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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

FiberNet Telecom Group, Inc.
(Name of Registrant in Its Charter)

(212) 405-6200
(Issuer’s Telephone Number, Including Area Code)

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.001 per share

(Title of Class)

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

     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 definite proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

     The aggregate market value of the registrant’s voting stock held by non-affiliates of the registrant (without admitting that any person whose shares are not included in such calculation is an affiliate) on June 30, 2002, was $2,961,374, based on the last sale price as reported by the Nasdaq National Market System.

     The number of shares outstanding of the registrant’s common stock, as of March 20, 2003, was 1,048,712,926 shares of Common Stock, $.001 par value.

     Check whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

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PART I

Overview

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

Industry Background

Over the past several years, there has been significant growth in the use of communications services, including Internet access, electronic commerce, streaming video and virtual private networks. As a result of the deregulation of the communications industry, these broadband applications are being provided by a number of new service providers. This increase in bandwidth intensive data applications and providers of these services has resulted in additional demand for transmission capacity on communications networks and additional capacity to the national and international telecom infrastructure. In addition, more businesses are relying on communications services to conduct mission critical operations, increasing the need for greater network reliability, security and speed.

In the past two years, however, general economic weakness has severely impacted the telecommunications industry in particular. The expected demand for broadband connectivity has not been realized in many segments of the market.  Although applications for additional telecommunications network capacity have been developed, the actual demand for capacity from those applications has not met industry expectations, and significant excess capacity has depressed the market for communications services.  As a result there has been an industry-wide slowdown in capital spending and a large number of industry-related bankruptcy filings, which have contributed to the financial distress that many companies in the telecommunications industry are currently experiencing.

The deployment of communications network infrastructure consists of two separate segments.

Long-Haul Networks. Expected demand for transmission capacity was initially focused between metropolitan areas. As a result, long-haul fiber-optic networks were built to function as transport links for vast amounts of traffic between metropolitan locations worldwide. Communications traffic is aggregated at the core of metropolitan networks and transferred onto long-haul networks for transmission to other metropolitan points. These long-haul networks typically terminate at carrier hotels in metropolitan locations, where traffic is routed onto local metropolitan networks.  This segment of the market has been subject to the most severe downturn in the industry.

Local Loop Networks. The role of networks in metropolitan areas is to transport large volumes of traffic delivered by long-haul networks, as well as traffic generated in the local loop, between carrier interconnection points and end-user locations. Existing metropolitan networks mainly consist of copper infrastructure installed by incumbent local exchange carriers, or ILECs, and regional Bell operating companies, or RBOCs. These legacy networks were built for voice traffic and cannot support the volumes of data intensive traffic being generated in the local loop. In contrast to this legacy infrastructure, many sophisticated end-users of communications services, like tenants within commercial offices, have deployed high-capacity local area networks, or LANs, which have abundant network capacity.

There are numerous technically complex issues involved in building out local loop networks to increase capacity

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and extend connectivity in metropolitan areas:

These complexities have impeded the deployment of additional bandwidth capacity in the local loop. As a result, an opportunity arose in many major metropolitan areas to provide sufficient network capacity starting at the carrier interconnection point, which is the entry point to the local loop, and extending all the way to the tenants’ LANs in office buildings.

Needs of Telecommunications Service Providers in Major Metropolitan Areas

Service providers are seeking a local loop network that allows them to rapidly and cost-effectively interconnect their networks with each other and to provide their communications services to end-users. In particular, they seek:

End-to-End Connectivity to Multiple Locations. Service providers establish points of presence for their networking equipment in carrier hotels in metropolitan areas.  Because of the myriad of national and international telecommunications networks, the number of points of presence in major gateway markets is extensive.  Network connectivity must extend directly to a significant number of these points of presence so that service providers may efficiently exchange communications traffic.  In addition, service providers need to connect directly to the end-users of their communications services. 

Carrier Neutral Transport Services. Traditionally, service providers have relied on ILECs and RBOCs for metropolitan connectivity, also known as transport. However, in addition to providing network transport, both the ILECs and RBOCs provide communications services directly to end-users. This puts service providers at a competitive disadvantage. Unless these service providers undertake the time-consuming and costly construction of their own proprietary networks, they are dependent on their competitors’ networks for transport.

Reliable, High-Capacity Network. Service providers desire a broadband network with the robust transmission capacity to maximize the speed of their services and with a reliable quality of service to ensure the delivery of their traffic. Further, in order to offer a full range of services, providers are seeking a network that can incorporate multiple transmission protocols and new technologies.

Rapid Provisioning of Services. Service providers need a network provider that has deployed an extensive, ubiquitous network and the necessary advanced network management systems to rapidly provision circuits.  One alternative for connectivity in metropolitan areas is dark fiber, which is inoperative until lit by installing optical networking equipment. Lighting dark fiber can be expensive and time consuming. Service providers can significantly decrease the time and cost to provision interconnections and services to end-users by obtaining capacity from a network provider that offers lit network capacity.

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Our Solution

We are focused on owning and operating advanced, broadband networks that provide superior carrier neutral capacity to service providers in metropolitan areas. We design, install and operate local loop networks to provide wholesale end-to-end, broadband connectivity that is scalable, reliable and secure. We also enter into strategic agreements with building owners and managers pursuant to which we manage the communications access and infrastructure in their buildings. The following are key elements of our solution:

Full Range of Services. In our markets, our carrier point facilities, metropolitan transport networks and FiberNet in-building networks, or FINs, will offer service providers cost-effective access to complete optical and electrical local loop networks. Our carrier-to-carrier transport services provide fiber-optic connectivity to carriers between and within carrier hotels. Our carrier-to-customer transport services provide fiber-optic transport between carrier points and on-net buildings in which we have deployed our FINs. By offering both of these transport services, we believe that we can meet a service providers’ end-to-end connectivity needs.

We also offer colocation services at certain of our carrier point facilities and on-net and off-net buildings. Colocation refers to the ability of a carrier to locate its networking equipment in another carrier’s facilities. These colocation facilities provide service providers with a network interconnection point where they can terminate their traffic and transfer it onto our high-capacity networks.

In addition, we provide access management services to certain property owners and managers of buildings that are not on our metropolitan transport network, which we refer to as our off-net buildings. In these buildings we deploy network infrastructure and coordinate service providers’ access to that infrastructure.

Extensive Network Reach.  We have deployed significant network infrastructure in our gateway markets to establish connectivity to an extensive number of service providers, enabling us to exchange traffic between many other carriers.  The reach of our network, particularly our vertical infrastructure in carrier hotels, is a competitive advantage in that our carrier customers are able to interconnect with many other carriers’ networks through a single interconnection with our network. 

Network Architecture. In order to provide high quality local loop network services to our customers, we have deployed what we believe to be an advanced optical and electrical local loop network architecture. Features of this network architecture include:

Rapid Provisioning of Services. Our optical local loop network gives us the ability to provision new circuits in as little as eight business days through our centralized network operations center, or NOC. As a result, we are able to allocate network capacity rapidly to meet our customers’ growing bandwidth requirements. Our customers can order capacity with minimal lead time enabling them to quickly provision new services. We believe that this provisioning capability is a key factor in our customers’ decisions to order our services.

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Our Strategy

Our goal is to be the preferred facilities-based provider of wholesale metropolitan fiber-optic network capacity in our markets. We intend to serve select, commercial office properties and major carrier hotels in our markets with carrier neutral, end-to-end, optical connectivity that enables our customers to provide next generation services and applications to end-users and to rapidly interconnect their own networks. Our strategy for achieving these goals includes the following key elements:

Establish our position as a leading provider of connectivity to carrier hotels. We have deployed fiber optic transport infrastructure in seven major carrier hotels in New York City, two major carrier hotels in New Jersey, one major carrier hotel on Long Island, and five major carrier hotels in Los Angeles. By establishing our presence in multiple carrier hotels, we hope to expand the geographic reach of our networks and increase the size of our addressable market. In addition, this presence increases our ability to interconnect with other service providers, thereby increasing our potential customer base and revenue opportunities with existing customers.

Strengthen and expand upon our relationships with customers. We believe that our local loop end-to-end fiber-optic connectivity is a compelling service offering to our carrier customers. We intend to promote:

We believe that due to our wholesale strategy we have a broader potential customer base than our competitors. Our potential customers include ILECs, RBOCs, competitive local exchange carriers, or CLECs, BLECs, inter-exchange carriers, or IXCs, Internet service providers, or ISPs, application service providers, or ASPs, post telephone & telegraph administrators, or PTTs, and integrated communications providers, or ICPs. We intend to strengthen our relationships with our existing customers and actively market our service offerings to this broad range of customers. As of December 31, 2002, we had 104 customers, including 360networks, AT&T, Bell Nexxia, BellSouth, British Telecom, Entel Chile, Equant, FLAG Telecom, France Telecom, Hanaro Telecom, NTT America, Qwest, Sprint, SwissFone, T-Systems (formerly Deutsche Telekom), Universal Access, Verizon, Winstar, and Wiltel Communications.

Develop the platforms that enable our customers to offer new revenue-generating communications services to their end-users. We believe that as technology continues to develop, there will potentially be opportunities for our customers to provide new services. To keep pace with this anticipated demand, we will continue to ensure that our network architecture provides the connectivity, scalability, performance and flexibility necessary for the rapid introduction of new services. We regularly test equipment with the intention of adopting new technologies that can be integrated into our networks to improve performance and decrease the cost of operating our network.

Our Services

Our services are designed to provide communications transport and colocation within our markets, and communications access management and infrastructure in markets nationwide:

 Transport

Our transport services consist of T-1 through OC-192 circuits, E-1 through STM-64 circuits, 10 Base-T, 100 Base-T and gigabit Ethernet connections and optical wavelengths. We also offer vertical dark fiber in certain of our carrier hotel facilities and our on-net and off-net buildings.

Carrier-to-Carrier Transport. We provide carrier-to-carrier transport by building optical transport facilities within and between carrier hotels. We offer carrier-to-carrier connectivity ranging from transport between floors of a carrier hotel, to comprehensive connectivity between carrier hotels within a metropolitan area.

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Carrier-to-Customer Transport. Our carrier-to-customer transport services provide our customers with connectivity from the carrier hotels where their communications traffic is aggregated to their end-user customers in our on-net commercial buildings. We transport their data from carrier hotels, via our metropolitan transport networks, to the central equipment rooms that we establish in the basements of our on-net buildings. Once in the central equipment room, the data is transferred from our metropolitan transport network onto our FIN and routed to the appropriate floor of the on-net building, where the end-user is located.

Meet-Me-Room Cross Connections. At 60 Hudson Street in New York City, one of the premier carrier hotels in the world, we operate the meet-me-room, a centralized, carrier-class cross connection facility. This facility enables us to offer our customers a single room within the carrier hotel where they can cross connect with one another in a secure, rapid and cost-effective manner.

Network Solutions Transport. In 2003, we initiated a new type of transport service offering to provide our customers with circuits on networks that we do not own.  We intend to sell this connectivity to our customers and purchase the underlying circuits from other wholesale, telecommunications carriers.  With this new initiative, we believe that we can serve the broader network capacity needs of our customers than we are currently able to on our own networks.  We intend to offer network solutions transport in markets that we currently serve, other metropolitan markets that we do not serve with our own networks, and on a long-haul basis to connect metropolitan areas.

Colocation

In select carrier hotels and buildings, we offer our customers racks, cabinets, or cages where they can locate their networking equipment. We also offer ancillary services, including AC/DC power, fire protection, security, network maintenance and heating, ventilation and air conditioning, or HVAC.

Communications Access Management

In certain on-net and off-net buildings, we obtain the exclusive right to manage the communications access and infrastructure for the buildings. We then enter into agreements with service providers giving them non-exclusive rights to provide services to tenants in the buildings. The term of our contracts with service providers typically ranges from one month to one year.

Network Design and Architecture

We have and will continue to design, develop and construct networks for carrier-to-carrier and carrier-to-customer transport in our markets. Our networks have five components: carrier point facilities, meet-me-rooms, metropolitan transport networks, FINs and a NOC.

Carrier Point Facilities

Carrier point facilities are environmentally controlled, secure sites within a carrier hotel, designed to house carrier transmission and networking equipment. At these facilities we establish the interconnection of our metropolitan transport networks with other service providers’ networks. This interconnection of networks enables us to transfer other carriers’ traffic onto our local loop networks and provide transport services to them. In addition to utilizing our carrier point facilities to interconnect with service providers, we also offer colocation and other ancillary services at certain of these facilities.

Our primary carrier point facilities in New York City are located in 60 Hudson Street and 111 8th Avenue. We have established eight other secondary carrier point facilities in New York City, Long Island and New Jersey, which we have connected to both 60 Hudson Street and 111 8th Avenue via our metropolitan transport networks. Our primary carrier point facility in Los Angeles is located at 707 Wilshire Boulevard. Until recently, we had five secondary carrier point facilities in Los Angeles. Due to the economic slowdown and a rationalization of our facilities and network infrastructure, we have recently closed one of these facilities. By establishing our presence in multiple carrier hotels we increased our ability to interconnect with other service providers, thereby increasing our potential customer base and revenue opportunities with existing customers. Although we currently have no plans to add additional carrier point facilities, we continually monitor and evaluate each of our markets to assess the viability of our existing facilities and to determine if the development of additional facilities is warranted.  At our primary sites we offer colocation facilities in addition to transport and interconnection services. In certain of our secondary carrier point facilities, we have colocated in other carriers’ facilities.

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Meet-Me-Room

Our meet-me-room at 60 Hudson Street offers standardized colocation cabinets and customized cages for carriers to house their mission critical telecommunications equipment in a secure, environmentally controlled environment. All of the colocation units are connected to a central cross connection area within the meet-me-room with optical, coaxial or copper terminations, allowing our customers to connect their networks in an organized, rapid and cost-efficient manner with carrier-class reliability.

Occupants of our meet-me-room have access to our vertical in-building network within 60 Hudson Street and to our metropolitan transport network, which connects them with other carrier hotels and our on-net buildings. We are exploring opportunities to develop additional meet-me-rooms in other carrier hotels.

Metropolitan Transport Networks

We acquire dark fiber rights, install our own optical transmission equipment to light the fiber and then provide lit circuits to carriers for the transport of traffic in the out-of-building local loop. We light the dark fiber in ring configurations with optical networking gear, establishing connectivity between carrier point facilities and our on-net buildings.

Our networks typically transmit data at 2.5 gigabits per second, or Gbps, (OC-48) and, at times, up to 10.0 Gbps (OC-192). We use dense wave division multiplexing technology to increase capacity on our networks. Dense wave division multiplexing can increase the bandwidth of a single fiber-optic strand by transmitting signals on up to 32 different wavelengths of light on a single fiber, therefore enabling the transmission of up to 32 times more information on an existing fiber-optic strand.

Our existing metropolitan transport networks consists of OC-48 SONET and protocol independent rings deployed in midtown Manhattan, downtown Manhattan, New York/Long Island, New York/New Jersey, and Los Angeles. In the future, we may establish additional metropolitan transport networks in additional markets, if we determine that there is a need for additional capacity.

FiberNet In-Building Networks

Our FIN is an advanced central distribution network that we deploy in our on-net buildings to provide communications transport within the building. We have a team of highly trained and experienced communications professionals and engineers that design and oversee the installation of our FINs. This team performs a thorough analysis of each commercial building that we have targeted, including an assessment of available space to house equipment in the building and install fiber cables in the vertical shafts, or risers, the adequacy of the power supply, and the diversity of fiber-optic entrance conduits from our metropolitan transport network. The standard design specifications for our FINs are then tailored to each building. We are committed to building the most secure, reliable fiber-optic systems that adhere to the highest technical standards in the industry. We strive to provide a system that is flexible and expandable and able to meet the needs of our customers. To date, we have constructed our FINs in 20 buildings in New York and Chicago. We are not currently considering the deployment of additional FINs.

Our in-building fiber-optic network infrastructure consists of:

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Network Operations Center

We monitor and manage traffic on our networks from our NOC located in Newark, New Jersey using Preside and MetaSolv TBS software. Our NOC enables us to provision circuits to any point on our networks and to provide timely customer support and maintenance from a centralized location. Our networks are monitored and maintained 24 hours a day, 7 days a week.

Real Estate

On-net buildings. In buildings that we have identified as on-net buildings, we sign a license agreement with the building owner or manager for the installation of a FIN. Our typical on-net license agreement has an initial term of 15 years, with renewal options of up to 10 years. We have installed FINs in 20 on-net buildings, and we do not presently plan on installing any additional FINs.

Off-net buildings. In buildings that we select as off-net buildings, we enter into license agreements with the owners or managers typically for an initial term of five years, with renewal options of up to 15 years. Once the license agreement has been executed, we enter into agreements with communications service providers, giving them non-exclusive access to provide services in the building. We currently have contracts to manage the communications infrastructure in approximately 75 off-net buildings, after recently terminating our agreements for approximately 30 other off-net buildings that we determined were no longer economically viable.

Sales and Marketing Strategy

Sales. We sell network access to other service providers through our direct sales force. Our sales team is comprised of representatives that have significant expertise in, and knowledge of, the wholesale communications market. Several of our sales representatives have had extensive work experience with British Telecom, AT&T and other major carriers. By using a direct sales strategy, we provide the personal attention and high quality of service that our customers require.

Marketing. Our marketing strategy is focused on building relationships with our customers and our real estate partners. We believe that all segments benefit from targeted advertising, public relations efforts, promotional materials, event marketing and personal selling techniques. In addition, we have marketing activities directed specifically to each of our constituent markets. These activities include supporting industry organizations, participating in conferences, tradeshows and seminars, preparing personalized presentations and engaging in direct marketing.

Customers

We have a broad target customer base that includes ILECs, RBOCs, CLECs, IXCs, ISPs, ASPs, PTTs and ICPs. Our technologically advanced fiber-optic infrastructure meets the needs not just of small- and medium-sized business end-users, but also large corporate end-users. This expands the size of our addressable market beyond that of traditional CLECs, which are generally focused on the small- and medium-sized business market opportunity. The flexibility of our network also allows us to interconnect with internationally based customers as well. We enter into contracts with our customers with terms ranging from one month to fifteen years.

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During the recent downturn in the telecommunications industry, a large number of our customers have experienced significant financial distress. Customers that have filed for bankruptcy include Cambrian Communications, Enron Broadband Services, FLAG Telecom, Genuity Solutions, Global Crossing, Metromedia Fiber Networks, NorthEast Optical Networks (NEON) and Williams Communications. In addition, we believe that other customers may file for bankruptcy in the future.

Transport and Colocation Customers

We target service providers seeking cost-effective, flexible, reliable, broadband network connectivity in the local loop. The increase in communications traffic and data intensive applications and the deregulation of the telecommunications industry has resulted in rapid growth in the number of service providers operating in the local loop market. Many of these providers do not have their own metropolitan networks and rely on us for transport in the local loop. Our customer base also includes providers that have their own local networks, but do not have sufficient bandwidth to meet their customers’ needs or are seeking shorter installation intervals and will benefit from our faster provisioning times. We also generate transport-traffic through agreements with our colocation customers.

Our transport and colocation customers are typically:

As of December 31, 2002, our transport and colocation customers included 360networks, AT&T, Bell Nexxia, BellSouth, British Telecom, Entel Chile, Equant, FLAG Telecom, France Telecom, Hanaro Telecom, NTT America, Qwest, Sprint, SwissFone, T-Systems (formerly Deutsche Telekom), Universal Access, Verizon, Winstar, and Wiltel Communications.

Access Management Customers

Our access management customers include facilities-based providers that want access to our on-net and off-net buildings to provide communications services to tenants in the building. As of December 31, 2002, our access customers included AT&T, Cogent Communications, Winstar, Con Edison Communications, XO Communications, IntelliSpace, Yipes, and QwestLink.

Competition

The market for our services is very competitive. Our competitors include established and new communications companies.

Local Telephone Companies. In New York City and Los Angeles, we face significant competition from ILECs and RBOCs, which currently dominate local communications markets, and CLECs, which are increasing their market penetration for local communications services. ILECs, including Verizon Communications, have several competitive advantages over us, which include established brand names, reputation and significant capital. As a result of the Telecommunications Act of 1996, ILECs are required to provide other carriers with access to end users via their existing networks. This type of access is in direct competition to our services. Moreover, ILECs also sell wholesale connectivity in the local loop, which competes with our local loop transport services. Various other competitive communications providers also own communications infrastructure in the local loop. Some of these carriers currently compete with us in the market for providing broadband transmission capacity in the local loop, and such competition may increase in the future.

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Other In-Building Communications Providers. Certain integrated communications providers are deploying their own network infrastructure in commercial office properties in our markets to provide communications services to tenants. These include, but are not limited to, AT&T, WorldCom and XO Communications. These companies build out networks on which they offer only their own services. Consequently, they could indirectly compete against us by not utilizing our FIN to gain connectivity to tenants. in their buildings. We have competed and will continue to compete with some of these companies for in-building communications services and license agreements.

Metropolitan Network Providers. Many of the leading communications companies, including AT&T, WorldCom, Sprint, Level 3, Qwest and Time Warner Telecom, have constructed or are constructing fiber-optic networks within metropolitan areas. These companies utilize their networks for their own transmission requirements and in certain circumstances provide excess network capacity to other carriers. Other communications companies, such as Con Edison Communications, Metromedia Fiber Network, Looking Glass Networks and OnFiber Communications, build metropolitan fiber networks that are leased or sold to other carriers and large corporate users. In addition, these companies could begin to build their own in-building networks. We compete directly and indirectly with these companies in New York City and Los Angeles.

Fixed Wireless Service Providers. We may lose potential customers to fixed wireless service providers. Fixed wireless service providers can provide high- speed inter-building communications services using microwave or other facilities or satellite earth stations on building rooftops. Some of these providers have targeted small- and medium-sized business customers and have business strategies that are similar to ours. These providers include Winstar, Sprint, WorldCom and XO Communications.

Our History

FiberNet Telecom, Inc. was organized under the laws of the State of Delaware on August 10, 1994. On November 24, 1997, Desert Native Designs Inc., an existing public company incorporated in the State of Nevada, acquired FiberNet Telecom, Inc. pursuant to an agreement and plan of merger dated as of the same date. Upon consummation of the merger, FiberNet Telecom, Inc. became a wholly owned subsidiary of Desert Native Designs, Inc., which subsequently changed its name to FiberNet Telecom Group, Inc. On February 4, 2000, we reincorporated in Delaware.

On July 31, 2000, we consummated a corporate reorganization in order to acquire Devnet L.L.C. As a result of this reorganization, we became a holding company that directly owns all of the outstanding common stock of FiberNet Operations, Inc., a Delaware corporation and Devnet L.L.C., a Delaware limited liability company. FiberNet Operations directly owns all of the outstanding common stock of FiberNet Telecom, Inc., a Delaware corporation. FiberNet Telecom, Inc. owns all of the outstanding membership interests in Local Fiber, L.L.C. and FiberNet Equal Access, LLC, both New York limited liability companies. We conduct our primary business operations through our operating subsidiaries, Local Fiber, FiberNet Equal Access and Devnet.

Regulation of FiberNet

General Regulatory Environment

We are subject to federal, state and local regulations that affect our product offerings, competition, demand, costs and other aspects of our operations. The regulation of the communications industry varies from state to state and is changing rapidly. To the extent that our offerings are treated as telecommunications services, federal and state regulation would apply to those offerings. Our operations are also subject to a variety of environmental, safety, health and other governmental regulations. We cannot guarantee that current or future regulatory, judicial or legislative activities will not have a material adverse effect on our operations or financial condition, or that domestic or international regulators or third parties will not raise material issues with regard to our compliance or noncompliance with applicable regulations.

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Federal Regulation

Federal regulation has a great impact on the communications industry and has undergone major changes in the last seven years as the result of the enactment of the Telecommunications Act of 1996, which amended the Communications Act of 1934 (“Act”).

Our services are provided through our operating subsidiaries, Local Fiber, Equal Access and Devnet. The services offered by our subsidiaries fall into one of two categories:

Certain regulations associated with each type of offering are described below. Although the law establishing regulatory requirements is often unclear, our telecommunications services generally are subject to a lower degree of federal and state regulation than those of dominant carriers such as the RBOCs.

Telecommunications Services

One of our subsidiaries, Local Fiber, is regulated as a telecommunications carrier because it provides telecommunications services directly to the public for a fee, or to such class of users as to be effectively available to the public. Telecommunications carriers are subject to extensive federal, state and local telecommunications regulation that may impose substantial administrative and other burdens on our operations.

As a competitive provider of local and long distance telecommunications services, Local Fiber is subject to federal telecommunications regulation, including, but not limited to the contribution to numerous funds to the extent we provide interstate services or obtain numbers for end user customers. These funds include the FCC’s universal service fund. This fund was established to ensure the availability of affordable basic telecommunications services to high cost, low income users, and access to advanced telecommunications and Internet services by schools and libraries and rural healthcare providers. The rate of assessment is approximately 7.2805% of gross interstate end-user telecommunications revenues for the first quarter of 2003, and may be higher in subsequent quarters and years.  The FCC is reviewing its current universal service assessment, contribution, and recovery rules.  Changes to the universal service rules could affect our revenues.  FCC rules also require that telecommunications carriers contribute to various other funds, which are also based on a percentage of our gross interstate end-user telecommunications revenues.  Our contribution obligations historically have been minimal or none because our customer base has been predominately carriers rather than end users and the services local or intrastate.  Our contribution obligations could increase should we provide more services to end users.

Local Fiber is also required to comply with a number of other federal regulatory requirements. Third parties may file complaints against us at the FCC for violations of the Act or the FCC’s regulations. Certain statistical reporting requirements may also apply. Although compliance with these regulatory requirements imposes certain administrative burdens, similarly situated competitors are subject to comparable regulatory obligations.

Local Exchange Carrier Regulation. The Act imposes a number of access and interconnection requirements on telecommunications carriers and on all local exchange providers, including CLECs, and imposes additional requirements on ILECs. CLECs compete with the ILECs for local subscribers of telecommunications services. As discussed under our state regulation section, Local Fiber provides local transport services and has obtained authorization as a CLEC to provide telecommunications services in the states of New York, Illinois, New Jersey, and California. However, because of the nature of Local Fiber’s service offerings, not all CLEC obligations will apply to us. As a CLEC, Local Fiber is subject to any requirement imposed by the FCC that is generally applicable to local exchange carriers or LECs. In addition, LEC regulations affect us to the extent that they have a direct affect on our carrier customers.

Under the Act, all telecommunications carriers must interconnect directly or indirectly with the facilities of other telecommunications carriers, offer certain services for resale, provide number portability and dialing parity, provide access to rights-of-way, and establish reciprocal compensation arrangements for the transport and termination of traffic.  In addition to these general duties, ILECs have additional obligations to provide cost-based interconnection at any technically feasible point, access to certain portions of their network at cost-based rates, and collocation to requesting carriers.

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The FCC has also adopted guidelines for implementing the interconnection and local competition provisions of the Act. In order to foster competition in the local exchange market, the FCC requires ILECs to offer access to certain portions of their communications networks (known as network elements) to CLECs at cost-based rates. The FCC’s decision implementing the interconnection and local competition provisions of the Act has been appealed, reconsidered, and modified several times.  In January 1999, the United States Supreme Court upheld the FCC’s authority to require ILECs to offer portions of their network to CLECs at cost-based rates.  Similarly, in May 2002, the Supreme Court upheld the FCC’s pricing methodology for developing cost-based rates. 

Most recently, in February 2003, the FCC modified the list of unbundled network elements to reduce the number of elements ILECs must offer to competitors.  In addition, the FCC has established a three-year transition period for the elimination of line sharing, which permitted competing carriers to offer digital subscriber line services over the same copper loop facilities used by the ILECs to provide voice telephone service.  The FCC has also indicated that it plans to undertake a comprehensive review of its pricing regime in 2003.  It is likely that the FCC’s February 2003 action will be appealed, and the outcome of that appeal and any subsequent FCC action could adversely affect our ability to obtain the elements of the ILECs’ networks we require to provide service to our customers.  In addition, to the extent our customers buy unbundled network elements from the ILEC, any court or FCC revisions of the interconnection and local competition provisions of the Act, including access to unbundled network elements or pricing, could affect the growth opportunities for some of our customers and thus demand for our services.

The FCC has also adopted rules regarding how telecommunications carriers compensate each other for the transport and termination of telecommunications traffic.  In April 2001, the FCC issued an order limiting the amount of compensation to be paid to terminate some traffic bound for Internet Service Providers (“ISP-bound traffic”) and eliminating compensation for other ISP-bound traffic.  On appeal, the federal court found that the FCC did not adequately support its findings regarding reciprocal compensation for ISP-bound traffic and  remanded the FCC’s order back to the FCC for further consideration.  In addition, several parties have asked the FCC to reconsider its decision.  The FCC has taken no action on either the remand from the federal court or on the petitions for reconsideration. This matter is also now on appeal to the Supreme Court of the United States.  In addition, the FCC is exploring methods to unify intercarrier compensation and access charges, and is considering a bill-and-keep approach (i.e., no compensation is paid between carriers) as well as other alternative modifications to the existing intercarrier compensation regimes.  Our revenues may be negatively affected by FCC and court decisions on compensation matters. 

As part of its ongoing examination of the competitive marketplace, the FCC is currently examining several other competition-related issues. First, the FCC is considering whether to adopt a set of performance measures and standards that could improve enforcement of ILECs’ wholesale obligations under the Act. Second, the FCC is considering how to regulate broadband services provisioned by ILECs. Finally, the FCC is looking at the appropriate regulatory treatment under the Act for a wireline carrier’s offering of broadband telecommunications services bundled with information services. The outcome of these proceedings may affect the rates, terms or conditions of our service offerings, and result in increased competition from ILECs with respect to some of our services.

In addition to the numerous decisions to implement the Act, in August 1999, the FCC issued an Order that provided substantial new pricing flexibility to ILECs. The pricing flexibility applies primarily to special access and dedicated transport. An appeals court recently upheld the FCC’s decision. This ruling will ultimately permit ILECs to utilize contract arrangements for the provision of dedicated services similar to the way in which we offer these same types of services. As a result of this new pricing flexibility for ILECs, we could face greater competition with respect to the services we provide. The FCC, however, is currently considering the adoption of performance measures and standards for ILEC-provisioned special access services, and thus, the ILECs’ special access services may face greater regulation.

All of these FCC regulations and pending proceedings may affect the growth opportunities for some of our customers and thus the demand for our services.  In addition, the outcome of these proceedings may affect the rates, terms or conditions of our service offerings as well as our revenues.

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State Regulation

The Act generally prohibits state and local governments from enforcing any law, rule or legal requirement that prohibits or has the effect of prohibiting any person from providing any interstate or intrastate telecommunications service. However, states retain jurisdiction to adopt regulations necessary to preserve universal service, protect public safety and welfare, ensure the continued quality of telecommunications services and safeguard the rights of consumers.

Local Fiber must obtain and maintain certificates of authority from regulatory bodies in states where it offers intrastate telecommunications services on a common carrier basis. In most states, telecommunications providers must also file and obtain prior regulatory approval of tariffs for its regulated intrastate services. Certificates of authority can generally be conditioned, modified or revoked by state regulatory authorities for failure to comply with state law or regulations. Fines and other penalties also may be imposed for such violations. Local Fiber is currently authorized as a CLEC to provide intrastate services in New York, New Jersey, Illinois, and California, and may seek additional authority in other states. Delays in receiving required regulatory approvals in other states could also have a material adverse effect on us. We cannot assure you that regulators or third parties will not raise material issues with regard to our compliance or non-compliance with applicable laws or regulations.

State regulatory commissions generally regulate the rates RBOCs charge for intrastate services, including intrastate access services paid by providers of intrastate long distance services. Intrastate access rates affect the costs of carriers providing intrastate long distance services and demand for our services and those that other carriers provide. Under the Act, state commissions have jurisdiction to arbitrate and review negotiations between local telephone companies and CLECs regarding the prices local telephone companies charge CLECs for interconnection and resale. In setting these prices, state commissions must use a forward-looking cost methodology as required by the FCC, and later upheld by the Supreme Court. A state may also impose telecommunications taxes and fees for state-level universal service and other programs on providers of services within that state.

Local Regulation

In addition to federal and state laws, local governments exercise legal authority that may affect Local Fiber’s operations. For example, local governments retain the authority to license public rights-of-way, subject to the limitation that local governments may not prohibit the provision of telecommunications services. Local authorities affect the timing and costs associated with the use of public rights-of-way. These regulations may have an adverse effect on our business to the extent Local Fiber requires access to such public rights-of-way.

Non-Telecommunications Services

Our subsidiaries, Equal Access and Devnet are not subject to telecommunications carrier regulation. Unlike a telecommunications carrier, Equal Access and Devnet do not hold their offerings out to the public generally for a fee. Moreover, Equal Access and Devnet do not use public rights-of-way that may trigger local regulation. Equal Access and Devnet generally enter into exclusive agreements with building owners to provide or manage intra-building fiber capacity to telecommunications carriers on a private contractual basis. As such, Equal Access and Devnet merely provide the in-building capacity over which telecommunications service providers may provide telecommunications services, including access to the public telephone system that enables a tenant to reach any point on the public telephone system. However, certain proposals have been made before Congress and the FCC that could have an adverse impact on Equal Access’ and Devnet’s exclusive contractual rights, in certain buildings, to provide such capacity.

Regulation of Equal Access and Devnet

Equal Access and Devnet are subject to numerous local regulations such as building and electrical codes, licensing requirements and construction requirements. These regulations vary on a city-by-city and county-by-county basis.

Equal Access and Devnet generally secure multi-year license agreements with real estate owners for the exclusive right to lease intra-building fiber capacity to third parties. Under current FCC regulations, commercial real estate owners have the right to control wiring within their premises, beyond the demarcation point at which telecommunications carriers terminate their facilities. The demarcation point is typically at a minimum point of entry to the building such as the basement. These rules allow the real estate owners or managers to install and maintain their own inside wiring, or to contract with companies, such as Equal Access or Devnet, to maintain wiring

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on their behalf. If laws or regulations are enacted that effectively require building owners to give inside wiring access to all requesting telecommunications providers on nondiscriminatory terms, Equal Access’ and Devnet’s ability to secure and maintain exclusive inside wiring contracts may be inhibited.

As of December 31, 2002, there was no federal legal requirement that owners or managers of privately owned commercial office buildings give access to competitive providers of telecommunications services. However, the FCC is currently considering such a requirement and these types of requirements have been adopted in certain states. For example, requirements in California, Connecticut, Texas and Massachusetts generally require commercial real estate owners to provide nondiscriminatory access to requesting telecommunications providers that have customers within a building, and limit what the real estate owner may charge for such access. Massachusetts has rules that also require owners or controllers of rights-of-way, including owners of commercial buildings and certain multi- tenant dwellings, to provide non-discriminatory access to a carrier upon a tenant’s request. The California Public Utilities Commission’s  rules  prohibit carriers  from entering, on a prospective basis, into exclusive access agreements with property owners that would restrict the access of other carriers to the property or discriminate against the facilities of other carriers. Other states, such as Nebraska and Ohio, have adopted similar exclusive contract prohibitions. Although these requirements generally permit telecommunications carriers to install their own inside wiring, there is no requirement that real estate owners allow such carriers to use existing inside wiring. Thus, in certain states, telecommunications carriers are permitted to construct inside wiring within buildings even if a provider such as Equal Access or Devnet already have existing facilities. However, some of these state requirements have been challenged, and therefore, we cannot predict how these rules will be interpreted.

Federal laws and regulations concerning building access have been considered in the past and may be adopted in the future. On June 10, 1999, the FCC initiated an inquiry into riser access in multiple tenant environments and requested comment on the following issues:

On October 25, 2000, the FCC released  and Order promoting competition between telecommunication carriers by regulating access to multiple tenant buildings. The FCC’s decision  bars telecommunications carriers from entering into exclusive contracts with commercial building owners in the future. Because Equal Access and Devnet are not “telecommunications carriers,” the FCC’s decision does not apply to them or their dealings with building owners. The FCC’s decision  also requires local exchange carriers and other utilities within multiple tenant buildings to provide other telecommunications carriers and cable service providers reasonable and non-discriminatory access to conduits and rights-of-way located in customer buildings and campuses, to the extent such conduits and rights-of-way are owned or controlled by the utility. This requirement will not apply directly to Equal Access or Devnet because they are not telecommunications carriers or utilities. However, this requirement may apply to telecommunications carriers and utilities holding separate access rights to those of Equal Access and Devnet in FiberNet buildings, and it may also apply to Equal Access’ and Devnet’s telecommunications carrier customers. Depending on how these rules are interpreted, these requirements may facilitate our competitors’ entry into buildings in which we offer our services by permitting our competitors to gain access through the separate access rights currently held by local exchange carriers or other utilities in the same buildings. We cannot predict how the FCC’s rules will be interpreted regarding this requirement or what, if any, effect such an interpretation would have on Equal Access or Devnet. The FCC also established procedures to enable building owners to request that the incumbent local exchange carrier move the demarcation point, the point at which the telecommunications network wiring under the incumbent local exchange carrier’s control ends and wiring under building owner/end-user control begins, to the minimum point of entry. The minimum point of entry is defined as either the closest practicable point to where the wiring crosses a property line or the closest practicable point to where the wiring enters a multi-tenant building or buildings. The FCC’s procedures to clarify the demarcation point in multi-tenant buildings do not place an obligation on Equal Access, Devnet or Local Fiber, because none of these entities are incumbent local exchange carriers. However, we cannot predict the FCC’s implementation of its demarcation point procedures or the consequences resulting from a building owner’s decision to locate the demarcation point at the minimum point of entry.

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Many parties have petitioned the FCC for reconsideration of its building access order and the FCC is currently considering those requests. In addition, the FCC has also issued a further notice requesting comments on, among other things, whether:

We cannot predict the outcome of the FCC’s proceeding or of any legislation, nor what effect, if any, it may have on our business.

Liability for Internet Content

There have been various statutes, regulations and court cases relating to liability of Internet service providers and other on-line service providers for information carried on or through their services or equipment, including in the areas of copyright, indecency, obscenity, defamation and fraud. The laws in this area are unsettled and there may be new legislation and court decisions that may affect our services and expose us to liability.

Other Regulations

Our operations are subject to various federal, state, local and foreign environmental, safety and health laws and governmental regulations. These laws and regulations govern matters such as the generation, storage, handling, use and transportation of hazardous materials, the emission and discharge of hazardous materials into the atmosphere, the emission of electromagnetic radiation, the protection of wetlands, historic sites and endangered species and the health and safety of our employees.

Although we monitor compliance with environmental, safety and health laws and regulations, we cannot ensure that our operations have been or will be in complete compliance with these laws and regulations. We may be subject to fines or other sanctions imposed by governmental authorities if we fail to obtain certain permits or violate the laws and regulations. We do not expect any capital or other expenditures for compliance with laws, regulations or permits relating to the environment, safety and health to be material in 2003.

In addition, our business may be subject to environmental laws requiring the investigation and cleanup of contamination at sites we own or operate or at third party waste disposal sites. These laws often impose liability even if the owner or operator did not know of, or was not responsible for, the contamination. Although we operate numerous sites in connection with our operations, we are not aware of any liability relating to contamination at these sites or third party waste disposal sites that could have a material adverse effect on our business or financial condition.

Employees

As of December 31, 2002, we had 75 employees, including 43 in network operations, 19 in sales and marketing and 13 in finance and administration. During fiscal 2002, we significantly downsized the number of our employees from 108 to 75. The reduction in headcount impacted all departments of our company. We have not experienced any work stoppages and consider our relations with our employees to be good.

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Our principal offices are located at 570 Lexington Avenue, in New York, New York where we lease an aggregate of approximately 12,195 square feet, of which we are subleasing approximately 5,100 square feet. The term for these premises expires in 2008. We also lease additional office space in Garden City, New York consisting of 3,800 square feet under a lease that expires in 2005. In addition, we have office space in Rochester, New York, our former headquarters, which we are subleasing. We lease 15,000 square feet under a lease that expires in 2005. Our NOC is located at Gateway Center in Newark, New Jersey, where we occupy 7,987 square feet under a lease that expires in 2010. Our warehouse facility is located in Long Island City, New York. We lease 6,500 square feet under a lease that expires in 2005, which is also being subleased. We have also leased facilities at major carrier hotels in New York, New York. These facilities are located at 60 Hudson Street and at 111 Eighth Avenue. At 60 Hudson Street we have two leases covering an aggregate of 30,039 square feet, both of which expire in 2015. The lease at 111 Eighth Avenue is for 11,912 square feet and expires in 2015. Additionally, we lease space in carrier hotels at 600 South Federal Street in Chicago consisting of 6,588 square feet under a lease that expires in 2015, and at 707 Wilshire Boulevard in Los Angeles consisting of 7,465 square feet under a lease that expires in 2010. We also lease space for other network-related facilities and in the basements of our on-net buildings for our central equipment rooms. We currently do not intend to lease additional space in the next 12 months.  However, we regularly evaluate our requirements for additional colocation space, and we review our current leases to determine if it is in our best interest to continue with such leases.

We are not currently a party to any material legal proceedings.

At our annual meeting of stockholders which convened on October 3, 2002, the stockholders:

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The following tables show the common stock votes cast with respect to the Proposals identified above:

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PART II

Price Range of Our Common Stock

On April 27, 2000, our common stock began trading on the Nasdaq National Market System under the ticker symbol “FTGX”.  Prior to that time, our common stock was quoted on the OTC Bulletin Board under the same ticker symbol.  On May 24, 2002, we received approval from The Nasdaq Stock Market to transfer our listing from the Nasdaq National Market System to the Nasdaq SmallCap Market System

     The following table sets forth the high and low sales prices for each quarter for our common stock as reported on the Nasdaq National Market System and the Nadsdaq SmallCap Market System from January 1, 2001 through December 31, 2002:

     As of March 20, 2003, there were 212 holders of record of our common stock and, according to our estimates, approximately 4,000 beneficial owners of our common stock.

     We have not paid any dividends with respect to our common stock and do not expect to pay dividends on our common stock in the foreseeable future.  Any future dividends will be declared at the discretion of our Board of Directors and will depend, among other things, upon our financial condition, capital requirements, earnings and liquidity.  Our credit facility currently prohibits, and future debt agreements and preferred stock will likely restrict, the payment of cash dividends on our common stock.

Securities Authorized for Issuance Under Equity Compensation Plans

Equity Compensation Plan Information
as of December 31, 2002

     We have authorized the issuance of equity securities under the compensation plans described below without the approval of stockholders. No additional options, warrants or rights are available for issuance under any of these plans, except for additional shares which may become purchasable under warrants with anti-dilution protection as noted below.

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Recent Sales of Unregistered Securities

     On March 15, 2002, we received gross proceeds of $2.0 million from the issuance of a subordinated note payable to an existing investor. The promissory note had an original maturity date of June 14, 2002 and bore interest, which was due and payable on the maturity date, at an annual rate of 8%. 

     On October 30, 2002 we completed a series of transactions with the lenders under our credit facility as well as certain investors to undertake the recapitalization of our company. These transactions are described below.

     Pursuant to the terms of a common stock purchase agreement dated as of October 30, 2002 by and among us and our lenders under our credit facility, we issued 440,000,000 shares of our common stock to the lenders at a price of $0.15 per share, as prepayment of an aggregate of $66.0 million of outstanding indebtedness under our credit facility. We also issued warrants to purchase 110,000,000 shares of common stock at an exercise price of $0.12 per share with a term of five years to the lenders. These warrants are immediately exercisable and contain standard anti-dilution protection.

     On November 11, 2002, we issued to our lenders in exchange for $2.0 million of accrued interest under our credit facility 20,000,000 shares of common stock and warrants to purchase 20,000,000 shares of common stock at

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an exercise price of $0.12 per share with a term of five years. These warrants are immediately exercisable and contain standard anti-dilution protection.

     On October 30, 2002, we also entered into a common stock purchase agreement with certain investors, pursuant to which we issued to the investors in a private offering an aggregate of 38,000,000 shares of common stock for a price of $0.10 per share, or an aggregate cash consideration of $3.8 million. Pursuant to the terms of this purchase agreement, we also issued to such investors warrants to purchase an additional 38,000,000 shares of common stock at an exercise price of $0.12 per share with a term of five years. These warrants are also immediately exercisable and contain standard anti-dilution protection.

     Immediately prior to the private offering of common stock and warrants, we consummated certain related transactions with the investors.  In one such transaction, we issued to one of the investors, 9,002,040 shares of common stock in exchange for the surrender of a promissory note originally issued on December 7, 2001 by us to a related party, which promissory note had been assigned by such related party to this investor immediately prior to such exchange for $150,000 in cash. This exchange was consummated pursuant to the terms of a note exchange agreement dated as of October 30, 2002 by and among us and the investor. Such promissory note, at the time of surrender, had an outstanding principal amount of $450,102 owing thereon.

     In a second related transaction, we issued an aggregate of 104,581,425 shares of common stock to the investors pursuant to the terms of a share exchange agreement dated as of October 30, 2002 by and among us and the investors. Such shares were issued upon the conversion of all 104,578 outstanding shares of our series H preferred stock. Such investors had, immediately prior to such exchange and conversion, acquired these series H preferred shares, along with shares of common stock, from a related party for cash consideration of $735,000. The shares of series H preferred stock so surrendered had an aggregate liquidation preference, including accrued dividends thereon, of $10.7 million.

     In a third related transaction, the holders of all 303 outstanding shares of our series J preferred stock surrendered such shares to us in exchange for 60,600,000 shares of common stock. This transaction was effected pursuant to a series J exchange agreement dated as of October 30, 2002 by and among us and the series J preferred stockholders. The series J preferred stock so surrendered had an aggregate liquidation preference of $3.0 million.

     In total, 652,183,465 shares of common stock and warrants to purchase an aggregate of 148,000,000 shares of common stock were issued on October 30, 2002, as part of these transactions.

     On November 11, 2002 in addition to the issuance of common stock and warrants to our lenders in satisfaction of $2.0 million of accrued interest as discussed above, we issued to an investor 52,000,000 shares of common stock in exchange for the surrender by that investor of the subordinated note payable issued by us on March 15, 2002 in the initial principal amount of $2.0 million, pursuant to the terms of a note exchange agreement.  Such promissory note, at the time of surrender, had outstanding principal and accrued interest of $2.1 million owing thereon. 

     In connection with the transactions consummated on October 30, 2002 and November 11, 2002, we issued to a financial advisory firm warrants to purchase an additional 6,200,000 shares of common stock at an exercise price of $0.001 per share with a term of one year.

     In December 2002, we issued 576,220 warrants to purchase common stock at $0.001 per share, with a term of five years, in connection with a settlement of certain litigation matters. 

     During the year ended December 31, 2002, holders of warrants exercised warrants for 3,649,275 shares of common stock all with an exercise price of $0.001 per share.  During the year ended December 31, 2002, we granted options to purchase an aggregate of 111,000 shares of common stock to employees with exercise prices ranging from $0.12 to $0.37 and at a weighted average exercise price of $0.16 per share.

     The securities issued in the foregoing transactions were either (i) offered and sold in reliance upon exemptions from the Securities Act of 1933 (“Securities Act”) registration requirements set forth in Sections 3(b) and 4(2) of the Securities Act, and any regulations promulgated thereunder, relating to sales by an issuer not involving any public offering, or (ii) in the case of certain options to purchase shares of common stock and shares of common stock issued upon the exercise of such options, such offers and sales were made in reliance upon an exemption from registration under Rule 701 promulgated under Section 3(b) of the Securities Act.  No underwriters were involved in the foregoing sales of securities.

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     You should read the selected financial data presented below, in conjunction with our consolidated financial statements, the notes to those consolidated financial statements and the management’s discussion and analysis of financial condition and results of operations section appearing elsewhere in this report on Form 10-K.

     The consolidated statement of operations data for the years ended December 31, 2002, 2001, and 2000 and the balance sheet data as of December 31, 2002 and 2001 have been derived from our audited consolidated financial statements included elsewhere herein, and should be read in conjunction with those financial statements (including notes thereto).  The selected financial data as of December 31, 2000, 1999 and 1998 and for the years ended December 31, 1999 and 1998 have been derived from audited consolidated financial statements not included herein, but which were previously filed with the Securities and Exchange Commission, or SEC. Our historical results are not necessarily indicative of the operating results to be realized in the future.

     The consolidated financial statements as of and for the year ended December 31, 2002 have been audited by Deloitte & Touche LLP, independent public accountants.  The previous periods referred to above were audited by Arthur Andersen LLP, independent public accountants.

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CONSOLIDATED FINANCIAL DATA
(in thousands, except per share amounts)

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Overview

     We deploy, own and operate fiber-optic networks designed to provide comprehensive broadband connectivity for data, voice and video transmission to service providers in major metropolitan areas.  These networks provide an advanced, high bandwidth fiber-optic solution to support the demand for network capacity in the local loop.  We provide optical transport within and between carrier hotels, which are facilities where service providers exchange and route communications traffic, as well as optical transport from carrier hotels to tenants in commercial office buildings.  Our networks support multiple transmission protocols including synchronous optical network, or SONET, SDH, Ethernet, Frame Relay, asynchronous transfer mode, or ATM and Internet Protocol, or IP.  We have lit multiple strands of fiber on a redundant and diversely routed SONET ring and IP architecture throughout New York City.  In addition, we also provide services in Chicago and Los Angeles.

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

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

Factors Affecting Future Operations

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

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     Our revenues are generated on a monthly recurring basis under contracts with our customers.  These terms of these contracts can range from month-to-month to fifteen years in length.  During 2002 we continued to experience a trend of entering into shorter term contracts with our customers.  Previously, our customers typically entered into contracts with terms of three to five years.  Increasingly, our customers are electing to purchase services on a month-to- month basis or for a contracted period of only one year.

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

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

     We typically begin our sales cycle by entering into a non-binding business services agreement with a customer.  This agreement establishes our mutual interest in exploring a business relationship and the general parameters upon which we will proceed.  As a next step, we execute a telecommunications services agreement, also known as an interconnection agreement.  This is a technical document that outlines the engineering specifications and operating standards that are required of us by the customer.  With the technical requirements complete, we finalize a sales contract.  Customers can order a specific circuit or colocation space, or, alternatively, they can purchase general availability on our networks or in our facilities by establishing minimum revenue commitments on a recurring basis.

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

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

     Cost of Services. Cost of services is associated with the operation of our networks and facilities. The largest component of our cost of services is the occupancy expenses at our carrier point facilities, on-net buildings and off-net buildings. Other specific costs include maintenance and repair costs and utility costs. Our license agreements for our on-net and off-net buildings require us to pay license fees to the owners of these properties. In addition, our leases at 60 Hudson Street in New York City also require us to pay license fees. These license fees typically are calculated as a percentage of the revenues that we generate in each particular building. Other than our license fees, our cost of services is generally fixed in nature. We do not anticipate that cost of services will change commensurately with any change in our revenues. Prospectively, our cost of services will include the costs that we will incur by purchasing connectivity from other wholesale, telecommunications carriers to provide our customers with transport services that are not on our networks. 

     Selling, General and Administrative Expenses.  Selling, general and administrative expenses generally include all of our personnel costs, occupancy costs for our corporate offices, insurance costs, professional fees, sales and marketing expenses and other miscellaneous expenses.  Personnel costs, including wages, benefits and sales

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commissions, are our largest component of selling, general and administrative expenses.  We have reduced the number of our employees from 108 at the beginning of 2002 to 75 as of December 31, 2002, and our personnel costs have decreased significantly.  Prospectively, we do not anticipate significant changes in headcount, and we believe that our personnel costs will increase moderately.  Other costs included in selling, general and administrative expenses, such as insurance costs, may increase due to changes in the economic environment and telecommunications industry.

     Stock Related Expense.  Stock related expense relates to the granting of stock options to our employees.  We grant stock options to our employees as a form of equity-based compensation to attract, retain and incentivize qualified personnel.  These costs are non-cash charges that are amortized over the vesting term of each employee’s option agreement.  Certain options granted to employees are accounted for using variable plan accounting.  Under variable plan accounting, the stock related expense is adjusted for changes in the market price of the underlying common stock.

     In December 2000 we repriced stock options for certain of our executive officers, resulting in variable plan accounting in accordance with FASB Interpretation (FIN) No. 44, Accounting for Certain Transactions Involving Stock Compensation, from the date of modification.  The additional intrinsic value was determined on the date of modification using the then market price of the common stock.  The additional compensation cost was recognized over the period from the date of modification to the date the awards vest.  The additional compensation cost has been adjusted in subsequent periods for changes in the market price.  After the awards vested, adjustments to compensation cost for changes in the market price were recognized immediately.  In subsequent periods, the market price declined, resulting in negative compensation cost being recognized.  In accordance with FIN 44, illustration 3(g), income (negative expense) has been recognized up to the amount of expense previously recognized in prior periods relating specifically to the modified awards.

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

Significant Accounting Policies

     Our significant accounting policies are described in Note 2 to the consolidated financial statements included in Item 8 of this Form 10-K.  Our discussion and analysis of financial condition and results from operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of the financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities.  On an on-going basis, we evaluate the estimates that we have made.  These estimates have been based upon historical experience and on various other assumptions that we believe to be reasonable under the circumstances.  Actual results may differ from these estimates under difference assumptions or conditions.  We believe our most critical accounting policies include revenue recognition, an allowance for doubtful accounts, the impairment of long-lived assets including goodwill and the recognition of deferred tax assets and liabilities.

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

     We have one reciprocal agreement, whereby we purchase services from one of our customers.  At the beginning of 2001 we had four such reciprocal agreements, two were cancelled during 2001 and one more was terminated in the beginning of 2002.  The services provided and obtained through these agreements were priced at fair value as of the date of the agreement.  We recognized the transport and colocation revenues from these

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agreements in accordance with our stated revenue recognition policy, and we concurrently recorded the expenses for colocation services as cost of services in our statements of operations.  None of the expenses associated with our reciprocal agreements are capitalized.  All of the costs are expensed as incurred.  Reciprocal agreements accounted for $2.2 million, or 17%, of revenues in 2000 and $2.2 million of our cost of services.  In 2001, reciprocal agreements accounted for $5.2 million, or 17%, of revenues and $5.4 million of our cost of services.  For the year ended December 31, 2002, reciprocal agreements accounted for $0.8 million, or 3%, of revenues and $0.8 million of our cost of services.

     We continuously monitor collections and payments from our customers and maintain allowances for doubtful accounts based upon our historical experience and any specific customer collection issues that we have identified.  While such credit losses have historically been within our expectations, there can be no assurance that we will continue to experience the same level of credit losses that we have in the past.  A significant number of our customers have filed for bankruptcy or are otherwise in significant financial distress.  A significant change in the liquidity or financial position of any one of these customers or a further deterioration in the economic environment or telecommunications industry, in general, could have a material adverse impact on the collectability of our accounts receivable and our future operating results, including a reduction in future revenues and additional allowances for doubtful accounts.  If we determine that collection of a receivable is not reasonably assured, we defer the revenue and recognize it at the time collection becomes reasonably assured, which is generally upon receipt of payment.

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

     During 2001, we performed an assessment of the goodwill related to our acquisition of Devnet, LLC, pursuant to SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.” Devnet had entered into exclusive license agreements to manage communications access to commercial office properties, and we associated the goodwill resulting from the acquisition primarily to those agreements. We made the determination to perform an assessment based upon significant negative industry and economic trends. In 2001, a change in the business environment resulted in significantly less demand for telecommunications access to commercial office properties, and the number of potential customers seeking these services diminished greatly. Consequently, we revised our forecasted cash flows from Devnet and determined that the decline in the market conditions within this market segment was material and other than temporary. After using an undiscounted cash flow model of the future cash flows forecasted to be generated from business activities in the commercial office properties underlying the license agreements and determining there was an impairment, we used a discounted cash flow model to determine the size of the impairment. As a result, we recorded a charge of $56.5 million during the third quarter of 2001 to reduce goodwill associated with the purchase of Devnet. The charge was based on the amount by which the carrying amount of these assets exceeded their fair value. During 2001, we recorded approximately $3.1 million of amortization of goodwill relating to Devnet.

     In June 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets”, applicable for fiscal years beginning after December 15, 2001. SFAS No. 142, which we adopted effective January 1, 2002, requires that goodwill and certain intangible assets resulting from business combinations entered into prior to June 30, 2001 no longer be amortized, but instead be reviewed for recoverability. Any write-down of goodwill would be charged as a cumulative change in accounting principle upon adoption of the new accounting standard if the recorded value of goodwill and certain intangibles exceeds its fair value.  During the fourth quarter of 2002, we considered current information, including an analysis of our market value as a result of our successful recapitalization as discussed in Note 6 of the financial statements, and determined that there is no additional impairment of goodwill.

     In 2001, we also determined that our forecasts for revenues for certain of our facilities would not be achieved due to the significant adverse change in the business climate. We further determined that the dramatic change in the operating environment for the telecommunications industry resulted in a significantly less demand for our services in these facilities. We believe that the decrease in demand was a result of the significant number of bankruptcies of

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telecommunications companies that were existing or potential customers of ours and the overall economic recession. We also determined that a rebound in demand for our services would not occur in the near term. As a result, we revised our business plan and conducted extensive reviews of our assets and operations. The revisions to the business plan primarily included reductions in forecasts of revenues and capital expenditures. The projected amounts of certain cost of services and overhead expenses were reduced as well to reflect the decrease in our expected business activity. We also determined that certain financial covenants in our credit facility would need to reflect the revised business plan, including our reduced revenue forecasts. Consequently, we amended our credit facility in December 2001.

     We used an undiscounted forecasted cash flow model to determine if there was an impairment based on the cash flows expected to be generated from the assets related to these facilities, and used a discounted cash flow model to measure the impairment. As a result of this analysis, we have recorded an asset impairment of approximately $51.8 million in the fourth quarter of 2001, based on the amount by which the carrying amount of these assets exceeded their fair value. Of this amount, $40.4 million relates to assets held for use, and $11.4 million represents assets to be disposed of.

     The assets that we identified for disposition were abandoned, as we determined that these assets had no value. Consequently, there was no cost to us for this abandonment, nor do we expect to receive any proceeds or other consideration from this abandonment. We recorded no reserves, accruals or other liabilities related to this abandonment. These assets primarily related to engineering and network architecture design costs and general contracting and project management costs for facilities that we are no longer pursuing.

     During 2002, we recovered approximately $0.3 million from the sale of assets previously written off as impaired.  The proceeds were recorded as a recovery of the impairment recorded during the year ended December 31, 2001.

     During 2002, we recorded a write-off of property, plant and equipment of $0.7 million. We recorded this write-off of capital assets due to the termination of several leases and license agreements for network facilities. There was no cost to us to abandon these assets, nor do we expect to receive any proceeds or other consideration from the abandonment of these assets.

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

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

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

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Results of Operations

Fiscal Year Ended December 31, 2002 Compared to Fiscal Year Ended December 31, 2001

     Revenues.  Revenues for the fiscal year ended December 31, 2002 were $25.3 million as compared to $31.2 million for the fiscal year ended December 31, 2001.  Revenues were generated by providing transport, colocation and communications access management services to our customers.  We recognized $15.8 million in transport services in 2002, down from $19.6 million in 2001.  This decrease was primarily the result of the termination of three of our reciprocal agreements and customer service disconnections.  These negative trends were partially offset by the provisioning of new services for new and existing customers. 

     Revenues from colocation and other services increased to $5.6 million in 2002 from $5.5 million in 2001, and revenues from communications access management services declined to $3.9 million in 2002 from $6.1 million in 2001.  This decrease in access revenues was due to the severe decline in the market for building-centric services and the resulting bankruptcies of many building-centric service providers, many of whom were our customers.  Prospectively, we expect transport services to grow at a faster rate than colocation and access management services.  Our network infrastructure has significant capacity to provide additional broadband transport connectivity.  However, our colocation facilities are approaching more stabilized utilization rates.  We do not expect revenue growth in our access management services revenues. 

     For fiscal year 2002, two customers accounted for approximately 24.0% of our revenues.  During 2001, three customers accounted for approximately 53.3% of our revenues.  Two of those companies have filed for bankruptcy.  Once a customer has filed for bankruptcy, we recognize revenues from that customer only upon the receipt of payment.  Prospectively, we expect these customers to represent a significantly lower percentage of our revenues.

     Reciprocal agreements accounted for $0.8 million, or 3%, of revenues in 2002, down from $5.2 million, or 17%, of revenues in 2001.  In 2001, we terminated two of our reciprocal agreements, and in 2002 we terminated one additional reciprocal agreement.

     Revenues continue to be negatively impacted by the general economic environment and by the difficulties that are impacting our industry. Customer contracts and services have been cancelled, resulting in a loss of recurring revenues to us.  Although losses in revenues have been partially offset by customer orders for new services, there can be no assurance that to the extent we continue to incur losses of revenues, they will be offset by orders for new services, if any.

     In July 2002 we negotiated a revised pricing structure with a significant customer for the services that we provided to it, although we previously were not obligated to do so. In addition, this customer subsequently terminated certain services that we were providing. The impact to revenues attributable to these two events was approximately a $1.4 million reduction in revenues for the year ended December 31, 2002.  The impact of these events does not put us in a loss position with respect to the remaining services with this customer.

     Cost of Services.  Cost of services, associated with the operation of our networks and facilities, were $7.5 million in 2002, compared to $13.8 million in 2001.  The majority of our cost of services is occupancy expenses, consisting of rent and utility costs, for our carrier hotel facilities, on-net buildings and off-net buildings.  Other cost of services includes license fees, maintenance and repair costs, and professional fees.  The decrease of $6.3 million was due to a reduction in expenses associated with the elimination of certain of our network facilities and the termination of certain reciprocal agreements. In addition, cost of services for the year ended December 31, 2002 was reduced by $0.7 million due to certain, non-recurring concessions that we negotiated from vendors, thereby reducing accounts payable. These items were expensed in prior periods and included in our cost of services.  Reciprocal agreements accounted for $0.8 million of our cost of services in 2002 and $5.4 million of our cost of services for 2001.

     Selling, General and Administrative Expenses.  Selling, general and administrative expenses for 2002 were $18.2 million compared to $32.9 million for 2001.  The decrease is a result of our aggressive cost savings initiatives to reduce corporate overhead in line with our outlook for business activity.  Cost reductions were realized in nearly all components of selling, general and administrative expenses, including advertising and marketing costs, professional fees and travel and entertainment expenses.  The greatest decrease in overhead came in personnel costs, as we reduced headcount from 108 employees at the beginning of 2002 to 75, as of December 31, 2002.  Included in selling, general and administrative expenses for 2002 was a legal settlement expense of approximately $0.6 million,

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and $2.1 million of charges incurred for professional fees related to our recapitalization in October 2002.  We anticipate selling, general and administrative expenses to increase modestly in 2003 with the general growth of our business, as the significant majority of our cost savings initiatives have already been implemented.

     Stock Related Expense.  Stock related expense for 2002 was $0.2 million, compared to $(1.2) million for 2001.  This non-cash expense relates to the granting of stock options to employees.  The amount for the prior period reflects a reversal of a previously recorded expense, due to the decline in the price per share of our common stock.

     In December 2000, we repriced stock options for certain of our executive officers, resulting in variable plan accounting in accordance with FASB Interpretation (FIN) No. 44, Accounting for Certain Transactions Involving Stock Compensation, from the date of modification.  The additional intrinsic value was determined on the date of modification using the then market price of the common stock.  The additional compensation cost was recognized over the period from the date of modification to the date the awards vest.  The additional compensation cost has been adjusted in subsequent periods for changes in the market price.  After the awards vested, adjustments to compensation cost for changes in the market price were recognized immediately.  In subsequent periods, the market price declined, resulting in negative compensation cost being recognized.  In accordance with FIN 44, illustration 3(g), income (negative expense) has been recognized up to the amount of expense previously recognized in prior periods relating specifically to the modified awards.

     Impairment of property, plant and equipment.  In 2002, we recorded an asset impairment of $13.2 million to reflect our revised business plan and forecast of revenues due to the continued adverse business environment and industry conditions. Included in this charge is a recovery of $0.3 million due to the disposition of equipment that was impaired in 2001. We also recorded a write-off of property, plant and equipment of $0.7 million in April 2002. We recorded this write-off of capital assets due to the termination of several property leases and license agreements for network facilities. There was no cost to us to abandon these assets, nor do we expect to receive any proceeds or other consideration from the abandonment of these assets. We recorded no other reserves, accruals or other liabilities related to these write-offs.  In 2001, we recorded an asset impairment of $51.8 million to reflect our revised business plan and the state of the market at that time.

     Impairment of goodwill.  In 2001, we recorded a non-cash, non-recurring charge for the impairment of goodwill, relating to our acquisition of Devnet, LLC in the amount of $56.5 million.  We recorded this write down of goodwill in accordance with Statement of Financial Accounting Standards No. 121 “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.” No additional impairment of goodwill was recorded in 2002.

     Depreciation and Amortization.  Depreciation and amortization expense for 2002 was $10.3 million, compared to $15.3 million for 2001.  This decrease resulted from the impairment of property, plant and equipment that we recorded in 2001 and the adoption of SFAS No. 142, “Goodwill and Other Intangible Assets”, applicable for fiscal years beginning after December 15, 2001. SFAS No. 142, which we adopted effective January 1, 2002, requires that goodwill and certain intangible assets resulting from business combinations entered into prior to December 31, 2001 no longer be amortized, but instead be reviewed for recoverability.

     Interest Expense, Net.  Interest expense, net for 2002 was $7.5 million, compared to $8.6 million in 2001.  Interest expense decreased due to lower effective interest rates on the indebtedness under our credit facility, and the conversion of debt into equity as part of our recapitalization that occurred in October 2002.

     Extraordinary loss on early extinguishment of debt.  In 2002, we recorded a non-cash charge of $5.8 million related to the extinguishment of our subordinated note payable on October 30, 2002, as part of our recapitalization.  In 2001, we recorded a non-cash charge of $7.4 million related to an early extinguishment of debt from the modification of our credit facility on February 9, 2001.

     Preferred Stock Dividends.  For the year ended December 31, 2002, we paid approximately $44,000 in non-cash dividends on our series H preferred stock in the form of additional shares of series H preferred stock, which were convertible into shares of common stock.  In 2001, we paid non-cash dividends on our series D, E, F, H and I preferred stock of $1.1 million in the form of additional shares of each respective series of preferred stock, which were convertible into shares of common stock.  The amounts of the dividends assume the market price per share of the underlying common stock, as of the date the dividends are paid.  The decrease in preferred dividends was the result of a decline in the public market price of our common stock and the conversion of certain series of preferred

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stock.  The liquidation value of the dividends paid in 2002 was $0.6 million, compared to $5.3 million for dividends paid in 2001.

     Preferred Stock - Beneficial Conversion. In February 2001, the conversion price of our series H and series I preferred stock was reduced to $4.38, in accordance with the original terms of the issuance transactions. The certificates of designation of the series H and series I included provisions requiring the conversion prices to be lowered to the per share price at which we issued any shares of common stock, subject to certain exceptions, subsequent to the initial issuance of the series H and series I. In February 2001, we issued shares of common stock in a directed public offering at a price of $4.38 per share, resulting in the reduction of the conversion price. We recorded a beneficial conversion charge of $21.0 million as a result of the reduction of the conversion price. Additionally, in connection with the conversion of the series H and series I, the conversion price of the remaining 100,000 shares of series H was reduced to $1.31. However, as all of the proceeds from the issuances of the series H and series I had been allocated to beneficial conversion features, no additional proceeds were allocated upon the reset of the conversion price of the series H to $1.31.

     On December 7, 2001, we consummated a directed public offering of 360 shares of a new series of preferred stock, designated series J preferred stock for an aggregate purchase price of $3.6 million.  Subject to certain adjustments, the series J preferred stock was convertible into the number of shares of common stock equal to 90% of the average of the five lowest volume weighted average prices for our common stock during the 15 trading days immediately prior to the date of conversion, provided that such average price shall not be less than $0.20 nor greater than $0.50.  In connection with this transaction, we recorded a non-recurring, non-cash charge for a beneficial conversion feature in the amount of $2.1 million to reflect the market price of the common stock as of the date of the issuance.  The amounts of the beneficial conversion charges assume the market price per share of the underlying common stock, as of the date the charge is incurred, in accordance with EITF Issue 98-05, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratio.”  There was no preferred stock - beneficial conversion recorded in 2002. 

     Net Loss Applicable to Common Stockholders.  We reported a net loss applicable to common stockholders of $37.4 million in 2002 compared to a loss of $178.2 million in 2001.  The decrease in the net loss applicable to common stockholders is a result of the aforementioned changes in our operations.

Fiscal Year Ended December 31, 2001 Compared to Fiscal Year Ended December 31, 2000

     Revenues.  Revenues for the fiscal year ended December 31, 2001 were $31.2 million as compared to $13.1 million for the fiscal year ended December 31, 2000.  Revenues were generated by providing transport, colocation and communications access management services to our customers.  We recognized $19.6 million in transport services in 2001, up from $9.3 million in 2000.  This increase was primarily a result of strong demand for high bandwidth circuits within and between our carrier hotel facilities.  Revenues from colocation and other services increased to $5.5 million in 2001 from $2.2 million in 2000, and revenues from communications access management services grew to $6.1 million in 2001 from $1.6 million in 2000. 

     During 2001, three customers accounted for approximately 53.3% of our revenues.  In 2000, these customers accounted for 70.8% of revenues.  Two of those companies have filed for bankruptcy.  Once a customer has filed for bankruptcy, we recognize revenues from that customer only upon the receipt of payment.  Our revenues for 2001 were not impacted by the bankruptcy of one of those customers because the customer filed for bankruptcy subsequent to year end. 

     Reciprocal agreements accounted for $5.2 million, or 17%, of revenues in 2001, up from $2.2 million, or 17%, of revenues in 2000.  In 2001, we terminated two of our reciprocal agreements, and in 2002 we terminated one additional reciprocal agreement. 

     Cost of Services.  Cost of services, associated with the operation of our networks and facilities, were $13.8 million in 2001, compared to $5.4 million in 2000.  The majority of our cost of services is occupancy expenses, consisting of rent and utility costs, for our carrier hotel facilities, on-net buildings and off-net buildings.  Other cost of services includes license fees, maintenance and repair costs, and professional fees.  The increase in cost of services was primarily the result of the addition of new facilities in 2001 and incorporating a full year’s expenses for facilities added in 2000.  Reciprocal agreements accounted for $5.4 million of our cost of services in 2001 and $2.2 million of our cost of services in 2000.

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     Selling, General and Administrative Expenses.  Selling, general and administrative expenses for 2001 were $32.9 million compared to $27.1 million for 2000.  The initial increase in expenses resulting from the expansion of our operations in the first half of 2001 was partially offset in the second half of the year by our aggressive cost savings initiatives to reduce corporate overhead in line with our outlook for business activity.  Cost reductions were realized in nearly all components of selling, general and administrative expenses, including advertising and marketing costs, professional fees and travel and entertainment expenses.  The greatest decrease in overhead came in personnel costs, as we reduced headcount from 194 employees at the beginning of 2001 to 108, as of December 31, 2001.  In accordance with EITF Issue 94-03, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)”, an accrual of approximately $62,000 for severance benefits not yet paid at December 31, 2001 was recorded.

     Stock Related Expense.  Stock related expense for 2001 was $(1.2) million, compared to $8.5 million for 2000.  This non-cash expense relates to the granting of stock options to employees.  The amount for the current period reflects a reversal of a previously recorded expense.  This reversal is due to a decline in the price per share of our common stock during the reporting period.

     In December 2000 we repriced stock options for certain of our executive officers, resulting in variable plan accounting in accordance with FASB Interpretation (FIN) No. 44, Accounting for Certain Transactions Involving Stock Compensation, from the date of modification.  The additional intrinsic value was determined on the date of modification using the then market price of the common stock.  The additional compensation cost was recognized over the period from the date of modification to the date the awards vest.  The additional compensation cost has been adjusted in subsequent periods for changes in the market price.  After the awards vested, adjustments to compensation cost for changes in the market price were recognized immediately.  In subsequent periods, the market price declined, resulting in negative compensation cost being recognized.  In accordance with FIN 44, illustration 3(g), income (negative expense) has been recognized up to the amount of expense previously recognized in prior periods relating specifically to the modified awards.

     Impairment of property, plant and equipment.  In 2001 we recorded an asset impairment of $51.8 million to reflect our revised business plan and the state of the market at that time.  No impairment of property, plant and equipment was recorded in 2000.

     Impairment of goodwill.  In 2001 we recorded a non-cash, non-recurring charge for the impairment of goodwill, relating to our acquisition of Devnet, LLC in the amount of $56.5 million.  We recorded this write down of goodwill in accordance with Statement of Financial Accounting Standards No. 121 “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.” No impairment of goodwill was recorded in 2000.

     Depreciation and Amortization.  Depreciation and amortization expense for 2001 was $15.3 million, compared to $7.7 million for 2000.  This increase resulted from the commencement of the depreciation of certain network related fixed assets that were placed into service, as well as amortization of goodwill from the purchase of Devnet.

     Interest Expense, Net.  Interest expense, net for 2001 was $8.6 million, compared to $5.7 million in 2000.  Interest expense increased due to additional borrowings under our credit facility to fund the buildout of our networks, operating losses and working capital.

     Extraordinary loss on early extinguishment of debt.  In 2001 we recorded a non-cash charge of $7.4 million related to an early extinguishment of debt from the modification of our credit facility on February 9, 2001.  We did not record such a charge in 2000.

     Preferred Stock Dividends.  In 2001 we paid non-cash dividends on our series D, E, F, H and I preferred stock of $1.1 million in the form of additional shares of each respective series of preferred stock, which are convertible into shares of common stock, compared to $8.1 million of dividends in 2000.  The amounts of the dividends assume the market price per share of the underlying common stock, as of the date the dividends are paid.  The decrease in preferred dividends was the result of a decline in the public market price of our common stock.  The liquidation value of the dividends paid in 2001 was $5.3 million, compared to $3.0 million for dividends paid in 2000.

     Preferred Stock - Beneficial Conversion.  We recorded beneficial conversion charges of $23.1 million and $27.8 million upon the issuance of three new series of preferred stock issued during fiscal 2001 and 2000, respectively.  The amounts of the dividends and the beneficial conversion charge assume the market price per share

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of the underlying common stock, as of the date the charge is incurred, in accordance with EITF Issue 98-05, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratio.”

     Net Loss Applicable to Common Stockholders.  We reported a net loss applicable to common stockholders of $178.2 million in 2001 compared to a loss of $77.0 million in 2000.  The increase in the net loss applicable to common stockholders is a result of the aforementioned changes in our operations.

Liquidity and Capital Resources

     To date, we have financed our operations through direct equity investments from our stockholders, the issuance of additional debt and equity securities in private transactions and by arranging a senior secured credit facility with a group of lenders.  We incurred a loss from operations and a net loss applicable to common stockholders for 2002 of $24.1 million and $37.4 million, respectively, compared to a loss from operations and a net loss applicable to common stockholders $138.0 million and $178.2 million, respectively, for 2001.  During 2002, cash used to fund operating activities was $4.5 million, and cash purchases of property, plant and equipment were $2.5 million, compared to $22.0 million and $46.7 million, respectively, for 2001.

     During 2002, we received $7.4 million in net cash proceeds from financing activities, primarily in connection with our recapitalization.  During 2001, we received $70.5 million in net cash proceeds from financing activities.  Net proceeds from the issuance of equity securities during 2001 were $25.8 million.  On February 2, 2001, we completed a $28.2 million directed public offering of our common stock under our existing shelf registration statement.  We issued 6,440,000 shares of common stock at a purchase price of $4.375 per share as well as warrants to purchase an additional 1,288,000 shares at an exercise price of $6.56 per share with a term of three years.

     On December 7, 2001, we completed another directed public offering under our shelf registration statement.  We issued 360 shares of our series J preferred stock at a purchase price of $10,000 per share, as well as warrants to purchase up to 10,212,701 shares of common stock at an exercise price of $0.30 per share with a term of five years.  The total proceeds to us from this offering were $3.6 million, before offering expenses.  In addition, subject to certain conditions, the stock purchase agreement for this offering of series J preferred stock contemplated two additional closings in which we could sell in the aggregate an additional $5.7 million of series J preferred stock to the initial purchasers.  We could opt out of one or both of these subsequent closings upon payment of cash consideration and upon approval of our lenders under our credit facility.

     On February 9, 2001, we increased our existing credit facility with Deutsche Bank AG New York Branch, Deutsche Banc Alex Brown Inc., First Union Investors, Inc., First Union Securities, Inc., Toronto Dominion (USA) Securities Inc. and other lenders from $75.0 million to $105.0 million.  In connection with this amended credit facility, we issued warrants to purchase an additional 454,409 shares of our common stock at a purchase price of $8.00 per share with a term expiring April 11, 2005.  In addition, as part of the amendment of our credit facility, all warrants issued under the original credit agreement were replaced with new warrants to purchase an equivalent amount of our common stock at a purchase price of $8.00 per share.  On April 27, 2001, in connection with a waiver and agreement under our credit facility, warrants to purchase 300,000 shares of our common stock at a purchase price of $8.00 per share held by Deutsche Banc Alex Brown were replaced with new warrants to purchase an equivalent amount of our common stock at a purchase price of $0.01 per share.  Also, on December 10, 2001 we amended the credit facility to reflect the issuance of the series J preferred stock and related matters.  In connection with this amendment, all warrants previously issued under the credit agreement were replaced with new warrants to purchase an equivalent amount of our common stock at a purchase price of $0.50 per share.

     On December 7, 2001 we issued a promissory note in the amount of $2.3 million to Nortel Networks Inc., a related party, as consideration for accounts payable previously due and owing for equipment and services.  The note bore interest at an annual rate of 14% and was payable in eight monthly installments of approximately $300,000 beginning in January 2002.  We believe the terms of this transaction were no less favorable than could be received from an independent, third party.

     On January 2, 2002 we entered into an interest rate swap transaction with Deutsche Bank AG for a notional amount of $25.0 million and a term of two years.  Pursuant to this transaction, we were obligated to make quarterly interest payments at a fixed, annual interest rate of 3.7%, excluding the applicable margin that we paid on our credit facility.  As part of this agreement, Deutsche Bank AG was obligated to pay to us on a quarterly basis a floating rate of interest based upon LIBOR with a designated maturity of three months.  On March 20, 2002, we terminated this

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interest rate swap transaction with Deutsche Bank AG with no payments or other amounts owed by either party. As a result, all of our outstanding borrowings under our credit facility bear interest at a floating rate.

     On March 15, 2002, we received gross proceeds of $2.0 million from the issuance of a subordinated note payable to an existing investor. The issuance of the note was in lieu of a second and third closing on our series J preferred stock, as was previously contemplated. The promissory note had an original maturity date of June 14, 2002 and bore interest, which was due and payable on the maturity date, at an annual rate of 8%.  The maturity of this subordinated note payable, as well as the due dates of certain interest payments under our credit facility, were extended as we pursued our recapitalization.

     On October 30, 2002 we completed a series of transactions with the lenders under our credit facility as well as certain investors to undertake the recapitalization of our company. These transactions are described below.

     Pursuant to the terms of a common stock purchase agreement dated as of October 30, 2002 by and among us and our lenders under our credit facility, we issued 440,000,000 shares of our common stock to the lenders at a price of $0.15 per share, as prepayment of an aggregate of $66.0 million of outstanding indebtedness under our credit facility. We also issued warrants to purchase 110,000,000 shares of common stock at an exercise price of $0.12 per share with a term of five years to the lenders. These warrants are immediately exercisable and contain standard anti-dilution protection. As of October 30, 2002, the 440,000,000 shares issued to the lenders constituted approximately 61% of the total number of outstanding shares of common stock. Such shares, together with shares issuable upon exercise of the warrants, also constituted approximately 61% of the shares of common stock outstanding on a fully diluted basis, assuming the exercise of all outstanding options and warrants.

     In connection with this transaction, we and certain of our lenders also entered into a stockholders agreement dated as of October 30, 2002. Under the terms of this stockholders agreement, such lenders have the right to designate two independent persons to be members of our board of directors, along with other certain rights and privileges. Together with the lenders, we also executed a seventh amendment to our credit agreement which, among other things, amends certain terms of the credit agreement in conjunction with the transactions that were consummated on October 30, 2002.

     As part of the seventh amendment, the term loan commitments and revolving loan commitments available under the credit facility were reduced to a total of $40.5 million from a total of $105.0 million.  The term loan commitments were reduced to $26.2 million, all of which was drawn and outstanding, and the revolving loan commitments were reduced to $14.4 million.  All of our revolving loan commitments were utilized with drawn, outstanding borrowings of $7.3 million and outstanding letter of credit issued in the amount of $7.1 million.  As a result of this amendment, we had no additional availability under our credit facility.

     In addition, the effective applicable margin on our borrowings was reduced from LIBOR+450 basis points to LIBOR+375 basis points until December 31, 2003.  Furthermore, the payment of all accrued interest on borrowings during the period beginning on October 30, 2002 and ending on June 30, 2003 is capitalized and added to the outstanding principal amount of the term loan indebtedness. Prior to October 30, 2002, there was $5.2 million of interest due and payable on the indebtedness outstanding under the credit facility.  As part of this transaction, accrued interest of $3.2 million was capitalized and added to the outstanding principal amount of the term loan indebtedness, included above. Subsequently on November 11, 2002, we issued to our lenders in exchange for the remaining $2.0 million of accrued interest 20,000,000 shares of common stock and warrants to purchase 20,000,000 shares of common stock at an exercise price of $0.12 per share with a term of five years. These warrants are immediately exercisable and contain standard anti-dilution protection.

     Other amendments to our credit facility include modifications to the automatic reduction of commitments and to financial covenants.  Previously the first automatic reduction in the availability under our credit facility was to have occurred on June 30, 2003.  However as amended, the automatic reduction of commitments begin on a quarterly basis on March 31, 2004.  We are also now subject to amended financial covenants.  Beginning with the quarter ended September 30, 2002, we must now comply with financial covenants that include minimum consolidated revenue, minimum consolidated EBITDA (as defined in the credit agreement underlying the credit facility) and maximum cumulative capital expenditures.  Beginning on December 31, 2003 in addition to those requirements, our financial covenants will also include a maximum consolidated leverage ratio, a minimum consolidated interest coverage ratio and a minimum consolidated fixed charge coverage ratio.  The compliance

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levels and calculation of such levels with respect to those covenants are as defined in the credit agreement underlying our credit facility, as amended.

     Pursuant to the terms of an investors’ rights agreement entered into on October 30, 2002 by and among us and our lenders, we agreed to file a resale registration statement with respect to all of the shares issued to our lenders, including shares issuable upon exercise of the warrants. This registration statement was declared effective on February 20, 2003 and also included shares issued in the other recapitalization transactions described below.

     On October 30, 2002, we also entered into a common stock purchase agreement with certain investors, pursuant to which we issued to the investors in a private offering an aggregate of 38,000,000 shares of common stock for a price of $0.10 per share, or an aggregate cash consideration of $3.8 million. Pursuant to the terms of this purchase agreement, we also issued to such investors warrants to purchase an additional 38,000,000 shares of common stock at an exercise price of $0.12 per share with a term of five years. These warrants are also immediately exercisable and contain standard anti-dilution protection.

     Immediately prior to the private offering of common stock and warrants, we consummated certain related transactions with the investors.  In one such transaction, we issued to one of the investors, 9,002,040 shares of common stock in exchange for the surrender of a promissory note originally issued on December 7, 2001 by us to a related party, which promissory note had been assigned by such related party to this investor immediately prior to such exchange for $150,000 in cash. This exchange was consummated pursuant to the terms of a note exchange agreement dated as of October 30, 2002 by and among us and the investor. Such promissory note, at the time of surrender, had an outstanding principal amount of $450,102 owing thereon.

     In a second related transaction, we issued an aggregate of 104,581,425 shares of common stock to the investors pursuant to the terms of a share exchange agreement dated as of October 30, 2002 by and among us and the investors. Such shares were issued upon the conversion of all 104,578 outstanding shares of our series H preferred stock. Such investors had, immediately prior to such exchange and conversion, acquired these series H preferred shares, along with shares of common stock, from a related party for cash consideration of $735,000. The shares of series H preferred stock so surrendered had an aggregate liquidation preference, including accrued dividends thereon, of $10.7 million.

     In a third related transaction, the holders of all 303 outstanding shares of our series J preferred stock surrendered such shares to us in exchange for 60,600,000 shares of common stock. This transaction was effected pursuant to a series J exchange agreement dated as of October 30, 2002 by and among us and the series J preferred stockholders. The series J preferred stock so surrendered had an aggregate liquidation preference of $3.0 million.

     We entered into a registration rights agreement dated as of October 30, 2002 with these investors which required us to file a resale registration statement with the Securities and Exchange Commission no later than 30 days after such date, with respect to the registration of all of the shares of common stock issued on October 30, 2002 and all shares issuable upon the exercise of the warrants issued to investors.  As described above, this registration statement was declared effective on February 20, 2003 and included shares issued to our lenders.

     In total, 652,183,465 shares of common stock and warrants to purchase an aggregate of 148,000,000 shares of common stock were issued on October 30, 2002, as part of these transactions.

     On November 11, 2002 in addition to the issuance of common stock and warrants to our lenders in satisfaction of $2.0 million of accrued interest as discussed above, we issued to an investor 52,000,000 shares of common stock in exchange for the surrender by that investor of the subordinated note payable issued by us on March 15, 2002 in the initial principal amount of $2.0 million, pursuant to the terms of a note exchange agreement.  Such promissory note, at the time of surrender, had outstanding principal and accrued interest of $2.1 million owing thereon.  Furthermore, we also agreed to include such shares issued to our lenders and this investor within the terms of agreements previously entered into on October 30, 2002, including the registration rights agreement. Other than the inclusion of such additional shares, the terms of such amended and restated agreements are unchanged from those of their respective predecessors.   We, together with our lenders, also executed an eighth amendment to the credit agreement dated as of November 11, 2002 to amend certain terms in conjunction with the transactions occurring on such day.

     A total of 72,000,000 shares of common stock and warrants to purchase an aggregate of 20,000,000 shares of common stock were issued on November 11, 2002, representing the issuance of approximately 10% of the common

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stock outstanding, on a fully diluted basis, as of that day.  As a result, we had 788,515,187 shares of common stock outstanding, or approximately 1,000,000,000 shares of common stock outstanding on a fully diluted basis, assuming the exercise of all outstanding options and warrants. 

     In connection with the transactions consummated on October 30, 2002 and November 11, 2002, we paid a fee of $0.4 million to a financial advisory firm and issued to that firm warrants to purchase an additional 6,200,000 shares of common stock at an exercise price of $0.001 per share with a term of one year. In addition, Michael Liss, our Chief Executive Officer, was compensated in the amount of $0.4 million for his efforts in negotiating and completing the transactions described above.

     On January 10, 2003, we completed another series of transactions with the lenders under our credit facility. Pursuant to the terms of three debt exchange agreements between us and each of Bank One, N.A., Nortel Networks Inc. and TD Securities (USA) Inc., we issued 138,514,536 shares of our common stock to these lenders at a price of $0.10 per share, in satisfaction of approximately $13.4 million of indebtedness, representing all of the outstanding principal indebtedness and accrued interest owing to these lenders under our credit facility.

     We also entered into a common stock purchase agreement, dated as of January 10, 2003, with certain investors, pursuant to which we issued to the investors in a private offering an aggregate of 29,166,667 shares of common stock for a price of $0.12 per share, for an aggregate cash consideration of $3.5 million. Pursuant to the terms of the purchase agreement, we also issued to such investors warrants to purchase an additional 56,869,574 shares of common stock at an exercise price of $0.12 per share with a term of five years. Concurrently with the other transactions occurring on January 10, 2003, the investors also purchased 294,601,838 shares of common stock from the three lenders, departing from the credit facility, in a privately negotiated transaction for an aggregate cash consideration of $9.0 million.

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

     In connection with the transactions contemplated by the debt exchange agreements, we executed a ninth amendment to our credit agreement, pursuant to which, among other things, the rights and obligations of the departing lenders under the credit facility terminated, subject to standard reinstatement and survival provisions. As a condition to the lenders entering into this amendment, we agreed to reduce the exercise price of certain warrants previously issued to and held by the lenders to purchase approximately 76,349,206 shares of common stock from $0.12 per share to $0.001 per share. All of the repriced warrants were immediately exercised by the lenders. In addition pursuant to a security agreement and a securities account control agreement, we agreed to deposit approximately $2.3 million in a restricted account as cash collateral to secure the assumption by Deutsche Bank AG New York Branch of the departing lenders’ funding obligations for our outstanding letters of credit, which totalled approximately $6.1 million.

     As a result of these transactions, we had $21.7 million of indebtedness outstanding under our credit facility, which reflects the total amount available under the credit facility as of January 10, 2003.  The weighted average interest rate on our outstanding borrowings under the facility were 5.17%, and we were in full compliance with all of the covenants contained in the credit agreement underlying the facility.  Non-compliance with any of the covenants, requirements, or other terms and conditions under the credit agreement, constitutes an event of default and potentially accelerates the outstanding balance of the credit facility for immediate payment.

     In addition, we have approximately 1.0 billion shares of common stock outstanding, or approximately 1.2 billion shares of common stock outstanding on a fully diluted basis, assuming the exercise of all outstanding options and warrants. Currently, the three remaining lenders under the Company’s senior secured credit facility own approximately 30.1% of the outstanding shares of our common stock.

     We anticipate spending approximately $2.0 million in capital expenditures during 2003, primarily for the implementation of customer orders.  We have substantially completed the deployment of our FINs, carrier hotel facilities and metropolitan transport networks.  We may expend additional capital for the selected expansion of our network infrastructure, depending upon market conditions, customer demand and our liquidity and capital resources.

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     Our obligations and commitments to make future payments under contracts primarily include scheduled reductions in the availability of our credit facility, principal payments on our capital lease obligations, and payments under our operating leases.

     The chart below identifies our outstanding contractual obligations and commitments as of December 31, 2002.

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

Recent Accounting Pronouncements

     In June 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets”, applicable for fiscal years beginning after December 15, 2001. SFAS No. 142, which we adopted effective January 1, 2002, requires that goodwill and certain intangible assets resulting from business combinations entered into prior to June 30, 2001 no longer be amortized, but instead be reviewed for recoverability. Any write-down of goodwill would be charged as a cumulative change in accounting principle upon adoption of the new accounting standard if the recorded value of goodwill and certain intangibles exceeds its fair value.  During the fourth quarter of 2002, we considered current information, including an analysis of our market value as a result of our successful recapitalization as discussed in Note 6 of the financial statements, and determined that there is no additional impairment of goodwill.

     The following table presents the impact of SFAS No. 142 as if it had been in effect for the years ended December 31, 2001 and 2000 (in thousands, except per share amounts):

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

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     In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” The statement replaces SFAS No. 121, “Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed Of,” although it retains the impairment testing methodology used in SFAS No. 121. The accounting and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” are superceded by SFAS No. 144, except that the statement preserves the requirement of APB Opinion No. 30 to report discontinued operations separately from continuing operations. The statement covers a variety of implementation issues inherent in SFAS No. 121, unifies the framework used in accounting for assets to be disposed of and discontinued operations, and broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. The statement is effective for fiscal years beginning after December 15, 2001. We adopted SFAS No. 144 on January 1, 2002. The adoption of SFAS No. 144 did not have a material impact on our financial statements.

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

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

     In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—an Amendment of FASB Statement No. 123,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.

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

Certain Facts That May Affect Future Results of Operations

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

Factors Affecting our Business Condition

     In addition to the other information and factors included in this report, the following factors should be considered in evaluating our business and future prospects:

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We are an early-stage company, and we expect to encounter risks and difficulties frequently experienced by early-stage companies in new and rapidly evolving markets.

We did not begin to engage in our current business until 1999 and did not begin to offer our services until the first quarter of 2000. The market for our services is unproven, and our limited operating history makes the evaluation of our future prospects very difficult. We will encounter risks and difficulties frequently experienced by early stage companies in new and rapidly evolving markets. As an early-stage organization we are at a competitive disadvantage to larger, more established competitors. We anticipate that this competitive disadvantage may persist for the foreseeable future. If we do not successfully address these risks, our business may suffer.

We have and may continue to experience operating losses, net losses and a cash flow deficit.

We may not achieve or sustain operating income, net income or positive cash flow from operations in the future. Since our inception we have incurred operating losses and net losses both on an annual and quarterly basis. We have not achieved profitability and expect to continue to incur operating losses and net losses in 2003, and we may not for the foreseeable future. In 2000, we had an operating loss of $35.5 million and a net loss applicable to common stockholders of $77.0 million, and in 2001, we had an operating loss of $138.0 million and a net loss applicable to common stockholders of $178.2 million. In 2002, we had an operating loss of $24.1 million and a net loss applicable to common stockholders of $37.4 million. In 2000, we had revenues of $13.1 million, and in 2001 we had revenues of $31.2 million. In 2002, we generated revenues of $25.3 million.

You should also be aware that our financial and operational performance depends upon a number of factors, many of which are beyond our control. These factors include:

We may require additional capital to fund the further development of our networks and operation of our business, and an inability to obtain such capital could harm our business.

Although we have substantially completed the build-out of our networks, we may selectively expand our networks in the future as market conditions and customer demand dictate. In addition, we may have to expand or adapt our networks to respond to the following:

To do so, we may need to raise additional funds through public or private equity or debt financings. If we raise funds through the issuance of equity securities, the ownership percentage of our then-current stockholders will be diluted and the holders of new equity securities may have rights, preferences or privileges senior to those of the holders of our common stock. If additional funds are raised through another bank credit facility or the issuance of debt

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securities, the holders of such indebtedness would have rights senior to the rights of the holders of our common stock, and the terms of this indebtedness could impose restrictions on our ability to incur additional indebtedness and on our operations, which could impede the successful completion of our business plan.

There can be no assurance that additional funds will be available at the time needed, or on terms acceptable to us. Our inability to obtain additional financing, as needed, could have a material adverse effect on our business.

We must maintain our existing agreements for space in major carrier hotels or our business will be harmed.

Our business depends upon our ability to lease space in carrier hotels to establish carrier point facilities where we can locate our networking equipment and interconnect with our customers. At a minimum, to provide our services in a particular metropolitan area, we must obtain space in the major carrier hotels in that area. In addition, we need adequate space at our carrier point facilities in order to continue offering colocation services. There may be significant competition for space in major carrier hotels. Our inability to obtain additional space, or our inability to renew existing leases, would negatively impact our operations and have a material adverse effect on our business.

Many of our customers and vendors are experiencing financial difficulties and have filed or may file for bankruptcy protection.

The recent general economic weakness has severely impacted the telecommunications industry. The expected demand for broadband connectivity has not been realized in many segments of the market. As a result, there has been an industry-wide slowdown in capital spending and a large number of industry related bankruptcy filings. Many of our customers and vendors are currently experiencing financial distress, some of them have filed for bankruptcy protection.

We have contracts with communications providers that have filed for relief from creditors under the Bankruptcy Code, as well as contracts with other communications providers who may still yet file for bankruptcy protection. As a result, there is a significant doubt that some of our customers or vendors will perform their obligations under our contracts with them. In bankruptcy proceedings, the debtor, or trustee, as the case may be, has the right to, among other things, reject certain contracts.

In the past, bankruptcy courts have determined that certain our contracts with our customers constitute executory contracts, and the contracts were rejected. As a result, we received an unsecured claim for damages against the debtors, and all rights and privileges under the contracts were terminated, including payment for services rendered. There can be no assurance that additional customers or vendors will not seek bankruptcy protection and that additional contracts will be terminated.

We should increase the number of our significant customers and the volume of traffic on our networks or our business may suffer.

Our revenues continue to be negatively impacted by the general economic environment and by the difficulties that are affecting our industry. As a result, we should increase the current volume of traffic on our networks in order to realize anticipated revenues and cash flows. To do so, we must obtain long-term commitments from new large-volume customers, as well as expand our relationships with current customers. This need is more critical as a wholesale carrier because our potential customers are a limited number of service providers. Therefore, it is essential for us to succeed at establishing and expanding customer relationships; otherwise our business will suffer.

During the fiscal year ended December 31, 2002, two of our largest customers accounted for approximately 24.0% of our revenues. This concentration of revenues increases the risk of a substantial decrease in our revenues, resulting from a deterioration in our relationship with either of these customers.

If we cannot maintain the scalability, reliability and speed of our network, potential customers will not use our services.

Because of the limited deployment of our services, our ability to manage a substantial amount of traffic on our networks while maintaining superior service is unknown at this time. There is no assurance that our network will be able to maintain current levels of service as the number of our customers grows. Our failure to maintain such levels

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of service would significantly reduce customer demand for our services and have a material adverse effect on our business.

Service interruptions on our networks could expose us to liability or cause us to lose customers.

Our operations depend on our ability to avoid and mitigate any damages from power losses, network failures, transmission cable cuts or natural disasters. The failure of any equipment or facility on our networks could result in the interruption of service until we make the necessary repairs or install replacement equipment. If service is not restored in a timely manner, agreements with our customers may obligate us to provide credits or other remedies to them, which would reduce our revenues. Service disruptions could also damage our reputation with customers, causing us to lose existing customers or have difficulty attracting new ones. Many of our customers’ communications needs are extremely time sensitive, and delays in signal delivery may cause significant losses to a customer using our networks. Our networks may also contain undetected design faults and software “bugs” that, despite our testing, may be discovered only after our networks have been completed and are in use.

The occurrence of a natural disaster or act of terrorism in close proximity to our facilities would substantially harm our business.

The substantial majority of our facilities are located within the New York metropolitan area, with the remainder located in Chicago and Los Angeles. Given the concentration of our facilities, the loss of one of our facilities through the occurrence of a natural disaster, fire or flood, or an act of terrorism would have a material adverse effect on our business, results of operations and financial condition. We may not carry sufficient insurance to compensate us for losses caused by such an occurrence.

Our failure to manage the growth of our operations could harm our business.

We have rapidly and significantly expanded our operations. We anticipate that further expansion will be required to grow our customer base if we are to be successful in implementing our business strategy. Our future performance depends in part upon our senior management’s ability to manage our growth effectively. We may not be able to implement management information and control systems in an efficient and timely manner, and our current or planned personnel, systems, procedures and controls may not be adequate to support our future operations. If we are unable to manage our growth effectively, our business will suffer.

Our business will be harmed if our information support systems are not further developed.

Sophisticated information processing systems, including provisioning, accounting and network management, are vital to our growth and our ability to achieve operating efficiencies. Our plans for the development and implementation of these systems rely largely upon acquiring products and services from third party vendors and integrating those products and services. We may be unable to implement these systems on a timely basis or at all, and these systems may not perform as expected. A failure of these systems could substantially impair our ability to provide services, send invoices and monitor our operations. We may also be unable to maintain and upgrade our operational support systems as necessary.

We license key software from third parties. If we are unable to obtain such software on commercially acceptable terms, our business could be adversely affected.

We rely on software licensed from third parties, including applications that are integrated with internally developed software and used in our services. Most notably, we license Portal, Preside and MetaSolv TBS. These third-party technology licenses may not continue to be available to us on commercially reasonable terms, or at all, and we may not be able to obtain licenses for other existing or future technologies that we desire to integrate into our services. Although we believe that there are alternative suppliers for the software that we rely upon, it could take a significant period of time to establish relationships with alternative suppliers and integrate their software into our services. The loss of any of our relationships with these suppliers could have a material adverse affect on our business.

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We depend on our key personnel, and the loss of their services may adversely affect our business.

We are highly dependent upon the efforts of our senior management team, none of whom currently have an employment agreement with us. The death or departure of any of our key personnel could have a material adverse effect on our business.

We may become the subject of litigation by our stockholders, which could adversely affect our business.

In addition to claims that may arise in the normal course of our business and financing activities, certain of our stockholders may sue us in an attempt to recover their losses as a result of the decline in our stock price. The resolution of such a claim would likely be costly and time-consuming. If any or all of such claims cannot be resolved through a negotiated settlement, we could become a party to the resulting litigation. Any litigation, even if we are successful, could result in substantial costs and diversion of resources and management attention. An adverse determination in any litigation could also subject us to significant liability, under the judgment of a court or by default.

The sector in which we operate is highly competitive, and we may not be able to compete effectively.

We face competition from many entities with significantly greater financial resources, well-established brand names and larger customer bases. The entities that compete with us include cable modem, Internet, digital subscriber line, microwave, mobile and fixed wireless service providers, local telephone companies, long distance companies and competitive collocation providers. The numerous companies that may seek to enter our market may expose us to severe price competition for our services. We expect competition to intensify in the future. If these competitors successfully focus on our market opportunity, there may be intense price competition which could have a material adverse effect on our business.

We may face competition from various service providers in buildings for which we have exclusive license agreements.

We generally have exclusive license agreements for both our on-net and off-net buildings. Even though our competitors cannot install a central distribution system in any of our buildings covered by an exclusive agreement, they may still compete with us by installing infrastructure designed to directly service one or more specific tenants in the building as requested by such tenants. Consequently, they could indirectly compete against us by not utilizing our in-building networks to gain connectivity to tenants. In addition, incumbent local exchange carriers, or ILECs, and the regional bell operating companies, or RBOCs, currently own pre- existing, copper-based networks in many of our on-net and off-net buildings. These ILECs and RBOCs may be able to upgrade their existing networks to provide advanced broadband services which would place them in direct competition with us. Furthermore, service providers may have pre-existing license agreements in our buildings, which allow these providers to install, and possibly expand, their network infrastructure in our buildings. As a result, we may face competition in some of the buildings for which we have exclusive license agreements.

Alternative technologies pose competitive threats.

In addition to fiber-optic technology, there are other technologies that provide more capacity and speed than traditional copper wire transmission technology, such as digital subscriber lines, or DSL, and wireless technologies, and can be used instead of our network. Furthermore, these technologies may be improved and other new technologies may be developed that provide more capacity, reliability, scalability and speed than the fiber-optic technology we deploy. The development of new technologies or the significant penetration of alternative technologies into our target markets may reduce the demand for our services and consequently could have a material adverse effect on our business.

In the communications industry, continued pricing pressure from our competitors and an excess of network capacity continue to cause prices for our services to decline.

We anticipate that prices for broadband network services, in general, and for our services, in particular, will continue to decline over the next several years due primarily to the following:

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We have outstanding debt that may limit our ability to borrow additional money, restrict the use of our cash flows and constrain our business strategy, and we may not be able to meet our debt obligations.

As of February 28, 2003, we had total debt of $21.7 million. As a result of this debt and debt that we may incur in the future, we will need to devote a portion of our available cash towards debt service payments. In addition, our ability to borrow additional money is restricted by our current debt arrangements. Furthermore, we have agreed to terms in the credit agreement, which governs our senior secured credit facility, that expose us to certain risks and limitations, including the following:

You should be aware that our ability to repay or refinance our debt depends on our successful financial and operating performance and on our ability to implement our business strategy successfully. We cannot assure you that our future cash flows and capital resources will be sufficient to repay our existing indebtedness and any indebtedness we may incur in the future, or that we will be successful in obtaining alternative financing. Further, our borrowings under our credit facility are secured by substantially all of our assets and our obligations under our facility are guaranteed by our subsidiaries. In the event that we are unable to repay our debts, we may be forced to reduce or delay the completion or expansion of our networks, sell some of our assets, obtain additional equity capital or refinance or restructure our debt. If we are unable to meet our debt service obligations or comply with our covenants, we would be in default under our existing debt agreements. To avoid a default, we may need waivers from third parties, which might not be granted.

Legislation and government regulation could adversely affect us.

We are subject to federal, state and local regulations that affect our services, competition, the taxation of our services and other aspects of our operations. The regulation of the communications industry is changing rapidly, and varies from state to state. Changes in the regulatory environment could affect our operating results by increasing competition, decreasing revenue, increasing costs or impairing our ability to offer services. Certain communications services are subject to significant regulation at the federal and state level. The Federal Communications Commission, or FCC, regulates communications carriers providing intrastate, interstate and international common carrier services. State public utility commissions exercise jurisdiction over intrastate communications services. The FCC and state public utility commissions do not regulate most enhanced services, which involve more than the pure transmission of customer provided information. Our subsidiary, Local Fiber, LLC, is regulated as a common carrier by virtue of its provision of communications services directly to the public for a fee. As a common carrier, Local Fiber, LLC is subject to extensive federal, state and local communications regulation, which includes the payment of all applicable regulatory assessments.

Many of our competitors and vendors, especially ILECs, are subject to federal and state regulations. These regulations change from time to time in ways that are difficult for us to predict. Although we believe the services we provide today, other than those provided by Local Fiber, LLC, are not subject to regulation imposed on other telecommunications services by the FCC or the state public utility commissions, changes in regulation or new legislation may impose regulation on our non-regulated services.

Regulation of access to office buildings could negatively affect our business. Some states have adopted laws that require that commercial building owners provide non-discriminatory access to communications providers. Recently,

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the FCC released its decision relating to access to commercial multiple tenant buildings, and legislation was enacted that increases telecommunications access to buildings owned or used by the federal government. Among other decisions, the FCC prohibited telecommunications carriers from entering into exclusive agreements with commercial building owners on a prospective basis, and required utilities, including local exchange carriers, to provide access to other telecommunications carriers and cable service providers. Other building access issues remain to be addressed by the FCC. Depending on how these rules are interpreted, these requirements may facilitate our competitors’ entry into buildings in which we offer our services, which in turn will diminish the value of our access rights and adversely affect our competitive position.

As an access provider, we may incur liability for information disseminated through our networks. The law relating to the liability of access providers and on-line services companies for information carried on or disseminated through their networks is unsettled. Although we have not been sued for information carried on our networks, it is possible that we could be. Federal and state statutes have been directed at imposing liability on Internet service providers for aspects of content carried on their networks. There may be new legislation and court decisions that may affect our services and expose us to potential liability.

As the law in this area develops, the potential imposition of liability for information carried on and disseminated through our networks could require us to implement measures to reduce our exposure to such liability, which may require the expenditure of substantial resources or the discontinuation of certain products or services offerings. Any significant costs that we incur as a result of such measures or the imposition of liability could have a material adverse effect on our business, including our operating expenses and our liquidity.

Our principal stockholders, directors and executive officers currently control a majority of the voting rights of our stock, and this may limit your ability to affect the outcome of any stockholder vote or exercise any influence over our business.

The concentration of ownership of our common stock may have the effect of delaying, deferring or preventing a change in control, merger, consolidation, or tender offer that could involve a premium over the price of our common stock. Currently, our executive officers, directors and greater-than-five-percent stockholders and their affiliates, in the aggregate, beneficially own approximately 63% of our outstanding common stock. These stockholders, if they vote together, are able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions and matters.

Anti-takeover provisions could prevent or delay a change of control that stockholders may consider favorable.

Provisions in our certificate of incorporation, our by laws and Delaware law could delay or prevent a change of control or change in management that would provide stockholders with a premium to the market price of their common stock. The authorization of undesignated preferred stock, for example, gives our board the ability to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to change control of the company. If a change of control or change in management is delayed or prevented, this premium may not be realized, or the market price of our common stock could decline.

The liquidity of our common stock could be adversely affected by changes in our Nasdaq listing.

Our common stock is currently listed on the Nasdaq SmallCap Market. On February 13, 2002, we received notification from Nasdaq that our common stock failed to comply with Nasdaq’s minimum bid price requirement of $1.00 per share for continued listing on the Nasdaq National Market. Pursuant to the notification from Nasdaq, our common stock was to be delisted from the Nasdaq National Market on May 14, 2002. We, however, successfully applied to Nasdaq to have our listing transferred from the Nasdaq National Market to the Nasdaq SmallCap Market. Our common stock began trading on the Nasdaq SmallCap Market on May 24, 2002. We then had until August 22, 2002, to regain compliance with Nasdaq’s minimum bid price requirement. Although we did not satisfy the minimum bid price requirement by August 22, 2002, Nasdaq granted us an additional 180 calendar day grace period to regain compliance with its minimum bid price requirement.

On March 19, 2003, we received notification from Nasdaq that we were granted another grace period until May 12, 2003 to regain compliance.  We have yet to satisfy this requirement, and we may be delisted from the Nasdaq

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SmallCap Market, upon notification. Our stockholders have approved our effectuating a reverse stock split to bring us into compliance with Nasdaq’s minimum bid price requirement; however, our board of directors has yet to adopt such a reverse stock split.

If we are delisted from the Nasdaq SmallCap Market, our shares will continue to trade, if at all, on the OTC Bulletin Board, upon application by the requisite market makers. This will adversely impact our stock price, as well as the liquidity of the market for our shares which, as a result, will adversely affect the ability of our stockholders to purchase and sell their shares in an orderly manner, or at all. Furthermore, a delisting of our shares could damage our general business reputation and impair our ability to raise additional funds. Any of the foregoing events could have a material adverse effect on our business, financial condition and operating results.

Effect of Reverse Split

We have received the approval of our stockholders to effect either a 1-for-20 or a 1-for-30 reverse stock split at any time prior to June 30, 2003.  Should we determine to effectuate either of the reverse splits, the number of shares of our common stock outstanding will be reduced proportionately and the value of our common stock could be negatively affected in a number of ways, including less liquidity by virtue of fewer shares being traded and that although initially the market price per share of our common stock will be increased proportionately with the reverse split, there is no guarantee that the common stock will maintain such increased market price.  Additionally, if after the reverse split is effectuated a stockholder owns less than 100 shares of our common stock, then such stockholder will be considered an odd-lot holder and sales by such holders usually involve higher transaction costs.

Holders of our common stock will not receive a return on their shares until they sell them because we do not  plan to pay cash dividends on our shares.

We have neither declared nor paid any dividends on our common stock and do not anticipate paying cash dividends in the future. We currently intend to retain any earnings to fund operations and future growth. Furthermore, our credit facility currently prohibits, and the terms of any future debt agreements or preferred stock will likely restrict, the payment of cash dividends on our common stock.

Our stock price is likely to be highly volatile, and you may lose all or part of your investment.

The trading price of our common stock is highly volatile. Failure to meet market expectations because of quarterly fluctuations in our financial results could cause our stock price to decline, and you could lose all or part of your investment. Moreover, factors that are not related to our operating performance could cause our stock price to decline. The stock market has periodically experienced significant price and volume fluctuations that have affected the market prices for securities of technology and communications companies. Consequently, you may experience a decrease in the market value of your common stock or lose all or part of your investment, regardless of our operating performance or prospects.

We must issue a substantial number of additional shares of common stock, which could adversely affect the trading price of our common stock.

We have a substantial number of shares of common stock subject to stock options and warrants. We cannot predict the effect, if any, that future sales of shares of common stock, or the availability of shares of common stock for future sale, will have on the market price of our common stock. Sales of substantial amounts of common stock (including shares issued upon the exercise of stock options or warrants), or the perception that such sales could occur, may adversely affect prevailing market prices for our common stock.

     Our exposure to financial market risk, including changes in interest rates, relates primarily to our credit facility and marketable security investments.  Borrowings under our credit facility bear interest at floating rates, based upon LIBOR or a base rate plus an applicable margin.  As a result, we are subject to fluctuations in interest rates.  A 100 basis point increase in LIBOR would increase our annual interest expense by less than $1.0 million per year.  As of February 28, 2003, we had borrowed $21.7 million under our credit facility, with a current weighted average interest rate of 5.17%. 

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

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

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CONSOLIDATED FINANCIAL STATEMENTS

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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of FiberNet Telecom Group, Inc.:

     We have audited the accompanying consolidated balance sheet of FiberNet Telecom Group, Inc. (“FiberNet”) as of December 31, 2002, and the related consolidated statements of operations, stockholders’ equity and cash flows for the year then ended. These financial statements are the responsibility of FiberNet’s management. Our responsibility is to express an opinion on these financial statements based on our audit. The consolidated financial statements of FiberNet Telecom Group, Inc. as of December 31, 2001 and for the years ended December 31, 2001 and 2000, were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those consolidated financial statements in their report dated February 28, 2002 (except with respect to the matters discussed in Note 17, as to which the date is May 16, 2002).

     We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

     In our opinion, such 2002 consolidated financial statements present fairly, in all material respects, the financial position of FiberNet Telecom Group, Inc., as of December 31, 2002, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

     As described in Note 2 to the consolidated financial statements, FiberNet adopted Statement of Financial Accounting Standards No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets,” effective January 1, 2002.

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THIS REPORT SET FORTH BELOW IS A COPY OF A PREVIOUSLY ISSUED AUDIT REPORT BY ARTHUR ANDERSEN LLP. THIS REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP IN CONNECTION WITH ITS INCLUSION IN THIS FORM 10-K.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To FiberNet Telecom Group, Inc.:

     We have audited the accompanying consolidated balance sheets of FiberNet Telecom Group, Inc. and subsidiaries (a Delaware corporation) as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders’ equity and cash flows for the years ended December 31, 2001, 2000 and 1999, as restated-See Note 16. These consolidated 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 in accordance with auditing standards generally accepted in the United States. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

     We have also audited the adjustments described in Note 16 that were applied to restate the 1999 financial statements. In our opinion, such adjustments are appropriate and have been properly applied.

     In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FiberNet Telecom Group, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for the years ended December 31, 2001, 2000 and 1999, as restated, in conformity with accounting principles generally accepted in the United States.

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FIBERNET TELECOM GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)

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

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FIBERNET TELECOM GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)