |                                                                                                                                                   |                                            | 880   |         |         |  | 2,830  |        
|                                         |                                                                                                                                                   |                                            |       |         |         |  |        |        
|                                         |                                                                                                                                                   | Total Assets                               |       | $       | 124,445 |  |        | $       | 168,515 | 
|                                         |                                                                                                                                                   |                                            |       |         |         |  |        |        
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|Current Liabilities:                     |                                                                                                                                                   |                                            |       |         |         |  |        |        
|                                         | Accounts payable                                                                                                                                  |                                            | $     | 7,494   |         |  | $      | 6,751   |        
|                                         | Accrued liabilities                                                                                                                               |                                            |       | 6,229   |         |  |        | 8,386   |        
|                                         | Restructure reserve                                                                                                                               |                                            |       | 4,023   |         |  |        | 5,249   |        
|                                         | Billings in excess of costs and estimated
    earnings on uncompleted projects                                                                    |                                            |       | 1,837   |         |  |        | 474     |        
|                                         | Provision for contract losses                                                                                                                     |                                            |       | 3,472   |         |  |        |        |        
|                                         | Subordinated note payable to stockholder                                                                                                          |                                            |       | 1,582   |         |  |        | 1,582   |        
|                                         | Equipment and capital lease obligations                                                                                                           |                                            |       | 451     |         |  |        | 1,351   |        
|                                         |                                                                                                                                                   |                                            |       |         |         |  |        |        
|                                         |                                                                                                                                                   | Total Current Liabilities                  |       |         | 25,088  |  |        |         | 23,793  | 
|Subordinated note payable to stockholder |                                                                                                                                                   |                                            | 396   |         |         |  | 1,978  |        
|Accrued liabilities  noncurrent         |                                                                                                                                                   |                                            | 600   |         |         |  |       |        
|Restructure reserve  noncurrent         |                                                                                                                                                   |                                            | 6,566 |         |         |  | 4,093  |        
|Equipment and capital lease obligations  |                                                                                                                                                   |                                            | 70    |         |         |  | 682    |        
|                                         |                                                                                                                                                   |                                            |       |         |         |  |        |        
|                                         |                                                                                                                                                   | Total Liabilities                          |       |         | 32,720  |  |        |         | 30,546  | 
|                                         |                                                                                                                                                   |                                            |       |         |         |  |        |        
|Commitments and Contingencies            |                                                                                                                                                   |                                            |       |         |         |  |        |        
|Stockholders Equity:                    |                                                                                                                                                   |                                            |       |         |         |  |        |        
|                                         | Common stock, $.001 par value, 120,000,000 shares
    authorized, 42,168,396 and 41,612,372 shares outstanding at 2002
    and 2001, respectively |                                            |       | 42      |         |  |        | 42      |        
|                                         | Additional paid-in capital                                                                                                                        |                                            |       | 156,035 |         |  |        | 158,986 |        
|                                         | Deferred stock-based compensation                                                                                                                 |                                            |       | (2,126  | )       |  |        | (9,085  | )      
|                                         | Accumulated other comprehensive income                                                                                                            |                                            |       | 105     |         |  |        | 60      |        
|                                         | Accumulated deficit                                                                                                                               |                                            |       | (62,331 | )       |  |        | (12,034 | )      
|                                         |                                                                                                                                                   |                                            |       |         |         |  |        |        
|                                         |                                                                                                                                                   | Total Stockholders Equity                 |       |         | 91,725  |  |        |         | 137,969 | 
|                                         |                                                                                                                                                   |                                            |       |         |         |  |        |        
|                                         |                                                                                                                                                   | Total Liabilities and Stockholders Equity |       | $       | 124,445 |  |        | $       | 168,515 | 
|                                         |                                                                                                                                                   |                                            |       |         |         |  |        |        

See accompanying notes to consolidated financial
statements.

41



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##### Table of Contents



LEXENT INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                          |                                     |                                   |         |        |        |      |         |        |        |   |         |        |        |  
|--------------------------------------------------------- | ----------------------------------- | --------------------------------- | ------- | ------ | ------ | ---- | ------- | ------ | ------ | - | ------- | ------ | ------ | -
|                                                          |                                     |                                  
|                                                          |                                     | Year Ended December 31,          
|                                                          |                                     |                                  
|                                                          |                                     | 2002                              |         | 2001   |        | 2000
|                                                          |                                     |                                   |         |        |        |     
|                                                          |                                     |                                  
|                                                          |                                     | (Dollars in thousands,           
|                                                          |                                     | except per share amounts)        
|Revenues                                                  |                                     | $                                 | 123,842 |        |        | $    | 240,578 |        |        | $ | 295,993 |       
|Cost of revenues                                          |                                     |                                   | 130,524 |        |        |      | 195,001 |        |        |   | 222,754 |       
|                                                          |                                     |                                   |         |        |        |      |         |        |        |   |         |       
|                                                          | Gross margin                        |                                   |         | (6,682 | )      |      |         | 45,577 |        |   |         | 73,239 |       
|                                                          |                                     |                                   |         |        |        |      |         |        |        |   |         |       
|Operating expenses:                                       |                                     |                                   |         |        |        |      |         |        |        |   |         |       
|                                                          | General and administrative expenses |                                   |         | 15,906 |        |      |         | 20,237 |        |   |         | 20,340 |       
|                                                          | Depreciation and amortization       |                                   |         | 4,787  |        |      |         | 5,803  |        |   |         | 3,628  |       
|                                                          | Non-cash stock-based compensation*  |                                   |         | 3,301  |        |      |         | 6,058  |        |   |         | 26,159 |       
|                                                          | Provision for doubtful accounts*    |                                   |         | 126    |        |      |         | 32,286 |        |   |         | 2,551  |       
|                                                          | Restructuring charges, net          |                                   |         | 9,132  |        |      |         | 13,564 |        |   |         |       |       
|                                                          | Impairment of goodwill              |                                   |         | 1,514  |        |      |         |       |        |   |         |       |       
|                                                          |                                     |                                   |         |        |        |      |         |        |        |   |         |       
|                                                          |                                     | Total operating expenses          |         |        | 34,766 |      |         |        | 77,948 |   |         |        | 52,678 |  
|                                                          |                                     |                                   |         |        |        |      |         |        |        |   |         |       
|Income (loss) from operations                             |                                     |                                   | (41,448 | )      |        |      | (32,371 | )      |        |   | 20,561  |       
|Other (income) and expense                                |                                     |                                   |         |        |        |      |         |        |        |   |         |       
|                                                          | Interest expense                    |                                   |         | 244    |        |      |         | 1,077  |        |   |         | 1,252  |       
|                                                          | Interest income                     |                                   |         | (1,350 | )      |      |         | (2,334 | )      |   |         | (1,966 | )     
|                                                          | Other (income) expense, net         |                                   |         | 3,743  |        |      |         | 2,002  |        |   |         | (5     | )     
|                                                          |                                     |                                   |         |        |        |      |         |        |        |   |         |       
|                                                          |                                     | Total other (income) expense, net |         |        | 2,637  |      |         |        | 745    |   |         |        | (719   | )
|Income (loss) before income taxes                         |                                     |                                   | (44,085 | )      |        |      | (33,116 | )      |        |   | 21,280  |       
|Provision for (benefit from) income taxes                 |                                     |                                   | 6,212   |        |        |      | (13,856 | )      |        |   | 12,704  |       
|                                                          |                                     |                                   |         |        |        |      |         |        |        |   |         |       
|Net income (loss)                                         |                                     | $                                 | (50,297 | )      |        | $    | (19,260 | )      |        | $ | 8,576   |       
|                                                          |                                     |                                   |         |        |        |      |         |        |        |   |         |       
|Net income (loss) per share:                              |                                     |                                   |         |        |        |      |         |        |        |   |         |       
|                                                          | Basic                               |                                   | $       | (1.20  | )      |      | $       | (0.46  | )      |   | $       | 0.27   |       
|                                                          |                                     |                                   |         |        |        |      |         |        |        |   |         |       
|                                                          | Diluted                             |                                   | $       | (1.20  | )      |      | $       | (0.46  | )      |   | $       | 0.22   |       
|                                                          |                                     |                                   |         |        |        |      |         |        |        |   |         |       
|Weighted average number of common shares
    outstanding: |                                     |                                   |         |        |        |      |         |        |        |   |         |       
|                                                          | Basic                               |                                   |         | 41,945 |        |      |         | 41,449 |        |   |         | 30,839 |       
|                                                          |                                     |                                   |         |        |        |      |         |        |        |   |         |       
|                                                          | Diluted                             |                                   |         | 41,945 |        |      |         | 41,449 |        |   |         | 38,266 |       
|                                                          |                                     |                                   |         |        |        |      |         |        |        |   |         |       



---



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

See accompanying notes to consolidated financial
statements.

42



---



##### Table of Contents



LEXENT INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS EQUITY

Stockholders Equity

|                                                                                              |                                                                                   |                        |         |        |  |            |    |              |  |               |         |              |  |               |         |               |  |   |     |    |  |   |         |   |  |   |         |    |  |   |         |    | 
|--------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------- | ---------------------- | ------- | ------ |  | ---------- | -- | ------------ |  | ------------- | ------- | ------------ |  | ------------- | ------- | ------------- |  | - | --- | -- |  | - | ------- | - |  | - | ------- | -- |  | - | ------- | -- | 
|                                                                                              |                                                                                   | Redeemable             |         |        |  |            |    |              |  | Accumulated   |         | Retained     |  |               |         |              
|                                                                                              |                                                                                   | Convertible            |         |        |  | Additional |    | Deferred     |  | Other         |         | Earnings     |  |               |         | Total        
|                                                                                              |                                                                                   | Preferred              |         | Common |  | Paid-in    |    | Stock-based  |  | Comprehensive |         | (Accumulated |  | Comprehensive |         | Stockholders
|                                                                                              |                                                                                   | Stock                  |         | Stock  |  | Capital    |    | Compensation |  | Income        |         | Deficit)     |  | Loss          |         | Equity       
|                                                                                              |                                                                                   |                        |         |        |  |            |    |              |  |               |         |              |  |               |         |              
|                                                                                              |                                                                                   |                       
|                                                                                              |                                                                                   | (Dollars in thousands)
|Balance at January 1, 2000                                                                    |                                                                                   | $                      | 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 |   
|Comprehensive income (loss), year ended
    December 31, 2002:                                |                                                                                   |                        |         |        |  |            |    |              |  |               |         |              |  |               |         |               |  |   |     |    |  |   |         |   |  |   |         |    |  |   |         |   
|Net loss                                                                                      |                                                                                   |                        |        |        |  |            |   |              |  |               |        |              |  |               |        |               |  |   |    |    |  |   | (50,297 | ) |  |   | (50,297 | )  |  |   | (50,297 | ) 
|Other comprehensive income, net of tax:                                                       |                                                                                   |                        |         |        |  |            |    |              |  |               |         |              |  |               |         |               |  |   |     |    |  |   |         |   |  |   |         |    |  |   |         |   
|                                                                                              | Unrealized gain on available-for-sale securities,
    net of income tax provision |                        |         |       |  |            |    |             |  |               |         |             |  |               |         |              |  |   |     | 45 |  |   |         |  |  |   |         | 45 |  |   |         | 45 | 
|                                                                                              |                                                                                   |                        |         |        |  |            |    |              |  |               |         |              |  |               |         |               |  |   |     |    |  |   |         |   |  |   |         |    |  |   |         |   
|Comprehensive loss                                                                            |                                                                                   |                        |        |        |  |            |   |              |  |               |        |              |  |               |        |               |  |   |    |    |  |   |        |   |  | $ | (50,252 | )  |  |   |        |   
|                                                                                              |                                                                                   |                        |         |        |  |            |    |              |  |               |         |              |  |               |         |               |  |   |     |    |  |   |         |   |  |   |         |    |  |   |         |   
|Reversal of unvested deferred stock based
    compensation                                    |                                                                                   |                        |        |        |  |            |   |              |  |               | (3,750  | )            |  |               | 3,750   |               |  |   |    |    |  |   |        |   |  |   |         |    |  |   |        |   
|Tax benefit from exercise of nonqualified stock
    options                                   |                                                                                   |                        |        |        |  |            |   |              |  |               | 140     |              |  |               |        |               |  |   |    |    |  |   |        |   |  |   |         |    |  |   | 140     |   
|Deferred stock-based compensation                                                             |                                                                                   |                        |        |        |  |            |   |              |  |               | 92      |              |  |               | (92     | )             |  |   |    |    |  |   |        |   |  |   |         |    |  |   |        |   
|Amortization of deferred stock-based compensation                                             |                                                                                   |                        |        |        |  |            |   |              |  |               |        |              |  |               | 3,301   |               |  |   |    |    |  |   |        |   |  |   |         |    |  |   | 3,301   |   
|Issuance of 556,024 common shares                                                             |                                                                                   |                        |        |        |  |            |   |              |  |               | 567     |              |  |               |        |               |  |   |    |    |  |   |        |   |  |   |         |    |  |   | 567     |   
|                                                                                              |                                                                                   |                        |         |        |  |            |    |              |  |               |         |              |  |               |         |               |  |   |     |    |  |   |         |   |  |   |         |    |  |   |         |   
|Balance at December 31, 2002                                                                  |                                                                                   | $                      |        |        |  | $          | 42 |              |  | $             | 156,035 |              |  | $             | (2,126  | )             |  | $ | 105 |    |  | $ | (62,331 | ) |  |   |         |    |  | $ | 91,725  |   
|                                                                                              |                                                                                   |                        |         |        |  |            |    |              |  |               |         |              |  |               |         |               |  |   |     |    |  |   |         |   |  |   |         |    |  |   |         |   

See accompanying notes to consolidated financial
statements.

43



---



##### Table of Contents



LEXENT INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                            |                                                                                                        |                                                         |                                                                                |                                                         |        |        |         |         |         |         |        |         |        |         |         |  
|--------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------ | ------------------------------------------------------- | ------------------------------------------------------------------------------ | ------------------------------------------------------- | ------ | ------ | ------- | ------- | ------- | ------- | ------ | ------- | ------ | ------- | ------- | -
|                                                                            |                                                                                                        |                                                        
|                                                                            |                                                                                                        | Year Ended December 31,                                
|                                                                            |                                                                                                        |                                                        
|                                                                            |                                                                                                        | 2002                                                    |                                                                                | 2001                                                    |        | 2000  
|                                                                            |                                                                                                        |                                                         |                                                                                |                                                         |        |       
|                                                                            |                                                                                                        |                                                        
|                                                                            |                                                                                                        | (Dollars in thousands)                                 
|Cash flows from operating activities:                                       |                                                                                                        |                                                         |                                                                                |                                                         |        |        |         |         |         |         |        |        
|                                                                            | Net income (loss)                                                                                      |                                                         | $                                                                              | (50,297                                                 | )      |        | $       | (19,260 | )       |         | $      | 8,576   |       
|                                                                            | Adjustments to reconcile net income (loss) to net
    cash provided by (used in) operating activities: |                                                         |                                                                                |                                                         |        |        |         |         |         |         |        |         |       
|                                                                            |                                                                                                        | Provision for uncollectible amounts, net                |                                                                                |                                                         | 126    |        |         |         | 32,286  |         |        |         | 2,551  |        
|                                                                            |                                                                                                        | Restructuring charges, net                              |                                                                                |                                                         | 9,132  |        |         |         | 13,564  |         |        |         |       |        
|                                                                            |                                                                                                        | Depreciation and amortization                           |                                                                                |                                                         | 4,787  |        |         |         | 5,803   |         |        |         | 3,628  |        
|                                                                            |                                                                                                        | Loss on impairment/ disposal of assets/
    investments |                                                                                |                                                         | 3,743  |        |         |         | 1,662   |         |        |         | 21     |        
|                                                                            |                                                                                                        | Non-cash stock-based compensation                       |                                                                                |                                                         | 3,301  |        |         |         | 6,058   |         |        |         | 26,159 |        
|                                                                            |                                                                                                        | Provision for contract losses                           |                                                                                |                                                         | 3,472  |        |         |         |        |         |        |         |       |        
|                                                                            |                                                                                                        | Provision for deferred taxes                            |                                                                                |                                                         | 20,962 |        |         |         | (12,944 | )       |        |         | (8,767 | )      
|                                                                            |                                                                                                        | Changes in working capital items:                       |                                                                                |                                                         |        |        |         |         |         |         |        |         |        |        
|                                                                            |                                                                                                        |                                                         | Receivables                                                                    |                                                         |        | 12,734 |         |         |         | 26,596  |        |         |        | (59,056 | )      
|                                                                            |                                                                                                        |                                                         | Prepaid expenses and other current assets                                      |                                                         |        | (981   | )       |         |         | (287    | )      |         |        | (244    | )      
|                                                                            |                                                                                                        |                                                         | Other assets                                                                   |                                                         |        | 1,950  |         |         |         | (308    | )      |         |        | (784    | )      
|                                                                            |                                                                                                        |                                                         | Accounts payable                                                               |                                                         |        | 743    |         |         |         | (4,373  | )      |         |        | 2,690   |        
|                                                                            |                                                                                                        |                                                         | Accrued liabilities                                                            |                                                         |        | (6,769 | )       |         |         | (11,315 | )      |         |        | 8,244   |        
|                                                                            |                                                                                                        |                                                         | Income taxes receivable and payable                                            |                                                         |        | (5,830 | )       |         |         | (7,781  | )      |         |        | (2,066  | )      
|                                                                            |                                                                                                        |                                                         | Billings in excess of costs and estimated
    earnings on uncompleted projects |                                                         |        | 1,363  |         |         |         | (4,606  | )      |         |        | 3,996   |        
|                                                                            |                                                                                                        |                                                         |                                                                                |                                                         |        |        |         |         |         |         |        |        
|                                                                            |                                                                                                        |                                                         |                                                                                | Net cash provided by (used in) operating
    activities |        |        | (1,564  | )       |         |         | 25,095 |         |        |         | (15,052 | )
|                                                                            |                                                                                                        |                                                         |                                                                                |                                                         |        |        |         |         |         |         |        |        
|Cash flows from investing activities:                                       |                                                                                                        |                                                         |                                                                                |                                                         |        |        |         |         |         |         |        |        
|                                                                            | Capital expenditures, net of equipment loans and
    capital leases                                    |                                                         |                                                                                | (942                                                    | )      |        |         | (6,256  | )       |         |        | (11,294 | )     
|                                                                            | Purchase of certificate of deposit                                                                     |                                                         |                                                                                | (2,012                                                  | )      |        |         |        |         |         |        |        |       
|                                                                            | Purchase of available-for-sale investments                                                             |                                                         |                                                                                | (44,107                                                 | )      |        |         |        |         |         |        |        |       
|                                                                            | Proceeds from sale of (investments in) securities                                                      |                                                         |                                                                                | 3,422                                                   |        |        |         | (1,655  | )       |         |        |        |       
|                                                                            |                                                                                                        |                                                         |                                                                                |                                                         |        |        |         |         |         |         |        |        
|                                                                            |                                                                                                        |                                                         |                                                                                | Net cash used in investing activities                   |        |        | (43,639 | )       |         |         | (7,911 | )       |        |         | (11,294 | )
|                                                                            |                                                                                                        |                                                         |                                                                                |                                                         |        |        |         |         |         |         |        |        
|Cash flows from financing activities:                                       |                                                                                                        |                                                         |                                                                                |                                                         |        |        |         |         |         |         |        |        
|                                                                            | Proceeds from exercise of stock options and sales
    of restricted stock                              |                                                         |                                                                                | 567                                                     |        |        |         | 254     |         |         |        | 6,576   |       
|                                                                            | 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                                            |                                                         |                                                                                | (1,582                                                  | )      |        |         | (1,583  | )       |         |        | (1,972  | )     
|                                                                            | Net repayments to banks                                                                                |                                                         |                                                                                |                                                        |        |        |         | (2,000  | )       |         |        | (6,841  | )     
|                                                                            | Net payments to related parties                                                                        |                                                         |                                                                                |                                                        |        |        |         |        |         |         |        | (408    | )     
|                                                                            | Repayment of equipment loans and capital leases                                                        |                                                         |                                                                                | (1,512                                                  | )      |        |         | (1,706  | )       |         |        | (1,336  | )     
|                                                                            |                                                                                                        |                                                         |                                                                                |                                                         |        |        |         |         |         |         |        |        
|                                                                            |                                                                                                        |                                                         |                                                                                | Net cash provided by (used in) financing
    activities |        |        | (2,527  | )       |         |         | (5,035 | )       |        |         | 88,878  |  
|                                                                            |                                                                                                        |                                                         |                                                                                |                                                         |        |        |         |         |         |         |        |        
|Net increase (decrease) in cash and cash
    equivalents                    |                                                                                                        |                                                         | (47,730                                                                        | )                                                       |        |        | 12,149  |         |         |         | 62,532 |        
|Cash and cash equivalents at beginning of period                            |                                                                                                        |                                                         | 75,839                                                                         |                                                         |        |        | 63,690  |         |         |         | 1,158  |        
|                                                                            |                                                                                                        |                                                         |                                                                                |                                                         |        |        |         |         |         |         |        |        
|Cash and cash equivalents at end of period                                  |                                                                                                        | $                                                       | 28,109                                                                         |                                                         |        | $      | 75,839  |         |         | $       | 63,690 |        
|                                                                            |                                                                                                        |                                                         |                                                                                |                                                         |        |        |         |         |         |         |        |        
|Supplemental cash flow information:                                         |                                                                                                        |                                                         |                                                                                |                                                         |        |        |         |         |         |         |        |        
|                                                                            | Cash paid for:                                                                                         |                                                         |                                                                                |                                                         |        |        |         |         |         |         |        |         |       
|                                                                            |                                                                                                        | Interest                                                |                                                                                | $                                                       | 258    |        |         | $       | 854     |         |        | $       | 1,307  |        
|                                                                            |                                                                                                        | Income taxes                                            |                                                                                |                                                         | 183    |        |         |         | 7,756   |         |        |         | 23,541 |        
|Supplemental disclosures of noncash investing and
    financing activities: |                                                                                                        |                                                         |                                                                                |                                                         |        |        |         |         |         |         |        |        
|                                                                            | Property and equipment additions financed by
    equipment loans and capital leases                    |                                                         | $                                                                              |                                                        |        |        | $       | 74      |         |         | $      | 2,143   |       
|                                                                            | Tax benefit from exercise of nonqualified stock
    options                                            |                                                         |                                                                                | 140                                                     |        |        |         | 376     |         |         |        | 104     |       
|                                                                            | Common stock received in settlement of accounts
    receivable                                         |                                                         |                                                                                |                                                        |        |        |         | 4,820   |         |         |        |        |       

See accompanying notes to consolidated financial
statements.

44



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##### Table of Contents



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), Lexent Capital, Inc.
(LCI), and Lexent Metro Connect, LLC
(LMC),were formed in June 1998, August 1998, May
2000, November 2000, July 2001, and March 2002, 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, Dormitory Authority of New
York and Level 3 Communications.

The Company has offices in New York, Boston,
Washington D.C., North Carolina, Florida, Long Island,
White Plains and in New Jersey. For the years 2002, 2001, and
2000, 77%, 79% and 75% 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

45



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##### Table of Contents



LEXENT INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 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.



| |                 
| | ----------------
| | 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,
provision for contract losses, and deferred tax assets, accrued
expenses, restructure reserve, 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. Statement of Financial Accounting Standards
No. (SFAS) 109 Accounting for

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##### Table of Contents



LEXENT INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Income Taxes requires that a valuation
allowance be established when it is more likely than
not that all or a portion of deferred tax assets will not
be realized. Based on the Companys performance in the past
few years and the current challenging economic environment that
has negatively impacted the Companys operating results,
the Company concluded that it was appropriate to establish a
full valuation allowance on future tax benefits until it can
substantiate a level of profitability that demonstrates its
ability to utilize the assets. Adjustments to increase or
decrease the valuation allowance are charged or credited,
respectively, to income tax expense.



| |                         
| | ------------------------
| | Stock-Based Compensation

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

On January 1, 2002, the Company adopted
Statement of Financial Accounting Standards No.
(SFAS) 142, which requires goodwill to be
tested for impairment on an annual basis, and written down when
impaired, rather than amortized, as previously required. If an
impairment loss exists as a result of the transitional goodwill
impairment test, the implementation of SFAS 142 could result in
a one-time charge to earnings as a cumulative effect of
accounting change. The Company did not identify an impairment
charge upon implementation.

47



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##### Table of Contents



LEXENT INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

During the fourth quarter of 2002, the Company
conducted the required annual impairment review. Due to a
significant decrease in demand for services from
telecommunications carriers and uncertainty as to the timing of
any improvement in industry conditions, the Company determined
that the implied fair value of its reporting unit, based on
quoted market prices, is less than recorded goodwill for the
reporting unit. As a result the Company recorded a goodwill
impairment charge of $1.5 million.

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 was effective
for the Company on January 1, 2002. The adoption of this
Statement did not have a material effect on the Companys
results of operations or financial position.

In April 2002, the FASB issued SFAS 145
Rescission of FAS Nos. 4, 44, and 64, Amendment of
SFAS No. 13, and Technical Corrections as of April
2002. This Statement amends SFAS 13, Accounting for
Leases, to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions as well
as other existing authoritative pronouncements to make various
technical corrections, clarify meanings, or describe their
applicability under changed conditions. SFAS 145 is
effective for fiscal years beginning after December 31,
2002. The Company does not anticipate that the adoption of SFAS
No. 145 will have a material impact on the consolidated
financial statements.

In June 2002, the FASB issued SFAS 146
Accounting for Costs Associated with Exit or Disposal
Activities. This Statement addresses financial accounting
and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force
(EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). SFAS 146 is effective for fiscal
years beginning after December 31, 2002. This statement
could impact the accounting for restructuring charges that the
Company might incur in the future.

In December 2002, the FASB issued SFAS 148
Accounting for Stock-Based Compensation Transition and
Disclosure that amends SFAS 123 Accounting for
Stock-Based Compensation. SFAS 148 provides
alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee
compensation. SFAS 148 amends the disclosure requirements
of APB Opinion No. 28, Interim Financial
Reporting and Statement No. 123 to require prominent
disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee
compensation and the effect of the method used on reporting
results. SFAS 148 is effective for fiscal years ending
after December 15, 2002. The adoption of SFAS 148
except for the disclosure requirements had no impact on the
consolidated financial statements. The additional required
disclosure is found in Note 13.



| |                            
| | ---------------------------
| | 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

48



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##### Table of Contents



LEXENT INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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,
|                                                   |  |                        
|                                                   |  | 2002                    |         | 2001 |  | 2000
|                                                   |  |                         |         |      |  |     
|                                                   |  |                        
|                                                   |  | (In thousands, except  
|                                                   |  | per share amounts)     
|Net income (loss) per share 
    basic:           |  |                         |         |      |  |      |         |   |  |   |        |  
|Net income (loss)                                  |  | $                       | (50,297 | )    |  | $    | (19,260 | ) |  | $ | 8,576  |  
|Less: preferred dividends                          |  |                         |        |      |  |      |        |   |  |   | (397   | )
|                                                   |  |                         |         |      |  |      |         |   |  |   |        |  
|Net income (loss) available to common stockholders |  | $                       | (50,297 | )    |  | $    | (19,260 | ) |  | $ | 8,179  |  
|                                                   |  |                         |         |      |  |      |         |   |  |   |        |  
|Weighted average shares  basic                    |  |                         | 41,945  |      |  |      | 41,449  |   |  |   | 30,839 |  
|                                                   |  |                         |         |      |  |      |         |   |  |   |        |  
|Net income (loss) per share  basic                |  | $                       | (1.20   | )    |  | $    | (0.46   | ) |  | $ | 0.27   |  
|                                                   |  |                         |         |      |  |      |         |   |  |   |        |  
|Net income (loss) per share 
    diluted:         |  |                         |         |      |  |      |         |   |  |   |        |  
|Net income (loss)                                  |  | $                       | (50,297 | )    |  | $    | (19,260 | ) |  | $ | 8,576  |  
|                                                   |  |                         |         |      |  |      |         |   |  |   |        |  
|Weighted average shares outstanding 
    basic    |  |                         | 41,945  |      |  |      | 41,449  |   |  |   | 30,839 |  
|Assumed conversion of preferred stock              |  |                         |        |      |  |      |        |   |  |   | 5,725  |  
|Dilutive effect of stock options                   |  |                         | 723     |      |  |      | 1,214   |   |  |   | 1,702  |  
|Dilutive effect of employee stock purchase plan    |  |                         | 5       |      |  |      | 7       |   |  |   |       |  
|                                                   |  |                         |         |      |  |      |         |   |  |   |        |  
|Weighted average shares  diluted                  |  |                         | 42,673  |      |  |      | 42,670  |   |  |   | 38,266 |  
|                                                   |  |                         |         |      |  |      |         |   |  |   |        |  
|Net income per share  diluted                     |  |                         | *       |      |  |      | *       |   |  | $ | 0.22   |  
|                                                   |  |                         |         |      |  |      |         |   |  |   |        |  



---



|  |                                                                                                                                                                                      
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | 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.



| |                  
| | -----------------
| | Reclassifications

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



| |                                           
| | ------------------------------------------
| | Accumulated Other Comprehensive
    Income

Comprehensive income includes, among other
things, net income (loss) and unrealized gains from investments
in available-for-sale securities, net of income tax effect. The
unrealized gains from investments in available-for-sale
securities were $ 0.2 million and $ 0.1 million for
2002 and 2001, respectively. The Company has chosen to present
comprehensive income in the Consolidated Statements of Changes
in Stockholders Equity.

49



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##### Table of Contents



LEXENT INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Changes in the components of accumulated other
comprehensive income for 2002 and 2001 were as follows:

|                           |  |                   |     |               |  |   |     | 
|-------------------------- |  | ----------------- | --- | ------------- |  | - | --- | 
|                           |  |                   |     | Accumulated  
|                           |  | Unrealized Gain   |     | Other        
|                           |  | on Available-for- |     | Comprehensive
|                           |  | Sale Securities   |     | Income       
|                           |  |                   |     |              
|                           |  |                  
|                           |  | (In thousands)   
|Balance, December 31, 2000 |  | $                 |    |               |  | $ |    | 
|Change for 2001            |  |                   | 60  |               |  |   | 60  | 
|                           |  |                   |     |               |  |   |     | 
|Balance, December 31, 2001 |  | $                 | 60  |               |  | $ | 60  | 
|                           |  |                   |     |               |  |   |     | 
|Change for 2002            |  |                   | 45  |               |  |   | 45  | 
|                           |  |                   |     |               |  |   |     | 
|Balance, December 31, 2002 |  | $                 | 105 |               |  | $ | 105 | 
|                           |  |                   |     |               |  |   |     | 

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 was 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 was amortized over ten years.

On January 1, 2002, the Company adopted
Statement of Financial Accounting Standards No.
(SFAS) 142, which requires goodwill to be
tested for impairment on an annual basis, and written down when
impaired, rather than amortized, as previously required. If an
impairment loss exists as a result of the transitional goodwill
impairment test, the implementation of SFAS 142 could result in
a one-time charge to earnings as a cumulative effect of
accounting change. The Company did not identify an impairment
charge upon implementation.

During the fourth quarter of 2002, the Company
conducted the required annual impairment review. Due to a
significant decrease in demand for services from
telecommunications carriers and uncertainty as to the timing of
any improvement in industry conditions, the Company determined
that the implied fair value of its reporting unit, based on
quoted market prices, is less than recorded goodwill for the
reporting unit. As a result the Company recorded a goodwill
impairment charge of $1.5 million.

3.     Certificate of
Deposit (Restricted Cash)

In August 2002, Lexent Metro Connect, LLC entered
into a franchise agreement with the City of New York, whereunder
LMC will be permitted to construct, operate and provide local
high capacity telecommunications networks and services. In
connection therewith, the City of New York, required that LMC
post $2.0 million to secure its obligations. LMC provided
the $2.0 million in the form of an unconditional letter of
credit. A certificate of deposit for $2.0 million was
pledged as collateral for the $2.0 million letter of credit.

50



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##### Table of Contents



LEXENT INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

4.     Receivables,
Net

|                                                                                                                               |  |                |        |              |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------ |  | -------------- | ------ | ------------ |  | - | ------- | -
|                                                                                                                               |  | December 31,   |        | December 31,
|                                                                                                                               |  | 2002           |        | 2001        
|                                                                                                                               |  |                |        |             
|                                                                                                                               |  |               
|                                                                                                                               |  | (In thousands)
|Accounts receivable  billed to
    customers                                                                                  |  | $              | 23,891 |              |  | $ | 42,237  |  
|Unbilled receivables on completed projects
    accounted for under the completed contract method                               |  |                | 717    |              |  |   | 3,734   |  
|Costs and estimated earnings in excess of
    billings on projects accounted for under the
    percentage-of-completion method |  |                | 5,044  |              |  |   | 2,852   |  
|Unbilled receivables on cost-plus contracts                                                                                    |  |                |       |              |  |   | 4,793   |  
|Costs of uncompleted projects accounted for under
    the completed contract method                                            |  |                | 661    |              |  |   | 2,457   |  
|Retainage                                                                                                                      |  |                | 2,638  |              |  |   | 736     |  
|                                                                                                                               |  |                |        |              |  |   |         |  
|                                                                                                                               |  |                | 32,951 |              |  |   | 56,809  |  
|Less: allowance for uncollectible amounts                                                                                      |  |                | (4,640 | )            |  |   | (15,638 | )
|                                                                                                                               |  |                |        |              |  |   |         |  
|                                                                                                                               |  | $              | 28,311 |              |  | $ | 41,171  |  
|                                                                                                                               |  |                |        |              |  |   |         |  

For 2002, 2001, and 2000, the provision for
uncollectible amounts was $0.1 million, $32.3 million, and
$2.6 million, respectively. Amounts written off against the
allowance for 2002, 2001, and 2000 were $11.1 million,
$24.0 million, and $2.1 million, respectively.

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

5.     Property and
Equipment

Property and equipment consists of the following:

|                                                |                             |                |        |        |  |   |         |        | 
|----------------------------------------------- | --------------------------- | -------------- | ------ | ------ |  | - | ------- | ------ | 
|                                                |                             |               
|                                                |                             | December 31,  
|                                                |                             |               
|                                                |                             | 2002           |        | 2001  
|                                                |                             |                |        |       
|                                                |                             |               
|                                                |                             | (In thousands)
|Motor vehicles                                  |                             | $              | 2,238  |        |  | $ | 4,000   |       
|Tools and equipment                             |                             |                | 4,034  |        |  |   | 9,489   |       
|Office equipment and furniture                  |                             |                | 432    |        |  |   | 1,224   |       
|Computer equipment                              |                             |                | 1,943  |        |  |   | 5,896   |       
|Leasehold improvements                          |                             |                | 1,327  |        |  |   | 1,418   |       
|Purchased software                              |                             |                | 794    |        |  |   | 933     |       
|                                                |                             |                |        |        |  |   |         |       
|                                                | Property and equipment      |                |        | 10,768 |  |   |         | 22,960 | 
|Less: accumulated depreciation and amortization |                             |                | (6,735 | )      |  |   | (10,064 | )     
|                                                |                             |                |        |        |  |   |         |       
|                                                | Property and equipment, net |                | $      | 4,033  |  |   | $       | 12,896 | 
|                                                |                             |                |        |        |  |   |         |       

Depreciation and amortization expense for 2002,
2001, and 2000 was $4.8 million, $5.8 million, and
$3.6 million, respectively. The above table includes assets
and related amortization in connection with capitalized leases.
See Note 17 for additional information.

In 2002, a loss on disposal of fixed assets of
$2.3 million was recorded. Loss on disposal of fixed assets
is included in Other income (expense), net.

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LEXENT INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

6.     Investments

Available-for-sale investments of
$44.3 million at December 31, 2002, represented
investment grade securities backed by U.S. government and
Federal Agency bonds, which have maturities in excess of
90 days. 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. One half of
such shares were sold during January 2002 for a net gain of
$0.6 million. On April 2, 2002, the Company sold its
remaining shares for a net loss of $2.0 million. Net
realized gains and losses are included in Other income
(expense), net.

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.

7.     Accrued
Liabilities

Accrued liabilities (including noncurrent
portion) are comprised of:

|                                    |                             |                |       |       |  |   |       |       | 
|----------------------------------- | --------------------------- | -------------- | ----- | ----- |  | - | ----- | ----- | 
|                                    |                             |               
|                                    |                             | December 31,  
|                                    |                             |               
|                                    |                             | 2002           |       | 2001 
|                                    |                             |                |       |      
|                                    |                             |               
|                                    |                             | (In thousands)
|Accrued payroll and related benefit |                             | $              | 2,275 |       |  | $ | 3,155 |      
|Accrued project costs               |                             |                | 2,930 |       |  |   | 1,674 |      
|Other                               |                             |                | 1,624 |       |  |   | 3,557 |      
|                                    |                             |                |       |       |  |   |       |      
|                                    | Total                       |                | $     | 6,829 |  |   | $     | 8,386 | 
|Less: noncurrent portion            |                             |                | 600   |       |  |   |      |      
|                                    |                             |                |       |       |  |   |       |      
|                                    | Accrued liabilities-current |                | $     | 6,229 |  |   | $     | 8,386 | 
|                                    |                             |                |       |       |  |   |       |      

8.     Provision for
Restructuring Charges

In 2002, the Company recorded $9.1 million
in restructuring expense, primarily in connection with the
closing of eleven offices and reduction in its workforce. The
restructuring charges are comprised primarily of
$6.5 million for obligations under leases for premises
which the Company has vacated, $0.7 million for severance
and related contractual obligations for approximately fifteen
non-unionized personnel and executives in areas being closed or
scaled back, and $2.3 million for write-offs of property
and equipment offset against a reversal of $0.4 million for
the unused restructure reserve for severance from 2001. During
the year the Company scaled back its expansion plans and closed
a number of offices, and changed its business plans to focus
primarily on its traditional markets, including the New York
metropolitan region, Washington D.C., and Florida.

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##### Table of Contents



LEXENT INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

A summary of the restructuring reserve at
December 31, 2002, is as follows:

|                                              |  |                |       |         |  |            |       |          |  |             |        |               |  |   |      |   |  |   |       |  |  |   |        | 
|--------------------------------------------- |  | -------------- | ----- | ------- |  | ---------- | ----- | -------- |  | ----------- | ------ | ------------- |  | - | ---- | - |  | - | ----- |  |  | - | ------ | 
|                                              |  | Reserve        |       |         |  |            |       |          |  |             |        | Reserve      
|                                              |  | Balance @      |       | 2002    |  |            |       |          |  | Net Expense |        | Balance @    
|(Including non-current portion)               |  | Dec. 31, 2001  |       | Expense |  | Deductions |       | Reversal |  | (Reversal)  |        | Dec. 31, 2002
|                                              |  |                |       |         |  |            |       |          |  |             |        |              
|                                              |  |               
|                                              |  | (In thousands)
|Severance and related contractual obligations |  | $              | 1,751 |         |  | $          | 729   |          |  | $           | (1,488 | )             |  | $ | (353 | ) |  | $ | 376   |  |  | $ | 639    | 
|Lease obligations                             |  |                | 7,591 |         |  |            | 6,520 |          |  |             | (4,134 | )             |  |   | (56  | ) |  |   | 6,464 |  |  |   | 9,921  | 
|Property and equipment                        |  |                |      |         |  |            | 2,292 |          |  |             | (2,263 | )             |  |   |     |   |  |   | 2,292 |  |  |   | 29     | 
|                                              |  |                |       |         |  |            |       |          |  |             |        |               |  |   |      |   |  |   |       |  |  |   |        | 
|Total                                         |  | $              | 9,342 |         |  | $          | 9,541 |          |  | $           | (7,885 | )             |  | $ | (409 | ) |  | $ | 9,132 |  |  | $ | 10,589 | 
|                                              |  |                |       |         |  |            |       |          |  |             |        |               |  |   |      |   |  |   |       |  |  |   |        | 

The Company estimates that $4.0 million of
the remaining reserve at December 31, 2002 will be paid
during 2003, and the balance of $6.6 million will be paid
over the next 8 years. The reversal amounts represent a
change in estimate relating to severance and lease obligations
from the 2001 plan.

9.     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, 2002 and 2001, the Company
had $0.3 million and $1.0 million, respectively, of
installment loans payable, primarily related to its fleet of
vehicles. Of those amounts, $0.2 million and
$0.6 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, 2002 and 2001, the balance
of a subordinated note payable to a stockholder was
$2.0 million and $3.6 million,
respectively  see Note 10.

The following are the maturities of long-term
debt (excluding capitalized lease obligations  see
Note 17) for the next two years:

|         |  |                |       | 
|-------- |  | -------------- | ----- | 
|Maturity |  | Amount        
|         |  |               
|         |  | (In thousands)
|2003     |  | $              | 1,776 | 
|2004     |  |                | 459   | 
|         |  |                |       | 
|Total    |  | $              | 2,235 | 
|         |  |                |       | 

10.     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, 2002 and
2001, the outstanding principal balance of the note was
$2.0 million and $3.6 million, respectively, of which
$1.6 million is classified as current at both dates, and
the balance is classified as non-current. The note is
subordinated to all senior debt. The note is payable in annual
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 non-current. 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.

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LEXENT INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

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 $31,000, $34,000 and $33,000 for 2002, 2001 and
2000, 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.

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 2002, 2001, and 2000, amounted
to $0.2 million, $0.2 million, and $0.4 million,
respectively. Accrued interest payable to related parties as of
December 31, 2002 and 2001 was $0.03 million and
$0.05 million, respectively.

11.     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.

54



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##### Table of Contents



LEXENT INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

12.     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.

13.     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 granted 1,343,425 new options to optionees who were
still employed on that date. The exercise price of the new
options was $3.03 based on the closing price on March 25,
2002 and the new options will vest as if the tendered options
had not been cancelled.

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 |      
|                                 | Granted             |           |           | 2,899,425        |   |   | $    | 3.72  | 
|                                 | Exercised           |           |           | (481,581         | ) |   | $    | 0.69  | 
|                                 | Canceled or expired |           |           | (1,210,638       | ) |   | $    | 5.80  | 
|                                 |                     |           |           |                  |   |   |      |      
|Outstanding at December 31, 2002 |                     |           | 5,125,767 |                  |   | $ | 5.05 |      
|                                 |                     |           |           |                  |   |   |      |      

55



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##### Table of Contents



LEXENT INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes options
outstanding and exercisable at December 31, 2002:

|                |                 |                     |  |                     |           |                  |  |                    |      |                  |  |   |       |  |  |  |           |  |  |   |       | 
|--------------- | --------------- | ------------------- |  | ------------------- | --------- | ---------------- |  | ------------------ | ---- | ---------------- |  | - | ----- |  |  |  | --------- |  |  | - | ----- | 
|                |                 |                     |  |                    
|                |                 | Options Outstanding |  | Options Exercisable
|                |                 |                     |  |                    
|Range of        |                 | Number              |  | Weighted Average    |           | Weighted Average |  |                    |      | Weighted Average
|Exercise Prices |                 | Outstanding         |  | Remaining Life      |           | Exercise Price   |  | Number Exercisable |      | Exercise Price  
|                |                 |                     |  |                     |           |                  |  |                    |      |                 
|                | $ 0.33 - $ 0.49 |                     |  |                     | 656,274   |                  |  |                    | 6.0  |                  |  | $ | 0.48  |  |  |  | 631,746   |  |  | $ | 0.48  | 
|                | $ 0.88 - $ 0.88 |                     |  |                     | 22,500    |                  |  |                    | 10.0 |                  |  | $ | 0.88  |  |  |  |          |  |  |   |      | 
|                | $ 1.01 - $ 1.01 |                     |  |                     | 130,355   |                  |  |                    | 6.7  |                  |  | $ | 1.01  |  |  |  | 96,641    |  |  | $ | 1.01  | 
|                | $ 1.58 - $ 1.67 |                     |  |                     | 825,000   |                  |  |                    | 9.7  |                  |  | $ | 1.65  |  |  |  | 206,250   |  |  | $ | 1.65  | 
|                | $ 3.03 - $ 3.71 |                     |  |                     | 960,984   |                  |  |                    | 7.8  |                  |  | $ | 3.05  |  |  |  | 564,495   |  |  | $ | 3.04  | 
|                | $ 5.00 - $ 7.33 |                     |  |                     | 2,264,000 |                  |  |                    | 7.6  |                  |  | $ | 6.51  |  |  |  | 1,440,817 |  |  | $ | 6.69  | 
|                | $ 7.60 - $10.00 |                     |  |                     | 75,000    |                  |  |                    | 8.0  |                  |  | $ | 8.80  |  |  |  | 55,470    |  |  | $ | 9.12  | 
|                | $15.00 - $15.00 |                     |  |                     | 38,154    |                  |  |                    | 6.7  |                  |  | $ | 15.00 |  |  |  | 24,827    |  |  | $ | 15.00 | 
|                | $23.25 - $30.00 |                     |  |                     | 153,500   |                  |  |                    | 8.0  |                  |  | $ | 23.40 |  |  |  | 99,250    |  |  | $ | 23.49 | 
|                |                 |                     |  |                     |           |                  |  |                    |      |                  |  |   |       |  |  |  |           |  |  |   |       | 
|                |                 |                     |  |                     | 5,125,767 |                  |  |                    | 7.7  |                  |  | $ | 5.05  |  |  |  | 3,119,496 |  |  | $ | 4.91  | 
|                |                 |                     |  |                     |           |                  |  |                    |      |                  |  |   |       |  |  |  |           |  |  |   |       | 

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 $0.1 million,
$1.3 million, and $41.7 million was recorded in 2002,
2001 and 2000, 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 2002,
$3.8 million was reversed for unvested options, which were
forfeited. 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
$3.3 million, $6.1 million, and $26.2 million for
2002, 2001, and 2000, respectively. Deferred tax benefits were
recorded in connection with amortization of stock-based
compensation expense related to nonqualified options in the
amounts of $0.4 million, $1.4 million, and
$8.1 million in 2002, 2001 and 2000, respectively. With
respect to such deferred tax benefits, to the extent that the
nonqualified options are forfeited or are exercised when the
fair value of the stock is lower than the deemed fair value of
the stock for financial reporting purposes on the grant date
($22.80 per share), a portion of such deferred tax benefits
would not be realized and such portion may be charged to
expense. During 2002, $2.4 million of deferred tax assets
were charged to expense in connection with forfeited options.
See Note 14.

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 was $1.60
per share on the first offering date (August 1, 2002), the
market value was $5.38 per share on the first offering date
(August 1, 2001) and $5.85 per share on the second offering
date (February 1, 2002). Employees may purchase up to
1,000 shares in each purchase period. Under the ESPP,
2,500,000 shares were

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LEXENT INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

authorized and available for issuance. At the end
of the first purchase period (January 31, 2002),
49,791 shares were issued at a purchase price of $4.57 per
share, at the end of the second purchase period (July 31,
2002), 24,652 shares were issued at a purchase price of
$1.39 per share. At December 31, 2002, 39,457 shares were
issuable to employees based on payroll deductions of
$0.03 million through that date. Employees participating in
the ESPP withdrew their funds prior to the January 31, 2003
purchase. The Employee Stock Purchase Plan was terminated in
January 2003.

Stock
Options

|                              |          |      |         |       |  |      |         |        |  |  |         |        | 
|----------------------------- | -------- | ---- | ------- | ----- |  | ---- | ------- | ------ |  |  | ------- | ------ | 
|                              |          | 2002 |         | 2001  |  | 2000
|                              |          |      |         |       |  |     
|Expected volatility factor:   |          |      |         |       |  |      |         |        |  |  |         |       
|                              | Pre IPO  |      |         | n/a   |  |      |         | n/a    |  |  |         | 0%     | 
|                              | Post IPO |      |         | 71%   |  |      |         | 66%    |  |  |         | 66%    | 
|Risk free interest rate       |          |      | 3.8%    |       |  |      | 4.6%    |        |  |  | 6.3%    |       
|Expected life                 |          |      | 4 years |       |  |      | 4 years |        |  |  | 4 years |       
|Expected dividend rate        |          |      | 0%      |       |  |      | 0%      |        |  |  | 0%      |       
|Weighted average fair value:  |          |      |         |       |  |      |         |        |  |  |         |       
|                              | Pre IPO  |      |         | n/a   |  |      |         | n/a    |  |  |         | $2.10  | 
|                              | Post IPO |      |         | n/a   |  |      |         | n/a    |  |  |         | $9.19  | 
|                              | Average  |      |         | $1.83 |  |      |         | $7.29  |  |  |         | $5.20  | 
|Weighted average grant price: |          |      |         |       |  |      |         |        |  |  |         |       
|                              | Pre IPO  |      |         | n/a   |  |      |         | n/a    |  |  |         | $9.32  | 
|                              | Post IPO |      |         | n/a   |  |      |         | n/a    |  |  |         | $16.66 | 
|                              | Average  |      |         | $3.26 |  |      |         | $13.53 |  |  |         | $12.53 | 

ESPP

|                             |  |      |       |      |  |  |       |  |  |  |  | 
|---------------------------- |  | ---- | ----- | ---- |  |  | ----- |  |  |  |  | 
|                             |  | 2002 |       | 2001 |  | 
|                             |  |      |       |      |  | 
|Expected volatility factor   |  |      | 71%   |      |  |  | 66%   |  |  |  |  | 
|Weighted average fair value  |  |      | $1.60 |      |  |  | $5.38 |  |  |  |  | 
|Weighted average grant price |  |      | $1.36 |      |  |  | $4.57 |  |  |  |  | 

57



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##### Table of Contents



LEXENT INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 2002, 2001 and 2000 is as follows:

|                                                                                                                                                       |         |                                          |         |       |   |      |         |       |   |   |       |      | 
|------------------------------------------------------------------------------------------------------------------------------------------------------ | ------- | ---------------------------------------- | ------- | ----- | - | ---- | ------- | ----- | - | - | ----- | ---- | 
|                                                                                                                                                       |         | 2002                                     |         | 2001  |   | 2000
|                                                                                                                                                       |         |                                          |         |       |   |     
|                                                                                                                                                       |         |                                         
|                                                                                                                                                       |         | (In thousands, except per share amounts)
|Net income (loss), as reported                                                                                                                         |         | $                                        | (50,297 | )     |   | $    | (19,260 | )     |   | $ | 8,576 |     
|Deduct: Total stock-based employee compensation
    expense determined under the fair value based method for all
    awards net of related tax effects |         |                                          | 2,493   |       |   |      | 1,338   |       |   |   | 2,438 |     
|                                                                                                                                                       |         |                                          |         |       |   |      |         |       |   |   |       |     
|Pro forma net income                                                                                                                                   |         | $                                        | (52,790 | )     |   | $    | (20,598 | )     |   | $ | 6,138 |     
|                                                                                                                                                       |         |                                          |         |       |   |      |         |       |   |   |       |     
|Basic and diluted net income per share as
    reported:                                                                                                |         |                                          |         |       |   |      |         |       |   |   |       |     
|                                                                                                                                                       | Basic   |                                          | $       | (1.20 | ) |      | $       | (0.46 | ) |   | $     | 0.27 | 
|                                                                                                                                                       |         |                                          |         |       |   |      |         |       |   |   |       |     
|                                                                                                                                                       | Diluted |                                          | $       | (1.20 | ) |      | $       | (0.46 | ) |   | $     | 0.22 | 
|                                                                                                                                                       |         |                                          |         |       |   |      |         |       |   |   |       |     
|Basic and diluted pro forma net income per share:                                                                                                      |         |                                          |         |       |   |      |         |       |   |   |       |     
|                                                                                                                                                       | Basic   |                                          | $       | (1.26 | ) |      | $       | (0.50 | ) |   | $     | 0.19 | 
|                                                                                                                                                       |         |                                          |         |       |   |      |         |       |   |   |       |     
|                                                                                                                                                       | Diluted |                                          | $       | (1.26 | ) |      | $       | (0.50 | ) |   | $     | 0.16 | 
|                                                                                                                                                       |         |                                          |         |       |   |      |         |       |   |   |       |     

14.     Income
Taxes

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

|                               |                 |                |        |         |   |      |         |   |  |   |        |        | 
|------------------------------ | --------------- | -------------- | ------ | ------- | - | ---- | ------- | - |  | - | ------ | ------ | 
|                               |                 |               
|                               |                 | December 31,  
|                               |                 |               
|                               |                 | 2002           |        | 2001    |   | 2000
|                               |                 |                |        |         |   |     
|                               |                 |               
|                               |                 | (In thousands)
|Current:                       |                 |                |        |         |   |      |         |   |  |   |        |       
|                               | Federal         |                | $      | (14,750 | ) |      | $       |  |  |   | $      | 17,345 | 
|                               | State and local |                |        |        |   |      |         |  |  |   |        | 4,327  | 
|Deferred provision (benefit)   |                 |                | 20,962 |         |   |      | (13,856 | ) |  |   | (8,968 | )     
|                               |                 |                |        |         |   |      |         |   |  |   |        |       
|Income tax provision (benefit) |                 | $              | 6,212  |         |   | $    | (13,856 | ) |  | $ | 12,704 |       
|                               |                 |                |        |         |   |      |         |   |  |   |        |       

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LEXENT INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                            |                                                                                       |                             |         |        |   |   |        |       |        | 
|--------------------------- | ------------------------------------------------------------------------------------- | --------------------------- | ------- | ------ | - | - | ------ | ----- | ------ | 
|                            |                                                                                       |                            
|                            |                                                                                       | December 31,               
|                            |                                                                                       |                            
|                            |                                                                                       | 2002                        |         | 2001  
|                            |                                                                                       |                             |         |       
|                            |                                                                                       |                            
|                            |                                                                                       | (In thousands)             
|Current deferred taxes:     |                                                                                       |                             |         |        |   |   |        |      
|                            | Net operating loss                                                                    |                             | $       | 6,342  |   |   | $      | 8,061 |       
|                            | Allowance for uncollectible amounts                                                   |                             |         | 5,155  |   |   |        | 6,929 |       
|                            | Deferred costs on uncompleted projects                                                |                             |         | 70     |   |   |        | 185   |       
|                            | Other reserves                                                                        |                             |         | 3,301  |   |   |        | 1,595 |       
|                            | Accrued liabilities                                                                   |                             |         | 266    |   |   |        | 33    |       
|                            |                                                                                       |                             |         |        |   |   |        |      
|                            |                                                                                       |                             | 15,134  |        |   |   | 16,803 |      
|Less: valuation allowance   |                                                                                       |                             | (15,134 | )      |   |   |       |      
|                            |                                                                                       |                             |         |        |   |   |        |      
|                            |                                                                                       | Current deferred taxes, net |         |        |  |   |        |       | 16,803 | 
|                            |                                                                                       |                             |         |        |   |   |        |      
|Non-current deferred taxes: |                                                                                       |                             |         |        |   |   |        |      
|                            | Depreciation and amortization                                                         |                             |         | 348    |   |   |        | (970  | )     
|                            | Amortization of deferred stock-based compensation
    related to nonqualified options |                             |         | 11,239 |   |   |        | 9,794 |       
|                            |                                                                                       |                             |         |        |   |   |        |      
|                            |                                                                                       |                             | 11,587  |        |   |   | 8,824  |      
|Less: valuation allowance   |                                                                                       |                             | (11,587 | )      |   |   |       |      
|                            |                                                                                       |                             |         |        |   |   |        |      
|Net deferred tax asset      |                                                                                       | $                           |        |        |   | $ | 25,627 |      
|                            |                                                                                       |                             |         |        |   |   |        |      

SFAS 109 Accounting for Income
Taxes requires that a valuation allowance be established
when it is more likely than not that all or a
portion of deferred tax assets will not be realized. Based on
the Companys performance in the past few years and the
current challenging economic environment that has negatively
impacted the Companys operating results, the Company
concluded that it was appropriate to establish a full valuation
allowance for its net deferred tax assets. In addition, the
Company expects to provide a full valuation allowance on future
tax benefits until it can substantiate a level of profitability
that demonstrates its ability to utilize the assets. Adjustments
to increase or decrease the valuation allowance are charged or
credited, respectively, to income tax expense.

As of December 31, 2002, the Company has
recorded a $14.8 million income tax receivable relating to
current net operating losses expected to be realized through tax
carryback provisions.

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

|                                                 |  |      |       |      |  |      |       |    |  |  |      |  
|------------------------------------------------ |  | ---- | ----- | ---- |  | ---- | ----- | -- |  |  | ---- | -
|                                                 |  | 2002 |       | 2001 |  | 2000
|                                                 |  |      |       |      |  |     
|Federal statutory rate applied to pre-tax income |  |      | (35.0 | )%   |  |      | (35.0 | )% |  |  | 35.0 | %
|State and local taxes, net of federal benefit    |  |      | (11.9 | )    |  |      | (9.3  | )  |  |  | 9.5  |  
|Tax effect of non-deductible items               |  |      | 0.4   |      |  |      | 2.3   |    |  |  | 15.2 |  
|Change in valuation allowance                    |  |      | 60.6  |      |  |      |      |    |  |  |     |  
|                                                 |  |      |       |      |  |      |       |    |  |  |      |  
|Total tax provision (benefit)                    |  |      | 14.1  | %    |  |      | (42.0 | )% |  |  | 59.7 | %
|                                                 |  |      |       |      |  |      |       |    |  |  |      |  

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LEXENT INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

15.     Retirement
Plans and 401(k) 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 2002, 2001 and
2000, $0.3 million, $0.9 million and
$0.6 million, respectively, was charged to expense for the
401(k) plan.

16.     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 and
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 executives and its
underwriters, alleging violation of the Securities law in
connection with the initial public offering. It is too early to
assess the outcome of the above referenced matters. Therefore,
at present it cannot be determined whether the ultimate outcome
of these matters will have a material impact on the
Companys financial position or results of operations.

A shareholder class action suit filed on
October 26, 2001, Labansky, et al. v. Lexent
Inc. et al., in the Southern District of New York
against the Company, certain of its present and former senior
executives and its underwriters continues. All individual
present and former senior executive defendants have been
dismissed from the case without prejudice. The complaint alleges
that the registration statement and prospectus relating to the
Companys initial public offering contained material
misrepresentations and/or omissions in that those documents did
not disclose that (1) certain underwriters had solicited
and received undisclosed fees and commissions and other economic
benefits from some investors in connection with the distribution
of the Companys stock in the initial public offering; and
(2) certain underwriters had entered into arrangements with
some investors that were designed to distort and/or inflate the
market price for the Companys stock in the aftermarket
following the initial public offering. The suit against the
Company is part of a number of initial public offering
securities claims against multiple issuers and underwriters
presently pending before the Judge. No discovery has occurred in
the suit involving the Company. On February 19, 2003,
U.S. District Court Judge Scheindlin issued an opinion
denying the Motion to Dismiss the Section 11 claims against
the Company but granting said motion, without prejudice, with
respect to the Section 10 (b) (5) claims. As indicated
in previous filings, the Company intends to defend itself
vigorously. Management currently believes that the resolution of
this litigation will not have a material adverse impact on the
Companys financial position or the results of operations,
although the ultimate outcome of this matter cannot be
determined at this time.

On July 9, 2002, the Companys
subsidiary, Hugh OKane Electric Co., LLC
(HOK), was served with a Complaint filed in the
District of Maryland by several former employees, Yemele
T. William Nestor et al. v. Hugh OKane Electric
Company, LLC (Employee Action), alleging
violations of Title VII of the Civil Rights Act of 1964, as
amended. Plaintiffs in the Employee Action seek compensatory and
punitive damages. In addition, on September 9, 2002, HOK
was served with a second Complaint filed in the District of
Maryland by the U.S. Equal Employment Opportunity
Commission on behalf of other employees, Equal Employment
Opportunity Commission v. Hugh OKane Electric Company,
LLC (EEOC Action), alleging violations of
Title VII of the Civil Rights Act of 1964, as amended. The
EEOC Action seeks compensatory damages and injunctive relief.
The Employee Action and the EEOC Action arise from the same core
of allegations. HOK intends to defend itself vigorously in both
actions. HOKs Answers in both actions have been filed, and
limited discovery has been conducted in anticipation of
mediation, which has been scheduled for March 2003. It is too
early to assess the ultimate outcome of the above-referenced
matters served upon the Company. Therefore, at

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LEXENT INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

present, it cannot be determined whether the
ultimate outcome of these matters, individually or cumulatively,
will have a material impact on the Companys financial
position or results of operations.

On or about July 22, 2002, the Company was
served with a complaint in the Northern District of Illinois,
Annecca Inc. et al. v. Lexent Inc.,
brought by several plaintiffs associated with U.S. Electric
LLC, alleging that the Companys decisions neither to
complete the purchase of U.S. Electric nor to employ
certain of U.S. Electrics principals constitute a
breach of contract. Plaintiffs seek damages for lost profits,
salaries, etc. The Company believes that the complaint is
without merit and will vigorously defend itself. The
Companys Answer has been filed, and the Company has
asserted several counterclaims. The parties are currently
engaged in discovery. It is too early to assess the ultimate
outcome of the litigation. Therefore, at present, it cannot be
determined whether the ultimate outcome will have a material
impact on the Companys financial position or results of
operations.

HOK continues to be involved in litigation in the
Southern District of New York, U.S. Information
Systems, Inc. et al. v. International Brotherhood of
Electrical Workers Local Union 3, AFL-CIO
et al., served on or about March 10, 2002,
brought by three electrical contractors alleging a conspiracy
among certain other contractors (including HOK) and the
International Brotherhood of Electrical Workers, Local Union
Number 3, AFL-CIO (IBEW). The suit alleges
violations of the federal Sherman Antitrust Act and state laws
and claims that the defendants exercise market power restricting
the ability of plaintiffs, who employ workers from the
Communication Workers of America (CWA), from
performing telecommunications services work in the New York
metropolitan area. Plaintiffs seek treble damages. The Company
believes that this suit is part of an ongoing labor dispute
between the IBEW and the CWA and that the allegations against
HOK are without merit. HOK intends to defend itself vigorously
in this litigation. Discovery is complete, but it is too early
to assess the ultimate outcome of the litigation.
Notwithstanding, a damage judgment against HOK could have a
material adverse effect on the Companys business operating
results and financial condition.



|    |                  
|--- | -----------------
|17. | Lease Commitments

The Company leases equipment, motor vehicles and
real estate (including real estate leased from related parties
referred to in Note 10) under leases accounted for as
operating leases with terms ranging from one to ten years. Total
rent expense for operating leases was $7.1 million,
$7.8 million, and $4.4 million for 2002, 2001 and
2000, respectively.

Future minimum lease payments under operating
leases as of December 31, 2002 are as follows:

|           |  |                |        | 
|---------- |  | -------------- | ------ | 
|           |  | Amount        
|           |  |               
|           |  | (In thousands)
|2003       |  | $              | 4,793  | 
|2004       |  |                | 3,330  | 
|2005       |  |                | 2,712  | 
|2006       |  |                | 1,865  | 
|2007       |  |                | 1,875  | 
|After 2007 |  |                | 4,971  | 
|           |  |                |        | 
|Total      |  | $              | 19,546 | 
|           |  |                |        | 

The Company has also leased equipment under
capitalized leases. As of December 31, 2002 and 2001,
assets recorded under capitalized leases were $0.5 million
and $2.5 million, respectively, accumulated amortization
was $0.4 million and $1.4 million, respectively, and
the total liability recorded under such capitalized leases was
$0.3 million and $1.0 million, respectively. The
weighted average interest rate for

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LEXENT INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

capitalized leases is 6.3% and 6.9%,
respectively. Following are minimum lease payments under
capitalized leases and the present value of the net minimum
lease payments as of December 31, 2002:

|                                            |  |                |     |  
|------------------------------------------- |  | -------------- | --- | -
|                                            |  | Amount        
|                                            |  |               
|                                            |  | (In thousands)
|2003                                        |  | $              | 265 |  
|2004                                        |  |                | 6   |  
|                                            |  |                |     |  
|Total minimum lease payments                |  |                | 271 |  
|Less: amount representing interest          |  |                | (7  | )
|                                            |  |                |     |  
|Present value of net minimum lease payments |  | $              | 264 |  
|                                            |  |                |     |  



|    |                             
|--- | ----------------------------
|18. | Concentration of Credit Risk

Financial instruments, which potentially subject
the Company to credit risk, consist primarily of cash, cash
equivalents, available-for-sale investments, a certificate of
deposit 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 2002, the Company had revenues from two
separate customers, which comprised 23% and 18%, respectively,
of the Companys total revenues. A significant portion of
the Companys revenue from the second largest customer was
derived from a contract, which was completed during 2002. At
December 31, 2002, accounts receivable from these customers
totaled $6.1 million and $0.5 million, respectively.
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 customer totaled
$2.1 million. 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.



|    |                  
|--- | -----------------
|19. | Subsequent Events

On February 18, 2003, the Company announced
that it had received an offer from a buying group, which
included Hugh J. OKane, Jr. and Kevin M. OKane
(Buying Group), to purchase all outstanding shares
of the Company (not owned by the Buying Group) for $1.25 per
share (Offer). The Companys Board of Directors
currently consists solely of Hugh J. OKane, Jr. and
Kevin M. OKane. As a result of the absence of independent
members from the Companys Board of Directors, the Company
retained Rodman & Renshaw,

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LEXENT INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Inc., a New York based investment banking firm as
an independent advisor to assist in evaluating and responding to
the Offer.

As of March 15, 2003, the Company was aware
of six (6) class action lawsuits that had been filed in the
State Court in Delaware. All of the lawsuits have named Lexent
Inc., Hugh J. OKane, Jr. and Kevin M. OKane as
defendants. At least one of the lawsuits, Robert Ramsey
v. Lexent Inc. et al., has also named, as
defendants, several former members of the Companys Board
of Directors. The suits allege, inter alia, that the Offer is
unfair and inadequate, the Buying Group has engaged in
self-dealing and has not acted in good faith, and that Lexent
Inc. and its Board of Directors, present and former, have
breached their fiduciary duty to shareholders. The plaintiffs
seek damages, including, but not limited to, enjoining the
Company and the Buying Group from proceeding with, consummating
or closing the proposed transaction. Answers have not yet been
filed on behalf of the Company and its present and former Board
Members. It is too early to assess the ultimate outcome of the
above referenced matters. Therefore, at present it cannot be
determined whether the ultimate outcome of these matters will
have a material impact on the Companys financial position
or results of operations.

The Company received a letter, dated
March 3, 2003, from the NASDAQ Stock Market notifying the
Company that, as a result of the resignations of the four
independent Board of Directors, the Company does not currently
meet the independent director and auditor committee requirements
for the continued listing on NASDAQ. NASDAQ rules require the
Company to have an audit committee composed of at least
3 independent directors. NASDAQ is currently reviewing the
Companys eligibility for continued listing on NASDAQ and
has requested that the Company submit a specific plan and
timetable to achieve compliance with NASDAQ rules. The requested
plan was submitted on March 19, 2003.

NASDAQ has not yet issued a formal notice for the
delisting of Lexents securities from NASDAQ.

63



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LEXENT INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                   
|--- | ----------------------------------
|20. | Unaudited Quarterly Financial Data

|                              |                                           |                |   |          |   |           |   |          |   |          |   |          |   |           |   |          |   |  |   |        |   |  |   |        |   |  |   |         |   |  |   |         |  
|----------------------------- | ----------------------------------------- | -------------- | - | -------- | - | --------- | - | -------- | - | -------- | - | -------- | - | --------- | - | -------- | - |  | - | ------ | - |  | - | ------ | - |  | - | ------- | - |  | - | ------- | -
|                              |                                           | Mar. 31,       |   | June 30, |   | Sept. 30, |   | Dec. 31, |   | Mar. 31, |   | June 30, |   | Sept. 30, |   | Dec. 31,
|                              |                                           | 2001           |   | 2001     |   | 2001      |   | 2001     |   | 2002     |   | 2002     |   | 2002      |   | 2002    
|                              |                                           |                |   |          |   |           |   |          |   |          |   |          |   |           |   |         
|                              |                                           |               
|                              |                                           | (In thousands)
|Statement of Operations Data: |                                           |                |   |          |   |           |   |          |   |          |   |          |   |           |   |          |   |  |   |        |   |  |   |        |   |  |   |         |   |  |   |        
|                              | Revenues                                  |                | $ | 72,105   |   |           | $ | 67,044   |   |          | $ | 49,189   |   |           | $ | 52,240   |   |  | $ | 31,313 |   |  | $ | 33,152 |   |  | $ | 27,718  |   |  | $ | 31,659  |  
|                              | Cost of revenues                          |                |   | 58,663   |   |           |   | 52,199   |   |          |   | 40,938   |   |           |   | 43,201   |   |  |   | 29,435 |   |  |   | 31,373 |   |  |   | 34,158  |   |  |   | 35,558  |  
|                              | General and administrative expenses       |                |   | 6,432    |   |           |   | 5,877    |   |          |   | 4,366    |   |           |   | 3,562    |   |  |   | 4,195  |   |  |   | 3,896  |   |  |   | 4,446   |   |  |   | 3,369   |  
|                              | Depreciation and amortization             |                |   | 1,311    |   |           |   | 1,440    |   |          |   | 1,527    |   |           |   | 1,525    |   |  |   | 1,289  |   |  |   | 1,233  |   |  |   | 1,229   |   |  |   | 1,036   |  
|                              | Non-cash stock-based compensation         |                |   | 2,244    |   |           |   | 1,287    |   |          |   | 1,269    |   |           |   | 1,258    |   |  |   | 1,021  |   |  |   | 760    |   |  |   | 760     |   |  |   | 760     |  
|                              | Provision for doubtful accounts           |                |   | 15,775   |   |           |   | 7,709    |   |          |   | 475      |   |           |   | 8,327    |   |  |   | 237    |   |  |   | 189    |   |  |   | 154     |   |  |   | (454    | )
|                              | Restructuring charges                     |                |   | 5,946    |   |           |   |         |   |          |   |         |   |           |   | 7,618    |   |  |   | 1,441  |   |  |   |       |   |  |   |        |   |  |   | 7,691   |  
|                              | Impairment of goodwill                    |                |   |         |   |           |   |         |   |          |   |         |   |           |   |         |   |  |   |       |   |  |   |       |   |  |   |        |   |  |   | 1,514   |  
|                              |                                           |                |   |          |   |           |   |          |   |          |   |          |   |           |   |          |   |  |   |        |   |  |   |        |   |  |   |         |   |  |   |        
|                              | Operating (loss) income                   |                |   | (18,266  | ) |           |   | (1,468   | ) |          |   | 614      |   |           |   | (13,251  | ) |  |   | (6,305 | ) |  |   | (4,299 | ) |  |   | (13,029 | ) |  |   | (17,815 | )
|                              | Interest expense                          |                |   | 284      |   |           |   | 172      |   |          |   | 253      |   |           |   | 368      |   |  |   | 76     |   |  |   | 65     |   |  |   | 57      |   |  |   | 46      |  
|                              | Interest income                           |                |   | (799     | ) |           |   | (541     | ) |          |   | (575     | ) |           |   | (419     | ) |  |   | (359   | ) |  |   | (337   | ) |  |   | (325    | ) |  |   | (329    | )
|                              | Other expense (income), net               |                |   | 393      |   |           |   | 126      |   |          |   | (72      | ) |           |   | 1,555    |   |  |   | 1,408  |   |  |   | 40     |   |  |   | 8       |   |  |   | 2,287   |  
|                              |                                           |                |   |          |   |           |   |          |   |          |   |          |   |           |   |          |   |  |   |        |   |  |   |        |   |  |   |         |   |  |   |        
|                              | Income (loss) before income taxes         |                |   | (18,144  | ) |           |   | (1,225   | ) |          |   | 1,008    |   |           |   | (14,755  | ) |  |   | (7,430 | ) |  |   | (4,067 | ) |  |   | (12,769 | ) |  |   | (19,819 | )
|                              | Provision for (benefit from) income taxes |                |   | (8,202   | ) |           |   | (117     | ) |          |   | 714      |   |           |   | (6,251   | ) |  |   | (701   | ) |  |   | (1,614 | ) |  |   | (5,620  | ) |  |   | 14,147  |  
|                              |                                           |                |   |          |   |           |   |          |   |          |   |          |   |           |   |          |   |  |   |        |   |  |   |        |   |  |   |         |   |  |   |        
|                              | Net income (loss)                         |                | $ | (9,942   | ) |           | $ | (1,108   | ) |          | $ | 294      |   |           | $ | (8,504   | ) |  | $ | (6,729 | ) |  | $ | (2,453 | ) |  | $ | (7,149  | ) |  | $ | (33,966 | )
|                              |                                           |                |   |          |   |           |   |          |   |          |   |          |   |           |   |          |   |  |   |        |   |  |   |        |   |  |   |         |   |  |   |        
|Net income (loss) per share:  |                                           |                |   |          |   |           |   |          |   |          |   |          |   |           |   |          |   |  |   |        |   |  |   |        |   |  |   |         |   |  |   |        
|                              | Basic                                     |                | $ | (0.24    | ) |           | $ | (0.03    | ) |          | $ | 0.01     |   |           | $ | (0.20    | ) |  | $ | (0.16  | ) |  | $ | (0.06  | ) |  | $ | (0.17   | ) |  | $ | (0.81   | )
|                              |                                           |                |   |          |   |           |   |          |   |          |   |          |   |           |   |          |   |  |   |        |   |  |   |        |   |  |   |         |   |  |   |        
|                              | Diluted                                   |                | $ | (0.24    | ) |           | $ | (0.03    | ) |          | $ | 0.01     |   |           | $ | (0.20    | ) |  | $ | (0.16  | ) |  | $ | (0.06  | ) |  | $ | (0.17   | ) |  | $ | (0.81   | )
|                              |                                           |                |   |          |   |           |   |          |   |          |   |          |   |           |   |          |   |  |   |        |   |  |   |        |   |  |   |         |   |  |   |        

During the fourth quarter of 2002, the Company
recorded a goodwill impairment charge of $1.5 million and
recorded net restructuring charges of $7.7 million.

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