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Friday, April 13, 2007 1:12:24 PM

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FTGX

From the 10K

Item 1A. RISK FACTORS

Factors Affecting our Business Condition

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

We have and may continue to experience operating losses and net losses.

We may not achieve or sustain operating income or net income in the future. Since our inception we have incurred operating losses and net losses both on an annual and quarterly basis. We expect to continue to incur operating losses and net losses in 2007. In 2004, we had an operating loss of $16.5 million and a net loss of $18.4 million. In 2005, we had an operating loss of $11.6 million and a net loss of $13.9 million. In 2006, we had an operating loss of $4.6 million and a net loss of $6.9 million.

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



• the economic and competitive conditions in the communications and networking industries;




• increased operating costs or pricing pressures we may experience;




• the passage of legislation or other regulatory developments that may adversely affect us;




• changes in technologies creating alternatives to our services or making our services and networks obsolete;




• delays in implementing any strategic projects; and




• our ability to operate our networks in a reliable and cost-effective manner.


The sector in which we operate is highly competitive.

We will encounter risks and difficulties frequently experienced by companies in rapidly evolving markets. We are at a competitive disadvantage to larger, more established competitors. We face competition from many entities with significantly greater financial resources, well-established brand names and larger customer bases. The entities that compete with us include wireless service providers, local telephone companies, long distance companies, competitive access providers, competitive local exchange carriers and competitive colocation providers. The numerous companies that compete in our markets expose us to severe price competition for our services. We anticipate that these competitive disadvantages may persist or even intensify for the foreseeable future. If additional competitors focus on our market, there may be intensified price competition which could have a material adverse effect on our business. Additionally, we may experience an increased number of service disconnections.

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

In 2006, we continued to experience decreases in the prices of certain of our services. We anticipate that prices for broadband network services, in general, may continue to decline due primarily to the following:



• price competition as various service providers continue to sell services at greatly reduced prices to absorb significant excess capacity in existing networks and continue to install additional networks that compete with our networks;




• recent technological advances that permit substantial increases in the transmission capacity and more efficient utilization of both new and existing networks; and




• strategic alliances, consolidations or similar transactions that increase customers’ purchasing power.




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

In the past few years, general economic weakness severely impacted the telecommunications industry. The expected demand for broadband connectivity was not realized in many segments of the market. As a result, there was an industry-wide slowdown in capital spending and a large number of industry-related bankruptcy filings. Many of our customers and vendors experienced financial distress, and some of them filed for bankruptcy protection.

We have contracts with communications providers that have filed for relief from creditors under the Bankruptcy Code, as well as contracts with other communications providers who may still yet file for bankruptcy protection. As a result, there is concern that some of our customers or vendors will not perform their obligations under our contracts with them because, in bankruptcy proceedings, the debtor, or trustee, as the case may be, has the right to reject certain contracts.

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

In the future, we may require additional capital to fund the further development of our networks and operation of our business.

Although we have substantially completed the build-out of our networks, we may selectively expand our facilities and networks in the future to respond to the following:



• an increasing number of customers;




• a specific customer demand;




• demand for greater network capacity or colocation space;




• the replacement of inadequate or malfunctioning network elements;




• changes in our customers’ service requirements; or




• technological advances.


In order to do so, we may need to raise additional funds through public or private equity or debt financings. If we raise funds through the issuance of equity securities, the ownership percentage of our then-current stockholders will be diluted and the holders of new equity securities may have rights, preferences or privileges senior to those of the holders of our common stock. If additional funds are raised through another bank credit facility or the issuance of debt securities, the holders of such indebtedness would have rights senior to the rights of the holders of our equity, and the terms of this indebtedness could impose restrictions on our ability to incur additional indebtedness, which could impede the successful execution of our business plan.

In addition, there can be no assurance that we will be able to successfully consummate any such financing on acceptable terms, or at all. Our inability to obtain additional financing, as needed, could have a material adverse effect on our business. We do not have any off-balance sheet financing arrangements, nor do we anticipate entering into any.

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

Our business depends in large part upon our ability to lease space in carrier hotels to establish carrier hotel facilities where we can locate our networking equipment and interconnect with our customers. At a minimum, to



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provide our services in a particular metropolitan area, we must obtain and maintain space in the major carrier hotels in that area. There may be significant competition for space in major carrier hotels. Our inability to obtain additional space, or our inability to renew existing leases, would negatively impact our operations and have a material adverse effect on our business.

We may not be able to increase the number of our significant customers.

Historically, we have experienced significant disconnections of services by our customers and decreases in the prices of our services. In order to realize anticipated revenues and cash flows, we endeavor to obtain long-term commitments from new customers, as well as expand our relationships with current customers. This need is more critical as a wholesale carrier because our potential customers are a limited number of service providers. Therefore, it is essential for us to succeed at establishing and expanding customer relationships.

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

Our ability to manage a substantial amount of traffic on our networks while maintaining superior service is critical to the operations of our business. There is no assurance that our network will be able to maintain current quality of service as the number of our customers and amount of traffic grow. Our failure to maintain such level of service would significantly reduce customer demand for our services and have a material adverse effect on our business.

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

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

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

The substantial majority of our facilities are located within the New York metropolitan area, with the remainder located in Los Angeles. In particular, our facilities located at 60 Hudson Street and 111 Eighth Avenue in New York City and 165 Halsey in Newark, New Jersey are critical to our business. Given the concentration of our facilities, the loss of one of our facilities through the occurrence of a natural disaster, fire or flood, or an act of terrorism would have a material adverse effect on our business, results of operations and financial condition. We may not carry sufficient insurance to compensate us for losses caused by such an occurrence, and we may not be able to operate our business after the loss of one of our facilities.

We may not be able to manage the growth of our operations.

We have rapidly and significantly expanded our operations. We anticipate that further expansion will be required to grow our customer base and successfully implement our business strategy. Our future performance depends in part upon our ability to manage our growth effectively. We may not be able to implement



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management information and control systems in an efficient and timely manner, and our current personnel and systems may not be adequate to support our future operations. If we are unable to manage our growth effectively, our business will suffer.

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

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

We license key software from third parties.

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

We depend on key personnel.

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

We may become the subject of litigation by our stockholders.

In addition to claims that may arise in the normal course of our business, certain stockholders may sue us in connection with our financing activities. The resolution of such a claim could be costly and time-consuming. Any litigation, even if we are successful, could result in substantial costs and diversion of resources and management attention. An adverse determination in any litigation could also subject us to significant liability, under the judgment of a court or by default.

Alternative technologies pose competitive threats.

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

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

As of March 29, 2007, we had total outstanding debt of $14.0 million and $5.4 million of outstanding letters of credit. In addition, we have $0.6 million of availability in our revolving line of credit and $5.0 million of



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availability in a capital expenditure term facility, subject to compliance with the terms of the credit agreement. As a result of this debt and debt that we may incur in the future, we will need to devote a portion of our available cash towards debt service payments. In addition, our ability to borrow additional money is restricted by our current debt arrangements. Furthermore, we have agreed to terms in the credit agreement (which governs our credit facility) that expose us to certain risks and limitations, including the following:



• principal amortization payments are required to be made quarterly beginning on July 1, 2008 and extend through maturity in 2012;




• we have made affirmative financial covenants that we will breach if our financial results do not meet our expectations; and




• we have agreed to certain negative covenants that may cause us to make choices regarding the operation of our business that we would not otherwise make.


You should be aware that our ability to repay or refinance our debt depends on our successful financial and operating performance and on our ability to implement our business strategy successfully. There can be no assurance that our future cash flows and capital resources will be sufficient to repay our existing indebtedness and any indebtedness we may incur in the future. Further, our borrowings under our credit facility are secured by substantially all of our assets, and our obligations under our facility are guaranteed by our subsidiaries. In the event that we are unable to repay our debts, we may be forced to reduce or delay any current network expansion projects, sell some of our assets, obtain additional equity capital or refinance or restructure our debt. If we are unable to meet our debt service obligations or comply with our covenants, we would be in default under our existing debt agreements, which would accelerate the repayment of our indebtedness. Our failure to achieve certain financial results would also violate our credit agreement, potentially accelerating the outstanding balance of our debt for immediate payment. To avoid a default, we may need waivers from third parties, which might not be granted.

Legislation and government regulation could adversely affect us.

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

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

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



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

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

The concentration of ownership of our common stock may have the effect of delaying, deferring or preventing a change in control, merger, consolidation, or tender offer that could involve a premium over the price of our common stock. Currently, our executive officers, directors and greater-than-five-percent stockholders and their affiliates, in the aggregate, beneficially own approximately 31% of our outstanding common stock. These stockholders, if they vote together, are able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions and matters.

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

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

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

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

Our stock price is likely to be highly volatile.

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

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

We have approximately 1.2 million shares of common stock subject to issuance upon exercise of outstanding stock options and warrants. We cannot predict the effect, if any, that future sales of shares of common stock, or the availability of shares of common stock for future sale, will have on the market price of our common stock. Sales of substantial amounts of common stock (including shares issued upon the exercise of stock options or warrants), or the perception that such sales could occur, may adversely affect prevailing market prices for our common stock.



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