SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

~~Form~~FORM 10-Q

(Mark One)
þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED JUNE 30, 2003.
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)

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

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

Commission File Number 000-31105

~~Lexent~~LEXENT ~~Inc~~INC.

(Exact name of registrant as specified in its charter)

Delaware		13-3990223
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
Three New York Plaza New York, New York (Address of principal executive offices)		10004 (Zip Code)
Three New York Plaza New York, New York		10004
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: 212-981-0700

Indicate by check mark whether the registrant: (1) has filed all reports ~~212-981-0700~~required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12 b-2 of the Securities Exchange Act of 1934) ~~Yes o No þ~~

~~Indicate~~Yes ~~the~~[ ] ~~number~~No ~~of shares outstanding of each~~[X] ~~of the issuer’s classes of common stock, as of the latest~~ ~~practicable date. Common Stock, $.001 par value, 42,266,522~~ ~~shares outstanding as of August 5, 2003.~~

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

TABLE OF CONTENTS

TABLE OF CONTENTS
PART I- FINANCIAL INFORMATION
PART I -- FINANCIAL INFORMATION
	ITEM 1. Financial Statements
	Item 1. Financial Statements
		CONDENSED CONSOLIDATED BALANCE SHEETS
LEXENT INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
LEXENT INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
LEXENT INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
	ITEM 4. Controls and Procedures
PART II -- OTHER INFORMATION
PART II — OTHER INFORMATION
	Item 1. Legal Proceedings
	ITEM 1. Legal Proceedings
	Item 5. Other Information
	ITEM 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K
	ITEM 6. Exhibits and Reports on Form 8-K
SIGNATURES
302 CERTIFICATION: CEO
CERTIFICATION
302 CERTIFICATION: COO
CERTIFICATION
906 CERTIFICATION: CEO AND COO
CERTIFICATION

LEXENT INC. AND SUBSIDIARIES

TABLE OF CONTENTS

			~~Page No.~~	Page No.
PART I.	Financial Information			2
Item 1.	Financial Statements			2
ITEM 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of June 30, 2003 (unaudited) and December 31, 2002			2
		Condensed Consolidated Balance Sheets as of September 30, 2003 (unaudited) and December 31, 2002			3
	Condensed Consolidated Statements of Operations (unaudited) for the Three Months and Six Months Ended June 30, 2003 and June 30, 2002			3
		Condensed Consolidated Statements of Operations (unaudited) for the Three Months and Nine Months Ended September 30, 2003 and September 30, 2002			4
	Condensed Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2003 and June 30, 2002			4
		Condensed Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2003 and September 30, 2002			5
	~~Notes to Condensed Consolidated Financial Statements (unaudited)~~	Notes to Condensed Consolidated Financial Statements (unaudited)		~~5-13~~	6-13
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			14-18
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations				14-18
Item 3.	Quantitative and Qualitative Disclosures about Market Risk			18
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk				18
Item 4.	Controls and Procedures			18
ITEM 4.	Controls and Procedures				18-19
PART II.	Other Information			19
Item 1.	Legal Proceedings			19
ITEM 1.	Legal Proceedings				19
Item 5.	Other Information			19-20
ITEM 5.	Other Information				19-20
Item 6.	Exhibits and Reports on Form 8-K			21
ITEM 6.	Exhibits and Reports on Form 8-K				20-21
	Signatures			22	22
	Certifications			~~23-25~~	23-25

PART I —- FINANCIAL INFORMATION

~~Item~~ITEM 1. Financial Statements

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

CONDENSED CONSOLIDATED BALANCE SHEETS


				September 30,			December 31,
				2003			2002

Assets:				(unaudited)
Current assets:
		Cash and cash equivalents		$	61,683		$	28,109
		Certificate of deposit (restricted cash)			2,013			2,012
		Available-for-sale investments			1,010			44,302
		Receivables, net			30,786			28,311
		Prepaid expenses and other current assets			2,030			2,048
		Income taxes receivable			—			14,750

			Total current assets		97,522			119,532
Property and equipment, net					4,704			4,033
Other assets					826			880

			Total assets	$	103,052		$	124,445

Liabilities and Stockholders’ Equity:
Current liabilities:
		Accounts payable		$	3,690		$	7,494
		Accrued expenses and other liabilities			8,013			6,229
		Restructure reserve			2,375			4,023
		Billings in excess of costs and estimated earnings on uncompleted projects			3,503			1,837
		Provision for contract losses			2,315			3,472
		Subordinated note payable to stockholder			791			1,582
		Equipment and capital lease obligations			99			451

			Total current liabilities		20,786			25,088
Subordinated note payable to stockholder					—			396
Accrued liabilities — noncurrent					700			600
Restructure reserve — noncurrent					5,534			6,566
Equipment and capital lease obligations					—			70

	Total liabilities				27,020			32,720

Commitments and contingencies
Stockholders’ equity:
		Common stock, $.001 par value, 120,000,000 shares authorized, 42,290,561 and 42,168,396 shares outstanding at September 30, 2003 and December 31, 2002 respectively			42			42
		Additional paid-in capital			156,105			156,035
		Deferred stock-based compensation			(479	)		(2,126	)
		Accumulated other comprehensive income			—			105
		Accumulated deficit			(79,636	)		(62,331	)

			Total stockholders’ equity		76,032			91,725

			Total liabilities and stockholders’ equity	$	103,052		$	124,445

			June 30,			December 31,
			2003			2002
			(Unaudited)
			(Dollars in thousands, except
			per share amounts)
ASSETS
Current assets:
	Cash and cash equivalents		$	39,850		$	28,109
	Certificate of deposit (restricted cash)			2,009			2,012
	Available-for-sale investments			34,973			44,302
	Receivables, net			23,361			28,311
	Prepaid expenses and other current assets			1,800			2,048
	Income taxes receivable			—			14,750
		Total current assets		101,993			119,532
Property and equipment, net				3,515			4,033
Other assets				834			880
		Total assets	$	106,342		$	124,445
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	2,606		$	7,494
	Accrued expenses and other liabilities			7,020			6,229
	Restructure reserve			2,773			4,023
	Billings in excess of costs and estimated earnings on uncompleted projects			2,437			1,837
	Provision for contract losses			1,696			3,472
	Subordinated note payable to stockholder			1,187			1,582
	Equipment and capital lease obligations			137			451
		Total current liabilities		17,856			25,088
Subordinated note payable to stockholder				—			396
Accrued liabilities — noncurrent				900			600
Restructure reserve — noncurrent				5,875			6,566
Equipment and capital lease obligations				14			70
		Total liabilities		24,645			32,720
Commitments and contingencies
Stockholders’ equity:
	Common stock, $.001 par value, 120,000,000 shares authorized, 42,244,959 and 42,168,396 shares outstanding at June 30, 2003 and December 31, 2002, respectively			42			42
	Additional paid-in capital			156,058			156,035
	Deferred stock-based compensation			(957	)		(2,126	)
	Accumulated other comprehensive income			—			105
	Accumulated deficit			(73,446	)		(62,331	)
		Total stockholders’ equity		81,697			91,725
		Total liabilities and stockholders’ equity	$	106,342		$	124,445

See accompanying notes to condensed consolidated financial statements.

3 ~~See accompanying notes to condensed consolidated~~ ~~financial statements.~~

2 Table of Contents

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

LEXENT INC. AND SUBSIDIARIES


				For the Three Months						For the Nine Months
				Ended September 30,						Ended September 30,

				2003			2002			2003			2002

Revenues				$	27,716		$	27,718		$	68,928		$	92,183
Cost of revenues					30,917			34,158			74,798			94,966

			Gross margin		(3,201	)		(6,440	)		(5,870	)		(2,783	)

Operating expenses:
	General and administrative expenses				2,204			4,600			8,937			13,117
	Depreciation and amortization				463			1,229			1,455			3,751
	Non-cash stock-based compensation*				478			760			1,637			2,541
	Restructuring charges				—			—			—			1,441

			Total operating expenses		3,145			6,589			12,029			20,850

Loss from operations					(6,346	)		(13,029	)		(17,899	)		(23,633	)
Other income and expense:
	Interest expense				21			57			82			198
	Interest income				(174	)		(325	)		(689	)		(1,021	)
	Other (income) expense, net				(3	)		8			(43	)		1,456

			Total other (income) expense, net		(156	)		(260	)		(650	)		633

Loss before income taxes					(6,190	)		(12,769	)		(17,249	)		(24,266	)
Provision for (benefit from) income taxes					—			(5,620	)		56			(7,935	)

			Net loss	$	(6,190	)	$	(7,149	)	$	(17,305	)	$	(16,331	)

Net loss per share:
		Basic and diluted		$	(0.15	)	$	(0.17	)	$	(0.41	)	$	(0.39	)

Weighted average common shares outstanding:
		Basic			42,269			42,076			42,236			41,870

		Diluted			*	*		*	*		*	*		*	*

~~CONDENSED~~*Substantially ~~CONSOLIDATED~~these ~~STATEMENTS~~amounts OFwould have been classified as general and administrative expenses. ~~OPERATIONS~~

			For the Three Months						For the Six Months
			Ended June 30,						Ended June 30,
			2003			2002			2003			2002
			(Unaudited)
			(Dollars in thousands, except per share amounts)
Revenues			$	20,867		$	33,152		$	41,212		$	64,465
Cost of revenues				21,352			31,373			43,881			60,808
	Gross margin			(485	)		1,779			(2,669	)		3,657
Operating expenses:
	General and administrative expenses			3,879			4,085			6,733			8,517
	Depreciation and amortization			479			1,233			992			2,522
	Non-cash stock-based compensation*			478			760			1,159			1,781
	Restructuring charges			—			—			—			1,441
		Total operating expenses		4,836			6,078			8,884			14,261
Loss from operations				(5,321	)		(4,299	)		(11,553	)		(10,604	)
Other income and expense:
	Interest expense			27			65			61			141
	Interest income			(256	)		(337	)		(515	)		(696	)
	Other (income) expense, net			11			40			(40	)		1,448
		Total other (income) expense, net		(218	)		(232	)		(494	)		893
Loss before income taxes				(5,103	)		(4,067	)		(11,059	)		(11,497	)
Provision for (benefit from) income taxes				18			(1,614	)		56			(2,315	)
	Net loss		$	(5,121	)	$	(2,453	)	$	(11,115	)	$	(9,182	)
Net loss per share:
	Basic and diluted		$	(0.12	)	$	(0.06	)	$	(0.26	)	$	(0.22	)
Weighted average common shares outstanding:
	Basic			42,245			41,832			42,220			41,766
	Diluted			**			**			**			**

** Anti-dilutive, therefore, not presented.

*See ~~Substantially~~accompanying ~~these~~notes ~~amounts~~to ~~would~~condensed ~~have~~consolidated ~~been~~financial ~~classified as general and administrative expenses~~statements.

** Anti-dilutive, therefore, not presented.4

SeeTable accompanyingof notes to condensed consolidated financial statements. Contents

3LEXENT INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) (unaudited)


					For the Nine Months Ended
					September 30,

					2003			2002

Cash flows from operating activities:
	Net loss				$	(17,305	)	$	(16,331	)
	Adjustments to reconcile net loss to net cash used in operating activities:
				Restructuring charges		—			1,441
				Depreciation and amortization		1,455			3,751
				Provision for uncollectible accounts		(1,286	)		580
				Loss on investment/ disposition of assets		—			1,455
				Provision for deferred tax benefit		—			(8,086	)
				Provision for contract losses		(1,157	)		2,995
				Non-cash stock-based compensation		1,637			2,541
			Changes in working capital items:
				Receivables		(1,189	)		11,967
				Deferred tax asset/income taxes receivable		14,750			3,284
				Prepaid expenses and other current assets		18			668
				Other assets		54			413
				Accounts payable		(3,804	)		(560	)
				Accrued liabilities		(681	)		(5,567	)
				Billings in excess of costs and estimated earnings on uncompleted projects		1,666			1,298

				Net cash used in operating activities		(5,842	)		(151	)

Cash flows from investing activities:
	Capital expenditures					(2,231	)		(913	)
	Purchase of certificate of deposit					(1	)		(2,005	)
	Proceeds from sale of available-for-sale investments					43,187			3,422

				Net cash provided by investing activities		40,955			504

Cash flows from financing activities:
	Proceeds from exercise of stock options and stock purchase plan					70			567
	Repayments of subordinated note payable to stockholder					(1,187	)		(1,187	)
	Repayments of equipment loans and capital leases					(422	)		(1,252	)

				Net cash used in financing activities		(1,539	)		(1,872	)

Net increase (decrease) in cash and cash equivalents						33,574			(1,519	)
Cash and cash equivalents at beginning of period						28,109			75,839

Cash and cash equivalents at end of period					$	61,683		$	74,320

Supplemental cash flow information:
	Cash paid for:
		Interest			$	86		$	211
		Taxes			$	91		$	157
Supplemental disclosures of non-cash investing and financing activities
		Reduction in deferred stock-based compensation			$	9		$	3,658

~~LEXENT~~See ~~INC.~~accompanying ~~AND~~notes ~~SUBSIDIARIES~~to condensed consolidated financial statements.

5 ~~CONDENSED CONSOLIDATED STATEMENTS OF CASH~~ ~~FLOWS~~

			For the Six Months
			Ended June 30,
			2003			2002
			(Unaudited)
			(Dollars in thousands)
Cash flows from operating activities:
Net loss			$	(11,115	)	$	(9,182	)
Adjustments to reconcile net loss to net cash provided by operating activities:
	Restructuring charges			—			1,441
	Depreciation and amortization			992			2,522
	Provision for uncollectible accounts			(100	)		426
	Loss on investment/disposition of assets			—			1,448
	Provision for deferred taxes			—			2,160
	Provision for contract losses			(1,776	)		—
	Non-cash stock-based compensation			1,159			1,781
Changes in working capital items:
	Receivables			5,051			6,271
	Income taxes receivable			14,750			—
	Prepaid expenses and other current assets			248			(1,315	)
	Other assets			46			432
	Accounts payable			(4,888	)		2,359
	Accrued liabilities			(738	)		(5,290	)
	Income taxes payable and prepaid taxes			—			(2,805	)
	Billings in excess of costs and estimated earnings on uncompleted projects			600			1,062
		Net cash provided by operating activities		4,229			1,310
Cash flows from investing activities:
	Capital expenditures			(596	)		(705	)
	Proceeds from renewal of certificate of deposit			22			—
	Proceeds from sale of property and equipment			—			28
	Proceeds from sale of available-for-sale investments			9,224			3,422
		Net cash provided by investing activities		8,650			2,745
Cash flows from financing activities:
	Proceeds from exercise of stock options and stock purchase plan			23			434
	Repayments of subordinated note payable to stockholder			(791	)		(791	)
	Repayments of equipment loans and capital leases			(370	)		(948	)
		Net cash used in financing activities		(1,138	)		(1,305	)
Net increase in cash and cash equivalents				11,741			2,750
Cash and cash equivalents at beginning of period				28,109			75,839
Cash and cash equivalents at end of period			$	39,850		$	78,589
Supplemental cash flow information:
Cash paid for:
	Interest		$	66		$	153
	Income taxes		$	75		$	138
Supplemental disclosures of non-cash investing and financing activities
	Reduction in deferred stock-based compensation		$	9		$	3,658

LEXENT INC. AND SUBSIDIARIES ~~See~~NOTES ~~accompanying~~TO ~~notes~~CONDENSED toCONSOLIDATED ~~condensed~~FINANCIAL ~~consolidated~~STATEMENTS ~~financial~~SEPTEMBER ~~statements.~~30, 2003 (UNAUDITED)

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

~~Table~~ Certain ofamounts ~~Contents~~in the prior period have been reclassified to conform with the current period presentation.

The Company received a letter, dated March 3, 2003, from the Nasdaq Stock ~~LEXENT~~Market ~~INC.~~notifying ~~AND~~the ~~SUBSIDIARIES~~Company that, as a result of the resignations of its independent directors, Lexent did not meet the independent director and audit committee requirements for continued listing on the Nasdaq National Market.

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

~~June 30,~~1. ~~2003~~NET LOSS PER SHARE

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

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


	Three Months Ended						Nine Months Ended
	September 30,						September 30,

	2003			2002			2003			2002

	(in thousands, except per share amounts)
Net loss per share-basic:
Net loss	$	(6,190	)	$	(7,149	)	$	(17,305	)	$	(16,331	)

Weighted average shares-basic		42,269			42,076			42,236			41,870

Net loss per share-basic	$	(0.15	)	$	(0.17	)	$	(0.41	)	$	(0.39	)

Net loss per share-diluted:
Net loss	$	(6,190	)	$	(7,149	)	$	(17,305	)	$	(16,331	)

Weighted average shares-basic		42,269			42,076			42,236			41,870

Dilutive effect of stock options		415			549			384			843
Dilutive effect of employee stock purchase plan		—			2			—			2

Weighted average shares-diluted		42,684			42,627			42,620			42,715

Net loss per share-diluted		*			*			*			*

~~Certain~~* ~~amounts~~Inclusion inof ~~the~~common ~~prior~~stock ~~period~~equivalent ~~have~~shares ~~been~~would result in an ~~reclassified~~anti-dilutive tonet ~~conform~~loss ~~with~~per share. As a result, the ~~current~~computation ~~year~~for ~~presentation~~diluted loss per share is not presented.

6 ~~The Company received a letter, dated~~ ~~March 3, 2003, from the Nasdaq Stock Market notifying the~~ ~~Company that, as a result of the resignations of its independent~~ ~~directors, Lexent did not meet the independent director and audit committee requirements for continued listing on the Nasdaq National Market.~~

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

1LEXENT INC. ~~Net~~ ~~Loss~~AND ~~Per~~SUBSIDIARIES ~~Share~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2003 (UNAUDITED)

~~Net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the period~~2. ~~Diluted~~ACCUMULATED ~~loss~~OTHER ~~per~~COMPREHENSIVE ~~share reflects the potential~~INCOME ~~dilution of other securities by including in the weighted~~ ~~average number of common shares outstanding for each period the~~ ~~dilutive effect of stock options and shares issuable under the~~ ~~employee stock purchase plan. Details of the calculations are as follows:~~

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2003			2002			2003			2002
	(In thousands, except per share amounts)
Net loss per share — basic:
Net loss	$	(5,121	)	$	(2,453	)	$	(11,115	)	$	(9,182	)
Weighted average shares — basic		42,245			41,832			42,220			41,766
Net loss per share — basic	$	(0.12	)	$	(0.06	)	$	(0.26	)	$	(0.22	)
Net loss per share — diluted:
Net loss	$	(5,121	)	$	(2,453	)	$	(11,115	)	$	(9,182	)
Weighted average shares — basic		42,245			41,832			42,220			41,766
Dilutive effect of stock options		383			865			368			990

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

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


	Unrealized gain			Accumulated
	on available-for-			other
	sale			comprehensive
	investments			income

	(in thousands)
Balance, December 31, 2002	$	105		$	105

Change for 2003		(105	)		(105	)

Balance, September 30, 2003	$	—		$	—

~~LEXENT INC~~3. ~~AND~~CERTIFICATE ~~SUBSIDIARIES~~OF DEPOSIT (RESTRICTED CASH)

In ~~NOTES~~August 2002, TOLexent ~~CONDENSED~~Metro ~~CONSOLIDATED~~Connect, ~~FINANCIAL~~LLC (“LMC”), a wholly owned subsidiary of Lexent Inc., entered into a franchise agreement with the City of ~~STATEMENTS~~New York, whereunder LMC will be permitted to construct, operate and provide local high capacity telecommunications networks and services within the New York metropolitan area. In connection therewith, the City of New York required that LMC post $2.0 —million to secure its obligations. LMC provided the $2.0 million in the form of an unconditional letter of credit. A certificate of deposit for $2.0 ~~(Continued)~~million was pledged as collateral for the $2.0 million letter of credit, and was renewed during the third quarter 2003. Based upon the City of New York requirements, the unconditional letter of credit was reduced to $1.0 million in September 2003. The certificate of deposit was reduced to $1.0 million on the date of maturity, October 7, 2003.

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2003		2002		2003		2002
	(In thousands, except per share amounts)
Dilutive effect of employee stock purchase plan		—		7		—		6
Weighted average shares — diluted		42,628		42,704		42,588		42,762
Net loss per share — diluted		*		*		*		*

4. RECEIVABLES, NET

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


	September 30,			December 31,
	2003			2002

	(in thousands)
Accounts receivable — billed to customers	$	22,980		$	23,891
Unbilled receivables on completed projects accounted for under the completed contract method		699			717
Costs and estimated earnings in excess of billings on projects accounted for under the percentage-of- completion method		5,736			5,044
Costs of uncompleted projects accounted for under the completed contract method		1,401			661
Retainage		4,285			2,638

		35,101			32,951
Less: allowance for uncollectible amounts		(4,315	)		(4,640	)

	$	30,786		$	28,311

7 ~~2. Accumulated~~ ~~Other Comprehensive Income~~

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

~~The~~LEXENT ~~change~~INC. inAND ~~accumulated~~SUBSIDIARIES NOTES ~~other~~TO ~~comprehensive income~~CONDENSED ~~for~~CONSOLIDATED ~~2003~~FINANCIAL ~~was~~STATEMENTS SEPTEMBER as30, ~~follows:~~2003 (UNAUDITED)

	Unrealized Gain on			Accumulated Other
	Available-for-Sale			Comprehensive
	Investments			Income
	(In thousands)
Balance, December 31, 2002	$	105		$	105
Change for 2003		(105	)		(105	)
Balance, June 30, 2003	$	—		$	—

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

3. ~~Certificate~~Amounts ofretained by customers related to projects that are progress-billed ~~Deposit~~may ~~(Restricted~~be ~~Cash)~~outstanding for periods that exceed one year.

~~In August 2002, Lexent Metro Connect, LLC (“LMC”), a wholly owned subsidiary of Lexent Inc~~5.~~, entered~~ ~~into a franchise agreement with the City of New York,~~INVESTMENTS ~~whereunder LMC will be permitted to construct, operate and~~ ~~provide local high capacity telecommunications networks and~~ ~~services within the New York Metropolitan area. In connection~~ therewith, the City of New York required that LMC post $2.0 million to secure its obligations. LMC provided the $2.0 million in the form of an unconditional letter of credit. A certificate of deposit for $2.0 million was pledged as collateral for the $2.0 million letter of credit, and was renewed during the first quarter 2003.

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

~~Table~~6. ofEMPLOYEE ~~Contents~~STOCK PURCHASE PLAN

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

~~NOTES~~7. TORELATED ~~CONDENSED~~PARTY ~~CONSOLIDATED FINANCIAL~~TRANSACTIONS ~~STATEMENTS — (Continued)~~

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

	June 30,			December 31,
	2003			2002
	(In thousands)
Accounts receivable — billed to customers	$	18,534		$	23,891
Unbilled receivables on completed projects accounted for under the completed contract method		162			717
Costs and estimated earnings in excess of billings on projects accounted for under the percentage-of-completion method		4,737			5,044
Costs of uncompleted projects accounted for under the completed contract method		1,325			661
Retainage		3,152			2,638
		27,910			32,951
Less: allowance for uncollectible amounts		(4,549	)		(4,640	)
	$	23,361		$	28,311

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

~~The~~In ~~amounts~~May 2000, ~~written~~the ~~off~~Company ~~against~~entered ~~the~~into ~~allowance~~a ten-year lease for a garage and ~~the~~warehouse ~~six~~facility ~~months~~in ~~ended~~Long ~~June 30~~Island City, ~~2003~~New ~~and~~York. ~~2002~~Lease payments were $0.3 5 million ~~and~~for ~~$4.3~~the nine months ended September ~~million~~30, ~~respectively~~2003. The facility is leased from an entity owned by the Company’s two principal common stockholders.

On July 9, 2003, the Company executed an Agreement and Plan of Merger (the ~~Amounts~~“Merger ~~retained~~Agreement”) bybetween ~~customers~~LX ~~related~~Merger toCorp. ~~projects~~(“Purchaser”) and the Company ~~that~~pursuant ~~are~~to ~~progress-billed~~which ~~may~~Purchaser will merge with and into the Company and the Company will be ~~outstanding~~the surviving corporation (the “Merger”). Purchaser is a newly formed corporation owned by Hugh J. O’Kane, Jr., Chairman of the Board of Lexent, and Kevin M. O’Kane, Chief Executive Officer and Vice Chairman of the Board of Lexent (together, the “Purchaser Stockholders”) and organized for ~~periods~~the sole ~~that~~purpose of entering into the Merger Agreement and consummating the ~~exceed~~transactions ~~one~~contemplated ~~year~~thereby. If the Merger is completed, the Company’s common stock will no longer be publicly traded and the Company will become a privately-held company owned entirely by the Purchaser Stockholders.

Pursuant to the terms of the Merger Agreement, the stockholders of the 5Company will receive $1. ~~Investments~~50 in cash for each outstanding share of the Company’s common stock. Outstanding options to purchase shares of the Company’s common stock will be canceled and each holder of such options will receive $1.50 per share minus the exercise price of the options, but only to the extent that the exercise price is lower than $1.50. Notwithstanding, the Purchaser Stockholders have agreed, pursuant to their settlement with the plaintiffs in the litigation challenging the Merger, that they will receive the cash merger consideration for no more than 20% of their shares of Lexent common stock. In addition, the Purchaser Stockholders do not hold any options that have an exercise price that is less than $1.50, so they will not receive any consideration upon the cancellation of their options. The Purchaser Stockholders have not yet determined the precise number of shares beneficially owned by them that they will cause to be converted

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

6. EmployeeTable Stock Purchaseof Plan Contents

AtLEXENT ~~June 30,~~INC. ~~2002,~~AND ~~43,500 shares were~~SUBSIDIARIES ~~issuable~~NOTES toTO ~~employees~~CONDENSED ~~based~~CONSOLIDATED onFINANCIAL ~~payroll deductions of~~STATEMENTS ~~$0.08 million~~SEPTEMBER ~~through~~30, ~~that date. The Employee Stock Purchase Plan was terminated in January~~ 2003. (UNAUDITED)

into the right to receive the merger consideration in the merger. Based on the 720% limitation, they are expected to receive no more than approximately $6. ~~Related~~3 million ~~Party~~in the aggregate, in connection with the Merger with respect to their ~~Transactions~~shares of Lexent common stock not contributed to the Purchaser.

~~During~~The closing of the ~~six~~Merger ~~months~~is ~~ended~~subject ~~June~~to various conditions, including that the Amended Stipulation of Settlement entered into on September 309, 2003, by the Company, Hugh J. O’Kane, Jr., Kevin M. O’Kane and the ~~Company~~plaintiffs ~~repaid~~named $0in the lawsuits consolidated under the caption In re Lexent Inc.~~8 million~~ ~~including~~Shareholders Litigation ~~interest~~and ~~expense~~filed with the Court of Chancery of the State of Delaware, is in full force and effect, approval of ~~$0.05 million~~the ontransaction aby ~~subordinated~~stockholders ~~note~~of ~~payable~~the Company torepresenting a majority of the shares of common stock actually voted on ~~stockholder~~the transaction (other than shares owned by the Purchaser or the Purchaser Stockholders), regulatory approvals, absence of any pending or threatened litigation related to the transaction and other customary conditions to closing, and there can be no assurance that the conditions to closing will be satisfied or that the Merger will be completed.

The Company ~~leases~~has ~~buildings~~filed ~~for~~preliminary ~~office~~proxy ~~and warehouse~~materials ~~purposes~~with inthe ~~New~~Securities ~~York City~~ and ~~in South Plainfield, New~~ ~~Jersey~~Exchange ~~from~~Commission ~~entities~~for ~~owned~~a byspecial ~~its~~meeting ~~two~~of ~~principal~~the ~~common~~ Company’s stockholders ~~and~~to ~~another common stockholder. Rent expense for~~vote ~~these~~on ~~premises was $0.2 million for~~ the ~~six months ended June 30, 2003~~Merger.

InThe ~~May~~Company’s ~~2000~~Board of Directors, ~~the~~which ~~Company~~consists ~~entered~~entirely ~~into~~of athe ~~ten-year~~Purchaser ~~lease~~Stockholders, ~~for~~approved athe ~~garage~~Merger Agreement and ~~warehouse~~the ~~facility~~Merger. inIn ~~Long~~reaching ~~Island~~its decision ~~City~~to approve the Merger Agreement and the Merger, the Board of Directors ~~New~~considered ~~York.~~the ~~Lease~~opinion ~~payments~~of ~~were~~Rodman $0& Renshaw, Inc.3, ~~million~~a ~~for~~New ~~the~~York ~~six~~based ~~months~~investment ~~ended~~banking ~~June 30~~firm and the Company’s independent financial advisor, that, as of July 9, 2003, the $1.50 ~~The~~per ~~facility~~share merger consideration is ~~leased~~fair, from ana ~~entity~~financial ~~owned~~point byof view, to the Company’s ~~two~~stockholders, ~~principal~~other ~~common~~than ~~stockholders~~the Purchaser Stockholders and their affiliates.

On ~~July~~November 95, 2003, the Company ~~executed an Agreement~~ and ~~Plan of Merger (~~the ~~“Merger Agreement”) between LX Merger Corp. (“~~Purchaser”) ~~and~~entered ~~the Company pursuant to which Purchaser will merge with and~~ into ~~the Company and the Company will be the surviving corporation (the “Merger”). Purchaser is~~ a ~~newly formed corporation~~First ~~owned~~Amendment byto ~~Hugh J.~~Agreement ~~O’Kane, Jr., Chairman of the Board of Lexent,~~ and ~~Kevin M.~~Plan ~~O’Kane, Chief Executive Officer and Vice Chairman~~ of ~~the~~Merger ~~Board~~to ofextend ~~Lexent (together,~~ the ~~“Purchaser~~ ~~Stockholders”)~~termination ~~and~~date ~~organized for the sole~~under ~~purpose of entering into~~ the Merger Agreement ~~and~~to ~~consummating the~~December 31, ~~transactions~~2003.

78. CONTINGENCIES

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

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

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

On June 17, 2003, Lexent publicly announced an agreement in principle ~~contemplated~~among ~~thereby~~Lexent, Hugh J. IfO’Kane, Jr., Kevin M. O’Kane and the ~~Merger~~plaintiffs isnamed ~~completed,~~in the ~~Company’s~~lawsuits ~~common~~consolidated ~~stock~~under ~~will~~the nocaption ~~longer~~In bere ~~publicly~~Lexent Inc. Shareholders ~~traded~~Litigation. ~~and~~Under the ~~Company~~proposed ~~will~~terms ~~become~~of athe ~~privately-held~~settlement, ~~company~~the Purchaser ~~owned~~Stockholders ~~entirely~~agreed, byamong other things, to raise the ~~Purchaser~~per ~~Stockholders~~share merger consideration to $1.50 per share.

9 ~~Pursuant to the terms of the Merger Agreement,~~ ~~the stockholders of the Company (other than the Purchaser) will~~ ~~receive $1.50 in cash for each outstanding share of the~~ Company’s common stock. Outstanding options to purchase shares of the Company’s common stock will be canceled and each holder of such options will receive $1.50 per share minus the exercise price of the options, but only to the extent that the exercise price is lower than $1.50.

TheTable Merger will be accounted for as a recapitalization transaction in accordance with accounting principles generally accepted in the United States, under which the total consideration for the shares acquired and the fully vested stock options redeemed will be treated similar to the acquisition of treasury shares and subsequently retired. Accordingly, the basis of Lexent’s consolidated assets and liabilities after the Merger will remain unchanged as compared to such assets and liabilities before the Merger, absent the cash utilized to effect the transaction. Contents

~~The~~LEXENT ~~closing~~INC. ofAND ~~the Merger is subject to various~~SUBSIDIARIES ~~conditions,~~NOTES ~~including~~TO ~~that~~CONDENSED ~~the~~CONSOLIDATED ~~Stipulation~~FINANCIAL ~~of Settlement entered~~STATEMENTS ~~into~~SEPTEMBER ~~on August 6~~30, 2003~~, by the Company, Hugh J.~~ O’Kane, Jr., Kevin M. O’Kane and the plaintiffs named in the lawsuits consolidated under the caption In re Lexent Inc. Shareholders Litigation and filed with the Court of Chancery of the State of Delaware, is in full force and effect, approval of the transaction by stockholders of the Company representing a majority of the shares of common stock actually voted on the transaction (~~other than shares owned by the Purchaser or the Purchaser Stockholders~~UNAUDITED)~~, regulatory~~ ~~approvals, absence of any pending or threatened litigation~~ ~~related to the transaction and other customary conditions to~~ ~~closing, and there can be no assurance that the conditions to~~ ~~closing will be satisfied or that the Merger will be completed.~~

~~The~~On August 6, 2003, the Company, ~~has~~Hugh ~~filed~~J. ~~preliminary~~O’Kane, ~~proxy~~Jr., ~~materials~~Kevin M. O’Kane and ~~with~~the plaintiffs named in the ~~Securities~~lawsuits ~~and~~consolidated ~~Exchange~~under ~~Commission~~the ~~for~~caption aIn ~~special~~re ~~meeting~~Lexent Inc. Shareholders Litigation filed a Stipulation of ~~the~~Settlement ~~Company’s~~with ~~stockholders~~the Court toof ~~vote~~Chancery onof the ~~Merger~~State of Delaware.

~~The~~On ~~Company’s~~September 9, ~~Board of Directors~~2003, ~~which consists entirely of~~ the ~~Purchaser Stockholders~~Company, ~~approved~~Hugh ~~the Merger~~J. ~~Agreement~~O’Kane, ~~and~~Jr., ~~the~~Kevin ~~Merger~~M. ~~In reaching its decision to~~O’Kane ~~approve~~and the ~~Merger~~plaintiffs ~~Agreement~~named ~~and~~in the ~~Merger,~~lawsuits ~~the~~consolidated ~~Board~~under ~~of Directors considered~~ the ~~opinion~~caption ofIn ~~Rodman~~re Lexent ~~& Renshaw,~~ Inc.~~, a~~ ~~New~~Shareholders ~~York~~Litigation ~~based~~filed ~~investment~~an ~~banking~~Amended ~~firm~~Stipulation ~~and~~of ~~the Company’s~~Settlement ~~independent~~with ~~financial~~the ~~advisor,~~Court ~~that,~~of asChancery of ~~July 9, 2003,~~ the ~~$1.50~~State ~~per share merger consideration is fair, from a financial point~~ of ~~view, to the Company’s stockholders, other than the Purchaser Stockholders and their affiliates~~Delaware.

Pursuant to the settlement, the plaintiffs (on their own behalf and on 8behalf of a class of holders of Lexent common stock) agreed to dismiss the litigation and release the defendants from all related claims. ~~Contingencies~~ In exchange, as previously announced, the defendants, without admitting any liability, agreed to, among other things, (i) raise the consideration to be paid in the proposed merger to $1.50 per share and (ii) condition the approval of the proposed merger on the receipt of the vote of a majority of shares of Lexent common stock actually voted with respect to the adoption and approval of the merger agreement and the proposed merger (other than shares held by Purchaser and the Purchaser Stockholders).

On October 15, 2003, the Court of Chancery of the State of Delaware issued ~~From~~an ~~time~~order todetermining ~~time,~~that the ~~Company~~settlement is ~~involved~~fair, inreasonable, and adequate to ~~various~~the ~~suits~~holders of Lexent common stock (other than Purchaser and ~~legal~~the ~~proceedings,~~Purchaser Shareholders). ~~which~~The ~~arise~~Court of Chancery of the State of Delaware further awarded plaintiffs’ attorneys fees and expenses in the ~~ordinary~~aggregate amount of $500,000. ~~course~~In the event that the stockholders of ~~business~~the Company approve the proposed Merger and the proposed Merger is completed, plaintiffs’ court-approved attorneys’ fees and expenses will be paid by the Company.

~~From~~As ~~February 15~~indicated in previous filings, ~~2003~~a ~~through~~shareholder class action lawsuit was ~~February~~filed on October 2826, ~~2003~~2001, inLabansky, ~~response~~et toal. ~~the~~v. ~~announcement~~Lexent byInc. et al., in the Southern District of New York against the Company, certain of its ~~receipt~~present ofand former ansenior ~~offer~~executives ~~from~~and ~~Hugh J~~its underwriters. The complaint alleged that the ~~O’Kane,~~registration ~~Jr.,~~statement and prospectus relating to the Company’s ~~Chairman,~~initial public offering contained material misrepresentations and/or ~~Kevin~~omissions in that those documents did not disclose that: (1) M.certain underwriters had solicited and ~~O’Kane,~~received undisclosed fees and commissions and other economic benefits from some investors in connection with the distribution of the Company’s ~~Chief~~stock ~~Executive~~in ~~Officer~~the initial public offering; and ~~Vice~~(2) certain underwriters had entered into ~~Chairman,~~arrangements with some investors that were designed to ~~purchase~~distort ~~all~~and/or ~~outstanding~~inflate the ~~shares~~market ofprice ~~common~~for the Company’s stock ofin the aftermarket following the initial public offering. The suit against the Company ~~(other~~was ~~than~~one ~~those~~of ~~owned~~a bynumber ~~Hugh J.~~of initial ~~O’Kane,~~public offering securities claims against approximately 308 other ~~Jr.~~issuers and ~~Kevin M~~underwriters. ~~O’Kane~~For the purpose of coordination, the suits were consolidated as In re Initial Public Offering Securities Litigation, 21 MC 92 (SAS) at(the $1“IPO Litigation”).25 ~~per~~On ~~share~~June 26, ~~six~~2003, the plaintiffs’ executive ~~putative~~committee, ~~class~~responsible ~~actions~~for ~~were~~coordinating ~~filed~~and inmanaging the ~~Court~~IPO ofLitigation ~~Chancery~~ for all ~~the~~plaintiffs, ~~State~~announced ofa ~~Delaware.~~proposed ~~All~~settlement ofbetween plaintiffs, on the ~~lawsuits~~one hand, ~~named~~and the issuer defendants and their respective officer and director defendants, including Lexent Inc. and its named officers and directors, on the ~~Hugh J~~other. ~~O’Kane,~~The ~~Jr.~~proposed ~~and~~settlement ~~Kevin M.~~does Onot resolve plaintiffs’~~Kane~~ asclaims against the underwriter defendants. ~~One~~A memorandum of understanding to settle plaintiffs’ claims against the ~~lawsuits~~issuers ~~also~~and ~~named,~~their directors and officers has been approved as to form by counsel for the issuers and the process of obtaining individual approval by each of the other 308 issuer defendants has begun. On July 9, 2003, ~~several~~the ~~former~~Company ~~members~~elected ofto ~~Lexent~~adopt the plaintiffs’s ~~Board~~settlement proposal set forth in the memorandum of ~~Directors~~understanding. The principal components of the proposed ~~suits~~settlement ~~alleged,~~include: ~~inter~~(i) a ~~alia,~~release ~~that~~of all plaintiffs’ claims against the ~~offer~~issuer defendants ~~was~~and ~~unfair~~their officers and ~~inadequate~~ directors which have, or could have, been asserted in the ~~buying~~IPO ~~group~~Litigation ~~had~~arising ~~engaged~~out of the conduct alleged in ~~self-dealing~~the complaints to be wrongful; (ii) the assignment by the issuers to the plaintiffs of certain potential claims against the underwriter defendants and ~~had~~the agreement by the issuers not ~~acted~~to inassert ~~good~~certain ~~faith,~~claims against the underwriter defendants; and ~~that~~(iii) an undertaking by the ~~Company~~insurers of the issuer defendants to pay to plaintiffs the difference between $1 billion and ~~its~~any ~~Board~~lesser amount recovered by plaintiffs from the underwriter defendants in the IPO Litigation. If recoveries in excess of $1 billion are obtained by plaintiffs from the ~~Directors~~underwriters, ~~present~~the ~~and~~insurers ~~former,~~of ~~had~~the ~~breached~~settling ~~their~~issuer ~~fiduciary~~defendants ~~duty~~will owe no money to ~~shareholders~~the plaintiffs. The plaintiffs’ proposed settlement is contingent upon a substantial majority of the issuer defendants entering into the settlement and is further subject to approval by the Court.

810

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

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

ByHOK ~~order~~continues ~~dated~~to ~~April 7,~~be ~~2003,~~involved ~~the~~in ~~court consolidated~~litigation in the ~~class~~Southern ~~actions~~District ~~under~~of ~~the~~New York, ~~caption~~U.S. InInformation reSystems, ~~Lexent~~ Inc. ~~Shareholders~~et ~~Litigation, Cons~~al. Cv.A. NoInternational Brotherhood of Electrical Workers Local Union 3, AFL-CIO et al., served on or about March ~~20177.~~10, 2002, ~~The~~brought by three electrical contractors alleging a conspiracy among ~~complaint~~certain ~~adopted~~other incontractors ~~the~~(including ~~consolidated~~HOK) ~~action~~and ~~named~~the ~~only~~International ~~Lexent~~Brotherhood of ~~Inc.~~Electrical Workers, ~~Hugh J.~~Local ~~O’Kane~~Union Number 3, JrAFL-CIO (“IBEW”). The suit alleges violations of the federal Sherman Antitrust Act and ~~Kevin M~~state laws and claims that the defendants exercise market power restricting the ability of plaintiffs, who employ workers from the Communication Workers of America (“CWA”), from performing telecommunications services work in the New York metropolitan area. ~~O’Kane~~Plaintiffs asseek ~~defendants~~treble damages. The ~~plaintiffs~~Company ~~seek~~believes ~~various~~that ~~forms~~this suit is part of ~~relief,~~an ~~including~~ongoing ~~but~~labor ~~not~~dispute ~~limited~~between ~~to,~~the ~~damages~~IBEW and ~~enjoining~~the CWA and that the allegations ~~Company~~against ~~and~~HOK are without merit. HOK intends to defend itself vigorously in this litigation. Discovery is complete, but it is too early to assess the ~~Purchaser~~ultimate outcome ~~Stockholders~~of ~~from~~the ~~proceeding~~litigation. ~~with~~Notwithstanding, a damage judgment against HOK ~~consummating~~could orhave ~~closing~~a material adverse effect on the ~~proposed~~Company’s ~~merger~~business operating results and financial condition.

~~On June 17, 2003, Lexent publicly announced an agreement in principle among Lexent, Hugh J~~9. ~~O’Kane,~~ ~~Jr.,~~STOCK ~~Kevin M.~~OPTIONS ~~O’Kane~~AND ~~and the plaintiffs~~AWARDS ~~named in the lawsuits consolidated under the caption In re~~ ~~Lexent Inc. Shareholders Litigation. Under the proposed~~ ~~terms of the settlement, the Purchaser Stockholders agreed,~~ ~~among other things, to raise the per share merger consideration to $1.50 per share.~~

OnDuring ~~August 6,~~the ~~2003,~~nine ~~the~~months ~~Company,~~ended ~~Hugh~~September ~~J. O’Kane~~30, ~~Jr.~~2003, ~~Kevin M.~~no ~~O’Kane~~options ~~and~~were ~~the plaintiffs~~granted ~~named~~to inpurchase ~~the~~common ~~lawsuits~~shares, ~~consolidated~~767,065 ~~under~~options ~~the~~were ~~caption~~terminated Inand reexpired and ~~Lexent~~120,626 ~~Inc.~~options ~~Shareholders~~were ~~Litigation~~exercised. ~~filed~~As ~~a Stipulation~~ of ~~Settlement~~ ~~with~~September 30, ~~the~~2003, ~~Court~~options ofto ~~Chancery~~purchase 4,238,076 ofcommon ~~the~~shares ~~State~~were ~~of Delaware~~outstanding.

~~Pursuant~~Deferred tostock-based ~~the~~compensation ~~settlement,~~is ~~the~~recorded ~~plaintiffs~~for ~~(on their~~options ~~own behalf~~ and onrestricted stock ~~behalf~~grants offor awhich ~~class~~the ofexercise ~~holders~~or ofsale ~~Lexent common~~prices ~~stock)~~are ~~agreed~~lower tothan ~~dismiss~~ the ~~litigation~~deemed fair ~~and~~values ~~release~~for ~~the defendants~~financial ~~from~~reporting ~~all~~purposes ~~related~~of ~~claims.~~the Inunderlying ~~exchange,~~common asstock ~~previously~~on ~~announced,~~ the ~~defendants,~~grant ~~without~~date. ~~admitting~~Deferred ~~any~~stock-based ~~liability, agreed~~compensation ~~to,~~also ~~among~~includes ~~other things, (i) raise~~ the ~~consideration~~fair value toat begrant ~~paid~~date inof ~~the~~options ~~proposed~~granted ~~merger~~ to ~~$1.50~~non-employees ~~per share~~ and ~~(ii) condition~~ ~~the~~options ~~approval~~which ofwere remeasured ~~the~~to ~~proposed~~fair ~~merger~~value on the ~~receipt~~ ofdate ~~the~~optionees’ ~~vote~~status ofwas achanged ~~majority~~from employee ofto ~~shares~~consultant. ofDeferred ~~Lexent common~~ stock-based ~~actually~~compensation ~~voted~~is ~~with~~amortized ~~respect~~ to expense over the ~~adoption~~vesting ~~and~~term ~~approval~~ of the ~~merger~~options. ~~agreement~~To ~~and~~ the ~~proposed~~extent ~~merger~~that ~~(other than~~unvested ~~shares~~options ~~held~~are byforfeited, ~~Purchaser~~the ~~and~~balance ~~the~~of ~~Purchaser~~unamortized ~~Stockholders)~~deferred stock-based compensation is reversed.

~~The~~During ~~settlement~~the isnine ~~conditioned~~months ~~upon~~ended September 30, ~~among other things~~2003, ~~consummation~~no ofdeferred ~~the~~stock-based compensation ~~proposed~~was ~~merger~~recorded and ~~approval~~$0.1 million ofwas ~~the settlement~~recorded byduring the ~~Court~~nine ofmonths ended ~~Chancery~~September 30, ~~of the State of Delaware~~2002. ~~The~~ ~~Court~~Also ~~will~~during ~~schedule~~the anine ~~hearing~~months toended ~~determine the fairness~~September 30, ~~reasonableness~~ 2003 and ~~adequacy of the settlement~~2002, ~~whether~~$0.01 million ~~or not the settlement should be approved~~ and to$3.8 million, ~~hear~~respectively, ~~and~~was ~~determine~~reversed ~~any~~for ~~objections~~unvested tooptions, ~~the~~which ~~settlement~~were forfeited.

InAmortization ~~connection~~of ~~with~~deferred stock-based compensation was $0.5 million and $0.8 million for the ~~settlement~~three months ended September 30, 2003 and 2002, ~~plaintiffs’~~respectively, ~~counsel~~and ~~will~~$1.6 million ~~petition~~and $2.5 million for the ~~Court~~nine months ended September 30, 2003 and September 30, 2002, respectively. Deferred tax benefits were $0.2 million and $0.1 million for anthe ~~award~~three ofmonths ended September 30, ~~attorneys’~~2003 ~~fees~~and 2002, respectively and ~~expenses~~$0.5 million and $0.3 million for the nine months ended September 30, 2003 and 2002, respectively, in anconnection ~~aggregate~~with amortization ~~amount~~of ~~not~~deferred stock-based compensation for nonqualified options. With respect to such deferred tax benefits, to the extent that nonqualified ~~exceed~~options are forfeited or are exercised when the fair value of the stock is lower than the deemed fair value of the stock for financial reporting purposes on the grant date ($~~500,000~~22.80 ~~Defendants~~per ~~have~~share), ~~agreed~~a portion of such deferred tax benefits would not tobe ~~object~~realized toand such anportion may be charged to expense. During the ~~application~~nine months ended September 30, 2003 and 2002, $0.2 million and $2.4 million of deferred tax assets was charged to expense in connection with forfeited

11 ~~In the event that the stockholders of the Company~~ ~~approve the proposed Merger and the proposed Merger is~~ ~~completed, plaintiffs’ court-approved attorneys’ fees~~ ~~and expenses will be paid by the Company.~~

AsTable indicated in previous filings, a shareholder class action lawsuit was filed on October 26, 2001, Labansky, et al. v. Lexent Inc. et al., in the Southern District of New York against the Company, certain of its present and former senior executives and its underwriters. The complaint alleged that the registration statement and prospectus relating to the Company’s initial public offering contained material misrepresentations and/or omissions in that those documents did not disclose that: (1) certain underwriters had solicited and received undisclosed fees and commissions and other economic benefits from some investors in connection with the distribution of the Company’s stock in the initial public offering; and (2) certain underwriters had entered into arrangements with some investors that were designed to distort and/or inflate the market price for the Company’s stock in the aftermarket following the initial public offering. The suit against the Company was one of a number of initial public offering securities claims against approximately 308 other issuers and underwriters. For the purpose of coordination, the suits were consolidated as In re Initial Public Offering Securities Litigation, 21 MC 92 (SAS) (the “IPO Litigation”). On June 26, 2003, the plaintiffs’ executive committee, responsible for coordinating and managing the IPO Litigation for all plaintiffs, announced a proposed settlement between plaintiffs, on the one hand, and the issuer defendants and their respective officer and director defendants, including Lexent Inc. and its named officers and directors, on the other. The proposed settlement does not resolve plaintiffs’ claims against the underwriter defendants. A memorandum of understanding to settle plaintiffs’ claims against the issuers and their directors and officers has been approved as to form by counsel for the issuers and the process of obtaining individual approval by Contents

9LEXENT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2003 (UNAUDITED)

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

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

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

each of the other 308 issuer defendants has begun. On July 9, 2003, the Company elected to adopt the plaintiffs’ settlement proposal set forth in the memorandum of understanding. The principal components of the proposed settlement include: (i) a release of all plaintiffs’ claims against the issuer defendants and their officers and directors which have, or could have, been asserted in the IPO Litigation arising out of the conduct alleged in the complaints to be wrongful; (ii) the assignment by the issuers to the plaintiffs of certain potential claims against the underwriter defendants and the agreement by the issuers not to assert certain claims against the underwriter defendants; and (iii) an undertaking by the insurers of the issuer defendants to pay to plaintiffs the difference between $1 billion and any lesser amount recovered by plaintiffs from the underwriter defendants in the IPO Litigation. If recoveries in excess of $1 billion are obtained by plaintiffs from the underwriters, the insurers of the settling issuer defendants will owe no money to the plaintiffs. The plaintiffs’ proposed settlement is contingent upon a substantial majority of the issuer defendants entering into the settlement and is further subject to approval by the Court.


		Three months ended						Nine months ended
(in thousands, except amounts per share)		September 30,						September 30,
		2003			2002			2003			2002

Net loss as reported		$	(6,190	)	$	(7,149	)	$	(17,305	)	$	(16,331	)
Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards net of related tax effects			(204	)		(784	)		(1,227	)		(2,109	)

Pro forma net loss		$	(6,394	)	$	(7,933	)	$	(18,532	)	$	(18,440	)

Basic and diluted net loss per share as reported:
	Basic	$	(0.15	)	$	(0.17	)	$	(0.41	)	$	(0.39	)

	Diluted		*			*			*			*
Basic and diluted pro forma net loss per share:
	Basic	$	(0.15	)	$	(0.19	)	$	(0.44	)	$	(0.44	)

	Diluted		*			*			*			*

~~On July 9, 2002, the Company’s subsidiary, Hugh O’Kane Electric Co~~10., ~~LLC (“HOK”),~~PROVISION ~~was~~FOR ~~served~~RESTRUCTURING ~~with a Complaint filed in the~~CHARGES ~~District of Maryland by several former employees, Yemele T.~~ ~~William Nestor et al. v. Hugh O’Kane Electric Company, LLC~~ ~~(“Employee Action”), alleging violations of Title~~ VII of the Civil Rights Act of 1964, as amended. Plaintiffs in the Employee Action sought compensatory and punitive damages. In addition, on September 9, 2002, HOK was served with a second Complaint filed in the District of Maryland by the U.S. Equal Employment Opportunity Commission on behalf of other employees, Equal Employment Opportunity Commission v. Hugh O’Kane Electric Company, LLC (“EEOC Action”), alleging violations of Title VII of the Civil Rights Act of 1964, as amended. The EEOC Action sought compensatory damages and injunctive relief. The Employee Action and the EEOC Action arose from the same core of allegations. HOK entered into settlement agreements with all plaintiffs in both the Employee Action and the EEOC Action, which settlement agreements were effective as of July 14, 2003 and served to conclude both the Employee Action and the EEOC Action. In connection with the final settlement of the EEOC Action and the Employee Action, HOK entered into a consent decree with the EEOC and contributed towards certain settlement payments made to the plaintiffs, the sum of which contributions did not have a material impact on the Company’s financial position or results of operations.

OnIn ~~or about July 22,~~ 2002, the Company ~~was served~~recorded ~~with~~$9.1 million ain ~~complaint~~restructuring expense, primarily in ~~the~~connection ~~Northern~~with ~~District~~the closing of ~~Illinois, Annecca~~eleven ~~Inc.~~offices etand ~~al.~~reduction vin its workforce. ~~Lexent~~The ~~Inc.,~~restructuring ~~brought~~charges bywere ~~several plaintiffs~~comprised ~~associated~~primarily ~~with~~of U$6.S.5 million for ~~Electric~~obligations ~~LLC,~~under ~~alleging~~leases ~~that~~for ~~the Company’s~~premises ~~decisions~~which ~~neither~~the toCompany ~~complete~~has ~~the~~vacated, ~~purchase of U~~$0.S.7 million ~~Electric~~for ~~nor~~severance toand ~~employ~~related ~~certain~~contractual ofobligations ~~U.S.~~for ~~Electric’s~~approximately ~~principals~~fifteen ~~constitute~~non-unionized apersonnel ~~breach~~and ofexecutives ~~contract.~~in ~~Plaintiffs~~areas ~~seek damages~~closed ~~for~~or ~~lost~~scaled ~~profits~~back, and ~~salaries, etc~~$2.3 million ~~The~~for ~~Company~~write-offs ~~believes that~~of ~~the~~property ~~complaint~~and isequipment ~~without~~offset ~~merit~~against ~~and~~a reversal ~~will~~of ~~vigorously defend itself~~$0.4 million ~~The~~for ~~Company’s~~the ~~Answer~~unused ~~has~~restructure ~~been~~reserve ~~filed,~~for ~~and~~severance ~~the~~from ~~Company has asserted several counterclaims~~2001. ~~The~~During ~~parties~~2002, ~~are currently~~the ~~engaged~~Company inscaled ~~discovery.~~back Itits isexpansion ~~too~~plans ~~early~~and toclosed ~~assess the~~a ~~ultimate~~number ~~outcome~~ of ~~the litigation. Therefore~~offices, atand ~~present,~~changed ~~it cannot~~its bebusiness ~~determined~~plans ~~whether~~to ~~the~~focus ~~ultimate~~primarily ~~outcome~~on ~~will have a~~its ~~material~~traditional ~~impact~~markets, onincluding the ~~Company’s~~New ~~financial~~York ~~position~~metropolitan orregion, Washington ~~results~~D.C., ofand ~~operations~~Florida.

~~HOK~~A ~~continues~~summary ~~to be involved in litigation in the Southern District~~ of New York, U.S. Information Systems, Inc. et al. v. International Brotherhood of Electrical Workers Local Union 3, AFL-CIO et al., served on or about March 10, 2002, brought by three electrical contractors alleging a conspiracy among certain other contractors (including HOK) and the ~~International~~restructuring ~~Brotherhood~~reserve ofat ~~Electrical Workers, Local Union Number~~September 330, ~~AFL-CIO (“IBEW”). The suit alleges violations of the federal Sherman Antitrust Act and state laws and claims that the defendants exercise market power restricting the ability of plaintiffs~~2003, who employ workers from the Communication Workers of America (“CWA”), from performing telecommunications services work in the New York metropolitan area. Plaintiffs seek treble damages. The Company believes that this suit is ~~part of an ongoing labor dispute~~as ~~between the IBEW and the CWA and that the allegations against~~follows: ~~HOK are without merit. HOK intends to defend itself vigorously~~ ~~in this litigation. Discovery is complete, but it is too early~~ ~~to assess the ultimate outcome of the litigation.~~ ~~Notwithstanding, a damage judgment against~~

1012

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


									Reserve
		Reserve							Balance at
		Balance at							September 30,
		December 31, 2002		Restructuring					2003
		(including		Charges		Amounts			(including
		noncurrent		Recorded in		Charged to			noncurrent
		portion)		2003		the Reserve			portion)

		(in thousands)
Severance and related contractual obligations		$	639	$	—	$	(508	)	$	131
Lease obligations			9,921		—		(2,143	)		7,778
Property and equipment			29		—		(29	)		—

	Total	$	10,589	$	—	$	(2,680	)	$	7,909

~~HOK~~11. ~~could~~DEFERRED ~~have~~INCOME ~~a material adverse effect on the~~TAXES ~~Company’s business operating results and financial~~ ~~condition.~~

Statement of Financial Accounting Standards No. 109 “Accounting for Income 9Taxes” requires that a valuation allowance be established when it is “more likely than not” that all or a portion of deferred tax assets will not be realized. ~~Stock~~ ~~Options~~Based on the Company’s performance in the past few years and the current challenging economic environment that has negatively impacted the Company’s operating results, the Company concluded that it was appropriate to establish a full valuation allowance for its net deferred tax assets at December 31, 2002. The Company is continuing to provide a full valuation allowance on future tax benefits until it can substantiate a level of profitability that demonstrates its ability to utilize the assets. Adjustments to increase or decrease the valuation allowance are charged or credited, respectively, to income tax expense. For the nine months ended September 30, 2003, the Company recorded a charge to the provision for income taxes of approximately $56,000 which included payments for state and ~~Awards~~local taxes.

~~During the six months ended June 30, 2003, no options were granted to purchase common shares, 504,511 options were terminated and expired and 76,563 options were exercised~~12. AsRECENT ofACCOUNTING ~~June 30, 2003, options to purchase~~PRONOUNCEMENTS ~~4,544,693 common shares were outstanding.~~

~~Deferred~~In ~~stock-based~~December 2002, ~~compensation~~the isFinancial ~~recorded~~Accounting ~~for~~Standards Board (“FASB”), ~~options~~issued ~~and~~Statement ~~restricted~~of ~~stock~~Accounting ~~grants~~Standards ~~for~~No. ~~which~~(“SFAS”) ~~the~~148, ~~exercise~~“Accounting orfor ~~sale~~Stock-Based ~~prices~~Compensation ~~are~~— ~~lower~~Transition ~~than~~Disclosure, ~~the~~An ~~deemed~~Amendment ~~fair~~of ~~values~~FASB Statement ~~for~~No. 123”. ~~financial reporting~~This ~~purposes~~statement provides alternative methods of ~~the~~transition for ~~underlying~~a ~~common~~voluntary ~~stock~~change onto the ~~grant date.~~fair ~~Deferred~~value based method of accounting for stock-based employee compensation. ~~also~~In ~~includes~~addition, ~~the~~SFAS ~~fair value~~148 atamends ~~grant~~the ~~date~~disclosure requirements of ~~options~~Statement ~~granted~~No. 123 to ~~non-employees~~require more prominent and more frequent ~~options~~disclosures ~~which~~in ~~were~~financial ~~remeasured~~statements toabout ~~fair~~the ~~value~~effects onof the ~~date~~stock-based ~~optionees’~~compensation. ~~status~~The ~~was~~provisions ~~changed~~of ~~from~~SFAS ~~employee~~148 toare ~~consultant. Deferred~~effective ~~stock-based~~for ~~compensation~~fiscal isyears ~~amortized~~ending after toDecember 15, ~~expense~~2002. ~~over the~~The ~~vesting~~Company ~~term~~adopted ofSFAS 148 during the ~~options~~quarter ended December 31, 2002. ToThe adoption did not have a material impact on the Company’s ~~extent~~results ~~that~~of ~~unvested~~operations or financial position and the additional ~~options~~required disclosures are ~~forfeited,~~provided ~~the~~in ~~balance~~Note 9 of ~~unamortized~~“Notes ~~deferred stock-based~~to ~~compensation~~Condensed isConsolidated Financial ~~reversed~~Statements”.

~~During~~In January 2003, the ~~six~~FASB ~~months~~issued ~~ended~~Interpretation ~~June~~No. 3046, ~~2003,~~“Consolidation of noVariable ~~deferred~~Interest ~~stock-based~~Entities” ~~compensation~~(“FIN ~~was recorded and $0~~46”).~~1 million,~~ ~~was~~FIN ~~recorded~~46 ~~during~~clarifies the ~~six~~application ~~months ended~~of ~~June 30,~~Accounting ~~2002~~Research Bulletin No. 51 ~~Also~~and ~~during~~applies ~~the~~immediately ~~six~~to ~~months~~any ~~ended~~variable ~~June~~interest entities created after January 3031, 2003 and ~~2002,~~to ~~$0.01 million~~variable ~~and~~interest $3entities in which an interest is obtained after that date.8 For variable interest entities created or acquired prior to February ~~million~~1, ~~respectively~~2003, ~~was~~the ~~reversed~~provisions of FIN 46 must be applied for ~~unvested~~the first interim or annual period beginning ~~options~~after June 15, ~~which~~2003. ~~were~~The ~~forfeited~~Company believes that the adoption of FIN 46 will not have a material impact on the Company’s consolidated financial position and results of operations.

13 ~~Amortization of deferred stock-based compensation~~ ~~was $0.5 million and $0.8 million for the three months~~ ~~ended June 30, 2003 and 2002, respectively, and~~ $1.2 million and $1.8 million for the six months ended June 30, 2003 and June 30, 2002, respectively. Deferred tax benefits were $0.2 million and $0.1 million for the three months ended June 30, 2003 and 2002, respectively and $0.3 million and $0.2 million for the six months ended June 30, 2003 and June 30, 2002, respectively, in connection with amortization of deferred stock-based compensation for nonqualified options. With respect to such deferred tax benefits, to the extent that nonqualified options are forfeited or are exercised when the fair value of the stock is lower than the deemed fair value of the stock for financial reporting purposes on the grant date ($22.80 per share), a portion of such deferred tax benefits would not be realized and such portion may be charged to expense. During the six months ended June 30, 2003 and 2002, $0.2 million and $2.4 million of deferred tax assets was charged to expense in connection with forfeited options, respectively. For the six months ended June 30, 2003 such charges were offset by a corresponding reduction in the deferred tax asset valuation allowance.

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

~~The~~ITEM ~~Company applies the Accounting Principles Board Opinion No~~2. ~~(“APB”) 25 “Accounting~~ ~~for~~Management’s ~~Stock~~Discussion ~~Issued to Employees,”~~ and ~~related~~ ~~interpretations,~~Analysis inof ~~accounting~~Financial ~~for~~Condition ~~its stock-based compensation plans. Accordingly, no compensation costs have been recognized for its stock option plans~~ and ~~its~~Results ~~stock~~of ~~purchase plan. Had compensation cost for the Company’s stock-based compensation plans been determined based on~~ Operations

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

~~Table of Contents~~OVERVIEW

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

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

~~the~~ We ~~fair~~have ~~value~~offices atin ~~the~~New ~~grant~~York ~~dates~~City, ~~for~~Washington ~~awards under~~D.C. ~~those~~metro, ~~plans~~Boston ~~consistent with SFAS 123~~metro, ~~the~~ ~~Company’s~~Long ~~net~~Island, ~~loss~~ and ~~loss~~in ~~per~~the ~~share~~states ~~would~~of ~~have~~Florida, ~~been increased~~North toCarolina ~~the~~and ~~pro~~New ~~forma amounts indicated below:~~Jersey.

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2003			2002			2003			2002
		(In thousands, except amounts per share)
Net loss as reported		$	(5,121	)	$	(2,453	)	$	(11,115	)	$	(9,182	)
Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards net of related tax effects			(471	)		(791	)		(1,023	)		(1,343	)
Pro forma net loss		$	(5,592	)	$	(3,244	)	$	(12,138	)	$	(10,525	)
Basic and diluted net loss per share as reported:
	Basic	$	(0.12	)	$	(0.06	)	$	(0.26	)	$	(0.22	)
	Diluted	$	(0.12	)	$	(0.06	)	$	(0.26	)	$	(0.22	)
Basic and diluted pro forma net loss per share:
	Basic	$	(0.13	)	$	(0.08	)	$	(0.29	)	$	(0.25	)
	Diluted	$	(0.13	)	$	(0.08	)	$	(0.29	)	$	(0.25	)

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

Lexent was incorporated in Delaware in January 1998. Our wholly owned 10subsidiaries, Hugh O’Kane Electric Co. ~~Provision~~, LLC, National Network Technologies LLC, Lexent Services, Inc., HOK Datacom, Inc., Lexent Capital, Inc., and Lexent Metro Connect LLC, were formed in June 1998, August 1998, May 2000, November 2000, July 2001 and March 2002, respectively. On August 22, 2002, Lexent Metro Connect was awarded a 15 year Franchise for Local High Capacity ~~Restructuring~~Telecommunications ~~Charges~~Services for the City of New York, which expires on or about August 22, 2017, unless terminated earlier.

In ~~2002~~July 1998, ~~the~~Hugh ~~Company~~O’Kane ~~recorded~~Electric $9Co.~~1 million in~~, ~~restructuring expense~~Inc., ~~primarily~~our inpredecessor ~~connection with the~~company, ~~closing~~merged ofinto ~~eleven~~Lexent, ~~offices~~ and ~~reduction~~Lexent inissued ~~its~~22,716,600 ~~workforce.~~shares ~~The restructuring charges were comprised primarily~~ of ~~$6.5 million~~ ~~for~~common ~~obligations~~stock ~~under~~to ~~leases for premises~~the ~~which~~stockholders ~~the~~of ~~Company~~our ~~has vacated, $0~~predecessor.~~7 million~~ ~~for~~Following ~~severance and~~the ~~related contractual obligations for approximately fifteen non-unionized personnel and executives in areas closed or scaled back~~merger, ~~and~~substantially ~~$2.3 million~~all ~~for write-offs~~ of ~~property and~~ ~~equipment~~our ~~offset~~assets ~~against~~were acontributed ~~reversal~~to ofour ~~$0.4 million~~subsidiary, ~~for~~Hugh ~~the unused~~O’Kane ~~restructure~~Electric ~~reserve for severance from 2001~~Co., ~~During 2002~~LLC, ~~the~~and ~~Company~~that ~~scaled~~entity ~~back~~also ~~its~~assumed ~~expansion~~all ~~plans~~of ~~and~~the ~~closed~~obligations ~~a number~~ of ~~offices~~Lexent, ~~and changed its business plans to focus primarily on its traditional markets,~~ including ~~the New York metropolitan~~those ~~region,~~of ~~Washington~~our ~~D.C.,~~predecessor ~~and Florida~~company.

In August of 2002, Lexent Metro Connect (“LMC”) entered into a 15-year Afranchise ~~summary~~agreement with the City of New York, whereunder LMC will be permitted to construct, operate and provide local high capacity telecommunications networks and services. As compensation for the ~~restructuring~~franchise, ~~reserve~~LMC atis obligated to ~~June~~pay the City of New York, a franchise fee. The franchise fee commencement date is the completion of the initial backbone or August 302004. The franchise fee is 5% of gross revenue per year, ~~2003~~with a minimum of $200,000 isper asyear. ~~follows:~~The initial backbone will be completed in the fourth quarter of 2003.

									Reserve
		Reserve Balance at							Balance at
		December 31, 2002		Restructuring					June 30, 2003
		(including		Charges		Amounts			(including
		noncurrent		Recorded in		Charged to			noncurrent
		portion)		2003		the Reserve			portion)
		(In thousands)
Severance and related contractual obligations		$	639	$	—	$	(456	)	$	183
Lease obligations			9,921		—		(1,456	)		8,465
Property and equipment			29		—		(29	)		—
	Total	$	10,589	$	—	$	(1,941	)	$	8,648

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

14 ~~11. Deferred~~ ~~Income Taxes~~

StatementTable of Financial Accounting Standards No. 109 “Accounting for Income Taxes” requires that a valuation allowance be established when it is “more likely than not” that all or a portion of deferred tax assets Contents

12lease period. The net cash commitment that LMC will recover over the 20-year lease period is approximately $4 million.

~~Table~~ The Company received a letter, dated March 3, 2003, from the Nasdaq Stock Market notifying the Company that, as a result of ~~Contents~~the resignations of its independent directors, Lexent did not meet the independent director and audit committee requirements for continued listing on the Nasdaq National Market. Because Lexent was not able to regain compliance with the independent director and audit committee requirements for continued listing on the Nasdaq Stock Market, the Nasdaq Listing Qualifications Panel made a determination to delist Lexent’s common stock from The Nasdaq National Market effective with the opening of business on June 26, 2003. As of such date, Lexent’s common stock began trading on the OTC Bulletin Board under the same symbol, “LXNT”.

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

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

~~will~~ On ~~not~~September 9, be2003, ~~realized. Based on~~ the Company~~’s performance~~, inHugh ~~the~~J. ~~past few years and the current challenging economic environment that has negatively impacted the Company~~O’~~s operating results~~Kane, ~~the Company concluded that it was appropriate to establish a full valuation allowance for its net deferred tax assets at December 31~~Jr., ~~2002~~Kevin M. ~~The Company~~O’Kane isand ~~continuing~~the toplaintiffs ~~provide~~named ain ~~full valuation allowance on future tax benefits until it can substantiate a level of profitability that demonstrates its ability to utilize~~ the ~~assets.~~lawsuits ~~Adjustments to~~consolidated ~~increase~~under ~~or decrease~~ the ~~valuation~~caption ~~allowance~~In ~~are charged or~~re ~~credited,~~Lexent ~~respectively, to income tax expense~~Inc. ~~For~~Shareholders ~~the~~Litigation ~~six months~~filed ~~ended~~an ~~June 30,~~Amended ~~2003,~~Stipulation ~~the~~of ~~Company recorded a charge~~Settlement towith the ~~provision~~Court ~~for~~of ~~income~~Chancery ~~taxes~~ of ~~approximately~~the ~~$56,000~~State ~~which included~~of ~~payments~~Delaware. ~~for~~See ~~state and local taxes~~“Item 5-Other Information.”

CRITICAL ACCOUNTING POLICIES ~~12. Recent~~ ~~Accounting Pronouncements~~

InPlease ~~December~~refer ~~2002,~~to the ~~Financial~~description ~~Accounting Standards~~of ~~Board~~our (“~~FASB”),~~Critical ~~issued Statement of~~ Accounting ~~Standards No. (“SFAS~~Policies”~~) 148, “Accounting~~ ~~for Stock-Based Compensation —~~in ~~Transition Disclosure, An Amendment of FASB Statement No. 123”. This statement provides alternative methods of transition for a voluntary change to~~ the ~~fair~~Management’s ~~value~~Discussion ~~based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of Statement No. 123 to require more prominent~~ and ~~more frequent~~Analysis ~~disclosures~~section ~~in financial statements about the effects~~ of ~~the~~our ~~stock~~Form 10-~~based~~K ~~compensation. The provisions of SFAS 148 are effective~~ for ~~fiscal years ending after December 15, 2002. The Company adopted SFAS 148 during~~ the ~~quarter ended~~year ended December 31, 2002. ~~The adoption did not have a material~~ ~~impact on the Company’s results of operations or financial~~ ~~position and the additional required disclosures are provided in~~ ~~Note 9 of “Notes to Condensed Consolidated Financial~~ ~~Statements”.~~

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

13THIRD QUARTER 2003 COMPARED TO THIRD QUARTER 2002

~~Table~~ Revenues. ofOur ~~Contents~~revenues were $27.7 million for the three months ended September 30, 2003 and September 30, 2002.

~~Item~~ Cost 2of revenues. ~~Management’s~~Our ~~Discussion~~cost ~~and~~of ~~Analysis~~revenues represented 112% of ~~Financial~~revenues ~~Condition~~in the ~~and~~third ~~Results~~quarter of ~~Operations~~2003 compared with 123% of revenues in the same period last year. The decrease is attributed to the reduction of the establishment of job loss provisions due to revisions in certain electrical contracting projects, and the decrease in overhead expenses.

~~The~~General ~~following~~and ~~discussion~~administrative ~~and~~expenses. ~~analysis~~Our ~~provides~~general and administrative ~~information~~expenses ~~that~~decreased ~~should~~52% beto ~~read~~$2.2 million in ~~conjunction~~the ~~with~~third quarter 2003 from $4.6 million in the same period last year. The decrease is the net effect of a ~~historical~~decrease ~~condensed~~in ~~consolidated~~wages ~~financial~~and ~~statements~~benefits, ~~including~~ ~~the~~facilities ~~notes~~expenses, ~~thereto~~bad debt provision, ~~included~~travel and ~~elsewhere~~entertainment inexpenses, ~~this~~office expenses offset against an increase in ~~Form 10-Q~~insurance expenses, and legal fees.

Depreciation and amortization: Our depreciation and amortization expense ~~Overview~~decreased to $0.5 million in the third quarter of 2003 from $1.2 million in the same period of last year. The decrease reflects a reduction in equipment and leasehold improvements resulting from the closing of offices in 2002.

WeNon-cash ~~are~~stock-based ancompensation. ~~infrastructure~~Amortization ~~services~~of ~~company,~~deferred ~~which~~stock-based ~~designs,~~compensation ~~deploys~~declined ~~and~~to ~~maintains telecommunications, electrical, life safety and other systems~~$0.5 million Wein ~~deliver~~the athird ~~full~~quarter ~~spectrum~~ of ~~services~~ ~~including~~2003 ~~engineering,~~from ~~program management, deployment~~$0.8 ~~and~~million ~~installation~~ in ~~certain local metropolitan markets. Our principal focus is to provide~~ the ~~expertise~~same ~~and~~period ~~resources~~of ~~our customers~~last ~~need to design, build, and operate their infrastructure systems~~year. ~~We generally offer our services~~The ~~24 hours a day, 7 days a week.~~

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

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

~~Our~~decrease ~~two~~was ~~largest~~attributed ~~customers~~to ~~for~~ the ~~six~~decrease ~~months ended June 30, 2003 were AT&T and a general contractor~~ in the NYunamortized ~~metro~~balance ~~area. We generated 20% and 16%, respectively,~~ of ~~our~~ ~~revenues from each of these customers for the six months~~non-cash ~~ended~~stock-based ~~June 30,~~compensation ~~2003.~~as ~~Some~~a result of ~~our key customers include IBM~~resignations, ~~Con~~ ~~Edison,~~terminations ~~general contractors in the New York metro area,~~ and fully ~~the~~amortized ~~Dormitory Authority of the State of New York~~balances.

~~Lexent~~Interest ~~was~~expense. ~~incorporated~~Interest inexpense ~~Delaware~~ in ~~January 1998.~~the ~~Our~~third ~~wholly~~quarter ~~owned~~of ~~subsidiaries,~~2003 ~~Hugh~~was ~~O’Kane Electric Co~~$0.,02 million ~~LLC,~~compared ~~National~~to ~~Network Technologies LLC, Lexent Services, Inc~~$0.,06 million ~~HOK~~in ~~Datacom,~~the ~~Inc.,~~same ~~Lexent~~period ~~Capital,~~last ~~Inc~~year., ~~and~~The ~~Lexent Metro~~decrease ~~Connect~~was ~~LLC,~~due ~~were~~primarily ~~formed~~to inlower ~~June~~average ~~1998,~~outstanding ~~August~~balances ~~1998,~~on ~~May~~equipment ~~2000,~~and ~~November~~vehicle ~~2000,~~loans ~~July 2001~~ and ~~March~~a ~~2002,~~subordinated ~~respectively.~~note ~~On August 22,~~payable ~~2002,~~to ~~Lexent Metro Connect was awarded~~ a ~~15 year~~ ~~Franchise for Local High Capacity Telecommunications Services for the City of New York, which expires on or about August 22, 2017, unless terminated earlier~~stockholder.

InProvision ~~July~~for ~~1998,~~income ~~Hugh~~taxes. ~~O’Kane~~Based ~~Electric~~upon ~~Co., Inc.,~~ our ~~predecessor~~performance ~~company,~~in ~~merged~~the ~~into~~past ~~Lexent,~~few years and ~~Lexent issued~~the ~~22,716,600~~current ~~shares~~challenging ofeconomic ~~common~~environment ~~stock~~that tohas ~~the stockholders of~~negatively impacted our ~~predecessor.~~operating ~~Following~~results, ~~the~~we ~~merger,~~have ~~substantially~~established ~~all~~a offull ~~our~~valuation allowance ~~assets~~to ~~were~~fully ~~contributed~~offset todeferred ~~our~~tax ~~subsidiary~~assets, ~~Hugh~~including ~~O’Kane Electric~~those ~~Co.~~related to tax carryforwards, ~~LLC~~at December 31, 2002 and ~~that~~to ~~entity~~date, ~~also~~resulting ~~assumed~~in ~~all~~no ofincome ~~the~~tax ~~obligations~~benefit offor ~~Lexent,~~financial ~~including~~reporting ~~those~~purposes offor ~~our~~the ~~predecessor~~three months ended September ~~company~~30, 2003.

~~The~~NINE ~~Company~~MONTHS ~~received a letter, dated March 3,~~ 2003, ~~from~~COMPARED ~~the~~TO ~~Nasdaq~~NINE ~~Stock~~MONTHS ~~Market notifying the~~2002 ~~Company that, as a result of the resignations of its independent~~ ~~directors, Lexent did not meet the independent director and~~ ~~audit committee requirements for continued listing on the Nasdaq~~ ~~National Market.~~

~~Because~~Revenues. ~~Lexent~~Our ~~was~~revenues ~~not~~decreased ~~able~~by 25.2% to ~~regain~~$68.9 million ~~compliance with~~in the ~~independent~~first nine ~~director~~months ~~and~~of ~~audit~~2003, ~~committee~~from ~~requirements~~ $92.2 million for ~~continued listing on~~ the ~~Nasdaq~~same ~~Stock~~period ~~Market,~~last ~~the~~year. ~~Nasdaq~~The ~~Listing~~decrease ~~Qualifications~~in ~~Panel~~revenues ~~made~~was primarily a ~~determination~~result toof ~~delist Lexent’s~~lower ~~common~~capital ~~stock~~expenditures ~~from The Nasdaq National Market~~by ~~effective~~several ~~with~~of ~~the~~our ~~opening~~large oftelecommunications ~~business~~customers ondue ~~June 26,~~to ~~2003.~~changing Asconditions in ofthe ~~such~~telecommunications ~~date,~~industry ~~Lexent’s~~and ~~common~~the ~~stock~~completion ~~began~~of ~~trading on~~ the engineering, ~~OTC~~procurement ~~Bulletin~~and ~~Board~~construction ~~under~~contract in the ~~same~~fourth ~~symbol,~~quarter ~~“LXNT”~~of 2002.

Cost of revenues. Our cost of revenues represented 109% of revenues in Onthe ~~July~~nine months ended September 930, 2003, ~~the~~compared ~~Company~~with ~~executed~~103% anof revenues in the ~~Agreement~~same ~~and~~period ~~Plan~~last ofyear. ~~Merger~~The ~~between~~increased LXpercentage ~~Merger~~was ~~Corp.~~due ~~and~~in part to the fixed ~~Company~~overhead costs, ~~pursuant~~which torepresented ~~which~~a LXhigher ~~Merger~~percentage ~~Corp.~~of ~~will~~a ~~merge~~lower ~~with~~level ~~and~~of ~~into~~revenues, to the ~~Company~~inclement ~~and~~weather ~~the~~causing ~~Company~~a ~~will~~decrease bein ~~the~~productivity ~~surviving~~and ~~corporation.~~delays ~~See~~in ~~“Item 5 —~~completing ~~Other Information~~projects.”

OnGeneral ~~August 6,~~and ~~2003,~~administrative ~~the~~expenses. ~~Company,~~Our ~~Hugh~~general J.and administrative ~~O’Kane, Jr.,~~expenses ~~Kevin~~decreased M.32% ~~O’Kane~~to ~~and~~$8.9 million for the ~~plaintiffs~~nine months of 2003 from $13.1 ~~named~~million in the ~~lawsuits~~same ~~consolidated~~period ~~under~~last ~~the~~year. ~~caption~~The Indecrease reis attributed to a ~~Lexent~~reduction ~~Inc.~~in ~~Shareholders~~wages ~~Litigation~~and ~~filed~~related benefits as a ~~Stipulation~~result of a headcount reduction, a ~~Settlement~~reduction ~~with~~in ~~the~~rent ~~Court~~and offacilities ~~Chancery~~expenses, ofa reduction in the ~~State~~bad debt provision, a reduction in board of ~~Delaware.~~directors fees, reduction in entertainment ~~See~~expenses ~~“Item 5 —~~and ~~Other~~a ~~Information~~reduction in office expenses offset against an increase in legal and insurance expenses.”

14 Depreciation and amortization: Our depreciation and amortization expense decreased to $1.5 million for the nine months ended September 30, 2003 from $3.8 million in the same period of last year. The decrease reflects a reduction in equipment and leasehold improvements resulting from the closing of offices in 2002.

~~Table~~ Non-cash stock-based compensation. Amortization of ~~Contents~~deferred stock-based compensation declined to $1.6 million for the nine months ended September 30, 2003 from $2.5 million in the same period of last year. The decrease was attributed to the decrease in the unamortized balance of non-cash stock-based compensation as a result of resignations, terminations and fully amortized balances.

InInterest ~~August~~expense. ofInterest ~~2002,~~expense ~~Lexent~~for ~~Metro Connect (“LMC”) entered into a 15-year franchise agreement with~~ the ~~City~~nine ofmonths ~~New~~ended ~~York~~September 30, ~~whereunder~~2003 ~~LMC~~was ~~will~~$0.08 million becompared ~~permitted~~ to ~~construct,~~ ~~operate and provide local high capacity telecommunications networks and services~~$0.2 million Asin ~~compensation for~~ the ~~franchise,~~same ~~LMC~~period ~~is obligated to pay the City of New York, a~~last ~~franchise fee~~year. The ~~franchise~~decrease ~~fee~~was ~~commencement~~due ~~date~~primarily isto ~~the completion~~lower ofaverage ~~the~~outstanding ~~initial~~balances ~~backbone or August 2004. The franchise~~on ~~fee~~equipment isand 5%vehicle ofloans ~~gross~~and ~~revenue per year, with~~ a ~~minimum~~subordinated ofnote ~~$200,000 per~~payable ~~year.~~to ~~The~~a ~~initial backbone will be completed in the third quarter 2003~~stockholder.

InProvision ~~May~~for ~~2003,~~income ~~LMC~~taxes. ~~entered~~Based ~~into~~upon aour ~~20-year~~performance ~~agreement with~~in athe ~~New~~past ~~York State based non-profit organization to lease~~few ~~dark~~years ~~fiber~~and ~~capacity~~the oncurrent achallenging ~~dark~~economic ~~fiber~~environment ~~network~~ that ~~LMC~~has ~~will~~negatively ~~install~~impacted ~~throughout~~our ~~certain~~operating ~~parts~~results, ofwe ~~New~~have ~~York~~established ~~City.~~a ~~The~~full ~~dark fiber~~valuation ~~network will be connected~~ allowance to ~~various~~fully ~~educational~~offset ~~and research~~deferred ~~institutions~~tax ~~throughout~~assets, ~~New~~including ~~York~~those ~~City~~related ~~who~~to ~~are customers~~tax ofcarryforwards, ~~the~~at ~~non-profit~~December 31, ~~organization.~~2002 ~~Under~~and ~~the~~to ~~terms~~date, ofresulting ~~the~~in ~~lease~~no ~~LMC~~income tax ~~will~~benefit ~~fund~~for ~~the~~financial ~~costs~~reporting ~~related~~purposes tofor ~~construction~~the ofnine ~~the~~months ~~dark~~ended ~~fiber~~September ~~network~~30, ~~and~~2003. ~~connection~~Additionally, ~~costs~~in ~~and~~2003, ~~shall~~we ~~recover~~recorded ~~these~~a ~~costs through~~charge ~~lease~~to ~~payments paid by~~ the ~~non-profit~~provision ~~organization over~~of ~~the~~approximately ~~20-year~~$56,000 ~~lease~~which ~~period.~~included ~~The~~payments ~~net~~for ~~cash~~state ~~commitment~~and ~~that~~local ~~LMC will~~taxes. ~~recover over the 20-year lease period is approximately~~ ~~$4 million.~~

16 ~~Critical Accounting Policies~~

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

~~Results~~Liquidity ofand ~~Operations~~Capital Resources

~~Second~~ Net ~~Quarter~~cash used in operations was $5.8 million for the nine months ended September 30, 2003. ~~Compared~~Cash toprovided ~~Second~~by ~~Quarter~~investing ~~2002~~activities was $40.9 million, representing $43.2 million of proceeds from available-for-sale investments, offset by $2.3 million for capital expenditures. Net cash used in financing activities was $1.5 million, comprised of repayments of $0.4 million for equipment and capital leases and $1.1 million of repayments on a subordinated note payable to a stockholder.

~~Revenues.~~We ~~Our revenues~~have ~~decreased~~no bymaterial ~~37.1%~~commitments other than installment obligations related to ~~$20.9 million~~equipment inpurchases, ~~the~~leases ~~second~~for facilities, computer equipment and vehicles, ~~quarter~~franchise fees to the City of ~~2003~~New ~~from~~York, ~~$33.2 million~~investments ininto LMC to fund the capital ~~same~~requirements ~~period~~related ~~last~~to the construction of the fiber optic network and ~~year~~a subordinated note payable to a stockholder. ~~The~~We ~~decrease~~anticipate inthat ~~revenues~~available cash ~~was~~and ~~primarily~~cash aequivalents ~~result~~and ofcash ~~lower~~flows from operations will be sufficient to satisfy our working capital ~~expenditures~~requirements byfor ~~several~~the offoreseeable ~~our~~future. ~~large~~Our future ~~telecommunications~~working capital requirements and liquidity will depend upon many factors, including our customers’ ~~due~~financial condition and their ability to ~~changing~~pay amounts ~~conditions~~owing into us, our ability to replace the revenues previously derived from several of our large telecommunications-carrier customers with revenue ~~industry~~from other customers, and ~~the~~our ~~completion~~ability ofto ~~the~~reduce ~~engineering,~~costs ~~procurement~~at ~~and~~a rate commensurate ~~construction~~with ~~contract~~any reduction in ~~the~~revenues ~~fourth~~which ~~quarter~~we ofare ~~2002~~unable to replace with new revenues.

In connection with the restructuring plan initiated during 2001, we ~~Cost~~recorded restructuring charges of ~~revenues~~$9. ~~Our~~1 million ~~cost~~during ofthe ~~revenues~~year ~~represented~~ended December ~~102~~31, 2002.3% ofThese ~~revenues~~charges inprimarily ~~the~~related ~~second~~to ~~quarter~~the ofexpense ~~2003~~associated ~~compared~~ with ~~94.6%~~certain lease obligations, the write-offs of ~~revenues~~property, inequipment ~~the~~and ~~same~~leasehold improvements, ~~period~~and ~~last~~severance ~~year.~~costs ~~The~~related ~~increased~~to our organizational restructuring, ~~percentage~~partially ~~was~~offset ~~due~~by inthe ~~part~~reduction to the ~~fixed~~2001 ~~overhead~~accrual for restructuring costs. Refer ~~which~~to our audited consolidated financial statements and notes thereto for ~~represented~~the ayear ~~higher~~ended ~~percentage~~December 31, of2002 afor ~~lower~~further ~~level~~details and components of ~~revenues,~~these ~~delays~~charges. inDuring ~~completing~~the ~~projects~~nine months ended September 30, 2003, we had cash outflows of approximately $2.7 million, related to the ~~establishment~~expenses associated with certain lease obligations, property equipment and leasehold improvements and severance that were accrued for as of ~~job~~December 31, ~~loss~~2002. The current accrued liability ~~provisions~~for ~~due~~additional cash outflows, related to ~~revisions~~the inexpense ~~estimates~~associated onwith certain ~~electrical~~ ~~contracting~~lease ~~projects~~obligations and inseverance ~~part~~are topayable ~~pricing~~as ~~pressure~~follows: $1.3 million throughout Wethe remainder of 2003, $1.4 million during 2004, $1.2 million during ~~anticipate~~2005, ~~that~~$0.7 million ~~pricing~~during ~~pressure~~2006, ~~will~~$0.8 million ~~continue~~during 2007, 2008, 2009 and 2010, and $0.1 million during ~~2003~~2011.

~~General~~Impact and administrative expenses. Our general and administrative expenses decreased 5.0% to $3.9 million in the second quarter 2003 from $4.1 million in the same period last year. The decrease is the net effect of aRecently ~~decrease~~Issued inAccounting ~~facilities~~Standards ~~expenses, bad debt provision, travel and entertainment expenses,~~ ~~office expenses offset against an increase in insurance~~ ~~expenses, wages and benefits and legal fees.~~

~~Depreciation~~In ~~and~~December 2002, the Financial Accounting Standards Board (“FASB”), ~~amortization~~issued Statement of Accounting Standards No. ~~Our~~(“SFAS”) ~~depreciation~~148, ~~and~~“Accounting for ~~amortization~~Stock-Based ~~expense~~Compensation ~~decreased~~— toTransition $0Disclosure, An Amendment of FASB Statement No.5 ~~million~~123”. inThis ~~the~~statement provides alternative methods of transition ~~second~~for ~~quarter~~a voluntary change to the fair value based method of ~~2003~~accounting ~~from~~for stock-based $1employee compensation.2 In addition, SFAS 148 amends the disclosure requirements of Statement No. ~~million~~123 to require more prominent and more frequent disclosures in financial statements about the ~~same~~effects ~~period~~of the stock-based compensation. The provisions of ~~last~~SFAS ~~year~~148 are effective for fiscal years ending after December 15, 2002. We adopted SFAS 148 during the quarter ended December 31, 2002. The ~~decrease~~adoption ~~reflects~~did not have a ~~reduction~~material inimpact ~~equipment~~on ~~and~~our results of ~~leasehold~~operations ~~improvements~~or ~~resulting~~financial ~~from~~position and the ~~closing~~additional ofrequired ~~offices~~disclosures inare ~~2002~~provided in Note 9 of “Notes to Condensed Consolidated Financial Statements”.

~~Non-cash~~In ~~stock-based~~January 2003, ~~compensation~~the FASB issued Interpretation No. ~~Amortization~~ 46, “Consolidation of Variable ~~deferred~~Interest ~~stock-based~~Entities” (“FIN 46”). FIN 46 clarifies the application of ~~compensation~~Accounting ~~declined~~Research toBulletin $0No.5 ~~million~~51 inand ~~the~~applies ~~second~~immediately ~~quarter~~to any variable ofinterest ~~2003~~entities ~~from~~created ~~$0.8~~after January ~~million~~31, 2003 and to variable interest entities in ~~the~~which ~~same~~an ~~period~~interest ofis ~~last~~obtained ~~year~~after that date. For variable ~~The~~interest ~~decrease~~entities ~~was~~created ~~attributed~~or acquired prior to February 1, 2003, the ~~decrease~~provisions of inFIN 46 must be applied for the ~~unamortized~~first interim or annual period beginning ~~balance~~after ofSeptember 15, ~~non-cash~~2003. ~~stock-based~~We ~~compensation~~believe asthat athe ~~result~~adoption of FIN 46 will not have a ~~resignations,~~material ~~terminations~~impact ~~and~~on ~~fully~~our ~~amortized~~consolidated ~~balances~~financial position and results of operations.

17 ~~Interest expense.~~ ~~Interest expense in the second quarter of 2003 was~~ ~~$0.03 million compared to $0.07 million in the same~~ ~~period last year. The decrease was due primarily to lower average outstanding balances on equipment and vehicle loans and a subordinated note payable to a stockholder.~~

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

15FORWARD LOOKING STATEMENTS

~~Table~~ This Quarterly Report on Form 10-Q contains both historical and forward-looking statements. All statements other than statements of ~~Contents~~historical fact are, or may be deemed to be, forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934. These forward-looking statements are only predictions and generally can be identified by use of statements that include phrases such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “foresee” or other words or phrases of similar import. Similarly, statements that describe the Company’s objectives, plans or goals also are forward-looking statements. The Company’s operations are subject to certain risks and uncertainties that could cause actual results to differ materially from those contemplated by the relevant forward-looking statement. These risks are more fully outlined in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 and other SEC filings. The forward-looking statements included herein are made only as of the date of this Quarterly Report on Form 10-Q and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. No assurances can be given that projected results or events will be achieved.

~~months~~ITEM ~~ended June 30, 2003~~3. ~~Additionally, for~~Quantitative ~~the~~and ~~three~~Qualitative ~~months~~Disclosures ~~ended~~About ~~June 30,~~Market ~~2003, we recorded a~~Risk ~~charge to the provision of approximately $18,000 which included~~ ~~payments for state and local taxes.~~

~~First~~ Financial ~~Six~~instruments, ~~Months~~which ~~2003~~potentially ~~Compared~~subject the Company to ~~First~~credit risk, ~~Six~~consist ~~Months~~primarily ~~2002~~of cash, cash equivalents, available-for-sale investments, and trade receivables. Cash balances may at times, exceed amounts covered by FDIC insurance. The Company believes it mitigates its risk by depositing cash balances with high quality financial institutions that it believes are financially sound. Recoverability is dependent upon the performance of the institution. The Company’s cash equivalents are diversified and consist primarily of investment grade securities with original maturities of three months or less. Investments are made in obligations of high-quality financial institutions, government and government agencies and corporations, thereby reducing credit risk concentrations. Interest rate fluctuations impact the carrying value of the portfolio.

~~Revenues.~~Trade ~~Our~~receivables are primarily short-term receivables from ~~revenues~~telecommunications ~~decreased~~companies byand ~~36.1%~~general tocontractor ~~$41~~companies.~~2 million~~ inTo ~~the~~attempt ~~first~~to ~~six~~reduce ~~months~~credit ~~of 2003~~risk, ~~from~~the ~~$64.5 million~~Company ~~for~~performs ~~the~~credit ~~same~~evaluations ~~period~~of its customers ~~last~~but ~~year.~~does ~~The~~not ~~decrease~~generally inrequire ~~revenues~~collateral ~~was~~and, ~~primarily~~therefore, athe ~~result~~majority of its ~~lower~~trade ~~capital~~receivables ~~expenditures~~are byunsecured. ~~several~~Credit ofrisk ~~our~~is ~~large telecommunications~~affected ~~customers~~by ~~due~~conditions towithin the ~~changing~~economy. ~~conditions~~The inCompany ~~the telecommunications~~establishes ~~industry~~an ~~and~~allowance ~~the~~for ~~completion~~doubtful ofaccounts ~~the~~based ~~engineering,~~upon ~~procurement~~its ~~and~~evaluation ~~construction~~of ~~contract~~factors insurrounding the ~~fourth quarter~~credit risk of ~~2002~~specific customers, historical trends, and other information.

~~Cost~~For ~~of revenues. Our cost of revenues represented 106.5% of revenues in~~ the ~~six~~nine months ended ~~June~~September 30, 2003, ~~compared~~ ~~with 94.3% of revenues in~~ the ~~same~~Company ~~period~~had ~~last year.~~revenues ~~The~~from ~~increased~~two ~~percentage~~separate ~~was~~customers, ~~due in part to the fixed overhead costs~~ which ~~represented~~comprised a19% ~~higher~~and ~~percentage of a lower level of revenues~~10%, ~~to the inclement weather causing a decrease in productivity and delays in completing projects~~respectively, ~~the establishment~~ of ~~job loss provisions due to revisions in~~the ~~estimates~~Company’s ontotal ~~certain electrical contracting projects and in part to pricing pressure~~revenues. ~~We anticipate that pricing pressure will~~ ~~continue during 2003.~~

~~General~~We ~~and~~currently ~~administrative~~do ~~expenses. Our~~not ~~general~~own ~~and~~any ~~administrative expenses~~investments ~~decreased 20.9% to $6.7 million for the first six months of 2003 from $8.5 million~~ in ~~the~~publicly ~~same~~traded ~~period last~~equity ~~year~~securities. ~~The decrease is attributed to a reduction in wages and related benefits as a result of a headcount reduction~~Therefore, ~~a reduction~~we indo ~~rent~~not ~~and~~currently ~~facilities~~have ~~expenses,~~any adirect ~~reduction~~equity inmarket ~~the~~price ~~bad debt provision, a reduction in board of directors fees and reduction in entertainment expenses~~risk.

~~Depreciation~~We ~~and amortization.~~currently ~~Our~~do ~~depreciation~~not ~~and amortization~~have ~~expense~~any ~~decreased~~international tooperations, ~~$1.0 million~~and ~~for~~we ~~the~~currently ~~six~~do ~~months~~not ~~ended~~enter ~~June 30,~~into ~~2003~~forward ~~from~~exchange ~~$2.5 million~~contracts inor ~~the same~~other ~~period~~financial ofinstruments ~~last~~with respect ~~year.~~to ~~The~~foreign ~~decrease~~currency. ~~reflects~~Accordingly, awe ~~reduction~~currently ~~in equipment~~do ~~and~~not ~~leasehold~~have ~~improvements~~any ~~resulting from the closing~~foreign ofcurrency ~~offices~~exchange inrate ~~2002~~risk.

~~Non-cash~~ITEM ~~stock-based compensation~~4. ~~Amortization~~ ofControls deferred stock-based compensation declined to $1.2 million in the first half of 2003 from $1.8 million in the same period of last year. The decrease was attributed to the decrease in the unamortized balance of non-cash stock-based compensation as a result of resignations, terminations and ~~fully amortized balances.~~Procedures

~~Interest~~(a) ~~expense~~Disclosure controls and procedures. ~~Interest~~ ~~expense~~As of the end of the Company’s most recently completed fiscal quarter (the registrant’s fourth fiscal quarter in the ~~first~~case ~~six~~of ~~months~~an annual report) covered by this report, the Company carried out an evaluation, with the participation of ~~2003~~the ~~was $0.06 million~~Company’s ~~compared~~management, toincluding ~~$0.1 million~~the inCompany’s Chief Executive Officer and Chief Financial Officer, of the ~~same period~~effectiveness ~~last~~of ~~year.~~the ~~The~~Company’s ~~decrease~~disclosure ~~was~~controls ~~due~~and ~~primarily~~procedures pursuant to ~~lower average~~Securities ~~outstanding~~Exchange ~~balances~~Act onRule ~~equipment~~13a-15. Based upon the evaluation, the Company’s Chief Executive Officer and ~~vehicle~~the ~~loans~~Chief Financial Officer concluded that the Company’s disclosure controls and a ~~subordinated~~procedures ~~note~~are ~~payable~~effective in ensuring that information required to abe ~~stockholder.~~ disclosed by the Company in

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

LiquidityTable andof Capital Resources Contents

~~Net~~the ~~cash~~reports ~~provided~~that byit ~~operations~~files ~~was $4.2 million~~or ~~for~~submits under the ~~six~~Securities ~~months~~Exchange ~~ended~~Act ~~June 30~~is recorded, ~~2003~~processed, ~~representing~~ ~~net~~summarized ~~collections of receivables offset by payments made for accounts payable~~ and ~~accrued liabilities~~reported, ~~and~~within ~~offset by~~ the ~~net~~time ~~loss.~~period ~~Cash~~specified ~~provided by investing activities was $8.6 million, representing $9.2 million of proceeds from available-for-sale investments, offset by $0.6 million for capital expenditures. Net cash used~~ in ~~financing~~the ~~activities was~~SEC’s ~~$1.1 million,~~rules ~~comprised of repayments of $0.4 million for equipment~~ and ~~capital leases and $0~~forms.~~7 million of repayments on a subordinated note payable to a stockholder.~~

We(b) ~~have~~Changes noin ~~material~~internal ~~commitments~~controls ~~other~~over ~~than installment~~financial ~~obligations~~reporting. ~~related~~There tohave ~~equipment~~been ~~purchases,~~no ~~leases for~~changes ~~facilities,~~in ~~computer equipment and vehicles, franchise fees to~~ the ~~City~~Company’s ofinternal ~~New~~controls ~~York,~~over ~~investments~~financial ~~into~~reporting ~~LMC~~that tooccurred ~~fund~~during the ~~capital~~ ~~requirements~~Company’s ~~related~~last tofiscal ~~the~~quarter ~~construction~~to ofwhich ~~the~~this ~~fiber optic~~report ~~network~~relates ~~and~~that ahave ~~subordinated~~materially ~~note~~affected, ~~payable~~or toare areasonably ~~stockholder. We~~likely ~~anticipate~~to ~~that~~materially ~~available~~affect, ~~cash~~the ~~and~~Company’s ~~cash~~internal ~~equivalents~~control ~~and~~over ~~cash~~ financial reporting.

16PART II — OTHER INFORMATION

~~Table~~ITEM of1. ~~Contents~~Legal Proceedings

~~flows~~ See ~~from~~Note ~~operations~~8 ~~will be sufficient~~ to ~~satisfy~~ ~~our working capital requirements for~~ the ~~foreseeable future.~~unaudited ~~Our~~interim ~~future~~condensed ~~working~~consolidated ~~capital requirements and liquidity will depend upon many factors, including our customers’~~ financial ~~condition and their ability to pay amounts owing to~~ ~~us, our ability to replace the revenues previously derived from~~statements. ~~several of our large telecommunications-carrier customers with~~ ~~revenue from other customers, and our ability to reduce costs at~~ ~~a rate commensurate with any reduction in revenues which we are~~ ~~unable to replace with new revenues.~~

InITEM ~~connection with the restructuring plan initiated during 2001, we recorded restructuring charges of $9~~5.~~1 million~~ ~~during~~Other ~~the year ended December 31, 2002.~~Information ~~These charges primarily related to the expense associated with~~ ~~certain lease obligations, the write-offs of property, equipment~~ ~~and leasehold improvements, and severance costs related to our~~ organizational restructuring, partially offset by the reduction to the 2001 accrual for restructuring costs. Refer to our audited consolidated financial statements and notes thereto for the year ended December 31, 2002 for further details and components of these charges. During the six months ended June 30, 2003, we had cash outflows of approximately $1.9 million, related to the expenses associated with certain lease obligations, property equipment and leasehold improvements and severance that were accrued for as of December 31, 2002. The current accrued liability for additional cash outflows, related to the expense associated with certain lease obligations and severance are payable as follows: $2.1 million throughout the remainder of 2003, $1.4 million during 2004, $1.2 million during 2005, $0.7 million during 2006, $0.8 million during 2007, 2008, 2009 and 2010, and $0.1 million during 2011.

~~Impact~~Execution of ~~Recently~~Merger ~~Issued Accounting~~Agreement ~~Standards~~

InOn ~~December~~July 9, ~~2002~~2003, the ~~Financial~~Company ~~Accounting Standards~~executed ~~Board~~an ~~(“FASB”),~~Agreement ~~issued~~and ~~Statement~~Plan of Merger (the ~~Accounting~~“Merger ~~Standards~~Agreement”) between NoLX Merger Corp. (“~~SFAS~~Purchaser”) ~~148, “Accounting~~ ~~for~~and ~~Stock-Based~~the ~~Compensation — Transition~~Company ~~Disclosure,~~pursuant Anto ~~Amendment~~which Purchaser ofwill ~~FASB~~merge ~~Statement No. 123”.~~with ~~This~~and ~~statement~~into ~~provides~~the ~~alternative~~Company ~~methods of~~and ~~transition~~the ~~for~~Company awill ~~voluntary~~be ~~change~~the surviving tocorporation (the ~~fair~~“Merger”). ~~value~~Purchaser ~~based method~~is ofa ~~accounting~~newly ~~for~~formed ~~stock-based~~corporation owned ~~employee~~by ~~compensation~~Hugh J. ~~In addition~~O’Kane, ~~SFAS~~Jr., ~~148~~Chairman ~~amends~~of the ~~disclosure~~Board ~~requirements~~ of ~~Statement~~ ~~No. 123~~Lexent, ~~to require more prominent~~ and ~~more~~Kevin M. ~~frequent~~O’Kane, ~~disclosures~~Chief inExecutive ~~financial~~Officer ~~statements~~and ~~about~~Vice ~~the~~Chairman ~~effects~~ of the ~~stock-based~~Board ~~compensation.~~of ~~The~~Lexent (together, ~~provisions~~the of“Purchaser ~~SFAS 148 are~~Stockholders”) ~~effective~~and organized for ~~fiscal~~the ~~years~~sole ~~ending~~purpose ~~after December 15,~~of ~~2002.~~entering Weinto ~~adopted~~the ~~SFAS 148~~Merger ~~during~~Agreement ~~the~~and ~~quarter~~consummating ~~ended~~the ~~December~~transactions ~~31,~~contemplated ~~2002~~thereby. ~~The~~If ~~adoption~~the ~~did~~Merger ~~not~~is ~~have~~completed, athe ~~material~~Company’s ~~impact~~common ~~on our~~stock ~~results~~will ofno ~~operations~~longer orbe ~~financial~~publicly ~~position~~traded and the ~~additional required~~Company ~~disclosures~~will ~~are~~become ~~provided~~a inprivately-held company ~~Note 9~~owned ofentirely ~~“Notes to~~by ~~Condensed~~the ~~Consolidated~~Purchaser ~~Financial Statements”~~Stockholders.

InPursuant ~~January~~to ~~2003~~the terms of the Merger Agreement, the ~~FASB~~stockholders ~~issued~~of ~~Interpretation~~the NoCompany will receive $1. ~~46,~~50 ~~“Consolidation~~in cash for each outstanding share of ~~Variable~~the ~~Interest~~Company’s ~~Entities”~~common ~~(“FIN 46”)~~stock. ~~FIN 46~~Outstanding ~~clarifies~~ options to purchase shares of the ~~application~~Company’s common stock will be canceled and each holder of ~~Accounting~~such ~~Research~~options ~~Bulletin~~will Noreceive $1. 5150 ~~and~~per ~~applies~~share ~~immediately~~minus tothe ~~any~~exercise ~~variable~~price ~~interest~~of ~~entities~~the ~~created~~options, but only to the extent that the ~~after~~exercise ~~January 31~~price is lower than $1.50. Notwithstanding, ~~2003~~the ~~and~~Purchaser Stockholders have agreed, pursuant to ~~variable~~their ~~interest~~settlement ~~entities~~with the plaintiffs in ~~which~~the anlitigation ~~interest~~challenging isthe ~~obtained~~Merger, ~~after~~ that ~~date.~~they ~~For~~will ~~variable~~receive the cash merger ~~interest~~consideration ~~entities~~for ~~created~~no ormore ~~acquired~~than ~~prior~~20% toof ~~February 1,~~their shares of Lexent common stock. In ~~2003~~addition, the ~~provisions~~Purchaser ofStockholders ~~FIN 46~~do ~~must~~not behold ~~applied~~any ~~for~~options ~~the first~~that ~~interim~~have oran exercise ~~annual~~price ~~period~~that ~~beginning~~is ~~after~~less ~~June 15~~than $1.50, so they will not receive any ~~2003~~consideration upon the cancellation of their options. WeThe ~~believe~~Purchaser Stockholders ~~that~~have not yet determined the ~~adoption~~precise number of ~~FIN 46~~shares beneficially owned by them that they will ~~not~~cause ~~have~~to be converted into the right to receive athe ~~material~~merger ~~impact~~consideration in the merger. Based on ~~our~~the ~~consolidated~~20% ~~financial~~limitation, ~~position~~they ~~and~~are ~~results~~expected to receive no more than approximately $6.3 million in the aggregate, in connection with the Merger with respect to their shares of ~~operations~~Lexent common stock not contributed to the Purchaser.

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

~~This~~The ~~Quarterly~~Company ~~Report~~has onfiled ~~Form 10-Q~~preliminary ~~contains both~~proxy ~~historical~~materials ~~and~~with ~~forward-looking statements. All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements within~~ the ~~meaning of section 27A of the~~ Securities ~~Act of 1933~~ and ~~section 21E of the Securities~~ Exchange ~~Act~~Commission offor ~~1934.~~a ~~These forward-looking~~special ~~statements~~meeting ~~are only predictions and generally can be identified by use~~ of statements that include phrases such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “foresee” or other words or phrases of similar import. Similarly, statements that describe the Company’s ~~objectives,~~ ~~plans~~stockholders ~~or goals also are forward-looking statements. The Company’s operations are subject~~ to ~~certain risks and~~vote uncertainties that could cause actual results to differ materially from those contemplated by the relevant forward-looking statement. These risks are more fully outlined in the Company’s Annual Report on ~~Form 10-K for~~ the ~~year~~ ~~ended December 31, 2002 and other SEC filings~~Merger. ~~The~~ ~~forward-looking statements included herein are made only as of~~ ~~the date of this Quarterly Report on Form 10-Q and the~~ ~~Company~~

1719

~~undertakes~~ The noCompany’s ~~obligation~~Board toof ~~publicly~~Directors, ~~update~~which ~~such~~consists entirely of the Purchaser ~~forward-looking~~Stockholders, ~~statements~~approved the Merger Agreement and the Merger. In reaching its decision to ~~reflect~~approve ~~subsequent~~the ~~events~~Merger orAgreement and the Merger, the Board of Directors ~~circumstances~~considered the opinion of Rodman & Renshaw, Inc., Noa ~~assurances~~New ~~can~~York bebased ~~given~~investment banking firm and the Company’s independent financial advisor, that, ~~projected~~as ~~results~~of July or9, ~~events~~2003, ~~will~~the be$1.50 ~~achieved~~per share merger consideration is fair, from a financial point of view, to the Company’s stockholders, other than the Purchaser Stockholders and their affiliates.

~~Item~~ On 3.November 5, ~~Quantitative~~2003 the Company and ~~Qualitative~~the ~~Disclosures~~Purchaser ~~About~~entered ~~Market~~into ~~Risk~~a First Amendment to Agreement and Plan of Merger to extend the termination date under the Merger Agreement to December 31, 2003.

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

~~Trade~~On ~~receivables~~August 6, ~~are~~2003, ~~primarily~~the ~~short-term receivables~~Company, ~~from~~Hugh ~~telecommunications~~J. ~~companies~~O’Kane, ~~and~~Jr., ~~general contractor~~Kevin ~~companies~~M. ToO’Kane ~~attempt~~and the toplaintiffs ~~reduce~~named ~~credit~~in ~~risk,~~ the ~~Company~~ ~~performs~~lawsuits ~~credit~~consolidated ~~evaluations~~under ofthe ~~its~~caption ~~customers~~In ~~but does~~re ~~not~~Lexent ~~generally~~Inc. ~~require~~Shareholders ~~collateral~~Litigation ~~and,~~filed ~~therefore,~~a ~~the~~Stipulation ~~majority~~ of ~~its~~ ~~trade~~Settlement ~~receivables~~with ~~are unsecured. Credit risk is affected by conditions within~~ the ~~economy. The Company establishes an~~ ~~allowance~~Court ~~for~~of ~~doubtful~~Chancery ~~accounts based upon its evaluation~~ of ~~factors~~ ~~surrounding~~ the ~~credit~~State ~~risk~~ of ~~specific customers, historical trends, and other information~~Delaware.

~~For~~On September 9, 2003, the ~~six~~Company, ~~months~~Hugh ~~ended~~J. ~~June 30~~O’Kane, ~~2003~~Jr., Kevin M. O’Kane and the plaintiffs named in the lawsuits consolidated under the caption In re ~~Company~~Lexent ~~had~~Inc. ~~revenues~~Shareholders ~~from~~Litigation ~~two~~filed ~~separate~~an ~~customers~~Amended Stipulation of Settlement with the Court of Chancery of the State of Delaware. The Amended Stipulation of Settlement served to revise the description of the consideration to be received by Lexent option holders in the proposed “going private” transaction to clarify that each outstanding Lexent option, ~~which~~whether or not presently ~~comprised~~exercisable, ~~20%~~will be accelerated, if necessary, and ~~16%~~canceled in consideration for a cash amount equal to the product of (i) the excess, ~~respectively~~if any, of the ~~Company’s~~$1.50 merger ~~total~~consideration per share over the applicable exercise price and (ii) the ~~revenues~~number of shares subject to such option. It further clarifies that to the extent that the exercise price of such option is greater than or equal to $1.50, such option will be terminated and canceled without consideration. The original Stipulation of Settlement indicated that only vested options that were in-the-money would be cashed out.

WePursuant ~~currently~~to dothe ~~not~~settlement, the plaintiffs (on their own ~~any~~behalf ~~investments~~and inon ~~publicly~~behalf ~~traded~~of ~~equity~~a ~~securities~~class of holders of Lexent common stock) agreed to dismiss the litigation and release the defendants from all related claims. ~~Therefore~~In exchange, weas previously doannounced, ~~not currently~~the ~~have~~defendants, without admitting any ~~direct~~liability, ~~equity~~agreed to, ~~market~~among ~~price~~other ~~risk~~things, (i) raise the consideration to be paid in the proposed merger to $1.50 per share and (ii) condition the approval of the proposed merger on the receipt of the vote of a majority of shares of Lexent common stock actually voted with respect to the adoption and approval of the merger agreement and the proposed merger (other than shares held by Purchaser and the Purchaser Stockholders).

WeOn ~~currently~~October 15, do2003, ~~not~~the ~~have~~Court ~~any~~of ~~international~~Chancery of the State of Delaware issued ~~operations~~an order determining that the settlement is fair, reasonable, and weadequate ~~currently~~to the doholders ~~not~~of ~~enter~~Lexent ~~into~~common ~~forward~~stock ~~exchange~~(other than Purchaser and the Purchaser ~~contracts~~Shareholders). orThe ~~other~~Court ~~financial~~of ~~instruments~~Chancery ~~with~~of ~~respect~~the toState ~~foreign~~of Delaware further awarded ~~currency.~~plaintiffs’ ~~Accordingly~~attorneys fees and expenses in the aggregate amount of $500,000. In wethe ~~currently~~event dothat ~~not~~the ~~have~~stockholders ~~any~~of ~~foreign~~the Company approve the proposed Merger ~~currency~~and ~~exchange~~the ~~rate~~proposed ~~risk~~Merger is completed, plaintiffs’ court-approved attorneys’ fees and expenses will be paid by the Company.

~~Item~~ITEM 46. ~~Controls~~Exhibits and ~~Procedures~~Reports on Form 8-K

Exhibits: ~~(a) Disclosure controls and~~ ~~procedures. As of the end of the Company’s most~~ recently completed fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) covered by this report, the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.

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


31.1		Certification of the Company’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of the Company’s President and Chief Operating Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

1820

~~PART~~32 ~~II —~~Certification ~~OTHER INFORMATION~~ of the Company’s Chief Executive Officer and President and Chief Operating Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

~~Item 1. Legal Proceedings~~Reports:

~~See~~Reports ~~Note~~on Form 8 ~~to the unaudited interim condensed~~-K ~~consolidated financial statements.~~

~~Item~~ On 5July 1, 2003, the Company filed a Form 8-K for the delisting of the Company’s common stock from the Nasdaq National Market effective with the open of business on June 26, 2003 and the resignation of Norman G. ~~Other~~Fornella ~~Information~~as the Chief Financial Officer and the assumption of the Chief Financial Officer responsibilities by Bruce Levy the Company’s President and the Chief Operating Officer.

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

On ~~The Company received a letter, dated March~~July 331, 2003, ~~from~~ the ~~Nasdaq Stock Market notifying the~~ Company ~~that,~~filed as a ~~result~~Form of8-K ~~the~~furnishing ~~resignations~~second ~~of its independent~~quarter ~~directors,~~2003 ~~Lexent~~operating ~~did not meet the independent director and audit committee requirements for continued listing on the Nasdaq National Market~~results. ~~Nasdaq rules required Lexent to have an audit~~ ~~committee composed of at least three independent directors,~~ ~~which it no longer had as a result of the resignations of~~ ~~L. White Matthews, III, Richard Schwob, Kathleen A.~~ Perone and Richard W. Smith. Lexent responded to Nasdaq’s letter and requested an extension of time from Nasdaq in which to achieve compliance with Nasdaq rules pending the evaluation of the proposed buyout offer.

On ~~April~~August 2312, 2003, ~~Lexent~~the ~~publicly~~Company ~~announced that~~filed ~~it received~~ a ~~Nasdaq~~Form ~~Staff~~8-K ~~Determination~~announcing ~~letter stating~~ that Lexent~~’s common stock was subject to delisting from~~ ~~the~~Inc., ~~Nasdaq~~Hugh ~~National~~J. ~~Market~~O’Kane, ~~for~~Jr., ~~failure~~Kevin toM. ~~meet~~O’Kane ~~the independent director~~ and ~~audit~~the ~~committee~~plaintiffs ~~requirements~~named ~~for~~in ~~continued listing~~the onlawsuits ~~the~~consolidated ~~Nasdaq~~under ~~Stock Market. On April 28, 2003, Lexent appealed~~ the ~~decision~~caption toIn ~~delist~~re Lexent’s ~~common~~Inc. ~~stock from~~Shareholders ~~the~~Litigation ~~Nasdaq~~entered ~~Stock~~into ~~Market~~ and ~~requested~~filed a ~~formal~~Stipulation ~~hearing with representatives~~ of ~~Nasdaq.~~Settlement Onwith ~~April 28,~~the ~~2003,~~Court ~~Lexent~~of ~~received~~Chancery ~~notification~~of ~~that~~the aState ~~formal~~of ~~hearing was scheduled with Nasdaq on May 29, 2003~~Delaware.

~~Because~~On ~~Lexent~~September 9, ~~was~~2003, ~~not~~the ~~able~~Company tofiled ~~regain~~a ~~compliance with~~Form ~~the~~8-K ~~independent~~announcing ~~director~~that ~~and audit committee requirements~~Lexent ~~for~~Inc., ~~continued~~Hugh ~~listing~~J. onO’Kane, ~~the Nasdaq Stock Market~~Jr., ~~the~~Kevin ~~Nasdaq Listing~~M. ~~Qualifications Panel made a determination to delist Lexent~~O’sKane ~~common~~and ~~stock~~the ~~from~~plaintiffs ~~The~~named ~~Nasdaq~~in ~~National Market~~the ~~effective~~lawsuits ~~with~~consolidated under the ~~opening~~caption ofIn ~~business~~re onLexent ~~June 26, 2003~~Inc. AsShareholders ofLitigation ~~such~~entered ~~date,~~into ~~Lexent’s~~and ~~common~~filed ~~stock~~an ~~began~~Amended ~~trading~~Stipulation onof Settlement with the ~~OTC~~Court ~~Bulletin~~of ~~Board~~Chancery ~~under~~of the ~~same~~State ~~symbol,~~of ~~“LXNT”~~Delaware.

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

21 ~~On June 27, 2003, Lexent publicly announced~~ ~~that Norman G. Fornella, its Executive Vice President and~~ ~~Chief Financial Officer, had resigned from Lexent in order to~~ pursue other business opportunities, effective on June 30, 2003. Since Mr. Fornella’s resignation, Bruce Levy, Lexent’s President and Chief Operating Officer, has been performing the functions of the Chief Financial Officer of Lexent.

ExecutionTable of Merger AgreementContents

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

Pursuant to the ~~terms~~requirements of the ~~Merger~~Securities ~~Agreement, the~~Exchange ~~stockholders~~Act of ~~the~~1934, ~~Company (other than~~ the ~~Purchaser) will~~ ~~receive~~registrant ~~$1.50~~has induly ~~cash~~caused ~~for each outstanding share of~~ the ~~Company’s~~ ~~common~~report ~~stock. Outstanding options~~ to ~~purchase shares of the Company’s common stock will~~ be ~~canceled~~signed ~~and each~~on ~~holder~~its ofbehalf ~~such~~by ~~options will receive $1.50 per share minus~~ the ~~exercise price of the options, but only to the extent~~ ~~that~~undersigned ~~the~~thereunto ~~exercise~~duly ~~price is lower than $1~~authorized.~~50.~~

The Merger will be accounted for as a recapitalization transaction in accordance with accounting principles generally accepted in the United States, under which the total consideration for the shares acquired


Dated: November 12, 2003		By:	/s/ Kevin M. O’Kane

	Kevin M. O’Kane
	Chief Executive Officer and Vice Chairman

Dated: November 13, 2003		By:	/s/ Bruce Levy

	Bruce Levy
	President and Chief Operating Officer

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and the fully vested stock options redeemed will be treated similar to the acquisition of treasury shares and subsequently retired. Accordingly, the basis of Lexent’s consolidated assets and liabilities after the Merger will remain unchanged as compared to such assets and liabilities before the Merger, absent the cash utilized to effect the transaction.

The closing of the Merger is subject to various conditions, including that the Stipulation of Settlement entered into on August 6, 2003, by the Company, Hugh J. O’Kane, Jr., Kevin M. O’Kane and the plaintiffs named in the lawsuits consolidated under the caption In re Lexent Inc. Shareholders Litigation and filed with the Court of Chancery of the State of Delaware, is in full force and effect, approval of the transaction by stockholders of the Company representing a majority of the shares of common stock actually voted on the transaction (other than shares owned by the Purchaser or the Purchaser Stockholders), regulatory approvals, absence of any pending or threatened litigation related to the transaction and other customary conditions to closing, and there can be no assurance that the conditions to closing will be satisfied or that the Merger will be completed.

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

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

Execution of Stipulation of Settlement

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

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

The settlement is conditioned upon, among other things, consummation of the proposed merger and approval of the settlement by the Court of Chancery of the State of Delaware. The Court will schedule a hearing to determine the fairness, reasonableness and adequacy of the settlement, whether or not the settlement should be approved and to hear and determine any objections to the settlement.

In connection with the settlement, plaintiffs’ counsel will petition the Court for an award of attorneys’ fees and expenses in an aggregate amount not to exceed $500,000. Defendants have agreed not to object to such an application.

Item 6. Exhibits and Reports on Form 8-K

Exhibits

31.1		Certification of the Company’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of the Company’s President and Chief Operating Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32		Certification of the Company’s Chief Executive Officer and President and Chief Operating Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Reports

Reports on Form 8-K

On June 17, 2003, the Company announced an agreement in principle among the Company, Hugh J. O’Kane, Jr., and Kevin M. O’Kane and the plaintiffs named in the lawsuits consolidated under the caption In re Lexent Inc. Shareholders Litigation.

On June 25, 2003, the Company announced the delisting of the Company’s common stock from The Nasdaq National Market effective with the open of business on June 26, 2003.

On June 27, 2003, the Company announced the resignation of Norman G. Fornella as the Chief Financial Officer, and the assumption of the Chief Financial Officer responsibilities by Bruce Levy the Company’s President and the Chief Operating Officer.

On July 10, 2003, the Company announced that it signed an Agreement and Plan of Merger between LX Merger Corp. and the Company.

On July 28, 2003, the Company furnished second quarter 2003 operating results.

SIGNATURES

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

Dated: August 8, 2003		By: /s/ KEVIN M. O’KANE Kevin M. O’Kane Chief Executive Officer and Vice Chairman
Dated: August 8, 2003		By: /s/ BRUCE LEVY Bruce Levy President and Chief Operating Officer

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