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SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED SEPTEMBER 30, 2003.

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 000-31105

LEXENT INC.

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [   ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12 b-2 of the Securities Exchange Act of 1934)

Yes [   ] No [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common Stock, $.001 par value, 42,290,561 shares outstanding as of November 6, 2003.

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LEXENT INC. AND SUBSIDIARIES

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PART I- FINANCIAL INFORMATION

ITEM 1. Financial Statements

LEXENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)

See accompanying notes to condensed consolidated financial statements.

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LEXENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
(unaudited)

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

** Anti-dilutive, therefore, not presented.

See accompanying notes to condensed consolidated financial statements.

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LEXENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)

See accompanying notes to condensed consolidated financial statements.

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LEXENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)

     The condensed consolidated financial statements of Lexent Inc. and Subsidiaries (the “Company”) included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to SEC rules and regulations. The condensed consolidated financial statements of the Company reflect, in the opinion of management, all adjustments necessary to present fairly the financial position of the Company at September 30, 2003 and the results of its operations and cash flows for the periods ended September 30, 2003 and September 30, 2002. All adjustments are of a normal recurring nature. These financial statements should be read in conjunction with the annual financial statements and notes thereto for the year ended December 31, 2002. The results of operations for the three and nine months ended September 30, 2003 are not necessarily indicative of the results of operations to be expected for the year ending December 31, 2003.

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

     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 its independent directors, Lexent did not meet the independent director and audit committee requirements for continued listing on the Nasdaq National Market.

     Because Lexent was not able to regain compliance with the independent director and audit committee requirements for continued listing on the Nasdaq Stock Market, the Nasdaq Listing Qualifications Panel made a determination to delist Lexent’s common stock from The Nasdaq National Market effective with the opening of business on June 26, 2003. As of such date, Lexent’s common stock began trading on the OTC Bulletin Board under the same symbol, “LXNT”.

1. NET LOSS PER SHARE

     Net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted loss per share reflects the potential dilution of other securities by including in the weighted average number of common shares outstanding for each period, the dilutive effect of stock options and shares issuable under the employee stock purchase plan. Details of the calculations are as follows:

* Inclusion of common stock equivalent shares would result in an anti-dilutive net loss per share. As a result, the computation for diluted loss per share is not presented.

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LEXENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)

2. ACCUMULATED OTHER COMPREHENSIVE INCOME

     Comprehensive income includes net loss and unrealized gains from available-for-sale investments, net of income tax effect. The unrealized gains from available-for-sale investments were $0.1 million for 2002.

     The change in accumulated other comprehensive income for 2003 was as follows:

3. CERTIFICATE OF DEPOSIT (RESTRICTED CASH)

     In August 2002, Lexent Metro Connect, LLC (“LMC”), a wholly owned subsidiary of Lexent Inc., 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 within the New York metropolitan area. 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, and was renewed during the third quarter 2003. Based upon the City of New York requirements, the unconditional letter of credit was reduced to $1.0 million in September 2003. The certificate of deposit was reduced to $1.0 million on the date of maturity, October 7, 2003.

4. RECEIVABLES, NET

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LEXENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)

     For the nine months ended September 30, 2003 recoveries, net of amounts written off against the allowance were $1.0 million. The amounts written off against the allowance for the same period last year were $8.1 million.

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

5. INVESTMENTS

     Available-for-sale investments represents investment grade securities backed by U.S. government, Federal Agency bonds, and AA rated corporate notes that have original maturities in excess of 90 days.

6. EMPLOYEE STOCK PURCHASE PLAN

     At September 30, 2002, 11,558 shares were issuable to employees based on payroll deductions of $0.01 million through that date. The Employee Stock Purchase Plan was terminated in January 2003.

7. RELATED PARTY TRANSACTIONS

     During the nine months ended September 30, 2003, the Company repaid $1.2 million including interest expense of $0.1 million on a subordinated note payable to a common stockholder.

     The Company leases buildings for office and warehouse purposes in New York City and in South Plainfield, New Jersey from entities owned by its two principal common stockholders and another common stockholder. Rent expense for these premises was $0.4 million for the nine months ended September 30, 2003.

     In May 2000, the Company entered into a ten-year lease for a garage and warehouse facility in Long Island City, New York. Lease payments were $0.5 million for the nine months ended September 30, 2003. The facility is leased from an entity owned by the Company’s two principal common stockholders.

     On July 9, 2003, the Company executed an Agreement and Plan of Merger (the “Merger Agreement”) between LX Merger Corp. (“Purchaser”) and the Company pursuant to which Purchaser will merge with and into the Company and the Company will be the surviving corporation (the “Merger”). Purchaser is a newly formed corporation owned by Hugh J. O’Kane, Jr., Chairman of the Board of Lexent, and Kevin M. O’Kane, Chief Executive Officer and Vice Chairman of the Board of Lexent (together, the “Purchaser Stockholders”) and organized for the sole purpose of entering into the Merger Agreement and consummating the transactions contemplated thereby. If the Merger is completed, the Company’s common stock will no longer be publicly traded and the Company will become a privately-held company owned entirely by the Purchaser Stockholders.

     Pursuant to the terms of the Merger Agreement, the stockholders of the Company will receive $1.50 in cash for each outstanding share of the Company’s common stock. Outstanding options to purchase shares of the Company’s common stock will be canceled and each holder of such options will receive $1.50 per share minus the exercise price of the options, but only to the extent that the exercise price is lower than $1.50. Notwithstanding, the Purchaser Stockholders have agreed, pursuant to their settlement with the plaintiffs in the litigation challenging the Merger, that they will receive the cash merger consideration for no more than 20% of their shares of Lexent common stock. In addition, the Purchaser Stockholders do not hold any options that have an exercise price that is less than $1.50, so they will not receive any consideration upon the cancellation of their options. The Purchaser Stockholders have not yet determined the precise number of shares beneficially owned by them that they will cause to be converted

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LEXENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)

into the right to receive the merger consideration in the merger. Based on the 20% limitation, they are expected to receive no more than approximately $6.3 million in the aggregate, in connection with the Merger with respect to their shares of Lexent common stock not contributed to the Purchaser.

     The closing of the Merger is subject to various conditions, including that the Amended Stipulation of Settlement entered into on September 9, 2003, by the Company, Hugh J. O’Kane, Jr., Kevin M. O’Kane and the plaintiffs named in the lawsuits consolidated under the caption In re Lexent Inc. Shareholders Litigation and filed with the Court of Chancery of the State of Delaware, is in full force and effect, approval of the transaction by stockholders of the Company representing a majority of the shares of common stock actually voted on the transaction (other than shares owned by the Purchaser or the Purchaser Stockholders), regulatory approvals, absence of any pending or threatened litigation related to the transaction and other customary conditions to closing, and there can be no assurance that the conditions to closing will be satisfied or that the Merger will be completed.

     The Company has filed preliminary proxy materials with the Securities and Exchange Commission for a special meeting of the Company’s stockholders to vote on the Merger.

     The Company’s Board of Directors, which consists entirely of the Purchaser Stockholders, approved the Merger Agreement and the Merger. In reaching its decision to approve the Merger Agreement and the Merger, the Board of Directors considered the opinion of Rodman & Renshaw, Inc., a New York based investment banking firm and the Company’s independent financial advisor, that, as of July 9, 2003, the $1.50 per share merger consideration is fair, from a financial point of view, to the Company’s stockholders, other than the Purchaser Stockholders and their affiliates.

     On November 5, 2003 the Company and the Purchaser entered into a First Amendment to Agreement and Plan of Merger to extend the termination date under the Merger Agreement to December 31, 2003.

8. CONTINGENCIES

     From time to time, the Company is involved in various suits and legal proceedings, which arise in the ordinary course of business.

     On February 15, 2003 through February 28, 2003, in response to the announcement by the Company of its receipt of an offer from Hugh J. O’Kane, Jr., the Company’s Chairman, and Kevin M. O’Kane, the Company’s Chief Executive Officer and Vice Chairman, to purchase all outstanding shares of common stock of the Company (other than those owned by Hugh J. O’Kane, Jr. and Kevin M. O’Kane) at $1.25 per share, six putative class actions were filed in the Court of Chancery for the State of Delaware. All of the lawsuits named Lexent Inc., Hugh J. O’Kane, Jr. and Kevin M. O’Kane as defendants. One of the lawsuits also named, as defendants, several former members of Lexent’s Board of Directors. The suits alleged, inter alia, that the offer was unfair and inadequate, the buying group had engaged in self-dealing and had not acted in good faith, and that the Company and its Board of Directors, present and former, had breached their fiduciary duty to shareholders.

     By order dated April 7, 2003, the court consolidated the class actions under the caption In re Lexent Inc. Shareholders Litigation, Cons. C.A. No. 20177. The complaint adopted in the consolidated action named only Lexent Inc., Hugh J. O’Kane, Jr. and Kevin M. O’Kane as defendants. The plaintiffs seek various forms of relief, including but not limited to, damages and enjoining the Company and the Purchaser Stockholders from proceeding with, consummating or closing the proposed merger.

     On June 17, 2003, Lexent publicly announced an agreement in principle among Lexent, Hugh J. O’Kane, Jr., Kevin M. O’Kane and the plaintiffs named in the lawsuits consolidated under the caption In re Lexent Inc. Shareholders Litigation. Under the proposed terms of the settlement, the Purchaser Stockholders agreed, among other things, to raise the per share merger consideration to $1.50 per share.

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LEXENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)

     On August 6, 2003, the Company, Hugh J. O’Kane, Jr., Kevin M. O’Kane and the plaintiffs named in the lawsuits consolidated under the caption In re Lexent Inc. Shareholders Litigation filed a Stipulation of Settlement with the Court of Chancery of the State of Delaware.

     On September 9, 2003, the Company, Hugh J. O’Kane, Jr., Kevin M. O’Kane and the plaintiffs named in the lawsuits consolidated under the caption In re Lexent Inc. Shareholders Litigation filed an Amended Stipulation of Settlement with the Court of Chancery of the State of Delaware.

     Pursuant to the settlement, the plaintiffs (on their own behalf and on behalf of a class of holders of Lexent common stock) agreed to dismiss the litigation and release the defendants from all related claims. In exchange, as previously announced, the defendants, without admitting any liability, agreed to, among other things, (i) raise the consideration to be paid in the proposed merger to $1.50 per share and (ii) condition the approval of the proposed merger on the receipt of the vote of a majority of shares of Lexent common stock actually voted with respect to the adoption and approval of the merger agreement and the proposed merger (other than shares held by Purchaser and the Purchaser Stockholders).

     On October 15, 2003, the Court of Chancery of the State of Delaware issued an order determining that the settlement is fair, reasonable, and adequate to the holders of Lexent common stock (other than Purchaser and the Purchaser Shareholders). The Court of Chancery of the State of Delaware further awarded plaintiffs’ attorneys fees and expenses in the aggregate amount of $500,000. In the event that the stockholders of the Company approve the proposed Merger and the proposed Merger is completed, plaintiffs’ court-approved attorneys’ fees and expenses will be paid by the Company.

     As indicated in previous filings, a shareholder class action lawsuit was 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. The complaint alleged 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 was one of a number of initial public offering securities claims against approximately 308 other issuers and underwriters. For the purpose of coordination, the suits were consolidated as In re Initial Public Offering Securities Litigation, 21 MC 92 (SAS) (the “IPO Litigation”). On June 26, 2003, the plaintiffs’ executive committee, responsible for coordinating and managing the IPO Litigation for all plaintiffs, announced a proposed settlement between plaintiffs, on the one hand, and the issuer defendants and their respective officer and director defendants, including Lexent Inc. and its named officers and directors, on the other. The proposed settlement does not resolve plaintiffs’ claims against the underwriter defendants. A memorandum of understanding to settle plaintiffs’ claims against the issuers and their directors and officers has been approved as to form by counsel for the issuers and the process of obtaining individual approval by each of the other 308 issuer defendants has begun. On July 9, 2003, the Company elected to adopt the plaintiffs’ settlement proposal set forth in the memorandum of understanding. The principal components of the proposed settlement include: (i) a release of all plaintiffs’ claims against the issuer defendants and their officers and directors which have, or could have, been asserted in the IPO Litigation arising out of the conduct alleged in the complaints to be wrongful; (ii) the assignment by the issuers to the plaintiffs of certain potential claims against the underwriter defendants and the agreement by the issuers not to assert certain claims against the underwriter defendants; and (iii) an undertaking by the insurers of the issuer defendants to pay to plaintiffs the difference between $1 billion and any lesser amount recovered by plaintiffs from the underwriter defendants in the IPO Litigation. If recoveries in excess of $1 billion are obtained by plaintiffs from the underwriters, the insurers of the settling issuer defendants will owe no money to the plaintiffs. The plaintiffs’ proposed settlement is contingent upon a substantial majority of the issuer defendants entering into the settlement and is further subject to approval by the Court.

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LEXENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)

     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.

9. STOCK OPTIONS AND AWARDS

     During the nine months ended September 30, 2003, no options were granted to purchase common shares, 767,065 options were terminated and expired and 120,626 options were exercised. As of September 30, 2003, options to purchase 4,238,076 common shares were outstanding.

     Deferred stock-based compensation is recorded for options and restricted stock grants for which the exercise or sale prices are lower than the deemed fair values for financial reporting purposes of the underlying common stock on the grant date. Deferred stock-based compensation also includes the fair value at grant date of options granted to non-employees and options which were remeasured to fair value on the date optionees’ status was changed from employee to consultant. Deferred stock-based compensation is amortized to expense over the vesting term of the options. To the extent that unvested options are forfeited, the balance of unamortized deferred stock-based compensation is reversed.

     During the nine months ended September 30, 2003, no deferred stock-based compensation was recorded and $0.1 million was recorded during the nine months ended September 30, 2002. Also during the nine months ended September 30, 2003 and 2002, $0.01 million and $3.8 million, respectively, was reversed for unvested options, which were forfeited.

     Amortization of deferred stock-based compensation was $0.5 million and $0.8 million for the three months ended September 30, 2003 and 2002, respectively, and $1.6 million and $2.5 million for the nine months ended September 30, 2003 and September 30, 2002, respectively. Deferred tax benefits were $0.2 million and $0.1 million for the three months ended September 30, 2003 and 2002, respectively and $0.5 million and $0.3 million for the nine months ended September 30, 2003 and 2002, respectively, in connection with amortization of deferred stock-based compensation for nonqualified options. With respect to such deferred tax benefits, to the extent that 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 the nine months ended September 30, 2003 and 2002, $0.2 million and $2.4 million of deferred tax assets was charged to expense in connection with forfeited

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LEXENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)

options, respectively. For the nine months ended September 30, 2003 such charges were offset by a corresponding reduction in the deferred tax asset valuation allowance.

     In December 2002, the Financial Accounting Standards Board (“FASB”), issued Statement of Accounting Standards No. (“SFAS”) 148, “Accounting for Stock-Based Compensation — Transition Disclosure, An Amendment of FASB Statement No. 123”. This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of Statement No. 123 to require more prominent and more frequent disclosures in financial statements about the effects of the stock-based compensation. The provisions of SFAS 148 are effective for fiscal years ending after December 15, 2002. The adoption did not have a material impact on the Company’s results of operations or financial position and the additional required disclosures have been provided below.

     The Company applies the Accounting Principles Board Opinion No. (“APB”) 25 “Accounting for Stock Issued to Employees,” and related interpretations, in accounting for its stock-based compensation plans. Accordingly, no compensation costs have been recognized for its stock option plans and its stock purchase plan. Had compensation cost for the Company’s stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with SFAS 123, the Company’s net loss and loss per share would have been increased to the pro forma amounts indicated below:

10. 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 were 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 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 2002, 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.

     A summary of the restructuring reserve at September 30, 2003, is as follows:

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LEXENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)

11. DEFERRED INCOME TAXES

     Statement of Financial Accounting Standards No. 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 at December 31, 2002. The Company is continuing 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. For the nine months ended September 30, 2003, the Company recorded a charge to the provision for income taxes of approximately $56,000 which included payments for state and local taxes.

12. RECENT ACCOUNTING PRONOUNCEMENTS

     In December 2002, the Financial Accounting Standards Board (“FASB”), issued Statement of Accounting Standards No. (“SFAS”) 148, “Accounting for Stock-Based Compensation — Transition Disclosure, An Amendment of FASB Statement No. 123”. This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of Statement No. 123 to require more prominent and more frequent disclosures in financial statements about the effects of the stock-based compensation. The provisions of SFAS 148 are effective for fiscal years ending after December 15, 2002. The Company adopted SFAS 148 during the quarter ended December 31, 2002. The adoption did not have a material impact on the Company’s results of operations or financial position and the additional required disclosures are provided in Note 9 of “Notes to Condensed Consolidated Financial Statements”.

     In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). FIN 46 clarifies the application of Accounting Research Bulletin No. 51 and applies immediately to any variable interest entities created after January 31, 2003 and to variable interest entities in which an interest is obtained after that date. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The Company believes that the adoption of FIN 46 will not have a material impact on the Company’s consolidated financial position and results of operations.

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ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following discussion and analysis provides information that should be read in conjunction with the historical condensed consolidated financial statements, including the notes thereto, included elsewhere in this Form 10-Q.

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, 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, 7 days a week.

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

     We have offices in New York City, Washington D.C. metro, Boston metro, Long Island, and in the states of Florida, North Carolina and New Jersey.

     Our two largest customers for the nine months ended September 30, 2003 were AT&T and a general contractor in the NY metro area. We generated 19% and 10%, respectively, of our revenues from each of these customers for the nine months ended September 30, 2003. Some of our key customers include IBM, Con Edison, general contractors in the New York metro area, and the Dormitory Authority of the State of New York.

     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.

     In August of 2002, Lexent Metro Connect (“LMC”) entered into a 15-year 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. As compensation for the franchise, LMC is obligated to pay the City of New York, a franchise fee. The franchise fee commencement date is the completion of the initial backbone or August 2004. The franchise fee is 5% of gross revenue per year, with a minimum of $200,000 per year. The initial backbone will be completed in the fourth quarter of 2003.

     In May 2003, LMC entered into a 20-year agreement with a New York State based non-profit organization to lease dark fiber capacity on a dark fiber network that LMC will install throughout certain parts of New York City. The dark fiber network will be connected to various educational and research institutions throughout New York City who are customers of the non-profit organization. Under the terms of the lease, LMC will fund the costs related to construction of the dark fiber network and connection costs and shall recover these costs through lease payments paid by the non-profit organization over the 20-year

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lease period. The net cash commitment that LMC will recover over the 20-year lease period is approximately $4 million.

     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 its independent directors, Lexent did not meet the independent director and audit committee requirements for continued listing on the Nasdaq National Market. Because Lexent was not able to regain compliance with the independent director and audit committee requirements for continued listing on the Nasdaq Stock Market, the Nasdaq Listing Qualifications Panel made a determination to delist Lexent’s common stock from The Nasdaq National Market effective with the opening of business on June 26, 2003. As of such date, Lexent’s common stock began trading on the OTC Bulletin Board under the same symbol, “LXNT”.

     On July 9, 2003, the Company executed an Agreement and Plan of Merger between LX Merger Corp. and the Company, pursuant to which LX Merger Corp. will merge with and into the Company and the Company will be the surviving corporation. See “Item 5 — Other Information.”

     On August 6, 2003, the Company, Hugh J. O’Kane, Jr., Kevin M. O’Kane and the plaintiffs named in the lawsuits consolidated under the caption In re Lexent Inc. Shareholders Litigation filed a Stipulation of Settlement with the Court of Chancery of the State of Delaware. See “Item 5 — Other Information.”

     On September 9, 2003, the Company, Hugh J. O’Kane, Jr., Kevin M. O’Kane and the plaintiffs named in the lawsuits consolidated under the caption In re Lexent Inc. Shareholders Litigation filed an Amended Stipulation of Settlement with the Court of Chancery of the State of Delaware. See “Item 5-Other Information.”

CRITICAL ACCOUNTING POLICIES

     Please refer to the description of our “Critical Accounting Policies” in the Management’s Discussion and Analysis section of our Form 10-K for the year ended December 31, 2002.

RESULTS OF OPERATIONS

THIRD QUARTER 2003 COMPARED TO THIRD QUARTER 2002

     Revenues. Our revenues were $27.7 million for the three months ended September 30, 2003 and September 30, 2002.

     Cost of revenues. Our cost of revenues represented 112% of revenues in the third quarter of 2003 compared with 123% of revenues in the same period last year. The decrease is attributed to the reduction of the establishment of job loss provisions due to revisions in certain electrical contracting projects, and the decrease in overhead expenses.

     General and administrative expenses. Our general and administrative expenses decreased 52% to $2.2 million in the third quarter 2003 from $4.6 million in the same period last year. The decrease is the net effect of a decrease in wages and benefits, facilities expenses, bad debt provision, travel and entertainment expenses, office expenses offset against an increase in insurance expenses, and legal fees.

     Depreciation and amortization: Our depreciation and amortization expense decreased to $0.5 million in the third quarter of 2003 from $1.2 million in the same period of last year. 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 $0.5 million in the third quarter of 2003 from $0.8 million in the same period of last year. The

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decrease was attributed to the decrease in the unamortized balance of non-cash stock-based compensation as a result of resignations, terminations and fully amortized balances.

     Interest expense. Interest expense in the third quarter of 2003 was $0.02 million compared to $0.06 million in the same period last year. The decrease was due primarily to lower average outstanding balances on equipment and vehicle loans and a subordinated note payable to a stockholder.

     Provision for income taxes. Based upon our performance in the past few years and the current challenging economic environment that has negatively impacted our operating results, we have established a full valuation allowance to fully offset deferred tax assets, including those related to tax carryforwards, at December 31, 2002 and to date, resulting in no income tax benefit for financial reporting purposes for the three months ended September 30, 2003.

NINE MONTHS 2003 COMPARED TO NINE MONTHS 2002

     Revenues. Our revenues decreased by 25.2% to $68.9 million in the first nine months of 2003, from $92.2 million for the same period last year. 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 the completion of the engineering, procurement and construction contract in the fourth quarter of 2002.

     Cost of revenues. Our cost of revenues represented 109% of revenues in the nine months ended September 30, 2003, compared with 103% of revenues in the same period last year. The increased percentage was due in part to the fixed overhead costs, which represented a higher percentage of a lower level of revenues, to the inclement weather causing a decrease in productivity and delays in completing projects.

     General and administrative expenses. Our general and administrative expenses decreased 32% to $8.9 million for the nine months of 2003 from $13.1 million in the same period last year. The decrease is attributed to a reduction in wages and related benefits as a result of a headcount reduction, a reduction in rent and facilities expenses, a reduction in the bad debt provision, a reduction in board of directors fees, reduction in entertainment expenses and a reduction in office expenses offset against an increase in legal and insurance expenses.

     Depreciation and amortization: Our depreciation and amortization expense decreased to $1.5 million for the nine months ended September 30, 2003 from $3.8 million in the same period of last year. 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 $1.6 million for the nine months ended September 30, 2003 from $2.5 million in the same period of last year. The decrease was attributed to the decrease in the unamortized balance of non-cash stock-based compensation as a result of resignations, terminations and fully amortized balances.

     Interest expense. Interest expense for the nine months ended September 30, 2003 was $0.08 million compared to $0.2 million in the same period last year. The decrease was due primarily to lower average outstanding balances on equipment and vehicle loans and a subordinated note payable to a stockholder.

     Provision for income taxes. Based upon our performance in the past few years and the current challenging economic environment that has negatively impacted our operating results, we have established a full valuation allowance to fully offset deferred tax assets, including those related to tax carryforwards, at December 31, 2002 and to date, resulting in no income tax benefit for financial reporting purposes for the nine months ended September 30, 2003. Additionally, in 2003, we recorded a charge to the provision of approximately $56,000 which included payments for state and local taxes.

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Liquidity and Capital Resources

     Net cash used in operations was $5.8 million for the nine months ended September 30, 2003. Cash provided by investing activities was $40.9 million, representing $43.2 million of proceeds from available-for-sale investments, offset by $2.3 million for capital expenditures. Net cash used in financing activities was $1.5 million, comprised of repayments of $0.4 million for equipment and capital leases and $1.1 million of repayments on a subordinated note payable to a stockholder.

     We have no material commitments other than installment obligations related to equipment purchases, leases for facilities, computer equipment and vehicles, franchise fees to the City of New York, investments into LMC to fund the capital requirements related to the construction of the fiber optic network 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.

     In connection with the restructuring plan initiated during 2001, we recorded restructuring charges of $9.1 million during the year ended December 31, 2002. These charges primarily related to the expense associated with certain lease obligations, the write-offs of property, equipment and leasehold improvements, and severance costs related to our organizational restructuring, partially offset by the reduction to the 2001 accrual for restructuring costs. Refer to our audited consolidated financial statements and notes thereto for the year ended December 31, 2002 for further details and components of these charges. During the nine months ended September 30, 2003, we had cash outflows of approximately $2.7 million, related to the expenses associated with certain lease obligations, property equipment and leasehold improvements and severance that were accrued for as of December 31, 2002. The current accrued liability for additional cash outflows, related to the expense associated with certain lease obligations and severance are payable as follows: $1.3 million throughout the remainder of 2003, $1.4 million during 2004, $1.2 million during 2005, $0.7 million during 2006, $0.8 million during 2007, 2008, 2009 and 2010, and $0.1 million during 2011.

Impact of Recently Issued Accounting Standards

     In December 2002, the Financial Accounting Standards Board (“FASB”), issued Statement of Accounting Standards No. (“SFAS”) 148, “Accounting for Stock-Based Compensation — Transition Disclosure, An Amendment of FASB Statement No. 123”. This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of Statement No. 123 to require more prominent and more frequent disclosures in financial statements about the effects of the stock-based compensation. The provisions of SFAS 148 are effective for fiscal years ending after December 15, 2002. We adopted SFAS 148 during the quarter ended December 31, 2002. The adoption did not have a material impact on our results of operations or financial position and the additional required disclosures are provided in Note 9 of “Notes to Condensed Consolidated Financial Statements”.

     In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). FIN 46 clarifies the application of Accounting Research Bulletin No. 51 and applies immediately to any variable interest entities created after January 31, 2003 and to variable interest entities in which an interest is obtained after that date. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after September 15, 2003. We believe that the adoption of FIN 46 will not have a material impact on our consolidated financial position and results of operations.

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FORWARD LOOKING STATEMENTS

     This Quarterly Report on Form 10-Q 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. These risks are more fully outlined in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 and other SEC filings. The forward-looking statements included herein are made only as of the date of this Quarterly Report on Form 10-Q and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. No assurances can be given that projected results or events will be achieved.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

     Financial instruments, which potentially subject the Company to credit risk, consist primarily of cash, cash equivalents, available-for-sale investments, 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 the nine months ended September 30, 2003, the Company had revenues from two separate customers, which comprised 19% and 10%, respectively, of the Company’s total revenues.

     We currently do not own any investments in publicly traded equity securities. Therefore, we do not currently have any direct equity market price risk.

     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 4. Controls and Procedures

(a)

Disclosure controls and procedures. As of the end of the Company’s most recently completed fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) covered by this report, the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15. Based upon the evaluation, the Company’s Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in

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the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported, within the time period specified in the SEC’s rules and forms.

(b)

Changes in internal controls over financial reporting. There have been no changes in the Company’s internal controls over financial reporting that occurred during the Company’s last fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. Legal Proceedings

     See Note 8 to the unaudited interim condensed consolidated financial statements.

ITEM 5. Other Information

Execution of Merger Agreement

     On July 9, 2003, the Company executed an Agreement and Plan of Merger (the “Merger Agreement”) between LX Merger Corp. (“Purchaser”) and the Company pursuant to which Purchaser will merge with and into the Company and the Company will be the surviving corporation (the “Merger”). Purchaser is a newly formed corporation owned by Hugh J. O’Kane, Jr., Chairman of the Board of Lexent, and Kevin M. O’Kane, Chief Executive Officer and Vice Chairman of the Board of Lexent (together, the “Purchaser Stockholders”) and organized for the sole purpose of entering into the Merger Agreement and consummating the transactions contemplated thereby. If the Merger is completed, the Company’s common stock will no longer be publicly traded and the Company will become a privately-held company owned entirely by the Purchaser Stockholders.

     Pursuant to the terms of the Merger Agreement, the stockholders of the Company will receive $1.50 in cash for each outstanding share of the Company’s common stock. Outstanding options to purchase shares of the Company’s common stock will be canceled and each holder of such options will receive $1.50 per share minus the exercise price of the options, but only to the extent that the exercise price is lower than $1.50. Notwithstanding, the Purchaser Stockholders have agreed, pursuant to their settlement with the plaintiffs in the litigation challenging the Merger, that they will receive the cash merger consideration for no more than 20% of their shares of Lexent common stock. In addition, the Purchaser Stockholders do not hold any options that have an exercise price that is less than $1.50, so they will not receive any consideration upon the cancellation of their options. The Purchaser Stockholders have not yet determined the precise number of shares beneficially owned by them that they will cause to be converted into the right to receive the merger consideration in the merger. Based on the 20% limitation, they are expected to receive no more than approximately $6.3 million in the aggregate, in connection with the Merger with respect to their shares of Lexent common stock not contributed to the Purchaser.

     The closing of the Merger is subject to various conditions, including that the Amended Stipulation of Settlement entered into on September 9, 2003, by the Company, Hugh J. O’Kane, Jr., Kevin M. O’Kane and the plaintiffs named in the lawsuits consolidated under the caption In re Lexent Inc. Shareholders Litigation and filed with the Court of Chancery of the State of Delaware, is in full force and effect, approval of the transaction by stockholders of the Company representing a majority of the shares of common stock actually voted on the transaction (other than shares owned by the Purchaser or the Purchaser Stockholders), regulatory approvals, absence of any pending or threatened litigation related to the transaction and other customary conditions to closing, and there can be no assurance that the conditions to closing will be satisfied or that the Merger will be completed.

     The Company has filed preliminary proxy materials with the Securities and Exchange Commission for a special meeting of the Company’s stockholders to vote on the Merger.

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     The Company’s Board of Directors, which consists entirely of the Purchaser Stockholders, approved the Merger Agreement and the Merger. In reaching its decision to approve the Merger Agreement and the Merger, the Board of Directors considered the opinion of Rodman & Renshaw, Inc., a New York based investment banking firm and the Company’s independent financial advisor, that, as of July 9, 2003, the $1.50 per share merger consideration is fair, from a financial point of view, to the Company’s stockholders, other than the Purchaser Stockholders and their affiliates.

     On November 5, 2003 the Company and the Purchaser entered into a First Amendment to Agreement and Plan of Merger to extend the termination date under the Merger Agreement to December 31, 2003.

Execution of Stipulation of Settlement

     On August 6, 2003, the Company, Hugh J. O’Kane, Jr., Kevin M. O’Kane and the plaintiffs named in the lawsuits consolidated under the caption In re Lexent Inc. Shareholders Litigation filed a Stipulation of Settlement with the Court of Chancery of the State of Delaware.

     On September 9, 2003, the Company, Hugh J. O’Kane, Jr., Kevin M. O’Kane and the plaintiffs named in the lawsuits consolidated under the caption In re Lexent Inc. Shareholders Litigation filed an Amended Stipulation of Settlement with the Court of Chancery of the State of Delaware. The Amended Stipulation of Settlement served to revise the description of the consideration to be received by Lexent option holders in the proposed “going private” transaction to clarify that each outstanding Lexent option, whether or not presently exercisable, will be accelerated, if necessary, and canceled in consideration for a cash amount equal to the product of (i) the excess, if any, of the $1.50 merger consideration per share over the applicable exercise price and (ii) the number of shares subject to such option. It further clarifies that to the extent that the exercise price of such option is greater than or equal to $1.50, such option will be terminated and canceled without consideration. The original Stipulation of Settlement indicated that only vested options that were in-the-money would be cashed out.

     Pursuant to the settlement, the plaintiffs (on their own behalf and on behalf of a class of holders of Lexent common stock) agreed to dismiss the litigation and release the defendants from all related claims. In exchange, as previously announced, the defendants, without admitting any liability, agreed to, among other things, (i) raise the consideration to be paid in the proposed merger to $1.50 per share and (ii) condition the approval of the proposed merger on the receipt of the vote of a majority of shares of Lexent common stock actually voted with respect to the adoption and approval of the merger agreement and the proposed merger (other than shares held by Purchaser and the Purchaser Stockholders).

     On October 15, 2003, the Court of Chancery of the State of Delaware issued an order determining that the settlement is fair, reasonable, and adequate to the holders of Lexent common stock (other than Purchaser and the Purchaser Shareholders). The Court of Chancery of the State of Delaware further awarded plaintiffs’ attorneys fees and expenses in the aggregate amount of $500,000. In the event that the stockholders of the Company approve the proposed Merger and the proposed Merger is completed, plaintiffs’ court-approved attorneys’ fees and expenses will be paid by the Company.

ITEM 6. Exhibits and Reports on Form 8-K

Exhibits:

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Reports:

Reports on Form 8-K

     On July 1, 2003, the Company filed a Form 8-K for the delisting of the Company’s common stock from the Nasdaq National Market effective with the open of business on June 26, 2003 and the resignation of Norman G. Fornella as the Chief Financial Officer and the assumption of the Chief Financial Officer responsibilities by Bruce Levy the Company’s President and the Chief Operating Officer.

     On July 11, 2003, the Company filed a Form 8-K for the signing of an Agreement and Plan of Merger between LX Merger Corp. and the Company.

     On July 31, 2003, the Company filed a Form 8-K furnishing second quarter 2003 operating results.

     On August 12, 2003, the Company filed a Form 8-K announcing that Lexent Inc., Hugh J. O’Kane, Jr., Kevin M. O’Kane and the plaintiffs named in the lawsuits consolidated under the caption In re Lexent Inc. Shareholders Litigation entered into and filed a Stipulation of Settlement with the Court of Chancery of the State of Delaware.

     On September 9, 2003, the Company filed a Form 8-K announcing that Lexent Inc., Hugh J. O’Kane, Jr., Kevin M. O’Kane and the plaintiffs named in the lawsuits consolidated under the caption In re Lexent Inc. Shareholders Litigation entered into and filed an Amended Stipulation of Settlement with the Court of Chancery of the State of Delaware.

     On October 14, 2003, the Company filed a Form 8-K announcing the resignation of Victor P. DeJoy, Sr., an Executive Vice President of Lexent Inc.

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SIGNATURES

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

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