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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                 ---------------

                                    FORM 10-K

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

       FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2000

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

                        COMMISSION FILE NUMBER 000-27525

                                  DSL.NET, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

            DELAWARE                                           06-1510312
 (STATE OR OTHER JURISDICTION OF                            (I.R.S. EMPLOYER
   INCORPORATION OR ORGANIZATION)                        IDENTIFICATION NUMBER)

   545 LONG WHARF DRIVE, NEW HAVEN, CONNECTICUT                    06511
   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                     (ZIP CODE)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 772-1000

           SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

                                      NONE

           SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

                         COMMON STOCK, $.0005 PAR VALUE

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

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

     The aggregate market value of the voting stock held by non-affiliates of
the Registrant, as of March 21, 2001, was approximately $34,272,439 (based on
the closing price of the Registrant's Common Stock on March 21, 2001, of $1.00
per share).

     The number of shares outstanding of the Registrant's $.0005 par value
Common Stock as of March 21, 2001 was 64,779,468.

                       DOCUMENT INCORPORATED BY REFERENCE

     The registrant intends to file a definitive proxy statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended December 31,
2000. Portions of such proxy statement are incorporated by reference into Part
III of this Form 10-K.
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<PAGE>

                                  DSL.net, INC.

                           ANNUAL REPORT ON FORM 10-K

                          YEAR ENDED DECEMBER 31, 2000

                                TABLE OF CONTENTS

<TABLE><CAPTION>
                                                                                                     Page No.
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<S>         <C>                                                                                          <C>
Part I

Item 1.     Business......................................................................................3
Item 2.     Properties...................................................................................15
Item 3.     Legal Proceedings............................................................................15
Item 4.     Submission of Matters to a Vote of Security Holders..........................................16

Part II

Item 5.     Market for Registrant's Common Equity and Related Stockholder Matters........................17
Item 6.     Selected Consolidated Financial Data.........................................................17
Item 7.     Management's Discussion and Analysis of Financial Condition and Results of Operations........19
Item 7A.    Quantitative and Qualitative Disclosure About Market Risk....................................40
Item 8.     Financial Statements and Supplementary Data..................................................41
Item 9.     Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.........68

Part III

Item 10.    Directors and Executive Officers of the Registrant...........................................68
Item 11.    Executive Compensation.......................................................................68
Item 12.    Security Ownership of Certain Beneficial Owners and Management...............................68
Item 13.    Certain Relationships and Related Transactions...............................................68

Part IV

Item 14.    Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................69

SIGNATURES...............................................................................................72
</TABLE>





                                      -2-
<PAGE>

                                     PART I

ITEM 1.  BUSINESS

       THIS BUSINESS SECTION AND OTHER PARTS OF THIS ANNUAL REPORT ON FORM 10-K
CONTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR
ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE,
BUT ARE NOT LIMITED TO, THOSE SET FORTH IN "ITEM 7 - MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN THIS
ANNUAL REPORT ON FORM 10-K. EXISTING AND PROSPECTIVE INVESTORS ARE CAUTIONED NOT
TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS
OF THE DATE HEREOF. WE UNDERTAKE NO OBLIGATION, AND DISCLAIM ANY OBLIGATION, TO
UPDATE OR REVISE THE INFORMATION CONTAINED IN THIS ANNUAL REPORT ON FORM 10-K,
WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR CIRCUMSTANCES OR
OTHERWISE.

GENERAL

       DSL.net, Inc. ("DSL.net" or the "Company") (Nasdaq: DSLN) provides
high-speed data communications, Internet access, and related services to small
and medium sized businesses, primarily using digital subscriber line, or DSL,
technology. We primarily target select second and third tier cities for the
deployment of our own local DSL equipment. As of March 15, 2001, we had
installed equipment in over 375 cities. In first tier cities, and certain other
markets where we have not deployed our own equipment, we utilize the local DSL
facilities of other carriers to provide service. Our networks enable data
transport over existing copper telephone lines at speeds of up to 1.5 megabits
per second. Our services offer customers high-speed digital connections and
related services at prices that are attractive compared to the cost and
performance of alternative data communications services.

THE DSL.NET SOLUTION

      Our services provide small and medium sized businesses, as well as branch
offices of large businesses, with high-speed Internet access and data services
using DSL technology. Key elements of our solution are:

      HIGH-SPEED CONNECTIONS. We offer Internet access at speeds of up to 1.5
megabits per second. Our network is designed to provide data transmission at the
same speed to and from the customer, known as symmetric data transmission, and
is also capable of providing service at different rates, known as asymmetrical
data transmission. We believe that symmetric data transmission is best suited
for business applications, because business users require fast connections both
to send and receive information.

      COMPLETE BUSINESS SOLUTION. We offer our customers a single point of
contact for a complete solution that includes all of the necessary equipment and
services to establish and maintain digital data communications. Our primary
services include Internet access, e-mail, domain name or Internet address
registration for our customers, firewalls, hosting our customers' Web sites, and
virtual private networks that connect customers' various offices. Our network is
designed to enable us to individually configure each customer's service
remotely.

                                      -3-
<PAGE>

      ALWAYS-ON CONNECTIONS. With our service, customers can access the Internet
continuously without having to dial into the network for each use. These
"always-on" connections provide customers with the ability to readily access the
Internet and transfer information. We charge our customers a flat fee per month
rather than billing them based on usage.

      ATTRACTIVE VALUE PROPOSITION. Our DSL services offer customers high-speed
digital connections at prices that are attractive compared to the cost and
performance of alternative data communications services, such as dial-up, T1,
ISDN or frame relay lines. We believe that our services also increase the
productivity of network users by decreasing the time they spend connecting to
the Internet and waiting for information downloads and transfers.

      CUSTOMER SUPPORT. We provide customer support 24 hours a day, seven days a
week. This support is important to many of our small and medium sized business
customers because they do not typically have dedicated internal support staff.
With our remote monitoring and troubleshooting capabilities, we continuously
monitor our network. This enables us to identify and enhance network quality,
service and performance and address network problems promptly.

OUR SERVICES

      We utilize DSL technology to provide reliable and cost-effective service
to our customers. As part of our service offerings, we function as our
customers' Internet service provider and deliver a range of Internet-based,
value-added solutions.

      Our services currently include all necessary equipment, software and lines
required to establish and maintain a digital Internet connection. Our primary
services include Internet access, e-mail, domain name or Internet address
registration for our customers, firewalls, hosting our customers' Web sites, and
virtual private networks that connect customers' various offices. Our Services
also include collocation of customer equipment and limited alternative access
solutions, including T1, ISDN and dial-up. Our network is designed to enable us
to individually configure each customer's service remotely.

      Customers typically pay an installation charge and a monthly fee for the
service. The monthly fee includes the cost of our standard equipment installed
at the customer's site, all phone line charges, and general Internet access
services, including e-mail, assistance in obtaining Internet addresses and
services related to the registration of these addresses with various
administrative bodies. Generally, customers subscribe to our services for at
least one year and are billed for services on a monthly basis.

CUSTOMERS

      Our target customers are primarily small and medium sized businesses. We
sell to these customers primarily on a direct basis. In particular, we believe
the following are especially attractive prospective customers:

     o   businesses currently using other high-speed data communications
         services, such as T1, ISDN and frame relay services, or low-speed
         dial-up Internet access;

     o   professional or service-based firms that have multiple Internet service
         provider accounts and phone lines;

     o   branch office locations that require transmission of large files
         between locations; and

                                      -4-
<PAGE>

     o   businesses that use data-intensive applications, such as financial
         services, technology, and publishing.

None of our customers accounted for more than 5% of our total revenues during
the period from inception (March 3, 1998) through December 31, 1998, or during
the years ended December 31, 1999 and 2000.

SALES AND MARKETING

      Our marketing professionals have developed a methodology to identify the
businesses that would benefit from our services. Once we identify businesses in
a target market, we employ a targeted local marketing strategy utilizing a
variety of mediums, including print and radio, but primarily focused on direct
mail. Through inbound and outbound telesales campaigns, we utilize both internal
and external sales professionals to sell our services to prospective customers.
We also partner with local information technology professionals to assist in the
sale of our services.

CUSTOMER SUPPORT AND OPERATIONS

      Our customer support professionals work to minimize the complexity and
inconvenience of data communications and Internet access for our customers. They
provide our customers with a single point of contact for implementation,
maintenance and operations support.

      IMPLEMENTATION. We manage the implementation of our service for each
customer. In areas where we have installed our own local DSL facilities, we
lease the copper telephone lines from the local telephone company. These lines
run from our equipment located in the telephone company's central office to our
customer. We test these lines to determine whether they meet our specifications
and work with the local telephone company to correct any problems identified by
our testing. In other areas, we utilize the local DSL facilities of other
carriers, and work with these carriers to provide the DSL service. In both
cases, field service technicians install the modem and any necessary wiring
inside our customers' offices and test the modem and connection over our
network.

      MAINTENANCE. Our network operations center provides network surveillance
for all equipment in our network. We are able to detect and correct many of our
customers' maintenance problems remotely, often before our customer is aware of
the problem. Customer-initiated maintenance and repair requests are managed and
resolved primarily through our help desk. Our information management system,
which generates reports for tracking maintenance problems, allows us to
communicate maintenance problems from the customer service center to our network
operations center 24 hours a day, seven days a week.

      OPERATIONS SUPPORT SYSTEMS. Our operations support systems are intended to
improve many of our business processes, including customer billing, service
activation, inventory control, customer care reports and maintenance reports.
They have been designed to provide us with accurate, up-to-date information in
these areas. Additional enhancements and integration of these systems will
continue during 2001. We believe that our operations support systems will
provide us with the flexibility to add additional services for our customers as
well as to meet our expansion goals.

                                      -5-
<PAGE>

OUR NETWORK

      Our network delivers high-speed Internet access and data communication
services. It offers scalability, reliability, security and high performance.

      NETWORK DESIGN.  The key design principles of our network are:

     o   INTELLIGENT END-TO-END NETWORK MANAGEMENT. Our network is designed to
         allow us to monitor network components and customer traffic from a
         central location. We can perform network diagnostics and equipment
         surveillance continuously. From our network operations center, we have
         visibility across our entire network, allowing us to identify and
         address network problems quickly and to provide quality service and
         performance.

     o   CONSISTENT PERFORMANCE WITH THE ABILITY TO EXPAND. We have designed our
         network to leverage the economics of DSL technology, to grow with our
         business and to provide consistent performance. We also use
         asynchronous transfer mode equipment in our network, which implements
         high-speed, high volume transmission of data.

     o   SECURITY. Our network is designed to reduce the possibility of
         unauthorized access and to allow our customers to safely transmit and
         receive sensitive information and applications. The modems we install
         on our customers' premises are designed to work in conjunction with
         installed security systems and network servers in an effort to provide
         safe connections to the Internet and a secure operating environment.

     NETWORK COMPONENTS.  The primary components of our network are:

     o   DSL MODEMS AND ON-SITE CONNECTIONS. We purchase DSL modems and provide
         them to our customers as part of the service contract. We configure the
         DSL modem and arrange for the installation of the modem and on-site
         wiring needed to connect the modem to the copper telephone line. In
         areas where we have deployed our own local DSL facilities, we contract
         with independent field service organizations to perform these services,
         in addition to using a small internal staff. In areas where we utilize
         the local DSL facilities of other carriers, these other carriers
         provide these installation services.

     o   COPPER TELEPHONE LINES. In areas where we have deployed our own local
         DSL facilities, we lease a copper telephone line running to each
         customer from our equipment in the local telephone company's central
         office under terms specified in our interconnection agreements with
         these companies. In areas where we utilize the local DSL facilities of
         other carriers, the carrier leases the telephone line from the local
         telephone company. If we, or the other DSL carriers with whom we work,
         are unable to lease, or experience delays in leasing, a sufficient
         number of acceptable telephone lines on acceptable terms, our business
         will be harmed.

     o   CENTRAL OFFICE COLLOCATION. Through our interconnection agreements, we
         secure space to locate our equipment in certain central offices of
         traditional local telephone companies and offer our services from these
         locations. These collocation spaces are designed to offer the same high
         reliability and availability standards as the telephone companies'
         other central office spaces. We install the equipment necessary to
         provide high-speed DSL signals to our customers in these spaces. We
         have continuous access to these spaces to install and maintain our
         equipment located in these central offices. In first tier cities and
         certain other markets where we have not deployed our own DSL

                                   -6-
<PAGE>

         equipment, we utilize the local DSL facilities installed in central
         offices by other carriers to provide high-speed DSL connections to our
         customers.

     o   CONNECTION TO THE INTERNET. Network traffic gathered at each of our
         central offices is routed to one of our regional hubs and then to the
         Internet. In certain areas where we offer service from more than one
         central office, network traffic is routed from each central office in
         that area to a local hub which aggregates its traffic and the traffic
         from the other central offices located in that area and routes this
         traffic to a regional hub. At our regional hubs, we also connect to
         other carriers' networks via high speed connections. Our hubs contain
         extra equipment and backup power to provide backup facilities in the
         event of an equipment failure and are actively monitored from our
         network operations center. We lease space for our hubs in facilities
         designed to host network equipment. Our hubs are connected to one
         another via high speed data communications lines. We have agreements
         with WorldCom and AT&T to provide this service. Internet connectivity
         is provided by a combination of public and private peering and transit
         arrangements. We have presence at eight of the largest and newest
         national "network access points" to facilitate this high-performance
         high-volume external connectivity.

     o   NETWORK OPERATIONS CENTER. Our network is managed from our network
         operations center located in New Haven, Connecticut. We provide
         end-to-end network management 24 hours a day, seven days a week. This
         enhances our ability to address performance and service issues before
         they affect the customer. From the network operations center, we can
         monitor individual customer lines and the equipment and circuits in our
         network.

COMPETITION

      We face competition from many companies with significantly greater
financial resources, well-established brand names and large installed customer
bases. We expect that the level of competition in our markets may intensify in
the future. We expect competition from:

      OTHER DSL PROVIDERS. Certain competitive carriers, including Covad
Communications and Rhythms NetConnections, offer DSL-based services. The 1996
Telecommunications Act specifically grants competitive telecommunications
companies, including other DSL providers, the right to negotiate interconnection
agreements with traditional telephone companies, including interconnection
agreements which may be identical in all respects to, or more favorable than,
our agreements. Several of the large telecommunications companies and computer
companies, such as Microsoft and Qwest, have made investments in DSL service
providers.

      INTERNET SERVICE PROVIDERS. Several national and regional Internet service
providers, including UUNET, Cais, EarthLink, Verio, and America Online, offer
high-speed access capabilities, along with other products and services. These
companies generally provide Internet access to residential and business
customers through a host of methods, including DSL.

      TRADITIONAL LOCAL TELEPHONE COMPANIES. Many of the traditional local
telephone companies, including BellSouth, SBC Communications, Qwest and Verizon,
are rapidly deploying DSL-based services, either directly or through affiliated
companies. These companies have established brand names and reputations for high
quality in their service areas, possess sufficient capital to deploy DSL
equipment rapidly, have their own copper telephone lines and can bundle digital
data services with their existing voice services to achieve a competitive
advantage in serving customers. In addition, these companies also offer
high-speed data communications services that use other technologies. We depend
on these traditional local telephone companies to enter into agreements for
interconnection and to provide us access

                                      -7-
<PAGE>

to individual elements of their networks. Although the traditional local
telephone companies are required to negotiate in good faith in connection with
these agreements, future interconnection agreements may contain less favorable
terms and result in a competitive advantage to the traditional local telephone
companies.

      NATIONAL LONG DISTANCE CARRIERS. National long distance carriers, such as
AT&T, Qwest, Sprint, Williams and WorldCom, have deployed large-scale data
networks, sell connectivity to businesses and residential customers, and have
high brand recognition. They also have interconnection agreements with many of
the traditional telephone companies, and many offer competitive DSL services.

      OTHER FIBER-BASED CARRIERS. Companies such as Allegiance, Choice One and
Intermedia have extensive fiber networks in many metropolitan areas, primarily
providing high-speed data and voice circuits to small and large corporations.
They also have interconnection agreements with the traditional telephone
companies under which they have acquired collocation space in many large
markets, which could position them to offer DSL service in those markets.

      CABLE MODEM SERVICE PROVIDERS. Cable modem service providers, such as At
Home and its cable partners, RoadRunner and High Speed Access, offer high-speed
Internet access over cable networks to consumers. @Work, a division of At Home,
has positioned itself to do the same for businesses. Where deployed, these
networks provide high-speed local access services, in some cases at speeds
higher than DSL service. They typically offer these services at lower prices
than our services, in part by sharing the capacity available on their cable
networks among multiple end users.

      WIRELESS AND SATELLITE DATA SERVICE PROVIDERS. Several companies,
including Motorola Satellite Systems, Hughes Communications, Teligent and
WinStar Communications, are emerging as wireless and satellite-based data
service providers. These companies use a variety of new and emerging
technologies to provide high-speed data services.

      The most significant competitive factors include: transmission speed,
service reliability, breadth of product offerings, price/performance, network
security, ease of access and use, content and service bundling, customer
support, brand recognition, operating experience, capital availability and
exclusive contracts with customers, including Internet service providers and
businesses with multiple offices. We believe our services compete favorably
within our service markets with respect to transmission speed,
price/performance, ease of access and use and customer support. Many of our
competitors enjoy competitive advantages over us based on their brand
recognotion, breadth of product offerings, financial resources, customer bases,
operating experience and exclusive contracts with customers.

INTERCONNECTION AGREEMENTS WITH TRADITIONAL LOCAL TELEPHONE COMPANIES

      We are required to enter into and implement interconnection agreements
with the traditional local telephone company in each market in which we deploy
our own local DSL equipment . These agreements govern, among other things:

     o   the price and other terms under which we locate our equipment in the
         telephone company's central offices,

     o   the price we pay to lease copper telephone lines,

     o   the special conditioning of these copper lines that the traditional
         telephone company provides to enable the transmission of DSL signals,

     o   the price we pay to access the telephone company's transmission
         facilities, and

     o   certain other terms and conditions of our relationship with the
         telephone company.

      Under the 1996 Telecommunications Act, the traditional local telephone
companies have a statutory duty to negotiate in good faith with us for
agreements for interconnection and access to certain individual elements of
their networks. This interconnection process is subject to review and approval
by the state

                                      -8-
<PAGE>

regulatory commissions. We have signed interconnection agreements with
BellSouth, Cincinnati Bell, Frontier, SBC Communications, Qwest, Sprint, and
Verizon or their subsidiaries, which govern our relationships in 48 states and
the District of Columbia. In addition, we are negotiating certain replacement
agreements with these carriers as the current agreements' terms expire and are
also negotiating amendments to existing agreements. Future interconnection
agreements may contain terms and conditions less favorable to us than those in
our current agreements and could increase our costs of operations.

      During these interconnection negotiations, either the telephone company or
we may submit disputes to the state regulatory commissions for mediation and,
after the expiration of the statutory negotiation period set forth in the 1996
Telecommunications Act, we may submit outstanding disputes to the states for
arbitration, as well as ask the state regulatory commissions to arbitrate a new
agreement or particulars thereof.

      Under the 1996 Telecommunications Act, states have begun and, in a number
of cases, completed regulatory proceedings to determine the pricing of
individual elements of their networks and services, and the results of these
proceedings will determine the price we pay for, and whether it is economically
attractive for us to use, these elements and services.

      Our interconnection agreements generally have terms of one or two years.
Therefore, we have had to renegotiate our existing agreements when they have
expired and will have to renegotiate other existing agreements when they expire.
Although we expect to renew our interconnection agreements and believe the 1996
Telecommunications Act limits the ability of traditional telephone companies not
to renew these agreements, we may not succeed in extending or renegotiating our
interconnection agreements on favorable terms. In addition, disputes have arisen
and will likely arise in the future as a result of differences in
interpretations of the interconnection agreements. These disputes have, in the
past, delayed the deployment of our networks. Finally, the interconnection
agreements are subject to state regulatory commission, FCC and judicial
oversight. These government authorities may modify the terms of the
interconnection agreements in ways that hurt our business.

GOVERNMENT REGULATIONS

      A significant portion of the services that we offer are subject to
regulation at the federal and/or state levels. The Federal Communications
Commission, or FCC, and state public utility commissions regulate
telecommunications common carriers, which are companies that offer
telecommunications services to the public or to all prospective users on
standardized rates and terms. Our DSL data transport services are common carrier
services.

      While we serve many of our customers using transport facilities that we
own or lease, in some areas where we do not have the necessary facilities we
provide our Internet access and other services using the local DSL facilities of
another carrier. The FCC has determined that Internet service providers, such as
us, who are using another carrier's DSL transport facilities, are not acting as
carriers. In those markets where we have not deployed our own local DSL
transport facilities, our DSL services are therefore not subject to common
carrier regulation. Our ability to provide such services, however, is affected
by regulations imposed upon the carriers whose DSL facilities we utilize.

      The FCC exercises jurisdiction over common carriers, and their facilities
and services, to the extent they are providing interstate or international
communications. The various state utility commissions retain jurisdiction over
telecommunications carriers, and their facilities and services, to the extent
they are used to provide communications that originate and terminate within the
same state. The degree of regulation varies from state to state.

                                      -9-
<PAGE>

      In recent years, the regulation of the telecommunications industry has
been in a state of flux as the United States Congress and various state
legislatures have passed laws seeking to foster greater competition in
telecommunications markets. The FCC and state regulatory commissions have
adopted many new rules to implement those new laws and to encourage competition.
These changes, which are still incomplete, have created new opportunities and
challenges for us and our competitors. Certain of these and other existing
federal and state regulations are currently the subject of judicial proceedings,
legislative hearings and administrative proposals which could change, in varying
degrees, the manner in which this industry operates. Neither the outcome of
these proceedings nor their impact upon the telecommunications industry or us
can be predicted at this time. Indeed, future federal or state regulations and
legislation may be less favorable to us than current regulations and legislation
and therefore have a material and adverse impact on our business and financial
prospects by undermining our ability to provide DSL services at competitive
prices. In addition, we may expend significant financial and managerial
resources to participate in proceedings setting rules at either the federal or
state level, without achieving favorable results.

FEDERAL REGULATION AND LEGISLATION

      We must comply with the requirements of a common carrier under the
Communications Act of 1934, as amended, to the extent we provide regulated
interstate services. These requirements include an obligation that our charges,
terms and conditions for communications services must be "just and reasonable"
and that we may not make any "unjust or unreasonable discrimination" in our
charges or terms and conditions. The FCC also has jurisdiction to act upon
complaints against common carriers for failure to comply with their statutory
obligations. We are not currently subject to price cap or rate of return
regulation at the federal level and are not currently required to obtain FCC
authorization for the installation, acquisition or operation of our facilities.

      The FCC has established different levels of regulation for dominant and
non-dominant carriers. Of domestic carriers, only the traditional local
telephone companies are classified as dominant carriers and all other providers
of domestic common carrier service, including us, are classified as non-dominant
carriers. As a non-dominant carrier, we are subject to less FCC regulation than
are dominant carriers.

      In October 1998, the FCC ruled that DSL and other advanced data services
provided as dedicated access services in connection with interstate services
such as Internet access are interstate services subject to the FCC's
jurisdiction. Accordingly, we could offer DSL services without state regulatory
authority, so long as we do not also provide local or intrastate
telecommunications services via our network. This decision allows us to provide
our DSL services in a manner that potentially reduces state regulatory
obligations. However, the regulatory parameters used to define DSL service are,
directly and indirectly, subject to many pending FCC and judicial proceedings
and could change in the future.

      Comprehensive changes to the Communications Act of 1934 were made by the
1996 Telecommunications Act, enacted on February 8, 1996. It represents a
significant milestone in telecommunications policy by establishing competition
in local telephone service markets as a national policy. The 1996
Telecommunications Act removes many state regulatory barriers to competition and
forecloses state and local governments from creating laws preempting or
effectively preempting competition in the local telephone service market.

      The 1996 Telecommunications Act places substantial interconnection
requirements on the traditional local telephone companies.

                                      -10-
<PAGE>

     o   Traditional local telephone companies are required to provide physical
         collocation, which allows companies such as us and other
         interconnectors to install and maintain their own network termination
         equipment in the central offices of traditional local telephone
         companies, and virtual collocation only if requested or if physical
         collocation is demonstrated to be technically infeasible. This
         requirement is intended to enable us and other competitive carriers to
         deploy our equipment on a relatively convenient and economical basis.

     o   Traditional local telephone companies are required to unbundle
         components of their local service networks so that other providers of
         local service can compete for a wide range of local service customers.
         This requirement is designed to provide us flexibility to purchase only
         the equipment we require to deliver our services.

     o   Traditional local telephone companies are required to establish
         "wholesale" rates for their services to promote resale by competitive
         local exchange carriers and other competitors.

     o   Traditional local telephone companies are required to establish number
         portability, which allows a customer to retain its existing phone
         number if it switches from the traditional local telephone companies to
         a competitive local service provider.

     o   Traditional local telephone companies are required to establish dialing
         parity, which ensures that customers will not detect a quality
         difference in dialing telephone numbers or accessing operators or
         emergency services of competitive local service providers.

     o   Traditional local telephone companies are required to provide
         nondiscriminatory access to telephone poles, ducts, conduits and
         rights-of-way. In addition, the 1996 Telecommunications Act requires
         traditional local telephone companies to compensate competitive
         carriers for traffic originated by them and terminated on the
         competitive carrier's network.

      The 1996 Telecommunications Act in some sections is self-executing. The
FCC issues regulations interpreting the 1996 Telecommunications Act that impose
specific requirements upon which we and our competitors rely. The outcome of
various ongoing FCC rulemaking proceedings or judicial appeals of such
proceedings could materially affect our business and financial prospects by
increasing the cost or decreasing our flexibility in providing DSL services.

      The FCC prescribes rules applicable to interstate communications,
including rules implementing the 1996 Telecommunications Act, a responsibility
it shares in certain respects with the state regulatory commissions. As part of
its effort to implement the 1996 Telecommunications Act, the FCC issued an order
governing interconnection, the unbundling of network elements, and many other
aspects of the relationships between new and traditional telephone companies in
August 1996. The United States Court of Appeals for the Eighth Circuit vacated
many of these rules, and, in January 1999, the United States Supreme Court
reversed elements of the Eighth Circuit's ruling, finding that the FCC has broad
authority to interpret the 1996 Telecommunications Act and issue rules for its
implementation. Following the Supreme Court's decision, in November, 1999, the
FCC issued a modified list of the network elements that must be offered on an
unbundled basis by traditional local telephone companies, including the local
copper telephone lines leased by DSL.net. This decision is currently subject to
reconsideration and to appeal.

      Although the Supreme Court affirmed the FCC's authority to develop pricing
guidelines in its January 25, 1999 decision, the Supreme Court did not evaluate
the specific pricing methodology adopted by the FCC for unbundled network
elements. Instead, the Supreme Court remanded the case to the Eighth Circuit for
further consideration of the FCC's rules regarding its forward-looking pricing
methodology for unbundled network elements. On July 18, 2000, the Eighth
Circuit, among other findings, vacated a portion of the FCC's pricing
methodology

                                      -11-
<PAGE>

that likely had the effect of lowering the costs that we pay to the traditional
local telephone companies for unbundled network elements that we use to
provision DSL service. The Eighth Circuit's decision has been stayed pending an
appeal to the Supreme Court, which agreed in January 2001 to hear the case. We
cannot predict the possible impact of these proceedings on our ability to
provide DSL services to the public at competitive prices, if at all.

      In March 1998, several traditional local telephone companies petitioned
the FCC for relief from certain regulations applicable to the DSL and other
advanced data services that they provide, including their obligations to provide
copper telephone lines and resold DSL services to competitive carriers. In
August 1998, the FCC concluded that DSL services are telecommunications services
and, therefore, the traditional local telephone companies are required to allow
interconnection of their facilities and equipment used to provide data transport
functionality, unbundle local telecommunications lines and offer for resale DSL
services. After some of the traditional local telephone companies appealed this
decision, the U.S. Court of Appeals for the District of Columbia remanded the
proceeding to the FCC for further consideration. In December 1999, the FCC
reaffirmed its conclusion on remand that traditional telephone companies are
required to offer to competitive data transmission companies the ability to
interconnect and the necessary unbundled network elements to provide advanced
data transmission services. This remand order is now pending on appeal before
the U.S. Court of Appeals. Any change in the August 1998 and December 1999
orders that would affect our ability to interconnect with and obtain facilities
from the traditional local telephone companies could affect our ability to
provide DSL services to the public.

      The traditional local telephone companies continue to urge the elimination
of their unbundling obligations with respect to advanced services in various FCC
proceedings and through legislation. Recent changes in federal Congressional and
executive leadership could increase the possibility of changes in the law that
could alter our relationship with these companies, and thereby affect our
ability to provide DSL services to the public.

      At least two traditional telephone companies, SBC Communications and
Verizon, have taken the position in state and federal regulatory proceedings
that they are not obligated to unbundle portions of their network where they
construct modified or new digital loop carrier facilities that would enable them
to offer DSL services to customers who are located too far from the traditional
local telephone companies' central offices to be reached by existing DSL
technologies. DSL.net and other competitive carriers have urged state and
federal regulators to require these companies to provide access to these
facilities on an unbundled basis and to hold that carriers such as us may invoke
the good-faith negotiation and arbitration procedures of the Telecommunications
Act of 1996 to establish rates, terms and conditions for such access. We cannot
predict the outcome of these proceedings. If SBC and Verizon are not required to
provide access on an unbundled basis, there is no guarantee that we will be able
to provide DSL service in these areas, or that we will be able to secure
favorable rates, terms and conditions from the traditional local telephone
companies for access. For example, while SBC and Verizon are developing
"voluntary" wholesale DSL products for competitive local telephone companies
that would utilize their respective digital loop carrier facilities, these
products would support only asymmetric DSL, and not the symmetric DSL that we
primarily offer today.

      In August 1998 , the FCC issued a notice of proposed rulemaking seeking
comments on its tentative conclusion that traditional local telephone companies
should be permitted to create separate affiliates to provide DSL services. Under
the separate affiliate proposal, traditional local telephone companies would be
required to provide wholesale service to other DSL carriers at the same rates,
terms and conditions that it provided to its separate affiliate. The outcome of
this proceeding remains uncertain. In connection with its approval of mergers,
however, the FCC subsequently required two traditional local telephone
companies, SBC Communications and Verizon, to create separate affiliates to
provide DSL services, as

                                      -12-
<PAGE>

conditions of their mergers with Ameritech and GTE, respectively. In January
2001, the United States Court of Appeals for the District of Columbia held that
SBC may not avoid its obligations under the 1996 Telecommunications Act through
the creation of a separate advanced services affiliate. Under the terms of the
FCC's conditions on the SBC-Ameritech merger, SBC may be able to fold its
separate affiliate back into the parent company as early as later this year. It
remains unclear how this court decision will affect the existing SBC and Verizon
affiliates and the pending FCC proceedings. Any outcome that alters our
relationship with the traditional local telephone companies could adversely
affect our ability to provide DSL services at a competitive price.

      In March 1999, the FCC strengthened its regulations that require the
traditional local telephone companies to permit other carriers to collocate all
equipment necessary for interconnection. This requirement covers equipment that
we use to provide DSL data services. The FCC adopted limits on the construction
standards and other conditions for collocation that may be imposed by
traditional local telephone companies. These new rules would reduce our
collocation costs and expedite our ability to provide service to new areas. In
March 2000, however, the U.S. Court of Appeals for the District of Columbia
vacated some of these rules, and reconsideration of the collocation rules
remains pending before the FCC. There can be no assurance that this proceeding
will produce favorable collocation rules.

      In November 1999, the FCC issued an order reaffirming its prior conclusion
that DSL services must be offered for resale at a discount by traditional local
telephone companies to the extent such services are offered at retail to
residential and business customers. The FCC determined, however, that advanced
services provided to Internet service providers would not be subject to resale
at a discount. Accordingly, traditional telephone companies may enter into
volume and term discounts for the provisioning of DSL services with internet
service providers, arguably including its own internet affiliates, without
having to make such arrangements available to other requesting competitive
carriers at discounted rates. There is no guarantee that these resale rates will
compare favorably to those offered to internet service providers.

      In December 1999, the FCC issued an order that requires the traditional
local telephone companies to provide "line sharing" of unbundled copper
telephone lines to DSL companies. Line sharing allows a DSL company to lease the
high frequency portion of a loop over which some types of DSL data traffic is
transmitted without having to lease the low frequency portion of the loop which
carries voice traffic. Line sharing is not currently available using symmetric
DSL technology, which transmits data at the same speed to and from the customer
and is the technology that we primarily use in providing our service.

      Also in December 1999, the FCC granted Verizon (formerly Bell Atlantic)
authority to provide long distance interexchange service in New York, a service
it and the other traditional local telephone companies created by AT&T's
divestiture of its local telephone service business had previously been barred
from offering. Subsequently, the FCC has authorized Southwestern Bell, a
subsidiary of SBC Communications, to provide long distance service in Texas,
Kansas and Oklahoma, and numerous additional applications are expected over the
next one to two years. While we do not presently provide long distance
interexchange service, this ruling and any future similar rulings could
negatively impact our business. First, Verizon and Southwestern Bell are able to
offer potentially attractive packages of local, long distance and data services.
Second, the prospect of long distance authority has served as a powerful
incentive for the traditional local telephone companies to comply with their
obligations under the 1996 Telecommunications Act, including the provision of
unbundled network elements and collocation services to competitors such as us.
The traditional local telephone companies may not extend to us the same level of
cooperation once they receive approval to provide long distance interexchange
service.

      The 1996 Telecommunications Act also directs the FCC, in cooperation with
state regulators, to establish a universal service fund that will provide
subsidies to carriers that provide service to individuals that live in rural,
insular, and high-cost areas. A portion of carriers' contributions to the
universal service

                                      -13-
<PAGE>

fund also will be used to provide telecommunications related facilities for
schools, libraries and certain rural health care providers. The FCC released its
initial order in this context in June 1997, which requires all
telecommunications carriers to contribute to the universal service fund. The
FCC's implementation of universal service requirements remains subject to
judicial and additional FCC review. Additional changes to the universal service
regime, which could increase our costs, could have an adverse affect on us.

      DSL.net is authorized to provide interstate telecommunications services
pursuant to its access tariff filed with the FCC in April 1999. Although not
required for our existing DSL data service offering, on August 6, 1999 we
obtained authority from the FCC to provide international telecommunications
services originating from the United States.

STATE REGULATION

      In October 1998, the FCC deemed data transmission to the Internet to be
interstate services subject only to federal jurisdiction. However, this decision
is currently subject to reconsideration and appeal. Also, some of our services
that are not limited to interstate access potentially may be classified as
intrastate services subject to state regulation. All of the states where we
operate, or intend to operate, require some degree of state regulatory
commission approval to provide certain intrastate services and maintain ongoing
regulatory supervision. In most states, intrastate tariffs are also required for
various intrastate services, although our services are not subject to price or
rate of return regulation. Actions by state public utility commissions could
cause us to incur substantial legal and administrative expenses and adversely
affect our business.

      We have obtained authorizations to provide local exchange and
long-distance telecommunications services in all 50 states, the District of
Columbia, and Puerto Rico.

LOCAL GOVERNMENT REGULATION

      In certain instances, we may be required to obtain various permits and
authorizations from municipalities, such as for use of rights-of-way, in which
we operate our own local distribution facilities. Whether various actions of
local governments over the activities of telecommunications carriers such as
ours, including requiring payment of franchise fees or other surcharges, pose
barriers to entry for competitive local exchange carriers which violate the 1996
Telecommunications Act or may be preempted by the FCC is the subject of
litigation. While we are not a party to this litigation, we may be affected by
the outcome. If municipal governments impose conditions on granting permits or
other authorizations or if they fail to act in granting such permits or other
authorizations, the cost of providing DSL services may increase or it may
negatively impact our ability to expand our network on a timely basis and
adversely affect our business.

INTELLECTUAL PROPERTY

      We regard our products, services and technology as proprietary and attempt
to protect them with copyrights, trademarks, trade secret laws, restrictions on
disclosure and other methods. For example, we own a federal supplemental
registration and claim rights in the name DSL.net. There can be no assurance
these methods will be sufficient to protect our technology and intellectual
property. We also generally enter into confidentiality agreements with our
employees and consultants, and generally control access to and distribution of
our documentation and other proprietary information. Despite these precautions,
it may be possible for a third party to copy or otherwise obtain and use our
proprietary information without authorization, or to develop similar information
independently. Effective patent, copyright, trademark and trade secret
protection may be unavailable or limited in certain foreign countries, and the
global nature

                                      -14-
<PAGE>

of the Internet makes it virtually impossible to control the ultimate
destination of our technology or proprietary information. There can be no
assurance that the steps we have taken will prevent misappropriation or
infringement of our technology or proprietary information. In addition,
litigation may be necessary in the future to enforce our intellectual property
rights, to protect our trade secrets or to determine the validity and scope of
the proprietary rights of others. Such litigation could result in substantial
costs and diversion of resources and could have a material adverse effect on our
business, operating results and financial condition. In addition, some of our
information, including our competitive carrier status in individual states and
our interconnection agreements, is a matter of public record and can be readily
obtained by our competitors and potential competitors, possibly to our
detriment.

EMPLOYEES

      As of December 31, 2000, we had 380 employees. We believe that our future
success will depend in part on our continued ability to attract, hire and retain
qualified personnel. Competition for such personnel is intense, and we may be
unable to identify, attract and retain such personnel in the future. None of our
employees are represented by a labor union or are the subject of a collective
bargaining agreement. We have never experienced a work stoppage and believe that
our employee relations are good.

ITEM 2.  PROPERTIES

      Our headquarters consists of approximately 56,200 square feet in an office
building in New Haven, Connecticut. We also lease other offices in Milford and
New Haven, Connecticut; Santa Cruz, California; Minneapolis, Minnesota;
Marietta, Georgia and Chantilly, Virginia. We have vacated the offices in
Milford, Connecticut and Chantilly, Virginia, as well as certain office space in
New Haven, Connecticut, and are currently looking to sublease those premises.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations". In addition, we lease space for network equipment installations in
a number of other locations. With respect to our arrangements to use space in
traditional telephone companies' central offices, please see "BUSINESS -
Interconnection Agreements with Traditional Local Telephone Companies."

ITEM 3.  LEGAL PROCEEDINGS

      A lawsuit for wrongful termination of employment was filed against us in
the Superior Court in New Haven, Connecticut on July 29, 1999 by Frank W.
Pereira, a former officer who was employed by us for less than two months.
Plaintiff's claims are based chiefly on his allegation that we terminated his
employment because he allegedly voiced concerns to senior management about the
feasibility of our second and third tier city business strategy. He further
alleges that our senior management knew of these alleged flaws in the strategy.
The plaintiff is principally seeking compensatory damages for wages and unvested
stock options. We deny these allegations and believe that the plaintiff's claims
are without merit. We plan to defend the case vigorously.

      We are also a party to legal proceedings related to regulatory approvals.
We are subject to state commission, FCC and court decisions as they relate to
the interpretation and implementation of the 1996 Telecommunications Act, the
interpretation of competitive carrier interconnection agreements in general and
our interconnection agreements in particular. In some cases, we may be deemed to
be bound by the results of ongoing proceedings of these bodies. We therefore may
participate in proceedings before these regulatory agencies or judicial bodies
that affect, and allow us to advance, our business plans.

                                      -15-
<PAGE>

      From time to time, we may be involved in other litigation concerning
claims arising in the ordinary course of our business, including claims brought
by former employees and claims related to acquisitions. We do not currently
believe that any of the legal claims or proceedings will result in a material
adverse effect on our business, financial position, results of operations or
cash flows.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

       During the quarter ended December 31, 2000 we did not submit any matters
to the vote of our security holders.

                                      -16-
<PAGE>

                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

       As of March 21, 2001, there were approximately 589 holders of record of
our common stock. Our common stock is listed for quotation on the Nasdaq
National Market under the symbol "DSLN".

       The range of high and low sales prices per share of DSL.net's common
stock as reported on the Nasdaq National Market since DSL.net's initial public
offering are shown below.

QUARTER ENDED                                           HIGH            LOW

December 31, 1999 (from October 6, 1999)               $25.625         $7.469
March 31, 2000                                         $32.563        $14.000
June 30, 2000                                          $22.250         $6.125
September 30, 2000                                     $10.375         $2.406
December 31, 2000                                       $3.500         $0.469

RECENT SALES OF UNREGISTERED SECURITIES

       In May 2000, 102,737 shares of common stock were issued upon the cashless
exercise of an outstanding warrant pursuant to its terms. These shares of common
stock were issued pursuant to an exemption from registration provided under
Sections 3(a)(9) or 4(2) of the Securities Act of 1933.

DIVIDEND POLICY

       We have never declared or paid any cash dividends on our common stock and
currently intend to retain any future earnings for the future operation and
expansion of our business. In addition, our credit agreement with our bank
prohibits the payment of cash dividends. Accordingly, we do not anticipate that
any cash dividends will be declared or paid on our common stock in the
foreseeable future.

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

      We were incorporated on March 3, 1998 and commenced operations on March
28, 1998. The following historical data for the period from inception (March 3,
1998) through December 31, 1998 and the years ended December 31, 1999 and
December 31, 2000, except for "Other Data," has been derived from our financial
statements audited by PricewaterhouseCoopers LLP, independent accountants. Our
balance sheets at December 31, 1999 and 2000 and the related statements of
operations, changes in stockholders' equity and cash flows for the period from
inception (March 3, 1998) to December 31, 1998 and the years ended December 31,
1999 and December 31, 2000 and notes thereto appear elsewhere in this annual
report on Form 10-K.

      You should refer to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the more complete financial information
included elsewhere in this annual report on Form 10-K.

                                      -17-
<PAGE>

<TABLE><CAPTION>
                                                        Period From
                                                      Inception (March 3,
                                                        1998) Through       Year Ended        Year Ended
                                                        December 31,       December 31,       December 31,
                                                            1998               1999               2000
                                                            ----               ----               ----
<S>                                                   <C>                <C>                <C>
STATEMENT OF OPERATIONS DATA:
Revenue .........................................     $      31,533      $   1,312,546      $  17,789,410
Operating expenses:
      Network and operations ....................           127,054          9,604,200         78,242,544
      General and administrative ................         2,653,544          8,036,547         25,793,932
      Sales and marketing .......................            35,961          7,543,191         26,236,619
        Total operating expenses ................         2,816,559         25,183,938        130,273,095
Operating loss ..................................        (2,785,026)       (23,871,392)      (112,483,685)
Interest expense (income), net ..................             4,611         (1,889,312)        (6,729,657)
Other expense ...................................              --                6,233              9,120
Net loss ........................................     $  (2,789,637)     $ (21,988,313)     $(105,763,148)

NET LOSS PER COMMON SHARE DATA:
Net Loss per common share, basic and diluted ....     $       (0.55)     $       (2.05)     $       (1.75)
Shares used in computing net loss per share .....         5,118,342         16,549,535         60,593,437

CASH FLOW DATA:
Used in operating activities ....................     $    (153,505)     $  (6,342,720)     $ (74,985,739)
Used in investing activities ....................          (290,082)       (48,660,812)       (56,717,213)
Provided by financing activities ................           483,066        121,142,314        141,959,673

OTHER DATA:
EBITDA (A) ......................................     $    (356,010)     $ (17,917,617)     $ (88,137,915)
Capital expenditures ............................           290,082         33,811,121         55,942,721


                                                                           December 31,
                                                      ---------------------------------------------------
                                                            1998               1999               2000
                                                            ----               ----               ----

BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities      $      39,479      $  79,452,444      $  76,434,982
Total assets ....................................           369,980        117,631,772        194,805,921
Long-term obligations (including current portion)           433,161          3,055,625         14,114,457
Total stockholders' equity (deficit) ............          (315,865)       100,732,886        149,417,439
</TABLE>

     (A) EBITDA, shown above under "Other Data," consists of net loss excluding
net interest, taxes, depreciation of capital assets, amortization of intangibles
and non-cash stock compensation expense. Other companies, however, may calculate
it differently from us. We have provided EBITDA because it is a measure of
financial performance commonly used for comparing companies in the
telecommunications industry in terms of operating performance, leverage, and
ability to incur and service debt. EBITDA is not a measure determined under
generally accepted accounting principles. EBITDA should not be considered in
isolation from, and you should not construe it as a substitute for:

     o   operating loss as an indicator of our operating performance,

                                      -18-
<PAGE>

     o   cash flows from operating activities as a measure of liquidity,

     o   other consolidated statement of operations or cash flows data presented
         in accordance with generally accepted accounting principles, or

     o   as a measure of profitability or liquidity.

       The above financial data includes the operating results of acquisitions
from their acquisition date and consequently will effect the comparability of
such financial data from year to year.


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

       THE FOLLOWING DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH "ITEM 6 - SELECTED
CONSOLIDATED FINANCIAL DATA" AND "ITEM 8 - FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA" THAT APPEAR ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K.
THIS DISCUSSION AND ANALYSIS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A
DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE SET FORTH UNDER "RISK FACTORS"
AND ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K. EXISTING AND PROSPECTIVE
INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING
STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. WE UNDERTAKE NO OBLIGATION,
AND DISCLAIM ANY OBLIGATION, TO UPDATE OR REVISE THE INFORMATION CONTAINED IN
THIS ANNUAL REPORT ON FORM 10-K, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS OR CIRCUMSTANCES OR OTHERWISE.

OVERVIEW

      We provide high-speed data communications, Internet access, and related
services to small and medium sized businesses, primarily using digital
subscriber line, or DSL, technology. We primarily target select second and third
tier cities for the deployment of our own local DSL equipment. We began offering
commercial service in May 1998 and, as of March 15, 2001, we had installed
equipment in over 375 cities. In first tier cities, and certain other markets
where we have not deployed our own equipment, we utilize the local DSL
facilities of other carriers to provide service.

      We have incurred operating losses and net losses for each month since our
formation. For the periods ended December 31, 1998, 1999 and 2000, we
experienced net cash outflows from operating and investing activities. As of
December 31, 1998, 1999 and 2000, we had accumulated deficits of approximately,
$2,789,600, $27,180,000 and $132,943,100, respectively.

      In an effort to increase revenue from our installed network and conserve
capital, in the fourth quarter of 2000, we decided to suspend the build-out of
additional central offices and focus our efforts on increasing revenue through
targeted marketing to increase penetration in our existing service areas and by
introducing more services. In addition, we decided to suspend network
connections to certain central offices, consolidate operating facilities,
significantly reduce staff and curtail overall operating expenses. As a result,
in 2001, we currently expect a significant reduction in our capital expenditures
and a reduction

                                      -19-
<PAGE>

in the size of our operating losses, net losses and net operating cash outflows.
We currently believe these actions will reduce our monthly net cash outlay
during 2001.

      Our financial performance will vary, and whether and when we achieve
profitability will depend on a number of factors, including:

     o   development of the high-speed data communications industry and our
         ability to compete effectively;

     o   our ability to obtain additional financing to continue the
         implementation of our business plan;

     o   amount, timing and pricing of customer revenue;

     o   commercial acceptance of our service and attaining expected penetration
         within our target markets;

     o   our ability to recruit and retain qualified personnel;

     o   up front sales and marketing expenses;

     o   cost and utilization of our network components which we lease from
         other telecommunications providers, including other competitive
         carriers;

     o   our ability to establish and maintain relationships with marketing
         partners;

     o   successful implementation and management of financial, information
         management and operations support systems to efficiently and
         cost-effectively manage our growth; and

     o   favorable outcome of federal and state regulatory proceedings and
         related judicial proceedings, including proceedings relating to the
         1996 Telecommunications Act.

FACTORS AFFECTING FUTURE OPERATIONS

      REVENUE. We derive our revenue from monthly fees and installation costs
paid by customers for our services, which vary based on the speed of the
connection and the services ordered. The current monthly fee includes all phone
line charges, Internet access charges, the cost of the modem installed at the
customer's site and the other services we provide.

      During fiscal 2000, we implemented the Securities and Exchange
Commission's Staff Accounting Bulletin ("SAB") No. 101 "REVENUE RECOGNITION IN
FINANCIAL STATEMENTS." As a result, installation revenue and installation costs
are now deferred and amortized to revenue and expense, respectively, over
eighteen months, the estimated life of the customer relationship. Any excess of
installation cost over revenue is expensed when incurred. In certain situations
we waive non-recurring installation charges in order to obtain a customer and
expense the related direct installation cost as incurred. Management believes
that implementation of SAB No. 101 will not have a significant impact on future
revenue or future operating results because installation revenue represents a
small percentage of our total revenue and because the deferred revenue is offset
by the deferral of an equal amount of installation cost.

      We seek to price our services competitively. The market for high-speed
data communications services and Internet access is rapidly evolving and
intensely competitive. While many of our competitors and potential competitors
enjoy competitive advantages over us, we are pursuing a significant market that,
we

                                      -20-
<PAGE>

believe, is currently under-served. Although pricing will be an important part
of our strategy, we believe that direct relationships with our customers and
consistent, high quality service and customer support will be key to generating
customer loyalty. During the past several years, market prices for many
telecommunications services and equipment have been declining, a trend that we
believe will likely continue.

      NETWORK AND OPERATIONS. Our network and operations expenses include costs
related to personnel, monthly fees for telecommunications lines between
customers, central offices, network service providers and our network, customer
line installation, Internet access, certain depreciation and amortization
expenses and other costs. Our costs for customer lines will increase as we add
customers. We lease high-speed lines and other network capacity to connect our
central office equipment and our network. Additional costs are incurred to
connect to the Internet. Because of significant expansion and growth of our
business during 2000, our results include various network and operations
expenses, particularly depreciation and amortization expenses, for a portion of
the year. As a result, we expect to see increases in such expenses during 2001
as such expenses are included for the full year. We also expect these costs to
increase as the volume of data communications traffic generated by our
customers' increases.

      The majority of our capital expenditures relate to building our network
and delivering service to customers. Accordingly, the majority of our
depreciation and amortization expense, excluding amortization of goodwill and
intangibles resulting from acquisitions, is included in our network and
operations expense. This expense includes:

     o   Depreciation of network and operations equipment and DSL modems and
         routers installed at customer sites;

     o   Depreciation of information systems, and computer hardware and
         software; and

     o   Amortization and depreciation of the costs of obtaining, designing and
         building our collocation space and corporate facilities.

      GENERAL AND ADMINISTRATIVE. Our general and administrative expenses
consist primarily of costs relating to human resources, finance, billing,
administrative services, recruiting, insurance, legal services, operating
facilities rent, depreciation and amortization of goodwill and intangibles
resulting from acquisitions.

      SALES AND MARKETING. Our sales and marketing expenses consist primarily of
expenses for personnel, the development of our brand name, promotional
materials, advertising and sales commissions and incentives.

      STOCK COMPENSATION. We incurred non-cash stock compensation expenses as a
result of the granting of stock and stock options to employees and others with
exercise prices per share subsequently determined to be below the fair values
per share of our common stock for financial reporting purposes at the dates of
grant. The stock compensation, if vested, was charged immediately to expense,
while non-vested compensation is being amortized over the vesting period of the
applicable options or stock, which is generally 48 months. In addition, in
fiscal 2000, we recorded $870,000 of non-cash compensation expense relating to
the vesting of stock options held by members of our former advisory board.

      TAXATION. We have not generated any taxable income to date and, therefore,
have not paid any federal income taxes since inception. Use of our net operating
loss carryforwards, which will begin to expire in 2003, may be subject to
limitations. We have recorded a full valuation allowance on a deferred tax
asset,

                                      -21-
<PAGE>

consisting primarily of net operating loss carryforwards, because of uncertainty
regarding their future recoverability.

RESULTS OF OPERATIONS

      REVENUE. Revenue increased from approximately $32,000 for the period from
March 3, 1998 (inception) to December 31, 1998 to approximately $1,313,000 for
the year ended December 31, 1999 and to approximately $17,789,000 for the year
ended December 31, 2000. Revenue increased primarily due to the expansion of our
network, the increased number of customers subscribing for our services and
contributions from acquired businesses, primarily Vector Internet Services, Inc.
and Tycho Networks. We currently expect revenue to increase in future periods as
we increase our sales and marketing efforts in our existing service areas and
introduce additional services.

      NETWORK AND OPERATIONS. Network and operations expenses increased from
approximately $127,000 for the period from March 3, 1998 (inception) to December
31, 1998 to approximately $9,604,000 for the year ended December 31, 1999 and
approximately $78,243,000 for the year ended December 31, 2000. The increase in
network and operations expenses between the 1998 and 1999 periods was primarily
due to the increased number of customers subscribing for our services and other
increased costs resulting from the addition of personnel, the expansion of our
network and legal costs incurred in connection with our applications for
regulatory approvals in various states. The increases in these expenses between
the 1999 and 2000 periods was primarily attributable to increased
telecommunication costs and central office facilities costs, increases in
personnel and professional services and increased depreciation expense. These
increases resulted primarily from the expansion of our network and the increased
number of customers subscribing for our services.

      Network and operations expenses included depreciation expense of
approximately $5,744, $1,621,000 and $15,119,000 for the period from March 3,
1998 (inception) to December 31, 1998 and the years ended December 31, 1999 and
2000, respectively. This expense increased as we incurred further capital
expenditures in connection with our expansion and more of our network facilities
became operational.

      GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
from approximately $2,653,000 for the period from March 3, 1998 (inception) to
December 31, 1998 to $8,037,000 for year ended December 31, 1999 and
approximately $25,794,000 for the year ended December 31, 2000. The increase in
general and administrative expenses between the 1998 and 1999 periods was
principally the result of increases in the number of employees. The increases in
these expenses between the 1999 and 2000 periods were principally the result of
increases in personnel and professional services, increases in office facility
rents resulting from the development of our operating infrastructure and
amortization of goodwill and other intangible assets related to acquisitions.

      SALES AND MARKETING. Sales and marketing expenses increased from
approximately $36,000 for the period from March 3, 1998 (inception) to December
31, 1998 to approximately $7,543,000 for the year ended December 31, 1999 and
approximately $26,237,000 for the year ended December 31, 2000. These expenses
increased primarily as a result of increased marketing and promotional
activities, including direct mail, and increases in sales and marketing
personnel.

      STOCK COMPENSATION. Non-cash stock compensation expenses were
approximately $2,423,000 for the period from March 3, 1998 (inception) to
December 31, 1998, compared to $4,123,000 for the year ended December 31, 1999
and $3,192,000 for the year ended December 31, 2000. These expenses

                                      -22-
<PAGE>

consisted of charges and amortization related to stock options and restricted
stock granted to our employees, directors and advisors.

      The unamortized balance of approximately $13,362,000 as of December 31,
1999 and $3,931,000 as of December 31, 2000, will be amortized over the
remaining vesting period of each grant. As of December 31, 1999 and 2000 options
to purchase 5,874,302 and 7,318,612 shares of common stock, respectively, were
outstanding, which were exercisable at weighted average exercise prices of $2.32
and $4.07 per share, respectively.

      INTEREST EXPENSE (INCOME), NET. Net interest expense of approximately
$5,000 for the period from March 3, 1998 (inception) to December 31, 1998 did
not include any interest income. For the year ended December 31, 1999, net
interest income of approximately $1,889,000 included $2,077,000 of interest
income partially offset by $188,000 of interest expense. Net interest income of
approximately $6,730,000 for the year ended December 31, 2000 included
$8,538,000 of interest income partially offset by $1,808,000 of interest
expense. The increases in interest income in 1999 and 2000 were primarily due to
an increase in our cash and investment balances resulting from the sale of
preferred stock and common stock in 1999 and the sale of common stock in 2000.
The increases in interest expense were related to increased debt, primarily
attributable to new capital lease obligations and other financing arrangements.

      RESTRUCTURING. In the fourth quarter of 2000, we incurred approximately
$3,542,000 in non-recurring charges related to a corporate restructuring. Of
that amount, approximately $448,000 related to severance costs incurred as a
result of a reduction in our workforce of approximately 140 employees. These
severance costs are included in network and operations, general and
administrative and sales and marketing expenses. A charge of approximately
$1,078,000 was included in general and administrative expense for the estimated
costs resulting from the consolidation of our office facilities by vacating
office space located in Milford, Connecticut, and Chantilly, Virginia and for
unused office space in Santa Cruz, California. Lastly, a reserve of
approximately $2,016,000 was included in network and operations expenses for the
estimated costs resulting from our decision to not accept certain central
offices' previously applied for, and to forego the completion of our build-out
of certain other central offices.

      At December 31, 2000, approximately $362,000 of severance costs and
approximately $1,416,000 of capitalized collocation application fees had been
charged against the restructuring reserves.

      NET LOSS. Net loss of $2,790,000 for the period from March 3, 1998
(inception) to December 31, 1998 increased to approximately $21,988,000 for the
year ended December 31, 1999 and approximately $105,763,000 for the year ended
December 31, 2000.

LIQUIDITY AND CAPITAL RESOURCES

      We have financed our capital expenditures and operations primarily with
the proceeds from the sale of stock and from borrowings, including equipment
lease financings. As of December 31, 2000, we had cash and cash equivalents of
approximately $76,435,000 and working capital of approximately $46,762,000.

      Net cash provided by financing activities in the periods ended 1998, 1999
and 2000 was approximately $483,000, $121,142,000 and $141,960,000,
respectively. This cash primarily resulted from the sale of our capital stock.
We have used, and intend to continue using, the proceeds from these financings
primarily to implement our business plan and for working capital and general
corporate purposes. We have also used, and may in the future use, a portion of
these proceeds to acquire complementary businesses or assets.

                                      -23-
<PAGE>

      In August 1998, we issued a $100,000 demand note, which bore interest at
the annual rate of 5.56%. As of December 31, 1998, $66,667 of principal of this
note remained outstanding. This note was repaid in full in January 1999.

      In November 1998, we received $350,000 from a short-term bridge note and
warrant financing. These notes had an aggregate principal amount of $350,000 and
bore interest at annual rates of 5.56% or 6%. These notes were exchanged for
shares of our Series A preferred stock in January 1999.

      During 1998, we also received $50,500 from the sale of capital stock to
our founders.

      In January 1999, we received net proceeds of approximately $3,302,000 from
the sale of shares of Series A preferred stock and certain warrants. In April
1999, we received net proceeds of approximately $9,940,000 from the sale of
shares of Series C preferred stock to our principal stockholders and others. In
May 1999, we received net proceeds of approximately $29,961,000 from the sale of
shares of Series D preferred stock to our principal stockholders and others. In
addition, we received approximately $1,007,000 in connection with repayment of a
note, including interest at 6.0%, from an officer in connection with the
purchase of Series D preferred stock in June 1999. In July 1999, we received net
proceeds of approximately $18,458,000 from the sale of shares of Series E
preferred stock to two strategic marketing partners. In October and November
1999, we received net proceeds of approximately $55,722,000 from the sale of
shares of common stock in our initial public offering. Upon the closing of the
initial public offering of our common stock on October 12, 1999, all outstanding
shares of our preferred stock converted automatically into shares of common
stock. In March 2000, we received net proceeds of approximately $141,273,000
from the sale of 5,750,000 shares of our common stock in a public offering.

      In May 2000, our $5 million bank line of credit expired and the amounts
outstanding converted to a 36-month term loan. Amounts borrowed under this term
loan generally bear interest at the sum of 1% plus the higher of the bank's
prime rate of interest and the federal funds rate plus 0.5%, and are secured by
a lien on certain of our equipment. As of December 31, 2000, the $3,545,000
outstanding under the term loan bore interest at the annual rate of 10.5%. The
term loan contains certain restrictive covenants, including covenants requiring
us to maintain certain financial ratios and limitations relating to, among other
things, new indebtedness, the creation of liens, types of investments, mergers,
consolidations and the transfer of all or substantially all of our assets.

      In March 1999, we entered into a 36-month lease facility to finance the
purchase of up to an aggregate of $2,000,000 of equipment. Amounts financed
under this lease facility bear an interest rate of 8% or 9%, depending on the
type of equipment, and are secured by the financed equipment. In July 2000, we
entered into a 48-month lease agreement with an equipment vendor to finance the
purchase of network equipment. We have leased approximately $8,900,000 under
this agreement. Amounts financed under this agreement bear an interest rate of
12% and are secured by the financed equipment. In addition, during 1999 and
2000, we purchased and assumed through acquisition certain equipment and
computer software under other capital leases, which are being repaid over
periods ranging from 24 months to 60 months at rates ranging from 7.5% to 15%.
In the aggregate, there was approximately $10,477,000 outstanding under capital
leases at December 31, 2000.

      As a result of the development of our operating infrastructure and recent
acquisitions, we have entered into certain long-term agreements providing for
fixed payments. Under our facility operating leases, minimum office facility
operating lease payments are approximately $3,514,000 in 2001, $3,542,000 in
2002, $2,556,000 in 2003, $1,450,000 in 2004 and $389,000 in 2005. In addition,
under agreements with two long distance carriers providing for data transmission
services, minimum payments are approximately $8,295,000 in 2001, $10,024,000 in
2002, $9,281,000 in 2003, $4,800,000 in 2004 and

                                      -24-
<PAGE>

$1,600,000 in 2005. As part of our restructuring in December 2000, we vacated
certain office space in Milford, Connecticut and Chantilly, Virginia and did not
occupy certain increased space in Santa Cruz, California. We are currently
seeking to sublease these spaces. If we are successful, the fixed payments
associated with facility operating leases described above will decrease. We may
not be able to sublease these facilities for lease rates that will cover our
lease payments, or at all.

      On December 1, 1999, we acquired Tycho Networks, which is based in Santa
Cruz, California. Tycho Networks provides Internet access, web hosting and
related services throughout central coastal California. The approximate net
purchase price of $3.3 million, excluding transaction costs associated with the
acquisition, consisted of cash payments at closing of $1.6 million (including
notes paid at closing of approximately $0.8 million), amounts due to the selling
stockholders and others after the closing of approximately $0.8 million, net
liabilities assumed of approximately $0.5 million and other costs of
approximately $0.4 million. All amounts due to Tycho Networks selling
stockholders have been paid.

      On April 3, 2000, we acquired certain assets and liabilities of Trusted
Net Media Holdings, LLC. This acquisition was accounted for under the purchase
method of accounting and, accordingly, the purchase price has been allocated to
the assets acquired and liabilities assumed based on their estimated fair values
at the date of acquisition. The approximate net purchase price of $2,500,000,
excluding transaction costs, consisted of cash payments at closing of
approximately $2,097,000; amounts due to Trusted Net after the closing of
approximately $350,000; and net liabilities assumed of approximately $53,000. In
addition, we incurred transaction costs associated with the acquisition of
approximately $150,000.

      On May 26, 2000, we acquired Vector Internet Services, Inc.("VISI"), an
Internet solution provider based in Minneapolis, Minnesota. This acquisition was
accounted for under the purchase method of accounting and, accordingly, the
purchase price has been allocated to the assets acquired and liabilities assumed
based on their estimated fair values at the date of acquisition. The approximate
net purchase price of $19,969,000, excluding transaction costs, consisted of
cash payments at closing of approximately $8,800,000; amounts due to selling
stockholders after the closing of approximately $2,200,000; common stock valued
at $2,315,000; and the assumption of VISI employee stock options, which were
valued at $6,654,000. In addition, we incurred transaction costs associated with
the acquisition of approximately $425,000.

      On December 1, 2000, we acquired certain assets of Exario Networks. This
acquisition was accounted for under the purchase method of accounting and,
accordingly, the purchase price has been allocated to the assets acquired based
on their estimated fair values at the date of acquisition. The approximate net
purchase price of $4,463,000, excluding transaction costs, consisted of cash
payments at closing of approximately $2,902,000 and amounts due to Exario after
the closing of approximately $1,561,100. In addition, we incurred transaction
costs associated with the acquisition of approximately $100,000.

      In 1998, 1999 and 2000, net cash used in our operating activities was
approximately $154,000, $6,343,000 and $74,986,000, respectively. This cash was
used for a variety of operating expenses, including salaries, consulting and
legal expenses, network operations and overhead expenses.

      Net cash used in investing activities in 1998, 1999 and 2000 was
approximately $290,000 $48,661,000 and $56,717,000, respectively. For the year
ended December 31, 1999 approximately $33,811,000 was used for purchases of
equipment and payment of collocation costs, approximately $13,274,000 was used
for the purchase of marketable securities and approximately $1,576,000 was used
to acquire Tycho Networks. For the year ended December 31, 2000, approximately
$55,943,000 was used primarily for the purchase of equipment and payment of
collocation costs and approximately $14,049,000

                                      -25-
<PAGE>

was used for acquisitions and investments, excluding approximately $4,034,000
which is payable by us to selling stockholders at future dates. These
expenditures were partially offset by proceeds from the sale of marketable
securities of approximately $13,274,000.

      The development and expansion of our business has required significant
capital expenditures. Capital expenditures, including collocation fees, were
approximately $55,493,000 for the year ended December 31, 2000. The actual
amounts and timing of our future capital expenditures will vary depending on the
speed at which we expand and implement our network and implement service for our
customers. As a result of our decision to delay further deployment of our
network, our planned capital expenditures for 2001 are currently expected to be
primarily for the purchase and installation at our customers' sites of the
equipment necessary for us to provide our services, as well as for the continued
development of our network and operational support systems. We currently
anticipate spending approximately $15,000,000 to $20,000,000 for capital
expenditures during the year ending December 31, 2001. The actual amounts and
timing of our capital expenditures could differ materially both in amount and
timing from our current plans.

      We expect our operating losses, net operating cash outflows and capital
expenditures to continue during 2001. Our independent accountants have noted in
their report that our sustained operating losses raise substantial doubt about
our ability to continue as a going concern. We believe that our existing cash
and short-term investments and cash generated from operations will be sufficient
to fund our operating losses, capital expenditures, lease payments and working
capital requirements into the fourth quarter of 2001. We intend to use these
cash resources to finance our capital expenditures and for working capital and
other general corporate purposes. We may also use a portion of these cash
resources to acquire complementary businesses or other assets. The amounts
actually expended for these purposes will vary significantly depending on a
number of factors, including the rate of market acceptance of our services and
revenue growth, planned capital expenditures, cash generated from operations,
improvements in operating productivity, and the extent and timing of our entry
into new markets.

      Additional financing will be required during 2001. We do not believe that
our operations will generate sufficient cash to finance our requirements. As a
result, we need to raise financing through some combination of borrowings,
leasing, vendor financing and the sale of equity or debt securities. Our capital
requirements may vary based upon the timing and the success of implementation of
our business plan and as a result of regulatory, technological and competitive
developments or if:

     o   demand for our services or our cash flow from operations is less than
         or more than expected;

     o   our development plans or projections change or prove to be inaccurate;

     o   we make acquisitions; or

     o   we accelerate or delay deployment of our network or otherwise alter the
         schedule or targets of our business plan implementation.

We cannot assure you that we will be able to raise sufficient debt or equity
capital on terms that we consider acceptable, if at all. If we are unable to
obtain adequate funds, we may not be able to deploy and operate our network,
respond to competitive pressures or fund our operations. Ultimately, we may be
required to significantly reduce or discontinue our operations. Our financial
statements included herein do not include any adjustments that might result from
this uncertainty.

                                      -26-
<PAGE>

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

      In December 1999, the staff of the Securities and Exchange Commission
issued its Staff Accounting Bulletin ("SAB") No. 101, "REVENUE RECOGNITION IN
FINANCIAL STATEMENTS." SAB No. 101 provides guidance on the measurement and
timing of revenue recognition in financial statements of public companies.
Changes in accounting policies to apply the guidance of SAB No. 101, as amended
by SAB No. 101B, must be adopted by recording the cumulative effect of the
change back to January 1, 2000.

      We have adopted the revenue recognition guidelines of SAB No. 101,
which changed the manner in which we recognize installation revenue
(see "REVENUE RECOGNITION IN FINANCIAL STATEMENTS" above). The cumulative effect
of adoption of SAB No. 101 resulted in deferral of installation revenues and
related direct costs of approximately $176,000 at January 1, 2000. The effect of
the adoption for the year ended December 31, 2000, resulted in a deferral of
installation revenue and related direct costs of approximately $735,000.

      In March 2000, The Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 44 ("FIN 44"), "ACCOUNTING FOR CERTAIN TRANSACTIONS
INVOLVING STOCK COMPENSATION--AN INTERPRETATION OF ACCOUNTING PRINCIPLES BOARD
("APB") OPINION NO. 25." FIN 44 clarifies the following: the definition of an
employee for purposes of applying APB Opinion No. 25; the criteria for
determining whether a plan qualifies as a noncompensatory plan; the accounting
consequence of various modifications to the terms of previously fixed stock
options or awards; and the accounting for an exchange of stock compensation
awards in a business combination. FIN 44 became effective on July 1, 2000, but
certain conclusions in FIN 44 cover specific events that occurred after either
December 15, 1998 or January 12, 2000. The initial adoption of FIN 44 did not
have a material impact on our financial position or results of operations.

      In June 1999, the FASB issued Statement of Financial Accounting Standard
("SFAS") No. 137, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
- DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO.133." In June 2000, the
FASB issued SFAS 138, "ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN
HEDGING AGREEMENTS - AN AMENDMENT TO FASB STATEMENT NO. 133." SFAS 133
established new standards of accounting and reporting for derivative instruments
and hedging activities, and required that all derivatives, including foreign
currency exchange contracts, be recognized on the balance sheet at fair value.
We will adopt SFAS 133, as amended by SFAS 137 and SFAS 138, in the first
quarter of 2001 and do not expect the adoption to have a material effect on our
financial condition or results of operations.

                                  RISK FACTORS

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND CERTAIN OTHER INFORMATION

      Some of the statements under "Risk Factors", "Management's Discussion and
Analysis of Financial Condition and Results of Operations", "Business" and
elsewhere in this Annual Report on Form 10-K constitute forward-looking
statements. DSL.net makes such forward-looking statements under the provisions
of the "Safe Harbor" section of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities and Exchange Act of 1934, as amended.
These statements relate to future events or our future financial or business
performance and are identified by terminology such as "may", "might", "will",
"should", "expect", "scheduled", "plan", "intend", "anticipate", "believe",
"estimate", "potential", or "continue" or the negative of such terms or other
comparable terminology. These statements are subject to a variety of risks and
uncertainties, many of which are beyond our control, which could cause actual
results to differ materially from those contemplated in these forward-looking
statements. In evaluating these statements, you should specifically consider
various factors, including the

                                      -27-
<PAGE>

risks outlined under "Risk Factors". Existing and prospective investors are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. We undertake no obligation, and disclaim any
obligation, to update or revise the information contained in this Annual Report
on Form 10-K, whether as a result of new information, future events or
circumstances or otherwise.

                         RISKS RELATING TO OUR BUSINESS

OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE OUR BUSINESS AND
PROSPECTS

      We commenced operations in March 1998 and began offering commercial
service in Stamford, Connecticut in May 1998. Accordingly, you have limited
information about our company with which to evaluate our business, strategies
and performance and an investment in our common stock.

WE HAVE INCURRED LOSSES AND HAVE EXPERIENCED NEGATIVE OPERATING CASH FLOW TO
DATE AND EXPECT OUR LOSSES AND NEGATIVE OPERATING CASH FLOW TO CONTINUE

      We have incurred significant losses and experienced negative operating
cash flow for each month since our formation. We expect to continue to incur
significant losses and negative operating cash flow for the foreseeable future.
If our revenue does not grow as expected or capital and operating expenditures
exceed our plans, our business, prospects, financial condition and results of
operations will be materially adversely affected. As of December 31, 2000, we
had an accumulated deficit of approximately $132,900,000. We cannot be certain
if or when we will be profitable or if or when we will generate positive
operating cash flow. We expect our operating expenditures, particularly network
and operations and sales and marketing expenditures, to continue to increase as
we implement our business plan. In addition, we expect to continue to make
additional capital expenditures in 2001 and in subsequent years. Our revenue,
however, may not increase despite this increased spending. Our independent
accountants have noted in their report that our sustained operating losses raise
substantial doubt about our ability to continue as a going concern.

WE MUST OBTAIN ADDITIONAL FINANCING IN 2001 IF WE ARE TO CONTINUE OPERATING OUR
BUSINESS

      Additional financing will be required during 2001. We expect our operating
losses, net operating cash outflows and capital expenditures to continue during
2001. Our independent accountants have noted in their report that our sustained
operating losses raise substantial doubt about our ability to continue as a
going concern. We believe that our existing cash and short-term investments and
cash generated from operations will be sufficient to fund our operating losses,
capital expenditures, lease payments and working capital requirements into the
fourth quarter of 2001. We do not believe that our operations alone will
generate sufficient cash to finance our requirements. As a result, we need to
raise financing through some combination of borrowings, leasing, vendor
financing and the sale of equity or debt securities. Our capital requirements
may vary based upon the timing and the success of implementation of our business
plan and as a result of regulatory, technological and competitive developments
or if:

     o   demand for our services or our cash flow from operations is less than
         or more than expected;

     o   our development plans or projections change or prove to be inaccurate;

     o   we make acquisitions; or

     o   we accelerate or delay deployment of our network or otherwise alter the
         schedule or targets of our business plan implementation.

      We cannot assure you that we will be able to raise sufficient debt or
equity capital on terms that we consider acceptable, if at all. If we are unable
to obtain adequate funds, we may not be able to deploy and operate our network,
respond to competitive pressures or fund our operations. Ultimately, we may be
required to significantly reduce or discontinue our operations.

OUR INDEPENDENT ACCOUNTANTS HAVE RAISED QUESTIONS ABOUT OUR ABILITY TO CONTINUE
AS A GOING CONCERN IN THEIR REPORT ON OUR AUDITED FINANCIAL STATEMENTS, WHICH
MAY HAVE AN ADVERSE IMPACT ON OUR ABILITY TO RAISE ADDITIONAL CAPITAL AND ON OUR
STOCK PRICE

      Our independent accountants have included in their report an explanatory
paragraph relating to our ability to continue as a going concern. This
explanatory paragraph includes the following language: "The accompanying
financial statements have been prepared assuming that the Company will continue
as a going concern. As discussed in Note 1 to the financial statements, the
Company has experienced sustained operating losses that raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty."
The inclusion of this explanatory paragraph in the report of our independent
accountants may have an adverse impact on our ability to raise additional
capital and on our stock price. We cannot assure you that we will be able to
continue as a going concern.

BECAUSE THE HIGH-SPEED DATA COMMUNICATIONS INDUSTRY IS NEW AND RAPIDLY EVOLVING,
WE CANNOT PREDICT ITS FUTURE GROWTH OR ULTIMATE SIZE

      The high-speed data communications industry is in the early stages of
development and is subject to rapid and significant technological change. Since
this industry is new and because the technologies available for high-speed data
communications services are rapidly evolving, we cannot accurately predict the
rate at which the market for our services will grow, if at all, or whether
emerging technologies will render our services less competitive or obsolete. If
the market for our services fails to develop or grows more slowly than
anticipated, our business, prospects, financial condition and results of
operations could be materially adversely affected. Many providers of high-speed
data communication services are testing products from numerous suppliers for
various applications. In addition, certain industry groups are in the process of
trying to establish standards which could limit the types or speeds of the
technologies we could use. Certain critical issues concerning commercial use of
DSL technology for Internet access, including security, reliability, ease and
cost of access and quality of service, remain unresolved and may impact the
growth of these services.

OUR BUSINESS MODEL IS UNPROVEN, AND MAY NOT BE SUCCESSFUL

      We do not know whether our business model and strategy will be successful.
If the assumptions underlying our business model are not valid or we are unable
to implement our business plan, achieve the predicted level of market
penetration or obtain the desired level of pricing of our services for sustained
periods, our business, prospects, financial condition and results of operations
could be materially adversely affected. We have adopted a different strategy
than certain other broadband ISPs and DSL providers. We focus on selling
directly to small and medium sized businesses. Our unproven business model makes
it difficult to predict the extent to which our services will achieve market
acceptance. To be successful, we must deploy our services in a significant
number of our selected markets and convince our target customers to utilize our
service. In December 2000, we decided to suspend the further build-out of our

                                      -29-
<PAGE>

network into new target markets and to focus our efforts on penetrating the
markets in which we currently can provide service and on adding services. It is
possible that these efforts will not result in significant market penetration,
favorable operating results or profitability.

IF OUR SERVICES FAIL TO ACHIEVE OR SUSTAIN MARKET ACCEPTANCE AT DESIRED PRICING
LEVELS, OUR ABILITY TO ACHIEVE PROFITABILITY OR POSITIVE CASH FLOW WOULD BE
IMPAIRED

      Prices for digital communication services have fallen historically, a
trend we expect will continue. Accordingly, we cannot predict to what extent we
may need to reduce our prices to remain competitive or whether we will be able
to sustain future pricing levels as our competitors introduce competing services
or similar services at lower prices. If our services fail to achieve or sustain
market acceptance at desired pricing levels, our ability to achieve
profitability or positive cash flow would be impaired, which would have a
material adverse effect on our business, prospects, financial condition and
results of operations.

WE DEPEND ON WHOLESALE DSL PROVIDERS, SOME OF WHOM ARE COMPETITORS, TO PROVIDE
US WITH LOCAL DSL FACILITES IN AREAS WHERE WE HAVE NOT DEPLOYED OUR OWN DSL
EQUIPMENT

      In markets where we have not deployed our own local DSL equipment, we
utilize local DSL facilities from wholesale providers, including Covad
Communications and NorthPoint Communications, in order to provide service to our
end-user customers. In these cases, we are dependent upon these wholesale
carriers to provide, or arrange the provision of, the equipment and on-site
wiring required to provide local DSL services to our end-user customers, as well
as to provide and maintain the local DSL line. In general, these carriers may
terminate the service they provide to us with little or no notice. These
carriers may not continue to provide us with acceptable local DSL services for
our customers on the scale, at the price levels and within the time frames we
require, or at all. If we are unable to obtain acceptable DSL services from
these wholesale carriers or they terminate the service they provide us, we may
be required to install our own equipment in a central office and provide and
install new equipment for our customers, or arrange for another wholesale
carrier to do so. Obtaining space and provisioning equipment in a new central
office is a lengthy and costly process. We cannot assure you that we, or another
carrier with whom we work, would be able to obtain the space required in a
central office on a cost effective basis, if at all, or that we could provide
DSL services to such customers on a timely basis. Our failure to install and
provide services to customers on a timely basis, or the disruption in the
services provided to our customers, would likely result in the loss of many, if
not all, of the customers in the affected locations, and could result in claims
brought by these customers against us. This could have a material adverse effect
on our competitive position, business, results of operations, financial position
and prospects.

      Certain wholesale DSL providers with whom we work offer services that
compete with ours, or have other customers whose services compete with ours.
Such competing interests may affect the ability or willingness of these
providers to provide us with acceptable services on acceptable terms. In
addition, certain of these providers are relatively young companies that are
facing substantial operational and financial challenges. The operational success
and abilities of these carriers to operate and expand their businesses could
materially affect our business. The failure of any of these companies could
cause us to lose customers and revenue, expose us to claims and otherwise have a
material adverse effect on our competitive position, business, results of
operations, financial position and prospects.

                                      -30-
<PAGE>

THERE IS SUBSTANTIAL UNCERTAINTY ABOUT OUR ABILITY TO CONTINUE PROVIDING SERVICE
TO CUSTOMERS WHOSE LOCAL DSL FACILITES ARE PROVIDED BY NORTHPOINT COMMUNICATIONS

      We utilize local DSL facilities provided by NorthPoint Communications in
order to provide service to certain of our end-user customers. NorthPoint
Communications is currently in bankruptcy and has notified its customers,
including us, that the cessation of its services is imminent. NorthPoint has
already discontinued providing local DSL service for a number of our end-user
customers, and we believe that it will discontinue this service for the
remainder of our customers who are served using its facilities. We are working
to establish interim and long-term alternatives for our affected customers. Some
of these customers are located in areas where neither we nor any of our existing
wholesaler DSL providers other than NorthPoint have installed DSL equipment. We
may need to offer incentives and concessions to these customers. We may not be
able to transition all of our customers who currently obtain service through us
via local DSL facilities provided by NorthPoint on a timely basis, if at all.
Any disruption in service may result in a loss of many, if not all, of these
customers, and could result in claims brought by these customers against us.
This could have a material adverse effect on our competitive position, business,
results of operations, financial position and prospects.

IF WE FAIL TO RECRUIT QUALIFIED PERSONNEL IN A TIMELY MANNER AND RETAIN OUR
EMPLOYEES, WE WILL NOT BE ABLE TO EXECUTE OUR BUSINESS PLAN AND OUR BUSINESS
WILL BE HARMED

      To execute our business plan, we need to hire and retain a substantial
number of qualified personnel, particularly sales and marketing, engineering and
other technical personnel. If we are unable to recruit qualified personnel in a
timely manner or to retain our employees, we will not be able to execute our
business plan. In particular, if we are unable to recruit and retain a
sufficient number of qualified personnel, our revenue growth may be lower than
we expect and our business may be harmed. Our industry is characterized by
intense competition for, and aggressive recruiting of, skilled personnel, as
well as a high level of employee mobility. Our recent reduction in workforce,
together with our need for additional financing during 2001 and the competitive
nature of our industry may make it difficult to hire qualified personnel on a
timely basis and to retain our employees.

OUR MANAGEMENT TEAM IS CRITICAL AND THE LOSS OF KEY PERSONNEL COULD ADVERSELY
AFFECT OUR BUSINESS

      We depend on a small number of executive officers and other members of
senior management to work effectively as a team, to execute our business
strategy and business plan, and to manage employees located in several offices
across the United States. The loss of key managers or their failure to work
effectively as a team could have a material adverse effect on our business and
prospects. We do not have employment agreements with any of our executive
officers, so any of these individuals may terminate employment at any time.

OUR FAILURE TO ESTABLISH AND MAINTAIN THE NECESSARY INFRASTRUCTURE TO SUPPORT
OUR BUSINESS AND TO MANAGE OUR GROWTH COULD STRAIN OUR RESOURCES AND ADVERSELY
AFFECT OUR BUSINESS AND FINANCIAL PERFORMANCE

      We have had significant growth in the number of markets in which we
provide service, the number of customers subscribing for our service and in the
number of employees in geographically-dispersed areas. This growth has placed a
significant strain on our management, financial controls, operations, personnel

                                      -31-
<PAGE>

and other resources. We have deployed operations support systems to help manage
customer service, bill customers, process customer orders and coordinate with
vendors and contractors. The subsequent integration and enhancement of these
systems could be delayed or cause disruptions in service or billing. To
efficiently and cost-effectively manage our geographically-dispersed business,
we must continue to successfully implement these systems on a timely basis, and
continually expand and upgrade these systems as our operations expand.

DISAPPOINTING QUARTERLY REVENUE, OPERATING RESULTS OR OPERATING STATISTICS COULD
CAUSE THE PRICE OF OUR COMMON STOCK TO FALL

      Our quarterly revenue, operating results and operating statistics are
difficult to predict and may fluctuate significantly from quarter to quarter. If
our quarterly revenue, operating results or operating statistics fall below the
expectations of investors or security analysts, the price of our common stock
could fall substantially. Our quarterly revenue, operating results and operating
statistics may fluctuate as a result of a variety of factors, many of which are
outside our control, including:

     o   the amount and timing of expenditures relating to the rollout of our
         infrastructure and services;

     o   regulatory developments;

     o   the rate at which we are able to attract customers within our target
         markets and our ability to retain these customers at sufficient
         aggregate revenue levels;

     o   our ability to deploy our network on a timely basis;

     o   the availability of financing to continue our operations and expansion;

     o   technical difficulties or network service interruptions; and

     o   the introduction of new services or technologies by our competitors and
         resulting pressures on the pricing of our service.

THE FAILURE OF OUR CUSTOMERS TO PAY THEIR BILLS ON A TIMELY BASIS COULD
ADVERSELY AFFECT OUR CASH FLOW

      Our target customers consist of small and medium sized businesses. We bill
and collect numerous relatively small customer accounts. We may experience
difficulty in collecting amounts due on a timely basis. Our failure to collect
accounts receivable owed to us by our customers on a timely basis could have a
material adverse effect on our business, financial condition and cash flow.

OUR FAILURE TO DEVELOP AND MAINTAIN GOOD RELATIONSHIPS WITH MARKETING PARTNERS
IN A LOCAL SERVICE MARKET COULD ADVERSELY AFFECT OUR ABILITY TO OBTAIN AND
RETAIN CUSTOMERS IN THAT MARKET

      In addition to marketing through our direct sales force, we rely on
relationships with local marketing partners, such as integrators of computer
systems and networks and consultants. These partners recommend our services to
their clients, provide us with referrals and help us build a local presence in
each

                                      -32-
<PAGE>

market. We may not be able to identify, and maintain good relationships with
quality marketing partners and we cannot assure you that they will recommend our
services rather than our competitors' services to their customers. Our failure
to identify and maintain good relationships with quality marketing partners
could have a material adverse effect on our ability to obtain and retain
customers in a market and, as a result, our business would suffer.

OUR SUCCESS DEPENDS ON NEGOTIATING AND ENTERING INTO INTERCONNECTION AGREEMENTS
WITH TRADITIONAL TELEPHONE COMPANIES

      We must enter into and renew interconnection agreements with traditional
local telephone companies in each market in which we deploy our own DSL
equipment. These agreements govern, among other things, the price and other
terms regarding our location of equipment in the offices of traditional local
telephone companies which house telecommunications equipment and from which
local telephone service is provided, known as central offices, and our lease of
copper telephone lines that connect those central offices to our customers. We
have entered into agreements with BellSouth, Cincinnati Bell, SBC
Communications, Qwest, Sprint, Verizon or their subsidiaries, which govern our
relationships in 48 states and the District of Columbia. Delays in obtaining or
renewing interconnection agreements would delay our entrance into target markets
and could have a material adverse effect on our business and prospects. In
addition, disputes have arisen, and will likely arise in the future, regarding
the interpretation of these interconnection agreements. These disputes have, in
the past, delayed the deployment of our network. Our interconnection agreements
generally have limited terms of one to two years and we cannot assure you that
new agreements will be negotiated on a timely basis, if at all, or that existing
agreements will be extended on terms favorable to us. Interconnection agreements
must be approved by state regulators and are also subject to oversight by the
FCC and the courts. These governmental authorities may modify the terms or
prices of our interconnection agreements in ways that could adversely affect our
ability to deliver service and our business and results of operations.

FAILURE TO NEGOTIATE INTERCONNECTION AGREEMENTS WITH THE TRADITIONAL LOCAL
TELEPHONE COMPANIES COULD LEAD TO COSTLY AND LENGTHY ARBITRATION WHICH MAY NOT
BE RESOLVED IN OUR FAVOR

      Under federal law, traditional local telephone companies have an
obligation to negotiate with us in good faith to enter into interconnection
agreements. If no agreement can be reached, either side may petition the
applicable state telecommunications regulators to arbitrate remaining
disagreements. Arbitration is a costly and lengthy process that could delay our
entry into markets and could harm our ability to compete. Interconnection
agreements resulting from arbitration must be approved by state regulators. We
cannot assure you that a state regulatory authority would resolve disputes in
our favor.

FAILURE TO OBTAIN ADDITIONAL SPACE FOR OUR DSL EQUIPMENT IN THE LOCAL TELEPHONE
COMPANIES' CENTRAL OFFICES IN OUR TARGET MARKETS COULD ADVERSELY AFFECT OUR
BUSINESS

      In December 2000, we began to focus our efforts on increasing our
penetration of those markets in which we can currently provide service and
providing more services. As our penetration of a target market increases, we may
be required to install additional equipment in central offices, known as
collocation space. We may not be able to secure additional collocation space in
the central offices of our choice on a timely basis or on acceptable terms.

                                      -33-
<PAGE>

OUR SUCCESS DEPENDS ON TRADITIONAL TELEPHONE COMPANIES PROVIDING ACCEPTABLE
TRANSMISSION FACILITIES AND COPPER TELEPHONE LINES

      We interconnect with and use the networks of traditional telephone
companies to provide services to our customers in the markets where we have
deployed our own DSL equipment. In markets where we utilize the local DSL
facilities of other carriers to provide our service, those carriers must
interconnect with and use the networks of traditional local telephone companies
to provide this service. We cannot assure you that these networks will be able
to meet the telecommunications needs of our customers or maintain our service
standards. We also depend on the traditional telephone companies to provide and
maintain their transmission facilities and the copper telephone lines between
our network and our customers' premises. Our dependence on traditional telephone
companies could cause delays in establishing our network and providing our
services. Any such delays could have a material adverse effect on our business.
We, or the other carrier with which we work, lease copper telephone lines
running from the central office of the traditional telephone companies to each
customer's location. In many cases, the copper telephone lines must be specially
conditioned by the telephone company to carry digital signals. We may not be
able to obtain a sufficient number of acceptable telephone lines on acceptable
terms, if at all. Traditional telephone companies often rely on unionized labor
and labor-related issues have in the past, and may in the future, adversely
affect the services provided by the traditional telephone companies.

WE COMPETE WITH THE TRADITIONAL LOCAL TELEPHONE COMPANIES ON WHICH WE DEPEND

      Many of the traditional local telephone companies, including those created
by AT&T's divestiture of its local telephone service business, have begun
deploying DSL-based services. In addition, these companies also currently offer
high-speed data communications services that use other technologies.
Consequently, these companies have certain incentives to delay:

     o   our entry into, and renewals of, interconnection agreements with them;

     o   our access to their central offices to install our equipment and
         provide our services,

     o   providing acceptable transmission facilities and copper telephone
         lines; and

     o   our introduction and expansion of our services.

Any such delays would negatively impact our ability to implement our business
plan and harm our competitive position, business and prospects.

      In addition, the other carriers whose local DSL facilities we utilize in
markets where we have not deployed our own DSL equipment also compete with the
traditional local telephone companies and rely on these companies for the same
facilities and services that we do. Any delay in the provision of acceptable
transmission facilities and copper telephone lines provided by the traditional
local telephone companies to these carriers which are used in the provision of
our service could negatively impact our ability to implement our business plan
and harm our competitive position, business and prospects.

      Further, the prospect of these traditional local telephone companies
offering DSL or other competitive high-speed data communications services in a
specific market may adversely impact our ability to obtain customers in that
area and harm our competitive position, business and prospects. These companies
have established brand names and reputations for high quality in their service
areas, possess sufficient capital to deploy DSL equipment rapidly, have their
own copper telephone lines and can bundle digital data services

                                      -34-
<PAGE>

with their existing voice services to achieve a competitive advantage in serving
customers. In addition, we depend upon these traditional local telephone
companies to provide us access to their central offices and to individual
elements of their networks. As a result, they can significantly influence the
actual and perceived reliability, quality and timeliness of our services in
their service areas. The perceived relative stability of the traditional local
telephone companies, particularly in light of the failure of certain competitive
telephone companies and the financial and operational issues surrounding other
such companies, provides the traditional local telephone companies a significant
competitive advantage.

WE DEPEND ON TWO LONG DISTANCE CARRIERS TO CONNECT OUR NETWORK

      Data is transmitted across our network via transmission facilities that we
lease from WorldCom and AT&T. Failure of these carriers to provide service or to
provide quality service may interrupt the use of our services by our customers.
In August 1999, the service provided by WorldCom was interrupted for several
days by a failure of their communications network. Several of our customers were
without service or had poor service during this period. We cannot be sure that
the WorldCom and AT&T service will not be interrupted in the future.

OUR SUCCESS DEPENDS ON CONTRACTORS WHO INSTALL THE EQUIPMENT AND WIRING
NECESSARY TO UTILIZE OUR SERVICE AT OUR CUSTOMERS' PREMISES

      We primarily utilize contractors to install necessary equipment and wiring
at our customers' premises. In markets where we utilize the local DSL facilities
of other carriers, such carriers, or their contractors, effect such
installations. These installations must be completed on a timely basis and in a
cost-efficient manner. Failure to retain experienced contractors to install the
equipment and wiring or failure to complete these installations on a timely,
cost-efficient basis could materially delay our growth or damage our reputation,
our business and prospects and results of operations. If we are unable to retain
contractors to provide these services, we will have to complete these
installations ourselves, probably at a greater cost and with delay. We may be
required to utilize numerous contractors as we expand our operations, which may
divert management attention and result in delays in installations,
cancellations, increased costs and lower quality.

INTENSE COMPETITION IN THE HIGH-SPEED DATA COMMUNICATION SERVICES MARKET MAY
NEGATIVELY AFFECT THE NUMBER OF OUR CUSTOMERS AND THE PRICING OF OUR SERVICES

      The high-speed data communication services market is intensely
competitive. If we are unable to compete effectively, our business, prospects,
financial condition and results of operations would be adversely affected. We
expect the level of competition to intensify in the future, due, in part, to
increasing consolidation in our industry. Our competitors use various high speed
communications technologies for local access connections such as integrated
services digital network, or ISDN, frame relay, T1, DSL services and wireless,
satellite-based and cable networks. We expect significant competition from:

     o   Other providers of DSL-based services, including Covad Communications,
         Network Access Solutions and Rhythms NetConnections;

     o   Internet service providers, such as Cais, Vario and EarthLink, which
         offer high-speed access capabilities, as well as other related products
         and services;

                                      -35-
<PAGE>

     o   Traditional local telephone companies, including the traditional
         telephone companies created by AT&T's divestiture of its local
         telephone service business, which have begun deploying DSL-based
         services and which provide other high-speed data communications
         services;

     o   National long distance carriers, such as AT&T and WorldCom, which are
         offering competitive DSL-based services;

     o   Cable modem service providers, such as At Home, which are offering
         high-speed Internet access over cable networks; and

     o   Providers utilizing alternative technologies, such as wireless and
         satellite-based data service providers.

      Many of our current and potential competitors have longer operating
histories, greater brand name recognition, larger customer bases and
substantially greater financial, technical, marketing, management, service
support and other resources than we do. Therefore, they may be able to respond
more quickly than we can to new or changing opportunities, technologies,
standards or customer requirements. See "Business--Competition."

WE MAY INCUR SIGNIFICANT AMOUNTS OF DEBT IN THE FUTURE TO IMPLEMENT OUR BUSINESS
PLAN AND, IF INCURRED, THIS INDEBTEDNESS WILL CREATE GREATER FINANCIAL AND
OPERATING RISK AND LIMIT OUR FLEXIBILITY

      We may seek additional debt financing in the future. We are not generating
sufficient revenue or operating cash flow to fund our operations and repay
existing or expected debt. We may not be able to repay our current debt or any
future debt. In addition, the terms of any future debt would likely contain
additional restrictive covenants that would limit our ability to incur
additional indebtedness and place other operating restrictions on our business.
If we incur additional debt, we will be required to devote increased amounts of
our cash flow to service indebtedness. This could require us to modify, delay or
abandon the capital expenditures and other investments necessary to implement
our business plan.

WE MAY BE SUBJECT TO RISKS ASSOCIATED WITH ACQUISITIONS

      We have made a number of asset and business acquisitions and may acquire
additional assets or businesses in the future. An acquisition may not produce
the revenue, earnings or business synergies that we anticipate, and an acquired
business might not perform as we expect. If we pursue any future acquisition,
our management could spend a significant amount of time and effort in
identifying and completing the acquisition and may be distracted from the
operation of our business. We will probably have to devote a significant amount
of management resources to integrating any acquired business, including the
business and assets that we have already acquired, with our existing operations,
and that integration may not be successful.

OUR SERVICES ARE SUBJECT TO FEDERAL, STATE AND LOCAL REGULATION AND CHANGES IN
LAWS OR REGULATIONS COULD ADVERSELY AFFECT THE WAY WE OPERATE OUR BUSINESS

      The facilities we use and the services we offer are subject to varying
degrees of regulation at the federal, state and/or local levels. Changes in
applicable laws or regulations could, among other things, increase our costs,
restrict our access to the central offices of the traditional telephone
companies, or

                                      -36-
<PAGE>

restrict our ability to provide our services. For example, the 1996
Telecommunications Act, which, among other things, requires traditional
telephone companies to unbundle network elements and to allow competitors to
locate their equipment in the traditional local telephone companies' central
offices, is the subject of ongoing proceedings at the federal and state levels,
litigation in federal and state courts, and legislation in federal and state
legislatures. For example, FCC rules governing pricing standards for access to
the networks of the traditional local telephone companies are currently being
challenged in federal court. In addition, the traditional local telephone
companies are pursuing several judicial and legislative avenues to overturn an
FCC order that found that advanced services, such as DSL, are subject to the
market opening requirements of the 1996 Telecommunications Act. The FCC's
collocation rules were also vacated by a federal court and are pending on remand
at the FCC. In addition, at least two traditional telephone companies, SBC
Communications and Verizon, have taken the position in state and federal
regulatory proceedings that they are not obligated to unbundle portions of their
network where they construct modified or new digital loop carrier facilities
that would enable them to offer DSL services to customers who are located too
far from the traditional local telephone companies' central offices to be
reached by existing DSL technologies. We cannot predict the outcome of the
various proceedings, litigation and legislation or whether or to what extent
these proceedings, litigation and legislation may adversely affect our business
and operations.

      Decisions by the FCC and state telecommunications regulators will
determine some of the terms of our relationships with traditional
telecommunications carriers, including the terms and prices of interconnection
agreements, and access fees and surcharges on gross revenue from interstate and
intrastate services. Recent changes in federal Congressional and executive
leadership could increase the possibility of changes in the law that could alter
our relationship with these companies, and thereby affect our ability to provide
DSL services to the public. State telecommunications regulators determine
whether and on what terms we will be authorized to operate as a competitive
local exchange carrier in their state. In addition, local municipalities may
require us to obtain various permits which could increase the cost of services
or delay development of our network. Future federal, state and local regulations
and legislation may be less favorable to us than current regulations and
legislation and may adversely affect our businesses and operations.
See  "Business-Governmental Regulations."

THE ABILITY OF THE TRADITIONAL LOCAL TELEPHONE COMPANIES TO OFFER DSL SERVICES
THROUGH LESS-REGULATED SUBSIDIARIES COULD ADVERSELY AFFECT OUR BUSINESS PLAN BY
ALTERING OUR RELATIONSHIP WITH THE LOCAL TELEPHONE COMPANIES UPON WHOSE
FACILITIES WE DEPEND FOR ACCESS TO CUSTOMERS

      There exists considerable uncertainty as to the status of the FCC's policy
toward the ability of the traditional local telephone companies to provide DSL
services through less-regulated subsidiaries. In August 1998, the FCC issued a
notice of proposed rulemaking seeking comments on its tentative conclusion that
traditional local telephone companies should be permitted to create separate
affiliates to provide DSL services. The outcome of this proceeding remains
uncertain. However, the FCC subsequently required two traditional local
telephone companies, SBC Communications and Verizon, to create separate
affiliates to provide DSL services as conditions of their mergers with Ameritech
and GTE, respectively. In January 2001, the United States Court of Appeals for
the District of Columbia held that SBC may not avoid its obligations under the
Telecommunications Act of 1996 through the creation of a separate advanced
services affiliate. Under the terms of the FCC's conditions on the SBC-Ameritech
merger, SBC may be able to fold its separate affiliate back into the parent
company as early as later this year. It remains unclear how this court decision
will affect the existing SBC and Verizon affiliates and the pending FCC
proceeding. Any outcome that alters our relationship with the traditional local
telephone companies could adversely affect our ability to provide DSL services
at a competitive price. See "Business--Governmental Regulations".

                                      -37-
<PAGE>

UNCERTAIN TAX AND OTHER SURCHARGES ON OUR SERVICES MAY INCREASE OUR PAYMENT
OBLIGATIONS TO FEDERAL AND STATE GOVERNMENTS

      Telecommunications providers are subject to a variety of federal and state
surcharges and fees on their gross revenues from interstate and intrastate
services. These surcharges and fees may be increased and other surcharges and
fees not currently applicable to our services could be imposed on us. In either
case, the cost of our services would increase and that could have a material
adverse effect on our business, prospects, financial condition and results of
operations.

A BREACH OF OUR NETWORK SECURITY COULD RESULT IN LIABILITY TO US AND DETER
CUSTOMERS FROM USING OUR SERVICES

      Our network may be vulnerable to unauthorized access, computer viruses and
other disruptive problems. Any of the foregoing problems could result in
liability to us and deter customers from using our service. Unauthorized access
could jeopardize the security of confidential information stored in the computer
systems of our customers. Eliminating computer viruses and alleviating other
security problems may require interruptions, delays or cessation of service to
our customers, cause us to incur significant costs to remedy the problem, and
divert management attention. We can provide no assurance that the security
measures we have implemented will not be circumvented or that any failure of
these measures will not have a material adverse effect on our ability to obtain
and retain customers. Any of these factors could have a material adverse effect
on our business and prospects.

OUR FAILURE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS MAY ADVERSELY AFFECT
OUR BUSINESS

      We rely on unpatented trade secrets and know-how to maintain our
competitive position. Our inability to protect these secrets and know-how could
have a material adverse effect on our business and prospects. We protect our
proprietary information by entering into confidentiality agreements with
employees and consultants and potential business partners. These agreements may
be breached or terminated. In addition, third parties, including our
competitors, may assert infringement claims against us. Any such claims, could
result in costly litigation, divert management's attention and resources, and
require us to pay damages and/or to enter into license or similar agreements
under which we would be required to pay license fees or royalties.

WE MAY BE EXPOSED TO LIABILITY FOR INFORMATION CARRIED OVER OUR NETWORK OR
DISPLAYED ON WEB SITES THAT WE HOST

      Because we provide connections to the Internet and host web sites for our
customers, we may be perceived as being associated with the content carried over
our network or displayed on web sites that we host. We do not and cannot screen
all of this content. As a result, we may face potential liability for
defamation, negligence, copyright, patent or trademark infringement and other
claims based on the content carried over our network or displayed on web sites
that we host. These types of claims have been brought against providers of
online services in the past and can be costly to defend regardless of the merit
of the lawsuit. The protection offered by recent federal legislation that
protects online services from some claims when the material is written by third
parties is limited. Further, the law in this area remains in flux and varies
from state to state. We may also suffer a loss of customers or reputational harm
based on this content or resulting from our involvement in these legal
proceedings.

                                      -38-
<PAGE>

                 RISKS RELATING TO OWNERSHIP OF OUR COMMON STOCK

OUR STOCK PRICE COULD FLUCTUATE WIDELY IN RESPONSE TO VARIOUS FACTORS, MANY OF
WHICH ARE BEYOND OUR CONTROL

      The trading price of our common stock has been and is likely to continue
to be highly volatile. Our stock price could fluctuate widely in response to
factors such as the following:

     o   actual or anticipated variations in quarterly operating results or
         operating statistics;

     o   announcements of new products or services by us or our competitors or
         new competing technologies;

     o   the addition or loss of customers;

     o   changes in financial estimates or recommendations by securities
         analysts;

     o   conditions or trends in the telecommunications industry, including
         regulatory developments;

     o   growth of the Internet and on-line commerce industries;

     o   announcements by us of significant acquisitions, strategic
         partnerships, joint ventures or capital commitments;

     o   additions or departures of our key personnel;

     o   future equity or debt financings by us or our announcements of such
         financings; and

     o   general market and economic conditions.

      In addition, in recent years the stock market in general, and the Nasdaq
National Market and the market for Internet and technology companies in
particular, have experienced large price and volume fluctuations. These
fluctuations have often been unrelated or disproportionate to the operating
performance of these companies. These market and industry factors may materially
and adversely affect our stock price, regardless of our operating performance.

OUR EXECUTIVE OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS OWN A SIGNIFICANT
PERCENTAGE OF OUR COMPANY AND WILL BE ABLE TO EXERCISE SIGNIFICANT INFLUENCE
OVER OUR COMPANY, WHICH COULD HAVE A MATERIAL AND ADVERSE EFFECT ON THE MARKET
PRICE OF OUR COMMON STOCK

      Our executive officers, directors and principal stockholders and their
affiliates together controlled approximately 47.1% of our outstanding common
stock as of March 21, 2001. As a result, these stockholders, if they act
together, are able to exercise substantial control over all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions, and can have significant influence over our
affairs. This concentration of ownership may have the effect of delaying,
preventing or deterring a change in control, could deprive our stockholders of
an opportunity to receive a premium for their common stock as part of a sale and
might affect the market price of our common stock.

                                      -39-
<PAGE>

CERTAIN PROVISIONS OF OUR CHARTER, BY-LAWS AND DELAWARE LAW MAKE A TAKEOVER
DIFFICULT

      Our corporate documents and Delaware law contain provisions that might
enable our management to resist a takeover. These provisions include a staggered
board of directors, limitations on persons authorized to call a special meeting
of stockholders and advance notice procedures required for stockholders to make
nominations of candidates for election as directors or to bring matters before
an annual meeting of stockholders. These provisions might discourage, delay or
prevent a change of control or a change in our management. These provisions
could also discourage proxy contests and make it more difficult for our
stockholders to elect directors and take other corporate actions. The existence
of these provisions could limit the price that investors might be willing to pay
in the future for shares of common stock and could deprive our stockholders of
an opportunity to receive a premium for their common stock as part of a sale.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      We have no derivative financial instruments in our cash and cash
equivalents. We invest our cash and cash equivalents in investment-grade, highly
liquid investments, consisting of commercial paper, bank certificates of deposit
and corporate bonds.

      Our exposure to market risk for changes in interest rates relates
primarily to borrowings under our bank term loan. These borrowings bear interest
at variable rates and the fair value of this indebtedness should not be
significantly affected by changes in market interest rates. An effective
increase or decrease of 10% in the current effective interest rates under the
term loan would not have a material effect on our results of operations or cash
flow.









                                      -40-
<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of DSL.net, Inc.

      In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of changes in stockholders'
equity and of cash flows present fairly, in all material respects, the financial
position of DSL.net, Inc. and its subsidiaries at December 31, 2000 and 1999 and
the results of their operations and their cash flows for the years ended
December 31, 2000 and 1999, and for the period from inception (March 3, 1998)
through December 31, 1998 in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.

      The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has experienced sustained operating losses
that raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

PRICEWATERHOUSECOOPERS LLP


Stamford, Connecticut
February 26, 2001


                                      -41-

<PAGE>

                                  DSL.NET, INC.

                           CONSOLIDATED BALANCE SHEETS

<TABLE><CAPTION>
                                                                                      December 31,
                                                                          -------------------------------------
                                                                               1999                    2000
                                                                          -------------           -------------
<S>                                                                       <C>                     <C>
Current assets:
Cash and cash equivalents                                                 $  65,575,301           $  72,323,911
Restricted cash (Note 2)                                                        602,960               4,111,071
Marketable securities                                                        13,274,183                    --
Accounts receivable (net of allowances of $63,000 and $1,353,000
  at December 31, 1999 and 2000, respectively)                                  318,516               3,694,547
Prepaid expenses and other current assets                                     1,043,935               2,446,737
                                                                          -------------           -------------
Total current assets                                                         80,814,895              82,576,266
Fixed assets, net (Note 3)                                                   32,664,924              83,272,045
Goodwill and other intangible assets  (Note 5)                                3,420,135              26,628,577
Other assets                                                                    731,818               2,329,033
                                                                          -------------           -------------
Total assets                                                              $ 117,631,772           $ 194,805,921
                                                                          =============           =============

                  LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable                                                          $   9,587,186           $  13,185,650
Accrued salaries                                                                848,841               1,577,997
Accrued liabilities  (Note 13)                                                3,173,173              14,156,468
Deferred revenue                                                                234,061               2,353,910
Current portion of capital leases payable (Note 7)                              715,953               3,037,369
Current portion of term loan payable (Note 6)                                   281,316               1,502,449
                                                                          -------------           -------------
Total current liabilities                                                    14,840,530              35,813,843
    Capital leases payable (Note 7)                                             892,906               7,439,949
Term loan payable (Note 6)                                                    1,165,450               2,134,690
                                                                          -------------           -------------
Commitments and contingencies (Note 7)
Total liabilities                                                            16,898,886              45,388,482
                                                                          -------------           -------------
Stockholders' equity (Note 9)
Common stock, $.0005 par value; 200,000,000 shares authorized;
  58,382,196 and 66,002,808 shares issued and outstanding                        29,191                  33,001
Additional paid-in capital                                                  141,245,583             286,258,257
Deferred compensation                                                       (13,361,940)             (3,930,723)
Accumulated deficit                                                         (27,179,948)           (132,943,096)
                                                                          -------------           -------------
Total stockholders' equity                                                  100,732,886             149,417,439
                                                                          -------------           -------------
Total liabilities and stockholders' equity                                $ 117,631,772           $ 194,805,921
                                                                          =============           =============

            The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                      -42-
<PAGE>

                                  DSL.NET, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE><CAPTION>
                                                            For the Period
                                                            From Inception
                                                            (March 3, 1998)
                                                                through               Year Ended              Year Ended
                                                           December 31, 1998       December 31, 1999       December 31, 2000
                                                             -------------           -------------           -------------
<S>                                                          <C>                     <C>                     <C>
Revenue                                                      $      31,533           $   1,312,546           $  17,789,410
                                                             -------------           -------------           -------------
Operating expenses:
Network and operations (including $0, $369,922
  and $412,717 of stock compensation, respectively)                127,054               9,604,200              78,242,544
General and administrative (including $2,423,272,
  $3,058,037 and $1,805,703 of stock compensation,
  respectively)                                                  2,653,544               8,036,547              25,793,932
Sales and marketing (including $0, $695,495 and
  $973,802 of stock compensation, respectively)                     35,961               7,543,191              26,236,619
                                                             -------------           -------------           -------------
Total operating expenses                                     $   2,816,559           $  25,183,938           $ 130,273,095
                                                             -------------           -------------           -------------
Operating loss                                               $  (2,785,026)          $ (23,871,392)          $(112,483,685)

Interest expense (income), net                                       4,611              (1,889,312)             (6,729,657)

Other expense, net                                                    --                     6,233                   9,120
                                                             -------------           -------------           -------------
Net loss                                                     $  (2,789,637)          $ (21,988,313)          $(105,763,148)
                                                             -------------           -------------           -------------
Exchange of preferred stock (Note 9)                                  --                11,998,000                    --
                                                             -------------           -------------           -------------
Loss applicable to common stock                              $  (2,789,637)          $ (33,986,313)          $(105,763,148)
                                                             =============           =============           =============

Net loss per share-basic and diluted                         $        (.55)          $       (2.05)          $       (1.75)
                                                             =============           =============           =============
Shares used in computing net loss per share                      5,118,342              16,549,535              60,593,437
                                                             =============           =============           =============

           The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
                                      -43-
<PAGE>

                                  DSL.NET, INC.

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE><CAPTION>
                                                               Preferred Stock                          Common Stock
                                                       -------------------------------         -------------------------------
                                                          Shares              Amount              Shares             Amount
                                                       -----------         -----------         -----------         -----------
<S>                                                         <C>            <C>                   <C>               <C>
Initial capitalization, including retroactive
  effect of stock splits                                    20,000         $    50,000           5,089,634         $       500
Exchange of preferred stock for common stock               (20,000)            (50,000)          7,634,451               5,862
Issuance of common stock                                      --                  --             4,071,715               2,036
Repayment of notes receivable from officers                   --                  --                  --                  --
Net loss                                                      --                  --                  --                  --
                                                       -----------         -----------         -----------         -----------
Balance at December 31, 1998                                  --           $      --            16,795,800         $     8,398
Issuance of warrants                                          --                  --                  --                  --
Deferred compensation - restricted stock                      --                  --                  --                  --
Stock compensation                                            --                  --               436,256                 218
Deferred compensation - stock options                         --                  --                  --                  --
Amortization of deferred compensation                         --                  --                  --                  --
Issuance of warrants                                          --                  --                  --                  --
Surrender of common stock                                     --                  --            (3,102,256)             (1,551)
Acceleration associated with surrender                        --                  --                  --                  --
Exchange of redeemable preferred stock                        --                  --                  --                  --
Notes receivable from officers                                --                  --                  --                  --
Repayment of notes receivable from officers                   --                  --                  --                  --
Issuance of common stock - stock options                      --                  --               116,635                  58
Issuance of common stock, net of issuance costs               --                  --             8,226,000               4,113
Issuance of and conversion of redeemable
  preferred stock into common stock                           --                  --            35,909,761              17,955
Net loss                                                      --                  --                  --                  --
                                                       -----------         -----------         -----------         -----------
Balance at December 31, 1999                                  --           $      --            58,382,196         $    29,191
Deferred compensation - stock options                         --                  --                  --                  --
Amortization of deferred compensation                         --                  --                  --                  --
Issuance of common stock - warrants                           --                  --               102,737                  51
Issuance of common stock - employee stock
  purchase plan                                               --                  --                29,741                  14
Issuance of common stock - stock options                      --                  --             1,451,742                 727
Issuance of common stock, net of issuance costs               --                  --             5,750,000               2,875
Issuance of common stock - Vector Internet
  Services, Inc. acquisition                                  --                  --               286,392                 143
Net loss                                                      --                  --                  --                  --
                                                       -----------         -----------         -----------         -----------
Balance at December 31, 2000                                  --           $      --            66,002,808         $    33,001
                                                       ===========         ===========         ===========         ===========
</TABLE>
                                      -44-
<PAGE>

                                  DSL.NET, INC.

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                   (CONTINUED)

<TABLE><CAPTION>
                                                                           Notes
                                                             Additional  Receivable
                                                              Paid-In       from       Deferred      Accumulated
                                                              Capital     Officers   Compensation       Deficit           Total
                                                           -------------    -----    ------------    -------------    -------------
<S>                                                        <C>              <C>      <C>             <C>              <C>
Initial capitalization, including
  Retroactive effect of stock splits                       $        --      $(500)   $       --      $        --      $      50,000
Exchange of preferred stock for common stock                   1,444,138     --              --               --          1,400,000
Issuance of common stock                                       1,021,236     --              --               --          1,023,272
Repayment of notes receivable from officers                         --        500            --               --                500
Net loss                                                            --       --              --         (2,789,637)      (2,789,637)
                                                           -------------    -----    ------------    -------------    -------------
Balance at December 31, 1998                               $   2,465,374    $--      $       --      $  (2,789,637)   $    (315,865)
Issuance of warrants                                           1,155,000     --              --               --          1,155,000
Deferred compensation - restricted stock                       3,733,854     --        (3,733,854)            --               --
Stock compensation                                               602,369     --              --               --            602,587
Deferred compensation - stock options                         13,928,591     --       (13,928,591)            --               --
Amortization of deferred compensation                               --       --         2,350,325             --          2,350,325
Issuance of warrants                                             112,000     --              --               --            112,000
Surrender of common stock                                       (778,087)    --           779,638             --               --
Acceleration associated with surrender                              --       --         1,170,542             --          1,170,542
Exchange of redeemable preferred stock                       (10,750,757)    --              --         (2,401,998)     (13,152,755)
Notes receivable from officers                                      --       --          (999,911)            --           (999,911)
Repayment of notes receivable from officers                         --       --           999,911             --            999,911
Issuance of common stock - stock options                           4,315     --              --               --              4,373
Issuance of common stock, net of issuance
  costs                                                       55,718,285     --              --               --         55,722,398
Issuance of and conversion of redeemable
  preferred stock into common stock                           75,054,639     --              --               --         75,072,594
Net loss                                                            --       --              --        (21,988,313)     (21,988,313)
                                                           -------------    -----    ------------    -------------    -------------
Balance at December 31, 1999                               $ 141,245,583    $--      $(13,361,940)   $ (27,179,948)   $ 100,732,886
Deferred compensation - stock options                         (6,238,995)    --         6,238,995             --               --
Amortization of deferred compensation                               --       --         3,192,222             --          3,192,222
Issuance of common stock - warrants                                  (51)    --              --               --               --
Issuance of common stock - employee stock
  purchase plan                                                  182,704     --              --               --            182,718
Issuance of common stock - stock options                         851,259     --              --               --            851,986
Issuance of common stock, net of issuance
  costs                                                      141,248,935     --              --               --        141,251,810
Issuance of common stock - Vector Internet Services, Inc.
acquisition                                                    8,968,822     --              --               --          8,968,965
Net loss                                                            --       --              --       (105,763,148)    (105,763,148)
                                                           -------------    -----    ------------    -------------    -------------
Balance at December 31, 2000                               $ 286,258,257    $--      $ (3,930,723)   $(132,943,096)   $ 149,417,439
                                                           =============    =====    ============    =============    =============

                      The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
                                      -45-
<PAGE>

                                  DSL.NET, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE><CAPTION>
                                                             For the Period
                                                             From Inception
                                                             (March 3, 1998)
                                                                 through               Year Ended              Year Ended
                                                            December 31, 1998       December 31, 1999       December 31, 2000
                                                              -------------           -------------           -------------
<S>                                                           <C>                     <C>                     <C>
Cash flows from operating activities:
Net loss                                                      $  (2,789,637)          $ (21,988,313)          $(105,763,148)
Reconciliation of net loss to net cash provided by
  (used in) operating activities:
    Depreciation and amortization                                     5,744               1,831,331              21,132,583
    Bad debt expense                                                   --                    62,819                 700,000
    Sales Discounts                                                    --                      --                   590,496
    Amortization of deferred debt issuance costs                       --                    41,978                  58,299
    Stock compensation expense                                    2,423,272               4,123,454               3,192,222
    Write-down of central offices                                      --                      --                 1,416,816
    Net changes in current assets and liabilities:
      Increase in accounts receivable                               (30,597)               (320,149)             (4,219,149)
      Increase in prepaids and other current assets                    --                  (943,888)             (1,052,000)
      Increase in other assets                                      (15,566)               (578,145)             (1,055,846)
      Increase in accounts payable                                  231,073               8,624,119               2,054,260
      Increase in accrued salaries                                     --                   848,841                 729,156
      Increase in accrued expenses                                   16,814               1,831,119               5,676,441
      Increase in deferred revenue                                    5,392                 124,114               1,554,131
                                                              -------------           -------------           -------------
Net cash used in operating activities                              (153,505)             (6,342,720)            (74,985,739)
                                                              -------------           -------------           -------------
Cash flows from investing activities:
  Purchases of property and equipment                              (290,082)            (33,811,121)            (55,942,721)
  (Purchases) / sales of marketable securities                         --               (13,274,183)             13,274,183
  Acquisition of subsidiary, net of cash acquired                      --                (1,575,508)            (13,548,674)
  Other investments                                                    --                      --                  (500,001)
                                                              -------------           -------------           -------------
Net cash used in investing activities                              (290,082)            (48,660,812)            (56,717,213)
                                                              -------------           -------------           -------------
Cash flows from financing activities
  Initial capitalization                                             50,500                    --                      --
  Proceeds from bridge financing                                    350,000                    --                      --
  Proceeds from equipment credit facility                              --                 1,355,036               2,921,870
  Proceeds from common stock issuance / exercise
    of options, net                                                    --                55,726,681             142,286,514
  Proceeds from equipment notes / leases payable                    124,000               1,762,754                    --
  Proceeds from preferred stock issuance                               --                62,724,823                    --
  Payments on equipment notes payable                               (41,434)                (66,667)                   --
  Principal payments under capital lease obligations                   --                  (360,313)             (3,248,711)
                                                              -------------           -------------           -------------
Net cash provided by financing activities                           483,066             121,142,314             141,959,673
                                                              -------------           -------------           -------------
</TABLE>
                                      -46-
<PAGE>

<TABLE><CAPTION>
<S>                                                           <C>                     <C>                     <C>
Net increase in cash and cash equivalents                            39,479              66,138,782              10,256,721
Cash and cash equivalents at beginning of period                       --                    39,479              66,178,261
                                                              -------------           -------------           -------------
Cash and cash equivalents at end of period                    $      39,479           $  66,178,261           $  76,434,982
                                                              =============           =============           =============
Supplemental disclosure:
Cash paid:
Interest                                                      $       2,524           $     172,380           $   1,477,168
                                                              =============           =============           =============
Fixed assets financed under capital leases                    $      22,699           $   1,561,289           $  10,292,727
                                                              =============           =============           =============
Fixed asset purchases included in accounts payable            $        --             $   7,179,912           $   8,136,269
                                                              =============           =============           =============

The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>



































                                      -47-

<PAGE>

                                  DSL.NET, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   FORMATION AND OPERATIONS OF THE COMPANY

      DSL.net, Inc. (the "Company") was incorporated in Delaware on March 3,
1998 and operations commenced March 28, 1998. The Company provides dedicated
high-speed digital communications and Internet access and related services,
primarily using digital subscriber line (DSL) technology. During the period
ended December 31, 1998, the Company was considered a development stage company
in accordance with Statement of Financial Accounting Standard No. 7. As of June
30, 1999, the Company was no longer considered a development stage enterprise.

      As reflected in the accompanying financial statements for the year ended
December 31, 2000, the Company incurred operating losses of $112,483,685 and
negative operating cash flows of $74,985,739 that have been financed primarily
by proceeds from equity issuances. The Company had accumulated deficits of
$27,179,948 and $132,943,096 at December 31, 1999 and 2000, respectively.
Management expects operating losses and negative cash flows to continue into at
least 2002. This raises substantial doubt about the Company's ability to
continue as a going concern.

      The Company expects its operating losses, net operating cash flows and
capital expenditures to continue during 2001. Additional financing will be
required during 2001. Management intends to seek additional financing through
some combination of borrowings, leasing, vendor financing and the sale of equity
or debt securities. There can be no assurance that the Company will be able to
raise sufficient debt, equity or other capital on acceptable terms, if at all.
There can therefore be no assurance that the Company will have sufficient funds
to continue its operations. These financial statements do not include any
adjustments relating to the recoverability of the carrying value of the recorded
assets or the amounts of liabilities that might result from this uncertainty.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      Significant accounting policies followed in the preparation of these
financial statements are as follows:

PRINCIPLES OF CONSOLIDATION

      The accompanying consolidated financial statements include the
transactions and balances of DSL.net, Inc. and its wholly owned subsidiaries,
including DSLnet Communications Delaware, Inc., DSLnet Communications, LLC,
DSLnet Communications Puerto Rico, Inc., DSLnet Communications VA, Inc., Tycho
Networks, Inc. and Vector Internet Services, Inc. All material intercompany
transactions and balances have been eliminated.

USE OF ESTIMATES

      The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting

                                      -48-
<PAGE>

                                  DSL.NET, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (CONTINUED)

period. Actual results could differ from those estimates. The markets for the
Company's services are characterized by intense competition, rapid technological
development, regulatory changes, and frequent new product introductions, all of
which could impact the future value of the Company's assets.

CASH EQUIVALENTS AND MARKETABLE SECURITIES

      The Company considers all highly liquid investments purchased with an
initial maturity of three months or less to be cash equivalents.

      The Company considers its investment portfolio to be available-for-sale
securities as defined in Statement of Financial Accounting Standards ("SFAS")
No. 115. Marketable securities as of December 31, 1999 consisted of debt
securities and certificates of deposit with maturities of greater than three
months and no more than a year. Securities are available-for-sale and are
carried at fair value.

      Included in cash and cash equivalents at December 31, 1999 and 2000 was
$602,960 and $4,111,071, respectively, representing cash restricted for future
amounts due in connection with our acquisitions, subject to any post-closing
adjustments.

CONCENTRATION OF CREDIT RISK AND CONCENTRATION OF DATA TRANSMISSION SERVICE
PROVIDERS

      Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash, cash equivalents,
marketable securities and accounts receivable. The Company's cash and investment
policies limit investments to short-term, investment grade instruments.
Concentrations of credit risk with respect to accounts receivable are limited
due to the large number of customers comprising the Company's customer base.

      Data is transmitted across our network via transmission facilities that
the Company leases from WorldCom and AT&T. Failure of these carriers to provide
service or to provide quality service may interrupt the use of the Company's
services by its customers. In August 1999, the service provided by WorldCom was
interrupted for several days by a failure of their communications network. The
financial impact on the Company's operations related to this interruption was
immaterial. However, no assurance can be provided that the WorldCom and AT&T
service will not be interrupted in the future.

FIXED ASSETS

      Fixed assets are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets, which are
five years for network equipment (except for routers and modems, which are three
years), three years for computer equipment, five years for furniture, fixtures
and office equipment and three years for capitalized software and vehicles.
Leasehold improvements are amortized over the shorter of the term of the related
lease or the useful life of the asset. Maintenance and repairs are charged to
expense as incurred. Collocation space improvements represent payments to
carriers for infrastructure improvements within their central offices to allow
the Company to install its equipment, which allows the Company to interconnect
with the carrier's network. These payments are being amortized over their
estimated useful lives of five years. The Company also installs its equipment at
customer locations to enable connections to its network.

                                      -49-
<PAGE>

                                  DSL.NET, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (CONTINUED)

      The Company, in accordance with AICPA Statement of Position 98-1,
"ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR
INTERNAL USE," ("SOP 98-1"), capitalizes certain costs incurred in the
development of internal use software. Internal use software has an estimated
useful life of three years.

      Upon disposal of fixed assets, the cost and related accumulated
depreciation are removed from the accounts and the resulting gain or loss is
reflected in earnings. Fully depreciated assets are not removed from the
accounts until physical disposition.

GOODWILL AND OTHER INTANGIBLE ASSETS

      Goodwill and other intangible assets are amortized on a straight-line
basis over the estimated future periods to be benefited, ranging from three to
five years. In addition, goodwill and other intangible assets are reviewed for
impairment quarterly, or whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
the assets to future undiscounted cash flows of the business acquired. If the
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. To date, no impairment has occurred.

OTHER ASSETS

      As of December 31, 1999 other assets included $731,815 in refundable
deposits held as security on certain lease obligations. As of December 31, 2000
other assets included $1,829,032 in refundable deposits held as security on
certain lease obligations and $500,001 in other long-term investments.

INCOME TAXES

      The Company uses the liability method of accounting for income taxes, as
set forth in Statement of Financial Accounting Standards No. 109, "ACCOUNTING
FOR INCOME TAXES". Under this method, deferred tax assets and liabilities are
recognized for the expected future tax consequences of temporary differences
between the carrying amounts and the tax basis of assets and liabilities and net
operating loss carryforwards, all calculated using presently enacted tax rates.

REVENUE RECOGNITION

      Revenue is recognized pursuant to the terms of each contract on a monthly
service fee basis. Deferred revenue represents payments received in advance of
the services provided. Revenue related to installation charges is deferred and
amortized to revenue over eighteen months, the estimated life of the customer
relationship. Related direct costs incurred (up to the amount of deferred
revenue) are also deferred and amortized to expense over eighteen months, any
excess direct costs over installation charges are charged to expense as
incurred. In certain situations, the Company waives non-recurring installation
charges in order to obtain a sale and expenses the related direct costs as
incurred (See "RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS," SAB No. 101 below).

                                      -50-
<PAGE>

                                  DSL.NET, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (CONTINUED)

LONG-LIVED ASSETS

      Statement of Financial Accounting Standards No. 121, "ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF,"
requires that long-lived assets and certain intangible assets be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. If undiscounted expected future cash
flows are less than the carrying value of the assets, an impairment loss is to
be recognized based on the fair value of the assets. No impairment losses have
been recognized to date.

STOCK COMPENSATION

      The Company applies Accounting Principles Board Opinion No. 25 ("APB 25")
and related interpretations in accounting for its stock option plan and stock
awards with the disclosure provisions of Statement of Financial Accounting
Standards No. 123 ("SFAS 123"). Under APB 25, compensation expense is computed
to the extent that the fair market value of the underlying stock on the date of
grant exceeds the exercise price of the employee stock option or stock award.
Compensation so computed is then recognized over the vesting period. The Company
accounts for equity instruments issued to non-employees in accordance with SFAS
123 and Emerging Issues Task Force ("EITF") 96-18.

      Stock compensation expense includes amortization of deferred compensation
and charges related to stock grants. Stock compensation expense for the period
ended December 31, 1998 and years ended December 31, 1999 and 2000 totaled
approximately $2,423,000, $4,123,000 and $3,192,000, respectively.

EARNINGS (LOSS) PER SHARE

      The Company computes net loss per share pursuant to Statement of Financial
Accounting Standards No. 128, "EARNINGS PER SHARE." Basic net loss per share is
computed by dividing income or loss applicable to common stockholders by the
weighted average number of shares of the Company's common stock outstanding
during the period. Diluted net loss per share is determined in the same manner
as basic net loss per share except that the number of shares is increased
assuming exercise of dilutive stock options and warrants using the treasury
stock method and dilutive conversion of the Company's preferred stock.

      The following options and warrants were excluded from the calculation of
earnings per share since their inclusion would be antidilutive for all periods
presented:

<TABLE><CAPTION>
                                                         Shares of Common Stock
                                              -----------------------------------------------
                                                                December 31,
                                              -----------------------------------------------
                                                 1998               1999               2000
                                              ---------          ---------          ---------
<S>                                             <C>              <C>                <C>
Options to purchase common stock ...               --            5,874,302          7,318,612
Warrants to purchase preferred stock
     convertible to common stock ........       233,277               --                 --
Warrants to purchase common stock ..               --              194,556             83,314
                                              ---------          ---------          ---------
     Total .........................            233,277          6,068,858          7,401,926
                                              =========          =========          =========
</TABLE>

                                      -51-
<PAGE>

                                  DSL.NET, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (CONTINUED)

COMPREHENSIVE INCOME

      The Company has adopted the accounting treatment prescribed by Statement
of Financial Accounting Standards No. 130, "COMPREHENSIVE INCOME." The adoption
of this statement had no material impact on the Company's financial statements
for the periods presented.

RECLASSIFICATIONS

      Certain reclassifications have been made in prior years' financial
statements to conform to classifications used in the current year.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

      In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 137, "ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE OF FASB
STATEMENT NO.133." In June 2000, the FASB issued SFAS 138, "ACCOUNTING FOR
CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING AGREEMENTS - AN AMENDMENT TO
FASB STATEMENT NO. 133." SFAS 133 established new standards of accounting and
reporting for derivative instruments and hedging activities, and required that
all derivatives, including foreign currency exchange contracts, be recognized on
the balance sheet at fair value. We will adopt SFAS 133, as amended by SFAS 137
and SFAS 138, in the first quarter of 2001 and do not expect the adoption to
have a material effect on our financial condition or results of operations.

      In December 1999, the staff of the Securities and Exchange Commission
issued its Staff Accounting Bulletin ("SAB") No. 101, "REVENUE RECOGNITION IN
FINANCIAL STATEMENTS." SAB No. 101 provides guidance on the measurement and
timing of revenue recognition in financial statements of public companies.
Changes in accounting policies to apply the guidance of SAB No. 101, as amended
by SAB No. 101B, must be adopted by recording the cumulative effect of the
change as of January 1, 2000.

      During fiscal 2000, the Company adopted the revenue recognition guidelines
of SAB No.101, which changed the manner in which the Company recognizes
installation revenue and related direct costs (see "REVENUE RECOGNITION" above).
The cumulative effect of adoption of SAB No. 101 resulted in deferral of
installation revenues and related direct costs of approximately $176,000 at
January 1, 2000. The effect of the adoption for the year ended December 31,
2000, resulted in a deferral of installation revenue and related direct costs of
approximately $735,000. Installation revenue deferred during the fourth quarter
of 2000 was approximately $25,000. The comparable pro forma fourth quarter 1999
deferred installation revenue and related direct costs would have been
approximately $101,400. The adoption of SAB No. 101 had no impact on net income.



                                      -52-
<PAGE>

                                  DSL.NET, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (CONTINUED)

      The following table sets forth the unaudited pro forma impact of SAB No.
101 adoption on previously reported quarterly revenue at December 31, 1999 and
the unaudited revenue as adjusted for each quarter of the year 2000:

<TABLE><CAPTION>
                            Revenue as                  Effect of               Revenue
Quarter Ended            Originally Reported           SAB No. 101            as Adjusted
-------------            -------------------           -----------            -----------
<S>                          <C>                       <C>                    <C>
December 31 1999             $  810,881                $ (101,413)            $  709,468
March 31, 2000               $1,737,306                $ (333,176)            $1,404,130
June 30, 2000                $3,785,626                $ (279,760)            $3,505,866
September 30, 2000           $5,860,857                $  (97,128)            $5,763,729
December 31, 2000            $7,140,599                $  (24,914)            $7,115,685
</TABLE>

3.   FIXED ASSETS

<TABLE><CAPTION>
                                                                    December 31,
                                                           -----------------------------
                                                               1999             2000
                                                           ------------     ------------
<S>                                                        <C>              <C>
Network and computer equipment........................     $ 19,866,200     $ 56,423,741
Furniture, fixtures, office equipment and software ...        5,827,493       16,892,409
Vehicles .............................................           99,189          148,257
Collocation costs ....................................        8,659,789       28,518,456
                                                           ------------     ------------
                                                             34,452,671      101,982,863
Less-accumulated depreciation and amortization .......        1,787,747       18,710,818
                                                           ------------     ------------
                                                           $ 32,664,924     $ 83,272,045
                                                           ============     ============
</TABLE>

      As of December 31, 1999 and December 31, 2000, the recorded cost of the
equipment under capital lease was $1,862,466 and $12,312,838, respectively.
Accumulated amortization for this equipment under capital lease was $222,495 and
$2,172,518 at December 31, 1999 and 2000, respectively.

      As of December 31, 1999 and 2000, the Company had capitalized computer
software costs of $5,046,545 and $9,665,735, respectively, and had recorded
amortization expense related to these costs of $217,644 and $2,819,057,
respectively.

      Depreciation and amortization expense related to fixed assets was $5,744,
$1,782,003 and $16,975,382, for the period ended December 31, 1998 and the years
ended December 31, 1999 and 2000, respectively.

4.    ACQUISITIONS

      On December 1, 1999, the Company acquired Tycho Networks, Inc., a Santa
Cruz, California based provider of Internet access, web hosting and related
services throughout central coastal California. The acquisition was accounted
for under the purchase method of accounting and, accordingly, the purchase price
has been allocated to the assets acquired and liabilities assumed based on their
estimated fair values at the date of acquisition. The approximate net purchase
price of $3,267,000, excluding transaction costs, consisted of cash payments at
closing of approximately $1,576,000 (including notes paid at closing of
approximately $793,000); amounts due to selling stockholders and others after
the closing of approximately $802,000; net liabilities

                                      -53-
<PAGE>

                                  DSL.NET, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (CONTINUED)

assumed of approximately $530,000 and other costs of approximately $359,000. In
addition, the Company incurred transaction costs associated with the acquisition
of approximately $125,000. Immediately prior to the acquisition, Tycho Networks
sold fixed assets with a net book value of approximately $90,000 to a related
party and received notes that were convertible into the preferred stock of the
buyer. These notes were assigned an estimated fair value of $90,000. The excess
of purchase price over the fair value of net assets received, including
transaction costs, of approximately $3,392,000, has been recorded as goodwill
and is being amortized over its estimated useful life of five years. The results
of Tycho Networks' operations have been included in the consolidated results of
the Company from the date of acquisition.

      On April 3, 2000, the Company acquired certain assets and liabilities of
Trusted Net Media Holdings, LLC ("Trusted Net"). The acquisition was accounted
for under the purchase method of accounting and, accordingly, the purchase price
has been allocated to the assets acquired and liabilities assumed based on their
estimated fair values at the date of acquisition. The approximate net purchase
price of $2,500,000, excluding transaction costs, consisted of cash payments at
closing of approximately $2,097,000; amounts due to Trusted Net after the
closing of approximately $350,000; and net liabilities assumed of approximately
$53,000. In addition, the Company incurred transaction costs associated with the
acquisition of approximately $150,000. The purchase price, including the net
liabilities assumed, of $2,650,000 has been recorded as goodwill and is being
amortized on a straight-line basis over its estimated useful life of five years.
The results of the acquired operations of Trusted Net have been included in the
consolidated results of the Company from the date of acquisition.


       On May 26, 2000, the Company acquired Vector Internet Services, Inc.
("VISI"), an Internet solution provider based in Minneapolis, Minnesota. The
acquisition was accounted for under the purchase method of accounting and,
accordingly, the purchase price has been allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the date of
acquisition. The approximate net purchase price of $19,969,000, excluding
transaction costs, consisted of cash payments at closing of approximately
$8,800,000; amounts due to selling stockholders after the closing of
approximately $2,200,000; common stock valued at $2,315,000; and the assumption
of VISI employee stock options, which were valued at a fair value of $6,654,000.
In addition, the Company incurred transaction costs associated with the
acquisition of approximately $425,000.

       The purchase consideration of the assets acquired and liabilities assumed
were allocated based on the fair values as follows: Net assets acquired,
$130,000; customer base, $7,878,000; and goodwill, $12,386,000. The customer
base was valued based on the expected future net cash flows from customers
discounted back to the present value taking into account the expected life cycle
of the customer relationships. This amount is being amortized on a straight-line
basis over its estimated useful life of three years. The excess of the purchase
price over the net identifiable assets has been recorded as goodwill and is
being amortized on a straight-line basis over its estimated useful life of five
years.

      The results of the VISI operations have been included in the consolidated
results of the Company from the date of acquisition.

       On December 1, 2000, the Company acquired certain assets of Exario
Networks, Inc. ("Exario"). The acquisition was accounted for under the purchase
method of accounting and,

                                      -54-
<PAGE>

                                  DSL.NET, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (CONTINUED)

accordingly, the purchase price has been allocated to the assets acquired based
on their estimated fair values at the date of acquisition. The approximate net
purchase price of $4,463,000, excluding transaction costs, consisted of cash
payments at closing of approximately $2,902,000 and amounts due to Exario after
the closing of approximately $1,561,100. In addition, the Company incurred
transaction costs associated with the acquisition of approximately $100,000.

       The purchase consideration of the assets acquired was allocated based on
the fair values approximately as follows: Net assets acquired of $57,000 and
customer base of $4,506,000. The customer base was valued based on the expected
future net cash flows from customers discounted back to the present value taking
into account the expected life cycle of the customer relationships. This amount
is being amortized on a straight-line basis over its estimated useful life of
four years. The results of the acquired operations of Exario have been included
in the consolidated results of the Company from the date of acquisition.

           The following table sets forth the unaudited pro forma consolidated
financial information of the Company, giving effect to the acquisitions of Tycho
Networks, Inc. ("Tycho") and Vector Internet Services, Inc. ("VISI"), and the
acquisition of certain assets of Exario Networks, Inc. ("Exario"), as if the
transactions occurred at the beginning of the periods presented (1998 and 1999
for Tycho and 1999 and 2000 for VISI and Exario). The pro forma results for 1999
and 2000 assuming the Trusted Net acquisition had occurred at the beginning of
the year would not be materially different from the reported results.

<TABLE><CAPTION>
                                                                 Year Ended December 31,
                                                    ---------------------------------------------------
                                                         1998               1999               2000
                                                    -------------      -------------      -------------
<S>                                                 <C>                <C>                <C>
Pro forma revenue .............................     $     380,060      $   9,851,207      $  24,487,979
Pro forma operating loss ......................     $  (4,198,261)     $ (32,543,111)     $(116,540,764)
Pro forma net loss applicable to common shares      $  (4,471,839)     $ (42,876,861)     $(109,866,953)
Pro forma net loss per share, basic and diluted     $       (0.87)     $       (2.55)     $       (1.81)
Shares used in computing pro forma net loss
     per share ................................         5,118,342         16,835,927         60,712,751
</TABLE>

      The pro forma results are not necessarily indicative of the actual results
of operations that would have been obtained had the acquisitions taken place at
the beginning of the respective periods or the results that may occur in the
future.




                                      -55-
<PAGE>

                                  DSL.NET, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (CONTINUED)

5.    GOODWILL AND OTHER INTANGIBLE ASSETS

      The following table shows the unamortized balances of goodwill and other
intangible assets:

                                                         December 31,
                                               --------------------------------
                                                  1999                 2000
                                               -----------          -----------
        Tycho goodwill, net .........          $ 3,342,386          $ 2,669,187
        Trusted Net, goodwill, net ..                 --              2,211,683
        VISI goodwill, net ..........                 --             10,940,233
        VISI customer lists, net ....                 --              6,346,391
        Exario customer lists, net ..                 --              4,412,156
        Other intangibles ...........               77,749               48,927
                                               -----------          -----------
                                               $ 3,420,135          $26,628,577
                                               ===========          ===========

      Amortization expense of goodwill and other intangible assets for the years
ended December 31, 1999 and 2000 was $63,306 and $4,179,155, respectively.
Accumulated amortization at December 31, 1999 and 2000 was $63,306 and
$4,242,461, respectively.

6.   DEBT

CREDIT FACILITY

      In May 1999, the Company entered into a secured credit facility (the
"Credit Facility") with a bank to provide up to $5.0 million for the purchase of
telecommunications and office equipment and vehicles. The Credit Facility
expired in May 2000 and converted to a term loan payable over 36 months. The
Credit Facility bears interest on outstanding borrowings at 1% over the higher
of the bank's prime rate or the federal funds rate plus 0.5%. As of December 31,
2000, amounts outstanding under this line of credit bore interest at the annual
rate of 10.5%. The Credit Facility is secured by a lien on certain equipment and
vehicles owned by the Company located at its principal office, and imposes
certain financial and other covenants requiring us to maintain certain financial
ratios and limits new indebtedness, the creation of liens, types of investments,
mergers, consolidations and the transfer of all or substantially all of our
assets. As of December 31, 2000, there was $3,545,095 outstanding on this term
loan. Financing costs associated with the Credit Facility of $83,868 were
deferred over the four year life of the facility and term loan. Amortization
expense related to the deferred costs for the years ended December 31, 1999 and
2000 was $13,978 and $20,967, respectively.

7.   COMMITMENTS AND CONTINGENCIES

LEASES

      Rent expense under operating leases was approximately $14,000, $721,000
and $2,726,000 for the period from inception (March 3, 1998) through December
31, 1998 and for the years ended December 31, 1999 and 2000, respectively.

                                      -56-
<PAGE>

                                  DSL.NET, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (CONTINUED)

      The Company leases space in several buildings which are used for office
and network operations facilities. The Company is obligated under various
building and capital equipment leases expiring at different times through March,
2005.

      The future minimum annual lease payments under the terms of such
non-cancelable leases as of December 31, 2000 are as follows:

                                                     Operating        Capital
                                                       Leases          Leases
                                                    -----------     -----------
2001 ............................................   $ 3,514,455     $ 4,150,457
2002 ............................................     3,541,674       3,655,504
2003 ............................................     2,556,247       3,081,420
2004 ............................................     1,449,915       1,705,279
2005 ............................................       389,420          59,833
                                                    -----------     -----------
Total............................................   $11,451,711      12,652,493
                                                    ===========
Less-Amount representing interest ...............                     2,175,174
                                                                    -----------
Present value of future minimum lease payments ..                   $10,477,319
                                                                    ===========

      In March 1999, the Company entered into a master lease agreement to
provide up to $2,000,000 for capital equipment purchases over an initial
twelve-month period, subject to renewal options. Individual capital leases are
amortized over 30 or 36 month terms and bear interest at 8% to 9% per annum. The
outstanding balance under this agreement at December 31, 1999 and 2000 was
approximately $921,956 and $1,168,000, respectively.

      In July 2000, the Company entered into a 48-month lease agreement with an
equipment vendor to finance the purchase of network equipment. The Company has
leased approximately $8,900,000 under this agreement. Amounts financed under
this lease agreement bear an interest rate of 12% and are secured by the
financed equipment. The outstanding balance under this agreement at December 31,
2000 was approximately $8,061,000.

PURCHASE COMMITMENTS

      The Company has long-term purchase commitments with WorldCom and AT&T for
data transport services with minimum payments due even if the Company's usage
does not reach the minimum amounts. The WorldCom commitment began on May 1, 2000
and requires minimum purchases of $4,800,000 per year for each of five years.
The AT&T commitment began on October 2, 2000 and requires minimum purchases of
$3,000,000, $4,000,000 and $5,000,000 for the contract years ending October 1,
2001, 2002 and 2003, respectively. The Company also has a commitment to purchase
$81,000 per month of certain additional network capacity from AT&T over the last
two years of the same three-year contract period.

LITIGATION

      The Company is involved in litigation with a former officer who claims
wrongful termination of employment. The plaintiff is principally seeking
compensatory damages for wages and unvested stock options. The Company believes
that the plaintiff's claims are without merit, and plans to defend the case
vigorously.

                                      -57-
<PAGE>

                                  DSL.NET, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (CONTINUED)

      From time to time, the Company may be involved in other litigation
concerning claims arising in the ordinary course of its business, including
claims brought by former employees and claims related to acquisitions. The
Company does not believe any of the legal claims or proceedings will result in a
material adverse effect on its business, financial position, results of
operations or cash flows.

OTHER MATTERS

      The Company has entered into interconnection agreements. The agreements
have terms of one to two years and are subject to certain renewal and
termination provisions by either party generally upon 30 days' notification. The
Company anticipates that it will renew such agreements beyond their initial
terms. However, failure to re-negotiate interconnection agreements or delay in
negotiations could have a material adverse effect on the Company's operations.

      In certain markets where the Company has not deployed its own DSL
equipment, the Company utilizes local DSL facilities from wholesale providers in
order to provide service to its end-user customers. Local wholesale carriers may
terminate their service with little or no notice. Such terminations of service
could have a material adverse effect on the Company's operations.

8.    RELATED PARTY TRANSACTIONS

      In January 1999, the Company entered into an Asset Transfer Agreement with
FutureComm, Inc., whose sole shareholder is an officer and founder of the
Company. The amount paid by the Company in exchange for certain equipment,
agreements, licenses and intellectual property was approximately $28,000.

      In May 1999, the Company entered into an agreement to license and
implement components of an operations support system from a software vendor. In
November 2000, the Company entered into an additional agreement with this vendor
settling open matters from the earlier agreement and licensing additional
software. Amounts paid under these agreements were approximately $563,000 in
1999 and $62,000 in 2000. Two stockholders of the Company, own stock of the
software vendor.

                                      -58-
<PAGE>

9.    STOCKHOLDERS' EQUITY

COMMON STOCK TRANSACTIONS

      In January 1999, the Company's Board of Directors declared a stock split
of 1,909.09 shares for every outstanding common share. The accompanying
financial statements have been restated to reflect this stock split. In
conjunction with this split and the sale of Series A Preferred Stock described
below, certain employment tenure and performance criteria were required of
management in order to fully vest in a portion of their founders' shares. The
value attributed to these 14,857,397 non-vested shares is reflected in deferred
compensation of approximately $3,734,000.

      In March 1999, the Company issued 436,256 shares of common stock to an
executive officer of the Company, adjusted for stock splits. Compensation
expense of $602,587 has been recognized related to this issuance.

                                      -59-
<PAGE>

                                  DSL.NET, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (CONTINUED)

      In April 1999, the Company's founding shareholders surrendered 3,102,256
shares of common stock. Such stock was previously made subject to certain
employment tenure and performance vesting criteria. In exchange, the vesting
criteria on other restricted common stock owned by the founders was removed.
This share surrender and acceleration of vesting resulted in a compensation
charge of approximately $1,200,000 in the second quarter of 1999 and eliminated
approximately $780,000, or $0.25 per share, from deferred compensation.

      In May 1999, the Company declared a 2:1 stock split of its common stock.
The accompanying financial statements have been restated to reflect this stock
split.

      In July 1999, the Company declared a 0.333:1 stock dividend on its common
stock. The accompanying financial statements have been restated to reflect this
stock dividend.

      On October 12, 1999, the Company completed its initial public offering of
7,200,000 shares of common stock resulting in net proceeds to the Company of
approximately $48.5 million. In addition, the underwriters exercised their
over-allotment option for 1,026,000 shares, resulting in additional net proceeds
to the Company of approximately $7.2 million on November 8, 1999.

      In conjunction with the closing of the Company's initial public offering
on October 12, 1999, all outstanding preferred stock was converted into
35,909,761 shares of common stock.

       In March 2000, the Company completed a public offering of 5,750,000
shares of common stock, including the exercise of the underwriters' over
allotment option, at an offering price of $26.00 per share. Net proceeds to the
Company from this offering were approximately $141,273,000, after deducting
underwriting discounts and commissions and offering expenses payable by the
Company.

       In the first quarter of 2000, the Company recorded non-cash compensation
expense of $870,000 relating to the vesting of stock options held by members of
the Company's former advisory board. The advisory board was dissolved in the
first quarter of 2000 and, therefore, the unamortized deferred compensation
balance of $4,163,000, related to unvested stock options held by advisory board
members was reclassified against additional paid-in capital. The Company's
remaining unamortized deferred compensation balance of approximately $3,931,000
as of December, 31 2000, relating to stock options and restricted stock held by
employees and directors, is being amortized over the respective remaining
vesting periods.

       In conjunction with the Company's acquisition of VISI, described in Note
4 above, the Company issued purchase consideration that included 286,392 shares
of common stock having a value of $2,315,000 at the time of the acquisition. The
Company also assumed all of the then outstanding options issued under the VISI
1997 and 1999 Stock Option Plans, which became fully vested options to purchase
an aggregate of 898,926 shares of common stock. No additional options will be
granted by the Company under the VISI stock option plans. The VISI options were
valued at $6,654,000 at the time of the acquisition.


                                      -60-
<PAGE>

                                  DSL.NET, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (CONTINUED)

COMMON STOCK RESERVED

      The Company has reserved shares of common stock as follows:

                                                   December 31,
                                            -------------------------
                                               1999           2000
                                            ----------     ----------
1999 Stock Plan .......................     12,247,565     10,795,814
VISI Stock Option Plans ...............           --          836,441
1999 Employee Stock Purchase Plan .....        300,000        270,259
Stock warrants ........................        194,556         83,314
                                            ----------     ----------
                                            12,742,121     11,985,828
                                            ==========     ==========

STOCK WARRANTS

      At December 31, 1999 and 2000, the Company had outstanding stock purchase
warrants to purchase 194,556 and 83,314 shares of common stock, respectively.

                                       December 31,
                                   -------------------
                                     1999       2000
                                   -------     -------
Lease Warrants ...............     111,242        --
Bridge Warrants ..............      83,314      83,314
                                   -------     -------
                                   194,556      83,314
                                   =======     =======

       On May 8, 2000, 111,242 lease warrants were exercised in a cashless
exercise pursuant to the terms of the lease warrant resulting in a net issuance
of 102,737 shares of common stock.

       On October 6, 1999, warrants for 56,250 shares of Series A preferred
stock were exercised and converted into 149,963 shares of common stock at the
rate of 2.666 shares of common stock for one share of Preferred Stock, which had
been adjusted for certain subsequent dilutive issuances and stock splits, for
aggregate net proceeds of $56,250.

REDEEMABLE CONVERTIBLE PREFERRED STOCK

      In January 1999, the Company issued 3,500,000 shares of convertible voting
preferred stock designated as Series A Preferred Stock, together with warrants
to purchase 3,500,000 shares of a prior Series B Preferred Stock (the
"Warrants"), at an exercise price of $1.00 per share, for an aggregate of
$3,500,000. A total of $1,155,000 of the related proceeds has been allocated to
the Warrants.

      In January 1999, the holders of $225,000 of convertible notes converted
$225,000 of the notes into 225,000 shares of Series A Preferred Stock. The
remaining $125,000 of such convertible notes reduced the proceeds paid to the
Company for the Series A Preferred Stock.

      In April 1999, certain holders of the Series A Preferred Stock exchanged
3,500,000 shares of Series A Preferred Stock and the Warrants for 6,500,000
shares of Series B Preferred Stock. Cashless warrant exercises accounted for
2,525,070 of these 6,500,000 shares of Series B Preferred Stock. The exchange
into the remaining 3,974,930 shares of Series B Preferred Stock,

                                      -61-
<PAGE>

                                  DSL.NET, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (CONTINUED)

which was not contemplated in the original Series A Preferred Stock purchase
agreement, afforded the holders an exchange rate of $0.57 per share, which was
lower than the deemed fair market value of the preferred stock at the time of
exchange of $3.59 per share and therefore has been treated as a beneficial
non-monetary exchange under APB Opinion No. 29, "Accounting for Non-Monetary
transactions." The difference between the carrying value of the Series A
Preferred Stock, $2,272,000, and the deemed fair market value of the Series B
Preferred Stock, $14,270,000, has been included in the calculation of net loss
per common share, although no assets of the Company were expended. The exchange
reduced additional paid-in capital and increased the carrying value of the
Series B Preferred Stock by approximately $11,998,000 for the year ended
December 31, 1999. The exchange has been given no other accounting treatment in
the 1999 financial statements of the Company.

      In April 1999, the Company issued 2,785,516 shares of convertible voting
preferred stock designated as Series C Preferred Stock at $3.59 per share for
net proceeds of $9,940,000. These shares were subsequently converted into
7,426,186 shares of common stock, representing a per share price of $1.35.

      In May and June 1999, the Company issued 2,963,672 shares of convertible
voting preferred stock designated as Series D Preferred Stock at $10.46 per
share for net proceeds of $29,961,000. In July 1999, we received approximately
$1,007,000 in connection with repayment of a note, including interest at 6.0%,
from an officer in connection with the purchase of Series D Preferred stock in
June 1999. These shares were subsequently converted into 7,901,150 shares of
common stock, representing a per share price of $3.92.

      In July 1999, the Company issued 939,086 shares of convertible voting
preferred stock designated as Series E Preferred Stock at $19.70 per share for
net proceeds of approximately $18,468,000. These shares were subsequently
converted into 2,503,603 shares of common stock, representing a per share price
of $7.39.

      The preferred stock automatically converted into shares of common stock
upon the completion of the Company's initial public offering.

10.   INCOME TAXES

      The Company's gross deferred tax assets and liabilities were comprised of
the following:

<TABLE><CAPTION>
                                                             December 31,
                                           ------------------------------------------------
                                               1998              1999             2000
                                           ------------      ------------      ------------
<S>                                        <C>               <C>               <C>
Gross deferred tax asset:
Net operating loss carryforwards .....     $  1,076,382      $  7,462,759      $ 46,351,085
Other ................................           53,599           554,756         3,381,268
                                           ------------      ------------      ------------
                                              1,129,981         8,017,515        49,732,353
Gross deferred tax liability:
Depreciation .........................            8,054           656,033         2,164,719
Other ................................             --                --             527,713
                                           ------------      ------------      ------------
                                              1,121,927         7,361,482        47,039,921
Valuation allowance ..................       (1,121,927)       (7,361,482)      (47,039,921)
                                           ------------      ------------      ------------
Net deferred taxes ...................     $       --        $       --        $       --
                                           ============      ============      ============
</TABLE>

                                      -62-
<PAGE>

                                  DSL.NET, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (CONTINUED)

      The Company has provided a valuation allowance for the full amount of the
net deferred tax asset, since management has not determined that these future
benefits will more likely than not be realized as of December 31, 1998, 1999 and
2000. If the Company achieves profitability, the deferred tax assets may be
available to offset future income tax liabilities.

      At December 31, 1999 and 2000 the Company had approximately $18 million
and $115 million of federal and state net operating loss carryforwards,
respectively.

      Approximately $1,000,000 of the net operating loss carryforward at
December 31, 2000, related to stock-based compensation deductions. Any tax
benefit derived therefrom, when realized, will be accounted for as a credit to
additional paid-in capital rather than a reduction to the income tax provision.
The federal and state net operating loss carryforwards expire in various years
beginning in 2009. The utilization of a portion of the net operating loss
carryforwards may be subject to limitations under the U.S. federal income tax
laws.

      The provision for (benefit from) income taxes reconciles to the statutory
federal tax rate as follows:

<TABLE><CAPTION>
                                                                December 31,
                                                       -----------------------------
                                                        1998        1999        2000
                                                        ----        ----        ----
<S>                                                   <C>         <C>         <C>
Statutory federal tax rate ....................       (34.00)%    (34.00)%    (34.00)%
State income tax, net of federal benefit ......        (6.27)      (6.27)      (6.00)
Permanent differences .........................         0.05        7.29        1.50
Other .........................................          --         4.46         --
Deferred tax asset valuation allowance ........        40.22       28.52       38.50
                                                       -----       -----       -----
                                                         --  %       --  %       --  %
                                                       =====       =====       =====
</TABLE>

11.   INCENTIVE STOCK AWARD PLANS

EMPLOYEE STOCK OPTION PLAN

      In February 1999, the Company's Board of Directors adopted the 1999 Stock
Plan (the "Stock Plan") under which employees, directors, advisors and
consultants can be granted any or all of the following: incentive stock options
and non-qualified stock options, stock appreciation rights, and stock awards. A
total of 12,364,200 shares of common stock have been authorized under the Stock
Plan.

      Options generally vest 25% after one year, then ratably over the next
thirty-six months and are exercisable once vested for ten years from the date of
grant.

       In conjunction with the acquisition of Vector Internet Services, Inc.
(see Note 4), the Company also assumed all of the then outstanding options
issued under the VISI 1997 and 1999 Stock Option Plans (together with the Stock
Plan, the "Plans"), which became fully vested options to purchase an aggregate
of 898,926 shares of common stock. No additional options will be granted by the
Company under the VISI stock option plans. The VISI options were valued at
$6,654,000 at the time of the acquisition.

                                      -63-
<PAGE>

                                  DSL.NET, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (CONTINUED)

      A summary of activity under the Plans as of December 31, 1999 and 2000 is
as follows:

                                                   Weighted Average
                                                   -----------------
                                      Number of     Fair    Exercise
                                        Shares     Value     Price
                                      ---------    -----     -----
Outstanding at Inception .......           --      $--       $--

Granted ........................      7,692,879    $3.59     $2.01
Exercised ......................       (116,635)             $0.04
Cancelled ......................     (1,701,942)             $1.09
                                      ---------
Outstanding at December 31, 1999      5,874,302

Granted ........................      6,142,293    $5.49     $8.31
VISI assumed ...................        898,926              $2.18
Exercised ......................     (1,451,751)             $0.59
Cancelled ......................     (4,145,158)             $8.66
                                      ---------
Outstanding at December 31, 2000      7,318,612
                                      =========

      The following summarizes the outstanding and exercisable options under the
Plans as of December 31, 1999 and 2000:

<TABLE><CAPTION>
                                Options Outstanding         Options   Exercisable
                           ----------------------------- --------------------------
                            Weighted Avg.
                  Number   Remaining Life  Weighted Avg.    Number    Weighted Avg.
Exercise Price Outstanding   (in years)   Exercise Price Exercisable Exercise Price
-------------- ----------- -------------- -------------- ----------- --------------
<S>              <C>             <C>           <C>          <C>              <C>
12/31/99
$0.04-0.07       2,383,741       9.2           $0.05        96,086           $0.04
$0.39-0.53       2,127,484       9.4           $0.47          -                 -
$5.00-9.85       1,166,077       9.7           $7.73          -                 -
$16.50-18.75       197,000       9.9          $17.81          -                 -

12/31/00
$0.04-2.53       2,787,663       8.1           $0.66     1,425,012           $0.81
$2.72-5.00       2,712,289       9.7           $3.19       306,039           $2.99
$6.31-9.85       1,020,128       9.1           $7.04       140,002           $7.63
$10.63-14.88       584,283       8.9          $12.53        25,000          $10.63
$16.50-18.75        17,250       8.9          $17.28         4,783          $17.26
$20.94-25.94       196,999       2.2          $22.78       149,999          $22.75
</TABLE>

     If compensation expenses had been recognized based on the fair value of the
options at their grant date, in accordance with Financial Accounting Standard
No. 123 ("FAS 123"), the results of operations for the years ended December 31,
1999 and 2000 would have been as follows:

<TABLE><CAPTION>
                                                        Year ended December 31,
                                                 -----------------------------------
                                                       1999                 2000
                                                 --------------      ---------------
<S>                                              <C>                 <C>
Net loss:
As reported ................................     $  (21,988,313)     $  (105,763,148)
Pro forma under FAS 123 ....................     $  (22,426,281)     $  (110,231,819)
Basic and diluted net loss per common share:
As reported ................................     $        (2.05)     $         (1.75)
Pro forma under FAS 123 ....................     $        (2.08)     $         (1.82)
</TABLE>




                                      -64-
<PAGE>

                                  DSL.NET, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (CONTINUED)

     The estimated fair value at date of grant for options granted for the year
ended December 31, 1999 ranged from $0.23 to $16.27 per share and for the year
ended December 31, 2000, $0.75 to $17.19 per share. The minimum value of each
option grant is estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions:

                                                     December 31,
                                           -------------------------------
                                               1999                2000
                                           ------------        -----------
Risk free interest rate..................   4.88%-6.09%        5.26%-6.72%
Expected dividend yield..................       None              None
Expected life of option..................     10 years          5 years
Expected volatility......................  .0001%-84.52%           75%

      As additional options are expected to be granted in future years, and the
options vest over several years, the above pro forma results are not necessarily
indicative of future pro forma results.

      Deferred compensation of approximately $13,929,000 has been attributed to
those common stock options granted during the year ended December 31, 1999, with
an exercise price below estimated fair value. Stock compensation expense is
recognized over the four year vesting period and totaled approximately
$4,123,000 and $3,192,000 for the years ended December 31, 1999 and 2000,
respectively.

EMPLOYEE STOCK PURCHASE PLAN

      The Company's 1999 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors in September 1999. The Purchase Plan
authorized the issuance of up to a total of 300,000 shares of Common Stock to
participating employees.

All employees of the Company and all employees of any participating subsidiaries
whose customary employment is more than 20 hours per week and more than three
months in any calendar year are eligible to participate in the Purchase Plan.
Under the terms of the Purchase Plan, the price per share paid by each
participant on the last day of the Offering Period (as defined therein) is an
amount equal to 85% of the fair market value of the Common Stock on either the
first day or the last day of the Offering Period, whichever is lower. Each
employee participating in the plan may purchase a maximum of 500 shares during
each six-month offering period. The Purchase Plan terminates on December 31,
2009 or such earlier date as the Board of Directors determines. The Purchase
Plan will terminate in any case when all or substantially all of the unissued
shares of stock reserved for the purposes of the Purchase Plan have been
purchased. Upon termination of the Purchase Plan all amounts in the accounts of
participating employees will be promptly refunded.

      The first offering period of the Purchase Plan began on October 6, 1999
and ended on February 29, 2000. The Company issued a total of 29,741 shares of
common stock under the plan during the year ended December 31, 2000.



                                      -65-
<PAGE>

                                  DSL.NET, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (CONTINUED)

12.   EMPLOYEE SAVINGS PLAN 401(K)

      On April 1, 2000, the Company started a 401(k) savings plan under which it
matches employee contributions at 50% up to the first 4% of their contribution.
Employees may elect to participate in the plan bi-annually on the enrollment
dates provided they have been an employee for at least ninety days. The
Company's contribution to the 401(k) plan during the year ended December 31,
2000 was $219,459.

13.   ACCRUED LIABILITIES

      Accrued liabilities included the following:

                                                            December 31,
                                                     ---------------------------
                                                        1999            2000
                                                     -----------     -----------
         Due to sellers
                                                     $   602,960     $ 4,033,658
         Taxes payable - other than
           income taxes ........................         434,513       3,233,353
         Other accrued
           liabilities .........................       2,135,700       6,889,457
                                                     -----------     -----------
               Total ...........................     $ 3,173,173     $14,156,468
                                                     ===========     ===========


14.   RESTRUCTURING

      In December 2000, the Company incurred approximately $3,542,000 in
non-recurring charges related to a corporate restructuring. Of that amount,
approximately $448,000 was related to severance costs incurred as a result of a
reduction in its workforce of approximately 140 employees. These severance costs
are included in network and operations, general and administrative and sales and
marketing expenses. A charge of approximately $1,078,000 was included in general
and administrative expense for the estimated costs resulting from the
consolidation of our facilities by vacating office space located in Milford,
Connecticut, and Chantilly, Virginia and for unused office space in Santa Cruz,
California. Lastly, a charge of approximately $2,016,000 was included in network
and operations expense for the estimated costs resulting from our decision to
not accept certain central offices' previously applied for, and to forego the
completion of our build-out of certain other central offices.

      At December 31, 2000, approximately $362,000 of severance costs and
approximately $1,416,000 of capitalized collocation application fees had been
charged against the restructuring reserves.



                                      -66-
<PAGE>

                                  DSL.NET, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (CONTINUED)

15.   SELECTED UNAUDITED QUARTERLY FINANCIAL DATA

      The following table depicts selected quarterly unaudited financial data
for the years ended December 31, 1999 and 2000.

<TABLE><CAPTION>
                                                                        Net Loss Per
                      Net Revenue    Operating Loss         Loss        Common Share
                     ------------     ------------      ------------      --------
         <S>        <C>              <C>               <C>               <C>
         Q1 1999     $     48,188     $ (1,693,088)     $ (1,686,614)     $  (0.51)
         Q2 1999     $    135,985     $ (5,011,774)     $ (4,810,633)     $  (2.45)
         Q3 1999     $    317,492     $ (6,236,669)     $ (5,621,484)     $  (0.66)
         Q4 1999     $    810,881     $(10,929,861)     $ (9,869,582)     $  (0.21)

         Q1 2000     $  1,404,130     $(19,851,278)     $(18,338,284)     $  (0.33)
         Q2 2000     $  3,505,866     $(29,668,566)     $(27,286,633)     $  (0.45)
         Q3 2000     $  5,763,729     $(31,563,809)     $(30,231,355)     $  (0.48)
         Q4 2000     $  7,115,685     $(31,400,032)     $(29,906,876)     $  (0.47)
</TABLE>

      The 2000 quarterly revenue has been restated to reflect the impact of SAB
No.101 (see Note 2).





























                                      -67-
<PAGE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

      There have been no changes in or disagreements with accountants on
accounting or financial disclosure matters during DSL.net's two most recent
fiscal years.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      The information under the Sections "Election of Directors," "Occupations
of Directors and Officers" and "Section 16(a) Beneficial Ownership Reporting
Compliance" from the registrant's definitive proxy statement for the annual
meeting of stockholders to be held on May 23, 2000, which is to be filed with
the Securities and Exchange Commission not later than 120 days after the close
of the registrant's fiscal year ended December 31, 2000, is hereby incorporated
by reference.


ITEM 11.  EXECUTIVE COMPENSATION

      The information under the Sections "Compensation and Other Information
Concerning Directors and Officers" and "Stock Performance Graph" from the
registrant's definitive proxy statement for the annual meeting of stockholders
to be held on May 23, 2000, which is to be filed with the Securities and
Exchange Commission not later than 120 days after the close of the registrant's
fiscal year ended December 31, 2000, is hereby incorporated by reference.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The information under the Section "Securities Ownership of Certain
Beneficial Owners and Management" from the registrant's definitive proxy
statement for the annual meeting of stockholders to be held on May 23, 2001,
which is to be filed with the Securities and Exchange Commission not later than
120 days after the close of the registrant's fiscal year ended December 31,
2000, is hereby incorporated by reference.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The information under the Sections "Compensation and Other Information
Concerning Directors and Officers" and "Certain Relationships and Related
Transactions" from the registrant's definitive proxy statement for the annual
meeting of stockholders to be held on May 23, 2001, which is to be filed with
the Securities and Exchange Commission not later than 120 days after the close
of the registrant's fiscal year ended December 31, 2000, is hereby incorporated
by reference.

                                      -68-
<PAGE>

                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K

       (a)   The following documents are filed as part of this form 10-K.

             (1)     Financial Statements (see "Financial Statements and
                     Supplementary Data" at Item 8 and incorporated herein by
                     reference).

             (2)     Financial Statement Schedules -- Schedules to the Financial
                     Statements have been omitted because the information
                     required to be set forth therein is not applicable or is
                     shown in the accompanying Financial Statements or notes
                     thereto, except for Schedule II, Valuation and Qualifying
                     Accounts, which is attached hereto.

             (3)     Exhibits.

      The following exhibits are filed as part of and incorporated by reference
into this Form 10-K:

                                     EXHIBIT
                                     -------
EXHIBIT
   NO.
--------
2.01           Agreement and Plan of Merger, dated as of November 30, 1999, by
               and among DSL.net, Inc., Long Wharf Mergeco, Inc. and Tycho
               Networks, Inc. (incorporated by reference to Exhibit 2 filed with
               our Form 8-K dated as of December 1, 1999).

2.02           Agreement and Plan of Merger dated as of May 25, 2000, by and
               among DSL.net Inc., Greens Farms Corporation, Vector Internet
               Services, Inc. and certain stockholders of Vector (incorporated
               by reference to Exhibit 2 with our Form 8-K dated as of May 26,
               2000).

3.01           Amended and Restated Certificate of Incorporation of DSL.net,
               Inc. as amended (incorporated by reference to Exhibit 3.02 filed
               with our registration statement on Form S-1 (No. 333-80141)).

3.02           Amended and Restated By-laws of DSL.net, Inc. (incorporated by
               reference to Exhibit 3.03 filed with our registration statement
               on Form S-1 (No. 333-80141)).

4.01           Specimen Certificate for shares of DSL.net, Inc.'s Common Stock
               (incorporated by reference to the exhibit of corresponding number
               filed with our registration statement on Form S-1 (No.
               333-80141)).

4.02           Description of Capital Stock (contained in the Certificate of
               Incorporation filed as Exhibit 3.02 with our registration
               statement on Form S-1 (No. 333-80141)).


                                      -69-
<PAGE>

4.03           Form of Stock Purchase Warrant dated as of October 12, 1999
               between DSL.net, Inc. and certain investors (incorporated by
               reference to the exhibit of corresponding number filed with our
               registration statement on Form S-1 (No. 333-96349)).

10.01+         Amended and Restated 1999 Stock Plan (incorporated by reference
               to the exhibit of corresponding number filed with our
               registration statement on Form S-1 (No. 333-80141)).

10.02+         1999 Employee Stock Purchase Plan (incorporated by reference to
               the exhibit of corresponding number filed with our registration
               statement on Form S-1 (No. 333-80141)).

10.03          Amended and Restated Investors' Rights Agreement dated as of July
               16, 1999 between DSL.net, Inc. and the purchasers named therein
               (incorporated by reference to the exhibit of corresponding number
               filed with our registration statement on Form S-1 (No.
               333-80141)).

10.04          Credit Agreement dated as of May 12, 1999 by and between DSL.net,
               Inc. and Fleet National Bank (incorporated by reference to
               Exhibit 10.05 filed with our registration statement on Form S-1
               (No. 333-80141)).

10.05*         Amendment and Waiver Agreement dated June 12, 2000 to Credit
               Agreement dated as of May 12, 1999 by and between DSL.net, Inc.
               and Fleet National Bank.

10.06*         Amendment and Waiver Agreement dated as of July 21, 2000 to
               Credit Agreement dated as of May 12, 1999 by and between DSL.net,
               Inc. and Fleet National Bank.

10.07          Security Agreement dated as of May 12, 1999 by and between
               DSL.net, Inc. and Fleet National Bank (incorporated by reference
               to Exhibit 10.06 filed with our registration statement on Form
               S-1 (No. 333-80141)).

10.08          Lease Agreement dated February 5, 1999 by and between DSL.net,
               Inc. and Long Wharf Drive, LLC, as amended (incorporated by
               reference to Exhibit 10.07 filed with our registration statement
               on Form S-1 (No. 333-96349)).

10.09          Amendment No. 1 dated June 9, 1999 to Lease Agreement by and
               between DSL.net, Inc. and Long Wharf Drive, LLC (incorporated by
               reference to Exhibit 10.08 filed with our registration statement
               on Form S-1 (No. 333-96349)).

10.10          Amendment No. 2 dated November 9, 1999 to Lease Agreement by and
               between DSL.net, Inc. and Long Wharf Drive, LLC (incorporated by
               reference to Exhibit 10.09 filed with our registration statement
               on Form S-1 (No. 333-96349)).

10.11          Amendment No. 3 dated January 20, 2000 to Lease Agreement by and
               between DSL.net, Inc. and Long Wharf Drive, LLC (incorporated by
               reference to Exhibit 10.10 filed with our registration statement
               on Form S-1 (No. 333-96349)).

10.12*         Amendment No. 4 dated February 8, 2000 to Lease Agreement by and
               between DSL.net, Inc. and Long Wharf Drive, LLC.

10.13          Amended and Restated Shareholders' Agreement, as amended, by and
               among DSL.net, Inc. and certain investors (incorporated by
               reference to Exhibit 10.08 filed with our registration statement
               on Form S-1 (No. 333-80141)).

                                      -70-

<PAGE>

10.14+         Additional Compensation Agreement dated as of December 29, 1998
               between DSL.net, Inc. and David Struwas (incorporated by
               reference to Exhibit 10.18 filed with our registration statement
               on Form S-1 (No. 333-80141)).

10.15          Amendment No. 1 to Amended and Restated Investors' Rights
               Agreement (incorporated by reference to Exhibit 10.21 filed with
               our registration statement on Form S-1 (No. 333-80141)).

10.16+         Vector Internet Services, Inc. 1999 Stock Option Plan
               (incorporated by reference to Exhibit 4.4 filed with our
               registration statement on Form S-8 (No. 333-39016))

10.17+         Vector Internet Services, Inc. 1997 Stock Option Plan
               (incorporated by reference to Exhibit 4.5 filed with our
               registration statement on Form S-8 (No. 333-39016))

21.01*         Subsidiaries of DSL.net, Inc.

23.01*         Consent of PricewaterhouseCoopers LLP.

24.01*         Power of Attorney (see signature page hereto).

--------------------------
*     Filed herewith

+     Indicates a management contract or any compensatory plan, contract or
      arrangement.


(b)   Reports on Form 8-K

      No reports on Form 8-K were filed on behalf of DSL.net during the quarter
ended December 31, 2000.

                                      -71-
<PAGE>

                                   SIGNATURES

       Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                                  DSL.NET, INC.

Dated: March 29, 2001                             By:  /s/David F. Struwas
                                                  -------------------------
                                                  David F. Struwas
                                                  Chairman of the Board and
                                                  Chief Executive Officer

                        POWER OF ATTORNEY AND SIGNATURES

       We, the undersigned officers and directors of DSL.net, Inc., hereby
severally constitute and appoint David F. Struwas, Walter Keisch and Stephen
Zamansky, and each of them singly, our true and lawful attorneys, with full
power to them and each of them singly, to sign for us in our names in the
capacities indicated below, any amendments to this Annual Report on Form 10-K,
and generally to do all things in our names and on our behalf in such capacities
to enable DSL.net, Inc. to comply with the provisions of the Securities Exchange
Act of 1934 and all requirements of the Securities and Exchange Commission.

       Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE><CAPTION>
Signature                              Title(s)                                Date
---------                              --------                                ----
<S>                                   <C>                                     <C>
/s/David F. Struwas                    Chairman of the Board and Chief         March 29, 2001
--------------------------------       Executive Officer
David F. Struwas                       (Principal Executive Officer)


/s/ Walter Keisch                      Vice President, Finance (Principal      March 29, 2001
--------------------------------       Financial and Accounting Officer)
Walter Keisch


/s/ Robert Gilbertson                  Director                                March 29, 2001
--------------------------------
Robert Gilbertson


/s/ William J. Marshall                Director                                March 29, 2001
--------------------------------
William J. Marshall
</TABLE>


                                      -72-

<PAGE>

<TABLE><CAPTION>


Signature                              Title(s)                                Date
---------                              --------                                ----
<S>                                   <C>                                     <C>

/s/James D. Marver                     Director                                March 29, 2001
--------------------------------
James D. Marver


/s/ William Seifert                    Director                                March 29, 2001
--------------------------------
William Seifert


/s/ Paul K. Sun                        Director                                March 29, 2001
--------------------------------
Paul K. Sun
</TABLE>


                                      -73-


<PAGE>

                   Exhibit Index to Annual Report on Form 10-K
                     for Fiscal Year Ended December 31, 2000

                                     EXHIBIT
                                     -------
EXHIBIT
   NO.
--------

2.01           Agreement and Plan of Merger, dated as of November 30, 1999, by
               and among DSL.net, Inc., Long Wharf Mergeco, Inc. and Tycho
               Networks, Inc. (incorporated by reference to Exhibit 2 filed with
               our Form 8-K dated as of December 1, 1999,

2.02           Agreement and Plan of Merger dated as of May 25, 2000, by and
               among DSL.net Inc., Greens Farms Corporation, Vector Internet
               Services, Inc. and certain stockholders of Vector (incorporated
               by reference to Exhibit 2 with our Form 8-K dated as of May 26,
               2000).

3.01           Amended and Restated Certificate of Incorporation of DSL.net,
               Inc. as amended (incorporated by reference to Exhibit 3.02 filed
               with our registration statement on Form S-1 (No. 333-80141)).

3.02           Amended and Restated By-laws of DSL.net, Inc. (incorporated by
               reference to Exhibit 3.03 filed with our registration statement
               on Form S-1 (No. 333-80141)).

4.01           Specimen Certificate for shares of DSL.net, Inc.'s Common Stock
               (incorporated by reference to the exhibit of corresponding number
               filed with our registration statement on Form S-1 (No.
               333-80141)).

4.02           Description of Capital Stock (contained in the Certificate of
               Incorporation filed as Exhibit 3.02 with our registration
               statement on Form S-1 (No. 333-80141)).

4.03           Form of Stock Purchase Warrant dated as of October 12, 1999
               between DSL.net, Inc. and certain investors (incorporated by
               reference to the exhibit of corresponding number filed with our
               registration statement on Form S-1 (No. 333-96349)).

10.01+         Amended and Restated 1999 Stock Plan (incorporated by reference
               to the exhibit of corresponding number filed with our
               registration statement on Form S-1 (No. 333-80141)).

10.02+         1999 Employee Stock Purchase Plan (incorporated by reference to
               the exhibit of corresponding number filed with our registration
               statement on Form S-1 (No. 333-80141)).

10.03          Amended and Restated Investors' Rights Agreement dated as of July
               16, 1999 between DSL.net, Inc. and the purchasers named therein
               (incorporated by reference to the exhibit of corresponding number
               filed with our registration statement on Form S-1 (No.
               333-80141)).

10.04          Credit Agreement dated as of May 12, 1999 by and between DSL.net,
               Inc. and Fleet National Bank (incorporated by reference to
               Exhibit 10.05 filed with our registration statement on Form S-1
               (No. 333-80141)).

10.05*         Amendment and Waiver Agreement dated June 12, 2000 to Credit
               Agreement dated as of May 12, 1999 by and between DSL.net, Inc.
               and Fleet National Bank.

10.06*         Amendment and Waiver Agreement dated as of July 21, 2000 to
               Credit Agreement dated as of May 12, 1999 by and between DSL.net,
               Inc. and Fleet National Bank.

10.07          Security Agreement dated as of May 12, 1999 by and between
               DSL.net, Inc. and Fleet National Bank (incorporated by reference
               to Exhibit 10.06 filed with our registration

                                      -74-
<PAGE>

               statement on Form S-1 (No. 333-80141)).

10.08          Lease Agreement dated February 5, 1999 by and between DSL.net,
               Inc. and Long Wharf Drive, LLC, as amended (incorporated by
               reference to Exhibit 10.07 filed with our registration statement
               on Form S-1 (No. 333-96349)).

10.09          Amendment No. 1 dated June 9, 1999 to Lease Agreement by and
               between DSL.net, Inc. and Long Wharf Drive, LLC (incorporated by
               reference to Exhibit 10.08 filed with our registration statement
               on Form S-1 (No. 333-96349)).

10.10          Amendment No. 2 dated November 9, 1999 to Lease Agreement by and
               between DSL.net, Inc. and Long Wharf Drive, LLC (incorporated by
               reference to Exhibit 10.09 filed with our registration statement
               on Form S-1 (No. 333-96349)).

10.11          Amendment No. 3 dated January 20, 2000 to Lease Agreement by and
               between DSL.net, Inc. and Long Wharf Drive, LLC (incorporated by
               reference to Exhibit 10.10 filed with our registration statement
               on Form S-1 (No. 333-96349)).

10.12*         Amendment No. 4 dated February 8, 2000 to Lease Agreement by and
               between DSL.net, Inc. and Long Wharf Drive, LLC.

10.13          Amended and Restated Shareholders' Agreement, as amended, by and
               among DSL.net, Inc. and certain investors (incorporated by
               reference to Exhibit 10.08 filed with our registration statement
               on Form S-1 (No. 333-80141)).

10.14+         Additional Compensation Agreement dated as of December 29, 1998
               between DSL.net, Inc. and David Struwas (incorporated by
               reference to Exhibit 10.18 filed with our registration statement
               on Form S-1 (No. 333-80141)).

10.15          Amendment No. 1 to Amended and Restated Investors' Rights
               Agreement (incorporated by reference to Exhibit 10.21 filed with
               our registration statement on Form S-1 (No. 333-80141)).

10.16+         Vector Internet Services, Inc. 1999 Stock Option Plan
               (incorporated by reference to Exhibit 4.4 filed with our
               registration statement on Form S-8 (No. 333-39016))

10.17+         Vector Internet Services, Inc. 1997 Stock Option Plan
               (incorporated by reference to Exhibit 4.5 filed with our
               registration statement on Form S-8 (No. 333-39016))

21.01*         Subsidiaries of DSL.net, Inc.

23.01*         Consent of PricewaterhouseCoopers LLP.

24.01*         Power of Attorney (see signature page hereto).

----------------
*     Filed herewith

+     Indicates a management contract or any compensatory plan, contract or
      arrangement.

                                      -75-
<PAGE>

                      Report of Independent Accountants on
                          Financial Statement Schedule


To the Board of Directorsn and Stockholders of
DSL.net, Inc.:


Our audits of the consolidated financial statements referred to in our report
dated February 26, 2001 appearing in this Annual Report on the Form 10-K of
DSL.net, Inc. also included an audit of the financial statement schedule listed
in Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement
schedule presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.


PricewaterhouseCoopers LLP

Stamford, Connecticut
February 26, 2001


                                      -76-
<PAGE>


                 SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS



The following table depicts the activity in the allowance for doubtful accounts
for the period from March 3, 1998 (inception) to December 31, 1998 and for the
years ended 1999 and 2000:

<TABLE><CAPTION>
----------------- --------------- --------------- --------------- --------------- -------------- --------------- ---------------
                                                                                                   Deductions
                     Allowance                      Additions       Additions       Additions       Charged
                        For         Balance at      Charged to      Charged to     Charged to       Against        Balance at
                      Doubtful     Beginning of     Costs and        Purchase         Sales        Valuation         End of
      Year            Accounts        Period         Expenses       Accounting      Discounts      Allowance         Period
----------------- --------------- --------------- --------------- --------------- -------------- --------------- ---------------
<S>               <C>             <C>             <C>             <C>             <C>            <C>             <C>
      1998                         $          --   $          --   $          --   $         --   $          --   $          --
----------------- --------------- --------------- --------------- --------------- -------------- --------------- ---------------
      1999                         $          --   $      62,819   $      16,329   $         --   $    (16,545)   $      62,603
----------------- --------------- --------------- --------------- --------------- -------------- --------------- ---------------
      2000                         $      62,603   $     700,000   $      87,000   $    590,496   $    (87,000)   $   1,353,099
----------------- --------------- --------------- --------------- --------------- -------------- --------------- ---------------
</TABLE>

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