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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, 2003

                                       OR

[_]   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           (203) 772-1000
--------------------------------------------   ----------        ---------------
 (Address of principal executive offices)      (Zip Code)        (Telephone No.)

        Securities registered pursuant to Section 12(b) of the Act: None

           Securities registered pursuant to Section 12(g) of the Act:

                    Common Stock, par value $.0005 per share

     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]

     Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [_]  No [X]

     The aggregate market value of the Common Stock held by non-affiliates of
the registrant, as of the last business day of the registrant's most recently
completed second fiscal quarter, was approximately $19,801,538 (based on the
closing price of the registrant's Common Stock of $0.52 per share). The number
of shares outstanding of the registrant's Common Stock, par value $.0005 per
share, as of April 6, 2004, was 144,119,957.

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<PAGE>

                                  DSL.net, Inc.

                           ANNUAL REPORT ON FORM 10-K

                          YEAR ENDED DECEMBER 31, 2003

                                TABLE OF CONTENTS


                                                                            Page
                                                                            No.
                                                                            ---
Part I

Item 1.   Business.............................................................2
Item 2.   Properties..........................................................17
Item 3.   Legal Proceedings...................................................17
Item 4.   Submission of Matters to a Vote of Security Holders.................18


Part II

Item 5.   Market for Registrant's Common Equity, Related Stockholder
          Matters and Issuer Purchases of Equity Securities...................18
Item 6.   Selected Consolidated Financial Data................................22
Item 7.   Management's Discussion and Analysis of Financial Condition
          and Results of Operations...........................................24
Item 7A.  Quantitative and Qualitative Disclosure About Market Risk...........64
Item 8.   Financial Statements and Supplementary Data.........................65
Item 9.   Changes in and Disagreements with Accountants on Accounting and
          Financial Disclosure...............................................111
Item 9A.  Controls and Procedures............................................111


Part III

Item 10.  Directors and Executive Officers of the Registrant.................111
Item 11.  Executive Compensation.............................................114
Item 12.  Security Ownership of Certain Beneficial Owners and Management
          and Related Stockholder Matters....................................121
Item 13.  Certain Relationships and Related Transactions.....................124
Item 14   Principal Accountant Fees and Services.............................127

Part IV

Item 15.  Exhibits, Financial Statement Schedule, and Reports on Form 8-K....128

SIGNATURES...................................................................134



                                       1
<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") provides high-speed data
communications, Internet access, and related services to small and medium sized
businesses and branch offices of larger businesses and their remote office
users, throughout the United States, primarily utilizing digital subscriber line
("DSL," generally, or "SDSL," in reference to symmetrical DSL service) and T-1
technology ("T-1" refers to a digital transmission link, provisioned via DS-1
(i.e., North American Digital Signal Level One) or substantially equivalent
technology). In September of 2003, we expanded our service offerings to include
integrated voice and data services using voice over Internet protocol ("VoIP")
to business customers in select Mid-Atlantic and Northeast markets. Our networks
enable data transport over existing copper telephone lines at speeds of up to
1.5 megabits per second. We were organized in 1998 as a corporation under the
laws of the State of Delaware.

      We sell directly to businesses, primarily through our own direct sales
force, and to third party resellers whose end users are typically business-class
customers. We deploy our own local communications equipment primarily in select
first and second tier cities. As of March 1, 2004, we operated equipment in
approximately 340 cities in the United States. In certain markets where we have
not deployed our own equipment, we utilize the local facilities of other
carriers to provide service.

      In addition to a number of high-speed, high-performance DSL-based data
communications and Internet connectivity solutions specifically designed for
businesses, our product offerings include T-1 Internet connectivity and data
communications services, integrated voice and data services (provisioned over
SDSL or T-1 lines), Web hosting, domain name system management, enhanced e-mail,
on-line data backup and recovery services, firewalls, nationwide dial-up
services, private frame relay services and virtual private networks. 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.

      In January 2003, we acquired the majority of Network Access Solutions
Corporation's ("NAS") operations and assets. The acquired NAS assets included
operations and equipment in

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approximately 300 central offices extending from Virginia to Massachusetts, and
included approximately 11,500 subscriber lines. This acquisition significantly
increased our facilities-based footprint in one of the largest business markets
in the United States, providing us with increased opportunities to sell more
higher-margin facilities-based services.

      In September of 2003 we acquired substantially all of the assets and
subscribers of TalkingNets, Inc., a voice and data communications provider that
offered soft switched-based VoIP and high-speed data services to businesses.
This acquisition was strategically significant as it gave us the capability to
offer business customers in the business-intensive Mid-Atlantic and Northeast
regions a carrier-class integrated voice and data service which utilizes VoIP.

      In December of 2003 we introduced an expanded range of VoIP products in
the Washington, D.C. metropolitan region. In February of 2004 we introduced our
full suite of VoIP and data bundles in the New York City metropolitan area.

THE DSL.NET SOLUTION

      We provide small and medium sized businesses and branch offices of larger
businesses and their remote office users, with high-speed Internet access and
data communications services, and integrated voice and data services, primarily
using DSL and T-1 technology. Key elements of our solution are:

      HIGH-SPEED CONNECTIONS. We offer Internet access and private network
services at speeds of up to 1.5 megabits per second, via SDSL and T-1
technology. Our network is designed to provide data transmission at the same
speed to and from the customer, known as symmetrical data transmission, and is
also capable of providing service at different speeds to and from the customers,
known as asymmetrical data transmission. We believe that symmetrical data
transmission is best suited for business applications, because business users
require fast connections both to send and receive information, and to host
advanced services and applications.

       VOICE OVER INTERNET PROTOCOL. We offer a full suite of VoIP-based
telephone services in conjunction with our high speed data connections. Each
bundle includes unlimited local, unlimited regional, and unlimited domestic
long-distance calling (subject to certain limitations set forth in our service
agreement). Multiple voice and data bundles varying by the number of phone lines
and broadband speeds are available to meet the needs of a variety of business
types and sizes. Our VoIP services are offered over a "quality of service"
("QoS") controlled network to ensure that telephone calls are delivered with
carrier-grade quality.

      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 services
include high-speed Internet access and data communications services, integrated
voice and data services, frame relay, Web hosting, domain name system
management, enhanced e-mail, on-line data backup and recovery services,
firewalls, nationwide dial-up services and virtual private networks. Our network
is designed to enable us to individually configure each customer's service
remotely.

      ALWAYS-ON CONNECTIONS. With our high-speed 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 for high-speed connectivity service rather than billing them based on
usage.

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      ATTRACTIVE VALUE PROPOSITION. Our DSL and T-1 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
multiple dial-up connections, ISDN or traditional 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. The ability to bundle multiple services, such as
Internet access, data communications and voice, over the same access line allows
us to offer our services at price points which are significantly less than those
of the same communications services if purchased separately.

      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 address network problems
promptly, thus enhancing network quality, service and performance.

OUR SERVICES

      As part of our service offerings, we function as our customers' Internet
service provider and voice carrier, 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 and carrier-class voice service. Our primary services include
high-speed data communications, with or without Internet access, integrated
voice and data services, e-mail, domain name system management and Web hosting.
Other services provided by DSL.net include firewalls, on-line data backup and
recovery services, nationwide dial-up services, private frame relay and virtual
private networks that connect customers' various offices.

      Customers typically pay an installation charge and a monthly fee for our
service. Revenue related to installation charges is deferred and amortized to
revenue over 18 months, which is the average customer life of the existing
customer base. The monthly fee for our data communications services includes all
phone line charges, general Internet access services, e-mail, and domain name
system management, including the issuance of Internet protocol ("IP") addresses
for customers who wish to assign fixed IP addresses to their network computers.
The monthly fee for our integrated voice and data service includes all phone
line charges, general Internet access services, local and domestic long distance
phone service (subject to subscription bundles and other restrictions set forth
in the customer's service agreement), caller ID, call waiting, call forwarding,
e-mail, and domain name system management, including the issuance of IP
addresses. Customers generally contract for our services for a minimum of 12 or
24 months, depending upon the service, and are billed for services on a monthly
basis.

CUSTOMERS

      Our target customers are primarily small and medium sized businesses and
branch locations of larger enterprises and their remote office users. We sell to
these customers primarily on a direct basis. In particular, we believe the
following market segments are especially attractive prospective customers:

      o  businesses currently using other high-speed data communications
         services, such as ISDN and frame relay services;

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<PAGE>

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

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

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

      o  businesses that cannot afford to pay the costs for maintaining
         high-speed connections for voice and data services separately, but can
         justify the cost of a high-speed connection if shared for voice and
         data services.

      No customer accounted for more than 5% of our total revenue during the
years ended December 31, 2003, 2002 and 2001.

SALES AND MARKETING

      Our marketing professionals have developed a methodology to identify the
businesses that we believe would most likely benefit from our services. Once we
identify businesses in a specific market, we employ a targeted local marketing
strategy utilizing a variety of media but primarily focused on telemarketing
efforts, direct mail and opt-in e-mail. Through inbound and outbound telesales
campaigns, we utilize internal sales professionals to sell our services to
prospective customers. We also partner with various resellers and referral
channels, including local information technology professionals, application
service providers and marketing partners to assist in the sale of our services.

CUSTOMER ACQUISITIONS

      In addition to our internal sales and marketing efforts, and our reseller
and referral channels, we have grown our customer base by acquiring end users of
other Internet service providers and companies offering broadband access. We
continuously identify and evaluate acquisition candidates, and in many cases
engage in discussions and negotiations regarding potential acquisitions.
Acquisition candidates include both individual subscriber lines and whole
businesses. Our discussions and negotiations may not result in acquisitions.
Further, if we make any additional acquisitions, we may not be able to operate
any acquired assets or businesses profitably or otherwise successfully implement
our expansion strategy. We intend to continue to seek additional opportunities
for further acquisitions, a strategy which we believe represents a distinct
opportunity to accelerate our growth.

CUSTOMER SUPPORT AND OPERATIONS

      Our customer support professionals serve as an information repository to
our customers and work to streamline the ordering, installation and maintenance
processes associated with data and voice communications and Internet access.
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 communications
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

                                       5
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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 communications facilities of other carriers, and work with these carriers
to provide the service. In both cases, field service technicians install the
modem or router purchased or leased from us and any necessary wiring at our
customers' offices and test the modem or router and connection over our network
to confirm successful installation.

      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 customer service department. Our information
management system, which generates reports for tracking maintenance problems,
allows us to communicate maintenance problems from the network operations center
to our customer service 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 of these systems, including improved
automation and support for voice services, were made in 2003. We believe that
our operations support systems provide us with the flexibility to support
additional customers and additional services.

OUR NETWORK

      Our network has been designed to deliver reliable, secure and scaleable
high-speed, high-performance Internet access data communication services, local
phone service as well as domestic and international long distance.

      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  NEXT GENERATION VOIP TECHNOLOGY. We have deployed the latest in
         "session initiation protocol" ("SIP")-based, soft-switching technology
         to deliver voice services over our existing network backbone. In
         contrast to certain other VoIP services, our voice services are
         provided over a facilities-based, fully controlled, QoS-enabled
         network. This quality-of-service approach is designed to assure that
         adequate bandwidth is always available for the voice service and that
         the voice quality is equivalent to traditional voice services.

      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 enables
         high-speed, high volume transmission of data.

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      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 and routers
         we sell or lease to our customers for use in support of subscribed
         services 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  MODEMS, ROUTERS AND ON-SITE CONNECTIONS. We purchase modems and routers
         and provide them to our customers, as appropriate, depending on their
         specific needs and contractual service agreements. We configure the
         modem or router and arrange for the installation of the modem or router
         along with the on-site wiring needed to connect the modem or router to
         the copper telephone line. In areas where we have deployed our own
         local facilities, we either perform these services ourselves or we
         contract with independent field service organizations to perform these
         services on our behalf. In areas where we utilize the local facilities
         of other carriers, these other carriers (or their contractors) provide
         these installation services. We will either lease or sell customer
         premise equipment (modem or router) to our customers. When we lease the
         customer premise equipment, we charge the customer for the use of this
         equipment as part of our monthly service fee. These modems and routers
         are capitalized and depreciated over their estimated useful life of
         three years. Such leased equipment remains our exclusive property. When
         we sell customer premise equipment (modem or router) to the customer,
         we recognize the revenue from the sale and expense the cost of this
         equipment at the time of sale.

      o  SOFT SWITCH, GATEWAYS AND MEDIA SERVERS. In support of our integrated
         voice and data offerings, we have deployed our own soft switching
         equipment, comparable in functionality to traditional Class 4 and Class
         5 switches, to deliver business-class, line-side features to customers.
         We are directly interconnected to the public switched telephone network
         ("PSTN"), and do not rely on other service providers for access to the
         PSTN. Our integrated voice and data network uses soft switches,
         routers, and gateways from Cisco Systems. In addition, we utilize
         additional software applications to provide voice features and enhanced
         services.

      o  COPPER TELEPHONE LINES. In areas where we have deployed our own local
         communications 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
         communications facilities of other carriers, the carrier leases the
         telephone line from the local telephone company and makes that line
         available to us for our customer's use.

      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' own
         central office spaces. We install the equipment necessary to provide
         high-speed DSL or T-1 service 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 markets where

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         we have not deployed our own equipment, we utilize the local facilities
         installed in central offices by other carriers, to provide high-speed
         connections to our customers.

      o  NETWORK BACKBONE; CONNECTION TO THE INTERNET. Network traffic gathered
         at each of our central offices is directed to one of our regional hubs,
         if applicable in support of the customer's service, and then to the
         Internet. In certain areas where we offer service from more than one
         central office, network traffic is directed from each central office in
         that area to a local hub which aggregates its traffic along with the
         traffic from the other central offices located in that area and directs
         the 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 MCI, Level 3 Communications and other carriers to provide this
         service. Internet connectivity is provided by various transit
         arrangements.

      o  NETWORK OPERATIONS CENTER. Our network is managed from our network
         operations centers located in New Haven, Connecticut, and in Herndon,
         Virginia. We provide network management 24 hours a day, seven days a
         week. This enhances our ability to address performance and service
         issues before they affect our customers. From the network operations
         centers, we can monitor the performance of individual subscriber 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 CARRIERS. A number of competitive carriers, including Covad
Communications and New Edge Networks, offer DSL and T-1 services to residential
and business customers. The Telecommunications Act of 1996 (the
"Telecommunication 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.

      INTERNET SERVICE PROVIDERS. Several national and regional Internet service
providers, including UUNET, EarthLink and MegaPath, 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 and T-1 services. These companies leverage wholesale
arrangements to resell broadband access they purchase from facility-based
broadband providers.

      NEXT GENERATION VOICE AND DATA PROVIDERS. A number of competitive
carriers, including Cbeyond Communications, LLC and DSLi, offer converged voice
and data products to residential and business customers. These companies provide
services over a single data connection primarily using DSL and T-1 access
methods.

      TRADITIONAL LOCAL TELEPHONE COMPANIES. Many of the traditional local
telephone companies, including BellSouth, SBC Communications, Qwest and Verizon,
are deploying DSL-based

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services, either directly or through affiliated companies. These companies have
established brand names, 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, including T-1 services. We
depend on these traditional local telephone companies to enter into agreements
for interconnection and to provide us access 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, Sprint, Williams and MCI, 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 local telephone companies, and many offer competitive DSL and T-1
services.

      OTHER FIBER-BASED CARRIERS. Companies such as XO Communications and Choice
One 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 local telephone
companies under which they have acquired collocation space in many large
markets, and some offer competitive DSL and T-1 services.

      CABLE MODEM SERVICE PROVIDERS. Cable modem service providers, such as
Time-Warner Cable, Comcast and RCN, offer high-speed Internet access over cable
networks primarily to residential consumers. 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 Hughes Communications and Teledesic, 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
recognition, breadth of product offerings, financial resources, customer bases,
operating experience and exclusive contracts with customers.

INTERCONNECTION AGREEMENTS WITH TRADITIONAL LOCAL TELEPHONE COMPANIES

      Under the 1996 Telecommunications Act, the traditional local telephone
companies (which are often also referred to as "regional Bell operating
companies" and "incumbent local exchange carriers") 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

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process is subject to review and approval by the state 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 49 states and the District of Columbia. 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 prices we pay both to direct the installment of, and 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.

      We are negotiating renewal agreements with these carriers as the current
agreements 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, particularly if, in the wake of the recent decision of the
D.C. Circuit Court in the action UNITED STATES TELECOM ASSOCIATION V. FEDERAL
COMMUNICATIONS COMMISSION AND UNITED STATES OF AMERICA, CONSOLIDATED CASE NO.
00-1012, WL 374262 (D.C. CIR. MAR. 2 2004), the Federal Communications
Commission (the "FCC") promulgates rules that discontinue, qualify or mitigate
the current requirements regarding services and access that traditional local
phone companies must provide and the pricing for such services and access. The
decision is subject to future judicial review, and various parties, including
the FCC and various state commissions, may seek a stay of the order and a
rehearing and appeal of the decision. The FCC may re-issue sections of its
Triennial Review Order, an order governing interconnection, the unbundling of
network elements, and many other aspects of the relationships between new and
traditional telephone companies. Any new rules may be less favorable to us, than
the existing rules and may cause us to incur increased operating costs or
significantly alter or curtail our operations.

      During our interconnection agreement negotiations, either the telephone
company or we may submit disputes to the state regulatory commissions for
mediation. Also, after the expiration of the statutory negotiation period set
forth in the 1996 Telecommunications Act, we may submit outstanding disputes to
the states for binding arbitration, in which the state regulatory commissions
may arbitrate a new agreement or particular portions 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 networks and services. The results of these proceedings
determine the price we pay for, and whether it is economically attractive for us
to use, these elements and services. These prices may be subject to change as
the result of ongoing and future regulatory proceedings.

      Our interconnection agreements generally have terms of one or two years.
Therefore, we have renegotiated, and expect to continue to renegotiate, existing
agreements when they expire. Although we expect to renew our interconnection
agreements and believe the 1996 Telecommunications Act limits the ability of
traditional local telephone companies not to renew

                                       10
<PAGE>

these agreements, we may not succeed in extending or renegotiating our
interconnection agreements on favorable terms. In addition, the traditional
local telephone companies may seek to materially increase the pricing of the
network elements that we lease from them and that are necessary for us to
service our new and existing customers. Further, 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
are harmful to our business.

GOVERNMENT REGULATIONS

      Significant portions of the services that we offer are subject to
regulation at the federal and/or state levels. The 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 and other facilities-based 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 facilities of
another carrier. The FCC has determined that Internet service providers, such as
us, who are using another carrier's transport facilities, are not acting as
common carriers. Therefore, in those markets where we have not deployed our own
local transport facilities, our services are not subject to common carrier
regulation. Our ability to provide such services, however, is affected by
regulations imposed upon the carriers whose local transport 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.

      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 rules to implement those laws and to encourage competition. These
changes, which are still incomplete, have created new opportunities and
challenges for us and our competitors. However, certain of these and other
existing federal and state regulations remain the subject of judicial
proceedings, legislative hearings and administrative proposals, any or all of
which could change, in varying degrees, the manner in which the
telecommunications industry operates. For example, on March 2, 2004, the D.C.
Circuit Court invalidated many sections of the FCC's Triennial Review Order (an
order governing interconnection, the unbundling of network elements, and many
other aspects of the relationships between new and traditional telephone
companies), and, depending upon the outcome of certain stays and likely appeals,
that decision could negatively impact the availability and pricing of various
network elements and services which the traditional local telephone companies
have previously offered to us. Neither the outcome of these various 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

                                       11
<PAGE>

services at competitive prices. In addition, we may expend significant financial
and managerial resources to participate in legislative, regulatory, or judicial
proceedings at the federal and/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.

      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, including the
following obligations that are, to varying degrees and/or at varying times
relevant to our business:

      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 equipment in the
         central offices of traditional local telephone companies. This
         requirement is intended to enable us and other competitive carriers to
         deploy our equipment on a relatively convenient and economical basis
         and is integral to our business.

      o  Traditional local telephone companies are required to unbundle certain
         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 network elements we require to deliver our services and is integral
         to our business.

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

      o  Traditional local telephone companies are required to provide
         non-discriminatory access to telephone poles, ducts, conduits and
         rights-of-way, and this requirement is integral to our business.

                                       12
<PAGE>

      The 1996 Telecommunications Act generally sets forth the rights and
obligations of competing carriers. The FCC issues regulations interpreting the
1996 Telecommunications Act and imposing more 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 services.

      As part of its effort to implement the 1996 Telecommunications Act, in
August 1996, 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. 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 United States 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 and interoffice
transport which we lease. However, the decision announced the FCC's intention to
revisit these regulations within three years.

      The FCC initiated this three-year review in early 2002, and on February
20, 2003, it voted to adopt new regulations pertaining to the unbundling
obligations of the traditional local telephone companies. The FCC's Triennial
Review Order (the "TRO") was released on August 21, 2003 and became effective
October 3, 2003. However, the D.C. Circuit Court's March 2, 2004 decision
vacated much of the TRO and remanded proceedings back to the FCC on certain
issues. At this time we are unable to determine what requirements the FCC will
include in its final rules or when those rules will be definitively promulgated
(and when they will ultimately take effect, after challenge by various potential
litigants). Nevertheless, the Court's order and the conclusions and directives
contained in the order's accompanying opinion may have an adverse effect on the
Company's ability to obtain the use of certain other facilities, equipment and
services from the traditional local phone companies at prices substantially
similar to those we currently pay.

      Several other issues that the TRO had addressed in a manner that was
either favorable or neutral to the Company are now subject to uncertainty. Some
of those issues ultimately may be determined in a manner unfavorable to the
Company's interests and could have the effect of increasing our costs.
Prospective modified FCC regulations might include changes:

      o  to the preferred pricing formula for unbundled network elements
         provided to us by the traditional local telephone companies;

      o  to the set of unbundled network elements that are subject to the FCC's
         recommended preferred pricing formula; and

      o  to the set of network elements that are subject to the 1996
         Telecommunications Act's unbundling requirements.

      Any changes on any of the foregoing issues that are decided in favor of
the traditional local telephone companies would likely increase our costs of
providing service to our customers. When effective, any new regulations may have
a material adverse affect on our business, results

                                       13
<PAGE>

of operations, cash flows, financial condition, or prospects.

      In one portion of the TRO that was not vacated by the D.C. Circuit Court's
March 2, 2004 decision, the FCC announced that it would exempt from unbundling
obligations certain loop transmission facilities that use fiber or new
technologies for both the business and residential markets. Depending on how the
new prospective rules are written and implemented, the traditional local
telephone companies over time may decide to modify, characterize or replace
their facilities in ways that would qualify them for this exemption and thereby
preclude us from accessing these facilities pursuant to the terms of their
interconnection agreements. Without access to these facilities, we may not be
able to provide all or certain of our services in these areas.

      Another portion of the TRO that the D.C. Circuit Court recently upheld
related to an FCC determination with respect to the unbundling of high
frequency, broadband loops and circuits (commonly known as "high capacity
dedicated transport facilities" and "fiber to the home" circuits and loops). As
a result, the traditional local telephone companies need not make these types of
loops and circuits available to competitive local exchange carriers like us for
resale at wholesale or any other discounted rates. We do not significantly rely
on such facilities and accordingly do not currently believe that such a result
will have any material adverse effect on the Company in the foreseeable future;
however, such developments could somewhat limit the number of acquisition
targets that may have been otherwise potentially attractive to the Company.

      The FCC will eliminate the traditional local telephone companies'
obligation to provide the high frequency portion of a copper loop to a
competitive DSL provider, known as "line sharing," over the course of the next
three years. Our current business is not directly affected because we do not use
line sharing to provide services to our customers. Line sharing technology
currently does not support the ability to provide the high-capacity symmetric
services most desired by customers in the business market, and therefore has
been primarily used by other competing carriers to provide DSL services in the
residential market.

      The FCC's decisions and its rulemaking in response to related judicial
activity will likely be subject to petitions for reconsideration and appeal. We
cannot predict the outcome of these proceedings on our ability to offer services
in the future.

      In addition to the TRO proceedings and related judicial activity, the FCC
in February 2002 initiated a new proceeding that will reevaluate the appropriate
degree of regulation of broadband services offered by the traditional local
telephone companies, including whether they should continue to be required to
offer network access to competitors such as us. Any changes to the obligation of
the traditional local telephone companies to provide us with unbundled copper
loops and/or interoffice transport could have significant adverse consequences
for our business. It is currently unclear when a rule or decision regarding this
specific matter will be issued.

      There is also the possibility that legislation will be proposed in the
United States Congress that would limit our access to certain unbundled network
elements. In 2002, the House of Representatives passed legislation known as the
Tauzin-Dingell bill, which would have amended the 1996 Telecommunications Act to
prohibit state or federal regulation of high-speed data services. While the
legislation was ultimately not enacted, similar legislation may be proposed in
the future. The effect of such legislation would be that the traditional local
telephone companies would no longer be required to provide unbundled elements at
cost-based rates (if at all) if those elements were to be used to provide
high-speed data services.

                                       14
<PAGE>

      The traditional local telephone companies have also lobbied numerous state
legislatures to adopt new legislation that would limit, or prohibit, the ability
of their state utility commissions to expand upon certain federal requirements
relating to the obligations of the traditional local telephone companies to
provide access to competitors such as us. Because the existing FCC framework
relies substantially on state implementation, the effect of such state
legislation, if passed, could be to inhibit favorable implementation of the 1996
Telecommunications Act with respect to broadband services, and could negatively
affect our ability to offer services in these states.

      Over the past three years, the FCC has granted authority to provide long
distance inter-exchange service to Verizon, SBC, BellSouth and Qwest in many of
the states where we do business, and numerous additional applications are
pending or are expected in the near future. While we do not presently provide a
material amount of long distance inter-exchange service, this ruling and any
future similar rulings could negatively impact the future prospects for our
business. First, the traditional local telephone companies are now able to offer
bundled packages of local, long distance and data services that may be
attractive to some of our existing and potential customers. 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 given that compliance with the Act's requirements to
provide unbundled network elements and collocation services to competitors such
as us has been and remains a pre-requisite to the FCC's grant of permission to
enter the long distance business. The traditional local telephone companies may
not extend to us the same level of cooperation once they receive approval to
provide long distance inter-exchange service.

        Pursuant to the 1996 Telecommunications Act, the FCC requires all
telecommunications carriers providing interstate telecommunications services to
contribute to a universal service fund used to provide subsidies to carriers
that provide service to individuals that live in rural, insular, and high-cost
areas, and to provide telecommunications-related services and facilities for
schools, libraries and certain rural health care providers. The
telecommunications portion of our service is currently subject to this
requirement. For the fourth quarter of 2003, the FCC has established a
contribution rate of 9.2% of our interstate telecommunications revenues. We pass
the cost of our universal service fund contributions along to our customers. The
FCC's implementation of universal service requirements remains subject to
judicial and additional FCC review. In several new proceedings, the FCC will
consider the degree to which companies providing services such as ours should be
obligated to contribute to this fund. We are unable to predict the outcome of
these proceedings and their impact on our business at this time.

      DSL.net's subsidiaries are 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 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

                                       15
<PAGE>

pending FCC and judicial proceedings and could change in the future.

      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 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 our 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 patents, copyrights, trademarks, trade secret laws,
restrictions on disclosure and other methods, as applicable. 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, consultants and business partners; 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 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.

                                       16
<PAGE>

EMPLOYEES

      As of March 25, 2004, we had approximately 175 employees. We believe that
our future success will depend in part on our continued ability to attract, hire
and retain qualified personnel. Competition for qualified personnel can be
intense, and we may be unable to identify, attract and retain such personnel in
the future. In addition, reductions in our workforce (including those that we
undertook in 2001, 2003 and 2004) may make it difficult to attract, hire and
retain qualified personnel. 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 31,500 square feet in an office
building in New Haven, Connecticut. We also lease other offices in Santa Cruz,
California; Minneapolis, Minnesota; Wilmington, North Carolina; and Herndon,
Virginia. We vacated and sublet the office in Santa Cruz, California from
December, 2001 through July, 2003; our Santa Cruz office is currently vacant.
See "Item 7 - 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
Item 1 - 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 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 certain
aspects of our business strategy. The plaintiff is principally seeking
compensatory damages for wages and unvested stock options. We deny the
plaintiff's allegations and believe that his claims are without merit. We have
been defending the case vigorously and plan to continue to do so.

      A lawsuit was filed against us in Connecticut State Court in the Judicial
District of New Haven on January 15, 2004 by an individual who claims that he
was offered a sales manager position at the Company in December 2003 but was
wrongly deprived of that position at or immediately prior to his initial
employment date. The plaintiff's complaint includes claims for breach of
contract, negligent misrepresentation and intentional infliction of emotional
distress. We deny the plaintiff's allegations and believe that his 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 and 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.

      From time to time, we may be involved in other litigation concerning
claims arising in the

                                       17
<PAGE>

ordinary course of our business, including claims brought by current or former
employees and claims related to acquisitions. We do not currently believe that
any of these 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

      The information required by this Item 4 was included in Item 4 of Part II
of the Quarterly Report on Form 10-Q for the fiscal periods ended September 30,
2003, which has been filed with the Securities and Exchange Commission.


                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
        ISSUER PURCHASES OF EQUITY SECURITIES

MARKET INFORMATION

      As of March 1, 2004, there were approximately 609 holders of record of our
common stock. Our common stock is listed for quotation on the Nasdaq SmallCap
Market under the symbol "DSLN". Our common stock was listed for quotation on the
Nasdaq National Market under the same symbol until July 22, 2002.

      The range of high and low bid prices per share of DSL.net's common stock
as reported on the Nasdaq National Market and the Nasdaq SmallCap Market for the
two most recent fiscal years are shown below. The last trading price of DSL.net
common stock on March 25, 2004 was $ 0.48 per share.


             Quarter Ended                   High           Low
             -------------                   -----         -----
             March 31, 2002                  $1.38         $0.70
             June 30, 2002                    1.05          0.29
             September 30, 2002               0.45          0.24
             December 31, 2002                0.89          0.28
             March 31, 2003                   0.67          0.36
             June 30, 2003                    0.76          0.35
             September 30, 2003               1.07          0.51
             December 31, 2003               $0.77         $0.51

      On July 22, 2002, The Nasdaq Stock Market, Inc. ("Nasdaq") transferred the
listing of our common stock from the Nasdaq National Market to the Nasdaq
SmallCap Market. We applied for such transfer as a result of our non-compliance
with Nasdaq's Marketplace Rule 4450(a)(5), which required us to maintain a
minimum bid price of $1.00 per share for at least 10 consecutive trading days
during the last ninety day period prior to July 17, 2002 in order to remain
qualified for listing on the Nasdaq National Market. On October 16, 2002, Nasdaq
notified us that, while we had not regained compliance by October 15, 2002 with
the $1.00 minimum bid price per share requirement generally required for
continued listing on the Nasdaq SmallCap Market, we did continue to meet the
initial listing requirements for the Nasdaq

                                       18
<PAGE>

SmallCap Market under Rule 4310(c)(2)(A). As a result, we were afforded an
additional 180 calendar days, or until April 14, 2003, to comply with the
minimum bid price of $1.00 per share for 10 consecutive trading days, or such
greater number of trading days as Nasdaq may have determined, in order to remain
listed on the Nasdaq SmallCap Market. On March 11, 2003, Nasdaq amended its
rules to provide that a company that satisfies the initial listing requirements
for the Nasdaq SmallCap Market under Rule 4310(c)(2)(A) would have an additional
90 days (over the 180 days already contemplated by the Nasdaq SmallCap Market
rules) to comply with the minimum bid price of $1.00 per share. On April 15,
2003, Nasdaq notified us that, while we had not regained compliance by April 14,
2003 with the $1.00 minimum bid price per share requirement generally required
for continued listing on the Nasdaq SmallCap Market, we did continue to meet the
initial listing requirements for the Nasdaq SmallCap Market under Rule
4310(c)(2)(A). As a result, we were afforded an additional 90 calendar days, or
until July 14, 2003, to comply with the minimum bid price of $1.00 per share for
10 consecutive trading days, or such greater number of trading days as Nasdaq
may have determined, in order to remain listed on the Nasdaq SmallCap Market. On
July 15, 2003, we received notification from the Nasdaq staff indicating that
our common stock failed to comply with the $1.00 closing bid price per-share
requirement for 10 consecutive trading days as set forth in the Nasdaq's
Marketplace Rule 4310(c)(4) and as such our common stock was subject to
delisting from the Nasdaq SmallCap Market. We appealed this determination to a
Listings Qualifications Panel and were subsequently granted an extension until
November 17, 2003, to comply with the minimum bid price of $1.00 per share for a
minimum of 10 consecutive days. On October 7, 2003, Nasdaq notified us that we
had been granted an additional extension until December 8, 2003 to gain
compliance with the minimum bid price rule pending SEC action on certain Nasdaq
proposed rule changes (discussed below). On December 12, 2003, Nasdaq notified
us that we had been granted an additional extension until January 30, 2004 to
gain compliance with the minimum bid price rule. This extension was granted to
allow for further developments in the pending SEC action on certain Nasdaq rule
changes (discussed below). On December 23, 2003, the SEC approved certain
modifications to Nasdaq's bid price requirements and subsequently notified us on
January 2, 2004 that we had been granted an additional extension until April 19,
2004 to gain compliance with the minimum bid price rule as set forth in Nasdaq's
newly amended Marketplace Rule 4310(c)(8)(D) (discussed below). There can be no
assurance that we will be able to continue to remain listed on the Nasdaq
SmallCap Market.

      Nasdaq submitted proposed rule changes to the SEC which proposed, among
other things, to modify the grace periods for companies trying to come into
compliance with the bid price requirements for continued listing. On December
23, 2003, the SEC approved certain modifications to Nasdaq's bid price
requirements. Under the amended Marketplace Rule 4310(c)(8)(d), the Company has
until April 19, 2004 to trade at or above $1.00 per share for a minimum of 10
consecutive trading days, or, if the bid price deficiency is not remedied by
that date, to take steps for implementation of a reverse stock split in order to
continue its Nasdaq SmallCap Market listing. At the annual meeting of
stockholders held on October 14, 2003, our stockholders authorized our Board of
Directors to implement a reverse stock split for this purpose, at their
discretion.

                                       19
<PAGE>
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

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, prior to and in preference to any
declaration or payment of any cash dividends on our common stock, the holders of
our Series X and Series Y preferred stock are entitled to receive cumulative
dividends of $120.00 per share per annum when and as declared by the DSL.net
Board of Directors. All such dividends on the Series X and Series Y preferred
stock accrue monthly and are payable in cash, except in the case of the
conversion of the Series X or Series Y preferred stock, as the case may be, into
common stock, in which case dividends may be paid, at the sole option of
DSL.net, in shares of DSL.net common stock. Notwithstanding the foregoing,
accrued but unpaid dividends are payable upon the earliest to occur of:

      o  the liquidation, dissolution, winding up or change in control of
         DSL.net,

      o  the conversion of the Series X or Series Y preferred stock, as the case
         may be, into common stock, and

      o  the redemption of the Series X or Series Y preferred stock, as the case
         may be.

During the second half of 2003 and the first quarter of 2004, all of the issued
and outstanding shares of our Series Y preferred stock and 6,000 of the issued
and outstanding shares of our Series X preferred stock were converted into
shares of our common stock and all accrued dividends on these converted shares
were paid in shares of our common stock. We do not anticipate that any cash
dividends will be declared or paid on our common stock in the foreseeable
future.

EQUITY COMPENSATION PLAN INFORMATION

      The following table provides information as of March 22, 2004 with respect
to the shares of the Company's common stock that may be issued under the
Company's existing equity compensation plans:

<TABLE><CAPTION>
-----------------------------------------------------------------------------------------------------
<S>                        <C>                <C>                   <C>
                               Number of        Weighted Average     Number of Securities Remaining
                            Securities to be    Exercise Price of     Available for Future Issuance
                              Issued upon      Outstanding Options   Under Equity Compensation Plans
                              Exercise of                            (Excluding Securities Reflected
                              Outstanding                                  in the first Column)
   Plan Category                Options
-------------------------- ------------------ --------------------- ---------------------------------
   Equity
   Compensation Plans
   Approved by
   Shareholders                38,194,897             $0.81                    12,373,979
-------------------------- ------------------ --------------------- ---------------------------------
   Equity
   Compensation Plans
   Not Approved by
   Shareholders                      --                 --                           --
-------------------------- ------------------ --------------------- ---------------------------------
   Total                       38,194,897             $0.81                    12,373,979
-------------------------- ------------------ --------------------- ---------------------------------
</TABLE>

                                       20
<PAGE>

RECENT SALES OF UNREGISTERED SECURITIES

      Between July 2003 and March 2004, we issued 37,710,788 shares of our
common stock upon conversion of 15,000 shares of our Series Y preferred stock
(33,890,669 shares upon conversion and 3,820,119 shares issued as dividends) and
we issued 35,650,165 shares of our common stock upon conversion of 6,000 shares
of our Series X preferred stock (33,333,333 shares upon conversion and 2,316,832
shares issued as dividends).

      No underwriters were involved in the foregoing sales of securities. Such
sales were made in reliance upon an exemption from the registration requirements
of the Securities Act of 1933, as amended, set forth in Sections 3(a)(9) and
4(2) thereof.




























                                       21
<PAGE>
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

       The following historical data for the years ended December 31, 2003,
2002, 2001, 2000 and 1999, except for "Other Data," has been derived from our
financial statements audited by PricewaterhouseCoopers LLP, independent
accountants. Our balance sheets at December 31, 2003 and 2002 and the related
statements of operations, changes in stockholders' equity and cash flows for the
years ended December 31, 2003, 2002 and 2001 and notes thereto appear elsewhere
in this annual report on Form 10-K.

       Reference is also made to "Item 7 - 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.

<TABLE><CAPTION>
                                                                          Year Ended December 31,
                                                 --------------------------------------------------------------------------
                                                    2003            2002            2001            2000            1999
                                                 --------------------------------------------------------------------------
<S>                                              <C>             <C>             <C>             <C>             <C>
STATEMENT OF OPERATIONS DATA:
Revenue                                          $   71,333      $   45,530      $   41,969      $   17,789      $    1,313
Operating expenses:
Network (A)                                          51,452          33,470          44,451          30,599           1,641
Operations (A)                                       11,873          7, 949          45,752          32,112           5,974
General and administrative (A)                       12,200          11,403          25,229          17,974           4,782
Sales and marketing (A)                               8,642           6,969          13,188          25,263           6,848
Stock compensation                                      438           1,228           1,202           3,192           4,108
Depreciation and amortization                        16,359          20,332          28,043          21,133           1,831
                                                 --------------------------------------------------------------------------
Total operating expenses                            100,964          81,351         157,865         130,273          25,184

Operating loss                                      (29,631)        (35,821)       (115,896)       (112,484)        (23,871)

Interest income (expense), net                       (2,936)           (458)            455           6,730           1,889
Other (expense) income, net                          (2,430)            185             (13)             (9)             (6)
                                                 --------------------------------------------------------------------------

Net loss                                         $  (34,997)     $  (36,094)     $ (115,454)     $ (105,763)     $  (21,988)

Exchange of preferred stock                            --              --              --              --           (11,998)
Dividends on preferred stock                         (3,698)         (3,573)           (122)           --              --
Accretion of preferred stock                        (14,327)        (10,078)           (348)           --              --
                                                 --------------------------------------------------------------------------

Net loss applicable to common stockholders       $  (53,022)     $  (49,745)     $ (115,924)     $ (105,763)     $  (33,986)
                                                 --------------------------------------------------------------------------

NET LOSS PER COMMON SHARE DATA:
Net Loss per common share, basic and
diluted                                          $    (0.72)     $    (0.77)     $    (1.81)     $    (1.75)     $    (2.05)
Shares used in computing net loss per share          74,126          64,858          63,939          60,593          16,550
</TABLE>

                                       22
<PAGE>
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE><CAPTION>
                                                                          Year Ended December 31,
                                                 --------------------------------------------------------------------------
                                                    2003            2002            2001            2000            1999
                                                 --------------------------------------------------------------------------
<S>                                              <C>             <C>             <C>             <C>             <C>
CASH FLOW DATA:
Used in operating activities                     $  (13,715)     $  (17,706)     $  (62,989)     $  (74,986)     $   (6,343)
Used in investing activities                        (11,135)         (2,368)         (2,921)        (60,225)        (49,264)
Provided by financing activities                 $   27,311      $   12,107      $   12,871      $  141,960      $  121,142

OTHER DATA:
Reconciliation of net loss to adjusted EBITDA:
   Net loss                                      $  (34,997)     $  (36,094)     $ (115,454)     $ (105,763)     $  (21,988)
   Add:  Interest and other (income) expense,
             net                                      5,366             273            (442)         (6,721)         (1,883)
             Depreciation and amortization           16,359          20,332          28,043          21,133           1,831
             Stock compensation                         438           1,228           1,202           3,192           4,108
                                                 --------------------------------------------------------------------------
   Adjusted EBITDA (B)                           $  (12,834)     $  (14,261)     $  (86,651)     $  (88,159)     $  (17,932)
                                                 --------------------------------------------------------------------------

Reconciliation of Adjusted EBITDA to net
  cash used in operating activities:

Adjusted EBITDA                                  $  (12,834)     $  (14,261)     $  (86,651)     $  (88,159)     $  (17,932)

 Interest and other (expense) income, net              (450)           (444)            611           6,764           1,926
 Financing costs (deferrals) expenses                  (183)           --                49              21              14
 Bad debt expense                                     2,117           2,536           2,996             700              63
 Sales discounts                                        394           1,181           1,498             590            --
 Restructuring / impairment charges                    --              --            34,083           1,417            --
 Write off / sales of equipment                          46             555             229              (7)           --
 Net changes in  assets and liabilities              (2,805)         (7,273)        (15,804)          3,687           9,586
                                                 --------------------------------------------------------------------------
Net cash used in operating activities            $  (13,715)     $  (17,706)     $  (62,989)     $  (74,986)     $   (6,343)
                                                 ==========================================================================

Capital expenditures                             $    2,405      $    1,647      $    5,345      $   55,943      $   33,811

                                                                                December 31,
                                                 --------------------------------------------------------------------------
                                                    2003            2002            2001            2000            1999
                                                 --------------------------------------------------------------------------
Balance Sheet Data:
Cash, cash equivalents, restricted cash
  and marketable securities                      $   13,784      $   11,319      $   19,631      $   76,435      $   79,452
Total assets                                         59,061          53,496          81,024         194,806         117,632
Long-term obligations (including current
  portion)                                            5,529           4,565           7,463          14,114           3,056
Mandatorily redeemable convertible
  preferred stock                                    17,019          14,122             470            --              --
Stockholders' equity                             $   18,300      $   20,751      $   50,725      $  149,417      $  100,733
</TABLE>

                                       23
<PAGE>
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

      (A) Excluding stock compensation, depreciation and amortization.

      (B) Adjusted EBITDA, shown above under "Other Data", consists of net loss
excluding net interest and other income/expense, taxes, depreciation,
amortization of intangibles and non-cash stock compensation expense. Other
companies, however, may calculate Adjusted EBITDA differently from us. We have
provided Adjusted 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.
Adjusted EBITDA is not a measure determined under generally accepted accounting
principles. Adjusted 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,

      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, which consequently will affect 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

OUR BUSINESS

      We provide high-speed data communications, Internet access, and related
services to small

                                       24
<PAGE>
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

and medium sized businesses and branch offices of larger businesses and their
remote office users, throughout the United States, primarily utilizing digital
subscriber line ("DSL") and T-1 technology. In September of 2003, we expanded
our service offerings to business customers in select Mid-Atlantic and Northeast
markets to include integrated voice and data services using VoIP. Our networks
enable data transport over existing copper telephone lines at speeds of up to
1.5 megabits per second. Our product offerings also include Web hosting, domain
name system management, enhanced e-mail, on-line data backup and recovery
services, firewalls, nationwide dial-up services, private frame relay services
and virtual private networks.

      We sell directly to businesses, primarily through our own direct sales
force, and to third party resellers whose end users are typically business-class
customers. We deploy our own local communications equipment primarily in select
first and second tier cities. In certain markets where we have not deployed our
own equipment, we utilize the local facilities of other carriers to provide our
service.

OUR GROWTH STRATEGY

      In addition to our internal sales and marketing efforts, our strategic
goals have been focused on accelerating our growth and expanding our network and
customer base through select acquisitions of customer lines, assets and/or
businesses. During 2003, we completed the following strategically significant
acquisitions:

      o  In January 2003, we acquired the majority of Network Access Solutions
         Corporation's ("NAS") operations and assets, including operations and
         equipment in approximately 300 central offices extending from Virginia
         to Massachusetts, and approximately 11,500 subscriber lines (the "NAS
         Assets"). This acquisition significantly increased our facilities-based
         footprint in one of the largest business markets in the United States,
         providing us with increased opportunities to sell more higher-margin,
         facilities-based services. Currently, we operate equipment in
         approximately 490 central offices located in approximately 340 cities
         in the United States.

      o  In September 2003, we acquired substantially all of the assets and
         subscribers of TalkingNets, Inc., a voice and data communications
         provider that offered soft switched-based VoIP and high-speed data
         services to businesses. This acquisition gave us the capability to
         offer business customers in the business-intensive Mid-Atlantic and
         Northeast regions a carrier-class integrated voice and data service
         which utilizes VoIP. In December 2003, we introduced in the Washington,
         D.C. metropolitan region, an expanded range of VoIP products that
         offered integrated voice and data services utilizing DSL-based services
         in addition to our T-1 based services. In February 2004, we introduced
         our full suite of VoIP and data bundles in the New York City
         metropolitan area.

      We continuously identify and evaluate acquisition candidates, and in many
cases engage in discussions and negotiations regarding potential acquisitions.
Acquisition candidates include both subscriber lines and whole businesses. Our
discussions and negotiations may not result in an acquisition. Further, if we
make any acquisitions, we may not be able to operate any acquired businesses
profitably or otherwise successfully implement our expansion strategy. We intend
to continue to seek additional opportunities for further acquisitions, which we
believe represents a distinct opportunity to accelerate our growth. We may need
to obtain additional funding to finance additional acquisitions, accordingly, we
continue to engage and pursue discussions with potential investors.

                                       25
<PAGE>
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

      We also believe there are significant revenue growth opportunities for our
newly introduced VoIP suite of integrated voice and data services. We may also
seek additional funding to expand our voice network in order to accelerate this
growth opportunity.

OUR CASH FINANCINGS AND CONSTRAINTS

      Although we have made noticeable progress in reducing the amount of cash
used by our operations, we have not been able to finance our operations from
cash provided by operations. In 2003, 2002 and 2001, net cash used in our
operating activities was approximately $13,715, $17,706 and $62,989,
respectively. The reductions in cash used for operating activities as a percent
of revenues over the three-year period was primarily attributable to increased
revenues and related margins, primarily resulting from acquisitions, combined
with reduced operational expenses (network, operations, selling, general and
administrative expenses), primarily resulting from our restructuring and cost
containment efforts (discussed below).

      We also have incurred operating losses and net losses for each month since
our formation in 1998. As of December 31, 2003 and 2002, we had accumulated
deficits of approximately $319,488 and $284,491, respectively.

      In addition, our growth strategies have required significant capital and
cash investments. Our operating cash shortfalls and investments have been
financed principally with the proceeds from the sale of stock and from
borrowings, including equipment lease financings. Our most significant recent
financings include:

      o  In July 2003, we executed a note and warrant purchase agreement for the
         sale of $30,000 in senior secured promissory notes and issuance of
         warrants to purchase 157,894,737 shares of our common stock at an
         exercise price of $0.38 per share for an aggregate purchase price for
         the notes and warrants of $30,000. We used approximately $10,200 of the
         proceeds from this financing to prepay approximately $14,600 in
         pre-existing debt and lease obligations.

      o  In late 2001 and early 2002, we secured additional private equity
         financing from the sale of $35,000 of our Series X and Series Y
         preferred stock.

      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. Our business plan includes modest revenue growth for 2004
generated from internal direct marketing sales efforts and additional
operational cost savings to be obtained from streamlining our network and
further reducing discretionary and controllable costs. During the last quarter
of 2003 and the first quarter of 2004, we began implementing some of these cost
reduction measures, including a reduction-in-force of approximately 63 employees
on March 25, 2004. Accordingly, based on our current business plans and
projections as approved by our Board of Directors, we believe that our existing
cash and cash expected to be generated from operations will be sufficient to
fund our operating losses, capital expenditures, lease payments, and working
capital requirements into 2005. Failure to generate sufficient revenues, contain
certain discretionary spending or achieve certain other business plan objectives
could have a material adverse affect on our results of operations, cash flows
and financial position, including our ability to continue as a going concern.

      We intend to use our cash resources to finance our capital expenditures
and for our working capital and other general corporate purposes. We may also
need additional funding to pursue our strategic objective of accelerating our
growth through acquisition of complementary businesses, subscriber lines and
other assets. The amounts actually expended for these purposes will vary

                                       26
<PAGE>
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

significantly depending on a number of factors, including market acceptance of
our services, revenue growth, planned capital expenditures, cash generated from
operations, improvements in operating productivity, the extent and timing of
entry into new markets, and availability of and prices paid for acquisitions.

      Our cash requirements may vary based upon the timing and the success of
implementation of our business plan or if:

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

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

      o  we make acquisitions;

      o  we alter the schedule or targets of our business plan implementation;
         or

      o  we curtail and/or reorganize our operations.


      Our financial performance, and whether we achieve profitability or become
cash flow positive, will depend on a number of factors, including:

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

      o  amount, timing and pricing of customer revenue;

      o  availability, timing and pricing of acquisition opportunities, and our
         ability to capitalize on such opportunities;

      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 operational growth; and

      o  favorable outcome of federal and state regulatory proceedings and
         related judicial proceedings, including proceedings relating to the
         1996 Telecommunications Act and the Federal Communications Commissions'
         Triennial Review Order.

                                       27
<PAGE>
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

      There can be no assurance that we will be able to achieve our business
plan objectives or that we will achieve or maintain cash flow positive operating
results. If we are unable to generate adequate funds from our operations, we may
not be able to continue to operate our network, respond to competitive pressures
or fund our operations. As a result, we may be required to significantly reduce,
reorganize, discontinue or shut down our operations. Our financial statements do
not include any adjustments that might result from this uncertainty.

CRITICAL ACCOUNTING POLICIES, ESTIMATES AND RISKS

      Management's discussion and analysis of financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with generally accepted accounting principles. The
preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, including the
recoverability of tangible and intangible assets, disclosure of contingent
assets and liabilities as of the date of the financial statements, and the
reported amounts of revenues and expenses during the reported period. The
markets for our services are characterized by intense competition, rapid
technological development, regulatory and legislative changes, and frequent new
product introductions, all of which could impact the future value of our assets
and liabilities.

      We evaluate our estimates on an on-going basis. The most significant
estimates relate to revenue recognition, goodwill and other long-lived assets,
the allowance for doubtful accounts, income taxes, contingencies and litigation.
We base our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ materially from those estimates.

      The following is a brief discussion of the more significant accounting
policies and methods and the judgments and estimates used by us in their
application.

REVENUE RECOGNITION

      We recognize revenue in accordance with SEC Staff Accounting Bulletin No.
101 (SAB No. 101), "Revenue Recognition in Financial Statements", which requires
that four basic criteria must be met before revenue can be recognized: (1)
persuasive evidence of an arrangement exists; (2) delivery has occurred or
services rendered; (3) the fee is fixed and determinable; and (4) collectibility
is reasonably assured. Determination of criteria (3) and (4) are based on
management's judgments regarding the fixed nature of the fee charged for
services rendered and products delivered and the collectibility of those fees.

      Revenue is recognized pursuant to the terms of each contract on a monthly
service fee basis, which varies based on the speed of the customer's Internet
connection and the services ordered by the customer. The monthly fee includes
phone line charges, Internet access charges, the cost of the equipment installed
at the customer's site and the other services we provide, as applicable. Revenue
that is billed in advance of the services provided is deferred until the
services are rendered. Revenue related to installation charges is also deferred
and amortized to revenue over 18 months. Related direct costs incurred (up to
the amount of deferred revenue) are also deferred and amortized to expense over
18 months. Any excess direct costs over installation charges are charged to
expense as incurred. In certain instances, we negotiate credits and allowances
for

                                       28
<PAGE>
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

service related matters. We establish a reserve for such credits based on
historical experience. From time to time we offer sales incentives to our
customers in the form of rebates toward select installation services and
customer premise equipment. We record a liability based on historical experience
for such estimated rebate costs, with a corresponding reduction to revenue.

      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 believe, is currently under-served. Although pricing is 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
might continue.

GOODWILL AND OTHER LONG-LIVED ASSETS

      We account for our long-lived assets in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 144, "ACCOUNTING FOR THE IMPAIRMENT
OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF" ("SFAS No.
144"), which 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.

      Effective January 1, 2002, we adopted SFAS No. 142, "GOODWILL AND OTHER
INTANGIBLE ASSETS" ("SFAS No. 142"). This statement requires that the
amortization of goodwill be discontinued and instead an impairment approach be
applied. The impairment tests were performed during the first quarter of 2002
and last quarters of 2002 and 2003, and will be performed annually hereafter (or
more often if adverse events occur) and are based upon a fair value approach
rather than an evaluation of the undiscounted cash flows. If impairment exists,
under SFAS No. 142, the resulting charge is determined by the recalculation of
goodwill through a hypothetical purchase price allocation of the fair value and
reducing the current carrying value to the extent it exceeds the recalculated
goodwill. We did not record any goodwill impairment adjustments resulting from
our impairment reviews during 2002 and 2003.

      Other long-lived assets, such as identifiable intangible assets and fixed
assets, are amortized or depreciated over their estimated useful lives. These
assets are reviewed for impairment whenever events or circumstances provide
evidence that suggests that the carrying amount of the assets may not be
recoverable, with impairment being based upon an evaluation of the identifiable
undiscounted cash flow. If impaired, the resulting charge reflects the excess of
the asset's carrying cost over its fair value.

      If market conditions become less favorable, future cash flows (the key
variable in assessing the impairment of these assets) may decrease and as a
result we may be required to recognize impairment charges.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

      We maintain an allowance for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. We
primarily sell our services directly to end users mainly consisting of small to
medium sized businesses, but we also sell our services to

                                       29
<PAGE>
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

certain resellers, such as to Internet service providers ("ISPs"). We believe
that we do not have significant exposure or concentrations of credit risk with
respect to any given customer, as no customer accounted for more than 5% of
annual revenues for the years ended December 31, 2003, 2002 or 2001,
respectively. However, if the country or any region we service, experiences an
economic downturn, the financial condition of our customers could be adversely
affected, which could result in their inability to make payments to us. This
could require additional provisions for allowances. In addition, a negative
impact on revenue related to those customers may occur.

      With the acquisition of the NAS Assets on January 10, 2003, we acquired a
number of end users, some of whom we service indirectly through various ISPs. We
sell our services to such ISP's who then resell such services to the end user.
We have some increased exposure and concentration of credit risk pertaining to
such ISPs. However, no individual customer accounted for more than 5% of revenue
for 2003.

INVENTORY

      Inventories consist of modems and routers (customer premise equipment or
"CPE") which we either sell or lease to customers, and are required to establish
a high speed DSL or T-1 digital connection. Inventories are stated at the lower
of cost or market. Cost of inventory is determined on the "first-in, first-out"
("FIFO") or average cost methods. We establish inventory reserves for excess,
obsolete or slow-moving inventory based on changes in customer demand,
technology developments and other factors.

INCOME TAXES

      We use 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.

      We have not generated any taxable income to date and, therefore, have not
paid any federal income taxes since inception. Our state and federal net
operating loss carryforwards begin to expire in 2004 and 2019, respectively. Use
of our net operating loss carryforwards may be subject to significant annual
limitations resulting from a change in control due to securities issuances
including our sales of Series X preferred stock and Series Y preferred stock in
2001 and 2002 and from the sale of $30,000 in notes and warrants in 2003. We are
currently assessing the potential impact resulting from these transactions. We
have 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.

LITIGATION

      From time to time, we may be involved in litigation concerning claims
arising in the ordinary course of our business, including claims brought by
current or former employees and claims related to acquisitions. We record
liabilities when a loss is probable and can be reasonably estimated. These
estimates are based on an analysis made by legal counsel who consider
information known at the time. We believe we have made reasonable estimates in
the past; however, court decisions could cause liabilities to be incurred in
excess of estimates.

                                       30
<PAGE>
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

      In June 2001, SFAS No. 143, "ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS"
("SFAS No. 143") was issued. SFAS No. 143 addresses financial accounting and
reporting for legal obligations associated with the retirement of tangible
long-lived assets and the associated retirement costs that result from the
acquisition, construction, or development and normal operation of a long-lived
asset. Upon initial recognition of a liability for an asset retirement
obligation, SFAS No.143 requires an increase in the carrying amount of the
related long-lived asset. The asset retirement cost is subsequently allocated to
expense using a systematic and rational method over the assets useful life. SFAS
No. 143 is effective for fiscal years beginning after June 15, 2002. The
adoption of this statement on January 1, 2003, did not have a material affect on
our financial position or results of operations.

      In August 2001, SFAS No. 144, "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL
OF LONG-LIVED ASSETS" was issued. SFAS No. 144 supersedes SFAS No. 121,
"ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS TO BE DISPOSED OF" and
supercedes and amends certain other accounting pronouncements. SFAS No. 144
retains the fundamental provisions of SFAS No. 121 for recognizing and measuring
impairment losses on long-lived assets held for use and long-lived assets to be
disposed of by sale, while resolving significant implementation issues
associated with SFAS No. 121. Among other things, SFAS No. 144 provides guidance
on how long-lived assets used as part of a group should be evaluated for
impairment, establishes criteria for when long-lived assets are held for sale,
and prescribes the accounting for long-lived assets that will be disposed of
other than by sale. SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001. The adoption of SFAS No. 144 did not have an impact on our
financial position and results of operations in 2002 or 2003.

      In June 2002, SFAS No. 146, "ACCOUNTING FOR EXIT OR DISPOSAL ACTIVITIES"
("SFAS No. 146"). was issued. SFAS No. 146 addresses the accounting for costs to
terminate a contract that is not a capital lease, costs to consolidate
facilities and relocate employees, and involuntary termination benefits under
one-time benefit arrangements that are not an ongoing benefit program or an
individual deferred compensation contract. The provisions of the statement are
effective for disposal activities initiated after December 31, 2002. The
adoption of SFAS No. 146 did not have a material impact on our financial
position or results of operations.

      In December 2002, SFAS No. 148, "ACCOUNTING FOR STOCK-BASED COMPENSATION -
TRANSITION AND DISCLOSURE - AN AMENDMENT OF SFAS NO. 123" ("SFAS No. 148") was
issued. SFAS No. 148 amends SFAS No. 123 to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. As provided for in SFAS No. 148, the Company has elected not to
transition to the fair value based method of accounting for stock based employee
compensation; it has, however, adopted the amended disclosure requirements
provided under SFAS No. 148 and incorporated those requirements into its
financial statements.

      In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT
GUARANTEES OF INDEBTEDNESS OF OTHERS," ("FIN 45"). FIN 45 expands previously
issued accounting guidance and disclosure requirements for certain guarantees.
FIN 45 requires an entity to recognize an initial liability for

                                       31
<PAGE>
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

the fair value of an obligation assumed by issuing a guarantee. The disclosure
requirements of FIN 45 are effective for all financial statements issued after
December 15, 2002. The provision for initial recognition and measurement of the
liability will be applied on a prospective basis to guarantees issued or
modified after December 31, 2002. The adoption of FIN 45 did not have a material
affect on our financial position, results of operations or cash flows.

      In January 2003, the FASB issued FIN No. 46, "CONSOLIDATION OF VARIABLE
INTEREST ENTITIES." FIN No.46 requires that companies that control another
entity through interests other than voting interests should consolidate the
controlled entity. FIN No. 46 is effective for variable interest entities
created after January 31, 2003 and to any variable interest entities in which
the company obtains an interest after that date. FIN No. 46 was originally
effective for the quarter ending September 30, 2003 for variable interest
entities in which the company held a variable interest that it acquired before
February 1, 2003. However, in October 2003, the FASB deferred the effective date
for implementation of FIN No. 46 until December 31, 2003. Accordingly, we
adopted FIN No. 46 effective December 31, 2003 with no material impact on our
financial condition or results of operations.

      In April 2003, the FASB issued SFAS No. 149, "AMENDMENT OF STATEMENT 133
ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES." ("SFAS No. 149") SFAS No. 149
amends and clarifies certain derivative instruments embedded in other contracts,
and for hedging activities under SFAS No. 133. SFAS No. 149 was effective for
certain contracts entered into or modified after June 30, 2003. We adopted SFAS
No. 149 effective July 1, 2003 with no material impact on our financial
condition or results of operations.

      In May 2003, the FASB issued SFAS No. 150, "ACCOUNTING FOR CERTAIN
FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY"
("SFAS No. 150"). SFAS No. 150 specifies that freestanding financial instruments
within its scope constitute obligations of the issuer and that, therefore, the
issuer must classify them as liabilities. Such freestanding financial
instruments include mandatorily redeemable financial instruments, obligations to
repurchase the issuer's equity shares by transferring assets and certain
obligations to issue a variable number of shares. SFAS No. 150 was effective
immediately for all financial instruments entered into or modified after May 31,
2003. For all other instruments, SFAS No. 150 was effective at the beginning of
the third quarter of 2003. We adopted SFAS No. 150 effective July 1, 2003 with
no material impact on our financial condition or results of operations.

      In May 2003, The Emerging Issues Task Force ("EITF") released Issue No.
00-21 "REVENUE ARRANGEMENTS WITH MULTIPLE DELIVERABLES" ("EITF 00-21"). EITF
00-21 requires that: (i) revenue arrangements with multiple deliverables be
divided into separate units of accounting if: the deliverables in the
arrangement have value to the customer on a standalone basis; there is objective
and reliable evidence of the fair value of the undelivered items; and if the
arrangement includes a right of return of a delivered item, delivery or
performance of the undelivered items is considered probable and substantially in
control of the vendor, (ii) arrangement consideration should be allocated among
the separate units of accounting based on their relative fair values, and (iii)
applicable revenue recognition criteria should be considered separately for
separate units of accounting. EITF 00-21 became effective for revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. We
have not yet adopted EITF 00-21, but we have evaluated the impact of adoption,
and determined that it would not have a material effect on our financial
condition or results of operations.

                                       32
<PAGE>
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

RESULTS OF OPERATIONS

      The following table depicts our results of operations data and the
components of net loss as a percentage of revenue:

<TABLE><CAPTION>
                                                                    Year Ended December 31,
                                                                    -----------------------
                                                              2003           2002           2001
                                                              ----           ----           ----
<S>                                                          <C>            <C>            <C>
          Revenue                                            100.0%         100.0%         100.0%
                                                            --------------------------------------
          Operating expenses:
             Network (excluding stock compensation)           72.1%          73.5%         105.9%

             Operations
             (excluding stock compensation)                   16.6%          17.4%         109.0%

             General and administrative
             (excluding stock compensation)                   17.2%          25.0%          60.1%

             Sales and marketing
             (excluding stock compensation)                   12.1%          15.3%          31.4%

             Stock compensation                                0.6%           2.7%           2.9%

             Depreciation and amortization                    22.9%          44.7%          66.8%
                                                            --------------------------------------

          Total operating expenses                           141.5%         178.7%         376.1%

          Operating loss                                     (41.5)%        (78.7)%       (276.1)%

          Interest (expense) income, net                      (4.1)%         (1.0)%          1.0%

          Other (expense) income, net                         (3.4)%          0.4%           0.0%
                                                            --------------------------------------

          Net loss                                           (49.0)%        (79.3)%       (275.1)%
                                                            --------------------------------------

          Net loss applicable to common stockholders:
             Net loss                                        (49.0)%        (79.3)%       (275.1)%

             Dividends on preferred stock                     (5.2)%         (7.8)%         (0.3)%

             Accretion of preferred stock                    (20.1)%        (22.1)%         (0.8)%
                                                            --------------------------------------

          Net loss applicable to common stockholders         (74.3)%       (109.3)%       (276.2)%
                                                            --------------------------------------
</TABLE>

      REVENUE. Revenue is recognized pursuant to the terms of each contract on a
monthly service fee basis, which varies based on the speed of the customer's
broadband connection and the services ordered by the customer. The monthly fee
includes all phone line charges, Internet access charges, the cost of any leased
equipment installed at the customer's site and the other services we provide, as
applicable. Revenue that is billed in advance of the provision of services is
deferred until the services are provided. Revenue related to installation
charges is deferred and amortized to revenue over 18 months, which is the
average customer life of the existing customer

                                       33
<PAGE>
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

base. Related direct costs incurred (up to the amount of deferred revenue) are
also deferred and amortized to expense over 18 months. Any excess direct costs
over installation charges are charged to expense as incurred. In certain
instances, we negotiate credits and allowances for service related matters. We
establish a reserve against revenue for such credits based on historical
experience. From time to time we offer sales incentives to our customers in the
form of rebates toward select installation services and customer premise
equipment. We record a liability based on historical experience for such
estimated rebate costs, with a corresponding reduction to revenue.

      Revenue increased to approximately $71,333 for the year ended December 31,
2003, from approximately $45,530 for the year ended December 31, 2002, and from
approximately $41,969 for the year ended December 31, 2001. Revenue increased
primarily due to the expansion of our network, the increased number of customers
subscribing for our services and contributions from acquisitions of certain
network assets, equipment and associated subscriber lines of NAS during 2003,
certain subscriber lines of Broadslate Networks, Inc. ("Broadslate") and Abacus
America, Inc. ("Abacus") during 2002 and certain subscriber lines of Covad
Communications, Inc. ("Covad") under its Safety Net program, and Zyan
Communications, Inc. ("Zyan") during 2001. The revenue attributable to
contributions from acquired businesses was approximately $23,013, $2,069 and
$5,326 for the years ended December 31, 2003, 2002 and 2001, respectively.

       NETWORK EXPENSES. Our network expenses include costs related to network
engineering and network field operations personnel, costs for telecommunications
lines between customers, central offices, network service providers and our
network, costs for rent and power at our central offices, costs to connect to
the Internet, costs of customer line installations and the costs of customer
premise equipment when sold to our customers. We lease high-speed lines and
other network capacity to connect our central office equipment and our network.
Costs incurred to connect to the Internet are expected to vary as the volume of
data communications traffic generated by our customers varies.

      Network expenses increased to approximately $51,452 for the year ended
December 31, 2003, from approximately $33,470 for the year ended December 31,
2002. The increase in network expenses between 2003 and 2002 of approximately
$17,982 was primarily attributed to increased telecommunications expenses of
approximately $16,299 and increased network engineering and field operations
personnel expenses of approximately $1,279 resulting from our acquisition of the
NAS Assets. The increase was also attributable to increased subcontract labor
and consulting fees of approximately $886 related to increased customer
installations and the elimination of certain duplicate central offices, and was
partially offset by net decreases in miscellaneous other expenses of
approximately $483. Network expenses decreased to $33,470 for the year ended
December 31, 2002, from approximately $44,451 for the year ended December 31,
2001. The decrease in network expenses between 2002 and 2001 of approximately
$10,980 was primarily attributable to decreased telecommunications expenses
resulting from our restructuring and cost containment efforts during 2001 (see
Restructuring and Impairment Charges, below).

      OPERATIONS EXPENSES. Our operations expenses include costs related to
customer care, customer provisioning, customer billing, customer technical
assistance, purchasing, headquarters facilities operations, operating systems
maintenance and support and other related overhead expenses.

      Operations expenses increased to approximately $11,873 for the year ended
December 31, 2003, from $7,949 for the year ended December 31, 2002. The
increase in operations expenses

                                       34
<PAGE>
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

between 2003 and 2002 of approximately $3,924 was primarily attributed to
increases in operations personnel expenses of approximately $2,346, other
outside services of approximately $1,230, equipment costs of approximately $95
and net increases in other miscellaneous expenses of approximately $253. All
such increases were primarily associated with the acquisition of the NAS Assets.
Operations expenses decreased to approximately $7,949 for the year ended
December 31, 2002, from approximately $45,752 for the year ended December 31,
2001. The decrease in operations expenses between 2002 and 2001 of approximately
$37,803 was primarily due to decreased expenses resulting from our cost
containment efforts during 2001. These included reductions in restructuring
charges of approximately $31,511, reductions of approximately $3,739 in salaries
and benefits, reductions of approximately $1,349 in professional and consulting
services, reductions of approximately $922 in equipment costs and reductions of
approximately $282 in travel and entertainment and other expenses due to our
cost containment efforts.

      GENERAL AND ADMINISTRATIVE. Our general and administrative expenses
consist primarily of costs relating to human resources, finance, executive,
administrative services, recruiting, insurance, legal and auditing services,
leased office facilities rent and bad debt expenses.

      General and administrative expenses increased to approximately $12,200 for
the year ended December 31, 2003, from approximately $11,403 for the year ended
December 31, 2002. The increase from 2002 to 2003 of approximately $797 was
primarily due to increases in professional fees of approximately $750, tax
expenses of approximately $735, and miscellaneous expenses of approximately
$320. These increased expenses were partially offset by reductions in salaries
and benefits of approximately $266, bad debt expenses of approximately $481, and
insurance expenses of approximately $262. General and administrative expenses
decreased to approximately $11,403 for the year ended December 31, 2002, from
approximately $25,229 for the year ended December 31, 2001. The decrease from
2002 to 2001 of approximately $13,826 was primarily due to decreases resulting
from our restructuring and cost containment efforts during 2001 and included
reductions in restructuring and impairment charges of approximately $6,998,
professional fees of approximately $1,897, salaries and benefits of
approximately $2,000, sales, use, property and other taxes of approximately
$1,955, bad debt expense of approximately $542 and other expenses of
approximately $755. These reductions were partially offset by increased
insurance costs of approximately $321.

       In March 2002, we filed an application with the Connecticut Department of
Revenue Services for research and development expenditure credits for the 1999
and 2000 calendar years. The credits were approved as a reduction against our
corporation business tax. With regard to credits approved for the 2000 calendar
year, we were entitled to elect a cash refund at 65 percent of the approved
credit. We elected to receive the 2000 calendar year credit as a cash refund of
approximately $1,301. The 1999 calendar year credit of approximately $671 is
available as a carryforward offset to future State of Connecticut business
taxes. In July of 2002, we received the first installment of the cash refund
pertaining to the 2000 calendar year of approximately $1,000. In July, 2003, we
received the second installment of approximately $150 (which was recorded as a
reduction of general and administrative expenses) with the remaining balance of
approximately $151 payable in July 2004. Upon receipt of the research and
development credits, we were obligated to pay approximately $402 to a
professional service provider as a result of a contingent fee arrangement for
professional services in connection with obtaining such credits. For the year
ended December 31, 2002, we recorded the $1,000 refund as a reduction in our
state corporate franchise tax expenses which are included in general and
administrative expenses, and the $402 contingent fee as professional services
expenses, also included in general and administrative expenses.

                                       35
<PAGE>
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

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

      Sales and marketing expenses increased to approximately $8,642 for the
year ended December 31, 2003, from approximately $6,969 for the year ended
December 31, 2002. The increase in sales and marketing expenses during 2003 of
approximately $1,673 was primarily due to increases in salaries and benefits
expenses of approximately $1,685 and miscellaneous expenses of approximately
$128 which were partially offset by reductions in advertising expense of
approximately $140. Sales and marketing expenses decreased to approximately
$6,969 for the year ended December 31, 2002, from approximately $13,188 for the
year ended December 31, 2001. The decrease in sales and marketing expenses
during 2002 of approximately $6,219 was primarily due to decreased costs that
resulted from our restructuring and cost containment efforts during 2001,
including reductions in advertising and direct mail marketing expenses of
approximately $2,414, salaries and benefits of approximately $1,880,
professional and consulting services of approximately $1,752 and other expenses
of approximately $173.

       STOCK COMPENSATION. We incurred non-cash stock compensation expenses as a
result of the granting of stock and stock options to employees, directors and
members of our former board of advisors 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 for initial grants and 36 months
for subsequent grants. Unvested options for terminated employees are cancelled
and the value of such options is recorded as a reduction of deferred
compensation with an offset to additional paid-in-capital.

      Non-cash stock compensation expenses were approximately $438, $1,228 and
$1,202 for the years ended December 31, 2003, 2002 and 2001, respectively. The
unamortized balances of $0 and approximately $438, as of December 31, 2003 and
2002, respectively, were amortized over the remaining vesting period of each
grant.

      As of December 31, 2003 and 2002, options to purchase 18,671 and 23,877
shares of common stock, respectively, were outstanding, which were exercisable
at weighted average exercise prices of $1.07 and $0.98 per share, respectively.

      DEPRECIATION AND AMORTIZATION. Depreciation and amortization is primarily
attributable to the following: (i) depreciation of network and operations
equipment and Company-owned modems and routers installed at customer sites, (ii)
depreciation of information systems and computer hardware and software, (iii)
amortization and depreciation of the costs of obtaining, designing and building
our collocation space and corporate facilities and (iv) amortization of
intangible capitalized costs pertaining to acquired businesses and customer line
acquisitions.

      Depreciation and amortization expenses were approximately $16,359, $20,332
and $28,043 for the years ended December 31, 2003, 2002 and 2001, respectively.
The decrease in depreciation and amortization expenses during 2003 of
approximately $3,973 was primarily attributable to certain intangible and fixed
assets having become fully depreciated and amortized during 2003 and 2002,
resulting in a decline in depreciation and amortization expense of approximately
$7,371, which was partially offset by increased depreciation and amortization
expenses relating to our acquisition of the NAS Assets and the TalkingNets
Assets and associated

                                       36
<PAGE>
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

subscriber lines of approximately $3,398. The decrease in depreciation and
amortization expenses during 2002 of approximately $7,711 primarily resulted
from restructuring write-offs of central office equipment and impairment
write-offs of intangible assets taken during 2001 (see "Restructuring and
Impairment Charges" below).

      Also, in accordance with SFAS No. 142 (see Critical Accounting Policies,
Estimates and Risks, discussed above), we discontinued amortization of goodwill
beginning January 1, 2002, and completed an impairment review during the first
and last quarters of 2002 and the last quarter of 2003. We did not record any
impairment adjustments resulting from these impairment reviews and will continue
to make annual reviews, unless a change in circumstances requires a review in
the interim. Consequently, amortization expense related to our goodwill was
approximately $2,484 higher for the year ended December 31, 2001 than for the
year ended December 31, 2002.

      Our identified intangible assets consist of customer lists, which are
amortized over two years. Amortization expense of intangible assets for the
years ended December 31, 2003, 2002 and 2001 were approximately $2,756, $5,349
and $7,925, respectively. Accumulated amortization of customer lists as of
December 31, 2003 and 2002 was approximately 14,496 and $11,740, respectively.
The expected future amortization of customer lists as of December 31, 2003 is
approximately $954 in 2004 and approximately $56 in 2005.

      Depreciation expense pertaining to assets for our network and operations
was approximately $12,300, $13,719 and $18,132 for the years ended December 31,
2003, 2002 and 2001, respectively. Depreciation and amortization expenses
pertaining to assets related to general and administrative expenses was
approximately $4,059, $6,613 and $9,911 for the years ended December 31, 2003,
2002 and 2001, respectively.

      INTEREST INCOME (EXPENSE), NET. For the year ended December 31, 2003, net
interest expense of approximately $2,936 included approximately $3,086 in
interest expense, partially offset by $150 in interest income. For the year
ended December 31, 2002, net interest expense of approximately $458 included
approximately $790 in interest expense, partially offset by $332 in interest
income. Net interest income of approximately $455 for the year ended December
31, 2001 included $1,718 of interest income, partially offset by $1,263 of
interest expense. The increase in interest expense during 2003 of approximately
$2,296 was primarily attributable to the amortization of deferred non-cash
financing costs of approximately $1,266 which related to the warrants issued
under the Note and Warrant Purchase Agreement (as defined and discussed below),
and the amortization of deferred non-cash financing costs of approximately $909
which related to the warrants issued in consideration for loan guarantees under
our Reimbursement Agreement (as defined and discussed below), partially offset
by decreased other interest expense due to lower debt balances and borrowing
rates. The decrease in interest income in 2003 and 2002 was caused by lower
interest rates on significantly lower cash and investment balances. The decrease
in interest expense during 2002 of approximately $473 was primarily the result
of reductions in debt and capital lease obligations.

      OTHER (EXPENSE) INCOME, NET. For the year ended December 31, 2003, net
other expense of approximately $2,430 included expenses that were primarily
attributable to the loss on the sale of assets of approximately $115, the
write-off of approximately $184 in unamortized loan origination fees and
approximately $5,747 of unamortized deferred non-cash financing costs which
related to the warrants issued in consideration for loan guarantees under our
Reimbursement Agreement (discussed below). These items were written-off as a
result of the loan repayment and cancellation of the Credit Agreement and
Reimbursement Agreement subsequent to our $30,000 note and warrant financing on
July 18, 2003. These write-offs were

                                       37
<PAGE>
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

partially offset by miscellaneous income of approximately $116 and a non-cash
gain of $3,500 recorded in August 2003, resulting from the $1,500 settlement of
the $5,000 note payable to NAS. For the year ended December 31, 2002, net other
income of approximately $185 included approximately $180 in gains on sale of
assets and approximately $5 in miscellaneous income. Net other expense of
approximately $13 for the year ended December 31, 2001 included approximately
$131 of net losses on sale of assets, partially offset by approximately $118 of
other income primarily from the sale of customer lines.

      RESTRUCTURING AND IMPAIRMENT CHARGES. In December 2000, we initiated a new
business plan strategy designed to conserve our capital, reduce our losses and
extend our cash resources. This strategy included the following actions: (i)
further network expansion was curtailed; (ii) network connections to 100 central
offices were suspended; (iii) certain facilities were vacated and consolidated;
(iv) operating expenses were reduced; and (v) headcount was reduced by
approximately 140 employees. These actions resulted in a restructuring charge of
approximately $3,542. The components of the restructuring charge were: (i)
approximately $448 relating to severance expense for the 140 employees; (ii)
approximately $1,078 for estimated costs resulting from the consolidation of our
office facilities by vacating office space located in Milford, Connecticut;
Santa Cruz, California; Atlanta, Georgia and Chantilly, Virginia, and (iii)
approximately $2,016 for termination costs and write-offs associated with our
decision to not accept certain central office collocation applications
previously applied for, and to forego the completion of our build-out of certain
other central offices.

      At December 31, 2000, approximately $362 of severance costs and
approximately $1,416 of capitalized collocation application fees had been
charged against the restructuring reserves. The remaining reserve balance of
approximately $1,764 was included in our accrued liabilities at December 31,
2000.

      As part of our restructuring in December 2000, we vacated certain office
space in Milford, Connecticut and Chantilly, Virginia and did not occupy certain
space in Santa Cruz, California. During 2001, we vacated our office space
located in Atlanta, Georgia and Santa Cruz, California. As of December 31, 2001,
we were successful in terminating our lease for office space in Chantilly,
Virginia and in assigning our lease in Atlanta, Georgia. During 2001, we also
entered into a sublease agreement which ended in July, 2003 on our office space
in Santa Cruz, California. In February 2002, we were successful in terminating
our obligations under the lease for office space in Milford, Connecticut.

      In March 2001, we re-evaluated our restructuring reserve and booked an
increase in the reserve of approximately $831, which was primarily related to
delays in subleasing our vacated facilities and additional estimated costs
pertaining to our suspended central offices.

      In June 2001, due to the lack of liquidity in the financial markets, we
further re-evaluated our business plans and determined that additional actions
were necessary to further reduce our operating losses, cash burn rate and total
funding requirements. These actions included: (i) closure of approximately 350
central offices; and (ii) an additional reduction-in-force of approximately 90
employees. These actions resulted in additional restructuring and impairment
charges of approximately $32,503. Included in this amount were: (i)
approximately $272 relating to severance expenses for the 90 employees; (ii)
approximately $26,079 for the costs associated with the our decision to close
350 central offices, which includes approximately $2,545 relating to termination
and equipment removal fees and approximately $23,534 in write-off of fixed
assets; (iii) approximately $1,641 for additional estimated costs resulting from
delays and expected losses in subleasing vacated office space located in Santa
Cruz, California; Atlanta,

                                       38
<PAGE>
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Georgia; Milford, Connecticut; and Chantilly, Virginia; (iv) $1,356 for
write-downs of additional equipment no longer in use; and (v) $3,155 for
impairments of goodwill. The goodwill impairment analysis was accomplished by
comparing the carrying value of the assets with the expected future net cash
flows generated over the remaining useful life of the assets. Since the carrying
value was more than the expected future net cash flows, the goodwill was reduced
to the net present value of the expected future net cash flows. Of this amount,
$2,124 related to a reduction in the goodwill for our acquisition of Tycho
Networks, Inc. ("Tycho") and $1,031 related to a reduction in the goodwill for
our acquisition of certain assets of Trusted Net Media Holdings, LLC ("Trusted
Net"). These reductions in goodwill resulted in decreases in monthly
amortization expense from approximately $57 to approximately $5 for Tycho, and
from approximately $44 to approximately $21 for Trusted Net.

      During the third quarter 2001, due to limited available financing for our
operations and other factors, we again re-evaluated our business plans and
determined that additional actions were necessary to further reduce our
operating losses, cash burn rate and total funding requirements. These actions
included closure of the Tycho and Trusted Net facilities in Santa Cruz,
California and Atlanta, Georgia, respectively, and our decision not to install
equipment in 100 new central offices. These actions resulted in additional
restructuring and impairment charges of approximately $4,748. Included in this
amount were: (i) increases of approximately $4,451 relating to the write-off of
equipment; (ii) approximately $376 for additional estimated costs relating to
the delays and losses in subleasing vacated office space located in Santa Cruz,
California and Milford, Connecticut; (iii) approximately $246 in additional
costs for equipment removal fees associated with our previous decision to close
certain central offices; and (iv) approximately $800 for impairments of
goodwill. These increases in the restructuring reserve were partially offset by
a reduction of approximately $1,125 in previously reserved amounts relating to
estimated termination fees associated with our previous decision to close
certain central offices, as we were successful in negotiating significantly
reduced fees at many of the closed central office locations. The goodwill
impairment analysis was accomplished by comparing the carrying value of the
assets with the expected future net cash flows generated over the remaining
useful life of the assets. As a result of this analysis, expected future net
cash flows were determined to be insignificant and, as the carrying value was
more than these expected future net cash flows, the balance of goodwill was
written off. Of this amount, approximately $170 related to a reduction in the
goodwill for the acquisition of Tycho and approximately $630 related to a
reduction in the goodwill for our acquisition of certain assets of Trusted Net.

      During the fourth quarter 2001, we had an additional reduction in force of
approximately 84 employees. This resulted in an additional restructuring charge
for severance of approximately $164, which was partially offset by a reduction
of approximately $153 in previously reserved amounts related to the write-down
of certain fixed assets. In addition, we re-classified amounts previously
reserved for equipment removal to estimated termination fees as we were
successful in negotiating reduced fees for equipment removal at many of the
closed central office locations. In addition, our impairment analyses of
long-lived assets resulted in a $500 impairment write-off of a long-term
investment.

      During 2003, we charged approximately $647 against our restructuring
reserves. Of this amount, approximately $315 related to payment of certain
termination fees associated with the closure of certain central offices during
2001, and approximately $332 related to facilities expense associated with the
Company's vacated offices.

      The following table summarizes the additions and charges to the
restructuring reserve from December 2000 through December 2003, and the
remaining reserve balances at December 31, 2003:

                                       39
<PAGE>
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE><CAPTION>
                                              CENTRAL      CENTRAL     FIXED                  IMPAIRMENT
                                              OFFICE       OFFICE      ASSET    IMPAIRMENT        OF
                                  FACILITY     TERM.       EQUIP.      WRITE        OF        LONG-TERM
                      SEVERANCE    LEASES      FEES        REMOVAL      OFF      GOODWILL     INVESTMENT     TOTAL
                      --------    --------   --------     --------   --------    --------      --------    --------
<S>                  <C>         <C>        <C>          <C>        <C>         <C>           <C>         <C>
Reserve balance at
  Dec. 31, 2000       $    86     $ 1,078    $   600      $   --     $   --      $   --        $   --      $ 1,764

Additions to the
  reserve                 436       2,408        215        1,451     29,628       3,955           500      38,593

Charges to the
  reserve                (522)     (2,290)      (500)      (1,451)   (29,628)     (3,955)         (500)    (38,846)
                      --------    --------   --------     --------   --------    --------      --------    --------
Reserve balance at
  Dec. 31, 2001           --        1,196        315          --         --          --            --        1,511

Charges to the
  reserve                 --         (576)       --           --         --          --            --         (576)
                      --------    --------   --------     --------   --------    --------      --------    --------
Reserve balance at
  Dec. 31, 2002           --          620        315          --         --          --            --          935

Additions to the
  reserve                 --          252        --           --         --          --            --          252

Charges to the
  reserve                 --         (332)      (315)         --         --          --            --         (647)
                      --------    --------   --------     --------   --------    --------      --------    --------
Reserve balance at
  Dec. 31, 2003       $   --      $   540    $   --       $   --     $   --      $   --        $   --      $   540
                      --------    --------   --------     --------   --------    --------      --------    --------
</TABLE>

      The restructuring reserve additions for the year ended December 31, 2001
of approximately $38,593 included approximately $31,528 in network and
operations expenses, approximately $6,998 in general and administrative
expenses, and approximately $67 in sales and marketing expenses on the
consolidated statements of operations. There were no additions to restructuring
reserves for the year ended December 31, 2002. The remaining restructuring
reserve balance at December 31, 2002, of approximately $935, was included in our
accrued liabilities and represented approximately $620 for anticipated costs
pertaining to our vacated office space in Santa Cruz, California and
approximately $315 for anticipated costs pertaining to our closed central
offices which we had been disputing. During the year ended December 31, 2003, we
increased our reserve for vacated facilities by $252 as a sublet tenant vacated
our Santa Cruz facility and we currently do not anticipate any additional
sublets. At December 31, 2003, the remaining restructuring reserve balance for
our leased Santa Cruz facility of approximately $540 was included in our accrued
liabilities.

      Net Loss. For reasons explained above, net loss of approximately $34,997
for the year ended December 31, 2003, decreased from approximately $36,094 for
the year ended December 31, 2002 and decreased from approximately $115,454 for
the year ended December 31, 2001.

LIQUIDITY AND CAPITAL RESOURCES

      We have financed our capital expenditures, acquisitions and operations
primarily with the proceeds from the sale of stock and from borrowings,
including equipment lease financings. As

                                       40
<PAGE>
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

of December 31, 2003, we had cash and cash equivalents of approximately $13,784
and working capital of approximately $5,725.

      CASH PROVIDED BY FINANCING ACTIVITIES. Net cash provided by financing
activities in the years ended December 31, 2003, 2002 and 2001, was
approximately $27,311, $12,107 and $12,871, respectively. For 2003, this cash
was provided primarily from the sale of our senior secured notes and warrants
issued in accordance with the Note and Warrant Purchase Agreement we entered
into in July, 2003. For 2001 and 2002, this cash was provided primarily from the
sale of our preferred 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.

      DETAILS OF CASH FROM FINANCING ACTIVITIES. From time to time we have
entered into equipment lease financing arrangements with vendors. In the
aggregate, there was approximately $155 and $4,565 outstanding under capital
leases at December 31, 2003 and 2002, respectively.

      In November and December of 2001 and March of 2002, we received proceeds
of $6,000, $4,000 and $10,000, respectively, from the sale of 6,000, 4,000 and
10,000 shares, respectively, of mandatorily redeemable convertible Series X
preferred stock (the "Series X Preferred Stock") before direct issuance costs of
approximately $189.

      In December 2001, we received proceeds of $6,469 from the sale of 6,469
shares of mandatorily redeemable convertible Series Y preferred stock (the
"Series Y Preferred Stock") before direct issuance costs of $300. In addition,
in December 2001, we received proceeds of $3,531 from the issuance of promissory
notes to the Series Y Preferred Stock investors. In May 2002, we received net
proceeds of $5,000 from the sale of 8,531 additional shares of Series Y
Preferred Stock and, pursuant to the provisions of the Series Y Preferred Stock
Purchase Agreement, the $3,531 in promissory notes issued to the Series Y
Preferred Stock investors were cancelled.

      We entered into a Revolving Credit and Term Loan Agreement, dated as of
December 13, 2002 (the "Credit Agreement"), with a commercial bank providing for
a revolving line of credit of up to $15,000 (the "Commitment"). Interest on
borrowings under the Credit Agreement was payable on at 0.5% percent above the
Federal Funds Effective Rate. Our ability to borrow amounts available under the
Credit Agreement was subject to the bank's receipt of a like amount of
guarantees from certain of our investors and/or other guarantors. On February 3,
2003, we borrowed $6,100 under the Credit Agreement. As of March 3, 2003,
certain of our investors had guaranteed $9,100 under the Credit Agreement. On
July 18, 2003, we repaid the $6,100 outstanding balance plus accrued interest,
and terminated the Credit Agreement. We wrote off approximately $184 of the
related unamortized balance of loan origination fees.

      We entered into a Reimbursement Agreement, dated as of December 27, 2002
(the "Reimbursement Agreement"), with VantagePoint and Columbia and other
holders of our Series X Preferred Stock and Series Y Preferred Stock or their
affiliates (the "Guarantors"), and a related Security Agreement of even date
therewith. Pursuant to the terms of the Reimbursement Agreement, on December 27,
2002, VantagePoint and Columbia issued guarantees in an aggregate amount of
$6,100 to support certain of our obligations under the Credit Agreement. On July
18, 2003, in connection with the termination of the Credit Agreement, the
guarantees, Reimbursement Agreement and related Security Agreement were
terminated.

                                       41
<PAGE>
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

      Pursuant to the terms of the Reimbursement Agreement, on December 27,
2002, we issued warrants to purchase 12,013,893 shares of our common stock to
VantagePoint and Columbia, in consideration for their guarantees aggregating
$6,100. All such warrants have a ten year life and an exercise price of $0.50
per share. On March 26, 2003, we issued additional warrants, exercisable for ten
years, to purchase a total of 936,107 shares of our common stock at $0.50 per
share, to VantagePoint and Columbia, bringing the total number of warrants
issued in connection with the Reimbursement Agreement to 12,950,000. On February
3, 2003, we borrowed $6,100 on the Credit Agreement and the Guarantors'
guarantees of the subject loan became effective.

      On February 3, 2003, we valued the 12,950,000 warrants at $0.514 each with
a total value of approximately $6,656. The valuation was performed using a
Black-Scholes valuation model with the following assumptions: (i) a risk free
interest rate of 4.01% (ten-year Treasury rate), (ii) a zero dividend yield,
(iii) a ten year expected life, (iv) an expected volatility of 153%, (v) an
option exercise price of $0.50 per share and (vi) a current market price of
$0.52 per share (the closing price of our common stock on February 3, 2003).
Since the warrants were issued in consideration for loan guarantees, which
enabled us to secure financing at below market interest rates, we recorded their
value as a deferred debt financing cost to be amortized to interest expense over
the term of the loan (approximately 57 months) using the "Effective Interest
Method" of amortization. On July 18, 2003, we repaid our outstanding loan
balance that was secured by these loan guarantees, and terminated the Credit
Agreement. Accordingly, we wrote-off approximately $5,747 of the related
unamortized balance of deferred financing costs to other expense. For year ended
December 31, 2003, expense relating to amortized deferred financing costs
approximated $909.

      On March 3, 2003, we and VantagePoint entered into Amendment No. 1 to the
Reimbursement Agreement, pursuant to which VantagePoint increased its guarantee
by $3,000 bringing the aggregate guarantees by all Guarantors under the
Reimbursement Agreement, as amended, to $9,100. As consideration for
VantagePoint's increased guarantee, if we closed an equity financing on or
before December 3, 2003, we were authorized to issue VantagePoint additional
warrants to purchase the type of equity securities issued by us in such equity
financing. The number of such additional warrants would be determined by
dividing the per share price of such equity securities into a thousand dollars.
Accordingly, since we closed a financing on July 18, 2003, we issued to
VantagePoint in December 2003, additional warrants with a three-year life to
purchase 2,260,909 shares of our common stock at a per share price of $0.4423.

      On July 18, 2003, we entered into a Note and Warrant Purchase Agreement
(the "Note and Warrant Purchase Agreement") with Deutsche Bank AG London, acting
through DB Advisors LLC as Investment Agent ("Deutsche Bank"), VantagePoint
Venture Partners III (Q), L.P., VantagePoint Venture Partners III, L.P.,
VantagePoint Communications Partners, L.P. and VantagePoint Venture Partners
1996, L.P. (collectively, the "Investors") relating to the sale and purchase of
an aggregate of (i) $30,000 in senior secured promissory notes (the "Notes") and
(ii) warrants to purchase 157,894,737 shares of our common stock for a period of
three years at an exercise price of $0.38 per share (the "Warrants"). The
aggregate purchase price for the Notes and Warrants was $30,000.

      Subject to the terms and conditions of the Note and Warrant Purchase
Agreement, we issued an aggregate of $30,000 in principal amount of Notes to the
Investors on July 18, 2003. Principal on the Notes is payable in a single
payment on July 18, 2006. The Notes provide for an annual interest rate of
1.23%, payable in cash, quarterly in arrears commencing on October 31, 2003,
unless we were to elect to capitalize such interest and pay it together with the
principal amount of the Notes at maturity on July 18, 2006. Pursuant to the
Security Agreement, our obligations

                                       42
<PAGE>
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

under the Notes are secured by a security interest in a majority of our personal
property and assets and certain of our subsidiaries. The terms of the Notes also
contain provisions that limit our ability to incur additional indebtedness and
place other restrictions on our business. We elected to defer all interest
payments on the Notes until further notice. Interest expense accrued on the
Notes for the year ended December 31, 2003 approximated $171.

      Subject to the terms and conditions of the Note and Warrant Purchase
Agreement, we issued a warrant to purchase 12,950,000 shares of our common stock
to Deutsche Bank on or about August 12, 2003. We issued the remaining Warrants
to purchase an aggregate of 144,944,737 shares of our common stock to Deutsche
Bank (105,471,053 shares) and VantagePoint (39,473,864 shares) on or about
December 9, 2003.

      On July 18, 2003, we recorded the Note and Warrant transactions in
accordance with Accounting Principals Board Opinion No. 14, "ACCOUNTING FOR
CONVERTIBLE DEBT AND DEBT ISSUED WITH STOCK PURCHASE WARRANTS," whereby a fair
value was ascribed to the 157,894,737 Warrants to be issued to the Investors
(related to the Note and Warrant Purchase Agreement) together with the 2,260,909
warrants to be issued to VantagePoint (related to VantagePoint's increased
guarantee under Amendment No. 1 to the Reimbursement Agreement) using a
Black-Scholes valuation model with the following assumptions: (i) a risk free
interest rate of 2.24% (three-year Treasury rate), (ii) a zero dividend yield,
(iii) a three-year life, (iv) an expected volatility of 152%, (v) a warrant
option price of $0.38 per share for the 157,894,737 Warrants and $0.4423 per
share for the 2,260,909 warrants, and (vi) a current market price of $0.83 per
share (the closing price of our common stock on July 18, 2003). A fair value was
ascribed to the $30,000 Notes using a present value method with a 19% discount
rate. The relative fair value of the warrants representing 87% of the combined
fair value of the warrants and Notes was applied to the $30,000 proceeds to
determine a note discount of approximately $26,063, which was recorded as a
reduction to the Notes payable and an increase to additional paid in capital.
The note discount is being amortized to interest expense using the "Effective
Interest Method" over the 36 month term of the Notes. For the year ended
December 31, 2003, approximately $1,266 of this note discount has been amortized
to interest expense.

      Also, on July 18, 2003, in connection with the Note and Warrant Purchase
Agreement, we, the Investors and certain of our stockholders entered an Amended
and Restated Stockholders Agreement (the "Amended and Restated Stockholders
Agreement"), which provides for rights relating to election of directors, the
registration of our common stock and certain protective provisions.

      As part of the agreements negotiated in conjunction with our $30,000
financing on July 18, 2003, we and holders of a majority of the Series X
Preferred Stock and Series Y Preferred Stock agreed to extend the redemption
dates of the Series X Preferred Stock and Series Y Preferred Stock from January
1, 2005 to July 18, 2006. Also, as a result of this financing transaction, in
accordance with the terms of the Series Y Preferred Stock, the Series Y
Preferred Stock conversion price was adjusted from $0.50 per share (each Series
Y preferred share is convertible into 2,000 shares of common stock) to $0.4423
per share (each Series Y preferred share is convertible into approximately
2,260.9 shares of common stock).

      The proceeds from the sale of the Notes and warrants will be (and portions
already have been) used by us for general corporate purposes, including
acquisitions, the expansion of our sales and marketing activities and repayment
of certain debt and lease obligations. As of December 31, 2003, we had paid
approximately $10,200 for the complete repayment of approximately $14,600 of our
debt and lease obligations.

                                       43
<PAGE>
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

      CASH USED IN OPERATING ACTIVITIES. In 2003, 2002 and 2001, net cash used
in our operating activities was approximately $13,715, $17,706 and $62,989,
respectively. This cash was used for a variety of operating expenses, including
salaries, consulting and legal expenses, network operations, sales and marketing
and overhead expenses. The reduction in cash used for operating activities over
the three-year period was mainly attributable to (i) increased revenues,
primarily resulting from acquisitions, (ii) reduced operating expenses (before
depreciation, amortization and non-cash stock compensation) as a percent of
revenues, primarily resulting from our restructuring and cost containment
efforts (discussed above), and, to a lesser extent, (iii) improvements in
working capital.

      CASH USED IN INVESTING ACTIVITIES. Net cash used in investing activities
in 2003, 2002 and 2001, was approximately $11,135, $2,368, and $2,921,
respectively. For the year ended, December 31, 2003, approximately $2,405 was
used primarily for the purchase of equipment and approximately $8,743 was used
for acquisition of subscriber lines and a $4 increase in restricted cash,
resulting from an increase of the Company's share of matching contributions for
terminated employees in the Company's 401(k) plan. These expenditures were
partially offset by approximately $17 in proceeds from sale of equipment. For
the year ended, December 31, 2002, approximately $1,647 was used primarily for
the purchase of equipment and approximately $1,150 was used for acquisition of
subscriber lines. These expenditures were partially offset by approximately $85
in proceeds from sale of equipment and a $344 decrease in restricted cash,
primarily resulting from our settlement of holdback payments attributable to
acquisitions. For the year ended, December 31, 2001, approximately $5,345 was
used primarily for the purchase of equipment and approximately $1,797 was used
for the acquisition of subscriber lines. These expenditures were partially
offset by approximately $456 in proceeds from sale of equipment and a $3,765
decrease in restricted cash, primarily resulting from our settlement of holdback
payments attributable to acquisitions.

      The development and expansion of our business has required significant
capital expenditures. Capital expenditures, including collocation fees, were
approximately $2,405, $1,647 and $5,345 for the years ended December 31, 2003,
2002 and 2001, respectively. 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. Our planned capital
expenditures for 2004 are currently expected to be primarily for the upgrade of
our network to support our integrated voice and data service offering. We
currently anticipate spending approximately $1,500 for capital expenditures,
excluding acquisitions, during the year ending December 31, 2004. The actual
amounts and timing of our capital expenditures could differ materially both in
amount and timing from our current plans.

      In December of 2002, the U.S. Bankruptcy Court for the District of
Delaware approved our bid to purchase the on-network assets and associated
subscriber lines of NAS for $14,000, consisting of $9,000 in cash and $5,000 in
a note payable to NAS. We closed the transaction on January 10, 2003, whereby we
acquired NAS' operations and network assets, associated equipment in
approximately 300 central offices and approximately 11,500 associated subscriber
lines. In connection with the closing of the NAS transaction, on January 10,
2003, we hired approximately 78 former NAS employees. No pre-closing liabilities
were assumed in connection with the NAS transaction. The cash portion of the
purchase price was paid from our existing cash. The NAS note had a term of
approximately 5 years and carried interest at 12% and was secured by the NAS
network assets acquired. During August 2003, we paid $1,500 to repurchase and
cancel the $5,000 note issued by us to NAS. The difference between the $5,000
note and the $1,500 settlement amount was recorded as other income during 2003.

                                       44
<PAGE>
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

      In connection with the integration of the NAS business, on January 17,
2003, we had a reduction in force of approximately 35 employees at our
headquarters facility in New Haven, Connecticut. We paid approximately $62 in
severance to the terminated employees.

      On September 8, 2003, in accordance with the terms of an asset purchase
agreement by and among the TalkingNets entities and the Company, dated April 8,
2003, we completed the transaction to acquire certain assets and subscribers of
TalkingNets (the "TalkingNets Assets") for approximately $726 in cash (the
"TalkingNets Asset Purchase Agreement"). As TalkingNets had filed a voluntary
petition for Chapter 11 reorganization in February 2003, the TalkingNets Asset
Purchase Agreement was subject to the approval of the U.S. Bankruptcy Court for
the Eastern District of Virginia. On April 9, 2003, the TalkingNets Asset
Purchase Agreement and the transactions contemplated thereby were approved by
the Bankruptcy Court. On April 11, 2003, we paid the full purchase price of
approximately $726 into escrow.

      The TalkingNets acquisition has been accounted for under the purchase
method of accounting in accordance with SFAS No. 141. The results of
TalkingNets' operations have been included in our consolidated financial
statements since September 8, 2003 (the closing date). The allocated estimated
fair values of the acquired assets at the date of acquisition exceeded the
purchase price and, accordingly, have been written down on a pro-rata basis by
asset group to the purchase price of approximately $851 ($726 plus associated
direct acquisition costs of approximately $125) as follows: (i) certain accounts
receivables of approximately $55, (ii) intangible assets pertaining to
approximately 90 acquired subscriber lines of approximately $111, and (iii)
property and equipment of $685.

      In the first quarter of 2002, we entered into an Asset Purchase Agreement,
dated as of January 1, 2002 (the "Broadslate Asset Purchase Agreement"), with
Broadslate Networks, Inc. ("Broadslate") for the purchase of business broadband
customer accounts and certain other assets, including certain accounts
receivable related to the customer accounts, for $800, subject to certain
adjustments. The Broadslate Asset Purchase Agreement provided for an initial
cash payment of $650, with $150 retained by us (the "Broadslate Holdback
Amount"), to be paid to Broadslate after a transition period, subject to certain
adjustments, as provided for in the Broadslate Asset Purchase Agreement. On
March 26, 2002, we gave notice to Broadslate of our intent to pursue an
indemnity claim against the Broadslate Holdback Amount for the full amount in
accordance with the provisions of the Broadslate Asset Purchase Agreement. The
claim and final settlement amount of $150 was applied to the Broadslate Holdback
Amount as follows: (i) approximately $50 pertained to our request for
reimbursement of a ratable portion of the purchase price paid for certain
subscriber lines which were not available for migration to our network, and (ii)
approximately $100 was for amounts due to us from revenue collected by
Broadslate, net of related costs, during the customer transition period as
provided for in the Broadslate Asset Purchase Agreement. The Broadslate customer
line acquisitions were accounted for under the purchase method of accounting
and, accordingly, the adjusted purchase price of approximately $750 was
allocated to the assets acquired based on their estimated fair values at the
date of acquisition as follows: approximately $28 to net accounts receivable
acquired and approximately $722 to approximately 520 subscriber lines acquired,
which amount is being amortized on a straight-line basis over two years from the
date of purchase.

      In the third quarter of 2002, we entered into an Asset Purchase Agreement
dated as of July 30, 2002 (the "Abacus Asset Purchase Agreement") with Abacus
for the purchase of broadband subscriber lines. The Abacus Asset Purchase
Agreement provided for a cash payment for each successfully migrated broadband
customer line, up to a maximum payment of approximately

                                       45
<PAGE>
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

$844 and required a purchase price deposit of approximately $211. Ultimately, we
were able to migrate and acquire 1,066 lines for a purchase price of
approximately $543. The Abacus customer line acquisitions were accounted for
under the purchase method of accounting and, accordingly, the purchase price has
been allocated to the subscriber lines acquired based on their estimated fair
values at the date of acquisition. This amount is being amortized on a
straight-line basis over two years from the date of purchase.

      In the second quarter of 2001, we entered into agreements with Covad and
Zyan, a California-based Internet service provider which had filed for
bankruptcy protection, affording us the right to acquire up to 4,800 Zyan
subscriber lines whose wholesale circuit connections were being supported by
Covad. In accordance with the Covad agreement, the anticipated purchase price of
$1,467 for these Zyan lines was escrowed at closing and restricted as of June
30, 2001. Ultimately, we were able to contract for service with and acquire
approximately 2,800 former Zyan customers, for a purchase price of approximately
$1,075. As of December 31, 2001, there were no amounts remaining in escrow.
These Zyan customer line acquisitions were accounted for under the purchase
method of accounting and, accordingly, the purchase price has been allocated to
subscriber lines acquired based on their estimated fair values at the date of
acquisition.

      CONTRACTUAL OBLIGATIONS. As of December 31, 2003, we had the following
contractual obligations:
<TABLE><CAPTION>
                                                              PAYMENTS DUE BY PERIOD
                                      ----------------------------------------------------------------------
                                       Less than                                    More than
CONTRACTUAL OBLIGATIONS                  Total         1 year        1-3 years      3-5 years       5 years
------------------------------------------------------------------------------------------------------------
<S>                                   <C>            <C>            <C>            <C>            <C>
Long-Term Debt Obligations (1)        $   31,143     $       --     $   31,143     $       --     $       --

Capital Lease Obligations (2)                167            116             51             --             --

Operating Lease Obligations
    Facilities Leases (3)                  2,937          1,987            753            197
    Operating Equipment &
      Maintenance Contracts                  445            307            138             --             --
Purchase Obligations
    Software Maintenance and
      Support (4)                            275            237             38             --             --
    Marketing Services (5)                   153            147              6             --             --
    Customer Support Services                738            681             57
    Network Service Providers (6)         24,263          9,962          9,731          3,831            739
                                      ----------------------------------------------------------------------
    Total                             $   60,121     $   13,437     $   41,917     $    4,028     $      739
                                      ======================================================================
</TABLE>
Notes:
(1)   Represents $30,000 senior secured notes plus accrued interest of $1,143
      payable on July 18, 2006. Amounts shown on the Company's balance sheet are
      net of a note discount of $26,063 recorded as a reduction of notes
      payable.
(2)   Capital lease obligations include accrued interest of $12.
(3)   Office facility operating leases with minimum lease payments of
      approximately $1,987 in 2004, $520 in 2005, $233 in 2006, $169 in 2007 and
      $28 in 2008.
(4)   Does not include payments to a service provider under a contract which is
      terminable by the Company upon sixty days' notice and which has a minimum
      payment obligation as of December 31, 2003, which could range from $10 to
      $345 over the three-year term of the contract.

                                       46
<PAGE>
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(5)   Does not include payments to a service provider under a contract which is
      terminable by the Company upon 30 days' notice and which has a minimum
      payment obligation as of December 31, 2003, and which could range from $22
      to $198 over the remaining nine-month term of the contract.
(6)   Does not include payments to (i) a service provider under a contract which
      is terminable by the Company upon 60 days' notice and which, as of
      December 31, 2003, has a minimum payment obligation which could range from
      $1 to $4 over the remaining eight-month term of the contract, (ii) a
      service provider under a contract which, as of December 31, 2003, included
      payment obligations of no more than $70 over the next twelve months, and
      (iii) a service provider under a contract which as of December 31, 2003,
      included payment obligations for multiple twelve-month contracts for
      individual circuits having termination dates ranging from one to twelve
      months, of no more than $5,824 over the next twelve months.

      We transmit data across our network via transmission facilities that are
leased from certain carriers, including Level 3 Communications, Inc. and MCI.
The failure of any of our data transport carriers to provide acceptable service
on acceptable terms could have a material adverse effect on our operations. MCI
has filed a voluntary petition to reorganize under Chapter 11 of the U.S.
Bankruptcy Code. While MCI has continued with its current operations since
filing its voluntary petition to reorganize in June of 2001, and has announced
that it expects to continue with its current operations without adverse impact
on its customers, it may not be able to do so. We believe that we could
transition the data transport services currently supplied by MCI to alternative
suppliers in thirty to sixty days should MCI announce discontinuance of such
services. However, were MCI to discontinue such services without providing
sufficient advance notice (at least sixty days), we might not be able to
transition such services in a timely manner, which could disrupt service
provided by us to certain of our customers. This could result in the loss of
revenue, loss of customers, claims brought against us by our customers, or could
otherwise have a material adverse effect on us. Even were MCI to provide
adequate notice of any such discontinuation of service, there can be no
assurance that we would be able to transition such service without a material
adverse impact on us or our customers, if at all.

      CASH RESOURCES FOR FUTURE ACTIVITIES. As of December 31, 2003, we had cash
and cash equivalents of approximately $13,784 and working capital of
approximately $5,725. On March 25, 2004, we reduced our workforce by
approximately 63 employees. As a result of this action, we incurred
approximately $160 in restructuring charges pertaining to severance and benefits
payments. We expect to realize approximately $3,400 in annualized savings of
salary and benefit costs.

      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. Based on our current business plan and projections as approved
by our Board of Directors, we believe that our existing cash and cash expected
to be generated from operations will be sufficient to fund our operating losses,
capital expenditures, lease payments, and working capital requirements into
2005. Failure to generate sufficient revenues, contain certain discretionary
spending or achieve certain other business plan objectives, however, could have
a material adverse affect on our results of operations, cash flows and financial
position, including our ability to continue as a going concern.

      We intend to use our cash resources to finance our capital expenditures
and for our working capital and other general corporate purposes. We may also
need additional funding to pursue our strategic objective of accelerating our
growth through acquisitions of complementary businesses,

                                       47
<PAGE>
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

subscriber lines and other assets. The amounts actually expended for these
purposes will vary significantly depending on a number of factors, including
market acceptance of our services, revenue growth, planned capital expenditures,
cash generated from operations, improvements in operating productivity, the
extent and timing of entry into new markets, and availability of and prices paid
for acquisitions.

      Our cash requirements may vary based upon the timing and the success of
implementation of our business plan or if:

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

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

      o    we make acquisitions;

      o    we alter the schedule or targets of our business plan implementation;
           or

      o    we curtail and/or reorganize our operations.


      Our financial performance, and when we achieve profitability or become
cash flow positive will depend on a number of factors, including:

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

      o    amount, timing and pricing of customer revenue;

      o    availability, timing and pricing of acquisition opportunities, and
           our ability to capitalize on such opportunities;

      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 and the Federal Communications
           Commissions' Triennial Review Order.

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      There can be no assurance that we will be able to achieve our business
plan objectives or that we will achieve or maintain cash flow positive operating
results. If we are unable to generate adequate funds from our operations, we may
not be able to continue to operate our network, respond to competitive pressures
or fund our operations. As a result, we may be required to significantly reduce,
reorganize, discontinue or shut down our operations. Our financial statements do
not include any adjustments that might result from this uncertainty.

      Potential De-listing of our Stock. On July 22, 2002, The Nasdaq Stock
Market, Inc. ("Nasdaq") transferred the listing of our common stock from the
Nasdaq National Market to the Nasdaq SmallCap Market. We applied for such
transfer as a result of our non-compliance with Nasdaq's Marketplace Rule
4450(a)(5), which required us to maintain a minimum bid price of $1.00 per share
for at least 10 consecutive trading days during the last ninety day period prior
to July 17, 2002 in order to remain qualified for listing on the Nasdaq National
Market. On October 16, 2002, Nasdaq notified us that, while we had not regained
compliance by October 15, 2002 with the $1.00 minimum bid price per share
requirement generally required for continued listing on the Nasdaq SmallCap
Market, we did continue to meet the initial listing requirements for the Nasdaq
SmallCap Market under Rule 4310(c)(2)(A). As a result, we were afforded an
additional 180 calendar days, or until April 14, 2003, to comply with the
minimum bid price of $1.00 per share for 10 consecutive trading days, or such
greater number of trading days as Nasdaq may have determined, in order to remain
listed on the Nasdaq SmallCap Market. We have received various subsequent
extensions to comply with the $1.00 minimum bid price requirement, the most
recent of which affords us until April 19, 2004 to gain compliance with the
minimum bid price rule as set forth in Nasdaq's newly amended Marketplace Rule
4310(c) (8)(D) or, if the bid price deficiency is not remedied by that date, to
take steps for implementation of a reverse stock split in order to continue our
Nasdaq SmallCap Market listing. There can be no assurance that we will be able
to continue to remain listed on the Nasdaq SmallCap Market. At the annual
meeting of stockholders held on October 14, 2003, our stockholders authorized
our Board of Directors to implement a reverse stock split for this purpose, at
their discretion.

OFF-BALANCE SHEET ARRANGEMENTS

      We do not have any off-balance sheet arrangements.


                                  RISK FACTORS

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND CERTAIN OTHER INFORMATION

      This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The statements contained in this report, which are not
historical facts, may be deemed to contain forward-looking statements. 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 particular, the risks and uncertainties include, among other
things, those described below. Existing and prospective investors are cautioned
not to place undue reliance on these forward-looking

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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 report, whether as a result of new information, future events or
circumstances or otherwise.


                         RISKS RELATING TO OUR BUSINESS

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 throughout 2004 and negative operating cash flows during
2004. If our revenue does not grow as expected or capital and operating
expenditures exceed our plan, our business, prospects, financial condition, cash
flows and results of operations will be materially adversely affected. 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.
Failure to generate sufficient revenues, contain certain discretionary spending
or achieve certain other business plan objectives, however, could have a
material adverse affect on our results of operations, cash flows and financial
position, including our ability to continue as a going concern.

      We intend to use our cash resources to finance our capital expenditures
and for our working capital and other general corporate purposes. We may also
need additional funding to pursue our strategic objective of accelerating our
growth through acquisitions of complementary businesses, subscriber lines and
other assets. The amounts actually expended for these purposes will vary
significantly depending on a number of factors, including market acceptance of
our services, revenue growth, planned capital expenditures, cash generated from
operations, improvements in operating productivity, the extent and timing of
entry into new markets, and availability of and prices paid for acquisitions.

      Our cash requirements may vary based upon the timing and the success of
implementation of our business plan or if:

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

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

      o    we make acquisitions;

      o    we alter the schedule or targets of our business plan implementation;
           or

      o    we curtail and/or reorganize our operations.

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      Our financial performance, when we achieve profitability or become cash
flow positive will depend on a number of factors, including:

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

      o    amount, timing and pricing of customer revenue;

      o    availability, timing and pricing of acquisition opportunities, and
           our ability to capitalize on such opportunities;

      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 operations and growth; and

      o    favorable outcome of federal and state regulatory proceedings and
           related judicial proceedings, including proceedings relating to the
           1996 Telecommunications Act and the Federal Communications
           Commissions' Triennial Review Order.

      There can be no assurance that we will be able to achieve our business
plan objectives or that we will achieve or maintain cash flow positive operating
results. If we are unable to generate adequate funds from our operations, we may
not be able to continue to operate our network, respond to competitive pressures
or fund our operations. As a result, we may be required to significantly reduce,
reorganize, discontinue or shut down our operations. Our financial statements do
not include any adjustments that might result from this uncertainty.

OUR INDEPENDENT AUDITORS 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 on our audited
financial statements 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

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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.

ADDITIONAL FINANCING WILL BE REQUIRED IN 2004 IF WE ARE TO ACHIEVE OUR
ACCELERATED GROWTH OBJECTIVES THROUGH STRATEGIC ACQUISITIONS

      Additional financing will be required during 2004 if we are to achieve our
accelerated growth objectives through strategic acquisitions. There can be no
assurance that we will be able to raise additional financing through some
combination of borrowings, leasing, vendor financing and the sale of equity or
debt securities. Our failure to raise additional financing may hamper our
ability to accelerate our growth and may have an adverse impact on our stock
price.

BECAUSE THE HIGH-SPEED DATA COMMUNICATIONS INDUSTRY CONTINUES TO RAPIDLY EVOLVE,
WE CANNOT PREDICT ITS FUTURE GROWTH OR ULTIMATE SIZE

      The high-speed data communications industry is subject to rapid and
significant technological change. 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.

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 Internet service providers and DSL providers. We
focus on selling directly to small and medium sized businesses and branch
offices of larger businesses and their remote office users. Our unproven
business model makes it difficult to predict the extent to which our services
will achieve market acceptance. It is possible that our 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.
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.

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WE MAY BE SUBJECT TO RISKS ASSOCIATED WITH ACQUISITIONS

      We may not be able to compete successfully for acquisition opportunities,
operate the acquired assets or businesses profitably or otherwise implement
successfully our acquisition strategy. We have made a number of asset and
business acquisitions. We intend to continue to seek additional opportunities
for further acquisitions, which we believe represents a distinct market
opportunity to accelerate growth. We continuously identify and evaluate
acquisition candidates and in many cases engage in discussions and negotiations
regarding potential acquisitions. Our discussions and negotiations may not
result in any acquisitions. There is significant competition for acquisition
opportunities in our business. As the consolidation in our industry continues,
this competition may intensify and increase the costs of capitalizing on such
opportunities. We compete for acquisition opportunities with companies that have
significantly greater financial and management resources. Also, all or part of
the purchase price of any future acquisition may be paid in cash, thus depleting
our cash resources. In addition, an acquisition, may not produce the revenue,
earnings, cash flows or business synergies that we anticipate, and an acquired
asset or business might not perform as we anticipated. Any such event may delay
the time at which we expect to achieve profitability or positive cash flows.
Further, 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
also have to devote a significant amount of management resources to integrating
any acquired businesses, with our existing operations, and that may not be
successful.

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

      In the last four months, two officers from our management team have left
the Company to pursue other opportunities. 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 locations 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 can not guarantee that our key
employees will desire to continue their employment with the Company over any
period of time and thus there is the risk that any or all of these individuals
may seek employment opportunities with other employers at any time. Further,
there is no assurance that we will be able to attract highly-qualified
employees, as we have in the past, to replace key personnel in the future.

OUR FAILURE TO 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 and the number of customers subscribing for our services. This
growth has placed a significant strain on our management, financial controls,
operations, personnel 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. 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.

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IF WE FAIL TO RETAIN OUR EMPLOYEES OR RECRUIT QUALIFIED PERSONNEL IN A TIMELY
MANNER, 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 qualified
personnel, particularly sales and marketing, engineering and other technical
personnel. If we are unable to retain our employees or recruit qualified
personnel in a timely manner, we will not be able to execute our business plan.
The reductions in workforce that we have made since 2000, and the competitive
nature of our industry, may make it difficult to hire qualified personnel on a
timely basis and to retain our employees.

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 timing and success of acquisitions, if any;

      o    the timing of the rollout of our services and any additional
           infrastructure, and the amount and timing of expenditures relating
           thereto;

      o    regulatory developments;

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

      o    the availability of financing;

      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 mostly 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. In addition,
with the acquisition of the Network Access Solutions assets on January 10, 2003,
we acquired a number of end users that we service indirectly through various
Internet service providers. We sell our services to such Internet service
providers who then resell such services. We therefore expect to have increased
exposure and concentration of credit risk pertaining to such Internet service
providers during 2004 and beyond. 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.

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WE DEPEND ON WHOLESALE DSL AND T-1 PROVIDERS, SOME OF WHOM ARE COMPETITORS, TO
PROVIDE US WITH LOCAL FACILITIES IN AREAS WHERE WE HAVE NOT DEPLOYED OUR OWN
EQUIPMENT

      In markets where we have not deployed our own local DSL and T-1 equipment,
we utilize local facilities from wholesale providers, including Covad
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 or
T-1 services to our end-user customers, as well as to provide and maintain the
local DSL or T-1 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 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 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 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 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 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.

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 local levels. Changes in
applicable laws or regulations could, among other things, increase our costs,
restrict our access to the network elements and central offices of the
traditional local telephone companies, or restrict our ability to provide our
services. For example, the 1996 Telecommunications Act, which, among other
things, requires traditional local 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, the
order that the Federal Communications Commission (the "FCC") may ultimately
promulgate pursuant to the 1996 Telecommunications Act, including rules
established in response to judicial activity, may change, reduce, or even
eliminate the obligation of the traditional local telephone companies to provide
various network elements to competitors such as us for use for high-speed data
services. In addition, various pending or potential legislative proposals in
Congress and state legislatures could, if adopted, also

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have the effect of reducing the obligations of the traditional local telephone
companies on which we rely. Adoption of such legislation, or of some of the
regulatory changes being considered by the FCC, could have severe adverse
consequences for our business. 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, revise and/or reaffirm some of the terms of our relationships with
traditional telecommunications carriers, including the terms and prices of
services provided under our interconnection agreements, and access fees and
surcharges on gross revenue from interstate and intrastate services. 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 that
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 "Item 1 - Business-Governmental Regulations".

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

      We must enter into and renew interconnection agreements with traditional
local telephone companies in each market in which we deploy our own equipment.
These agreements govern, among other things, the price and other terms regarding
our location of equipment in the traditional local telephone companies' offices,
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, Frontier, SBC Communications, Qwest, Sprint and
Verizon, or their subsidiaries, which govern our relationships in 49 states and
the District of Columbia. Delays in obtaining or renewing interconnection
agreements would delay our entrance into new markets or impact our operations in
existing 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 our interconnection agreements in good faith. 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.

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

      We interconnect with and use the networks of traditional local telephone
companies to provide services to our customers in the markets where we have
deployed our own equipment. In markets where we utilize the local 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 local telephone companies to provide and maintain
their transmission facilities and the copper telephone lines between our network
and our customers' premises. The FCC's decision in February 2003 to exempt the
traditional local telephone companies from their obligation to provide access to
certain loop transmission facilities that use fiber or new technologies to
competitors such as us may motivate the traditional local telephone companies to
modify, characterize or replace their facilities in ways that would qualify them
for this exemption and thereby preclude us from accessing those facilities. Our
dependence on traditional local 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, and the other competitive
carriers with which we work, lease copper telephone lines running from the
central office of the traditional local 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

      Most of the traditional local telephone companies, including those created
by AT&T's divestiture of its local telephone service business, offer DSL-based
services. In addition, these companies also currently offer high-speed data
communications services that use other technologies, including T-1 services.
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    provisioning of acceptable transmission facilities and copper
           telephone lines on our behalf; and

      o    our introduction and expansion of various services.

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

      In addition, the other carriers whose local facilities we utilize in
markets where we have not deployed our own 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

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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.

      Competition from the traditional local telephone companies offering DSL,
T-1 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 quality in their service areas,
possess a large, existing customer base to whom they can market their various
products and services, possess sufficient capital to deploy broadband 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, 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 LONG DISTANCE CARRIERS TO CONNECT OUR NETWORK

      Data is transmitted across our network via transmission facilities that we
lease from long distance carriers, including Level 3 Communications and MCI.
Failure of these carriers to provide service or to provide quality service may
interrupt the use of our services by our customers. The service provided by
these carriers has been interrupted in the past, which has affected the services
we provide to our customers. We cannot be sure that this service will not be
interrupted in the future.

      In addition, MCI has filed a voluntary petition to reorganize under
Chapter 11 of the U.S. Bankruptcy Code. While MCI has continued with its current
operations since filing its voluntary petition to reorganize in June 2001, and
has announced that it expects to continue with its current operations without
adverse impact on its customers, it may not be able to do so. We believe that we
could transition the data transport services currently supplied by MCI to
alternative suppliers in thirty to sixty days, should MCI announce
discontinuance of such services. However, were MCI to discontinue such services
without providing sufficient advance notice (at least sixty days), we might not
be able to transition such services in a timely manner, which could disrupt
service provided by us to certain of our customers. This could result in the
loss of revenue, loss of customers, claims brought against us by our customers,
or could otherwise have a material adverse effect on us. Even were MCI to
provide adequate notice of any such discontinuation of service, there can be no
assurance that we would be able to transition such service without a material
adverse impact on us or our customers, if at all, or that such discontinuation
of service would not otherwise have a material adverse effect on us.

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

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speed communications technologies for local access connections such as
integrated services digital network, (or "ISDN"), frame relay, T-1, DSL services
and wireless, satellite-based and cable networks. We expect significant
competition from:

      o    Other providers of DSL and T-1 services, including Covad
           Communications, and New Edge Networks;

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

      o    Traditional local telephone companies, including the traditional
           local telephone companies created by AT&T's divestiture of its local
           telephone service business, which deploy DSL and T-1 services and
           which provide other high-speed data communications services;

      o    Competitive carriers offering their own integrated voice and data
           services, including Cbeyond Communications, LLC and DSLi;

      o    National long distance carriers, such as AT&T, Sprint, Williams and
           MCI, some of which are offering competitive DSL and T-1 services and
           other high-speed data communications services;

      o    Cable modem service providers, such as Time-Warner Cable, Comcast and
           RCN, which are offering high-speed Internet access over cable
           networks; and

      o    Providers utilizing alternative technologies, such as fiber optic,
           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 "Item 1. Business-Competition".

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 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.

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

                                       59
<PAGE>
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

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 SYSTEM FAILURE COULD DELAY OR INTERRUPT SERVICE TO OUR CUSTOMERS

      Our operations depend upon our ability to support a highly complex network
infrastructure and avoid damage from fires, earthquakes, floods, power losses,
excessive sustained or peak user demand, telecommunications failures, network
software flaws, computer worms and viruses, transmission cable cuts and similar
events. The occurrence of a natural disaster or other unanticipated interruption
of service at our owned or leased facilities could cause interruptions in our
services. In addition, failure of a traditional telephone company, competitive
telecommunications company or other service provider to provide communications
capacity or other services that we require, as a result of a natural disaster or
other unanticipated interruptions, operational disruption or any other reason,
could cause interruptions in our services. Any damage or failure that causes
sustained interruptions in our operations could have a material adverse effect
on our business.

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's 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 business partners. These agreements may be
breached or terminated. In addition, third parties, including our competitors,
may assert infringement claims against us. Any of 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
could 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

                                       60
<PAGE>
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

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.

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 issued $30,000 in notes in July 2003. Those notes contain provisions
that limit our ability to incur additional indebtedness and place other
restrictions on our business. We may seek additional debt financing in the
future. We may not be able to repay any current or future debt. 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.

                 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 our quarterly operating results
           or operating statistics or our financial condition;

      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 or legislative developments;

      o    growth of Internet and on-line commerce usage and 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    the delisting of our common stock from the Nasdaq SmallCap Market;

                                       61
<PAGE>
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

      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 market
for Internet, technology and telecommunications 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 COMMON STOCK MAY BE DE-LISTED FROM THE NASDAQ SMALLCAP MARKET, WHICH MAY
HAVE A MATERIAL ADVERSE IMPACT ON THE PRICING AND TRADING OF OUR COMMON STOCK

      On July 22, 2002, The Nasdaq Stock Market, Inc. ("Nasdaq") transferred the
listing of our common stock from the Nasdaq National Market to the Nasdaq
SmallCap Market. We applied for such transfer as a result of our non-compliance
with Nasdaq's Marketplace Rule 4450(a)(5), which required us to maintain a
minimum bid price of $1.00 per share for at least 10 consecutive trading days
during the last ninety day period prior to July 17, 2002 in order to remain
qualified for listing on the Nasdaq National Market. On October 16, 2002, Nasdaq
notified us that, while we had not regained compliance by October 15, 2002 with
the $1.00 minimum bid price per share requirement generally required for
continued listing on the Nasdaq SmallCap Market, we did continue to meet the
initial listing requirements for the Nasdaq SmallCap Market under Rule
4310(c)(2)(A). As a result, we were afforded an additional 180 calendar days, or
until April 14, 2003, to comply with the minimum bid price of $1.00 per share
for 10 consecutive trading days, or such greater number of trading days as
Nasdaq may have determined, in order to remain listed on the Nasdaq SmallCap
Market. On March 11, 2003, Nasdaq amended its rules to provide that a company
that satisfies the initial listing requirements for the Nasdaq SmallCap Market
under Rule 4310(c)(2)(A) would have an additional 90 days (over the 180 days
already contemplated by the Nasdaq SmallCap Market rules) to comply with the
minimum bid price of $1.00 per share. On April 15, 2003, Nasdaq notified us
that, while we had not regained compliance by April 14, 2003 with the $1.00
minimum bid price per share requirement generally required for continued listing
on the Nasdaq SmallCap Market, we did continue to meet the initial listing
requirements for the Nasdaq SmallCap Market under Rule 4310(c)(2)(A). As a
result, we were afforded an additional 90 calendar days, or until July 14, 2003,
to comply with the minimum bid price of $1.00 per share for 10 consecutive
trading days, or such greater number of trading days as Nasdaq may have
determined, in order to remain listed on the Nasdaq SmallCap Market. On July 15,
2003, we received notification from the Nasdaq staff indicating that our common
stock failed to comply with the $1.00 closing bid price per-share requirement
for 10 consecutive trading days as set forth in the Nasdaq's Marketplace Rule
4310(c)(4) and as such our common stock was subject to delisting from the Nasdaq
SmallCap Market. We appealed this determination to a Listings Qualifications
Panel and were subsequently granted an extension until November 17, 2003, to
comply with the minimum bid price of $1.00 per share for a minimum of 10
consecutive days. On October 9, 2003, Nasdaq notified us that we had been
granted an additional extension until December 8, 2003 to gain compliance with
the minimum bid price rule pending SEC action on certain Nasdaq proposed rule
changes (discussed below). On December 12, 2003, Nasdaq notified us that we had
been granted an additional extension until January 30, 2004 to gain compliance
with the minimum bid price rule. This extension was granted to allow for further
developments in the pending SEC action on certain Nasdaq rule changes (discussed
below). On December 23, 2003, the SEC approved certain modifications to Nasdaq's
bid price requirements, and Nasdaq subsequently notified us on January 2, 2004
that we had been granted an additional

                                       62
<PAGE>
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

extension until April 19, 2004 to gain compliance with the minimum bid price
rule as set forth in Nasdaq's newly amended Marketplace Rule 4310(c) (8)(D)
(discussed below). There can be no assurance that we will be able to continue to
remain listed on the Nasdaq SmallCap Market.

      Nasdaq has submitted proposed rule changes to the SEC which would, among
other things, modify the grace periods for companies trying to come into
compliance with the bid price requirements for continued listing. On December
23, 2003, the SEC approved certain modifications to Nasdaq's bid price
requirements. Under the Amended Marketplace Rule 4310 (c)(8)(d), the Company has
until April 19, 2004 to trade at or above $1.00 per share for a minimum of 10
consecutive trading days, or, if the bid price deficiency is not remedied by
that date, to take steps for implementation of a reverse stock split in order to
continue its SmallCap Market listing. Our stockholders approved a reverse stock
split at a ratio (to be determined by the Board of Directors) within a range
from one-for-two to one-for-twenty for this purpose at the annual meeting of
stockholders held on October 14, 2003. If implemented, a reverse stock split
could impact the trading value of your shares and may not result in our
continued compliance with applicable listing requirements, either in the short
or long term.

CERTAIN INVESTORS HAVE SIGNIFICANT INFLUENCE REGARDING MOST MATTERS REQUIRING
STOCKHOLDER APPROVAL, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON THE MARKET
PRICE OF OUR COMMON STOCK.

      As of March 30, 2004, a group of private investment funds affiliated with
VantagePoint Venture Partners owns of record approximately 4,027,820 shares of
our outstanding common stock and 14,000 shares of our outstanding Series X
Preferred Stock, which represented approximately 37% of the combined voting
power of all issued and outstanding capital stock of the Company. In addition,
that group owns warrants to purchase an aggregate of 53,326,568 shares of our
common stock. As long as at least 50% of the Series X preferred stock originally
owned by VantagePoint remains outstanding, the holders of the Series X preferred
stock are entitled to elect a majority of our Board of Directors, subject to the
provisions of a stockholders agreement relating to the election of directors. As
a result, subject to the provisions of the stockholders agreement, VantagePoint
can significantly influence most matters requiring stockholder approval,
including approval of significant corporate transactions. Further, subject to
the terms of such stockholders agreement, the investors who are parties thereto
have agreed, as part of our July 2003 note and warrant financing, to vote their
shares of voting capital stock of the Company to cause and maintain the election
to our Board of Directors of two representatives of Deutsche Bank AG London, for
so long as certain investment thresholds are maintained. This concentration of
ownership and/or board control 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.

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

      Our corporate documents and Delaware law contain provisions that might
enable our management to resist a third-party takeover. These provisions include
a staggered board of directors, limitations on persons authorized to call a
special meeting of stockholders, 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, and the right of the
holders of Series X preferred stock to elect a majority of our directors. These
provisions might discourage, delay or prevent a change in control by a
third-party or a change in our management.

                                       63
<PAGE>
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

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 our 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.


























                                       64
<PAGE>
ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





                         REPORT OF INDEPENDENT AUDITORS

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, 2003 and 2002 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2003, 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.


/s/ PricewaterhouseCoopers LLP
--------------------------------
PricewaterhouseCoopers LLP
Stamford, CT
April 9, 2004





                                       65
<PAGE>

                                  DSL.net, Inc.

                           CONSOLIDATED BALANCE SHEETS
                  (dollars in thousands, except per share data)
<TABLE><CAPTION>
                                                                                                             December 31,
                                                                                                  ---------------------------------
                                                                                                      2003                 2002
                                                                                                  ------------         ------------
<S>                                                                                               <C>                  <C>
                                                     ASSETS
Current assets:
Cash and cash equivalents                                                                         $     13,779         $     11,318
Restricted cash  (Note 2)                                                                                    5                    1
Accounts receivable (net of allowances of $902 and $606
  at December 31, 2003 and 2002, respectively)                                                           8,054                4,358
Inventory                                                                                                  477                  707
Deferred costs                                                                                             931                  615
Prepaid expenses and other current assets                                                                  797                  726
                                                                                                  ------------         ------------
Total current assets                                                                                    24,043               17,725

Fixed assets, net  (Note 3)                                                                             24,357               23,066
Goodwill and other intangible assets  (Note 5)                                                           9,492               10,656
Other assets                                                                                             1,169                2,049
                                                                                                  ------------         ------------
Total assets                                                                                      $     59,061         $     53,496
                                                                                                  ============         ============

                  LIABILITIES, MANDATORILY REDEEMABLE, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable                                                                                  $      3,570         $      4,621
Accrued salaries                                                                                         1,046                1,225
Accrued liabilities  (Note 14)                                                                           7,529                4,621
Deferred revenue                                                                                         6,068                3,591
Current portion of capital leases payable  (Note 7)                                                        105                2,676
                                                                                                  ------------         ------------
Total current liabilities                                                                               18,318               16,734

Capital leases payable  (Note 7)                                                                            50                1,889
Notes payable, net of discount (Note 6)                                                                  5,374                 --
                                                                                                  ------------         ------------
Total liabilities                                                                                       23,742               18,623
                                                                                                  ------------         ------------
Commitments and contingencies  (Note 7)

Preferred stock:  20,000,000 preferred shares authorized (Note 9)
  20,000 shares designated as Series X, mandatorily redeemable, convertible
  preferred stock, $.001 par value; 20,000 and 20,000 shares issued and outstanding
  as of December 31, 2003 and 2002, respectively (liquidation preference $24,660
  and $22,315 as of December 31, 2003 and 2002, respectively)                                           16,231                8,741

  15,000 shares designated as Series Y, mandatorily redeemable, convertible
  preferred stock, $.001 par value; 1,000 and 15,000 shares issued and outstanding
  as of December 31, 2003 and 2002, respectively (liquidation preference $1,211
  and $16,380 as of December 31, 2003 and 2002, respectively)                                              788                5,381

Stockholders' equity  (Note 9)
Common stock, $.0005 par value; 800,000,000 and 400,000,000 shares authorized
  as of December 31, 2003 and 2002, respectively; 105,449,054 and 64,929,899 shares
  issued and outstanding as of December 31, 2003 and 2002, respectively                                     53                   32
Additional paid-in capital                                                                             337,735              305,648
Deferred compensation                                                                                     --                   (438)
Accumulated deficit                                                                                   (319,488)            (284,491)
                                                                                                  ------------         ------------
Total stockholders' equity                                                                              18,300               20,751
                                                                                                  ------------         ------------
Total liabilities, redeemable preferred stock and stockholders' equity                            $     59,061         $     53,496
                                                                                                  ============         ============
</TABLE>
              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                       66
<PAGE>
                                  DSL.net, Inc.

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                  (dollars in thousands, except per share data)
<TABLE><CAPTION>
                                                                              Year ended December 31,
                                                                  ----------------------------------------------
                                                                      2003             2002             2001
                                                                  ------------     ------------     ------------
<S>                                                               <C>              <C>              <C>
Revenue                                                           $     71,333     $     45,530     $     41,969
                                                                  ------------     ------------     ------------
Operating expenses:
Network (excluding $10, $30 and
  $29 of stock compensation, respectively)                              51,452           33,470           44,451
Operations (excluding $11, $52 and
  $(153) of stock compensation, respectively)                           11,873            7,949           45,752
General and administrative (excluding $69, $283
  and $449 of stock compensation, respectively)                         12,200           11,403           25,229
Sales and marketing (excluding $348, $863 and
  $877 of stock compensation, respectively)                              8,642            6,969           13,188
Stock compensation                                                         438            1,228            1,202
Depreciation and amortization                                           16,359           20,332           28,043
                                                                  ------------     ------------     ------------

Total operating expenses                                          $    100,964     $     81,351     $    157,865
                                                                  ------------     ------------     ------------

Operating loss                                                    $    (29,631)    $    (35,821)    $   (115,896)

Interest income (expense), net                                          (2,936)            (458)             455
Other (expense) income, net                                             (2,430)             185              (13)
                                                                  ------------     ------------     ------------

Net loss                                                          $    (34,997)    $    (36,094)    $   (115,454)
                                                                  ============     ============     ============

Net loss applicable to common stockholders:
  Net loss                                                             (34,997)         (36,094)        (115,454)
  Dividends on preferred stock                                          (3,698)          (3,573)            (122)
  Accretion of preferred stock                                         (14,327)         (10,078)            (348)
                                                                                   ------------     ------------
    Net loss applicable to common stockholders                    $    (53,022)    $    (49,745)    $   (115,924)
                                                                  ============     ============     ============
Net loss per share, basic and diluted                             $      (0.72)    $      (0.77)    $      (1.81)
                                                                  ============     ============     ============
Shares used in computing net loss per share, basic and diluted      74,125,513       64,857,869       63,938,960
                                                                  ============     ============     ============
</TABLE>
              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                       67
<PAGE>
                                  DSL.NET, INC.
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                             (dollars in thousands)
<TABLE><CAPTION>

                                                   Common Stock            Additional
                                            ---------------------------     Paid - In      Deferred     Accumulated
                                               Shares         Amount         Capital     Compensation     Deficit          Total
                                            ------------   ------------   ------------   ------------   ------------   ------------
<S>                                           <C>          <C>            <C>            <C>            <C>                 <C>
Balance as of December 31, 2000               66,002,808   $         33   $    286,258   $     (3,931)  $   (132,943)       149,417
Deferred compensation - stock options               --             --             (674)           674           --             --
Amortization of deferred compensation               --             --             --            1,202           --            1,202
Repurchase of common stock                    (1,538,503)            (1)          (386)           387           --             --
Issuance of common stock - employee stock
  purchase plan                                   25,383           --               30           --             --               30
Issuance of common stock - stock options         361,774           --               19           --             --               19
Beneficial conversion feature of preferred
  stock                                             --             --           15,980           --             --           15,980
Accrued dividends on preferred stock                --             --             (122)          --             --             (122)
Accretion of beneficial conversion feature
  of preferred stock, net of issuance costs         --             --             (348)          --             --             (348)
Net loss                                            --             --             --             --         (115,454)      (115,454)
                                            ------------   ------------   ------------   ------------   ------------   ------------
Balance as of December 31, 2001               64,851,462   $         32   $    300,757   $     (1,668)  $   (248,397)  $     50,724
Deferred compensation - stock options               --             --               (2)             2           --             --
Amortization of deferred compensation               --             --             --            1,228           --            1,228
Issuance of common stock - employee stock
  purchase plan                                   14,000           --                4           --             --                4
Issuance of common stock - stock options          64,437           --                9           --             --                9
Beneficial conversion feature option of
  preferred stock                                   --             --           18,531           --             --           18,531
Accrued dividends on preferred stock                --             --           (3,573)          --             --           (3,573)
Accretion of beneficial conversion feature
  of preferred stock, net of issuance costs         --             --          (10,078)          --             --          (10,078)
Net loss                                            --             --             --             --          (36,094)       (36,094)
                                            ------------   ------------   ------------   ------------   ------------   ------------
Balance as of December 31, 2002               64,929,899   $         32   $    305,648   $       (438)  $   (284,491)  $     20,751
Amortization of deferred compensation               --             --             --              438           --              438
Valuation of common stock warrants issued
  for loan guarantees                               --             --            6,656           --             --            6,656
Issuance of common stock - employee stock
  purchase plan                                   15,380           --                5           --             --                5
Issuance of common stock - stock options       5,363,763              3          2,278           --             --            2,281
Issuance of common stock - preferred stock
  conversions                                 31,629,760             16         13,984           --             --           14,000
Issuance of common stock - dividends on
  preferred stock conversions                  3,510,252              2          2,520           --             --            2,522
Accrued dividends on preferred stock                --             --           (3,698)          --             --           (3,698)
Accretion of beneficial conversion feature
  of preferred stock                                --             --          (14,327)          --             --          (14,327)
Preferred stock reclassification                    --             --           (1,394)          --             --           (1,394)
Debt discount ascribed to warrants and
  notes payable                                     --             --           26,063           --             --           26,063
Net loss                                            --             --             --             --          (34,997)       (34,997)
                                            ------------   ------------   ------------   ------------   ------------   ------------
Balance as of December 31, 2003              105,449,054   $         53   $    337,735   $       --     $   (319,488)  $     18,300
                                            ============   ============   ============   ============   ============   ============
</TABLE>
              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                       68
<PAGE>
                                  DSL.NET, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (dollars in thousands)
<TABLE><CAPTION>
                                                                                 Year ended December 31,
                                                                      ----------------------------------------------
                                                                          2003             2002             2001
                                                                      ------------     ------------     ------------
<S>                                                                   <C>              <C>              <C>
Cash flows from operating activities:
Net loss                                                              $    (34,997)    $    (36,094)    $   (115,454)

Reconciliation of net loss to net cash provided by (used in)
  operating activities:
    Depreciation and amortization                                           16,359           20,332           28,043
    Bad debt expense                                                         2,117            2,536            2,996
    Sales credits and allowances                                               394            1,181            1,498
    Amortization of deferred debt issuance costs and debt discount           7,922                9               86
    Stock compensation expense                                                 438            1,228            1,202
    Restructuring charges for write-down of fixed assets                      --               --             29,628
    Impairment charges for write-down of goodwill and investments             --               --              4,455
    Loss (gain) on sales of fixed assets                                        (3)              13              132
    Write off of equipment                                                     166              362              229
    Gain on note settlement                                                 (3,500)            --               --
    Non-cash interest on lease payoff                                          194             --               --
    Net changes in assets and liabilities, net of acquired assets:
      (Increase) in accounts receivable                                     (6,153)          (2,194)          (6,656)
      (Increase) / decrease in prepaid and other current assets                (13)           1,318              222
      Decrease / (increase) in other assets                                    880           (1,480)           1,260
      (Decrease) / increase in accounts payable                             (1,051)             294           (8,859)
      (Decrease) / increase in accrued salaries                               (179)             318             (670)
      Increase / (decrease) in accrued expenses                              2,317           (5,111)          (2,713)
      Increase / (decrease) in deferred revenue                              1,394             (418)           1,612
                                                                      ------------     ------------     ------------
Net cash used in operating activities                                      (13,715)         (17,706)         (62,989)
                                                                      ------------     ------------     ------------
    Cash flows from investing activities:
    Purchases of property and equipment                                     (2,405)          (1,647)          (5,345)
    Proceeds from sales of property and equipment                               17               85              456
    Acquisitions of businesses and customer lines                           (8,743)          (1,150)          (1,797)
    (Increase) / decrease in restricted cash                                    (4)             344            3,765
                                                                      ------------     ------------     ------------
Net cash used in investing activities                                      (11,135)          (2,368)          (2,921)
                                                                      ------------     ------------     ------------
Cash flows from financing activities:
    Proceeds from credit facility                                            6,100             --               --
    Payments on credit facility                                             (6,100)            --               --
    Proceeds from common stock issuance                                      2,287               14               49
    Proceeds from preferred stock issuance and bridge note                    --             15,000           19,511
    Proceeds from note issuances                                            30,000             --               --
    Principal payments under notes and capital lease obligations            (4,976)          (2,907)          (6,689)
                                                                      ------------     ------------     ------------
Net cash provided by financing activities                                   27,311           12,107           12,871
                                                                      ------------     ------------     ------------
Net increase / (decrease) in cash and cash equivalents                       2,461           (7,967)         (53,039)
Cash and cash equivalents at beginning of period                            11,318           19,285           72,324
                                                                      ------------     ------------     ------------
Cash and cash equivalents at end of period                            $     13,779     $     11,318     $     19,285
                                                                      ============     ============     ============
Supplemental disclosure:
Cash paid: interest                                                   $        782     $        819     $      1,372
                                                                      ============     ============     ============
Fixed assets financed under capital leases                            $       --       $       --       $       --
                                                                      ============     ============     ============
Fixed asset purchases included in accounts payable                    $          3     $        485     $        455
                                                                      ============     ============     ============

Supplemental disclosure of non-cash investing activities:
  On January 10, 2003, the Company purchased network assets and associated subscriber lines of
  Network Access Solutions Corporation  (Note 5)
        The fair value of the assets acquired was $14,737

  On September 8, 2003, the Company purchased network assets and associated subscriber lines of
  TalkingNets Holdings, LLC (Note 5)
        The fair value of the assets acquired was $851

Supplemental disclosure of non-cash financing activities:
  During the third and fourth quarter 2003, 14,000 shares of Series Y Preferred Stock were converted
  into 31,629,759 shares of common stock and $2,522 of accrued dividends pertaining thereto were
  paid by issuing 3,510,255 shares of common stock
</TABLE>
              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                       69
<PAGE>
                                  DSL.NET, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


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 combines its
facilities, nationwide network infrastructure, and Internet service capabilities
to provide various broadband communications services to businesses throughout
the United States, primarily using digital subscriber line ("DSL") and T-1
technology. In certain markets where it has not deployed its own equipment, the
Company utilizes the local facilities of other carriers to provide service. The
Company's product offerings include T-1 and business-class DSL network
connectivity and Internet access, virtual private networks (VPNs), frame relay,
Web hosting, domain name services management, enhanced e-mail, online data
backup and recovery services, firewalls and nationwide dial-up services, as well
as integrated voice and data offerings in select markets.

      The Company has incurred substantial losses and negative cash flows from
operations in every fiscal period since inception. For the year ended December
31, 2003, the Company incurred operating losses of $29,631 and negative
operating cash flows of $13,715 that were financed primarily by proceeds from
equity issuances. The Company had accumulated deficits of $319,488 and $284,491
at December 31, 2003 and 2002, respectively. The Company expects its operating
losses, net operating cash outflows and capital expenditures to continue through
2004.

      The Company has successfully completed private equity and bridge financing
transactions totaling approximately $35,000 as follows: approximately $20,000 in
the fourth quarter of 2001, $10,000 in March 2002 and $8,500 in May 2002 (which,
after cancellation of the bridge loans, yielded net proceeds of approximately
$5,000) (Note 9). In addition, on July 18, 2003, the Company successfully raised
approximately $30,000 in additional debt and equity financing (Note 6). The
Company's independent auditors have noted in their report that the Company's
sustained operating losses raise substantial doubt about its ability to continue
as a going concern. Failure to generate sufficient revenues, contain certain
discretionary spending or achieve certain other business plan objectives could
have a material adverse affect on the Company's results of operations, cash
flows and financial position, including its ability to continue as a going
concern.

      The Company intends to use its cash resources to finance its capital
expenditures and for working capital and other general corporate purposes. The
Company may also need additional funding to pursue its strategic objective of
accelerating growth through acquisition of complementary businesses, subscriber
lines or other assets. The amounts actually expended for these purposes will
vary significantly depending on a number of factors, including market acceptance
of the Company's services, revenue growth, planned capital expenditures, cash
generated from operations, improvements in operating productivity, the extent
and timing of entry into new markets and availability of and prices paid for
acquisitions.



                                       70
<PAGE>
                                  DSL.NET, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


      The Company's cash requirements may vary based upon the timing and the
success of implementation of the Company's business plan or if:

      o   demand for the Company's services or its cash flow from operations is
          less than or more than expected;

      o   plans or projections change or prove to be inaccurate;

      o   the Company makes acquisitions;

      o   the Company alters the schedule or targets of its business plan
          implementation; or

      o   the Company curtails and/or reorganizes its operations.

      There can be no assurance that the Company will be able to achieve its
business plan objectives or that it will achieve or maintain cash flow positive
operating results. If the Company is unable to generate adequate funds from its
operations, the Company may not be able to continue to operate its network,
respond to competitive pressures or fund its operations. As a result, the
Company may be required to significantly reduce, reorganize, discontinue or shut
down its operations. These financial statements do not include any adjustments
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, LLC, DSLnet Communications VA, Inc., DSLnet
Atlantic, LLC, Tycho Networks, Inc. ("Tycho") and Vector Internet Services, Inc.
All material intercompany transactions and balances have been eliminated.

USE OF ESTIMATES

      The preparation of financial statements in accordance with generally
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, including the recoverability of tangible and intangible
assets, disclosure of contingent assets and liabilities as of the date of the
financial statements, and the reported amounts of revenues and expenses during
the reported period. The markets for the Company's services are characterized by
intense competition, rapid technological development, regulatory and legislative
changes, and frequent new product introductions, all of which could impact the
future value of the Company's assets and liabilities. Actual results may differ
from those estimates. Certain prior period amounts have been reclassified to
conform to the 2003 presentation.

                                       71
<PAGE>
                                  DSL.NET, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


      The Company evaluates its estimates on an on-going basis. The most
significant estimates relate to revenue recognition, goodwill and other
long-lived assets, the allowance for doubtful accounts, income taxes,
contingencies and litigation. Such estimates are based on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ materially from those estimates.

CASH EQUIVALENTS AND MARKETABLE SECURITIES

      The Company considers all highly liquid investments purchased with an
original maturity of three months or less from date of acquisition, to be cash
equivalents.

RESTRICTED CASH

      Restricted cash at December 31, 2003 and 2002 of $5 and $1, respectively,
represents the balance of unvested amounts of the Company's share of matching
contributions for terminated employees in the Company's 401(k) plan. This cash
is restricted for future funding of matching contributions to the Company's
401(k) plan.

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. No
individual customer accounted for more than 5% of the Company's revenue for the
years ended December 31, 2003, 2002 or 2001.

      The Federal Deposit Insurance Corporation's ("FDIC") maximum insurance
against bank failures for deposits is $100 per institution. The Company's funds,
maintained at its banking institutions from time to time, exceed the insured
amounts. The Company's short-term investment grade instruments generally are not
insured by the FDIC.

      In certain markets where the Company has not deployed its own DSL or T-1
equipment, the Company utilizes local DSL or T-1 facilities from wholesale
providers, including Covad Communications, Inc. ("Covad"), in order to provide
service to its end-user customers. These wholesale providers may terminate their
service with little or no notice. The failure of Covad or any of the Company's
other wholesale providers to provide acceptable service on acceptable terms
could have a material adverse effect on the Company's operations and cash flows.
There can be no assurance that Covad or other wholesale providers will be
successful in managing their operations and business plans.

      The Company transmits data across its network via transmission facilities
that are leased from certain carriers, including Level 3 Communications, Inc.
and MCI. The failure of any of the Company's data transport carriers to provide
acceptable service on acceptable terms could have a material adverse effect on
the Company's operations and cash flows. MCI, has filed a voluntary petition to
reorganize under Chapter 11 of the U.S. Bankruptcy Code. While MCI has continued
with its current operations and has announced that it expects to continue with
its current

                                       72
<PAGE>
                                  DSL.NET, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


operations without adverse impact on its customers, it may not be able to do so.
The Company believes that it could transition the data transport services
currently supplied by MCI to alternative suppliers in thirty to sixty days
should MCI announce discontinuance of such services. However, if MCI was to
discontinue such services without providing sufficient advance notice (at least
sixty days), the Company might not be able to transition such services in a
timely manner, which could disrupt service provided by the Company to certain of
its customers. This could result in the loss of revenue, loss of customers,
claims brought against the Company by its customers, or could otherwise have a
material adverse effect on the Company. Even if MCI was to provide adequate
notice of any such discontinuation of service, there can be no assurance that
the Company would be able to transition such service without a material adverse
impact on the Company or its customers, if at all.

INVENTORY

      Inventories consist of modems and routers (customer premise equipment or
"CPE") which we sell or lease to customers and are required to establish a high
speed DSL or T-1 digital connection. Inventories are stated at the lower of cost
or market. Cost of inventory is determined on the "first-in, first-out" ("FIFO")
or average cost methods. We establish inventory reserves for excess, obsolete or
slow-moving inventory based on changes in customer demand, technology

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. 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. Maintenance and repairs are
charged to expense as incurred. The Company also installs its equipment at
customer locations to enable connections to its network.

      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 were amortized on a straight-line
basis over the estimated future periods to be benefited, ranging from two to
five years. Goodwill represents the excess purchase price over the fair value of
identifiable net assets of businesses acquired. Effective January 1, 2002, the
Company adopted SFAS No. 142 "GOODWILL AND OTHER INTANGIBLE

                                       73
<PAGE>
                                  DSL.NET, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


ASSETS" ("SFAS No. 142"). The Company ceased to amortize $8,482 of goodwill in
accordance with the provisions of SFAS No. 142. The Company recorded
approximately $3,156 of goodwill amortization during 2001, $2,484 of which
related to the goodwill that it ceased to amortize in 2001.

      The Company completed its transitional goodwill impairment test during the
first quarter of 2002, which did not result in an impairment loss. The Company
reviews the recoverability of goodwill annually and when events and
circumstances change by comparing the estimated fair values of reporting units
with their respective net book values. If the fair value of a reporting unit
exceeds its carrying amount, the goodwill of the reporting unit is not
considered impaired. If the carrying amount of the reporting unit exceeds its
fair value, the goodwill impairment loss is measured as the excess of the
carrying value of goodwill over its implied fair value. The Company completed
its annual impairment test as of December 31, 2003 and 2002 and concluded that
goodwill was not impaired.

OTHER ASSETS

      Other assets include: (i) refundable deposits held as security on certain
lease or other obligations, (ii) deposits and associated direct costs paid in
connection with future acquisitions, subject to any post-closing adjustments,
and (iii) deferred financing costs which are amortized to general and
administrative expense over the respective terms of the related debt. As of
December 31, 2003 and 2002, refundable deposits were $659 and $1,167,
respectively, deposits and associated direct costs paid in connection with
future acquisitions were approximately $0 and $867, respectively, and deferred
financing costs of $510 and $15, respectively.

INCOME TAXES

      The Company uses the liability method of accounting for income taxes, as
set forth in SFAS 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.

      The Company has not generated any taxable income to date and, therefore,
has not paid any federal income taxes or state taxes based on income since
inception. The Company's state and federal net operating loss carryforwards
begin to expire in 2004 and 2019, respectively. Use of the Company's net
operating loss carryforwards may be subject to significant annual limitations
resulting from a change in control due to securities issuances including the
Company's sales of its mandatorily redeemable convertible Series X preferred
stock (the "Series X Preferred Stock") and its mandatorily redeemable
convertible Series Y preferred stock (the "Series Y Preferred Stock") in 2001
and 2002 (Note 9) and from the sale of $30,000 in notes and warrants in 2003
(Note 7). The Company is currently assessing the potential impact resulting from
these transactions. The Company has provided a valuation allowance for the full
amount of the net deferred tax asset since it has not determined that these
future benefits will more likely than not be realized.

                                       74
<PAGE>
                                  DSL.NET, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


REVENUE RECOGNITION

      The Company recognizes revenue in accordance with SEC Staff Accounting
Bulletin No. 101 (SAB No. 101), "Revenue Recognition in Financial Statements",
which requires that four basic criteria must be met before revenue can be
recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has
occurred or services have been rendered; (3) the fee is fixed and determinable;
and (4) collectibility is reasonably assured. Determination of criteria (3) and
(4) are based on management's judgments regarding the fixed nature of the fee
charged for services rendered and products delivered and the collectibility of
those fees.

      Revenue is recognized pursuant to the terms of each contract on a monthly
service fee basis, which varies based on the speed of the customer's broadband
connection and the services ordered by the customer. The monthly fee includes
phone line charges, Internet access charges, the cost of any leased equipment
installed at the customer's site and the other services, as applicable. Revenue
that is billed in advance of the services provided is deferred until the
services are provided by the Company. Revenue related to installation charges is
also deferred and amortized to revenue over 18 months, which is the average
customer life of the existing customer base. Related direct costs incurred (up
to the amount of deferred revenue) are also deferred and amortized to expense
over 18 months. Any excess direct costs over installation charges are charged to
expense as incurred. In certain instances, the Company negotiates credits and
allowances for service related matters. The Company establishes a reserve
against revenue for such credits based on historical experience. From time to
time the Company offers sales incentives to its customers in the form of rebates
toward select installation services and customer premise equipment. The Company
records a liability based on historical experience for such estimated rebate
costs, with a corresponding reduction to revenue.

      The Company seeks to price its services competitively. The market for
high-speed data communications services and Internet access is rapidly evolving
and intensely competitive. While many competitors and potential competitors may
enjoy competitive advantages over the Company, it is pursuing a significant
market that, it believes, is currently under-served. Although pricing is an
important part of the Company's strategy, management believes that direct
relationships with 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, which is a trend that might continue.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

      The Company maintains an allowance for doubtful accounts for estimated
losses resulting from the inability of its customers to make required payments.
The Company principally sells its services directly to end users mainly
consisting of small to medium sized businesses, but the Company also sells its
services to certain resellers, such as Internet service providers ("ISPs"). The
Company believes that it does not have significant exposure or concentrations of
credit risk with respect to any given customer. However, if the country or any
region the Company services experiences an economic downturn, the financial
condition of the Company's customers could be adversely affected, which could
result in their inability to make payments to the Company. This could require
additional provisions for allowances. In addition, a negative impact on revenue
and cash flows related to those customers may occur.

                                       75
<PAGE>
                                  DSL.NET, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


      With its acquisition of certain of the assets of Network Access Solutions
Corporation ("NAS") on January 10, 2003, the Company acquired a number of end
users, some of whom it serves indirectly through various ISPs. The Company sells
its services to such ISPs who then resell such services to the end user. The
Company has some increased exposure and concentration of credit risk pertaining
to such ISPs. However, no individual customer accounted for more than 5% of
revenue for 2003.

LONG-LIVED ASSETS

      For the fiscal years prior to 2002, the Company applied SFAS No. 121,
"ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF" ("SFAS No. 121"), which required 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.

      In August 2001, SFAS No. 144, "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL
OF LONG-LIVED ASSETS" ("SFAS No. 144"), was issued. SFAS No. 144 supersedes SFAS
No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS TO BE DISPOSED OF"
and supersedes and amends certain other accounting pronouncements. SFAS No. 144
retains the fundamental provisions of SFAS No. 121 for recognizing and measuring
impairment losses on long-lived assets held for use and long-lived assets to be
disposed of by sale, while resolving significant implementation issues
associated with SFAS No. 121. Among other things, SFAS No. 144 provides guidance
on how long-lived assets used as part of a group should be evaluated for
impairment, establishes criteria for when long-lived assets are held for sale,
and prescribes the accounting for long-lived assets that will be disposed of
other than by sale. SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001. The adoption of SFAS No. 144 on January 1, 2002, has not had
a material impact on the Company's financial position and results of operations.

STOCK COMPENSATION

      The Company applies Accounting Principles Board Opinion No. 25 ("APB No.
25") and related interpretations in accounting for its stock option plans and
stock awards with the disclosure provisions of SFAS No. 123, "ACCOUNTING FOR
STOCK-BASED COMPENSATION" ("SFAS No. 123"). Under APB No. 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 No. 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 years
ended December 31, 2003, 2002 and 2001, was approximately $438, $1,228 and
$1,202, respectively.

                                       76
<PAGE>
                                  DSL.NET, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


      If compensation expenses had been recognized based on the fair value of
the options at their grant date, in accordance with SFAS No. 123, the results of
operations for the years ended December 31, 2003, 2002 and 2001, would have been
as follows:
<TABLE><CAPTION>
                                                                       Year ended December 31,
                                                             ------------------------------------------
                                                                2003            2002            2001
                                                             ----------      ----------      ----------
<S>                                                          <C>             <C>             <C>
Net loss, as reported ..................................     $  (34,997)     $  (36,094)     $ (115,454)
Add: Stock-based employee compensation included in
   net income, net of related tax effects ..............            438           1,228           1,202
Deduct: Total stock-based employee compensation
   expense determined under fair value based method
   for all awards, net of related tax effects ..........         (3,863)         (4,476)         (3,477)
                                                             ----------      ----------      ----------
Pro forma under SFAS 123 ...............................     $  (38,422)     $  (39,342)     $ (117,729)

Net loss applicable to common stockholders:
   As reported .........................................     $  (53,022)     $  (49,745)     $ (115,924)
   Pro forma under SFAS 123 ............................     $  (56,447)     $  (52,993)     $ (118,199)
Basic and diluted net loss per common share:
   As reported .........................................     $    (0.72)     $    (0.77)     $    (1.81)
   Pro forma under SFAS 123 ............................     $    (0.76)     $    (0.82)     $    (1.85)
</TABLE>

EARNINGS (LOSS) PER SHARE

      The Company computes net loss per share pursuant to SFAS No. 128,
"Earnings Per Share." Basic earnings (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, excluding
shares subject to repurchase.

      Diluted earnings per share is determined in the same manner as basic
earnings 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 outstanding preferred stock. The
diluted earnings per share amount is presented herein as the same as the basic
earnings per share amount because the Company had a net loss during each period
presented, and the impact of the assumed exercise of stock options and warrants
and the assumed conversion of preferred stock would have been anti-dilutive.

      As of December 31, 2003, the Company had 105,449,054 shares of common
stock issued and outstanding. As of December 31, 2002, the Company had
64,929,899 shares of common stock issued and outstanding. The increase of
40,519,155 shares primarily resulted from common stock issued for preferred
stock conversions and for employee stock option exercises (Note 12). The
weighted average number of outstanding common shares used in computing earnings
per share for the years ended December 31, 2003, 2002 and 2001 were 74,125,513,
64,857,869 and 63,938,960, respectively.

                                       77
<PAGE>
                                  DSL.NET, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


      The following options, warrants and convertible preferred stock were
excluded from the calculation of earnings per share since their inclusion would
be anti-dilutive for all periods presented:
<TABLE><CAPTION>
                                                                            Shares of Common Stock
                                                                 ----------------------------------------------
                                                                                  December 31,
                                                                 ----------------------------------------------
                                                                     2003             2002             2001
                                                                 ------------     ------------     ------------
      <S>                                                        <C>              <C>              <C>
      Options to purchase common stock .....................       18,671,766       23,877,004       13,877,394
      Warrants to purchase common stock ....................      173,105,646       13,033,314           83,314
      Preferred Series X stock convertible to common stock..      111,111,111      111,111,111       55,555,556
      Preferred Series Y stock convertible to common stock..        2,260,909       30,000,000       12,938,000
                                                                 ------------     ------------     ------------
      Total ................................................      305,149,432      178,021,429       82,454,264
                                                                 ============     ============     ============
</TABLE>

COMPREHENSIVE INCOME

The Company has adopted the accounting treatment prescribed by SFAS 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 2001, SFAS No. 143, "ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS"
was issued. SFAS No. 143 addresses financial accounting and reporting for legal
obligations associated with the retirement of tangible long-lived assets and the
associated retirement costs that result from the acquisition, construction or
development and normal operation of a long-lived asset. Upon initial recognition
of a liability for an asset retirement obligation, SFAS No. 143 requires an
increase in the carrying amount of the related long-lived asset. The asset
retirement cost is subsequently allocated to expense using a systematic and
rational method over the asset's useful life. SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002. The adoption of this statement has
not had a material impact on the Company's financial position or results of
operations and cash flows.

      In August 2001, SFAS No. 144, "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL
OF LONG-LIVED ASSETS" was issued. SFAS No. 144 supersedes SFAS No. 121,
"ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS TO BE DISPOSED OF" and
supersedes and amends certain other accounting pronouncements. SFAS No. 144
retains the fundamental provisions of SFAS No. 121 for recognizing and measuring
impairment losses on long-lived assets held for use and long-lived assets to be
disposed of by sale, while resolving significant implementation issues
associated with SFAS No. 121. Among other things, SFAS No. 144 provides guidance
on how long-lived assets

                                       78
<PAGE>
                                  DSL.NET, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


used as part of a group should be evaluated for impairment, establishes criteria
for when long-lived assets are held for sale, and prescribes the accounting for
long-lived assets that will be disposed of other than by sale. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001. The adoption of
SFAS No. 144 has not had a material impact on the Company's financial position
or results of operations or cash flows.

      In June 2002, SFAS No. 146, "ACCOUNTING FOR EXIT OR DISPOSAL ACTIVITIES"
("SFAS NO. 146") was issued. SFAS No. 146 addresses the accounting for costs to
terminate a contract that is not a capital lease, costs to consolidate
facilities and relocate employees, and involuntary termination benefits under
one-time benefit arrangements that are not an ongoing benefit program or an
individual deferred compensation contract. The provisions of the statement will
be effective for disposal activities initiated after December 31, 2002. The
adoption of SFAS No. 146 did not have a material impact on the Company's
financial position or results of operations or cash flows.

      In December 2002, SFAS No. 148 "ACCOUNTING FOR STOCK-BASED COMPENSATION -
TRANSITION AND DISCLOSURE - AN AMENDMENT OF SFAS NO. 123" was issued. SFAS No.
148 amends SFAS No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION", to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS
No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results.

      In November 2002, the FASB issued Interpretation No. 45, "GUARANTOR'S
ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT
GUARANTEES OF INDEBTEDNESS OF OTHERS," ("FIN 45"). FIN 45 expands previously
issued accounting guidance and disclosure requirements for certain guarantees.
FIN 45 requires an entity to recognize an initial liability for the fair value
of an obligation assumed by issuing a guarantee. The disclosure requirements of
FIN 45 are effective for all financial statements issued after December 15,
2002. The provision for initial recognition and measurement of the liability
will be applied on a prospective basis to guarantees issued or modified after
December 31, 2002. The adoption of FIN 45 did not have a material affect on the
Company's financial position, results of operations or cash flows.

      In January 2003, the FASB issued FIN No. 46, "CONSOLIDATION OF VARIABLE
INTEREST ENTITIES." FIN No. 46 requires that companies that control another
entity through interests other than voting interests should consolidate the
controlled entity. FIN No. 46 is effective for variable interest entities
created after January 31, 2003 and to any variable interest entities in which
the company obtains an interest after that date. FIN No. 46 was originally
effective for the quarter ending September 30, 2003 for variable interest
entities in which the company held a variable interest that it acquired before
February 1, 2003. However, in October 2003, the FASB deferred the effective date
for implementation of FIN No. 46 until December 31, 2003. Accordingly, DSLnet
adopted FIN No. 46 effective December 31, 2003 with no material impact on its
financial condition or results of operations or cash flows.

      In April 2003, the FASB issued SFAS No. 149, "AMENDMENT OF STATEMENT 133
ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES." SFAS No. 149 amends and
clarifies certain derivative instruments embedded in other contracts, and for
hedging activities under SFAS No. 133. SFAS No. 149 was effective for certain
contracts entered into or modified after June 30, 2003. DSL.net adopted SFAS No.
149 effective July 1, 2003 with no material impact on its financial condition or
results of operations or cash flows.

                                       79
<PAGE>
                                  DSL.NET, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


      In May 2003, the FASB issued SFAS No. 150, "ACCOUNTING FOR CERTAIN
FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY." SFAS
No. 150 specifies that freestanding financial instruments within its scope
constitute obligations of the issuer and that, therefore, the issuer must
classify them as liabilities. Such freestanding financial instruments include
mandatorily redeemable financial instruments, obligations to repurchase the
issuer's equity shares by transferring assets and certain obligations to issue a
variable number of shares. SFAS No. 150 was effective immediately for all
financial instruments entered into or modified after May 31, 2003. For all other
instruments, SFAS No. 150 was effective at the beginning of the third quarter of
2003. DSL.net adopted SFAS No. 150 effective July 1, 2003 with no material
impact on its financial condition or results of operations or cash flows.

      In May 2003, The Emerging Issues Task Force ("EITF") released Issue No.
00-21 "REVENUE ARRANGEMENTS WITH MULTIPLE DELIVERABLES" ("EITF 00-21"). EITF
00-21 requires that: (i) revenue arrangements with multiple deliverables be
divided into separate units of accounting if: the deliverables in the
arrangement have value to the customer on a standalone basis; there is objective
and reliable evidence of the fair value of the undelivered items; and if the
arrangement includes a right of return of a delivered item, delivery or
performance of the undelivered items is considered probable and substantially in
control of the vendor, (ii) arrangement consideration should be allocated among
the separate units of accounting based on their relative fair values, and (iii)
applicable revenue recognition criteria should be considered separately for
separate units of accounting. EITF 00-21 became effective for revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. The
Company has not yet adopted EITF 00-21, but it has evaluated the impact of
adoption, and determined that it would not have a material effect on its
financial condition or results of operations or cash flows.


3.    FIXED ASSETS
<TABLE><CAPTION>
                                                       Estimated
                                                         Useful
                                                         Lives       2003       2002
                                                       ---------   --------   --------
<S>                                                    <C>         <C>        <C>
Network and computer equipment.......................  3-5 years   $ 45,303   $ 35,893
Furniture, fixtures, office equipment and software...  3-5 years     18,994     18,507
Vehicles.............................................    3 years        190        148
Collocation costs....................................    5 years     16,985     12,430
                                                                   --------   --------
                                                                     81,472     67,068
Less-accumulated depreciation and amortization...................    57,115     44,002
                                                                   --------   --------
                                                                   $ 24,357   $ 23,066
                                                                   ========   ========
</TABLE>

      As of December 31, 2003 and 2002, the recorded cost of equipment under
capital lease was $566 and $10,276, respectively. As of December 31, 2003 and
2002, the cost of equipment under capital lease included in network and computer
equipment was $173 and $8,901, respectively. The cost of equipment under capital
lease included in furniture, fixtures, office equipment and software as of
December 31, 2003 and 2002, was $393 and $1,375, respectively. Accumulated
depreciation for this equipment under capital lease at December 31, 2003 and
2002, was $442 and $6,416, respectively.

                                       80
<PAGE>
                                  DSL.NET, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


      As of December 31, 2003 and 2002, the Company had capitalized computer
software costs of $10,583 and $10,055, respectively, and had recorded
accumulated amortization expense related to these costs of $10,027 and $9,173,
respectively. Depreciation and amortization expense related to fixed assets was
$13,604, $14,983 and $20,118, for the years ended December 31, 2003, 2002 and
2001, respectively.


4.    ACQUISITIONS

      On April 8, 2003, the Company entered into an asset purchase agreement
with TalkingNets, Inc. and TalkingNets Holdings, LLC (collectively,
"TalkingNets") pursuant to which the Company agreed to acquire assets and
subscribers of TalkingNets (the "TalkingNets Assets") for $726 in cash (the
"TalkingNets Asset Purchase Agreement"). As TalkingNets had filed a voluntary
petition for Chapter 11 reorganization in February 2003, the TalkingNets Asset
Purchase Agreement was subject to the approval of the U.S. Bankruptcy Court for
the Eastern District of Virginia. On April 9, 2003, the TalkingNets Asset
Purchase Agreement and the transactions contemplated thereby were approved by
the Bankruptcy Court. On April 11, 2003, the Company paid the full purchase
price of $726 into escrow.

      On September 8, 2003, in accordance with the TalkingNets Asset Purchase
Agreement, the Company completed its transaction to acquire the TalkingNets
Assets. This acquisition has been accounted for under the purchase method of
accounting in accordance with SFAS No. 141. The results of TalkingNets'
operations have been included in the Company's consolidated financial statements
since September 8, 2003 (the closing date). The estimated fair values of the
acquired assets at the date of acquisition exceeded the purchase price and,
accordingly, the acquired assets have been written down on a pro-rata basis by
asset group to the purchase price of approximately $851 ($726 plus associated
direct acquisition costs of approximately $125) as follows: (i) certain accounts
receivables of $55, (ii) intangible assets pertaining to approximately 90
acquired subscriber lines of $111, and (iii) property and equipment of $685.

      In December of 2002, the U.S. Bankruptcy Court for the District of
Delaware approved the Company's bid to purchase certain network assets,
equipment and associated subscriber lines of NAS for $14,000 consisting of
$9,000 in cash and $5,000 in a note payable to NAS. The Company closed the
transaction on January 10, 2003, whereby it acquired certain of NAS' network
assets, equipment in approximately 300 central offices and approximately 11,500
associated subscriber lines (the "NAS Assets"), pursuant to an Amended and
Restated Asset Purchase Agreement, (the "NAS Asset Purchase Agreement").
Additionally, on January 10, 2003, the Company hired approximately 78 employees
formerly employed by NAS. No pre-closing liabilities were assumed in connection
with the NAS transaction. The cash portion of the consideration was paid from
the Company's existing cash. In accordance with the NAS Asset Purchase
Agreement, the Company negotiated a $1,083 reduction in the cash paid at the
closing, representing the Company's portion of January revenue which was billed
and collected by NAS, bringing the net cash paid for the NAS Assets to $7,917.

      NAS provided high-speed Internet and virtual private network services to
business customers using digital subscriber line, frame relay and T-1 technology
via its own network facilities in the Northeast and Mid-Atlantic markets. The
NAS acquisition significantly increased the Company's

                                       81
<PAGE>
                                  DSL.NET, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


subscriber base and its facilities-based footprint in one of the largest
business markets in the United States.

      The acquisition has been accounted for under the purchase method of
accounting in accordance with SFAS No. 141 "BUSINESS COMBINATIONS" ("SFAS No.
141"). The results of NAS' operations have been included in the consolidated
financial statements since January 10, 2003 (the acquisition date). The
estimated fair values of the acquired assets at the date of acquisition exceeded
the purchase price and, accordingly, the acquired assets have been written down
on a pro-rata basis by asset group to the purchase price of approximately
$14,737 ($14,000 plus associated direct acquisition costs of approximately $737)
as follows: (i) intangible assets pertaining to approximately 11,500 acquired
subscriber lines of $1,480 and (ii) property and equipment of $13,113 and
inventory of $144. In July, 2003, the Company paid $1,500 into escrow for the
negotiated repurchase and cancellation of the $5,000 note issued by the Company
to NAS as part of the purchase price for the NAS Assets. The payment was subject
to approval by the bankruptcy court presiding over NAS' bankruptcy petition. On
August 25, 2003, the court approved the transaction, and the $1,500 held in
escrow was paid to NAS in full satisfaction of the note.

      With the acquisition of the NAS Assets on January 10, 2003, the Company
acquired a number of end users, some of whom it serves indirectly through
various ISPs. The Company sells its services to such ISPs who then resell such
services to the end user. Accordingly, the Company had some increased exposure
and concentration of credit risk pertaining to such ISPs during 2003. However,
no individual customer accounted for more than 5% of revenue for 2003.

      During the quarter ended September 30, 2002, the Company entered into an
Asset Purchase Agreement dated as of July 30, 2002 (the "Abacus Asset Purchase
Agreement") with Abacus America, Inc. ("Abacus") for the purchase of broadband
subscriber lines. The Abacus Asset Purchase Agreement provided for a cash
payment for each successfully migrated broadband customer line, up to a maximum
payment of approximately $844, and required a purchase price deposit of
approximately $211. Ultimately, the Company was able to migrate and acquire
1,066 lines for a purchase price of approximately $543. The Abacus customer line
acquisitions were accounted for under the purchase method of accounting and,
accordingly, the purchase price has been allocated to the subscriber lines
acquired based on their estimated fair values at the date of acquisition. This
amount is being amortized on a straight-line basis over two years from the date
of purchase.

      During the quarter ended March 31, 2002, the Company entered into an Asset
Purchase Agreement, dated as of January 1, 2002, with Broadslate Networks, Inc.
("Broadslate") for the purchase of business broadband customer accounts and
certain other assets, including certain accounts receivable related to the
customer accounts. The initial purchase price of approximately $800 was subject
to certain adjustments, which resulted in a $50 reduction in the purchase price.
The Broadslate customer line acquisitions were accounted for under the purchase
method of accounting and, accordingly, the adjusted purchase price of
approximately $750 was allocated to the assets acquired based on their estimated
fair values at the date of acquisition as follows: approximately $28 to net
accounts receivable acquired and approximately $722 to approximately 520
subscriber lines acquired, which amount is being amortized on a straight-line
basis over two years from the date of purchase.

      During the quarter ended June 30, 2001, the Company entered into
agreements with Covad

                                       82
<PAGE>
                                  DSL.NET, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


and Zyan Communications, Inc. ("Zyan"), a California-based ISP which had filed
for bankruptcy protection; affording the Company the right to acquire up to
4,800 Zyan subscriber lines whose wholesale circuit connections were being
supported by Covad. In accordance with the Covad agreement, the anticipated
purchase price of $1,467 for these Zyan lines was escrowed at closing and
restricted as of June 30, 2001. Ultimately, the Company was able to contract for
service with and acquire approximately 2,800 former Zyan customers, for a
purchase price of approximately $1,075 and as of December 31, 2001 the remaining
escrow balance of approximately $392 had been returned to the Company. These
Zyan customer line acquisitions were accounted for under the purchase method of
accounting and, accordingly, the purchase price was allocated to subscriber
lines acquired based on their estimated fair values at the date of acquisition.
This amount is being amortized on a straight-line basis over two years.

      The following table sets forth the unaudited pro forma consolidated
financial information of the Company, giving effect to the acquisition of end
users under the Covad Safety Net program and the acquisition of Zyan customers,
Broadslate customers, Abacus customers, and NAS customers as if the transactions
occurred at the beginning of the periods presented. Inclusion of the TalkingNets
Acquisition would not materially change the pro forma results.
<TABLE><CAPTION>
                                                                 Year ended December 31,
                                                       ------------------------------------------
                                                           2003           2002           2001
                                                       ------------   ------------   ------------
<S>                                                    <C>            <C>            <C>
Pro forma revenue                                      $     72,091   $     71,615   $     48,805
Pro forma operating loss                                    (29,604)       (43,477)      (112,513)
Pro forma net loss                                          (35,016)       (65,269)      (112,998)
Pro forma net loss applicable to common stockholders   $    (53,041)  $    (78,921)  $   (113,463)
Pro forma net loss per share, basic and diluted        $      (0.72)  $       1.22   $      (1.77)
Shares used in computing pro forma net loss
  per share, basic and diluted                           74,125,513     64,857,869     63,938,960
</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.

      The revenue attributable to subscriber lines acquired for the years ended
December 31, 2003, 2002 and 2001, was approximately $23,012, $2,068 and $5,326,
respectively.


5.    GOODWILL AND OTHER INTANGIBLE ASSETS

      In June 2001, a goodwill impairment analysis was performed on the
Company's recorded goodwill for Tycho and Trusted Net by comparing the carrying
value of the goodwill with the expected future net cash flows generated over the
remaining useful life of the assets. Tycho and Trusted Net Media Holdings, LLC
("Trusted Net") goodwill resulted from acquisitions in 1999 and 2000,
respectively. Since the carrying value was more than the expected future net
cash flows due to the under performance of the acquired assets, the goodwill was
reduced by approximately $3,155 to the net present value of the expected future
net cash flows. Of this amount, $2,124 related to a reduction in the goodwill
for the Company's acquisition of Tycho and $1,031 related to a reduction in the
goodwill for the Company's acquisition of certain assets of Trusted Net. In
September 2001, a goodwill impairment analysis was again performed on the
Company's recorded goodwill for Tycho and Trusted Net by comparing the carrying
value of the goodwill with the expected future net cash flows generated over the
remaining useful life of the assets. As a result of this analysis, expected
future net cash flows were determined to be

                                       83
<PAGE>
                                  DSL.NET, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


insignificant and, as the carrying value was more than the expected future net
cash flows, the balance of goodwill of approximately $800 was written off. Of
this amount, approximately $170 and $630 pertained to reductions in the goodwill
of Tycho and Trusted Net, respectively (Note 15).

      The following table shows the gross and unamortized balances of goodwill
and other intangible assets:
<TABLE><CAPTION>
                                December 31, 2003                              December 31, 2002
                   ------------------------------------------     ------------------------------------------
                                   Accumulated                                    Accumulated
                       Gross      Amortization        Net             Gross      Amortization        Net
                   ------------   ------------   ------------     ------------   ------------   ------------
<S>                <C>            <C>            <C>              <C>            <C>            <C>
Goodwill           $     12,413   $      3,931   $      8,482     $     12,413   $      3,931   $      8,482
Customer lists           15,506         14,496          1,010           13,914         11,740          2,174
                   ------------------------------------------     ------------------------------------------
   Total           $     27,919   $     18,427   $      9,492     $     26,327   $     15,671   $     10,656
                   ==========================================     ==========================================
</TABLE>

      Amortization expense of other intangible assets for the years ended
December 31, 2003 and 2002 was $2,756 and $5,349, respectively. Accumulated
amortization at December 31, 2003 and 2002, was $18,427 and $15,671,
respectively. Amortization expense of goodwill and other intangible assets for
the year ended December 31, 2001 was $7,925. The future amortization of the
unamortized balance of customer lists as of December 31, 2003, is $954 in 2004
and $56 in 2005.

      In accordance with SFAS No. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS"
("SFAS No. 142"), which became effective on January 1, 2002, the Company ceased
to amortize $8,482 of goodwill in accordance with the provisions of SFAS No.
142. The Company recorded approximately $3,156 of goodwill amortization during
2001, $2,484 of which related to the goodwill that it ceased to amortize.

      In lieu of amortization, the Company made an initial impairment review of
its goodwill in January of 2002 which did not result in any impairment
adjustments. Annual impairment reviews were performed in December of 2002 and
2003. The Company did not record any goodwill impairment adjustments resulting
from its impairment reviews. The Company will continue to perform annual
impairment reviews, unless a change in circumstances requires a review in the
interim.

      The following table sets forth the effect on the Company's net loss and
net loss per share had SFAS No. 142 been effective at the beginning of the
periods presented.

                                        For the Year Ended December 31,
                                   ----------------------------------------
                                      2003           2002           2001
                                   ----------------------------------------
Reported: Net Loss                 $  (34,997)    $  (36,094)   $  (115,454)
Add back: Goodwill amortization            --             --          3,156
Adjusted Net Loss                  $  (34,997)    $  (36,094)   $  (112,298)


                                       84
<PAGE>
                                  DSL.NET, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


Basic earnings per share:
Reported: Net Loss                 $    (0.72)    $    (0.77)   $     (1.81)
Goodwill amortization                      --             --           0.05
Adjusted Net Loss                  $    (0.72)    $    (0.77)   $     (1.76)

Diluted earnings per share
Reported: Net Loss                 $    (0.72)    $    (0.77)   $     (1.81)
Goodwill amortization                      --             --           0.05
Adjusted Net Loss                  $    (0.72)    $    (0.77)   $     (1.76)



6.    DEBT

      In December 2001, in conjunction with the Company's sale of shares of
Series Y Preferred Stock, the Company issued short-term promissory notes for
proceeds of $3,531 to the holders of the Series Y Preferred Stock. The
promissory notes provided for an annual interest rate of 12%. In May 2002, in
accordance with the terms of the Series Y Purchase Agreement (as defined below),
the Company sold an additional 8,531 shares of its Series Y Preferred Stock for
$5,000 in cash and delivery of the promissory notes for cancellation. All
accrued interest on the promissory notes, of approximately $145, was forgiven
(Note 9).

      On January 10, 2003, the Company issued a $5,000 note to NAS in
conjunction with its acquisition of the NAS Assets (Note 5). The company
negotiated settlement of the note for $1,500, which was approved by the
bankruptcy court on August 25, 2003 and resulted in a gain of $3,500 in other
income.

      The Company entered into a Revolving Credit and Term Loan Agreement, dated
as of December 13, 2002 (the "Credit Agreement"), with a commercial bank
providing for a revolving line of credit of up to $15,000 (the "Commitment").
Interest on borrowings under the Credit Agreement was payable at 0.5% percent
above the Federal Funds Effective rate. The Company's ability to borrow amounts
available under the Credit Agreement was subject to the bank's receipt of a like
amount of guarantees from certain of the Company's investors and/or other
guarantors. On February 3, 2003, the Company borrowed $6,100 under the Credit
Agreement. As of March 3, 2003, certain of the Company's investors had
guaranteed $9,100 under the Credit Agreement. On July 18, 2003, the Company
repaid the $6,100 outstanding balance plus accrued interest and terminated the
Credit Agreement. The Company wrote off approximately $184 of the related
unamortized balance of loan origination fees.

      The Company entered into a Reimbursement Agreement and related Security
Agreement, dated as of December 27, 2002, with VantagePoint and Columbia and
other holders of or affiliates of holders of the Company's Series X and Series Y
Preferred Stock (the Guarantors"). Pursuant to the terms of the Reimbursement
Agreement, on December 27, 2002, VantagePoint and Columbia issued guarantees in
an aggregate amount of $6,100 to support certain obligations of the Company
under the Credit Agreement. On July 18, 2003, in connection with the termination
of the Credit Agreement, the guarantees, Reimbursement Agreement and related
Security Agreement were terminated.

      Pursuant to the terms of the Reimbursement Agreement, on December 27,
2002, the Company issued warrants to purchase an aggregate of 12,013,893 shares
of its common stock to

                                       85
<PAGE>
                                  DSL.NET, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


VantagePoint and Columbia, in consideration for their guarantees aggregating
$6,100. All such warrants have a ten year life and an exercise price of $0.50
per share. On March 26, 2003, the Company issued additional warrants,
exercisable for ten years, to purchase a total of 936,107 shares of its common
stock at $0.50 per share to VantagePoint and Columbia, bringing the total number
of warrants issued in connection with the Reimbursement Agreement to 12,950,000.
On February 3, 2003, the Company borrowed on the Credit Agreement and the
Guarantors' guarantees of the subject loan became effective.

      On February 3, 2003, the Company valued the 12,950,000 warrants at $0.514
each with a total value of approximately $6,656. The valuation was performed
using a Black-Scholes valuation model with the following assumptions: (i) a risk
free interest rate of 4.01% (ten-year Treasury rate), (ii) a zero dividend
yield, (iii) a ten year expected life, (iv) an expected volatility of 153%, (v)
an option exercise price of $0.50 per share and (vi) a current market price of
$0.52 per share (the closing price of the Company's common stock on February 3,
2003). Since the warrants were issued in consideration for loan guarantees,
which enabled the Company to secure financing at below market interest rates,
the Company recorded their value as a deferred debt financing cost to be
amortized to interest expense over the term of the loan (approximately 57
months) using the "Effective Interest Method" of amortization. On July 18, 2003,
the Company repaid its outstanding loan balance that was secured by these loan
guarantees, and terminated the Credit Agreement. Accordingly, the Company
wrote-off approximately $5,747 of the related unamortized balance of deferred
financing costs to other expense. For the year ended December 31, 2003 expense
relating to amortized deferred financing costs was approximately $909.

      On March 3, 2003, the Company and certain of the Guarantors entered into
Amendment No. 1 to the Reimbursement Agreement, pursuant to which VantagePoint
increased its guarantee by $3,000 bringing the aggregate guarantees by all
Guarantors under the Reimbursement Agreement, as amended, to $9,100. As
consideration for VantagePoint's increased guarantee, if the Company closed an
equity financing on or before December 3, 2003, it was authorized to issue
VantagePoint additional warrants to purchase the type of equity securities
issued by the Company in such equity financing. The number of such additional
warrants would be determined by dividing the per share price of such equity
securities into a thousand dollars. Accordingly, since the Company closed a
financing on July 18, 2003, the Company issued to VantagePoint in December 2003,
additional warrants with a three year life, to purchase 2,260,909 shares of its
common stock at a per share price of $0.4423.

      On July 18, 2003, the Company entered into a Note and Warrant Purchase
Agreement (the "Note and Warrant Purchase Agreement") with Deutsche Bank AG
London, acting through DB Advisors LLC as Investment Agent ("Deutsche Bank"),
VantagePoint Venture Partners III (Q), L.P., VantagePoint Venture Partners III,
L.P., VantagePoint Communications Partners, L.P. and VantagePoint Venture
Partners 1996, L.P. (collectively, the "Investors") relating to the sale of an
aggregate of (i) $30,000 in senior secured promissory notes (the "Notes") and
(ii) warrants to purchase an aggregate of 157,894,737 shares of the Company's
common stock for a period of three years at an exercise price of $0.38 per share
(the "Warrants"). The aggregate purchase price for the Notes and Warrants was
$30,000.

      Subject to the terms and conditions of the Note and Warrant Purchase
Agreement, the Company issued an aggregate of $30,000 in principal amount of
Notes to the Investors on July 18, 2003. Principal on the Notes is payable in a
single payment on July 18, 2006. The Notes provide for an annual interest rate
of 1.23%, payable in cash quarterly in arrears commencing on

                                       86
<PAGE>
                                  DSL.NET, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


October 31, 2003, unless the Company elects to defer payment of such interest
and pay it together with the principal amount of the Notes at maturity on July
18, 2006. Pursuant to the terms of the Security Agreement, the Company's
obligations under the Notes are secured by a security interest in a majority of
the personal property and assets of the Company and certain of its subsidiaries.
Interest expense accrued on the Notes for year ended December 31, 2003
approximated $170. The Company elected to defer all interest payments until
further notice.

      Subject to the terms and conditions of the Note and Warrant Purchase
Agreement, the Company issued a warrant to purchase 12,950,000 shares of its
common stock to Deutsche Bank on or about August 12, 2003. The Company issued
the remaining Warrants to purchase an aggregate of 144,944,737 shares of its
common stock to Deutsche Bank (105,471,053 shares) and VantagePoint (39,473,864
shares) on or about December 9, 2003. All of these warrants were issued with an
exercise price of $0.38 per share.

      On July 18, 2003, the Company recorded the Note and Warrant transactions
in accordance with Accounting Principals Board Opinion No. 14, "ACCOUNTING FOR
CONVERTIBLE DEBT AND DEBT ISSUED WITH STOCK PURCHASE WARRANTS," whereby a fair
value was ascribed to the 157,894,737 Warrants to be issued to the Investors
(related to the Note and Warrant Purchase Agreement) together with the 2,260,909
warrants to be issued to VantagePoint (related to VantagePoint's increased
guarantee under Amendment No. 1 to the Reimbursement Agreement) using a
Black-Scholes valuation model with the following assumptions: (i) a risk free
interest rate of 2.24% (three-year Treasury rate), (ii) a zero dividend yield,
(iii) a three-year life, (iv) an expected volatility of 152%, (v) a warrant
option price of $0.38 per share for the 157,894,737 Warrants and $0.4423 per
share for the 2,260,909 warrants and (vi) a current market price of $0.83 (the
closing price of the Company's common stock on July 18, 2003) per share. A fair
value was ascribed to the Notes using a present value method with a 19% discount
rate. The relative fair value of the warrants representing 87% of the combined
fair value of the warrants and Notes was applied to the $30,000 proceeds to
determine a note discount of approximately $26,063 which was recorded as a
reduction to the Notes payable and an increase to additional paid in capital.
The note discount is being amortized to interest expense using the "Effective
Interest Method" of amortization over the 36 month term of the Notes. For the
year ended December 31, 2003, approximately $1,266 of this note discount has
been amortized to interest expense.

      The proceeds from the sale of the Notes and Warrants will be (and portions
already have been) used by the Company for general corporate purposes, including
acquisitions, the roll out of the Company's integrated voice and data service
product offering, the expansion of the Company's sales and marketing activities
and repayment of certain debt and lease obligations. As of December 31, 2003,
the Company has paid approximately $10,200 for the complete repayment of
approximately $14,600 of its debt and lease obligations.

      On July 18, 2003, in connection with the Note and Warrant Purchase
Agreement, the Company, the Investors and certain of the stockholders of the
Company entered an Amended and Restated Stockholders Agreement, which provides
for rights relating to the election of directors, the registration of the
Company's common stock and certain protective provisions.


7.    COMMITMENTS AND CONTINGENCIES

LEASES

                                       87
<PAGE>
                                  DSL.NET, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


      Rent expense under operating leases was approximately $1,480, $1,460 and
$1,918, for the years ended December 31, 2003, 2002 and 2001, respectively.

      The Company leases space in several buildings, which are used for office
and network operations facilities. The Company is obligated under various
building leases and capital equipment leases, primarily for its network and
computer equipment, which expire at different times through February 2008.

      The future minimum annual lease payments under the terms of such
non-cancelable leases as of December 31, 2003 are as follows:

                                                     Operating          Capital
                                                      Leases            Leases
                                                     --------          --------
      2004                                           $  1,987          $    116
      2005                                                520                51
      2006                                                233                --
      2007                                                169                --
      2008                                                 28                --
      Thereafter                                           --                --
                                                     --------------------------
                                                     $  2,937          $    167
                                                     ========
      Less: Amount representing interest                                     12
                                                                       --------
      Present value of future minimum lease payments                   $    155
                                                                       ========

      In March 1999, the Company entered into a master lease agreement to
provide up to $2,000 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, 2003 and 2002 was $0
and approximately $113, 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 under this agreement. In July 2003, the Company paid
$2,600 in full settlement of certain outstanding capital lease obligations
approximating $3,728. The difference between the lease carrying value and the
purchase price of the assets, approximately $1,128 was recorded as a reduction
of the carrying value of the assets acquired under the lease obligation. Amounts
financed under this lease agreement carried an interest rate of 12% per annum
and were secured by the financed equipment. The outstanding capital lease
obligation under this agreement at December 31, 2003 and 2002 was $0 and
approximately $4,099, respectively.

      In addition, during 1999 and 2000, the Company 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 were capital lease
obligations of approximately $155 and $4,565 at December 31, 2003 and 2002,
respectively.

      In February 2002, the Company negotiated a termination of its obligations
under its lease for vacated office space located in Milford, Connecticut and
incurred total expenses in connection with this office closure of approximately
$1,109. The Company had recorded adequate reserves

                                       88
<PAGE>
                                  DSL.NET, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


for these expenses as part of its restructuring charges during the year ended
December 31, 2001. Consequently, no additional costs related to this lease were
recorded during the year ended December 31, 2002.

PURCHASE COMMITMENTS

      The Company has long-term purchase commitments with MCI and AT&T (which
commitment ended October, 2003), for data transport services with minimum
payments due even if the Company's usage does not reach the minimum amounts. The
MCI commitment began in May 2000 and required minimum purchases of $4,800 per
contract year. In October 2002, the contract was amended, pursuant to its terms
and for no additional consideration, to (i) provide for certain price
reductions, (ii) reduce the Company's minimum purchase commitment from $4,800
per contract year to $1,800 per contract year for contract years beginning on
and after June 1, 2002, and (iii) allow the Company to include certain
additional services toward meeting the minimum purchase commitment (which were
previously excluded) on a retroactive and prospective basis. The MCI contract
ends in November 2004.

      In January 2002, the Company negotiated an amendment to its long-term
purchase commitment with AT&T for data transport services. The amendment reduced
the Company's minimum purchase commitment to $1,100 for the contract year ending
in November 2002 and $987 for the contract period ending in October 2003. The
Company also had a commitment to purchase approximately $18 per month of certain
additional network facilities from AT&T throughout the commitment period. The
AT&T contract and related commitments ended in October, 2003.














                                       89
<PAGE>
                                  DSL.NET, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


      The following table depicts the Company's long-term purchase commitments
with the above described service providers:
<TABLE><CAPTION>
                                                                         AT&T
                                       MCI Data        AT&T Data      Additional
                                       Transport       Transport       Network
      Commitment Term                  Services        Services       Facilities        Total
      -------------------------------------------------------------------------------------------
      <S>                            <C>             <C>             <C>             <C>
      Nov., 9, 2002 - Oct. 3, 2003   $         --    $        987    $        194    $      1,181

      June 2002 - May 2003                  1,800    $         --              --           1,800

      June 2003 - May 2004                  1,800              --              --           1,800

      June 2004 - November 2004               900              --              --             900
                                     ------------    ------------    ------------    ------------
              Total                  $      4,500    $        987    $        194    $      5,681
                                     ============    ============    ============    ============
</TABLE>

LITIGATION

      A lawsuit for wrongful termination of employment was filed against the
Company in the Superior Court in New Haven, Connecticut on July 29, 1999 by a
former officer who was employed by the Company for less than two months.
Plaintiff's claims are based chiefly on his allegation that the Company
terminated his employment because he allegedly voiced concerns to senior
management about the feasibility of certain aspects of the Company's business
strategy. The plaintiff is principally seeking compensatory damages for wages
and unvested stock options. The Company denies the plaintiff's allegations and
believes that his claims are without merit. The Company has been defending the
case vigorously and plans to continue to do so.

      A lawsuit was filed against the Company in Connecticut State Court in the
Judicial District of New Haven on January 15, 2004 by an individual who claims
that he was offered a sales manager position at the Company in December 2003 but
was deprived of that position at or immediately prior to his initial employment
date. The plaintiff's complaint includes claims for breach of contract,
negligent misrepresentation and intentional infliction of emotional distress.
The Company denies the plaintiff's allegations and believes that his claims are
without merit. The Company plans to defend the case vigorously.

      The Company is also a party to legal proceedings related to regulatory
approvals and is subject to state commission, FCC and court decisions related to
the interpretation and implementation of the 1996 Telecommunications Act and the
interpretation of competitive carrier interconnection agreements in general and
the Company's interconnection agreements in particular. In some cases, the
Company may be deemed to be bound by the results of ongoing proceedings of these
bodies. The Company, therefore, may participate in proceedings before these
regulatory agencies or judicial bodies that may materially adversely affect,
and/or allow it to favorably advance, various aspects of its business plan.

      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 these legal claims or

                                       90
<PAGE>
                                  DSL.NET, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


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 with traditional
local telephone companies. The agreements generally 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 has renewed such
agreements beyond their initial terms in the past and anticipates that it will
do so in the future. The Company also is currently awaiting clarification from
several traditional local telephone companies with respect to their
understanding regarding which (if any) provisions of such agreements need be
amended as a result of the D.C. Circuit Court's decision in the action United
States Telecom Association v. Federal Communications Commission and United
States of America, Consolidated Case No. 00-1012, WL 374262 (D.C. Cir. Mar. 2
2004). Failure to re-negotiate favorable interconnection agreements or delays
in negotiations could have a material adverse effect on the Company's
operations.

      In certain markets where the Company has not deployed its own equipment,
the Company utilizes local facilities from wholesale providers, including Covad,
in order to provide service to its end-user customers. These wholesale providers
may terminate their service with little or no notice. The failure of Covad or
any of the Company's other wholesale providers to provide acceptable service
could have a material adverse effect on the Company's operations. There can be
no assurance that Covad or other wholesale providers will be successful in
managing their operations and business plans.

      The Company transmits data across its network via transmission facilities
that are leased from certain carriers, including Level 3 Communications, Inc.
and MCI. The failure of any of the Company's data transport carriers to provide
acceptable service on acceptable terms could have a material adverse effect on
the Company's operations. MCI, filed a voluntary petition to reorganize under
Chapter 11 of the U.S. Bankruptcy Code in July of 2002. While MCI has continued
its current operations and has announced that it expects to continue with its
current operations without adverse impact on its customers, it may not be able
to do so. The Company believes that it could transition the data transport
services currently supplied by MCI to alternative suppliers in thirty to sixty
days should MCI announce discontinuance of such services. However, if MCI was to
discontinue such services without providing sufficient advance notice (at least
sixty days), the Company might not be able to transition such services in a
timely manner, which could disrupt service provided by the Company to certain of
its customers. This could result in the loss of revenue, loss of customers,
claims brought against the Company by its customers, or could otherwise have a
material adverse effect on the Company. Even if MCI was to provide adequate
notice of any such discontinuation of service, there can be no assurance that
the Company would be able to transition such service without a material adverse
impact on the Company or its customers, if at all.


8.    RELATED PARTY TRANSACTIONS

      On November 14, 2001, the Company entered into a Series X Preferred Stock
Purchase Agreement (the "Series X Purchase Agreement") with several private
investment funds affiliated with VantagePoint Venture Partners (collectively
"VantagePoint") relating to the sale and purchase of up to an aggregate of
20,000 shares of Series X Preferred Stock at a purchase price of

                                       91
<PAGE>
                                  DSL.NET, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


$1,000 per share. Pursuant to the Series X Purchase Agreement, on November 14,
2001, December 10, 2001 and March 1, 2002 the Company sold an aggregate of 6,000
shares, 4,000 shares and 10,000 shares, respectively, of Series X Preferred
Stock to VantagePoint for total proceeds of $20,000, before direct issuance
costs of $189 (Note 9). Prior to the sale of the 20,000 shares of Series X
Preferred Stock, VantagePoint beneficially owned approximately 21,956,063 shares
of the Company's total outstanding common stock. The 20,000 shares of Series X
Preferred Stock issued to VantagePoint are convertible into approximately
111,111,111 shares of the Company's common stock. After the sale of the Series X
Preferred Stock, VantagePoint beneficially owned the equivalent of 133,067,174
shares of the Company's common stock (Notes 9 and 16). Two affiliates of
VantagePoint are members of the Company's Board of Directors.

      On December 24, 2001, the Company, entered into a Series Y Preferred Stock
Purchase Agreement (the "Series Y Purchase Agreement") with Columbia Capital
Equity Partners III, L.P., Columbia Capital Equity Partners II, L.P., The
Lafayette Investment Fund, L.P., Charles River Partnership X, A Limited
Partnership and N.I.G. - Broadslate, Ltd. (collectively with their assigns, the
"Series Y Investors") relating to the sale and purchase of up to an aggregate of
15,000 shares of Series Y Preferred Stock at a purchase price of $1,000 per
share. Subject to the terms and conditions of the Series Y Purchase Agreement,
on December 28, 2001, the Company sold an aggregate of 6,469 shares of Series Y
Preferred Stock to the Series Y Investors for an aggregate purchase price of
$6,469, before direct issuance costs of $300 (Note 9). In addition, on December
28, 2001, the Company issued promissory notes (Note 6) to the Series Y Investors
in the aggregate principal amount of $3,531 in exchange for proceeds of $3,531.
On May 29, 2002, the Company sold to the Series Y Investors 8,531 shares of
Series Y Preferred Stock for total proceeds of $8,531, which resulted in net
proceeds of approximately $5,000, after the cancellation of the promissory notes
issued to the Series Y Investors in December 2001. The 15,000 shares of Series Y
Preferred Stock owned by the Series Y Investors were convertible into 30,000,000
shares of the Company's common stock (Notes 9 and 16). An affiliate of Columbia
was a member of the Company's Board of Directors until August 5, 2003.

      In January 2002, the Company entered into an Asset Purchase Agreement with
Broadslate for the purchase of business broadband customer accounts and certain
other assets, including accounts receivables related to the acquired customer
accounts, for an adjusted purchase price of approximately $750 (Note 4). Certain
of the Company's stockholders, including investment funds affiliated with
Columbia Capital, in the aggregate owned in excess of 10% of the capital stock
of Broadslate. An affiliate of Columbia Capital was a director of Broadslate
until February 2002 and a member of the company's Board of Directors until
August 5, 2003.

      The Company entered into a Reimbursement Agreement, dated as of December
27, 2002, with several private investment funds affiliated with VantagePoint,
Columbia, The Lafayette Investment Fund, L.P. and Charles River Partnership,
L.P. (collectively the "Guarantors") and VantagePoint Venture Partners III (Q),
L.P., as administrative agent (the "Agent"). The Guarantors are all holders of
or affiliates of holders of the Series X Preferred Stock and the Series Y
Preferred Stock. Pursuant to the terms of the Reimbursement Agreement, on
December 27, 2002, the Company issued warrants to purchase 10,379,420 shares of
its common stock to VantagePoint and warrants to purchase 1,634,473 shares of
its common stock to Columbia (Columbia subsequently transferred 445,254 of such
warrants to VantagePoint), in consideration for their guarantees aggregating
$6,100. The Company issued additional warrants to purchase 767,301 shares of its
common stock to VantagePoint and 168,806 shares of its common stock to Columbia
during the first quarter of 2003, bringing the total number of warrants issued
to

                                       92
<PAGE>
                                  DSL.NET, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


12,950,000. All such warrants are exercisable for ten years at an exercise price
of $0.50 per share (Note 6). Prior to the execution of the Reimbursement
Agreement, VantagePoint beneficially owned 21,956,063 shares of the Company's
common stock and 20,000 shares of the Company's mandatorily redeemable,
convertible Series X Preferred Stock, which are convertible into 111,111,111
shares of the Company's common stock, and Columbia owned 15,000 shares of the
Company's Series Y Preferred Stock, which were convertible into 30,000,000
shares of the Company's common stock (Notes 9 and 16).

      On March 3, 2003, the Company and certain of the Guarantors entered into
Amendment No. 1 to the Reimbursement Agreement, pursuant to which VantagePoint
increased its guarantee by $3,000 bringing the aggregate guarantees by all
Guarantors under the Reimbursement Agreement, as amended, to $9,100. As
consideration for VantagePoint's increased guarantee, if the Company closed an
equity financing on or before December 3, 2003, it was authorized to issue
VantagePoint additional warrants to purchase the type of equity securities
issued by the Company in such equity financing. The number of such additional
warrants would be determined by dividing the per share price of such equity
securities into a thousand dollars. Accordingly, since the Company closed a
financing on July 18, 2003, the Company issued to VantagePoint in December 2003,
additional warrants with a three-year life, to purchase 2,260,909 shares of its
common stock at a per share price of $0.4423 (Note 6).

      Two affiliates of VantagePoint were members of the Company's Board of
Directors and one affiliate of Columbia was a member of the Company's Board of
Directors until August 5, 2003.

      On July 18, 2003, the Company entered into the Note and Warrant Purchase
Agreement (Note 6). VantagePoint participated in the transactions contemplated
by the Note and Warrant Purchase Agreement (Note 6). Two affiliates of
VantagePoint were members of the Company's Board of Directors.

      As of December 31, 2003, primarily resulting from the $30,000 financing
transaction and guarantees issued under the Reimbursement Agreement (Note 6),
VantagePoint had options and warrants issued to acquire approximately 53,726,568
shares of the Company's common stock. In addition, VantagePoint beneficially
owned approximately 463,357 shares of the Company's common stock and 20,000
shares of the Company's Series X Preferred Stock which are convertible into
approximately 111,111,111 shares of common stock. As a result, VanatagePoint
beneficially owned the equivalent of approximately 165,301,036 shares of the
Company's common stock (Notes 9 and 16). Two affiliates of VantagePoint are
members of the Company's Board of Directors.

      As of December 31, 2003, as a result of the $30,000 financing transaction
(Note 6), Deutsche Bank had warrants issued to acquire approximately 118,421,053
shares of the Company's common stock. Two affiliates of Deutsche Bank are
members of the Company's Board of Directors.

      During 2003, the Series Y Investors (including Columbia) converted 14,000
shares of Series Y Preferred Stock into 35,140,012 shares of the Company's
common stock (including shares issued as dividends) (Note 9). As of December 31,
2003, funds affiliated with one remaining Series Y Investor (Charles River
Partnership, L.P.) owned 1,000 shares of Series Y Preferred Stock which are
convertible into approximately 2,260,909 shares of the Company's common stock
(Note 9). These remaining 1,000 shares of Series Y Preferred Stock were
converted into

                                       93
<PAGE>
                                  DSL.NET, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


common shares in February, 2004 (Note 16). In addition, resulting from
guarantees issued under the Reimbursement Agreement (Note 6), Columbia had
warrants to acquire approximately 1,358,025 shares of the Company's common
stock. These warrants were exercised in February 2004 (Note 16). An affiliate of
Columbia was a member of the Company's Board of Directors until August 5, 2003.

9. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY

MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK

      On November 14, 2001, the Company entered into the Series X Purchase
Agreement with VantagePoint relating to the sale and purchase of up to an
aggregate of 20,000 shares of mandatorily redeemable convertible Series X
Preferred Stock of the Company at a purchase price of $1,000 per share. Pursuant
to the Series X Purchase Agreement, on November 14, 2001, December 10, 2001 and
March 1, 2002 the Company sold an aggregate of 6,000 shares, 4,000 shares and
10,000 shares, respectively, of Series X Preferred Stock to VantagePoint for
total proceeds of $20,000, before direct issuance costs of $189.

      The holders of the Series X Preferred Stock are entitled to receive
cumulative dividends of 12% per year ($120.00 per share per annum) when and as
declared by the Board of Directors. All such dividends shall accrue monthly and
shall be payable in cash, except in the case of the conversion of the Series X
Preferred Stock into common stock, in which case such dividends may be paid, at
the sole option of the Company, in shares of common stock. The accrued but
unpaid dividends are payable upon the earliest to occur of (i) the liquidation,
dissolution, winding up or change in control (as described below) of the
Company, (ii) the conversion of the Series X Preferred Stock into common stock
and (iii) the redemption of the Series X Preferred Stock.

      In the event of the liquidation, dissolution or winding up of the Company,
the holders of the Series X Preferred Stock shall be entitled to $1,000 per
share plus all unpaid accrued dividends (whether or not declared), on parity
with holders of the Series Y Preferred Stock (discussed below). Remaining
assets, if any, shall be distributed to the holders of Series X Preferred Stock,
Series Y Preferred Stock, common stock and any other class or series of the
Company's capital stock that is not limited to a fixed sum or percentage of
assets, on a pro rata basis assuming full conversion into the Company's common
stock of all preferred stock. Unless a majority of the holders of the then
outstanding Series X Preferred Stock elect otherwise, (i) an acquisition, merger
or consolidation which results in a majority ownership change or (ii) the sale
of all or substantially all of the assets of the Company (i.e., a "change in
control") shall be deemed to be a liquidation of the Company.

      At the option of the holders of the Series X Preferred Stock, each share
of Series X Preferred Stock may be converted at any time, into approximately
5,555.56 shares of common stock, which shall be adjusted for certain subsequent
dilutive issuances and stock splits. Since the conversion option price was less
than the market price of the Company's common stock on the date the Series X
Purchase Agreement was signed ("the Series X commitment date"), the Company has
recorded a Beneficial Conversion Feature ("BCF") by a reduction (discount) to
Preferred Stock in accordance with the guidance under Emerging Issues Task Force
("EITF") 00-27. The BCF was determined using the intrinsic value method which is
defined as the "accounting conversion price" less the quoted market price of the
common stock on the Series X commitment date multiplied by the number of common
shares into which the preferred stock converts; however,

                                       94
<PAGE>
                                  DSL.NET, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


the BCF recognized was limited to the net proceeds received from the issuance of
the Series X Preferred Stock. The BCF is accreted from the Preferred Stock
issuance dates to the redemption date of July 18, 2006. If conversion occurs
before the BCF is fully accreted, a charge will be required for the unamortized
BCF. The accreted BCF is included in the calculation of net loss applicable to
common stockholders.

      The Series X Preferred Stock shall automatically convert into common stock
upon the close of business on the date on which the closing sale price of the
Company's common stock on the Nasdaq Stock Market has exceeded $2.50 per share
(as adjusted for any stock splits, stock dividends, recapitalizations or the
like) for a period of 45 consecutive trading days beginning after May 13, 2002.

      The Series X Preferred Stock has voting rights similar to common stock
based on the number of shares into which such Series X Preferred Stock is
initially convertible. So long as at least 50% of the Series X Preferred Stock
issued pursuant to the Series X Purchase Agreement remains outstanding, the
holders of the Company's Series X Preferred Stock shall have the right to elect
a majority of the members of the Company's Board of Directors. In addition, so
long as at least 25% of the Series X Preferred Stock issued pursuant to the
Series X Purchase Agreement remains outstanding, the holders of the Company's
Series X Preferred Stock shall have the right to vote as a separate class with
respect to the approval of (i) the authorization or issuance, or obligation to
issue, any equity-related security having rights, preferences or privileges
senior to or, during the six-month period commencing December 28, 2001, on
parity with, to the Series X Preferred Stock, (ii) any alteration or change to
the rights, preferences or privileges of the Series X Preferred Stock or (iii)
any reclassification of the Series X Preferred Stock. The Series X Preferred
Stock is redeemable, on parity with the Series Y Preferred Stock (discussed
below), at the option of the holders of a majority of the then outstanding
shares of Series X Preferred Stock at any time on or after January 1, 2005
(which date was subsequently extended to July 18, 2006, as discussed below) at a
price equal to $1,000 per share plus all unpaid accrued dividends (whether or
not declared).

      On December 24, 2001, the Company entered into the Series Y Purchase
Agreement with the Series Y Investors relating to the sale and purchase of up to
an aggregate of 15,000 shares of mandatorily redeemable convertible Series Y
Preferred Stock of the Company at a purchase price of $1,000 per share. Subject
to the terms and conditions of the Series Y Purchase Agreement, on December 28,
2001, the Company sold an aggregate of 6,469 shares of Series Y Preferred Stock
to the Series Y Investors for an aggregate purchase price of $6,469, before
direct issuance costs of $300. In addition, on December 28, 2001, the Company
issued promissory notes to the Series Y Investors in the aggregate principal
amount of $3,531 in exchange for proceeds of $3,531 (Note 6). The promissory
notes provided for an annual interest rate of 12%. On May 29, 2002, in
accordance with the terms of the Series Y Purchase Agreement, the Company sold
8,531 additional shares of Series Y Preferred Stock for net proceeds of $5,000
in cash and delivered the promissory notes for cancellation. All accrued
interest of approximately $145 on the promissory notes was forgiven (Note 6).

      The holders of Series Y Preferred Stock are entitled to receive cumulative
dividends of 12% per year ($120.00 per share per annum) when and as declared by
the Company's Board of Directors. All such dividends accrue monthly and are
payable in cash, except in the case of the conversion of the Series Y Preferred
Stock into common stock, dividends may be paid, at the sole option of the
Company, in shares of common stock. Notwithstanding the foregoing, accrued but

                                       95
<PAGE>
                                  DSL.NET, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


unpaid dividends are payable upon the earliest to occur of (i) the liquidation,
dissolution, winding up or change of control (as described below) of the
Company, (ii) the conversion of the Series Y Preferred Stock into common stock
and (iii) the redemption of the Series Y Preferred Stock.

      In the event of the liquidation, dissolution or winding up of the Company,
the holders of Series Y Preferred Stock are entitled to receive $1,000 per share
plus all unpaid accrued dividends (whether or not declared) in parity with the
holders of the Company's Series X Preferred Stock. Remaining assets, if any,
shall be distributed to the holders of Series X Preferred Stock, Series Y
Preferred Stock, common stock and any other class or series of the Company's
capital stock that is not limited to a fixed sum or percentage of assets on a
pro rata basis, assuming full conversion into the Company's common stock of all
Preferred Stock. Unless a majority of the holders of the then outstanding Series
Y Preferred Stock elect otherwise, (i) an acquisition, merger or consolidation
of the Company which results in a majority ownership change or (ii) the sale of
all or substantially all of the assets of the Company (i.e., a "change in
control") shall be deemed to be a liquidation of the Company.

      In May 2002, the Company's certificate of incorporation was amended to,
among other things, increase the number of authorized shares of common stock to
400,000,000. Subsequent to this increase in the authorized shares, at the option
of the holders of the Series Y Preferred Stock, each share of Series Y Preferred
Stock may be converted into 2,000 shares of common stock, subject to adjustment
for certain subsequent dilutive issuances and stock splits (adjusted to 2,260.9
shares of common stock on July 18, 2003, as discussed below). Since the
conversion option price was less than the market price of the Company's common
stock on the dates the Series Y commitments occurred, the Company has recorded a
BCF by a reduction (discount) to Preferred Stock in accordance with the guidance
under EITF 00-27. The BCF was determined using the intrinsic value method which
is defined as the "accounting conversion price" less the quoted market price of
the common stock on the Series Y commitment dates multiplied by the number of
common shares into which the preferred stock converts; however, the BCF
recognized was limited to the net proceeds received from the issuance of the
Series Y Preferred Stock. The BCF is accreted from the preferred stock issuance
dates to the redemption date of July 18, 2006. The accreted BCF is included in
the calculation of net loss applicable to common stockholders. If conversion
occurs before the BCF is fully accreted, a charge will be required for the
unamortized BCF (Note 17).

      The Series Y Preferred Stock automatically converts into common stock upon
the close of business on the date on which the closing sale price of the common
stock on the Nasdaq Stock Market has exceeded $2.50 per share (as adjusted for
any stock splits, stock dividends, recapitalizations or the like) for a period
of 45 consecutive days commencing on or after June 26, 2002.

      Each share of Series Y Preferred Stock has the right to 978.5 votes and,
except as otherwise provided in the Company's certificate of incorporation or
required by law, votes together with all other classes and series of capital
stock of the Company as a single class on all actions to be taken by all holders
of the Company's stock. So long as at least 25% of the Series Y Preferred Stock
issued pursuant to the Series Y Purchase Agreement remains outstanding, the
holders of the Company's Series Y Preferred Stock have the right to vote as a
separate class with respect to the approval of (i) the authorization or
issuance, or obligation to issue, any equity-related security

                                       96
<PAGE>
                                  DSL.NET, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


having rights, preferences or privileges senior to or, during the six-month
period commencing December 28, 2001, on parity with, the Series Y Preferred
Stock, (ii) any alteration or change to the rights, preferences or privileges of
the Series Y Preferred Stock or (iii) any reclassification of the Series Y
Preferred Stock.

      The Series Y Preferred Stock is redeemable, on parity with the Series X
Preferred Stock and any other class or series of the Company's capital stock
entitled to redemption that is on parity with the Series X Preferred Stock, at
the option of a majority of the holders of the then outstanding shares of Series
Y Preferred Stock at any time on or after July 18, 2006, at a price equal to
$1,000 per share plus all unpaid accrued dividends (whether or not declared).

      In connection with the Series Y Purchase Agreement, the holders of the
Series Y Preferred Stock and the Series X Preferred Stock entered into voting
agreements which obligated them to vote in favor of the required transactions
contemplated by the Series Y Purchase Agreement and related matters. In
addition, a stockholders agreement, as amended, among the Company, the holders
of the Series X Preferred Stock and the holders of the Series Y Preferred Stock
provides for rights relating to election of directors, the registration of the
Company's common stock issuable upon conversion of the Series X and Series Y
Preferred Stock and certain protective provisions.

      Due to the effects of the Company's $30,000 debt financing issued with
warrants to purchase common stock at $0.38 per share (Note 6) on July 18, 2003,
the Series Y conversion price was adjusted from $0.50 per share (each share of
Series Y Preferred Stock was convertible into 2,000 shares of common stock) to
$0.4423 per share (each share of Series Y Preferred Stock is convertible into
approximately 2,260.9 shares of common stock) in accordance with certain
anti-dilution provisions of the Series Y Preferred Stock. Accordingly, the
Company recorded an additional BCF. In addition, the Company and holders of a
majority of the Series X Preferred Stock and Series Y Preferred Stock agreed to
extend the redemption dates of the Series X Preferred Stock and Series Y
Preferred Stock from January 1, 2005 to July 18, 2006.

      In the third quarter of 2003, 88 shares of Series Y Preferred Stock were
converted into 176,000 shares of the Company's common stock at a conversion
price of $0.50 per share and, in accordance with the terms of the Series Y
Preferred Stock, the Company elected to pay accrued dividends approximating $11
by issuing 22,431 shares of its common stock, based on an average fair market
value for the ten days preceding conversion of approximately $0.51 per share.

      Also, in the third quarter of 2003, 9,862 shares of Series Y Preferred
Stock were converted into 22,297,079 shares of the Company's common stock at a
conversion price of $0.4423 per share and, in accordance with the terms of the
Series Y Preferred Stock, the Company elected to pay accrued dividends
approximating $1,781 by issuing 2,423,465 shares of its common stock based on
average fair market values for the ten days preceding each conversion, ranging
between approximately $0.70 per share and $0.74 per share.

      As a result of the third quarter conversions of 9,950 preferred shares,
the Company was required to accelerate the unaccreted BCF related to such
shares, which amounted to an additional $4,724 of preferred stock accretion
charged in the third quarter of 2003.

      In December 2003, 4,050 shares of Series Y Preferred Stock were converted
into 9,156,680 shares of the Company's common stock at a conversion price of
$0.4423 per share and, in accordance with the terms of the Series Y Preferred
Stock, the Company elected to pay accrued dividends approximating $729 by
issuing 1,064,359 shares of its common stock, based on average fair market
values for the ten days preceding each conversion, ranging from between
approximately $0.68 per share and $0.69 per share.

      As a result of the fourth quarter conversions of 4,050 preferred shares,
the Company was required to accelerate the unaccreted BCF related to such
shares, which amounted to an additional $1,699 of preferred stock accretion
charged in the fourth quarter of 2003.

                                       97
<PAGE>
                                  DSL.NET, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
      The Series X Preferred Stock and Series Y Preferred Stock activity is
summarized as follows:

<TABLE><CAPTION>
                                                                          Mandatorily Redeemable Convertible Preferred Stock
                                                                          --------------------------------------------------
                                                                                  Series X                    Series Y
                                                                           ---------------------      ---------------------
                                                                            Shares       Amount        Shares       Amount
                                                                           --------     --------      --------     --------
<S>                                                                       <C>          <C>           <C>          <C>
Balance December 31, 2000                                                      --       $   --            --       $   --
                                                                           ========     ========      ========     ========

Issuance of shares                                                           10,000       10,000         6,469        6,469

Issuance costs                                                                              (189)                      (300)

Discount on Series X and Y Preferred Stock resulting from a beneficial
  conversion feature, net of issuance
  costs                                                                                   (9,811)                    (6,169)

Accrued dividends on Series X and Y Preferred Stock                                          115                          6

Accretion of beneficial conversion feature of Series X
  and Y Preferred Stock                                                                      321                         28
                                                                           --------     --------      --------     --------
Balance December 31, 2001                                                    10,000     $    436         6,469     $     35
                                                                           ========     ========      ========     ========

Issuance of shares                                                           10,000     $ 10,000         8,531     $  8,531

Discount on Series X and Y Preferred Stock resulting from a beneficial
  conversion feature, net of issuance costs                                              (10,000)                    (8,531)

Accrued dividends on Series X and Y Preferred Stock                                        2,200                      1,373

Accretion of beneficial conversion feature of Series X
  and Y Preferred Stock                                                                    6,105                      3,973

                                                                           --------     --------      --------     --------
Balance December 31, 2002                                                    20,000     $  8,741        15,000     $  5,381
                                                                           ========     ========      ========     ========

Conversion of Series Y Preferred Stock to
  Common stock                                                                                         (14,000)    $(14,000)

Payment of dividends on converted  Series
  Y Preferred Stock                                                                                                  (2,522)

Accrued dividends on Series X and Y
  Preferred Stock                                                                          2,345                      1,353

Accretion of beneficial conversion feature
  of Series X and Y Preferred Stock                                                        5,145                      9,182

Preferred Stock reclassification                                                            --                        1,394

                                                                           --------     --------      --------     --------
Balance December 31, 2003                                                    20,000     $ 16,231         1,000     $    788
                                                                           ========     ========      ========     ========
</TABLE>

                                       98
<PAGE>
                                  DSL.NET, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


      In January 2004, 6,000 shares of Series X Preferred Stock were converted
into 33,333,333 shares of the Company's common stock at a conversion price of
$0.18 per share and, in accordance with the terms of the Series X Preferred
Stock, the Company elected to pay accrued dividends approximating $1,560 by
issuing 2,316,832 shares of its common stock, based on average fair market value
for the ten days preceding the conversion of $0.67 per share (Note16). After the
conversion, 14,000 shares of Series X Preferred Stock remained outstanding with
a liquidation value of approximately $17,300 at January 31, 2004.

      In February 2004, the remaining 1,000 shares of Series Y Preferred Stock
were converted into 2,260,910 shares of the Company's common stock at a
conversion price of $0.4423 per share and, in accordance with the terms of the
Series Y Preferred Stock, the Company elected to pay accrued dividends
approximating $221 by issuing 309,864 shares of its common stock, based on
average fair market value for the ten days preceding the conversion of $0.71 per
share (Note16).

      COMMON STOCK TRANSACTIONS

      The Company's unamortized deferred compensation balance as of December, 31
2003 and 2002 of $0 and approximately $438, respectively, relating to stock
options and restricted stock held by employees and directors, was amortized over
the respective remaining vesting periods.

      In January 2001, the Company exercised its repurchase right for 1,288,566
shares of common stock at $.001875 per share, representing the remaining
unvested shares from one of the Company's founding shareholders who had
terminated his employment. The shares were subsequently cancelled and $323,832,
or $0.2513 per share, was reclassified from deferred compensation to additional
paid-in capital and common stock.

      In July 2001, the Company exercised its repurchase right for 249,937
shares of common stock at $.001875 per share, representing the remaining
unvested shares from one of the Company's founding shareholders who had
terminated his employment. The shares were subsequently cancelled and $62,809,
or $0.2513 per share, was reclassified from deferred compensation to additional
paid-in capital and common stock.

      During 2003, the Company issued 35,140,012 shares of its common stock upon
conversion of 14,000 shares of Series Y Preferred Stock (discussed above),
5,363,763 shares of its common stock upon exercise of vested stock options, and
15,380 shares of its common stock for shares purchased under its employee stock
purchase plan (discussed below).

      During January and February 2004, the Company issued 38,220,939 shares of
its common stock upon conversion of 6,000 shares and 1,000 shares of Series X
and Series Y convertible preferred stock, respectively (Note 16). Also in
February 2004, the company issued 413,160 shares of its common stock in a
cashless exercise of 1,358,025 warrants owned by Columbia Capital (Note 16).

                                       99
<PAGE>
                                  DSL.NET, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


COMMON STOCK RESERVED

      The Company has reserved shares of common stock as follows:

                                                             December 31,
                                                     ---------------------------
                                                         2003           2002
                                                     ------------   ------------
1999 Stock Plan...................................      7,590,328     10,409,130
2001 Stock Plan...................................     42,455,039     20,000,000
VISI Stock Option Plans...........................        560,364         76,392
1999 Employee Stock Purchase Plan.................        215,496        230,876
Stock Warrants....................................     15,210,909     13,033,314
Stock Warrants Associated with Debt Financing.....    157,894,737           --
Series X Redeemable Convertible Preferred Stock...    111,111,111    111,111,111
Series Y Redeemable Convertible Preferred Stock...      2,260,909     30,000,000
                                                     ------------   ------------
                                                      337,298,893    185,460,823
                                                     ============   ============

STOCK WARRANTS

      Pursuant to the terms of the Reimbursement Agreement, in December 2002,
the Company issued warrants to purchase 12,013,893 shares of its common stock
and in March 2003, the Company issued warrants to purchase 936,107 shares of its
common stock, to VantagePoint and Columbia, in consideration for their loan
guarantees aggregating $6,100. All such warrants have a ten-year life and an
exercise price of $0.50 per share (Note 6). The Company issued additional
warrants in December 2003, to purchase 2,260,909 shares of its common stock to
VantagePoint in consideration for their additional $3,000 loan guarantee. Such
warrants have a ten-year life and an exercise price of $0.4423 per share (Note
6).

      In July 2003, pursuant to the Note and Warrant Purchase Agreement, the
Company issued to Deutsche Bank AG London and VantagePoint, warrants to purchase
157,894,737 shares of its common stock. All such warrants have a three-year life
and an exercise price of $0.38 per share (Note 6).

      In November 2003, warrants owned by VantagePoint to purchase 83,314 shares
of the Company's common stock expired and accordingly, were cancelled.

      At December 31, 2003 and 2002, the Company had outstanding warrants to
purchase 173,105,646 and 13,033,314 shares of common stock, respectively.

10. INCOME TAXES

      An income tax provision has not been recorded for the years ended December
31, 2003, 2002 and 2001, because the Company generated net operating losses for
those respective years.

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

                                                     DECEMBER 31,
                                       ---------------------------------------
                                          2003           2002           2001
                                       ---------      ---------      ---------
Gross deferred tax asset:
Net operating loss carryforwards .     $ 111,175      $  98,956      $  87,891
Depreciation .....................           195           --             --
                                       ---------      ---------      ---------
Other ............................         6,189          6,197          6,802
                                       ---------      ---------      ---------
    Gross deferred tax assets ....       117,559        105,153         94,693


                                       100
<PAGE>
                                  DSL.NET, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


Gross deferred tax liability:
Depreciation .....................          --              765          1,329
Other ............................           863            513            566
                                       ---------      ---------      ---------
    Gross deferred tax liabilities           863          1,278          1,895

                                       ---------      ---------      ---------
Net deferred tax assets ..........       116,696        103,875         92,798
Valuation allowance ..............      (116,696)      (103,875)       (92,798)
                                       ---------      ---------      ---------
    Net deferred taxes ...........     $    --        $    --        $    --
                                       ---------      ---------      ---------

      A full valuation allowance is recorded against the net deferred tax assets
because management believes it is more likely than not that these assets will
not be realized. If future profitability is achieved, a significant portion of
the net deferred tax assets may not be available to offset future income tax
liabilities.

      At December 31, 2003 and 2002, the Company had approximately $282,200 and
$254,000 of federal and state net operating loss carryforwards, respectively. Of
this amount, approximately $6,000 relates to stock-based compensation deductions
which, 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 begin to expire in 2019 and 2004,
respectively. A significant portion of the net operating loss carryforwards may
be subject to limitations under the U.S. federal income tax laws due to changes
in the capital structure of the Company.

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

                                                         DECEMBER 31,
                                              --------------------------------
                                                2003        2002        2001
                                              --------------------------------

   Statutory federal tax rate .............     (34.00)%    (34.00)%    (34.00)%
   State income tax, net of federal benefit      (4.62)      (4.97)      (6.09)
   Permanent differences ..................       2.39        0.04        0.94
   Deferred tax state rate change .........       0.00        8.27        --
                                              --------    --------    --------
   Deferred tax asset valuation allowance .      36.23       30.66       39.15
                                              --------    --------    --------
         Effective federal tax rate .......       --  %       --  %       --  %
                                              --------    --------    --------

11. RESEARCH AND DEVELOPMENT EXPENDITURE CREDITS

      In March 2002, the Company filed an application with the Connecticut
Department of Revenue Services for research and development expenditure credits
for the 1999 and 2000 calendar years. The credits were approved as a reduction
against the Connecticut corporation business tax. With regard to credits
approved for the 2000 calendar year, the Company was entitled to elect a cash
refund at 65 percent of the approved credit. The Company elected to receive the
2000 calendar year credit as a cash refund of approximately $1,301. The 1999
calendar year credit of approximately $671 is available as a carry forward to
offset future State of Connecticut corporation business taxes. In July 2002, the
Company received the first installment of the cash refund pertaining to the 2000
calendar year of approximately $1,000. Upon receipt of the research and
development credits, the Company was obligated to pay approximately $402 to a

                                       101
<PAGE>
                                  DSL.NET, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


professional service provider as a result of a contingent fee arrangement for
professional services in connection with obtaining such credits. In July 2003,
the Company received the second installment of $150 with the balance of $151
payable in July 2004.

      For the years ended December 31, 2003 and 2002, the Company recorded the
$150 and $1,000 refunds, respectively, as a reduction in its state corporate
franchise tax expenses which are included in general and administrative
expenses. The $402 related professional services was recorded in general and
administrative expenses for the year ended December 31, 2002.

12. INCENTIVE STOCK AWARD PLANS

EMPLOYEE STOCK OPTION PLAN

      In February 1999, the Company's Board of Directors adopted the 1999 Stock
Plan under which employees, officers, directors, advisors and consultants can be
granted incentive stock options, 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 1999 Stock Plan.

      In November 2001, the Company's Board of Directors adopted the 2001 Stock
Option and Incentive Plan (the "2001 Stock Plan"), under which non-officer
employees, certain new officers, advisors and consultants can be granted
non-qualified stock options, stock appreciation rights, and stock awards. A
total of 4,000,000 shares of common stock had been authorized under the 2001
Stock Plan.

      In May 2002, the Company's Board of Directors and shareholders amended the
2001 Stock Plan to (i) increase the number of shares of common stock authorized
under the 2001 Stock Plan to a total of 20,000,000 shares, (ii) allow all
officers and directors to be granted awards under the plan and (iii) provide for
the granting of incentive stock options under the plan.

      In October 2003, the Company's Board of Directors and shareholders amended
the 2001 Stock Plan to increase the number of shares of common stock authorized
under the 2001 Stock Plan to a total of 45,000,000 shares.

      Options granted to employees under the 1999 Stock Plan and the 2001 Stock
Plan generally vest, at the discretion of the Board of Directors, either at (i)
25% after one year, then ratably over the next thirty-six months or (ii) 16%
after six months and a day, then ratably over the next thirty months. Once
vested, the options under both plans are exercisable for ten years from the date
of grant.

      In conjunction with the acquisition of Vector Internet Services, Inc.
("VISI"), the Company also assumed all of the then outstanding options issued
under the VISI 1997 and 1999 Stock Option Plans (together with the 1999 Stock
Plan and the 2001 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 at the time of the acquisition.

                                       102
<PAGE>
                                  DSL.NET, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


      A summary of activity under the Plans for the years ended December 31,
2001, 2002 and 2003 is as follows:

                                                              Weighted Average
                                                            --------------------
                                             Number of       Fair       Exercise
                                              Shares         Value       Price
                                            -----------     -------     --------

Outstanding at December 31, 2000.......       7,318,612

Granted................................       9,204,150      $0.68       $0.83
Exercised..............................        (361,774)                 $0.05
Cancelled..............................      (2,283,594)                 $6.17
                                            -----------
Outstanding at December 31, 2001.......      13,877,394

Granted................................      10,891,500      $0.25       $0.29
Exercised..............................         (64,433)                 $0.14
Cancelled..............................        (827,457)                 $3.47
                                            -----------
Outstanding at December 31, 2002.......      23,877,004

Granted................................       1,463,000      $0.47       $0.56
Exercised..............................      (5,363,763)                 $0.43
Cancelled..............................      (1,304,475)                 $1.41
                                            -----------
Outstanding at December 31, 2003.......      18,671,766
                                            ===========






                                       103
<PAGE>
                                  DSL.NET, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


      The following summarizes the outstanding and exercisable options under the
Plans as of December 31, 2003, 2002 and 2001:
<TABLE><CAPTION>
                                    Options Outstanding                        Options   Exercisable
                        ----------------------------------------------     -----------------------------
                                       Weighted Avg.
                                      Remaining Life     Weighted Avg.                     Weighted Avg.
Exercise Price              Number      (in years)      Exercise Price       Number       Exercise Price
-----------------       -----------   --------------    --------------     ----------     --------------
<S>                      <C>               <C>              <C>            <C>                <C>
12/31/03
$0.02-0.49                8,026,838         8.5              $0.29          2,752,783          $0.28
$0.49-1.05                5,953,181         8.2              $0.62          2,653,537          $0.64
$1.05-2.07                1,799,475         6.9              $1.24          1,339,411          $1.29
$2.07-5.19                2,314,069         6.8              $2.87          1,868,464          $2.87
$5.19-7.78                  325,745         6.3              $6.76            294,496          $6.77
$7.78-10.37                  81,000         5.8              $8.38             81,000          $8.38
$10.37-12.96                103,000         6.3             $11.94             94,725         $11.94
$12.96-15.56                 62,458         6.0             $14.79             61,213         $14.80
$15.56-$25.94                 6,000         6.1             $21.50              5,874         $21.44
                        -----------                                        ----------
                         18,671,766         8.0             $ 1.07          9,151,503          $1.57
                        ===========                                        ==========

12/31/02
$0.02-0.49               11,382,076         9.2              $0.28            927,605          $0.22
$0.49-1.05                7,511,060         8.5              $0.62          3,152,807          $0.61
$1.05-2.07                1,864,473         7.8              $1.25            941,417          $1.40
$2.07-5.19                2,449,597         7.7              $2.88          1,436,678          $2.89
$5.19-7.78                  387,432         7.2              $6.74            258,784          $6.76
$7.78-10.37                  83,000         6.6              $8.40             82,352          $8.40
$10.37-12.96                104,000         7.3             $11.94             69,641         $11.94
$12.96-15.56                 82,200         6.0             $14.65             59,686         $14.66
$15.56-$25.94                13,166         3.4             $20.25              9,994         $20.13
                        -----------                                        ----------
                         23,877,004         8.7              $0.98          6,938,964          $1.72
                        ===========                                        ==========

12/31/01
$0.04-2.59               10,902,144         9.3              $0.79          1,944,923          $0.79
$2.59-5.19                2,027,736         8.4              $3.07            805,236          $3.11
$5.19-7.78                  571,612         7.5              $6.93            341,058          $7.08
$7.78-10.37                  88,290         7.3              $8.45             86,892          $8.44
$10.37-12.97                171,100         5.2             $11.94            110,157         $11.94
$12.97-15.56                 96,287         7.2             $14.63             51,658         $14.63
$15.56-$25.94                20,225         6.7             $20.96             11,665         $21.53
                        -----------                                        ----------
                         13,877,394         9.0              $1.69          3,351,589          $2.84
                        ===========                                        ==========
</TABLE>

      The estimated fair value at date of grant for options granted for the year
ended December 31, 2003, ranged from $0.49 to $0.69, for the year ended December
31, 2002, ranged from $0.25 to $0.94 per share, and for the year ended December
31, 2001, ranged from $0.15 to $1.58 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,
                                      ------------------------------------
                                      2003           2002            2001
                                      ----           ----            ----

     Risk free interest rate       2.15%-3.06%    2.49%-4.42%    4.70%-5.48%
     Expected dividend yield          None           None           None
     Expected life of option        3-4 years      3-4 years       3 years
     Expected volatility              152%           152%           152%

                                       104
<PAGE>
                                  DSL.NET, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


      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.

      The Company records deferred compensation when common stock options and
shares of restricted stock are granted with an exercise price below estimated
fair value. Deferred compensation is recognized to compensation expense
generally over the vesting period. Unvested options for terminated employees are
cancelled and the value of such options are recorded as a reduction of deferred
compensation with an offset to additional-paid-in-capital. Stock compensation
expense totaled approximately $438, $1,228, and $1,202 for the years ended
December 31, 2003, 2002 and 2001, respectively.

EMPLOYEE STOCK PURCHASE PLAN

      The Company's 1999 Employee Stock Purchase Plan (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 Purchase 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.

      During the years ended December 31, 2003, 2002 and 2001, the Company
issued 15,380, 14,000 and 25,383 shares of its common stock, respectively, under
the plan.

13. 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 employees for at least ninety days. Employees
participating in the plan may chose from a portfolio of investments, with the
Company's match having the same investment distribution as the employees'
election. The Company's contribution to the 401(k) plan during the years ended
December 31, 2003, 2002 and 2001 was $166, $140 and $190, respectively.

                                       105
<PAGE>
                                  DSL.NET, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


14. ACCRUED LIABILITIES

        Accrued liabilities included the following:

                                                      December 31,
                                                   ------------------
                                                    2003        2002
                                                   ------      ------
         Taxes payable - other than
           income taxes                            $1,828      $1,401

         Accrued telecommunication
           expenses                                 3,886         790

         Accrued restructuring expenses               540         935

         Other accrued liabilities                  1,275       1,494
                                                  -------     -------
               Total                               $7,529      $4,621
                                                  =======     =======

      The increase in accrued telecommunications expenses between December 31,
2003 and 2002 of approximately $3,096 was primarily attributable to increased
telecommunications expenses resulting from the Company's acquisition of the NAS
Assets.

15. RESTRUCTURING AND IMPAIRMENTS

      In December 2000, the Company initiated a new business plan strategy
designed to conserve its capital, reduce its losses and extend its cash
resources. This strategy included the following actions: 1) further network
expansion was curtailed; 2) network connections to certain central offices were
suspended; 3) certain facilities were vacated and consolidated; 4) operating
expenses were reduced; and 5) headcount was reduced by approximately 140
employees. These actions resulted in a restructuring charge of approximately
$3,542.

      In March 2001, the Company re-evaluated its restructuring reserve and
booked an increase in the reserve of approximately $831, which was primarily
related to delays in subleasing its vacated facilities and additional costs
pertaining to its suspended central offices.

      In June 2001, due to the lack of liquidity in the financial markets, the
Company further re-evaluated its business plans and determined that additional
actions were necessary to further reduce its operating losses, cash burn rate
and total funding requirements. These actions included: 1) further reductions in
operating expenses; 2) closure of approximately 100 non-active and 250 active
central offices; and 3) an additional reduction-in-force of approximately 90
employees. These actions resulted in additional restructuring charges
approximating $32,503. Included in this amount were: 1) approximately $272
relating to severance expenses for the 90 employees; 2) approximately $26,079
for the costs associated with the Company's decision to close certain central
offices, which includes approximately $2,545 relating to termination and
equipment removal fees and approximately $23,534 in write-off of fixed assets;
3) approximately $1,641 for additional estimated costs resulting from delays and
expected losses in subleasing vacated office space located in Santa Cruz,
California, Atlanta, Georgia, Milford, Connecticut,

                                       106
<PAGE>
                                  DSL.NET, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


and Chantilly, Virginia; 4) $1,356 for write down of additional equipment no
longer in use; and 5) $3,155 for impairments of goodwill. The goodwill
impairment analysis was accomplished by comparing the carrying value of the
assets with the expected future net cash flows generated over the remaining
useful life of the assets. Since the carrying value was more than the expected
future net cash flows, the goodwill was reduced to the net present value of the
expected future net cash flows. Of this amount, $2,124 related to a reduction in
the goodwill for the Company's acquisition of Tycho and $1,031 related to a
reduction in the goodwill for the Company's acquisition of certain assets of
Trusted Net. These reductions in goodwill resulted in decreases in monthly
amortization expense from approximately $56,800 to approximately $5 for Tycho,
and from approximately $43 to approximately $21 for Trusted Net.

      During the third quarter 2001, due to limited available financing for the
Company's operations and other factors, the Company again re-evaluated its
business plans and determined that additional actions were necessary to further
reduce its operating losses, cash burn rate and total funding requirements.
These actions included: 1) further reductions in operating expenses; 2) closure
of the Tycho and Trusted Net facilities in Santa Cruz, CA and Marietta, GA,
respectively; and 3) the decision not to install equipment in 100 new central
offices. These actions resulted in additional restructuring and impairment
charges approximating $4,748. Included in this amount were increases of: 1)
approximately $4,451 relating to the write off of equipment; 2) approximately
$376 for additional estimated costs relating to the delays and losses in
subleasing vacated office space located in Santa Cruz, California and Milford,
Connecticut; 3) approximately $246 in additional costs for equipment removal
fees associated with the Company's previous decision to close certain central
offices; and 4) approximately $800 for impairments of goodwill. These increases
in the restructuring reserve were partially offset by a reduction of
approximately $1,125 in previously reserved amounts relating to estimated
termination fees associated with the Company's previous decision to close
certain central offices, as the Company was successful in negotiating
significantly reduced fees at many of the closed central office locations. The
goodwill impairment analysis was accomplished by comparing the carrying value of
the assets with the expected future net cash flows generated over the remaining
useful life of the assets. As a result of this analysis, expected future net
cash flows were determined to be insignificant and, as the carrying value was
more than these expected future net cash flows, the balance of goodwill was
written off. Of this amount, approximately $170 related to a reduction in the
goodwill for the Company's acquisition of Tycho and approximately $630 related
to a reduction in the goodwill for the Company's acquisition of certain assets
of Trusted Net.

      During the fourth quarter 2001, the Company again re-evaluated its
business plans and determined that additional actions were necessary to further
reduce its operating losses and cash burn rate. These actions included an
additional reduction-in-force of approximately 84 employees. These actions
resulted in additional restructuring and impairment charges approximating $511.
Included in this amount were increases of: 1) approximately $164 relating to
severance expenses for the 84 employees; and 2) approximately $500 for
impairment of a long term investment. These increases in the restructuring
reserve were partially offset by a reduction of approximately $153 in previously
reserved amounts relating to the write down of fixed assets associated with the
Company's previous decision to close certain central offices. Additionally,
during the fourth quarter of 2001, the Company reallocated amounts previously
reserved for equipment removal to termination fees, as the Company was
successful in negotiating reduced fees for equipment removal at many of the
closed central office locations.

                                       107
<PAGE>
                                  DSL.NET, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


      During the third quarter of 2003, the Company charged approximately $443
against its restructuring reserves. Of this amount, approximately $315 related
to payment of certain termination fees associated with the closure of certain
central offices during 2001, and approximately $128 related to facilities
expense associated with the Company's vacated offices.


      The long term investment impairment analysis was accomplished by comparing
the carrying value of the investment with the expected future net cash flows
generated, over the remaining useful life of the investment.

      The following table summarizes the additions and charges to the
restructuring reserve from December 2000 through December 2003, and the
remaining reserve balances at December 31, 2003:
<TABLE><CAPTION>
                                                  CENTRAL     CENTRAL        FIXED                  IMPAIRMENT
                                                  OFFICE       OFFICE        ASSET     IMPAIRMENT       OF
                                    FACILITY       TERM.       EQUIP.        WRITE         OF       LONG-TERM
                      SEVERANCE      LEASES        FEES       REMOVAL         OFF       GOODWILL    INVESTMENT     TOTAL
<S>                   <C>          <C>          <C>          <C>          <C>          <C>          <C>          <C>
Reserve balance at
  Dec. 31, 2000        $     86     $  1,078     $    600     $   --       $   --       $   --       $   --       $  1,764

Additions to the
  reserve                   436        2,408          215        1,451       29,628        3,955          500       38,593

Charges to the
  reserve                  (522)      (2,290)        (500)      (1,451)     (29,628)      (3,955)        (500)     (38,846)
                       --------     --------     --------     --------     --------     --------     --------     --------
Reserve balance at
  Dec. 31, 2001            --          1,196          315         --           --           --           --          1,511

Charges to the
  reserve                  --           (576)        --           --           --           --           --           (576)
                       --------     --------     --------     --------     --------     --------     --------     --------

Reserve balance at
  Dec. 31, 2002            --            620          315         --           --           --           --            935


Additions to the
  reserve                  --            252         --           --           --           --           --            252

Charges to the
  reserve                  --           (332)        (315)        --           --           --           --           (647)
                       --------     --------     --------     --------     --------     --------     --------     --------

Reserve balance at
  Dec. 31, 2003        $   --       $    540     $   --       $   --       $   --       $   --       $   --       $    540
                       ========     ========     ========     ========     ========     ========     ========     ========
</TABLE>

      During the year ended December 31, 2003 the Company increased its reserve
for vacated facilities by $252 as a sublet tenant vacated its Santa Cruz
facility and the Company does not anticipate any additional sublets. At December
31, 2003, the Company's remaining restructuring reserve balance for its leased
Santa Cruz facility of approximately $540 was included in its accrued
liabilities.

      There were no additions to restructuring reserves during 2002 and the
Company's restructuring reserve balance at December 31, 2002, of approximately
$935, was included in the Company's accrued liabilities and represented
approximately $620 for anticipated costs

                                       108
<PAGE>
                                  DSL.NET, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


pertaining to its vacated office space in Santa Cruz, California, and
approximately $315 for anticipated costs pertaining to its closed central
offices, which the Company had been disputing.

      The restructuring reserve charges for the year ended December 31, 2001
included approximately $31,528 in network and operations expenses, approximately
$6,998 in general and administrative expenses and approximately $67 in sales and
marketing expenses on the consolidated statements of operations. The remaining
reserve balance of approximately $1,511 was included in the Company's accrued
liabilities at December 31, 2001.

16. SUBSEQUENT EVENTS

      On January 15, 2004, a lawsuit was filed against the Company in
Connecticut State Court in the Judicial District of New Haven by an individual
who claims that he was offered a sales manager position at the Company in
December 2003 but was wrongly deprived of that position at or immediately prior
to his initial employment date. The plaintiff's complaint includes claims for
breach of contract, negligent misrepresentation and intentional infliction of
emotional distress. The Company denies the plaintiff's allegations and believes
that his claims are without merit, and intends to defend the case vigorously.

      In January 2004, 6,000 shares of Series X Preferred Stock were converted
into 33,333,333 shares of the Company's common stock at a conversion price of
$0.18 per share and, in accordance with the terms of the Series X Preferred
Stock, the Company elected to pay accrued dividends approximating $1,560 by
issuing 2,316,832 shares of its common stock, based on the average fair market
value for the ten days preceding the conversion of $0.67 per share.

      In February 2004, the remaining 1,000 shares of Series Y Preferred Stock
were converted into 2,260,910 shares of the Company's common stock at a
conversion price of $0.4423 per share and, in accordance with the terms of the
Series Y Preferred Stock, the Company elected to pay accrued dividends
approximating $221 by issuing 309,864 shares of its common stock, based on the
average fair market value for the ten days preceding the conversion of $0.71 per
share.

      In February 2004, Columbia Capital exercised their remaining warrants to
purchase 1,358,025 shares of the Company's common stock at an exercise price of
$0.50 per share in a cashless exchange which resulted in the issuance of 413,160
shares of the Company's common stock. The cashless exchange was accomplished by
deducting the per share exercise price from the per share fair market value of
the company's common stock and multiplying the differential times the total
warrants to determine the aggregate excess of the fair market value over the
exercise price; which was then divided by the the per share fair market value of
the Company's common stock to arrive at the number of shares issued. The fair
market value of the Company's common stock of $0.72 was determined in accordance
with the warrant agreement by calculating the average of the close prices for
the five days immediately preceding the exercise date.

      On March 25, 2004, the Company reduced its workforce by approximately 63
employees at its locations in New Haven, Connecticut; Herndon, Virginia;
Minneapolis, Minnesota and Wilmington, North Carolina. As a result, the Company
incurred approximately $160 in restructuring charges pertaining to severance and
benefits payments.

                                       109
<PAGE>
                                  DSL.NET, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


17. SELECTED UNAUDITED QUARTERLY FINANCIAL DATA

      The following table depicts selected quarterly unaudited financial data
for the years ended December 31, 2003, 2002 and 2001.
<TABLE><CAPTION>
                                                                 Preferred         Net Loss        Net Loss
                                                                   Stock          Applicable       Per Share,
                         Net       Operating                   Dividends and      to Common        Basic and
                       Revenue        Loss         Net Loss      Accretion       Stockholders       Diluted
                       -------------------------------------------------------------------------------------
<S>                    <C>          <C>            <C>           <C>              <C>              <C>
Q1 2003                $16,765      $(8,632)       $(9,243)      $(4,061)         $(13,304)        $(0.20)
Q2 2003                 18,097       (7,890)        (8,700)       (4,061)          (12,761)         (0.20)
Q3 2003 as reported     18,227       (5,957)        (9,111)       (2,824)          (11,935)         (0.17)
Q3 2003 as restated     18,227       (5,957)        (9,111)       (6,363)(a)       (15,474)(a)      (0.22)(a)
Q4 2003                 18,244       (7,152)        (7,943)       (3,474)          (11,417)         (0.12)

Q1 2002                 11,381       (9,382)        (9,455)       (2,191)          (11,646)         (0.18)
Q2 2002                 11,596       (9,405)        (9,394)       (3,339)          (12,733)         (0.20)
Q3 2002                 11,262       (8,390)        (8,458)       (4,060)          (12,518)         (0.19)
Q4 2002                 11,291       (8,644)        (8,787)       (4,061)          (12,848)         (0.20)

Q1 2001                  8,822      (27,153)       (26,627)           --           (26,627)         (0.42)
Q2 2001                 10,348      (56,270)       (56,169)           --           (56,169)         (0.88)
Q3 2001                 11,724      (21,898)       (21,912)           --           (21,912)         (0.34)
Q4 2001                $11,075     $(10,575)      $(10,746)        $(470)         $(11,216)        $(0.17)
</TABLE>

      (a) The Company's unaudited consolidated financial statements for the
third quarter of 2003 have been restated to correct the calculation of accretion
of preferred stock, net loss applicable to common stockholders and net loss per
share reflected on the Company's consolidated statements of operations. The
restatement did not impact the Company's net revenue, operating loss, net loss
or any of the items reported on the Company's consolidated statements of cash
flows. During the third quarter of 2003, 9,950 shares of the Company's Series Y
Convertible Preferred Stock were converted into 22,473,079 shares of the
Company's common stock. As originally reported, the calculation of accretion of
preferred stock did not reflect the acceleration of accretion of preferred
stock, required by the conversions and issuance costs of $4,931, partially
offset by a $1,392 adjustment for over accretion of preferred stock and issuance
costs as of June 30, 2003, resulting in a net adjustment of $3,539. In addition,
as a result of this restatement, the Company reclassified $1,394 related to the
BCF, from additional paid-in capital to preferred stock, $1,185 of which was
transferred back to additional paid-in capital as a result of the conversions,
resulting in a net reclassification of $209 (Note 9).

                                       110
<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 the Company's two most recent
fiscal years.

ITEM 9A. CONTROLS AND PROCEDURES

a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.

      Under the supervision and with the participation of the Company's
management, including the Company's principal executive officer and principal
financial officer, the Company has evaluated the disclosure controls and
procedures (as defined in the Securities and Exchange Act of 1934 (the "Exchange
Act") Rules 13a-14(c) and 15d-14(c)) as of December 31, 2003. Based on this
evaluation, the principal executive officer and principal financial officer
concluded that the Company's disclosure controls and procedures were effective
to provide reasonable assurance that material information required to be
disclosed in our filings and submissions under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms.

b) CHANGES IN INTERNAL CONTROLS

      There have been no changes in the Company's internal controls over
financial reporting, or, to the Company's knowledge, in other factors that could
materially affect these controls, subsequent to the date of evaluation of the
Company's disclosure controls and procedures referred to above.


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

OCCUPATIONS OF DIRECTORS AND OFFICERS

      Pursuant to the Company's certificate of incorporation, the Company has
three classes of directors, each serving for a three year term. Class III
directors were elected at our October 14, 2003 annual meeting of stockholders.
Class I directors shall be up for election at the 2004 annual meeting of
stockholders, and Class II directors shall be up for election at the 2005 annual
meeting of stockholders. Set forth below is information relating to the
directors and executive officers as of March 30, 2004:

      NAME                                AGE   POSITION
      David F. Struwas....................55    Chairman of the Board, Class III
                                                  Director and Chief Executive
                                                  Officer
      Keith Markley.......................45    President and Chief Operating
                                                  Officer
      Robert J. DeSantis..................48    Chief Financial Officer and
                                                  Treasurer
      Marc R. Esterman....................39    Vice President - Corporate
                                                  Affairs, General Counsel and
                                                  Secretary
      John M. Jaser.......................44    Vice President - Technology
      Walter Keisch.......................58    Vice President - Finance
      Robert B. Hartnett, Jr. (1)(2)(3)...52    Class I Director
      Roderick Glen MacMullin.............33    Class I Director
      Robert G. Gilbertson (1)(2)(3)......62    Class II Director
      Paul Keeler (1)(2)(3) ..............59    Class II Director
      William J. Marshall.................48    Class II Director
      Roger Ehrenberg.....................38    Class III Director
      James D. Marver.....................53    Class III Director



                                       111
<PAGE>

      Michael L. Yagemann.................48    Class III Director

      ------------------
      (1) Member of the audit committee
      (2) Member of the compensation committee
      (3) Member of the nominating committee

      DAVID F. STRUWAS has served as a director and our Chief Executive Officer
since January 1999 and as Chairman of the Board of Directors since November
2000. Mr. Struwas also served as our President from November 1998 until November
2000. From January 1997 to August 1998, Mr. Struwas was a General Manager for
Brooks Fiber-Worldcom. From May 1980 to January 1997, Mr. Struwas held various
positions at Southern New England Telephone, most recently as Director of
Marketing.

      KEITH MARKLEY has served as President and Chief Operating Officer since
November 2000. From July 1998 to November 2000, Mr. Markley served as President,
Eastern Region of Covad Communications, Inc. From June 1997 to June 1998, Mr.
Markley served as the General Manager of New England Fiber Communications, Inc.,
a facilities CLEC which was a joint venture between Brooks Fiber Properties and
CMP Communications. From June 1996 to June 1997, Mr. Markley served as the
District Manager of Advanced Radio Telecommunications, Inc., a wireless
broadband communications company. From June 1994 to June 1996, Mr. Markley was a
Principal and Consultant for Connecticut Research, a strategic and management
consulting company.

      ROBERT J. DESANTIS has served as Chief Financial Officer since December
2001 and as Treasurer since May 2002. From November 2000 to June 2001, Mr.
DeSantis served as Executive Vice President of Tellium, Inc. From 1986 to
October 2000, Mr. DeSantis served in various positions at Citizens
Communications, most recently as Chief Financial Officer, Vice President and
Treasurer.

      MARC R. ESTERMAN has served as our Vice President - Corporate Affairs,
General Counsel and Secretary since December 2003. Mr. Esterman served as our
Vice President - Corporate Affairs and Associate General Counsel from May 2003
to December 2003. Prior to that, Mr. Esterman served as our Associate General
Counsel from June 2000 to May 2003. From March 1996 to June 2000, Mr. Esterman
was an attorney at the law firm of Cummings and Lockwood. From September 1990 to
March 1996, Mr. Esterman was an attorney at the law firm of Winthrop, Stimson,
Putnam and Roberts.

      JOHN M. JASER has served as Vice President - Technology since May 1999.
Mr. Jaser served as our President from March 1998 to November 1998 and was
responsible for business development from November 1998 to May 1999. From
January 1992 to March 1998, Mr. Jaser was the President and Chief Executive
Officer of FutureComm, Inc., a consulting firm specializing in network planning,
architecture and design.

      WALTER KEISCH has served as Vice President - Finance since March 2001.
From January to March 2001, he was our Corporate Controller. From July 2000
through December 2000, Mr. Keisch served as Chief Financial Officer for a
start-up e-business unit of GE Capital Real Estate. From December 1997 to
October 1999 he served as Vice President of Finance, Chief Financial Officer and
Secretary for E-Sync Networks, Inc., an e-business service provider. From
February 1990 to July 1997, he served as Controller at Textron Lycoming/Allied
Signal Aerospace, Engines Division, a gas turbine engine manufacturer.

      ROBERT B. HARTNETT, JR. has served as a director since May 2002. Since
April 2002 he has served as the Chairman and Chief Executive Officer of Blue
Ridge Networks, an internet security company. Mr. Hartnett was President of
Business Markets at Worldcom and CEO of UUNET from July 2000 until April 2001.
Previously, Mr. Hartnett was President of global accounts at MCI Worldcom from
August 1998 to June 2000. Prior to its merger with Worldcom in 1998, Mr.
Hartnett was President of business sales and service at MCI Communications.

                                       112
<PAGE>

      RODERICK GLEN MACMULLIN has served as a director since July 2003. He is
currently affiliated with Xavier Sussex, LLC. Previously, he was a Director with
DB Advisors, LLC, a proprietary trading arm within the Global Equities Division
of Deutsche Bank AG. Prior to joining DB Advisors in 2001, Mr. MacMullin served
in various positions with Deutsche Bank Offshore in the Cayman Islands including
Head of Investment Funds. From 1993 to 1998, he worked in public accounting for
KPMG in the Cayman Islands and Coopers & Lybrand in Ottawa, Canada. Mr.
MacMullin holds a bachelor of business administration from St. Francis Xavier
University in Nova Scotia, Canada and is a member of the Canadian Institute of
Chartered Accountants.

      ROBERT GILBERTSON has served as a director since January 1999. He has been
the Chairman of the board of directors of Motia, Inc., a smart antenna company,
since November 2002. He has been a venture investor since 1996. From October
1999 through June 2001, he served as a Venture Partner and consultant at Sprout
Group, a venture affiliate of Credit Suisse First Boston. In addition, Mr.
Gilbertson served as Chairman of the board of directors of Network Computing
Devices, Inc. from August 1999 until December 2001 and as President and Chief
Executive Officer from May 1996 to August 1999. From April 1996 to April 1997,
Mr. Gilbertson also served as Chairman of Avidia Systems Inc.

      PAUL J. KEELER has served as a director since June 2001. Mr. Keeler is
currently affiliated with Convergence Consulting Group, LLC. Previously, Mr.
Keeler was a Partner of RockRidge Capital Partners, a private equity firm based
in Stamford, Connecticut. From February 1991 to February 2001, Mr. Keeler was a
Principal at Morgan Stanley & Co., and Head of Global Sales and Service for
Morgan Stanley Capital International, a joint venture between Morgan Stanley &
Company, Inc. and Capital Group Companies. Prior to that, Mr. Keeler served as
Vice President of Morgan Stanley Technology Services; President, Chief Executive
Officer and Vice Chairman of Tianchi Telecommunications Corp.; President and
Chief Operating Officer of Westinghouse Communications Software, Inc.; Vice
President of Strategic Accounts and Business Development for Reuters Holdings,
PLC; and Director of MCI Communications. He also served as President and CEO of
Halcyon Securities Corporation and is a former member of the New York and
American Stock Exchanges.

      WILLIAM J. MARSHALL has served as a director since January 1999. In 2002,
Mr. Marshall founded RockRidge Capital Partners, a private equity firm based in
Stamford, Connecticut. Previously, Mr. Marshall was a Partner with VantagePoint
Venture Partners, a leading venture capital firm with $2.5 billion under
management. Prior to joining VantagePoint, Mr. Marshall spent 11 years at Bear
Stearns & Company, Inc., serving as Senior Managing Director, Chief Technology
Officer and head of the Communications Technologies Group. Prior to Bear
Stearns, Mr. Marshall was an early employee at MCI Communications during its
high revenue growth years from $70 million to over $4.0 billion annually. Mr.
Marshall is a co-founder of the ATM Forum and also was a board member of the
Securities Industry Association Technology Committee. He is a graduate of New
York University in Finance and Computer Applications and Information Systems
(B.S.) and the Harvard Management Program in Strategic Technology and Business
Development.

      ROGER EHRENBERG is the President and Global Head of DB Advisors, LLC, the
proprietary trading arm of Deutsche Bank's Global Equities Division. Mr.
Ehrenberg joined Deutsche Bank in April 1999 from Citigroup, where he spent 10
years as an investment banker, structured tax specialist and derivatives
professional. Mr. Ehrenberg received his BBA in Economics and Finance from the
University of Michigan and his MBA in Finance and Management from Columbia
University.

      JAMES D. MARVER has served as director since April 1999. Mr. Marver has
been a Managing Partner at VantagePoint Venture Partners since co-founding the
firm in 1996. From 1988 to 1996, Mr. Marver was Senior Managing Director and
Head of the Global Technology Group at Bear Stearns & Co. Inc., as well as Head
of the San Francisco Investment Banking office. Prior to Bear Stearns, he served
as a Managing Director, Co-Head of Technology and Head of the San Francisco
corporate finance office at L.F. Rothschild,

                                       113
<PAGE>

Unterberg, Towbin. Earlier in his career, he was an investment banker with
Goldman Sachs and a senior consultant with SRI International (formerly Stanford
Research Institute). Mr. Marver earned a B.A. from Williams College and Ph.D.
from the University of California at Berkeley.

      MICHAEL L. YAGEMANN has served as a director since February 2003. Mr.
Yagemann is the Managing Member of Greenbridge Capital LLC, a communications and
technology private equity firm that he founded, and the Managing Member and
Founder of Greenbridge Partners LLC, a registered broker dealer that provides
merger and acquisition and strategic consulting services to telecommunication,
media and technology companies. Previously, Mr. Yagemann served as a partner of
VantagePoint Venture Partners from January 2003 to March 2004. From 1999 until
January 2003, he had been the Managing Member of Greenbridge Capital LLC and the
Managing Member and Founder of Greenbridge Partners LLC. From 1997 to 1999, Mr.
Yagemann was a partner and served as Co-Founder and Co-Head of the Media and
Telecommunications group at Montgomery Securities. He joined Bear Stearns in
1990 and from 1995 to 1997 he served as Co-head of Bear Stearns' Media and
Entertainment group and as a Senior Managing Director. Prior to joining Bear
Stearns, Mr. Yagemann was a partner at the law firm of Irell & Manella. He
earned a B.A. from the University of Colorado and a J.D. from Stanford Law
School.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

      Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
DSL.net's directors, executive officers and persons who own more than ten
percent of a registered class of our equity securities to file reports of
ownership and changes in ownership with the SEC. Such persons are required by
regulations of the SEC to furnish DSL.net with copies of all such filings. Based
solely on our review of copies of such filings received with respect to the
fiscal year ended December 31, 2003 and written representations from certain
persons, DSL.net believes that all such persons complied with all Section 16(a)
filing requirements in the fiscal year ended December 31, 2003

AUDIT COMMITTEE

      The Company's Audit Committee is comprised of Messrs. Robert G.
Gilbertson, Robert B. Hartnett, Jr. and Paul J. Keeler, all of whom are outside
directors. Mr. Gilbertson serves as the Chairman of the Audit Committee. The
Board of Directors of the Company has determined that Mr. Gilbertson is an
"audit committee financial expert," as such term is defined by regulations
promulgated by the Securities and Exchange Commission, and that such attributes
were acquired through relevant education and/or experience. Based upon
information submitted to the Board of Directors by the members of the Audit
Committee, the Board of Directors has determined and believes that all of such
persons are capable of exercising independent judgment as members of the
Company's Audit Committee and are also "independent" under the listing standards
of the Nasdaq and applicable securities laws.

CODE OF ETHICS

      The Company has not adopted a formal, written code of ethics within the
specific guidelines of Item 406 of Regulation S-K, promulgated under the
Securities Act of 1933, as amended. The Company has verbally communicated the
high level of ethical conduct expected from all of its employees, including its
officers, and intends to adopt a written code of ethics as soon as practicable.

ITEM 11. EXECUTIVE COMPENSATION

COMPENSATION AND OTHER INFORMATION CONCERNING DIRECTORS AND OFFICERS

SUMMARY COMPENSATION TABLE

      The following summary compensation table sets forth the total compensation
paid or accrued for the 2003 fiscal year for our named executive officers,
including our Chief Executive Officer, the four other most

                                       114
<PAGE>

highly compensated executive officers who were serving as of December 31, 2003,
and one individual who would have been one of our four most highly compensated
officers had he served as an officer on December 31, 2003.


                           SUMMARY COMPENSATION TABLE
<TABLE><CAPTION>
                                                                                                                  Long Term
                                                                                                                 Compensation
                                                                                                          --------------------------
                                                                                 Other       Restricted   Securities      All Other
                                                                                 Annual        Stock      Underlying    Compensation
Name and Principal Position                 Year     Salary($)    Bonus($)    Compensation    Award(s)      Options          ($)
                                            ----     ---------    --------    ------------    --------      -------          ---
<S>                                        <C>       <C>          <C>             <C>          <C>        <C>                <C>
David F. Struwas.......................     2003      200,000          --          --           --                --          --
  Chairman of the Board, Chief              2002      200,000      45,000          --           --         1,700,000          --
  Executive Officer and                     2001      200,000          --          --           --         1,450,000
  Treasurer

Keith Markley..........................     2003      200,000          --          --           --                --          --
  President and Chief                       2002      200,000      45,000          --           --         1,250,000          --
  Operating Officer                         2001      200,000     150,000          --           --         1,450,000          --

Robert J. DeSantis.....................     2003      200,000          --          --           --                --          --
  Chief Financial Officer                   2002      184,615          --          --           --         1,000,000       1,018(2)
  and Treasurer                             2001           --          --          --           --         1,300,000      36,837(2)

Raymond C. Allieri (1).................     2003      165,000          --          --           --                --          --
  Senior Vice President, Sales              2002      165,000      40,000          --           --           900,000          --
  and Marketing                             2001      168,148          --          --           --           500,000

Marc R. Esterman.......................     2003      159,856          --          --           --                --          --
  Vice President - Corporate Affairs,       2002      158,684          --          --           --           100,000          --
  General Counsel and Secretary (3)         2001      154,423          --          --           --           125,000          --

Stephen Zamansky (4)...................     2003      165,000          --          --           --                --          --
  Senior Vice President,                    2002      165,000      40,000          --           --           900,000          --
  Corporate Affairs, General                2001      164,423          --          --           --           550,000          --
  Counsel and Secretary
</TABLE>

     (1)  Mr. Allieri's employment by DSL.net began on June 1, 1999. As of
          January 30, 2004, Mr. Allieri ceased to be employed by DSL.net.

     (2)  Consists of amounts paid to Mr. DeSantis for professional services
          rendered and expenses incurred prior to his date of employment with
          the Company.

     (3)  Mr. Esterman's employment began on June 5, 2000. Mr. Esterman was
          elected Vice President - Corporate Affairs, General Counsel and
          Secretary on December 18, 2003.

     (4)  Mr. Zamansky's employment by DSL.net began on May 6, 1999. As of
          December 18, 2003, Mr. Zamansky ceased to be an officer of DSL.net.

OPTION GRANTS IN LAST FISCAL YEAR

      During the period from January 1, 2003 through December 31, 2003, there
were no grants of options to purchase common stock made to any executive
officers.

                                       115
<PAGE>

OPTION EXERCISES AND FISCAL YEAR END VALUES

      The following table sets forth information with respect to the exercise of
stock options during the year ended December 31, 2003 and the number and value
of shares of our common stock underlying the unexercised options held by the
named executive officers as of December 31, 2003.


               AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
                      AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE><CAPTION>
                                                                   NUMBER OF SECURITIES            VALUE OF UNEXERCISED
                                                                  UNDERLYING UNEXERCISED          IN-THE-MONEY OPTIONS AT
                                                               OPTIONS AT DECEMBER 31, 2003        DECEMBER 31, 2003(1)
                                                               ----------------------------    ----------------------------
NAME                      SHARES ACQUIRED    VALUE REALIZED
                          ON EXERCISE (#)         ($)          EXERCISABLE    UNEXERCISABLE    EXERCISABLE    UNEXERCISABLE
                          ---------------    --------------    -----------    -------------    -----------    -------------
<S>                               <C>               <C>        <C>             <C>             <C>             <C>
David F. Struwas                   --                --         1,809,721       1,340,279       $ 248,861       $ 278,139

Keith Markley                 1,297,220         $ 333,135       1,329,151       1,373,629        $ 43,056       $ 204,514

Robert J. DeSantis              388,888         $ 159,032         950,000         961,112        $ 25,834       $ 163,611

Raymond C. Allieri (2)        1,316,490         $ 281,049         155,556         627,779        $ 31,000       $ 147,250

Marc R. Esterman                 82,637          $ 19,298         104,759          89,104         $ 2,583       $  16,361

Stephen Zamansky (3)            801,625         $ 226,285         310,971         657,364        $ 23,250       $ 147,250
</TABLE>









                                       116
<PAGE>

     (1)  Value is based on the difference between the option exercise price and
          $0.60, the fair market value of DSL.net common stock on December 31,
          2003, multiplied by the number of shares of common stock underlying
          the options.

     (2)  Mr. Allieri's employment by DSL.net began on June 1, 1999. As of
          January 30, 2004, Mr. Allieri ceased to be employed by DSL.net.

     (3)  Mr. Zamansky's employment by DSL.net began on May 6, 1999. As of
          December 18, 2003, Mr. Zamansky ceased to be an officer of DSL.net.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

      The Compensation Committee of our Board of Directors, which in fiscal year
2003 was comprised of Messrs. Gilbertson, Hartnett and Keeler, reviewed salaries
and incentive compensation for our executive officers during fiscal year 2003.
All decisions of the Compensation Committee are currently subject to the review
and approval of our Board of Directors. No member of our Compensation Committee
(i) was, during the last fiscal year, an officer or employee of our Company or
any of its subsidiaries; (ii) was formerly an officer of our Company or any of
its subsidiaries; or (iii) had any relationship requiring disclosure under any
paragraph of Item 404 of Regulation S-K. None of our executive officers has
served as a director or member of the compensation committee, or other committee
serving an equivalent function, of any other entity whose executive officers
served as a director or member of our Compensation Committee.

COMPENSATION OF DIRECTORS

      Prior to 2003, the only compensation to directors for services provided as
a director or committee member were periodic grants of stock options subject to
vesting, except for reimbursement of reasonable out-of-pocket expenses incurred
in connection with attending board or committee meetings.

      In May 2003, the Board adopted new policies regarding director
compensation which became effective as of October 14, 2003. The new compensation
plan provides for a continuation of the compensation benefits listed above. In
addition, the new plan provides for the following payments, payable quarterly in
equal installments only to the Company's outside directors:

      o an annual retainer of $10,000;
      o an annual retainer of $7,500 for each member of the Audit Committee; and
      o an annual retainer of $2,500 for the Chairman of the Audit Committee.

      For 2003, cash payments made in accordance with the new plan were
pro-rated to include the period from October 14, 2003 through December 31, 2003
and totaled $14,300.

      In March 2004, the Board adopted new policies regarding director
compensation which provides for the following payments, payable quarterly in
equal installments only to the Company's outside directors:

      o an annual retainer of $20,000;
      o an aggregate annual meeting fee of $10,000, paid as a flat fee, based on
        an assumed number of meetings;

                                       117
<PAGE>

      o an annual retainer of $7,500 for each Audit Committee member;
      o an annual retainer of $5,000 for the Chairman of the Audit Committee;
      o an annual retainer of $5,000 for each Compensation Committee member;
      o an annual retainer of $2,500 for the Chairman of the Compensation
        Committee;
      o an annual retainer of $2,000 for each Nominating Committee member; and
      o an annual retainer of $1,000 for the Chairman of the Nominating
        Committee.

EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS

      The Company has entered into compensation agreements with each of David F.
Struwas, J. Keith Markley and Robert J. DeSantis, copies of which have been
filed as Exhibits Nos. 10.38, 10.39 and 10.40, respectively, to this Annual
Report on Form 10-K.

      These agreements provide these three officers, in pertinent part, with the
following benefits, respectively: (i) base salary and benefits through at least
March 31, 2004 (unless the employee has been terminated for "cause" or quit for
"good reason," as those terms are defined in the agreements); (ii) acceleration
of vesting of all unexercised stock options granted to such employee prior to
the effective date of the agreements if the employee has been terminated without
"cause" or quit for "good reason" on or prior to December 31, 2004; and (iii)
base salary and benefits in accordance with Company practices, less all
withholdings required under then current Company policy and applicable law or
regulation, for six (6) months from and after April 1, 2004, in the event the
employee is terminated without "cause" or quits for "good reason" on or prior to
March 31, 2004, or the date of termination, in the event the employee is
terminated without "cause" or quits for "good reason" on or after April 1, 2004,
subject to the execution and delivery by such employee of a release in favor of
the Company. In addition, Mr. Struwas has the potential to earn a one-time cash
bonus in the amount of $100,000 under his agreement with the Company if the
Company achieves certain target goals, as described therein.

BOARD OF DIRECTORS REPORT ON EXECUTIVE COMPENSATION
INTRODUCTION

      The Compensation Committee of the Board of Directors is responsible for
developing executive compensation policies and advising the Board of Directors
with respect to such policies, and administering the Company's stock option
plans and our employee stock purchase plan. Messrs. Gilbertson, Keeler and
Hartnett, all non-employee directors, are currently the members of the
Compensation Committee. The Committee's goal is to create and implement a
compensation program which will attract and retain talented executives and
provide incentives to management to enhance the Company's performance by basing
a significant portion of annual and long-term compensation on performance. All
decisions of the Compensation Committee are currently subject to the review and
approval of the Company's Board of Directors.

EXECUTIVE COMPENSATION PROGRAM

      The Company's executive compensation program consists of two elements:
salary and equity interests in the form of restricted stock or stock options.
This program applies to the Company's key management positions, including the
position of chief executive officer. All of the Company's executives also are
eligible for employee benefits offered to all employees, including

                                       118
<PAGE>

life, health, disability and dental insurance, and the Company's 401(k) profit
sharing plan and the Company's employee stock purchase plan.

      SALARY. The Compensation Committee reviews and approves cash compensation
for the chief executive officer and all other executive officers' salaries. The
Compensation Committee's policy is to establish base salaries after considering
amounts paid to senior executives with comparable qualifications, experience and
responsibilities at other companies of similar size and engaged in a similar
business to that of the Company. In addition, the base salaries take into
account the Company's performance relative to comparable companies.

      The salary compensation of the executive officers is based upon their
qualifications, experience and responsibilities, as well as on the attainment of
planned objectives. The chief executive officer makes recommendations to the
compensation committee regarding executive compensation levels.

      EQUITY INTERESTS. Executives are eligible to receive stock option grants
or other stock awards under the Company's 1999 Stock Option Plan and the
Company's Amended and Restated 2001 Stock Option and Incentive Plan. As of March
30, 2004, 1,134,266 shares remained available for grant under the Company's 1999
Stock Option Plan and 31,411,213 shares remained available for grant under the
Company's Amended and Restated 2001 Stock Option and Incentive Plan. The 1999
Stock Option Plan and the Amended and Restated 2001 Stock Option and Incentive
Plan are designed to provide long-term performance and retention incentives for
top management and other employees. An executive's participation in this program
is determined by the Compensation Committee and approved by the Board of
Directors.

      Executives participating in the Company's 1999 Stock Option Plan and the
Company's Amended and Restated 2001 Stock Option and Incentive Plan receive
stock option grants in amounts determined by the Compensation Committee. The
stock options granted to executives under the 1999 Stock Option Plan and the
Amended and Restated 2001 Stock Option and Incentive Plan have an exercise price
equal to the fair market value of the Company's common stock at the time of
grant. Currently, options granted to existing executives are generally
exercisable as to approximately 16.67% of the total number of option shares on
the day after the six-month anniversary of the date of grant of the options, and
monthly thereafter become exercisable as to approximately 2.78% of the total
number of option shares. Options granted to new executives are generally
exercisable as to 25% of the total number of option shares on the one-year
anniversary of such executive's start date, and monthly thereafter become
exercisable as to approximately 2.08% of the total number of option shares.

      BONUSES. The Company did not have an established bonus plan in fiscal year
2003. From time to time, at the discretion of the Compensation Committee,
subject to the approval by the Company's Board of Directors, bonuses are paid to
certain executives in recognition of the executive's performance. During 2003,
our executives received no bonuses.

CHIEF EXECUTIVE OFFICER'S COMPENSATION

      Mr. Struwas' compensation for 2003 was determined in accordance with the
executive compensation program described above.

      SALARY. Mr. Struwas received $200,000 in salary during 2003.

                                       119
<PAGE>

      EQUITY INTERESTS. Mr. Struwas held 63,250 shares of the Company's common
stock as of March 30, 2004. No additional equity based awards were granted to
Mr. Struwas in 2003.

      BONUS. Mr. Struwas did not receive a bonus in 2003.

      Mr. Struwas' total compensation for 2003 is set out in detail in the
Summary Compensation Table above.

COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(M)

      In general, under Section 162(m) of the Internal Revenue Code of 1986, as
amended, the Company cannot deduct, for federal income tax purposes,
compensation in excess of $1,000,000 paid to certain executive officers. This
deduction limitation does not apply, however, to compensation that constitutes
"qualified performance-based compensation" within the meaning of Section 162(m)
of the Internal Revenue Code and the regulations promulgated thereunder. The
Company has considered the limitations on deductions imposed by Section 162(m)
of the Internal Revenue Code, and it is the Company's present intention that,
for so long as it is consistent with its overall compensation objective,
substantially all tax deductions attributable to executive compensation will not
be subject to the deduction limitations of Section 162(m).

BOARD OF DIRECTORS OF DSL.NET, INC.

David F. Struwas
Roger Ehrenberg
Robert G. Gilbertson*
Robert B. Hartnett, Jr.*
Paul J. Keeler*
Roderick Glen MacMullin
William J. Marshall
James D. Marver
Michael L. Yagemann

*MEMBER OF COMPENSATION COMMITTEE.

STOCK PERFORMANCE GRAPH
      The following graph compares the monthly change in the cumulative total
stockholder return on the Company's common stock during the period from our
initial public offering (October 6, 1999) through December 31, 2003, with the
cumulative total return on (i) the Nasdaq Stock Market and (ii) the Nasdaq
Telecommunications Index. The comparison assumes that $100 was invested on
October 6, 1999 in our common stock and in each of the foregoing indices and
assumes reinvestment of dividends, if any.

        COMPARISON OF MONTHLY CUMULATIVE TOTAL RETURN AMONG DSL.NET INC.,
     THE NASDAQ MARKET INDEX, AND THE NASDAQ TELECOMMUNICATIONS INDEX (1)(2)

                           [LINE CHART APPEARS HERE]

                             CUMULATIVE TOTAL RETURN

                              10/6/99    12/99    3/00    6/00    9/00   12/00
                              -------    -----    ----    ----    ----   -----
DSL.NET, INC.                  100.00   192.51  294.17  137.51   40.84    7.08
NASDAQ STOCK MARKET (U.S.)     100.00   141.87  159.39  138.59  127.79   85.56
NASDAQ TELECOMMUNICATIONS      100.00   139.94  148.68  117.33   93.59   59.60

                                 3/01     6/01    9/01   12/01    3/02    6/02
                                 ----     ----    ----   -----    ----    ----
DSL.NET, INC.                   12.92    10.93    2.00   16.80   10.53    4.80
NASDAQ STOCK MARKET (U.S.)      63.86    75.30   52.25   67.91   64.35   51.29
NASDAQ TELECOMMUNICATIONS       52.51    49.77   36.25   39.92   28.45   17.16

                                 9/02    12/02    3/03    6/03    9/03   12/03
                                 ----    -----    ----    ----    ----   -----
DSL.NET, INC.                    4.40     6.53    5.07    6.93    7.17    8.00
NASDAQ STOCK MARKET (U.S.)      41.16    46.95   47.23   56.95   62.70   70.20
NASDAQ TELECOMMUNICATIONS       15.74    18.38   21.03   25.97   26.33   30.56

-----------------
(*)  $100 Invested on 10/6/99 in stock or index - including reinvestment of
     dividends.  Fiscal year ending December 31.

                                       120
<PAGE>

      (1) This graph is not "soliciting material," is not deemed filed with the
          SEC and is not to be incorporated by reference in any filing of the
          Company under the Securities Act of 1933, as amended, or the
          Securities Exchange Act of 1934, as amended, whether made before or
          after the date hereof and irrespective of any general incorporation
          language in any such filing.

      (2) The stock price performance shown on the graph is not necessarily
          indicative of future price performance. Information used in the graph
          was obtained from Research Data Group, Inc., a source believed to be
          reliable, but the Company is not responsible for any errors or
          omissions in such information.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

EQUITY COMPENSATION PLAN INFORMATION

      The following table provides information with respect to the shares of the
Company's common stock that may be issued under the Company's existing equity
compensation plans:

<TABLE><CAPTION>
------------------------------- ---------------------------- --------------------- -------------------------------------------------
                                                                                            Number of Securities Remaining
                                 Number of Securities to be     Weighted Average      Available for Future Issuance Under Equity
                                   Issued upon Exercise of     Exercise Price of       Compensation Plans (Excluding Securities
Plan Category                         Outstanding Options     Outstanding Options          Reflected in the first Column)
------------------------------- ---------------------------- --------------------- -------------------------------------------------
<S>                                     <C>                         <C>                              <C>
Equity Compensation Plans
Approved by Shareholders (1)             38,194,897                  $0.81                            12,373,979
------------------------------- ---------------------------- --------------------- -------------------------------------------------
Equity Compensation Plans Not
Approved by Shareholders
------------------------------- ---------------------------- --------------------- -------------------------------------------------
Total                                    38,194,897                  $0.81                            12,373,979
------------------------------- ---------------------------- --------------------- -------------------------------------------------
</TABLE>

     (1)  As of March 22, 2004.


                                       121
<PAGE>

SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The following table sets forth certain information regarding beneficial
ownership of the Company's capital stock as of March 30, 2004, by:

      o   each person known by the Company to be the beneficial owner of more
          than 5% of the Company's common stock, Series X preferred stock or
          Series Y preferred stock;

      o   each named executive officer;

      o   each of the Company's directors; and

      o   all executive officers and directors as a group.

      Unless otherwise noted below, the address of each person listed on the
table is c/o DSL.net, Inc., 545 Long Wharf Drive, New Haven, Connecticut 06511,
and each person has sole voting and investment power over the shares shown as
beneficially owned except to the extent authority is shared by spouses under
applicable law.

      Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In determining the number of shares of
common stock beneficially owned, shares of capital stock issuable by the Company
to a person pursuant to:

      o   options or warrants; and

      o   the right to convert outstanding Series X Preferred Stock and Series Y
          Preferred Stock;

in each case, which may be exercised within 60 days after March 30, 2004 are
deemed to be beneficially owned and outstanding for purposes of calculating the
number of shares of common stock and the percentage beneficially owned by that
person.

      Shares deemed to be beneficially owned by a person in accordance with the
above rules are not deemed to be beneficially owned and outstanding for purposes
of computing the percentage beneficially owned by any other person.
<TABLE><CAPTION>
                                                                               SERIES X                   COMBINED
                                                      COMMON STOCK          PREFERRED STOCK             VOTING POWER
                                                      ------------          ---------------             ------------
                                                              PERCENT                PERCENT                     PERCENT
                                                  SHARES      OF CLASS    SHARES     OF CLASS        VOTES       OF VOTES
                                                  ------      --------    ------     --------        -----       --------
<S>                                            <C>             <C>          <C>         <C>       <C>             <C>
David F. Struwas (1).......................     2,310,471       1.6%         -           -         2,310,471       1.0%
Keith Markley (2)..........................     1,839,565       1.3%         -           -         1,839,565        *
Robert J. DeSantis (3).....................     1,269,445        *                                 1,269,445        *
Raymond C. Allieri (4).....................       194,445        *           -           -           194,445        *
Marc R. Esterman (5).......................       145,938        *           -           -           145,938        *
Stephen Zamansky (6).......................       518,957        *           -           -           518,957        *
Robert B. Hartnett, Jr. (7)................       249,998        *           -           -           249,998        *
Roderick Glen MacMullin....................          --          *           -           -              --          *
Robert G. Gilbertson (8)...................       349,916        *           -           -           349,916        *
Paul J. Keeler (9).........................       303,123        *           -           -           303,123        *
Roger Ehrenberg (10).......................   118,421,053      45.1%         -           -       118,421,053      34.8%
</TABLE>

                                       122
<PAGE>
<TABLE><CAPTION>
<S>                                              <C>            <C>         <C>         <C>        <C>             <C>
William J. Marshall (11)...................       602,653        *           -           -          602,653         *
James D. Marver (12).......................   135,381,483      49.1%      14,000      100.0%      135,381,483     49.1%
Michael L. Yagemann........................          --           *          -           -             -            *
The VantagePoint Entities (13).............   134,547,653      48.9%      14,000      100.0%      134,547,653     48.9%
   1001 Bayhill Drive
   Suite 300
   San Bruno, CA 94066
Deutsche Bank AG London (14)...............   118,421,053      45.1%         -           -        118,421,053     34.8%
   31 West 52nd Street
   16th Floor
   New York, NY  10019
All executive officers and directors as a
group (14 persons) (15)....................   143,165,995      50.6%      14,000       100%       143,165,995     50.6%
------------------
</TABLE>

 * Indicates less than 1%.

(1)  Includes 2,247,221 shares issuable upon exercise of options held by Mr.
     Struwas that are exercisable within 60 days after March 30, 2004.

(2)  Includes 1,839,565 shares issuable upon exercise of options held by Mr.
     Markley that are exercisable within 60 days after March 30, 2004.

(3)  Includes 1,269,445 shares issuable upon exercise of options held by Mr.
     DeSantis that are exercisable within 60 days after March 30, 2004.

(4)  Mr. Allieri's employment by the Company began on June 1, 1999. As of
     January 30, 2004, Mr. Allieri ceased to be employed by the Company. All
     194,445 options to purchase the Company's common stock granted to Mr.
     Allieri will expire on April 30, 2004.

(5)  Includes 139,638 shares issuable upon exercise of options held by Mr.
     Esterman that are exercisable within 60 days after March 30, 2004.

(6)  Includes 518,957 shares issuable upon exercise of options held by Mr.
     Zamansky that are exercisable within 60 days after March 30, 2004. Mr.
     Zamansky's employment by the Company began on May 6, 1999. As of December
     18, 2003, Mr. Zamansky ceased to be an officer of the Company.

(7)  Includes 249,999 shares issuable upon exercise of options held by Mr.
     Hartnett that are exercisable within 60 days after March 30, 2004.

(8)  Includes 349,916 shares issuable upon exercise of options held by Mr.
     Gilbertson that are exercisable within 60 days after March 30, 2004.

(9)  Includes 303,123 shares issuable upon exercise of options held by Mr.
     Keeler that are exercisable within 60 days after March 30, 2004.

(10) Includes 118,421,053 shares beneficially owned by Deutsche Bank AG London.
     Mr. Ehrenberg may be deemed to share voting and investment power with
     respect to the shares beneficially owned by the Deutsche Bank AG London and
     disclaims beneficial ownership of such shares, except to the extent of his
     proportionate pecuniary interest therein.

(11) Includes 66,666 shares issuable upon exercise of options held by Mr.
     Marshall that are exercisable within 60 days after March 30, 2004.

(12) Includes 266,666 shares of common stock issuable upon exercise of options
     held by Mr. Marver that are exercisable within 60 days after March 30,
     2004, and the shares beneficially owned by the VantagePoint entities as set
     forth in footnote 15. Mr. Marver is a managing member of the general
     partner of each of the VantagePoint stockholders. Mr. Marver may

                                       123
<PAGE>

     be deemed to share voting and investment power with respect to the shares
     beneficially owned by the VantagePoint entities and disclaims beneficial
     ownership of such shares, except to the extent of his proportionate
     pecuniary interest therein.

(13) The entities listed below owned or have the right to purchase the shares of
     capital stock of the Company indicated in the table below as of March 30,
     2004.
<TABLE><CAPTION>
                                                                                   SHARES OF SERIES X
                                                   SHARES OF COMMON STOCK           PREFERRED STOCK
                                                   ----------------------     --------------------------
                                                                 SHARES                    SHARES
                                                                ISSUABLE                  OF COMMON
                                                                  UPON                  STOCK ISSUABLE
                                                     SHARES    EXERCISE OF    SHARES    UPON CONVERSION
                  STOCKHOLDER                         HELD      WARRANTS       HELD     OF SHARES HELD
     ------------------------------------------    ---------   ----------     ------    --------------
<S>                                                 <C>        <C>            <C>        <C>
     VantagePoint Venture Partners 1996, L.P.        463,586    7,535,220      2,800      15,555,555
     VantagePoint Communications Partners, L.P.      724,884    7,535,220      2,800      15,555,555
     VantagePoint Venture Partners III, L.P.         353,557    5,482,500        914       5,078,889
     VantagePoint Venture Partners III(Q), L.P.    1,901,280   32,773,628      7,486      41,587,778
</TABLE>

     VantagePoint Associates, L.L.C. is the general partner of VantagePoint
     Venture Partners 1996, L.P. VantagePoint Communications Associates, L.L.C.
     is the general partner of VantagePoint Communications Partners, L.P.
     VantagePoint Venture Associates III, L.L.C. is the general partner of
     VantagePoint Venture Partners III, L.P. and VantagePoint Venture Partners
     III (Q), L.P. Mr. Marver is a managing member of each of these general
     partner entities. Mr. Marver may be deemed to share voting and investment
     power with respect to the shares beneficially owned by the VantagePoint
     entities and disclaims beneficial ownership of such shares, except to the
     extent of his respective proportionate pecuniary interest therein.

(14) Deutsche Bank AG London has the right to purchase 118,421,053 shares of
     capital stock of the Company as of March 30, 2004.

(15) See Notes 1 through 14. Also includes shares owned by executive officers
     and shares issuable to executive officers in connection with options which
     are exercisable within 60 days after March 30, 2004.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      On November 14, 2001, the Company entered into the Series X Preferred
Stock Purchase Agreement with VantagePoint Venture Partners III (Q), L.P.,
VantagePoint Venture Partners III, L.P., VantagePoint Communications Partners,
L.P. and VantagePoint Venture Partners 1996, L.P. relating to the sale and
purchase of up to an aggregate of 20,000 shares of Series X Preferred Stock of
the Company at a purchase price of $1,000 per share. Subject to the terms and
conditions of the Series X Preferred Stock Purchase Agreement, on November 14,
2001, the Company sold an aggregate of 6,000 shares of Series X Preferred Stock
to the VantagePoint entities for an aggregate purchase price of $6,000,000, on
December 12, 2001, the Company sold an aggregate of 4,000 shares of Series X
Preferred Stock to the VantagePoint entities for an aggregate purchase price of
$4,000,000, and on March 1, 2002, the Company sold an aggregate of 10,000 shares
of Series X Preferred Stock to the VantagePoint entities for an aggregate
purchase price of $10,000,000. No additional shares of Series X Preferred Stock
may be issued under the Series X Purchase Agreement. James D. Marver, one of our
current directors, is a member and a managing member of the general partners of
each of the VantagePoint entities, and Michael L.

                                       124
<PAGE>

Yagemann, one of our current directors, was until recently a member of an
affiliate of certain of the VantagePoint entities. At the time of the
transactions described immediately above, William J. Marshall was an affiliate
of the VantagePoint entities and a member of the Board of Directors. Mr.
Marshall is no longer affiliated with the VantagePoint entities but continues to
serve on the Board of Directors.

      On December 24, 2001, the Company entered into the Series Y Preferred
Stock Purchase Agreement with Columbia Capital Equity Partners III (QP), L.P.,
Columbia Capital Equity Partners II (QP), L.P., The Lafayette Investment Fund,
L.P., Charles River Partnership X, A Limited Partnership and N.I.G. -
Broadslate, Ltd. relating to the sale and purchase of up to an aggregate of
15,000 shares of Series Y Preferred Stock of the Company at a purchase price of
$1,000 per share. On December 28, 2001, the Company sold an aggregate of 6,469
shares of Series Y Preferred Stock pursuant to the Series Y Preferred Stock
Purchase Agreement for an aggregate purchase price of $6,469,000 and received
proceeds of $3,531,000 from the issuance of promissory notes to the Series Y
investors. On May 30, 2002, the Company sold an aggregate of 8,531 shares of
Series Y Preferred Stock pursuant to the Series Y Preferred Stock Purchase
Agreement for an aggregate of $5,000,000 in net proceeds and the cancellation of
the $3,531,000 in promissory notes issued to the Series Y investors. Mr. Hopper,
an affiliate of the Columbia Capital entities, was a member of the Company's
Board of Directors from December 28, 2001 to August 5, 2003.

      In January 2002, the Company acquired digital subscriber line, T-1 and
virtual private network customers located in parts of Florida, Tennessee,
Virginia, North Carolina and Pennsylvania from Broadslate Networks, Inc. for an
aggregate purchase price of approximately $800,000, including a $650,000 initial
payment and $150,000 to be paid after a transition period, subject to certain
adjustments. In March 2002, the Company notified Broadslate that it was pursuing
an indemnification claim against the $150,000 hold back. The Company and
Broadslate eventually settled the claim, with the Company retaining the entire
$150,000 holdback amount. The Company stockholders, comprised of certain of the
Columbia Capital entities, in the aggregate, owned in excess of 10% of the
capital stock of Broadslate. Mr. Hopper, an affiliate of the Columbia Capital
entities, was a member of the Company's Board of Directors from December 28,
2001 to August 5, 2003. Mr. Hopper was also a director of Broadslate until
February 2002.

      On December 27, 2002, entered into a Reimbursement Agreement with certain
of the VantagePoint entities, certain of the Columbia Capital entities, The
Lafayette Investment Fund, L.P. and certain entities affiliated with Charles
River Ventures. Pursuant to the terms of the Reimbursement Agreement, the
VantagePoint entities and the Columbia Capital entities issued guarantees in an
aggregate amount of $6,100,000 to support the Company's obligations under a
credit agreement between the Company and a commercial bank providing for a
revolving line of credit of up to $15,000,000. On March 5, 2003, the Company
entered into amendment no. 1 to the Reimbursement Agreement with the
VantagePoint entities and the Columbia Capital entities pursuant to which the
VantagePoint entities increased their guarantees by $3,000,000, to an aggregate
of $9,100,000 for all guarantors. The Reimbursement Agreement was terminated in
connection with the July 2003 note and warrant financing.

      Pursuant to the terms of the Reimbursement Agreement, on December 27,
2002, the Company issued warrants to purchase 10,379,420 shares of its common
stock to the VantagePoint entities and 1,634,473 shares of its common stock to
the Columbia Capital entities in consideration for their guarantees aggregating
$6,100,000. The Company issued additional warrants to purchase 767,301 shares of
its common stock to the VantagePoint entities and

                                       125
<PAGE>

168,806 shares of its common stock to the Columbia Capital entities on March 26,
2003. All such warrants are exercisable for ten years at an exercise price of
$0.50 per share. Mr. Marver, one of our' current directors, is a member and a
managing member of the general partners of each of the VantagePoint entities and
Mr. Yagemann, one of our current directors, was until recently a member of an
affiliate of certain of the VantagePoint entities. Mr. Hopper, an affiliate of
the Columbia Capital entities, was a member of the Company's Board of Directors
from December 28, 2001 to August 5, 2003.

      On March 3, 2003, the Company and certain of the Guarantors entered into
Amendment No. 1 to the Reimbursement Agreement, pursuant to which VantagePoint
increased its guarantee by $3,000,000 bringing the aggregate guarantees by all
Guarantors under the Reimbursement Agreement, as amended, to $9,100,000. As
consideration for VantagePoint's increased guarantee, if the Company closed an
equity financing on or before December 3, 2003, the Company was authorized to
issue VantagePoint additional warrants to purchase the type of equity securities
issued by the Company in such equity financing. The number of such additional
warrants would be determined by dividing the per share price of such equity
securities into a thousand dollars. Accordingly, since the Company closed a
financing on July 18, 2003, the Company issued to VantagePoint in December 2003,
additional warrants with a three year life, to purchase 2,260,909 shares of its
common stock at a per share price of $0.4423. Mr. Marver, one of our current
directors, is a member and a managing member of the general partners of each of
the VantagePoint entities and Mr. Yagemann, one of our current directors, was
until recently a member of an affiliate of certain of the VantagePoint entities.

      On July 18, 2003, the Company entered into a note and warrant purchase
agreement with Deutsche Bank AG London acting through DB Advisors LLC, as
investment advisor, and the VantagePoint entities relating to the sale and
purchase of an aggregate of (i) $30,000,000 in principal amount of senior
secured promissory notes and (ii) common stock purchase warrants to purchase an
aggregate of 157,894,737 shares of the Company's common stock for a period of
three years at an exercise price of $0.38 per share. The aggregate purchase
price for the senior secured promissory notes and common stock purchase warrants
was $30,000,000. Subject to the terms and conditions of the note and warrant
purchase agreement, the Company issued $30,000,000 in aggregate principal amount
of senior secured promissory notes to Deutsche Bank AG London acting through DB
Advisors LLC, its investment advisor, and the VantagePoint entities on July 18,
2003. Subject to the terms and conditions of the note and warrant purchase
agreement, on August 12, 2003 Deutsche Bank AG London acting through DB Advisors
LLC, as investment advisor, was issued a common stock purchase warrant
exercisable for 12,950,000 shares of common stock. Pursuant to the terms and
conditions of the note and warrant purchase agreement, the Company issued the
remaining warrants to purchase an aggregate of 144,944,737 shares of the
Company's common stock to Deutsche Bank (105,471,053 shares) and VantagePoint
(39,473,864 shares) in December, 2003. James D. Marver, one of our current
directors, is a member and a managing member of the general partners of each of
the VantagePoint entities, and Michael L. Yagemann, one of our current
directors, was until recently a member of an affiliate of certain of the
VantagePoint entities. Roger Ehrenberg, who became a director of the Company on
July 18, 2003 in connection with the note and warrant financing, is President of
DB Advisors LLC, and Roderick Glen MacMullin, who became a director of the
Company on July 18, 2003 in connection with the note and warrant financing, was
until recently a director of DB Advisors LLC.

      As a result of the issuance of the common stock purchase warrant
exercisable for 12,950,000 shares of the Company's common stock to Deutsche Bank
AG London acting through DB Advisors LLC, as investment advisor, on August 12,
2003, the conversion price of the Series Y

                                       126
<PAGE>

Preferred Stock was adjusted pursuant to section 3(a)(i) of the Series Y
designation which constitutes a part of our certificate of incorporation. Prior
to such issuance, each share of Series Y Preferred Stock was convertible into
2,000 shares of common stock. Subsequent to such issuance, each share of Series
Y Preferred Stock is convertible into 2,260.91 shares of common stock. Mr.
Hopper, an affiliate of the Columbia Capital entities, was a member of the
Company's Board of Directors from December 28, 2001 to August 5, 2003.

      During 2003, the Series Y Investors (including Columbia) converted 14,000
shares of Series Y Preferred Stock into 35,140,012 shares of the Company's
common stock (including shares issued as payment for accrued dividends). As of
December 31, 2003, funds affiliated with one remaining Series Y Investor
(Charles River Partnership, L.P.) owned 1,000 shares of Series Y Preferred Stock
which are convertible into approximately 2,260,909 shares of the Company's
common stock. These remaining 1,000 shares of Series Y Preferred Stock were
converted into common shares in February 2004. In addition, resulting from
guarantees issued under the Reimbursement Agreement, Columbia had warrants to
acquire approximately 1,358,025 shares of the Company's common stock. These
warrants were exercised in February 2004. Mr. Hopper, an affiliate of the
Columbia Capital entities, was a member of the Company's Board of Directors from
December 28, 2001 to August 5, 2003.

      In January 2004, 6,000 shares of Series X Preferred Stock were converted
into 33,333,333 shares of the Company's common stock at a conversion price of
$0.18 per share and, in accordance with the terms of the Series X Preferred
Stock, the Company elected to pay accrued dividends approximating $1,560,000 by
issuing 2,316,832 shares of its common stock, based on the average fair market
value for the ten days preceding the conversion of $0.67 per share.

      In February 2004, the remaining 1,000 shares of Series Y Preferred Stock
were converted into 2,260,910 shares of the Company's common stock at a
conversion price of $0.4423 per share and, in accordance with the terms of the
Series Y Preferred Stock, the Company elected to pay accrued dividends
approximating $221,000 by issuing 309,864 shares of its common stock, based on
the average fair market value for the ten days preceding the conversion of $0.71
per share.

      In February 2004 Columbia Capital exercised their remaining warrants to
purchase 1,358,025 shares of the Company's common stock at an exercise price of
$0.50 per share in a cashless exchange which resulted in the issuance of 413,160
shares of the Company's common stock. The cashless exchange was accomplished by
deducting the per share exercise price from the per share fair market value of
the company's common stock and multiplying the differential times the total
warrants to determine the aggregate excess of the fair market value over the
exercise price; which was then divided by the per share fair market value of the
Company's common stock to arrive at the number of shares issued. The fair market
value of the Company's common stock of $0.72 was determined in accordance with
the warrant agreement by calculating the average of the close prices for the
five days immediately preceding the exercise date.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

      The total fees and related expenses for professional services provided by
the Company's independent certified public accountants, PricewaterhouseCoopers,
LLP, for the years ended 2003 and 2002 are presented in the table below. The
Audit Committee has determined that the provision of these services by
PricewaterhouseCoopers, LLP is compatible with the accountants' independence.

                                       127
<PAGE>


                                                     2003         2002
                                                   --------     --------
                   Audit fees (1)                  $444,950     $375,350
                   Audit-related fees               263,000       27,900
                   Tax fees                             --           --
                   All other fees                       --           --
                                                   --------     --------
                       Total                       $707,950     $403,250
                                                   ========     ========

                   (1) Includes $60,000 for 2003 to be billed in June 2004.

      Fees for audit services include fees and expenses associated with the
annual audit of the Company's financial statements included in the Company's
Annual Report on Form 10-K, reviews of its quarterly reports on Form 10-Q, fees
related to the audit of the Company's 401(k) plan and consultations related to
accounting matters. Audit related fees include fees and expenses for accounting
related consultations and audit services associated with the Company's
acquisitions.

                                     PART IV

ITEM 15. 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      Amended and Restated Asset Purchase Agreement, dated as of December
          11, 2002, By and among DSL.net, Inc., Network Access Solutions
          Corporation, Network Access Solutions LLC, NASOP, Inc. and Adelman
          Lavine Gold and Levin, A Professional Corporation, as deposit escrow
          agent (incorporated by reference to Exhibit 2.1 filed with our Form
          8-K dated as of January 10, 2003).

3.01      Amended and Restated Certificate of Incorporation of DSL.net, Inc., as
          amended (incorporated by reference to Exhibit 4.01 filed with our
          registration statement on Form S-8 (No. 333-89886)).

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<PAGE>

3.02      Amended and Restated By-laws of DSL.net, Inc. (incorporated by
          reference to Exhibit 4.02 filed with our registration statement on
          Form S-8 (No. 333-89886)).

3.03      Amended and Restated Certificate of Incorporation of DSL.net, Inc., as
          amended (incorporated by reference to Exhibit 4.01 filed with our
          registration statement on Form S-8 (No. 333- 110131)).

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      Specimen Certificate for shares of DSL.net, Inc.'s Series X Preferred
          Stock (incorporated by reference to Exhibit 4.01 filed with our
          Quarterly Report on Form 10-Q for the quarterly period ended September
          30, 2001).

4.03      Specimen Certificate for shares of DSL.net, Inc.'s Series Y Preferred
          Stock (incorporated by reference to Exhibit 4.02 filed with our Form
          8-K dated as of December 24, 2001).

4.04      Description of Capital Stock (contained in the Certificate of
          Incorporation filed as Exhibit 3.01 herewith).

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

4.06      Form of Stock Purchase Warrant dated as of December 27, 2002 between
          DSL.net, Inc. and certain guarantors (incorporated by reference to
          Exhibit 4.06 filed with our Annual Report on Form 10-K for the year
          ended December 31, 2002).

4.07      Form of Stock Purchase Warrant dated as of March 26, 2003 between
          DSL.net, Inc. and certain guarantors (incorporated by reference to
          Exhibit 4.07 filed with our Annual Report on Form 10-K for the year
          ended December 31, 2002).

4.08      Form of Warrant to Purchase Shares of Common Stock of DSL.net, Inc.,
          issued in connection with the Note and Warrant Purchase Agreement,
          dated as of July 18, 2003, by and among DSL.net, Inc. and the
          investors named therein (incorporated by reference to Exhibit 4.02
          filed with our Current Report on Form 8-K, dated as of August 4,
          2003).

4.09*     Form of Stock Purchase Warrant dated as of December 22, 2003 between
          DSL.net, Inc. and each of the VantagePoint entities.

10.01+    Amended and Restated 1999 Stock Option 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 2001 Stock Option and Incentive Plan
          (incorporated by reference to Exhibit 4.03 filed with our registration
          statement on Form S-8 (No. 333-89886)).

                                       129
<PAGE>

10.04     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 Exhibit 10.03 filed with our
          registration statement on Form S-1 (No. 333-80141)).

10.05     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)).

10.06     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)).

10.07     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)).

10.08     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)).

10.09     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)).

10.10     Amendment No. 4 dated February 8, 2000 to Lease Agreement by and
          between DSL.net, Inc. and Long Wharf Drive, LLC (incorporated by
          reference to Exhibit 10.12 filed with our Annual Report on Form 10-K
          for the fiscal year ended December 31, 2000).

10.11     Amendment No. 5 dated November 12, 2001 to Lease Agreement by and
          between DSL.net, Inc. and Long Wharf Drive, LLC. (incorporated by
          reference to Exhibit 10.11 filed with our Annual Report on Form 10-K
          for the year ended December 31, 2001).

10.12     Amendment No. 6 to Lease, Dated as of April 22, 2002, by and between
          DSL.net, Inc. and Long Wharf Drive, LLC (incorporated by reference to
          Exhibit 10.2 filed with our Quarterly Report on Form 10-Q for the
          quarterly period ended June 30, 2002).

10.13     Amendment No. 7 to Lease, Dated as of December 4, 2002, by and between
          DSL.net, Inc. and Long Wharf Drive, LLC (incorporated by reference to
          Exhibit 10.13 filed with our Annual Report on Form 10-K for the year
          ended December 31, 2002).

10.14     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)).

10.15+    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)).

10.16+    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)).

                                       130
<PAGE>

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)).

10.18     Series X Preferred Stock Purchase Agreement dated as of November 14,
          2001, by and among DSL.net and the Investors named therein
          (incorporated by reference to Exhibit 10.01 filed with our Quarterly
          Report on Form 10-Q for the quarterly period ended September 30,
          2001).

10.19     Series Y Preferred Stock Purchase Agreement dated as of December 24,
          2001, by and among DSL.net and the Investors named therein
          (incorporated by reference to Exhibit 99.01 filed with our Form 8-K
          dated as of December 24, 2001).

10.20     Stockholders Agreement dated as of December 24, 2001, by and among
          DSL.net and the Investors named therein (incorporated by reference to
          Exhibit 99.02 filed with our Form 8-K dated as of December 24, 2001).

10.21     Revolving Credit and Term Loan Agreement dated as of December 13, 2002
          by and between DSL.net, Inc. and Fleet National Bank (incorporated by
          reference to Exhibit 10.21 filed with our Annual Report on Form 10-K
          for the year ended 2002).

10.22     Reimbursement Agreement dated December 27, 2002 by and among DSL.net,
          Inc., the Guarantors party thereto and VantagePoint Venture Partners
          III (Q), L.P., as Administrative Agent (incorporated by reference to
          Exhibit 10.22 filed with our Annual Report on Form 10-K for the year
          ended 2002).

10.23     Subsidiary Guaranty dated as of December 27, 2002 by DSLnet
          Communications Puerto Rico, Inc., DSLnet Communications VA, Inc.,
          Tycho Networks, Inc. and Vector Internet Services, Inc. in favor of
          VantagePoint Venture Partners III (Q), L.P., as Administrative Agent
          (incorporated by reference to Exhibit 10.23 filed with our Annual
          Report on Form 10-K for the year ended 2002).

10.24     Security Agreement dated as of December 27, 2002 by DSL.net, Inc.,
          DSLnet Communications Puerto Rico, Inc., DSLnet Communications VA,
          Inc., Tycho Networks, Inc. and Vector Internet Services, Inc. in favor
          of VantagePoint Venture Partners III (Q), L.P., as Administrative
          Agent (incorporated by reference to Exhibit 10.24 filed with our
          Annual Report on Form 10-K for the year ended 2002).

10.25     Guaranty of VantagePoint Venture Partners III (Q), L.P. delivered to
          Fleet National Bank (incorporated by reference to Exhibit 10.25 filed
          with our Annual Report on Form 10-K for the year ended 2002).

10.26     Guaranty of Columbia Capital Equity Partners II (QP), LP, Columbia
          Capital Equity Partners II (Cayman), LP, Columbia Capital Equity
          Partners II, LP, Columbia Capital Equity Partners III (QP), LP,
          Columbia Capital Equity Partners III (Cayman), LP and Columbia Capital
          Equity Partners III (AI), LP delivered to Fleet National Bank
          (incorporated by reference to Exhibit 10.26 filed with our Annual
          Report on Form 10-K for the year ended 2002).

                                       131
<PAGE>

10.27     Amendment No. 1 to Stockholders Agreement dated as of December 24,
          2002 by and among DSL.net, Inc. and the investors named therein
          (incorporated by reference to Exhibit 10.27 filed with our Annual
          Report on Form 10-K for the year ended 2002).

10.28     Amendment No. 1 to Reimbursement Agreement dated March 5, 2003 by and
          among DSL.net, Inc., the Guarantors party thereto and VantagePoint
          Venture Partners III (Q), L.P., as administrative Agent (incorporated
          by reference to Exhibit 10.28 filed with our Annual Report on Form
          10-K for the year ended 2002).

10.29     First Amendment to Guaranty dated March 5, 2003 by and between
          VantagePoint Venture Partners III (Q), L.P. and Fleet National Bank
          (incorporated by reference to Exhibit 10.29 filed with our Annual
          Report on Form 10-K for the year ended 2002).

10.30     Letter Agreement dated March 5, 2003 by and between DSL.net, Inc. and
          VantagePoint Venture Partners III (Q), L.P. (incorporated by reference
          to Exhibit 10.30 filed with our Annual Report on Form 10-K for the
          year ended 2002).

10.31     Form of Senior Secured Promissory Note of DSL.net, Inc., issued in
          connection with the Note and Warrant Purchase Agreement, dated as of
          July 18, 2003, by and among DSL.net, Inc. and the investors named
          therein (incorporated by reference to Exhibit 4.01 filed with our
          Current Report on Form 8-K, dated as of August 4, 2003).

10.32     Form of Warrant to Purchase Shares of Common Stock of DSL.net, Inc.,
          issued in connection with the Note and Warrant Purchase Agreement,
          dated as of July 18, 2003, by and among DSL.net, Inc. and the
          investors named therein (incorporated by reference to Exhibit 4.02
          filed with our Current Report on Form 8-K, dated as of August 4,
          2003).

10.33     Note and Warrant Purchase Agreement, dated as of July 18, 2003, by and
          among DSL.net, Inc. and the investors named therein (incorporated by
          reference to Exhibit 10.01 filed with our Current Report on Form 8-K,
          dated as of August 4, 2003).

10.34     Agency, Guaranty and Security Agreement, dated as of July 18, 2003, by
          and among DSL.net, Inc., certain of DSL.net, Inc.'s subsidiaries,
          Deutsche Bank Trust Company Americas, as administrative agent, and the
          investors named therein (incorporated by reference to Exhibit 10.02
          filed with our Current Report on Form 8-K, dated as of August 4,
          2003).

10.35     Voting Agreement dated as of July 18, 2003, by and between DSL.net,
          Inc., the stockholders named therein and the investors named therein
          (incorporated by reference to Exhibit 10.03 filed with our Current
          Report on Form 8-K, dated as of August 4, 2003).

10.36     Amended and Restated Stockholders Agreement dated as of July 18, 2003,
          by and among DSL.net, Inc., the stockholders named therein and the
          investors named therein (incorporated by reference to Exhibit 10.04
          filed with our Current Report on Form 8-K, dated as of August 4, 2003.

10.37+    Amended and Restated 2001 Stock Option and Incentive Plan
          (incorporated by reference to Exhibit 4.03 filed with our registration
          statement on Form S-8 (No. 333-110131)).

10.38*+   Agreement, dated as of January 1, 2004, between DSL.net, Inc. and
          David F. Struwas.

                                       132
<PAGE>

10.39*+   Agreement, dated as of January 1, 2004, between DSL.net, Inc. and J.
          Keith Markley.

10.40*+   Agreement, dated as of January 1, 2004, between DSL.net, Inc. and
          Robert J. DeSantis.

21.01     Subsidiaries of DSL.net, Inc. (incorporated by reference to Exhibit
          21.01 filed with our Annual Report on Form 10-K for the year ended
          2002).

23.01*    Consent of PricewaterhouseCoopers LLP.

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

31.1*     Certification Pursuant to Rule 13a-14(a) of the Exchange Act, as
          Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*     Certification Pursuant to Rule 13a-14(a) of the Exchange Act, as
          Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*     Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
          to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*     Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
          to Section 906 of the Sarbanes-Oxley Act of 2002.

* Filed herewith

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

(b) Reports on Form 8-K

            The Company filed a Current Report on Form 8-K on December 19, 2003
      reporting, on Item 5, that it had received all required stockholder and
      regulatory approvals remaining to be obtained under the Note and Warrant
      Purchase Agreement, dated as of July 18, 2003, by and among DSL.net, Inc.
      and the investors named therein and that, as a result of such approvals,
      the Additional Warrants due under such Agreement were issued on such date.

            The Company filed a Current Report on Form 8-K on November 12, 2003
      reporting on Item 12 its financial results for the three and nine months
      ended September 30, 2003.


                                       133
<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: April 14, 2004                        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, Robert J. DeSantis and Marc
Esterman, 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, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

Signature                       Title(s)                          Date
---------                       --------                          ----

/s/ David F. Struwas            Chairman of the Board and         April 14, 2004
---------------------------     Chief Executive Officer
David F. Struwas                (Principal Executive Officer)


/s/ Robert J. DeSantis          Chief Financial Officer           April 14, 2004
---------------------------     (Principal Financial and
Robert J. DeSantis               Accounting Officer)


/s/ Roger Ehrenberg             Director                          April 14, 2004
---------------------------
Roger Ehrenberg


/s/ Robert G. Gilbertson        Director                          April 14, 2004
---------------------------
Robert G. Gilbertson

                                       134
<PAGE>


/s/ Robert B. Hartnett, Jr.     Director                          April 14, 2004
---------------------------
Robert B. Hartnett, Jr.


/s/ Paul Keeler                 Director                          April 14, 2004
---------------------------
Paul Keeler


/s/ Roderick Glen MacMullin     Director                          April 14, 2004
---------------------------
Roderick Glen MacMullin


/s/ William J. Marshall         Director                          April 14, 2004
---------------------------
William J. Marshall


/s/James D. Marver              Director                          April 14, 2004
---------------------------
James D. Marver


/s/ Michael L. Yagemann         Director                          April 14, 2004
---------------------------
Michael L. Yagemann






                                       135
<PAGE>


                   Exhibit Index to Annual Report on Form 10-K
                     for Fiscal Year Ended December 31, 2003


                                     EXHIBIT
EXHIBIT
  NO.

2.01      Amended and Restated Asset Purchase Agreement, dated as of December
          11, 2002, By and among DSL.net, Inc., Network Access Solutions
          Corporation, Network Access Solutions LLC, NASOP, Inc. and Adelman
          Lavine Gold and Levin, A Professional Corporation, as deposit escrow
          agent (incorporated by reference to Exhibit 2.1 filed with our Form
          8-K dated as of January 10, 2003).

3.01      Amended and Restated Certificate of Incorporation of DSL.net, Inc., as
          amended (incorporated by reference to Exhibit 4.01 filed with our
          registration statement on Form S-8 (No. 333-89886)).

3.02      Amended and Restated By-laws of DSL.net, Inc. (incorporated by
          reference to Exhibit 4.02 filed with our registration statement on
          Form S-8 (No. 333-89886)).

3.03      Amended and Restated Certificate of Incorporation of DSL.net, Inc., as
          amended (incorporated by reference to Exhibit 4.01 filed with our
          registration statement on Form S-8 (No. 333- 110131)).

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      Specimen Certificate for shares of DSL.net, Inc.'s Series X Preferred
          Stock (incorporated by reference to Exhibit 4.01 filed with our
          Quarterly Report on Form 10-Q for the quarterly period ended September
          30, 2001).

4.03      Specimen Certificate for shares of DSL.net, Inc.'s Series Y Preferred
          Stock (incorporated by reference to Exhibit 4.02 filed with our Form
          8-K dated as of December 24, 2001).

4.04      Description of Capital Stock (contained in the Certificate of
          Incorporation filed as Exhibit 3.01 herewith).

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

4.06      Form of Stock Purchase Warrant dated as of December 27, 2002 between
          DSL.net, Inc. and certain guarantors (incorporated by reference to
          Exhibit 4.06 filed with our Annual Report on Form 10-K for the year
          ended December 31, 2002).

4.07      Form of Stock Purchase Warrant dated as of March 26, 2003 between
          DSL.net, Inc. and certain guarantors (incorporated by reference to
          Exhibit 4.07 filed with our Annual Report on Form 10-K for the year
          ended December 31, 2002).

                                       136
<PAGE>

4.08      Form of Warrant to Purchase Shares of Common Stock of DSL.net, Inc.,
          issued in connection with the Note and Warrant Purchase Agreement,
          dated as of July 18, 2003, by and among DSL.net, Inc. and the
          investors named therein (incorporated by reference to Exhibit 4.02
          filed with our Current Report on Form 8-K, dated as of August 4,
          2003).

4.09*     Form of Stock Purchase Warrant dated as of December 22, 2003 between
          DSL.net, Inc. and each of the VantagePoint entities.

10.01+    Amended and Restated 1999 Stock Option 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 2001 Stock Option and Incentive Plan
          (incorporated by reference to Exhibit 4.03 filed with our registration
          statement on Form S-8 (No. 333-89886)).

10.04     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 Exhibit 10.03 filed with our
          registration statement on Form S-1 (No. 333-80141)).

10.05     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)).

10.06     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)).

10.07     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)).

10.08     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)).

10.09     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)).

10.10     Amendment No. 4 dated February 8, 2000 to Lease Agreement by and
          between DSL.net, Inc. and Long Wharf Drive, LLC (incorporated by
          reference to Exhibit 10.12 filed with our Annual Report on Form 10-K
          for the fiscal year ended December 31, 2000).

10.11     Amendment No. 5 dated November 12, 2001 to Lease Agreement by and
          between DSL.net, Inc. and Long Wharf Drive, LLC. (incorporated by
          reference to Exhibit 10.11 filed with our Annual Report on Form 10-K
          for the year ended December 31, 2001).

10.12     Amendment No. 6 to Lease, Dated as of April 22, 2002, by and between
          DSL.net, Inc. and Long Wharf Drive, LLC (incorporated by reference to
          Exhibit 10.2 filed with our Quarterly Report on Form 10-Q for the
          quarterly period ended June 30, 2002).

                                       137
<PAGE>

10.13     Amendment No. 7 to Lease, Dated as of December 4, 2002, by and between
          DSL.net, Inc. and Long Wharf Drive, LLC (incorporated by reference to
          Exhibit 10.13 filed with our Annual Report on Form 10-K for the year
          ended December 31, 2002).

10.14     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)).

10.15+    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)).

10.16+    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)).

10.18     Series X Preferred Stock Purchase Agreement dated as of November 14,
          2001, by and among DSL.net and the Investors named therein
          (incorporated by reference to Exhibit 10.01 filed with our Quarterly
          Report on Form 10-Q for the quarterly period ended September 30,
          2001).

10.19     Series Y Preferred Stock Purchase Agreement dated as of December 24,
          2001, by and among DSL.net and the Investors named therein
          (incorporated by reference to Exhibit 99.01 filed with our Form 8-K
          dated as of December 24, 2001).

10.20     Stockholders Agreement dated as of December 24, 2001, by and among
          DSL.net and the Investors named therein (incorporated by reference to
          Exhibit 99.02 filed with our Form 8-K dated as of December 24, 2001).

10.21     Revolving Credit and Term Loan Agreement dated as of December 13, 2002
          by and between DSL.net, Inc. and Fleet National Bank (incorporated by
          reference to Exhibit 10.21 filed with our Annual Report on Form 10-K
          for the year ended 2002).

10.22     Reimbursement Agreement dated December 27, 2002 by and among DSL.net,
          Inc., the Guarantors party thereto and VantagePoint Venture Partners
          III (Q), L.P., as Administrative Agent (incorporated by reference to
          Exhibit 10.22 filed with our Annual Report on Form 10-K for the year
          ended 2002).

10.23     Subsidiary Guaranty dated as of December 27, 2002 by DSLnet
          Communications Puerto Rico, Inc., DSLnet Communications VA, Inc.,
          Tycho Networks, Inc. and Vector Internet Services, Inc. in favor of
          VantagePoint Venture Partners III (Q), L.P., as Administrative Agent
          (incorporated by reference to Exhibit 10.23 filed with our Annual
          Report on Form 10-K for the year ended 2002).

10.24     Security Agreement dated as of December 27, 2002 by DSL.net, Inc.,
          DSLnet Communications Puerto Rico, Inc., DSLnet Communications VA,
          Inc., Tycho Networks, Inc. and Vector Internet Services, Inc. in favor
          of VantagePoint Venture Partners III (Q), L.P., as Administrative

                                       138
<PAGE>

          Agent (incorporated by reference to Exhibit 10.24 filed with our
          Annual Report on Form 10-K for the year ended 2002).

10.25     Guaranty of VantagePoint Venture Partners III (Q), L.P. delivered to
          Fleet National Bank (incorporated by reference to Exhibit 10.25 filed
          with our Annual Report on Form 10-K for the year ended 2002).

10.26     Guaranty of Columbia Capital Equity Partners II (QP), LP, Columbia
          Capital Equity Partners II (Cayman), LP, Columbia Capital Equity
          Partners II, LP, Columbia Capital Equity Partners III (QP), LP,
          Columbia Capital Equity Partners III (Cayman), LP and Columbia Capital
          Equity Partners III (AI), LP delivered to Fleet National Bank
          (incorporated by reference to Exhibit 10.26 filed with our Annual
          Report on Form 10-K for the year ended 2002).

10.27     Amendment No. 1 to Stockholders Agreement dated as of December 24,
          2002 by and among DSL.net, Inc. and the investors named therein
          (incorporated by reference to Exhibit 10.27 filed with our Annual
          Report on Form 10-K for the year ended 2002).

10.28     Amendment No. 1 to Reimbursement Agreement dated March 5, 2003 by and
          among DSL.net, Inc., the Guarantors party thereto and VantagePoint
          Venture Partners III (Q), L.P., as administrative Agent (incorporated
          by reference to Exhibit 10.28 filed with our Annual Report on Form
          10-K for the year ended 2002).

10.29     First Amendment to Guaranty dated March 5, 2003 by and between
          VantagePoint Venture Partners III (Q), L.P. and Fleet National Bank
          (incorporated by reference to Exhibit 10.29 filed with our Annual
          Report on Form 10-K for the year ended 2002).

10.30     Letter Agreement dated March 5, 2003 by and between DSL.net, Inc. and
          VantagePoint Venture Partners III (Q), L.P. (incorporated by reference
          to Exhibit 10.30 filed with our Annual Report on Form 10-K for the
          year ended 2002).

10.31     Form of Senior Secured Promissory Note of DSL.net, Inc., issued in
          connection with the Note and Warrant Purchase Agreement, dated as of
          July 18, 2003, by and among DSL.net, Inc. and the investors named
          therein (incorporated by reference to Exhibit 4.01 filed with our
          Current Report on Form 8-K, dated as of August 4, 2003).

10.32     Form of Warrant to Purchase Shares of Common Stock of DSL.net, Inc.,
          issued in connection with the Note and Warrant Purchase Agreement,
          dated as of July 18, 2003, by and among DSL.net, Inc. and the
          investors named therein (incorporated by reference to Exhibit 4.02
          filed with our Current Report on Form 8-K, dated as of August 4,
          2003).

10.33     Note and Warrant Purchase Agreement, dated as of July 18, 2003, by and
          among DSL.net, Inc. and the investors named therein (incorporated by
          reference to Exhibit 10.01 filed with our Current Report on Form 8-K,
          dated as of August 4, 2003).

10.34     Agency, Guaranty and Security Agreement, dated as of July 18, 2003, by
          and among DSL.net, Inc., certain of DSL.net, Inc.'s subsidiaries,
          Deutsche Bank Trust Company Americas, as administrative agent, and the
          investors named therein (incorporated by reference to Exhibit 10.02
          filed with our Current Report on Form 8-K, dated as of August 4,
          2003).

10.35     Voting Agreement dated as of July 18, 2003, by and between DSL.net,
          Inc., the stockholders named therein and the investors named therein
          (incorporated by reference to Exhibit 10.03 filed with our Current
          Report on Form 8-K, dated as of August 4, 2003).

                                       139
<PAGE>

10.36     Amended and Restated Stockholders Agreement dated as of July 18, 2003,
          by and among DSL.net, Inc., the stockholders named therein and the
          investors named therein (incorporated by reference to Exhibit 10.04
          filed with our Current Report on Form 8-K, dated as of August 4, 2003.

10.37+    Amended and Restated 2001 Stock Option and Incentive Plan
          (incorporated by reference to Exhibit 4.03 filed with our registration
          statement on Form S-8 (No. 333-110131)).

10.38*+   Agreement, dated as of January 1, 2004, between DSL.net, Inc. and
          David F. Struwas.

10.39*+   Agreement, dated as of January 1, 2004, between DSL.net, Inc. and J.
          Keith Markley.

10.40*+   Agreement, dated as of January 1, 2004, between DSL.net, Inc. and
          Robert J. DeSantis.

21.01     Subsidiaries of DSL.net, Inc. (incorporated by reference to Exhibit
          21.01 filed with our Annual Report on Form 10-K for the year ended
          2002).

23.01*    Consent of PricewaterhouseCoopers LLP.

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

31.1*     Certification Pursuant to Rule 13a-14(a) of the Exchange Act, as
          Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*     Certification Pursuant to Rule 13a-14(a) of the Exchange Act, as
          Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*     Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
          to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*     Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
          to Section 906 of the Sarbanes-Oxley Act of 2002.


*  Filed herewith

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

                                       140
<PAGE>


                        REPORT OF INDEPENDENT AUDITORS ON
                          FINANCIAL STATEMENT SCHEDULE



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


Our audits of the consolidated financial statements referred to in our report
dated April 8, 2004, appearing in this Form 10-K of DSL.net, Inc. also included
an audit of the financial statement schedule listed in Item 15(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.

/s/ PricewaterhouseCoopers LLP
----------------------------------
PricewaterhouseCoopers LLP

Stamford, Connecticut
April 9, 2004























                                      141
<PAGE>

SCHEDULE II. Valuation and Qualifying Accounts

      The following table depicts the activity in the allowance for doubtful
accounts for the years ended December 31, 2003, 2002 and 2001:
<TABLE><CAPTION>
                                     (Dollars in Thousands)
----------------------------------------------------------------------------------------------------
                                 Allowance for Doubtful Accounts
----------------------------------------------------------------------------------------------------
                     Additions     Additions
       Balance at    Charged to   Charged to  Additions Charged  Deductions Charged
      Beginning of   Costs and     Purchase    to Sales Credits   Against Valuation     Balance at
Year     Period       Expenses    Accounting    and Allowances        Allowance       End of Period
---- -------------- ------------ ------------ ----------------- -------------------- ---------------
<C>        <C>         <C>          <C>            <C>                <C>                <C>
2003     $  606        $2,047       $    -         $     -            $ (1,751)          $  902
---- -------------- ------------ ------------ ----------------- -------------------- ---------------
2002     $3,844        $2,583       $    -         $     -            $ (5,821)          $  606
---- -------------- ------------ ------------ ----------------- -------------------- ---------------
2001     $1,353        $2,807       $    -         $  1,498           $ (1,814)          $3,844
---- -------------- ------------ ------------ ----------------- -------------------- ---------------
</TABLE>























                                      142