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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, 2001

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

                        Commission File Number 000-27525

                                  DSL.net, Inc.
             (Exact Name of registrant as specified in its charter)

                   DELAWARE                                 06-1510312
        (State or other jurisdiction of                  (I.R.S. Employer
          incorporation or organization)                  Identification
                                                              Number)

545 Long Wharf Drive, New Haven, Connecticut                    06511
  (Address of principal executive offices)                    (Zip Code)

       Registrant's telephone number, including area code: (203) 772-1000

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

                                      None

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

                         Common Stock, $.0005 Par Value

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

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

      The aggregate market value of the common stock held by non-affiliates of
the Registrant, as of March 18, 2002, was approximately $29,113,916 (based on
the closing price of the Registrant's Common Stock on March 18, 2002, of $.80
per share).

  The number of shares outstanding of the Registrant's $.0005 par value Common
                  Stock as of March 18, 2002, was, 64,851,462.

                       DOCUMENT INCORPORATED BY REFERENCE

      The registrant intends to file a definitive proxy statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended December 31,
2001. Portions of such proxy statement are incorporated by reference into Part
III of this Form 10-K.

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                                  DSL.net, INC.

                           ANNUAL REPORT ON FORM 10-K

                          YEAR ENDED DECEMBER 31, 2001

                                TABLE OF CONTENTS

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Part I

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

Part II

Item 5.   Market for Registrant's Common Equity and Related Stockholder Matters......   16
Item 6.   Selected Consolidated Financial Data.......................................   17
          Management's Discussion and Analysis of Financial Condition and Results
Item 7.   of Operations..............................................................   19
Item 7A.  Quantitative and Qualitative Disclosure About Market Risk..................   45
Item 8.   Financial Statements and Supplementary Data................................   46
          Changes in and Disagreements with Accountants on Accounting and Financial
Item 9.   Disclosure.................................................................   85

Part III

Item 10.  Directors and Executive Officers of the Registrant.........................   85
Item 11.  Executive Compensation.....................................................   85
Item 12.  Security Ownership of Certain Beneficial Owners and Management.............   85
Item 13.  Certain Relationships and Related Transactions.............................   85

Part IV

Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K...........   86

SIGNATURES...........................................................................   89
</TABLE>


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                                     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 throughout the United States, primarily utilizing digital subscriber
line, or DSL, technology. 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
channel. We deploy our own local DSL equipment primarily in select second and
third tier cities. As of March 15, 2002, we operated equipment in 199 cities. In
first tier cities, and certain other markets where we have not deployed our own
equipment, we utilize the local DSL facilities of other carriers to provide
service.


      In addition to a number of high-speed, high-performance DSL-based Internet
connectivity solutions specifically designed for business, our product offerings
include Web hosting, domain name and internet address registration and
management, enhanced e-mail, on-line data backup and recovery services, T1
service, firewalls nationwide dial-up services and virtual private networks. Our
services offer customer high-speed digital connections and related services at
prices that are attractive compared to the cost and performance of alternative
data communications services.


The DSL.net Solution

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

      High-Speed Connections. We offer Internet access at speeds of up to 1.5
megabits per second. Our network is designed to provide data transmission at the
same speed to and from the customer, known as 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


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business users require fast connections both to send and receive information,
and to host advanced services and applications.

      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, Web hosting, domain name and internet
address registration and management, enhanced 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 service, customers can access the Internet
continuously without having to dial into the network for each use. These
"always-on" connections provide customers with the ability to readily access the
Internet and transfer information. We charge our customers a flat fee per month
rather than billing them based on usage.

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

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


Our Services

      As part of our service offerings, we function as our customers' Internet
service provider and deliver a range of Internet-based, value-added solutions.
Our services currently include all necessary equipment, software and lines
required to establish and maintain a digital Internet connection. Our primary
services include high-speed Internet access, e-mail, domain name and Internet
address registration for our customers, and Web hosting. Other services provided
by DSL.net include firewalls, on-line data backup and recovery services,
nationwide dial-up services and virtual private networks that connect customers'
various offices. Our network is designed to enable us to individually configure
each customer's service remotely.

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


Customers

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

      .     businesses currently using other high-speed data communications
            services, such as T1, ISDN and frame relay services;


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

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

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

      None of our customers accounted for more than 5% of our total revenues
during the years ended December 31, 1999, 2000 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 mediums but primarily focused on 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 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, 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
customer 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 out
additional opportunities for further acquisitions, 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 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 DSL facilities, we
lease the copper telephone lines from the local telephone company. These lines
run from our equipment located in the telephone company's central office to our
customer. We test these lines to determine whether they meet our specifications
and work with the local telephone company to correct any problems identified by
our testing. In other areas, we utilize the local DSL facilities of other
carriers, and work with these carriers to provide the DSL service. In both
cases, field service technicians install the modem and any necessary wiring
inside our customers' offices and test the modem and connection over our
network.

      Maintenance. Our network operations center provides network surveillance
for all equipment in our network. We are able to detect and correct many of our
customers' maintenance problems remotely, often before our customer is aware of
the problem. Customer-initiated maintenance and repair requests are managed and
resolved primarily through our help desk. Our information


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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 and integration of these systems will
continue during 2002. We believe that our operations support systems will
provide us with the flexibility to add additional services for our customers as
well as to meet our expansion goals.


Our Network

      Our network has been designed to deliver reliable, secure and scaleable
high-speed, high-performance Internet access and data communication services.

      Network Design. The key design principles of our network are:

      .     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.

      .     Consistent Performance With The Ability To Expand. We have designed
            our network to leverage the economics of DSL technology, to grow
            with our business and to provide consistent performance. We also use
            asynchronous transfer mode equipment in our network, which
            implements high-speed, high volume transmission of data.

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

      Network Components. The primary components of our network are:

      .     DSL Modems, Routers and On-Site Connections. We purchase DSL modems
            and routers and provide either of them to our customers, depending
            on their specific needs and contractual service agreements. We
            configure the DSL 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 DSL facilities, we contract
            with independent field service organizations to perform these
            services. In areas where we utilize the local DSL facilities of
            other carriers, these other carriers provide these installation
            services. We have typically provided customer premise equipment (DSL
            modem or router) to the customer and charged 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, which is three years. Such equipment remains
            the exclusive property of DSL.net. We have also sometimes sold the
            customer premise equipment to a customer. When customer premise
            equipment is sold to a customer, we defer the billings (along with
            our installation fees) and recognize the revenue over an 18-month
            period. Billings for router sales were de minimus in 1999, and
            approximately 1% and 1.4% of our revenue for 2000 and 2001,
            respectively.


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      .     Copper Telephone Lines. In areas where we have deployed our own
            local DSL facilities, we lease a copper telephone line running to
            each customer from our equipment in the local telephone company's
            central office under terms specified in our interconnection
            agreements with these companies. In areas where we utilize the local
            DSL facilities of other carriers, the carrier leases the telephone
            line from the local telephone company.

      .     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 signals to our customers in
            these spaces. We have continuous access to these spaces to install
            and maintain our equipment located in these central offices. In
            first tier cities and certain other markets where we have not
            deployed our own DSL equipment, we utilize the local DSL facilities
            installed in central offices by other carriers to provide high-speed
            DSL connections to our customers.

      .     Connection To The Internet. Network traffic gathered at each of our
            central offices is routed to one of our regional hubs and then to
            the Internet. In certain areas where we offer service from more than
            one central office, network traffic is routed from each central
            office in that area to a local hub which aggregates its traffic
            along with the traffic from the other central offices located in
            that area and routes 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 WorldCom and AT&T to
            provide this service. Internet connectivity is provided by a
            combination of public and private peering and transit arrangements.
            We have presence at eight of the largest and newest national
            "network access points" to facilitate this high-performance,
            high-volume external connectivity.

      .     Network Operations Center. Our network is managed from our network
            operations center located in New Haven, Connecticut. 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 the customer. From the network operations center, we can
            monitor individual customer lines and the equipment and circuits in
            our network.


                                       7

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Competition

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

      Other DSL Providers. A number of competitive carriers, including Covad
Communications, Network Access Solutions and New Edge Networks, offer DSL-based
services. The 1996 Telecommunications Act specifically grants competitive
telecommunications companies, including other DSL providers, the right to
negotiate interconnection agreements with traditional telephone companies,
including interconnection agreements which may be identical in all respects to,
or more favorable than, our agreements.

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

      Traditional Local Telephone Companies. Many of the traditional local
telephone companies, including BellSouth, SBC Communications, Qwest and Verizon,
are deploying DSL-based 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. 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 WorldCom, have deployed large-scale data networks,
sell connectivity to businesses and residential customers, and have high brand
recognition. They also have interconnection agreements with many of the
traditional local telephone companies, and many offer competitive DSL services.

      Other Fiber-Based Carriers. Companies such as Allegiance 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 service.

      Cable Modem Service Providers. Cable modem service providers, such as
AT&T, Comcast and RCN, offer high-speed Internet access over cable networks to
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.


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      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

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

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

      .     the price we pay to lease copper telephone lines,

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

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

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

      Under the 1996 Telecommunications Act, the traditional local telephone
companies have a statutory duty to negotiate in good faith with us for
agreements for interconnection and access to certain individual elements of
their networks. This interconnection process is subject to review and approval
by the state regulatory commissions. We have signed interconnection agreements
with BellSouth, Cincinnati Bell, Frontier, SBC Communications, Qwest, Sprint,
and Verizon or their subsidiaries, which govern our relationships in 48 states
and the District of Columbia. In addition, we are negotiating 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.

      During these interconnection 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
arbitration, as well as ask the state regulatory commissions to arbitrate a new
agreement or particulars thereof.

      Under the 1996 Telecommunications Act, states have begun and, in a number
of cases, completed regulatory proceedings to determine the pricing of
individual elements of their networks and services. 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.

      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 these agreements, we may not
succeed in extending or renegotiating our interconnection


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agreements on favorable terms. In addition, disputes have arisen and will likely
arise in the future as a result of differences in interpretations of the
interconnection agreements. These disputes have, in the past, delayed the
deployment of our networks. Finally, the interconnection agreements are subject
to state regulatory commission, FCC and judicial oversight. These government
authorities may modify the terms of the interconnection agreements in ways that
hurt our business.

Government Regulations

      Significant portions of the services that we offer are subject to
regulation at the federal and/or state levels. The Federal Communications
Commission, or FCC, and state public utility commissions regulate
telecommunications common carriers, which are companies that offer
telecommunications services to the public or to all prospective users on
standardized rates and terms. Our DSL 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. In those markets where we have not deployed our own local
transport facilities, our services are therefore not subject to common carrier
regulation. Our ability to provide such services, however, is affected by
regulations imposed upon the carriers whose 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 new rules to implement those new laws and to encourage competition.
These changes, which are still incomplete, have created new opportunities and
challenges for us and our competitors. Certain of these and other existing
federal and state regulations are currently the subject of judicial proceedings,
legislative hearings and administrative proposals which could change, in varying
degrees, the manner in which this industry operates. Neither the outcome of
these proceedings nor their impact upon the telecommunications industry or us
can be predicted at this time. Indeed, future federal or state regulations and
legislation may be less favorable to us than current regulations and legislation
and therefore have a material and adverse impact on our business and financial
prospects by undermining our ability to provide DSL services at competitive
prices. In addition, we may expend significant financial and managerial
resources to participate in proceedings setting rules at either the federal or
state level, without achieving favorable results.

Federal Regulation and Legislation

      We must comply with the requirements of a common carrier under the
Communications Act of 1934, as amended, to the extent we provide regulated
interstate services. These requirements include an obligation that our charges,
terms and conditions for communications services must be "just and reasonable"
and that we may not make any "unjust or unreasonable discrimination" in our
charges or terms and conditions. The FCC also has jurisdiction to act upon
complaints against common carriers for failure to comply with their statutory
obligations. We are not


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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.

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

      .     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.

      .     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.

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

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

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

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


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      The FCC prescribes rules applicable to interstate communications,
including rules implementing the 1996 Telecommunications Act, a responsibility
it shares in certain respects with the state regulatory commissions. As part of
its effort to implement the 1996 Telecommunications Act, 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 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's re-evaluation of the list of network elements subject to
unbundling began in December 2001, with the stated objective of completing the
review by the end of 2002. Some telecommunications carriers, particularly the
traditional local telephone companies, are expected to argue in this proceeding
that any elements used by competitors to provide high-speed data services should
be exempted from unbundling requirements. In addition to this proceeding, 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.

      There is also legislation pending in Congress that would limit our access
to certain unbundled network elements. House Bill H.R. 1542, also known as the
Tauzin-Dingell bill, would amend the Telecommunications Act of 1996 to prohibit
state or federal regulation of high-speed data services. The effect 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. The Tauzin-Dingell Bill was
passed by the House of Representatives on February 27, 2002, and is now pending
in the Senate. Adoption of this legislation could undermine our ability to
obtain the facilities necessary to provide our services in the future.

      The rates under which we are able to obtain unbundled network elements are
also subject to regulatory uncertainty. Although the Supreme Court affirmed the
FCC's authority to develop pricing guidelines in its January 25, 1999, decision,
the Supreme Court did not evaluate the specific pricing methodology adopted by
the FCC for unbundled network elements. Instead, the Supreme Court remanded the
case to the Eighth Circuit for further consideration of the FCC's rules
regarding its forward-looking pricing methodology for unbundled network
elements. On July 18, 2000, the Eighth Circuit, among other findings, vacated a
portion of the FCC's pricing methodology that likely had the effect of lowering
the costs that we pay to the traditional local telephone companies for unbundled
network elements that we use to provision DSL service. The Eighth Circuit's
decision has been stayed pending an appeal to the Supreme Court, which heard the
case in October 2001. We cannot predict the possible impact of these proceedings
on our ability to provide DSL services to the public at competitive prices, if
at all.

      At least two traditional local telephone companies, SBC Communications and
Verizon, have taken the position that they are not obligated to unbundle
portions of their network where they construct or modify digital loop carrier
facilities. These facilities would enable them to offer DSL services to
customers who are located too far from the traditional local telephone
companies' central offices to be reached by existing DSL technologies. DSL.net
and other competitive carriers have urged state and federal regulators to
require these companies to provide


                                       12

<PAGE>

access to these facilities on an unbundled basis. We have urged that carriers
such as us be allowed to invoke the good-faith negotiation and arbitration
procedures of the Telecommunications Act of 1996 to establish rates, terms and
conditions for such access. We cannot predict the outcome of these proceedings.
If SBC and Verizon are not required to provide access on an unbundled basis,
there is no guarantee that we will be able to provide DSL service in these
areas, or that we will be able to secure favorable rates, terms and conditions
from the traditional local telephone companies for access. For example, while
SBC and Verizon are developing "voluntary" wholesale DSL products for
competitive local telephone companies that would utilize their respective
digital loop carrier facilities, these products would support only asymmetrical
DSL, and not the symmetrical DSL that we primarily offer today.

      In November 1999, the FCC issued an order reaffirming its prior conclusion
that DSL services must be offered for resale at a discount by traditional local
telephone companies to the extent such services are offered at retail to
residential and business customers. The FCC determined, however, that advanced
services provided to Internet service providers would not be subject to resale
at a discount. For the most part, the traditional local telephone companies have
decided to sell DSL only to Internet service providers, including their own
affiliated Internet service providers, such that no DSL service is made
available to competing carriers such as us at the wholesale discount rate
established under the Telecommunications Act of 1996. In February 2002, the FCC
initiated a new proceeding that will, among other things, determine whether the
traditional local telephone companies must make available for resale, at a
wholesale discount, the telecommunications portion of the retail high-speed data
services sold by their affiliated internet service providers. Such a resale
requirement could reduce our costs of providing service to certain customers,
but could also make it easier for other companies to compete with us.

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

      Since December 1999, the FCC granted authority to provide long distance
inter-exchange service to Verizon in New York, Massachusetts, Connecticut, Rhode
Island, and Pennsylvania, and to Southwestern Bell, a subsidiary of SBC
Communications, in Texas, Kansas, Oklahoma, Missouri and Arkansas. Numerous
additional applications are pending or are expected over the next one to two
years. While we do not presently provide long distance inter-exchange service,
this ruling and any future similar rulings could negatively impact our business
as follows: First, Verizon and Southwestern Bell are able to offer potentially
attractive packages of local, long distance and data services. Second, the
prospect of long distance authority has served as a powerful incentive for the
traditional local telephone companies to comply with their obligations under the
1996 Telecommunications Act, including the provision of unbundled network
elements and collocation services to competitors such as us. The traditional
local telephone companies may not extend to us the same level of cooperation
once they receive approval to provide long distance inter-exchange service.

      The 1996 Telecommunications Act also directs the FCC, in cooperation with
state regulators, to establish a universal service fund that will provide
subsidies to carriers that provide service to individuals that live in rural,
insular, and high-cost areas. A portion of carriers' contributions to the
universal service fund also will be used to provide telecommunications related
facilities for schools, libraries and certain rural health care providers. The
FCC released its initial order in this context in June 1997, which requires all
telecommunications carriers to contribute to the universal service fund. The
FCC's implementation of universal service requirements remains subject to
judicial and additional FCC review. In several new proceedings, the FCC will
consider the


                                       13

<PAGE>

degree to which companies providing services such as ours should be obligated to
contribute to this fund. Changes to the universal service regime, which could
increase our costs, could have an adverse affect on us.

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

State Regulation

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

      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 DSL services may increase or it may
negatively impact our ability to expand our network on a timely basis and
adversely affect our business.

Intellectual Property

      We regard our products, services and technology as proprietary and attempt
to protect them with copyrights, trademarks, trade secret laws, restrictions on
disclosure and other methods. For example, we own a federal supplemental
registration and claim rights in the name DSL.net. There can be no assurance
these methods will be sufficient to protect our technology and intellectual
property. We also generally enter into confidentiality agreements with our
employees, 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


                                       14

<PAGE>

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.

Employees

      As of December 31, 2001, we had 186 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, the reductions in workforce that we undertook in 2000 and 2001 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 56,200 square feet in an office
building in New Haven, Connecticut. We also lease other offices in Santa Cruz,
California and Minneapolis, Minnesota. We have vacated the offices in Santa
Cruz, California, as well as approximately 15,600 square feet of office space in
New Haven, Connecticut. We have sublet the office space in Santa Cruz,
California and are currently looking to sublease the vacated premises in New
Haven. 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
"Interconnection Agreements with Traditional Local Telephone Companies."


Item 3. Legal Proceedings

      A lawsuit for wrongful termination of employment was filed against us in
the Superior Court in New Haven, Connecticut on July 29, 1999 by Frank W.
Pereira, a former officer who was employed by us for less than two months.
Plaintiff's claims are based chiefly on his allegation that we terminated his
employment because he allegedly voiced concerns to senior management about the
feasibility of our second and third tier city business strategy. 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 plan to defend the case vigorously.

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


                                       15

<PAGE>

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 ordinary course of our business, including claims brought
by 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

      DSL.net held a special meeting of the holders of shares of its mandatorily
redeemable convertible series X preferred stock, par value $.001 per share, on
December 23, 2001, to consider and vote upon the authorization and issuance of
up to 15,000 shares of mandatorily redeemable convertible series Y preferred
stock, par value $.001 per share, with the voting powers, preferences and
relative, participating, optional and other special rights set forth in the
Certificate of Designation of the series Y preferred stock. Holders of an
aggregate of 10,000 shares of series X preferred stock, representing all of the
issued and outstanding shares of series X preferred stock entitled to vote at
the special meeting, were present. At the special meeting, the holders of shares
of series X preferred stock unanimously approved the authorization and DSL.net's
becoming obligated to issue, up to 15,000 shares of series Y preferred stock,
with the designation, powers, preferences and relative, participating, optional
and other special rights of the shares of such series, and the qualifications,
limitations and restrictions thereof, set forth in the certificate of
designation for the series Y preferred stock, which rights, preferences and
privileges are on parity with series X preferred stock.


                                       16

<PAGE>

                                     PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

      As of March 18, 2002, there were approximately 551 holders of record of
our common stock. Our common stock is listed for quotation on the Nasdaq
National Market under the symbol "DSLN".

      The range of high and low sales prices per share of DSL.net's common stock
as reported on the Nasdaq National Market for the two most recent fiscal years
are shown below. The last trading price of DSL.net common stock on March 18,
2002 was $ .80 per share.

          Quarter Ended               High         Low
          -------------             -------      -------
          March 31, 2000            $32.563      $14.000
          June 30, 2000              22.250        6.125
          September 30, 2000         10.375        2.406
          December 31, 2000           3.500        0.469
          March 31, 2001              4.000        0.530
          June 30, 2001               1.690        0.625
          September 30, 2001          1.020        0.140
          December 31, 2001           1.490        0.150

Recent Sales of Unregistered Securities

      In November 2001, DSL.net sold an aggregate of 6,000 shares of Series X
preferred stock for an aggregate purchase price of $6,000,000. At the option of
the holder thereof, each share of Series X preferred stock may be converted into
approximately 5,555.56 shares of common stock, subject to adjustment for certain
subsequent dilutive issuances and stock splits.

      In December 2001, DSL.net sold an additional aggregate of 4,000 shares of
Series X preferred stock for an aggregate purchase price of $4,000,000. DSL.net
also sold an aggregate of 6,469 shares of Series Y preferred stock for an
aggregate purchase price of $6,469,000 in December 2001. Shares of Series Y
preferred stock are not convertible into shares of common stock until the
DSL.net certificate of incorporation is amended to increase the number of
authorized shares of common stock to at least 250,000,000 shares, at which time
each share of Series Y preferred stock will become convertible, at the option of
the holder thereof, into 2,000 shares of common stock, subject to adjustment for
certain subsequent dilutive issuances and stock splits.

      In March 2002, DSL.net sold an additional aggregate of 10,000 shares of
Series X preferred stock for an aggregate purchase price of $10,000,000.

      No underwriters were involved in the foregoing sales of securities. Such
sales were made in reliance upon an exemption from the registration provisions
of the Securities Act of 1933, as amended, set forth in Section 4(2) thereof
relative to sales by an issuer not involving any public offering or the rules
and regulations thereunder.

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
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


                                       17

<PAGE>

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:

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

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

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

Accordingly, we do not anticipate that any cash dividends will be declared or
paid on our common stock in the foreseeable future.


Item 6. Selected Consolidated Financial Data

      We were incorporated on March 3, 1998 and commenced operations on March
28, 1998. The following historical data for the period from inception (March 3,
1998) through December 31, 1998 and the years ended December 31, 1999, 2000 and
2001, except for "Other Data," has been derived from our financial statements
audited by PricewaterhouseCoopers LLP, independent accountants. Our balance
sheets at December 31, 2000 and 2001 and the related statements of operations,
changes in stockholders' equity and cash flows for the years ended December 31,
1999, 2000 and 2001 and notes thereto appear elsewhere in this annual report on
Form 10-K.

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


                                       18

<PAGE>

<TABLE>
<CAPTION>
                                                 Period From
                                                  Inception
                                               (March 3, 1998)
                                                   Through
                                                 December 31,                 Years Ended December 31,
                                               ---------------    -----------------------------------------------
                                                     1998              1999             2000             2001
                                               ---------------    -------------    -------------    -------------
<S>                                            <C>                <C>              <C>              <C>
Statement of Operations Data:
Revenue ....................................   $        31,533    $   1,312,546    $  17,789,410    $  41,969,411
Operating expenses:
      Network and operations ...............           121,310        7,983,364       63,123,716       90,078,580
      General and administrative ...........         2,653,544        7,826,052       19,780,177       25,678,878
      Sales and marketing ..................            35,961        7,543,191       26,236,619       14,064,589
      Depreciation and amortization ........             5,744        1,831,331       21,132,583       28,042,645
                                               ---------------    -------------    -------------    -------------
         Total operating expenses ..........         2,816,559       25,183,938      130,273,095      157,864,692

Operating loss .............................        (2,785,026)     (23,871,392)    (112,483,685)    (115,895,281)

Interest (expense) income, net .............            (4,611)       1,889,312        6,729,657          455,033
Other expense ..............................                --           (6,233)          (9,120)         (13,434)
                                               ---------------    -------------    -------------    -------------
Net loss ...................................   $    (2,789,637)   $ (21,988,313)   $(105,763,148)   $(115,453,682)

Exchange of preferred stock ................                --      (11,998,000)              --               --
Dividends on preferred stock ...............                --               --               --         (121,613)
Accretion of preferred stock ...............                --               --               --         (348,673)
                                               ---------------    -------------    -------------    -------------
Net loss applicable to common stockholders .   $    (2,789,637)   $ (33,986,313)   $(105,763,148)   $(115,923,968)
                                               ===============    =============    =============    =============

Net Loss Per Common Share Data:
Net Loss per common share, basic and diluted   $         (0.55)   $       (2.05)   $       (1.75)   $       (1.81)
Shares used in computing net loss per share          5,118,342       16,549,535       60,593,437       63,938,960

Cash Flow Data:
Used in operating activities ...............   $      (153,505)   $  (6,342,720)   $ (74,985,739)   $ (62,989,559)
Used in investing activities ...............          (290,082)     (49,263,772)     (60,225,324)      (2,920,684)
Provided by financing activities ...........           483,066      121,142,314      141,959,673       12,871,317

Other Data:
Adjusted EBITDA (A) ........................   $      (356,010)   $ (17,931,595)   $ (88,158,882)   $ (86,650,918)
Capital expenditures .......................           290,082       33,811,121       55,942,721        5,344,788

<CAPTION>
                                                                           December 31,
                                               ------------------------------------------------------------------
                                                     1998              1999             2000             2001
                                               ---------------    -------------    -------------    -------------
<S>                                            <C>                <C>              <C>              <C>
Balance Sheet Data:
Cash, cash equivalents and marketable
  securities ...............................   $        39,479    $  79,452,444    $  76,434,982    $  19,630,758
Total assets ...............................           369,980      117,631,772      194,805,921       81,023,902
Long-term obligations (including current
  portion) .................................           433,161        3,055,625       14,114,457        7,462,759
Mandatorily Redeemable Convertible
  Preferred Stock ..........................                --               --               --          470,286
Stockholders' equity (deficit) .............   $      (315,865)   $ 100,732,886    $ 149,417,439    $  50,724,540
</TABLE>

      (A) Adjusted EBITDA, shown above under "Other Data", consists of net loss
excluding net interest, taxes, depreciation, amortization of intangibles and
non-cash stock compensation expense. The title of this item has been changed
from EBITDA to conform to the SEC's current policy regarding the definition of
EBITDA; however, the components of this item remain unchanged from our prior
reporting of EBITDA. Other companies, however, may calculate


                                       19

<PAGE>

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:

      .     operating loss as an indicator of our operating performance,

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

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

      .     as a measure of profitability or liquidity.

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


Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

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


Overview

      We provide high-speed data communications, Internet access, and related
services to small and medium sized businesses, primarily using digital
subscriber line, or DSL, technology. We primarily target select second and third
tier cities for the deployment of our own local DSL equipment. We began offering
commercial service in May 1998 and, as of March 15, 2002, we operated equipment
in 199 cities. In first tier cities, and certain other markets where we have not
deployed our own equipment, we utilize the local DSL facilities of other
carriers to provide service.

      We have incurred operating losses and net losses for each month since our
formation. For the years ended December 31, 1999, 2000, and 2001, we experienced
net cash outflows from operating and investing activities. As of December 31,
2000 and 2001, we had accumulated deficits of approximately $132,943,100 and
$248,396,800, respectively.


                                       20

<PAGE>

      In an effort to increase revenue from our installed network and conserve
capital, in the fourth quarter of 2000, we decided to suspend the build-out of
additional central offices and focus our efforts on increasing revenue through
targeted marketing to increase penetration in our existing service areas and by
introducing more services. In addition, in order to reduce costs, we (i)
suspended network connections by shutting off the power and communication
connections to approximately 100 central offices, which were not being used to
service customers at the time, (ii) consolidated operating facilities and
vacated certain leased premises and (iii) significantly reduced staff. We also
began actively pursuing opportunities for additional equity financing.

      Near the end of the second quarter of 2001, since we still had not
received additional financing and were continuing to incur significant operating
losses, we initiated further cost reduction actions including (i) additional
reductions in force, (ii) closing our Santa Cruz office and vacating unused
office space in our headquarters building and (iii) closing the 100 non-active
central offices (discussed above), together with approximately 250 then active
central offices, which required removal of our equipment and vacating the
premises. Closure of the active central offices also required re-routing a
number of customers and ultimately resulted in our losing approximately 840
customers, or approximately 4% of our customer base. We also had another
significant staff reduction during the fourth quarter of 2001.

      All of the above-described actions were designed to significantly reduce
operating costs and cash outflows, but necessitated significant restructuring
charges related to: (i) closing of our central offices and resulting asset
write-offs, (ii) costs related to vacated facilities and (iii) severance costs.
In addition, we incurred impairment write-offs of goodwill pertaining to our
Tycho and Trusted Net acquisitions. These restructuring and impairment charges
are more fully discussed below.

      In November and December of 2001, we were successful in securing
additional equity financing from existing and new investor groups in accordance
with two purchase agreements which provide for the sale of up to an aggregate of
$35 million in series X and Y mandatorily redeemable convertible preferred
stock. In accordance with those agreements, in November 2001, we sold an
aggregate of 6,000 shares of series X preferred stock and in December 2001, we
sold an additional 4,000 shares of series X preferred stock and 6,469 shares of
series Y preferred stock for gross proceeds of $16,469,000, before direct
issuance costs. We also received in December of 2001, a $3,531,000 loan from the
series Y investors. Subject to Stockholder approval at our annual meeting of
stockholders, which is currently expected to occur on May 29, 2002, and certain
other closing conditions, we currently expect to sell an additional 8,531 shares
of series Y preferred stock during the second quarter of 2002, of which some of
the proceeds will be used to repay this loan. In March 2002, in accordance with
above mentioned purchase agreements, we sold an additional 10,000 shares of
series X preferred stock for an aggregate purchase price of $10,000,000.

      In addition to our internal sales and marketing efforts, 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
customer 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 assets or businesses profitably or otherwise
successfully implement our expansion strategy. We intend to continue to seek out
additional opportunities for further acquisitions, which we believe represents a
distinct opportunity to accelerate our growth.

      In 2002, we currently expect minimal expenditures for capital equipment
and expect continued reductions in the size of our operating losses, net losses
and net operating cash outflows as we continue to see the benefits from the cost
reduction actions completed in 2001. We believe that, based on our current
plans, we now have sufficient capital resources to opportunistically grow our
revenue, through either acquisitions or internally generated growth, and to
achieve positive cash flow.


                                       21

<PAGE>


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

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

      .     amount, timing and pricing of customer revenue;

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

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

      .     our ability to recruit and retain qualified personnel;

      .     up front sales and marketing expenses;

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

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

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

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

Critical Accounting Policies, Estimates and Risks

      Financial Reporting Release No. 60, which was released in December 2001,
by the Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. We have identified the accounting principles critical to
our business and results of operations. Note 2 to our financial statements
includes a summary of the significant accounting policies and methods used in
the preparation of our financial statements. The following is a brief discussion
of the more significant accounting policies and methods used by us.

      In addition, Financial Reporting Release No. 61, which was released in
December 2001, by the SEC to require all companies to include a discussion to
address, among other things, liquidity, off-balance sheet arrangements,
contractual obligations and commercial commitments.

      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 accounting principles generally accepted in the
United States. The preparation of financial statements in accordance with
generally accepted accounting principles in the United States 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


                                       22

<PAGE>

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.

      Management believes the following critical accounting policies affect our
more significant judgments and estimates used in the preparation of our
consolidated financial statements:

Revenue Recognition

      We recognize revenue in accordance with SEC Staff Accounting Bulletin No.
101, (SAB N0. 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 vary 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 service related matters. We establish a reserve for such credits based on
historical experience.

      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. 121, "Accounting for the Impairment
of Long-lived Assets and for Long-lived Assets to be Disposed of," 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.


                                       23

<PAGE>

      Effective January 1, 2002, we will adopt SFAS No. 142, "Goodwill and Other
Intangible Assets". This statement requires that the amortization of goodwill be
discontinued and instead an impairment approach be applied. The impairment tests
will be performed during the first quarter of adoption and annually thereafter
(or more often if adverse events occur) and will be 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.

      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 sell
our services directly to end users mainly consisting of small to medium sized
businesses, as opposed to selling to Internet service providers who then resell
such services. We believe that we do not have significant exposure or
concentrations of credit risk with respect to any given customer. 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.

Income Tax

      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 our recent sales of series
X and series Y preferred stock. 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
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 internal and external legal counsel which


                                       24

<PAGE>

considers 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.

Results of Operations

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

                                                    Year Ended December 31,
                                                ------------------------------
                                                  1999        2000       2001
                                                --------     ------     ------
Revenue                                            100.0%     100.0%     100.0%
                                                --------     ------     ------
Operating expenses:
   Network and operations
  (including stock compensation)                   608.2%     354.8%     214.6%

   General and administrative
   (including stock compensation)                  596.2%     111.2%      61.2%

   Sales and marketing
   (including stock compensation)                  574.7%     147.5%      33.5%

   Depreciation and amortization                   139.5%     118.8%      66.8%
                                                --------     ------     ------

Total operating expenses                         1,918.7%     732.3%     376.1%


Operating loss                                  (1,818.7)%   (632.3)%   (276.1)%

Interest income, net                               143.9%      37.8%       1.1%

Other expense, net                                  (0.5)%     (0.1)%     (0.0)%

                                                --------     ------     ------

Net loss                                        (1,675.2)%   (594.5)%   (275.1)%
                                                ========     ======     ======

Net loss applicable to common stockholders:

   Net loss                                     (1,675.2)%   (594.5)%   (275.1)%

   Exchange of preferred stock                    (914.1)%       --%        --%

   Dividends on preferred stock                       --%        --%      (0.3)%

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

Net loss applicable to common stockholders      (2,589.3)%   (594.5)%   (276.2)%
                                                ========     ======     ======

      Revenue. Revenue is recognized pursuant to the terms of each contract on a
monthly service fee basis, which vary based on the speed of the connection and
the services ordered. The monthly fee includes all phone line charges, Internet
access charges, the cost of the modem installed at the customer's site and the
other services we provide, as applicable.

      Revenue increased from approximately $1,313,000 for the year ended
December 31, 1999 to approximately $17,789,000 and approximately $41,969,000 for
the years ended December 31, 2000 and 2001, respectively. Revenue increased
primarily due to the expansion of our network,


                                       25

<PAGE>

the increased number of customers subscribing for our services and contributions
from acquisitions, primarily Vector Internet Services, Tycho Networks, and
certain assets of Exario Networks, during 2000 and Covad Safety Net customers
and Zyan Communications customers during 2001. The revenue attributable to
contributions from acquired businesses was approximately $170,000, $6,263,000
and $5,326,000 for the years ended December 31, 1999, 2000 and 2001,
respectively. We currently expect revenue to increase in future periods as we
continue our sales and marketing efforts in our existing service areas,
introduce additional services and acquire additional customer lines.

      Network and Operations. Our network and operations expenses include costs
related to personnel, monthly fees for telecommunications lines between
customers, central offices, network service providers and our network, customer
line installation, Internet access and other overhead costs. Our costs for
customer lines will increase as we add customers. We lease high-speed lines and
other network capacity to connect our central office equipment and our network.
Additional costs are incurred to connect to the Internet. We expect these costs
to increase as the volume of data communications traffic generated by our
customers increases.

      Network and operations expenses increased from approximately $7,984,000
for the year ended December 31, 1999 to approximately $63,124,000 and
approximately $90,079,000 for the years ended December 31, 2000 and 2001,
respectively. The increase in network and operations expenses between 1999 and
2000 was primarily attributable to increased telecommunication costs and central
office facilities costs, and increases in personnel and professional services.
These increases resulted primarily from the expansion of our network and the
increased number of customers subscribing for our services. The increase between
2000 and 2001 was primarily due to increases in restructuring charges (explained
below) of approximately $29.3 million and increased telecommunication expenses
of approximately $14.7 million, due to increased number of customers subscribing
for our services, which were partially offset by reductions of approximately
$5.1 million in salaries and benefits due to reductions in force, reductions of
approximately $8.3 million in professional and consulting services, and
reductions of approximately $3.6 million in facilities costs, travel and
entertainment, recruiting costs, taxes and other expenses, resulting from our
cost reduction initiatives.

      General and Administrative. Our general and administrative expenses
consist primarily of costs relating to human resources, finance, administrative
services, recruiting, insurance, legal services and operating facilities rent.
General and administrative expenses increased from approximately $7,826,000 to
$19,780,000 and to $25,679,000 for the years ended December 31, 1999, 2000 and
2001, respectively. The increase in general and administrative expenses between
1999 and 2000 was principally the result of increases in personnel and
professional services and increases in office facility rents resulting from the
development and expansion of our operating infrastructure. The increase from
2000 to 2001 was primarily attributable to increases of approximately $5.9
million in restructuring and impairment charges (discussed below) and
approximately $2.3 million in bad debt expenses, which was partially offset by
reductions of approximately $2.3 million in facilities costs, professional and
consulting services, recruiting costs and other expenses, resulting from our
cost reduction initiatives. The increase in bad debt expenses was primarily due
to (i) a significant increase in customers and associated revenue, (ii)
increased write-offs associated with customer line acquisitions and (iii)
increased loss of customers due to our closure of approximately 350 central
offices and various brief outages and service interruptions in the latter part
of 2001, including service interruptions associated with the aftermath of the
September 11th events.

      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 from approximately $7,543,000 for the year
ended December 31, 1999, to approximately $26,237,000 for the year ended
December 31, 2000, and then decreased to approximately $14,065,000 for the year
ended


                                       26

<PAGE>

December 31, 2001. These expenses increased during 2000 primarily as a result of
increased marketing and promotional activities, including direct mail, and
increases in sales and marketing personnel. Reductions during 2001 were
primarily due to approximately $4.0 million lower salaries and benefits due to
reductions in force, approximately $3.2 million in lower marketing and
advertising costs, approximately $2.9 million in lower professional and
consulting services costs, approximately $0.9 million in lower travel and
entertainment costs, approximately $0.7 million in lower recruiting costs and
approximately $0.4 million in lower office and other expenses.

      Depreciation and amortization. Depreciation and amortization is primarily
attributable to the following assets: (i) depreciation of network and operations
equipment and DSL 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 $1,831,000,
$21,133,000 and $28,043,000 for the years ended December 31, 1999, 2000, and
2001, respectively. Increases in such expenses primarily resulted from the
significant expansion of our network and infrastructure and acquired businesses
during late 1999 and 2000, partially offset by reduced depreciation and
amortization in 2001 from assets written off due to our restructuring and
impairment provisions (discussed below).

      Depreciation expense pertaining to assets for our network and operations
was approximately $1,621,000, $15,119,000 and $18,132,000 for the years ended
December 31, 1999, 2000 and 2001, respectively. Depreciation and amortization
expenses pertaining to assets related to general and administrative expenses was
approximately $210,000, $6,014,000 and $9,911,000 for the years ended December
31, 1999, 2000 and 2001, respectively.

      During December 2000 and calendar year 2001, we wrote-off approximately
$31 million of network equipment and other capitalized costs as part of our
restructuring efforts, and incurred approximately $4 million in impairment
charges pertaining to goodwill of acquired companies (see restructuring and
impairments explained below). Accordingly, we expect that our depreciation and
amortization expense related to such assets will be significantly reduced in
2002 and beyond. In addition, with the implementation of SFAS 142 (discussed
above), we will discontinue amortizing approximately $8.5 million of goodwill
associated with acquired businesses. We recorded approximately $2.5 million of
amortization related to this goodwill in 2001 and would have recorded an equal
amount in 2002. In lieu of amortization, we are required to make an initial
impairment review of goodwill in 2002 and an annual impairment review
thereafter. We expect to complete our initial review during the first quarter of
2002. We do not expect the results of our review to have a material impact on
the results of operations.

      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. 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.
In addition, in fiscal 2000, we recorded $870,000 of non-cash compensation
expense relating to the vesting of stock options held by members of our former
advisory board.

      Non-cash stock compensation expenses were approximately $4,123,000,
$3,192,000 and $1,202,000 for the years ended December 31, 1999, 2000, and 2001,
respectively. The


                                       27

<PAGE>

unamortized balance as of December 31, 2000 and 2001, of approximately
$3,931,000 and $1,668,000, respectively, are being amortized over the remaining
vesting period of each grant, and are expected to be fully amortized by June 30,
2003.

      As of December 31, 2000 and 2001, options to purchase 7,318,612 and
13,877,394 shares of common stock, respectively, were outstanding, which were
exercisable at weighted average exercise prices of $4.07 and $1.69 per share,
respectively.

      Interest Expense (Income), Net. For the year ended December 31, 1999, net
interest income of approximately $1,889,000 included $2,077,000 of interest
income partially offset by $188,000 of interest expense. Net interest income of
approximately $6,730,000 for the year ended December 31, 2000 included
$8,538,000 of interest income partially offset by $1,808,000 of interest
expense. For the year ended December 31, 2001, net interest income of
approximately $455,000 included approximately $1,718,000 in interest income
partially offset by $1,263,000 in interest expense. The increase in interest
income in 2000 was primarily due to an increase in our cash and investment
balances resulting from the sale of preferred stock and the sale of common stock
in our initial public offering in 1999 and our follow-on public offering in
2000. The increase in interest expense in 2000 related to increased debt,
primarily attributable to new capital lease obligations and other financing
arrangements. The decrease in interest income in 2001 was caused by lower
interest rates on significantly lower cash and investment balances. Lower
interest expense in 2001, was caused by reductions in debt and capital lease
obligations due to pay down of principal balances.

      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 $3,542,000. The components of the restructuring charge were: (i)
approximately $448,000 relating to severence expense for the 140 employees; (ii)
approximately $1,078,000 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 $2,016,000 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 $362,000 of severance costs and
approximately $1,416,000 of capitalized collocation application fees had been
charged against the restructuring reserves. The remaining reserve balance of
approximately $1,764,000 was included in our accrued liabilities at December 31,
2000.

      In March 2001, we re-evaluated our restructuring reserve and booked an
increase in the reserve of approximately $831,000, 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 100
non-active and 250 active central offices; and (ii) an additional
reduction-in-force of approximately 90 employees. These actions resulted in
additional restructuring and impairment charges of approximately $32,503,000.
Included in this amount were: (i) approximately $272,000 relating to severance
expenses for the 90 employees; (ii) approximately $26,079,000 for the costs
associated with the our decision to close 350 central offices, which includes
approximately $2,545,000 relating to termination and equipment removal


                                       28

<PAGE>

fees and approximately $23,534,000 in write-off of fixed assets; (iii)
approximately $1,641,000 for additional estimated costs resulting from delays
and expected losses in subleasing vacated office space located in Santa Cruz,
California; Atlanta, Georgia; Milford, Connecticut; and Chantilly, Virginia;
(iv) $1,356,000 for write-downs of additional equipment no longer in use; and
(v) $3,155,000 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, $2,124,000 related to a reduction in the goodwill for our
acquisition of Tycho Networks, Inc. ("Tycho") and $1,031,000 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 $56,800 to
approximately $5,000 for Tycho, and from approximately $43,500 to approximately
$20,600 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, CA and
Atlanta, GA, respectively, and our decision not to install equipment in 100 new
central offices. These actions resulted in additional restructuring and
impairment charges of approximately $4,748,000. Included in this amount were:
(i) increases of approximately $4,451,000 relating to the write-off of
equipment; (ii) approximately $376,000 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 $246,000 in
additional costs for equipment removal fees associated with our previous
decision to close certain central offices; and (iv) approximately $800,000 for
impairments of goodwill. These increases in the restructuring reserve were
partially offset by a reduction of approximately $1,125,000 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 $170,000 related to a
reduction in the goodwill for the our acquisition of Tycho and approximately
$630,000 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 $164,000, which was partially offset by a
reduction of approximately $153,000 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 $500,000 impairment write-off of a long-term
investment.

      The following table summarizes the additions and charges to the
restructuring reserve from December 2000 through December 2001, and the
remaining reserve balances at December 31, 2001:


                                       29

<PAGE>
                             (dollars in thousands)
<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>
Additions to the
 reserve, Dec. 2000            $     448    $ 1,078    $   600    $    --    $  1,416    $       --    $  --    $  3,542

Charges to the
  reserve                           (362)                                      (1,416)                            (1,778)
                               ---------    -------    -------    -------    --------    ----------    -----    --------
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
                               =========    =======    =======    =======    ========    ==========    =====    ========
</TABLE>

      The restructuring reserve charges during the year ended December 31, 2000
of approximately $3,542,000 included approximately $2,263,000 in network and
operations expenses, approximately $1,118,000 in general and administrative
expenses and approximately $161,000 in sales and marketing expenses on the
consolidated statements of operations.

      The restructuring reserve charges for the year ended December 31, 2001
included approximately $31,528,000 in network and operations expenses,
approximately $6,998,000 in general and administrative expenses, and
approximately $67,000 in sales and marketing expenses on the consolidated
statements of operations. The remaining reserve balance of approximately
$1,511,000 was included in the Company's accrued liabilities at December 31,
2001.

      Net Loss. Net loss of approximately $21,988,000 for the year ended
December 31, 1999 increased to approximately $105,763,000 for the year ended
December 31, 2000 and to approximately $115,454,000 for the year ended December
31, 2001.

Liquidity and Capital Resources

      We have financed our capital expenditures and operations primarily with
the proceeds from the sale of stock and from borrowings, including equipment
lease financings. As of December 31, 2001, we had cash and cash equivalents of
approximately $19,631,000 and working capital of approximately $3,585,000.

      Net cash provided by financing activities in the years ended December 31,
1999, 2000 and 2001, were approximately $121,142,000, $141,960,000 and
$12,871,000, respectively. This cash primarily resulted from the sale of our
capital stock. We have used, and intend to continue using, the proceeds from
these financings primarily to implement our business plan and for working
capital and general corporate purposes. We have also used, and may in the future
use, a portion of these proceeds to acquire complementary businesses or assets.

      In January 1999, we received net proceeds of approximately $3,302,000 from
the sale of shares of Series A preferred stock and certain warrants. In April
1999, we received net proceeds of approximately $9,940,000 from the sale of
shares of Series C preferred stock to our principal stockholders and others. In
May 1999, we received net proceeds of approximately $29,961,000 from the sale of
shares of Series D preferred stock to our principal stockholders and others. In
addition, we received approximately $1,007,000 in connection with repayment of a
note, including interest at 6.0%, from an officer in connection with the
purchase of Series D preferred stock in June 1999. In July 1999, we received net
proceeds of approximately $18,458,000 from the sale of shares of Series E
preferred stock to two strategic marketing partners. In October and November
1999, we received net proceeds of approximately $55,722,000 from the sale of
shares


                                       30

<PAGE>

of common stock in our initial public offering. Upon the closing of the initial
public offering of our common stock on October 12, 1999, all outstanding shares
of our preferred stock converted automatically into shares of common stock. In
March 2000, we received net proceeds of approximately $141,273,000 from the sale
of 5,750,000 shares of our common stock in a public offering.

      In May 1999, we entered into a secured credit facility (the "Credit
Facility") with a bank to provide up to $5,000,000 for the purchase of
telecommunications and office equipment and vehicles. The Credit Facility
expired in May 2000 and converted to a term loan payable over 36 months. The
Credit Facility bore interest on outstanding borrowings at 1% over the higher of
the bank's prime rate or the federal funds rate plus 0.5%. As of December 31,
2000 and July 31 2001, amounts outstanding under this line of credit bore
interest at annual rates of 10.5% and 7.75%, respectively. The Credit Facility
was secured by a lien on certain equipment and vehicles owned by us and located
at our principal office, and imposed certain financial and other covenants
requiring us to maintain certain financial ratios and limited new indebtedness,
the creation of liens, types of investments, mergers, consolidations and the
transfer of all or substantially all of our assets. As of December 31, 2000,
there was approximately $3,545,000 outstanding on this term loan. In April 2001,
we amended the term loan with the bank. The financial covenants relating to the
maintenance of certain financial ratios were eliminated in their entirety, the
maturity date of the loan was accelerated to August 1, 2001 and certain
certificates of deposit equal to the outstanding loan amount were pledged as
additional collateral. On August 1, 2001, we settled the outstanding loan
obligation in full and approximately $37,000 in unamortized deferred costs were
written off. Financing costs associated with the Credit Facility of
approximately $83,900 were deferred over the four-year life of the facility and
term loan. Amortization expense related to the deferred costs for the years
ended December 31, 2000 and 2001 was approximately $20,967 and approximately
$48,927, respectively.

      In March 1999, we entered into a 36-month lease facility to finance the
purchase of up to an aggregate of $2,000,000 of equipment. Amounts financed
under this lease facility bear an interest rate of 8% or 9%, depending on the
type of equipment, and are secured by the financed equipment. In July 2000, we
entered into a 48-month lease agreement with an equipment vendor to finance the
purchase of network equipment. We have leased approximately $8,900,000 under
this agreement. Amounts financed under this agreement bear an interest rate of
12% and are secured by the financed equipment. In addition, during 1999 and
2000, we purchased and assumed through acquisition certain equipment and
computer software under other capital leases, which are being repaid over
periods ranging from 24 months to 60 months at rates ranging from 7.5% to 15%.
In the aggregate, there was approximately $10,477,000 and $7,463,000 outstanding
under capital leases at December 31, 2000 and 2001, respectively.

      As a result of the development of our operating infrastructure and recent
acquisitions, we have entered into certain long-term agreements providing for
fixed payments. Under our facility operating leases, minimum office facility
operating lease payments are approximately $2,899,000 in 2002, $1,955,000 in
2003, $1,589,000 in 2004 and $577,000 in 2005. We also have long-term purchase
commitments with WorldCom and AT&T for data transport services with minimum
payments due even if our usage does not reach the minimum amounts. The WorldCom
commitment began in May 2000 and requires minimum purchases of $4,800,000 per
contract year. The WorldCom contract ends in November, 2004. The AT&T commitment
was renegotiated on January 23, 2002 and requires minimum purchases of
$1,100,000 for the contract year ending in November 2002 and $987,000 for the
contract year ending in October 2003. We also have a commitment to purchase
$17,600 per month of certain additional network capacity from AT&T throughout
the commitment period.

      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.


                                       31

<PAGE>

As of December 31, 2001, we have been successful in terminating our lease for
office space in Chantilly, Virginia and in assigning our lease in Atlanta,
Georgia. We have entered into a 14-month sublease agreement on our office space
in Santa Cruz, California with a one year renewal option. In February 2002, we
were successful in terminating our obligations under the lease for office space
in Milford, CT.

      On December 1, 1999, we acquired Tycho Networks, Inc. ("Tycho") which is
based in Santa Cruz, California. Tycho provides Internet access, web hosting and
related services throughout central coastal California. The approximate net
purchase price of $3,267,000 before transaction costs associated with the
acquisition, consisted of cash payments at closing of approximately $1,576,000
(including notes paid at closing of approximately $793,000), amounts due to the
selling stockholders and others after the closing of approximately $802,000, net
liabilities assumed of approximately $530,000 and other costs of approximately
$359,000. All amounts due to Tycho Networks selling stockholders have been paid.

      On April 3, 2000, we acquired certain assets and liabilities of Trusted
Net Media Holdings, LLC. ("Trusted Net") This acquisition was accounted for
under the purchase method of accounting and, accordingly, the purchase price has
been allocated to the assets acquired and liabilities assumed based on their
estimated fair values at the date of acquisition. The approximate net purchase
price of $2,500,000, before transaction costs, consisted of cash payments at
closing of approximately $2,097,000; amounts due to Trusted Net after the
closing of approximately $350,000; and net liabilities assumed of approximately
$53,000. In addition, we incurred transaction costs associated with the
acquisition of approximately $150,000. The remaining amount due to Trusted Net
at December 31, 2001, after certain offsets, as provided in the purchase
agreement, was approximately $272,000.

      On May 26, 2000, we acquired Vector Internet Services, Inc. ("VISI"), an
Internet solutions provider based in Minneapolis, Minnesota. This acquisition
was accounted for under the purchase method of accounting and, accordingly, the
purchase price has been allocated to the assets acquired and liabilities assumed
based on their estimated fair values at the date of acquisition. The approximate
net purchase price of $19,969,000, before transaction costs, consisted of cash
payments at closing of approximately $8,800,000; amounts due to selling
stockholders after the closing of approximately $2,200,000; common stock valued
at $2,315,000; and the assumption of VISI employee stock options, which were
valued at $6,654,000. In addition, we incurred transaction costs associated with
the acquisition of approximately $452,000. All amounts due the selling
stockholders of VISI were paid in 2001.

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

      On April 26, 2001, we gave notice to Exario of our intent to pursue an
indemnity claim against the Holdback Amount in accordance with the provisions of
the Asset Purchase Agreement, dated December 1, 2000. The claim, originally
estimated at $1,458,000 and subsequently modified to a final settlement amount
of $1,415,000, related primarily to a request by us for reimbursement of the
purchase price paid for those certain customer lines acquired from Exario that
were on the NorthPoint Communications' network, which ceased operations during
the first half of 2001.

      During the quarter ended June 30, 2001, we entered into agreements with
Covad Communications, Inc. ("Covad") and Zyan Communications, Inc. ("Zyan"), a
California-based


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<PAGE>

Internet service provider which had filed for bankruptcy protection, affording
us the right to acquire up to 4,800 Zyan customer lines whose wholesale circuit
connections were being supported by Covad. In accordance with the Covad
agreement, the anticipated purchase price of $1,467,000 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 $1,075,000. 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 customer lines acquired
based on their estimated fair values at the date of acquisition.

      In 1999, 2000 and 2001, net cash used in our operating activities was
approximately $6,343,000, $74,986,000 and $62,990,000, respectively. This cash
was used for a variety of operating expenses, including salaries, consulting and
legal expenses, network operations and overhead expenses.

      Net cash used in investing activities in 1999, 2000 and 2001, was
approximately $49,264,000, $60,225,000 and $2,921,000, respectively. For the
year ended December 31, 1999 approximately $33,811,000 was used for purchases of
equipment and payment of collocation costs, approximately $13,274,000 was used
for the purchase of marketable securities and approximately $1,576,000 was used
to acquire Tycho. For the year ended December 31, 2000, approximately
$55,943,000 was used primarily for the purchases of equipment and payment of
collocation costs and approximately $14,049,000 was used for acquisitions and
investments, excluding approximately $3,508,000 which was payable by us to
selling stockholders at future dates. These expenditures were partially offset
by proceeds from the sale of marketable securities of approximately $13,274,000.
For the year ended, December 31, 2001, approximately $5,345,000 was used
primarily for the purchase of equipment and approximately $1,797,000 was used
for acquisition of customer lines. These expenditures were partially offset by
approximately $456,000 in proceeds from sale of equipment and a $3,765,000
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 $33,811,000, $55,943,000 and $5,345,000 for the years ended
December 31, 1999, 2000 and 2001, respectively. The actual amounts and timing of
our future capital expenditures will vary depending on the speed at which we
expand our network and implement service for our customers. As a result of our
decision to suspend further deployment of our network, our planned capital
expenditures for 2002 are currently expected to be primarily for the purchase
and installation at our customers' sites of the equipment necessary for us to
provide our services, as well as for the continued development of our network
and operational support systems. We currently anticipate spending approximately
$0.7 million to $1.0 million for capital expenditures excluding acquisitions,
during the year ending December 31, 2002. The actual amounts and timing of our
capital expenditures could differ materially both in amount and timing from our
current plans.

      We expect our operating losses, net operating cash outflows and capital
expenditures to continue during 2002. We believe that our existing cash and
short-term investments, cash generated from operations and proceeds committed
from equity financings will be sufficient to fund our operating losses, capital
expenditures, lease payments and working capital requirements through the first
quarter of 2003 and beyond, until we attain cash flow positive status, based on
our current business plans and projections, as approved by our board of
directors. We intend to use our cash resources to finance our capital
expenditures and for working capital and other general corporate purposes. We
may also use a portion of these cash resources to acquire complementary
businesses or other assets. The amounts actually expended for these purposes
will vary significantly depending on a number of factors, including the rate of
market acceptance of our services and revenue growth, cash generated from
operations, improvements in operating


                                       33

<PAGE>

productivity, the availability of attractive acquisition opportunities and the
extent and timing of our entry into new markets.

      Our capital requirements may vary based upon the timing and the success of
implementation of our business plan and as a result of regulatory, technological
and competitive developments or if:

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

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

      .     we make acquisitions; or

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

Our financial statements included herein do not include any adjustments that
might result from these uncertainties.


Recently Issued Accounting Pronouncements

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

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

                                 Revenue as          Effect of         Revenue
Quarter Ended               Originally Reported     SAB No. 101      as Adjusted
-------------               -------------------     -----------      -----------

December, 31 1999                $  810,881          $(101,413)      $  709,468
March 31, 2000                   $1,737,306          $(333,176)      $1,404,130
June 30, 2000                    $3,785,626          $(279,760)      $3,505,866
September 30, 2000               $5,860,857          $ (97,128)      $5,763,729
December 31, 2000                $7,140,599          $ (24,914)      $7,115,685

      In July 2001, Statement of Financial Accounting Standards No. 141,
"Business Combinations" ("SFAS") No. 141 and SFAS No. 142 "Goodwill and Other
Intangible Assets" were issued. SFAS No. 141 requires the purchase method of
accounting to be used for all business combinations initiated after June 30,
2001. SFAS No. 141 also specifies criteria that intangible assets acquired must
meet to be recognized and reported separately from goodwill. The Company does
not anticipate that adoption of SFAS No. 141 will have any material effect on
the Company's financial position or results of operations.


                                       34

<PAGE>

      SFAS No. 142 requires that goodwill and intangible assets with indefinite
lives no longer be amortized but instead be measured for impairment at least
annually, or when events indicate that there may be an impairment. SFAS No. 142
is effective for fiscal years beginning after December 15, 2001 (see "Critical
Accounting Policies, Estimates and Risks" described above) With the the
implementation of SFAS No. 142, we will discontinue amortizing approximately
$8.5 million of goodwill associated with acquired businesses. We recorded
approximately $2.5 million of amortization related to this goodwill in 2001 and
would have recorded an equal amount in 2002.

      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 assets useful life. SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002. The adoption of this statement is
not expected to 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 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. We
do not anticipate, that adoption of SFAS No. 144 will have a material impact on
our financial position and results of operations.

                                  RISK FACTORS

Special Note Regarding Forward-Looking Statements and Certain Other Information

      Some of the statements under "Risk Factors", "Management's Discussion and
Analysis of Financial Condition and Results of Operations", "Business" and
elsewhere in this Annual Report on Form 10-K constitute forward-looking
statements. We make such forward-looking statements under the provisions of the
"Safe Harbor" section of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. These
statements relate to future events or our future financial or business
performance and are identified by terminology such as "may", "might", "will",
"should", "expect", "scheduled", "plan", "intend", "anticipate", "believe",
"estimate", "potential", or "continue" or the negative of such terms or other
comparable terminology. These statements are subject to a variety of risks and
uncertainties, many of which are beyond our control, which could cause actual
results to differ materially from those contemplated in these forward-looking
statements. In evaluating these statements, you should specifically consider
various factors, including the risks outlined under "Risk Factors". Existing and
prospective investors are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. We undertake
no obligation, and disclaim any obligation, to update or revise the information


                                       35

<PAGE>

contained in this Annual Report on Form 10-K, whether as a result of new
information, future events or circumstances or otherwise.

                         Risks relating to our business

Our Limited Operating History Makes it Difficult to Evaluate our Business and
Prospects

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

We Have Incurred Losses and Have Experienced Negative Operating Cash Flow to
Date and Expect our Losses and Negative Operating Cash Flow to Continue

      We have incurred significant losses and experienced negative operating
cash flow for each month since our formation. We expect to continue to incur
significant losses and negative operating cash flow in 2002. Based on our
current plans, we believe our existing cash and short-term investments, together
with the cash expected to be generated from operations and proceeds from
committed equity investments, will be sufficient to fund our operating losses,
capital expenditures, lease payments and working capital requirements through
the first quarter of 2003 and beyond, until such time as we are cash flow
positive. However, there can be no assurance that our existing cash and
short-term investments will be sufficient to meet our requirements or that we
will eventually generate positive cash flow. If we do not become cash flow
positive, or if our cash resources are not sufficient to fund us until such time
as we become cash flow positive, we may need to raise additional financing
through some combination of borrowings, leasing, vendor financing and the sale
of equity or debt securities. There can be no assurance that we will be able to
raise sufficient additional debt, equity or other capital on acceptable terms,
if at all.

Because the High-Speed Data Communications Industry is New and Rapidly Evolving,
we Cannot Predict its Future Growth or Ultimate Size

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

Our Business Model is Unproven, and May Not be Successful

      We do not know whether our business model and strategy will be successful.
If the assumptions underlying our business model are not valid or we are unable
to implement our business plan, achieve the predicted level of market
penetration or obtain the desired level of pricing of our services for sustained
periods, our business, prospects, financial condition and results of operations
could be materially adversely affected. We have adopted a different strategy
than certain other broadband Internet service providers and DSL providers. We
focus on selling


                                       36

<PAGE>

directly to small and medium sized businesses. Our unproven business model makes
it difficult to predict the extent to which our services will achieve market
acceptance. 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.

We Depend on Wholesale DSL Providers, Some of Whom are Competitors, to Provide
us With Local DSL Facilites in Areas Where we Have Not Deployed our Own DSL
Equipment

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

      Certain wholesale DSL providers with whom we work offer services that
compete with ours, or have other customers whose services compete with ours.
Such competing interests may affect the ability or willingness of these
providers to provide us with acceptable services on acceptable terms. In
addition, certain of these providers are relatively young companies that are
facing substantial operational and financial challenges. Covad Communications
Group, which had filed a pre-negotiated plan of reorganization and voluntary
petition to reorganize under Chapter 11 of the U.S. Bankruptcy Code, emerged
from bankruptcy in December 2001. Nonetheless, there can be no assurances that
Covad will be successful in managing its operations and business plans. 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.

If we Fail to Recruit Qualified Personnel in a Timely Manner and Retain our
Employees, we Will Not be Able to Execute our Business Plan and our Business
Will be Harmed


                                       37

<PAGE>

      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 recruit qualified personnel in a timely manner or
to retain our employees, we will not be able to execute our business plan. The
reductions in workforce that we made in 2000 and 2001, and the competitive
nature of our industry, may make it difficult to hire qualified personnel on a
timely basis and to retain our employees.

Our Management Team is Critical and the Loss of Key Personnel Could Adversely
Affect our Business

      We depend on a small number of executive officers and other members of
senior management to work effectively as a team, to execute our business
strategy and business plan, and to manage employees located in several 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 do not have employment agreements with any of our executive
officers, so any of these individuals may terminate employment at any time.

Our Failure to Establish and Maintain the Necessary Infrastructure to Support
our Business and to Manage our Growth Could Strain our Resources and Adversely
Affect our Business and Financial Performance

      We have had significant growth in the number of markets in which we
provide service 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.

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:

      .     the timing and success of acquisitions, if any;

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

      .     regulatory developments;

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

      .     the availability of financing to continue our expansion;

      .     technical difficulties or network service interruptions; and


                                       38

<PAGE>

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

The Failure of our Customers to Pay their Bills on a Timely Basis Could
Adversely Affect our Cash Flow

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

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 out 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
significant 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 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 FCC
currently has at least two open proceedings that will consider substantial
reductions or even elimination of the obligation of the traditional local
telephone companies to provide network elements to competitors such as us for
use for high-speed data services. Legislation has been passed by the United
States House of Representatives and remains pending in the Senate that would
amend the Telecommunications Act of 1996 to substantially reduce the obligations
of the traditional local telephone companies on which we rely. Adoption of this
legislation, or of some of the regulatory changes being considered by the FCC,
could have severe adverse consequences for our business. In addition, at least
two traditional local telephone companies, SBC Communications and Verizon, have
taken


                                       39

<PAGE>

the position in state and federal regulatory proceedings that they are not
obligated to unbundle portions of their network where they construct or modify
new digital loop carrier facilities. These facilities would enable them to offer
DSL services to customers who are located too far from the traditional local
telephone companies' central offices to be reached by existing DSL technologies.
We cannot predict the outcome of the various proceedings, litigation and
legislation or whether or to what extent these proceedings, litigation and
legislation may adversely affect our business and operations.

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

Failure to Negotiate Interconnection Agreements with the Traditional Local
Telephone Companies Could Lead to Costly and Lengthy Arbitration Which May Not
be Resolved in our Favor

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


                                       40

<PAGE>

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 DSL equipment. In markets where we utilize the local DSL
facilities of other carriers to provide our service, those carriers must
interconnect with and use the networks of traditional local telephone companies
to provide this service. We cannot assure you that these networks will be able
to meet the telecommunications needs of our customers or maintain our service
standards. We also depend on the traditional local telephone companies to
provide and maintain their transmission facilities and the copper telephone
lines between our network and our customers' premises. Our dependence on
traditional 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, or the other carrier 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.

Failure to Obtain Additional Space for our DSL Equipment in the Local Telephone
Companies' Central Offices in our Markets Could Adversely Affect our Business

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

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. Consequently, these
companies have certain incentives to delay:

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

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

      .     providing acceptable transmission facilities and copper telephone
            lines; and

      .     our introduction and expansion of our services.

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

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


                                       41

<PAGE>

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 or
other competitive high-speed data communications services in a specific market
may adversely impact our ability to obtain customers in that area and harm our
competitive position, business and prospects. These companies have established
brand names and reputations for high quality in their service areas, possess
sufficient capital to deploy DSL equipment rapidly, have their own copper
telephone lines and can bundle digital data services with their existing voice
services to achieve a competitive advantage in serving customers. In addition,
we depend upon these traditional local telephone companies to provide us access
to their central offices and to individual elements of their networks. As a
result, they can significantly influence the actual and perceived reliability,
quality and timeliness of our services in their service areas. The perceived
relative stability of the traditional local telephone companies, particularly in
light of the failure of certain competitive telephone companies and the
financial and operational issues surrounding other such companies, provides the
traditional local telephone companies a significant competitive advantage.

We Depend on Two Long Distance Carriers to Connect our Network

      Data is transmitted across our network via transmission facilities that we
lease from WorldCom and AT&T. Failure of these carriers to provide service or to
provide quality service may interrupt the use of our services by our customers.
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
the WorldCom and AT&T service will not be interrupted in the future.

Intense Competition in the High-Speed Data Communication Services Market May
Negatively Affect the Number of our Customers and the Pricing of our Services

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

      .     Other providers of DSL-based services, including Covad
            Communications, Network Access Solutions and New Edge Networks;

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

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

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

      .     Cable modem service providers, such as AT&T, Comcast and RCN, which
            are offering high-speed Internet access over cable networks; and


                                       42

<PAGE>

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

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

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 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,
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


                                       43

<PAGE>

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


                 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:

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

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


                                       44

<PAGE>

      .     the addition or loss of customers;

      .     changes in financial estimates or recommendations by securities
            analysts;

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

      .     growth of Internet and on-line commerce usage and the Internet and
            on-line commerce industries;

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

      .     additions or departures of our key personnel;

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

      .     general market and economic conditions.

      In addition, in recent years the stock market in general, and the Nasdaq
National Market and the market for Internet, 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 Delisted From the Nasdaq National Market, Which May Have
a Material Adverse Impact on the Pricing and Trading of our Common Stock

      Nasdaq Marketplace Rule 4450(a)(5) provides that if the price of the our
common stock remains less than $1.00 per share over 30 consecutive trading days,
our common stock may be delisted. Our common stock has traded below $1.00 since
March 6, 2002. The last trading price of the our common stock on March 28, 2002
was $.79 per share. If the price of our common stock remains less than $1.00
per share over 30 consecutive trading days as required by Nasdaq Marketplace
Rule 4450(a)(5), the Nasdaq may commence proceedings to delist our common stock
by issuing a notice of failure to comply, commencing a 90 day period during
which we may achieve compliance. If our common stock is delisted by the Nasdaq,
it will become more difficult to trade or to obtain accurate and timely
quotations to trade our common stock. Furthermore, any delisting of our common
stock could depress our stock price or result in a decline in the trading market
of our common stock.

A Stockholder Group Controls Most Matters Requiring Stockholder Approval, Which
Could Have a Material Adverse Effect on the Market Price of our Common Stock.

      A group of private investment funds affiliated with VantagePoint Venture
Partners owns of record approximately 34% of our outstanding common stock, 100%
of our outstanding series X preferred stock and 73% of the combined voting power
of all issued and outstanding DSL.net capital stock as of March 18, 2002. We
have agreed to sell an additional 8,531 shares of series Y preferred stock,
subject to certain closing conditions, to certain investors after we have
obtained stockholder approval of certain proposals to be considered and acted
upon at our 2002 annual meeting of stockholders. Even if we sell these shares,
VantagePoint will own of record DSL.net capital stock representing approximately
70% of the combined voting power of the issued and outstanding DSL.net capital
stock. In addition, as long as at least 50% of the series X preferred stock
owned by VantagePoint remains outstanding, the holders of the series X preferred
stock are entitled to elect a majority of our board of directors,


                                       45

<PAGE>

subject to the provisions of a stockholders' agreement relating to the election
of directors. As a result, subject to the special voting rights of the series Y
preferred stock and the provisions of the stockholders agreement, VantagePoint
can control most matters requiring stockholder approval, including approval of
significant corporate transactions. This concentration of ownership may have the
effect of delaying, preventing or deterring a change in control, could deprive
our stockholders of an opportunity to receive a premium for their common stock
as part of a sale and might affect the market price of our common stock.

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. 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.


                                       46

<PAGE>

Item 8.  Financial Statements and Supplementary Data


                        REPORT OF INDEPENDENT ACCOUNTANTS

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


      In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of changes in stockholders'
equity and of cash flows present fairly, in all material respects, the financial
position of DSL.net, Inc. and its subsidiaries at December 31, 2001 and 2000,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2001, 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.

PricewaterhouseCoopers LLP
Stamford, CT
February 26, 2002, except for the paragraph in Note 15, as to which the date is
March 1, 2002


                                       47

<PAGE>

                                  DSL.net, Inc.

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                          December 31,
                                                                                   --------------------------
                                                                                       2000           2001
                                                                                   ------------   -----------
<S>                                                                                <C>            <C>
                                     ASSETS
Current assets:
Cash and cash equivalents                                                          $ 72,323,911   $19,284,985
Restricted cash                                                                       4,111,071       345,773
Accounts receivable (net of allowances of $1,353,000 and $3,844,148
   at December 31, 2000 and 2001, respectively)                                       3,694,547     5,856,288
Deferred costs                                                                          734,976     1,131,031
Prepaid expenses and other current assets                                             1,711,761     2,235,201
                                                                                   ------------   -----------
Total current assets                                                                 82,576,266    28,853,278

Fixed assets, net  (Note 3)                                                          83,272,045    36,860,674
Goodwill and other intangible assets  (Note 5)                                       26,628,577    14,741,019
Other assets                                                                          2,329,033       568,931
                                                                                   ------------   -----------
Total assets                                                                       $194,805,921   $81,023,902
                                                                                   ============   ===========

                 LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE
                    PREFERRED STOCK AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable                                                                   $ 13,185,650   $ 4,326,642
Accrued salaries                                                                      1,577,997       907,444
Accrued liabilities (Note 13)                                                        14,156,468     9,635,427
Deferred revenue                                                                      2,353,910     3,965,804
Current portion of capital leases payable (Note 7)                                    3,037,369     2,902,267
Bridge loan payable (Note 6)                                                                 --     3,531,000
Current portion of term loan payable (Note 6)                                         1,502,449            --
                                                                                   ------------   -----------
Total current liabilities                                                            35,813,843    25,268,584

Capital leases payable  (Note 7)                                                      7,439,949     4,560,492
Term loan payable  (Note 6)                                                           2,134,690            --
                                                                                   ------------   -----------
Total liabilities                                                                    45,388,482    29,829,076
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, no shares and 10,000 shares ($0 and
   $10,115,233 liquidation preference) issued and outstanding as of December 31,
   2000 and 2001, respectively                                                               --       435,930

   15,000 shares designated as Series Y, mandatorily redeemable, convertible
   preferred stock, $.001 par value, no shares and 6,469 shares ($0 and $6,475,380
   liquidation preference) issued and outstanding as of December 31, 2000 and
   2001, respectively                                                                        --        34,356

 Stockholders' equity  (Note 9)
 Common stock, $.0005 par value; 200,000,000 shares authorized; 66,002,808 and
    64,851,462 shares issued and outstanding                                             33,001        32,426
 Additional paid-in capital                                                         286,258,257   300,756,586
 Deferred compensation                                                               (3,930,723)   (1,667,694)
 Accumulated deficit                                                               (132,943,096) (248,396,778)
                                                                                   ------------   -----------
 Total stockholders' equity                                                         149,417,439    50,724,540
                                                                                   ------------   -----------
 Total liabilities, mandatorily redeemable convertible preferred stock and
    stockholders' equity                                                           $194,805,921   $81,023,902
                                                                                   ============   ===========
</TABLE>

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


                                       48

<PAGE>

                                  DSL.net, Inc.

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                           Years ended December 31,
                                                               ----------------------------------------------
                                                                   1999            2000             2001
                                                               ------------    -------------    -------------
<S>                                                            <C>             <C>              <C>
Revenue                                                        $  1,312,546    $  17,789,410    $  41,969,411

Operating expenses:
Network and operations (including $369,922, $412,717 and
    ($124,113) of stock compensation, respectively)               7,983,364       63,123,716       90,078,580
General and administrative (including $3,058,037, $1,805,703
    and $449,320 of stock compensation, respectively)             7,826,052       19,780,177       25,678,878
Sales and marketing (including $695,495, $973,802 and
    $876,511 of stock compensation, respectively)                 7,543,191       26,236,619       14,064,589
Depreciation and amortization                                     1,831,331       21,132,583       28,042,645
                                                               ------------    -------------    -------------
Total operating expenses                                       $ 25,183,938    $ 130,273,095    $ 157,864,692
                                                               ------------    -------------    -------------
Operating loss                                                 $(23,871,392)   $(112,483,685)   $(115,895,281)

Interest income, net                                              1,889,312        6,729,657          455,033
Other expense, net                                                   (6,233)          (9,120)         (13,434)
                                                               ------------    -------------    -------------
Net loss                                                       $(21,988,313)   $(105,763,148)   $(115,453,682)
                                                               ============    =============    =============
Net loss applicable to common stockholders:
    Net loss                                                    (21,988,313)    (105,763,148)    (115,453,682)
    Exchange of preferred stock                                 (11,998,000)              --               --
    Dividends on preferred stock                                         --               --         (121,613)
    Accretion of preferred stock                                         --               --         (348,673)
                                                               ------------    -------------    -------------
       Net loss applicable to common stockholders              $(33,986,313)   $(105,763,148)   $(115,923,968)
                                                               ============    =============    =============
 Net loss per share, basic and diluted                         $      (2.05)   $       (1.75)   $       (1.81)
                                                               ============    =============    =============
Shares used in computing net loss per share, basic and
   diluted                                                       16,549,535       60,593,437       63,938,960
                                                               ============    =============    =============
</TABLE>

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


                                       49

<PAGE>

                                  DSL.net, Inc.

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                   Preferred Stock          Common Stock
                                                  ------------------   -----------------------
                                                  Shares     Amount      Shares        Amount
                                                  -------    -------   -----------    --------
<S>                                               <C>        <C>       <C>            <C>

Balance at December 31, 1998                           --    $    --    16,795,800    $  8,398
Issuance of warrants                                   --         --            --          --
Deferred compensation - restricted stock               --         --            --          --
Stock compensation                                     --         --       436,256         218
Deferred compensation - stock options                  --         --            --          --
Amortization of deferred compensation                  --         --            --          --
Issuance of warrants                                   --         --            --          --
Surrender of common stock                              --         --    (3,102,256)     (1,551)
Acceleration associated with surrender                 --         --            --          --
Exchange of redeemable preferred stock                 --         --            --          --
Notes receivable from officers                         --         --            --          --
Repayment of notes receivable from officers            --         --            --          --
Issuance of common stock - stock options               --         --       116,635          58
Issuance of common stock, net of issuance costs        --         --     8,226,000       4,113
Issuance of and conversion of redeemable
  preferred stock into common stock                    --         --    35,909,761      17,955
Net loss                                               --         --            --          --
                                                  -------    -------   -----------    --------
Balance at December 31, 1999                           --    $    --    58,382,196    $ 29,191
Deferred compensation - cancelled stock
  options                                              --         --            --          --
Amortization of deferred compensation                  --         --            --          --
Issuance of common stock - warrants                    --         --       102,737          51
Issuance of common stock - employee stock
  purchase plan                                        --         --        29,741          14
Issuance of common stock - stock options               --         --     1,451,742         727
Issuance of common stock, net of issuance costs        --         --     5,750,000       2,875
Issuance of common stock - Vector Internet
  Services, Inc. acquisition                           --         --       286,392         143
Net loss                                               --         --            --          --
                                                  -------    -------   -----------    --------
Balance at December 31, 2000                           --    $    --    66,002,808    $ 33,001
Deferred compensation - cancelled stock
  options                                              --         --            --          --
Amortization of deferred compensation                  --         --            --          --
Repurchase of common stock                             --         --    (1,538,503)       (769)
Issuance of common stock - employee stock
  purchase plan                                        --         --        25,383          13
Issuance of common stock - stock options               --         --       361,774         181
Beneficial conversion feature of Series X
  and Series Y preferred stock, net of
  issuance costs                                       --         --            --          --
Accrued dividends on preferred stock                   --         --            --          --
Accretion of Series X mandatorily redeemable
  preferred stock to redemption value                  --         --            --          --
Accretion of Series Y mandatorily redeemable
  preferred stock to redemption value                  --         --            --          --
Net loss                                               --         --            --          --
                                                  -------    -------   -----------    --------
Balance at December 31, 2001                           --    $    --    64,851,462    $ 32,426
                                                  =======    =======   ===========    ========
</TABLE>

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


                                       50

<PAGE>

                                  DSL.net, Inc.

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                   (Continued)

<TABLE>
<CAPTION>
                                                                   Notes
                                                 Additional     Receivable
                                                  Paid-In          from          Deferred        Accumulated
                                                  Capital        Officers      Compensation        Deficit           Total
                                               -------------    -----------    ------------     -------------    -------------
<S>                                            <C>              <C>             <C>             <C>              <C>

Balance at December 31, 1998                   $   2,465,374    $        --     $         --     $  (2,789,637)   $    (315,865)
Issuance of warrants                               1,155,000             --               --                --        1,155,000
Deferred compensation - restricted stock           3,733,854             --       (3,733,854)               --               --
Stock compensation                                   602,369             --               --                --          602,587
Deferred compensation - stock options             13,928,591             --      (13,928,591)               --               --
Amortization of deferred compensation                     --             --        2,350,325                --        2,350,325
Issuance of warrants                                 112,000             --               --                --          112,000
Surrender of common stock                           (778,087)            --          779,638                --               --
Acceleration associated with surrender                    --             --        1,170,542                --        1,170,542
Exchange of redeemable preferred stock           (10,750,757)            --               --        (2,401,998)     (13,152,755)
Notes receivable from officers                            --             --         (999,911)               --         (999,911)
Repayment of notes receivable from officers               --             --          999,911                --          999,911
Issuance of common stock - stock options               4,315             --               --                --            4,373
Issuance of common stock, net of issuance
  costs                                           55,718,285             --               --                --       55,722,398
Issuance of and conversion of redeemable
  preferred stock into common stock               75,054,639             --               --                --       75,072,594
Net loss                                                  --             --               --       (21,988,313)     (21,988,313)
                                               -------------    -----------     ------------     -------------    -------------
Balance at December 31, 1999                   $ 141,245,583    $        --     $(13,361,940)    $ (27,179,948)   $ 100,732,886
Deferred compensation - cancelled stock
  options                                         (6,238,995)            --        6,238,995                --               --
Amortization of deferred compensation                     --             --        3,192,222                --        3,192,222
Issuance of common stock - warrants                      (51)            --               --                --               --
Issuance of common stock - employee stock
  purchase plan                                      182,704             --               --                --          182,718
Issuance of common stock - stock options             851,259             --               --                --          851,986
Issuance of common stock, net of issuance
  costs                                          141,248,935             --               --                --      141,251,810
Issuance of common stock -
  Vector Internet Services, Inc. acquisition       8,968,822             --               --                --        8,968,965
Net loss                                                  --             --               --      (105,763,148)    (105,763,148)
                                               -------------    -----------     ------------     -------------    -------------
Balance at December 31, 2000                   $ 286,258,257    $        --     $ (3,930,723)    $(132,943,096)   $ 149,417,439
Deferred compensation - cancelled stock
  options                                           (674,670)            --          674,670                --               --
Amortization of deferred compensation                     --             --        1,201,718                --        1,201,718
Repurchase of common stock                          (385,872)            --          386,641                --               --
Issuance of common stock - employee stock
  purchase plan                                       29,993             --               --                --           30,006
Issuance of common stock - stock options              19,292             --               --                --           19,473
Beneficial conversion feature of Series X
  and Series Y preferred stock, net of
  issuance costs                                  15,979,872             --               --                --       15,979,872
Accrued dividends on preferred stock                (121,613)            --               --                --         (121,613)
Accretion of Series X mandatorily
  redeemable preferred stock to redemption
  value                                             (320,697)            --               --                --         (320,697)
Accretion of Series Y mandatorily
  redeemable preferred stock to redemption
  value                                              (27,976)                                                           (27,976)
Net loss                                                  --             --               --      (115,453,682)    (115,453,682)
                                               -------------    -----------     ------------     -------------    -------------
Balance at December 31, 2001                   $ 300,756,586    $        --     $ (1,667,694)    $(248,396,778)   $  50,724,540
                                               =============    ===========     ============     =============    =============
</TABLE>
              The accompanying notes are an integral part of these
                       consolidated financial statements.


                                       51

<PAGE>

                                  DSL.net, Inc.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                          Years ended December 31,
                                                                              -----------------------------------------------
                                                                                   1999             2000             2001
                                                                              -------------    -------------    -------------
<S>                                                                           <C>              <C>              <C>
     Cash flows from operating activities:
     Net loss                                                                 $ (21,988,313)   $(105,763,148)   $(115,453,682)

     Reconciliation of net loss to net cash provided by (used in) operating
        activities:
           Depreciation and amortization                                          1,831,331       21,132,583       28,042,645
           Bad debt expense                                                          62,819          700,000        2,996,096
           Sales credits and allowances                                                  --          590,496        1,498,498
           Amortization of deferred debt issuance costs                              41,978           58,299           86,259
           Stock compensation expense                                             4,123,454        3,192,222        1,201,718
           Restructuring charges for write-down of fixed assets                          --        1,416,816       29,627,771
           Impairment charges for write-down of goodwill and investment                  --               --        4,455,397
           Loss on sale/write-off of fixed assets                                        --               --          361,068
           (Increase) / decrease in other assets                                   (578,145)      (1,055,846)       1,260,101
           Net changes in current assets and liabilities:
              (Increase) in accounts receivable                                    (320,149)      (4,219,149)      (6,656,335)
              (Increase) / decrease in prepaid and other current assets            (943,888)      (1,052,000)         221,992
              Increase / (decrease) in accounts payable                           8,624,119        2,054,260       (8,859,006)
              Increase / (decrease) in accrued salaries                             848,841          729,156         (670,553)
              Increase / (decrease) in accrued liabilities                        1,831,119        5,676,441       (2,713,422)
              Increase in deferred revenue                                          124,114        1,554,131        1,611,894
                                                                              -------------    -------------    -------------
     Net cash used in operating activities                                       (6,342,720)     (74,985,739)     (62,989,559)
                                                                              -------------    -------------    -------------
     Cash flows from investing activities:
           Purchases of property and equipment                                  (33,811,121)     (55,942,721)      (5,344,788)
           Proceeds from sales of property and equipment                                 --               --          456,134
           (Purchases) / sales of marketable securities                         (13,274,183)      13,274,183               --
           Acquisitions of businesses and customer lines                         (1,575,508)     (13,548,674)      (1,797,328)
           Other investments                                                             --         (500,001)              --
           (Increase) / decrease in restricted cash                                (602,960)      (3,508,111)       3,765,298
                                                                              -------------    -------------    -------------
     Net cash used in investing activities                                      (49,263,772)     (60,225,324)      (2,920,684)
                                                                              -------------    -------------    -------------
     Cash flows from financing activities:
           Proceeds from equipment credit facility                                1,355,036        2,921,870               --
           Proceeds from common stock issuance, net of issuance costs            55,722,398      141,251,810               --
           Proceeds from preferred stock issuance and bridge loan, net of
               issuance costs                                                    62,724,823               --       19,510,872
           Proceeds from issuance of common stock for stock option
               exercises and employee stock purchase plan                             4,373        1,034,704           49,479
           Proceeds from equipment notes / leases payable                         1,762,754               --               --
           Principal payments under notes and capital lease obligations            (427,070)      (3,248,711)      (6,689,034)
                                                                              -------------    -------------    -------------
     Net cash provided by financing activities                                  121,142,314      141,959,673       12,871,317
                                                                              -------------    -------------    -------------

     Net increase / (decrease) in cash and cash equivalents                      65,535,822        6,748,610      (53,038,926)
     Cash and cash equivalents at beginning of period                                39,479       65,575,301       72,323,911
                                                                              -------------    -------------    -------------
     Cash and cash equivalents at end of period                               $  65,575,301    $  72,323,911    $  19,284,985
                                                                              =============    =============    =============
     Supplemental disclosure:
     Cash paid: interest                                                      $     172,380    $   1,477,168    $   1,372,308
                                                                              =============    =============    =============
     Fixed assets financed under capital leases                               $   1,561,289    $  10,292,727    $          --
                                                                              =============    =============    =============
     Fixed asset purchases included in accounts payable                       $   7,179,912    $   8,136,269    $     455,263
                                                                              =============    =============    =============
</TABLE>
              The accompanying notes are an integral part of these
                       consolidated financial statements.


                                       52

<PAGE>

                                 DSL.net, Inc.
                 Notes to Consolidated Financial Statements

1.    Formation and Operations of the Company

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

      The Company has incurred substantial losses and negative cash flows from
operations in every fiscal period since inception. For the year ended December
31, 2001, the Company incurred operating losses of $115,895,281 and negative
operating cash flows of $62,989,559 that were financed primarily by proceeds
from equity issuances. The Company had accumulated deficits of $132,943,096 and
$248,396,778 at December 31, 2000 and 2001, respectively. The Company expects
its operating losses and net cash outflows to continue into 2002.

      As reflected in the accompanying financial statements, in December 2000,
the Company initiated a new business plan strategy to reduce its losses and to
conserve its cash. The Company implemented its plan by undertaking various
restructuring actions (Note 14). The Company successfully completed rounds of
private equity financing totaling approximately $20 million in the fourth
quarter of 2001 (Note 9) and $10 million in March 2002 (Note 15). The Company
believes that its existing cash and short-term investments, cash expected to be
generated from operations, and equity financing, will be sufficient to fund its
operating losses, capital expenditures, lease payments and working capital
requirements through the first quarter 2003 and beyond, until it achieves cash
flow positive status, based on its current business plans and projections, as
approved by the Company's board of directors. The Company intends to use these
cash resources to finance its capital expenditures and for working capital and
other general corporate purposes. The Company may also use a portion of these
cash resources to acquire complementary businesses, customers 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 and prices paid for acquisitions.
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 and financial postion.

2.    Summary of Significant Accounting Policies

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

Principles of Consolidation

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


                                       53

<PAGE>

                                  DSL.net, Inc.
                   Notes to Consolidated Financial Statements
                                   (continued)

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 changes, and
frequent new product introductions, all of which could impact the future value
of the Company's assets and liabilities.

Cash Equivalents and Marketable Securities

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

Restricted Cash

      Restricted cash at December 31, 2000 and 2001 of $4,111,071 and $345,773,
respectively, represented cash restricted primarily for future amounts due in
connection with our acquisitions, subject to any post-closing adjustments.

Concentration of Credit Risk and Concentration of Data Transmission Service
Providers

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

      Data is transmitted across the Company's network via transmission
facilities that the Company leases from WorldCom and AT&T. Failure of these
carriers to provide service or to provide quality service may interrupt the use
of the Company's services by its customers. There can be no assurance that the
WorldCom and AT&T service will not be interrupted in the future.

      In certain markets where the Company has not deployed its own DSL
equipment, the Company utilizes local DSL facilities from wholesale providers,
including Covad Communications, Inc., 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.


                                       54

<PAGE>

                                  DSL.net, Inc.
                   Notes to Consolidated Financial Statements
                                   (continued)


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 are amortized on a straight-line
basis over the estimated future periods to be benefited, ranging from two to
five years. In addition, goodwill and other intangible assets are reviewed for
impairment quarterly, or whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
the assets to future undiscounted cash flows of the business acquired. If the
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. With the adoption of Statement of Financial Accounting
Standards ("SFAS") No. 142 effective January 1, 2002, the Company will no longer
amortize goodwill (see "Recently Issued Accounting Pronouncements" below).

Other Assets

      Other assets include refundable deposits held as security on certain lease
obligations and other long term investments. As of December 31, 2000, and 2001,
refundable deposits were $1,829,032 and $568,931, respectively, and long term
investments were $500,001 and $0, 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


                                       55

<PAGE>

                                  DSL.net, Inc.
                   Notes to Consolidated Financial Statements
                                   (continued)

carrying amounts and the tax basis of assets and liabilities and net operating
loss carryforwards, all calculated using presently enacted tax rates.

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 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. 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 eighteen months, the
estimated life of the customer relationship. Related direct costs incurred (up
to the amount of deferred revenue) are also deferred and amortized to expense
over eighteen months, and any excess direct costs over installation revenue is
charged to expense as incurred. The Company, in certain instances, negotiates
sales credits and allowances for service related matters. The Company
establishes a reserve for such credits based on historical experience.

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 sells its services directly to end users mainly consisting of small
to medium sized businesses, as opposed to selling to Internet service providers
who then resell such services and consequently, 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 serves, 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
it. This could require additional provisions for allowances. In addition, a
negative impact on revenue related to those customers may occur.

Long-Lived Assets

      SFAS No. 121, "Accounting For The Impairment Of Long-Lived Assets And For
Long-Lived Assets To Be Disposed Of," requires that long-lived assets and
certain intangible assets be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount may not be recoverable. If
undiscounted expected future cash flows are less than the carrying value of the
assets, an impairment loss is to be recognized based on the fair value of the
assets.

Stock Compensation

      The Company applies Accounting Principles Board Opinion ("APB") No. 25 and
related interpretations in accounting for its stock option plans and stock
awards with the disclosure provisions of 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


                                       56

<PAGE>
                                  DSL.net, Inc.
                   Notes to Consolidated Financial Statements
                                   (continued)


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, 1999, 2000 and 2001 totaled approximately $4,123,000,
$3,192,000, and $1,202,000, respectively.

Earnings (Loss) Per Share

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

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

                                                   Shares of Common Stock
                                            ------------------------------------
                                                        December 31,
                                            ------------------------------------
                                              1999         2000          2001
                                            ---------    ---------    ----------
Options to purchase common stock .......    5,874,302    7,318,612    13,877,394
Warrants to purchase common stock ......      194,556       83,314        83,314
Preferred Series X stock convertible to
     common stock ......................           --           --    55,555,556
Preferred Series Y stock convertible to
     common stock*......................           --           --    12,938,000
                                            ---------    ---------    ----------
     Total .............................    6,068,858    7,401,926    82,454,264
                                            ---------    ---------    ----------

* These shares were issued on December 28, 2001, and will become convertible
into common stock upon approval by the stockholders of an increase in the number
of authorized shares of common stock to at least 250,000,000 shares.

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.



                                       57

<PAGE>

                                  DSL.net, Inc.
                   Notes to Consolidated Financial Statements
                                   (continued)

Reclassifications

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

Recently Issued Accounting Pronouncements

      During fiscal 2000, the Company adopted the revenue recognition guidelines
of SAB No. 101, which changed the manner in which the Company recognizes
installation revenue and related direct costs. The cumulative effect of adoption
of SAB No. 101 resulted in deferral of installation revenue and related direct
costs of approximately $176,000 at January 1, 2000. The effect of the adoption
for the year ended December 31, 2000, resulted in a deferral of installation
revenue and related direct costs of approximately $735,000. The adoption of SAB
No. 101 had no impact on net income.

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

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

      In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Intangible
Assets." SFAS No. 141 requires companies to account for acquisitions entered
into after June 30, 2001 using the purchase method and establishes criteria to
be used in determining whether acquired intangible assets are to be recorded
separately from goodwill. This criterion is to be applied to business
combinations completed after June 30, 2001. SFAS No. 142 sets forth the
accounting for goodwill and intangible assets after the completion of a business
acquisition. Goodwill will no longer be amortized, but rather, tested for
impairment by comparing the asset's fair value to its carrying value. SFAS No.
142 is effective January 1, 2002.

      The adoption of SFAS No. 141 is not expected to have a material impact on
the Company's financial position or results of operations.

      In accordance with SFAS No. 142, the Company will cease to amortize
$8,482,394 of goodwill. The Company recorded approximately $2,483,732 of
amortization pertaining to this goodwill during 2001 and would have recorded an
equal amount in 2002. In lieu of amortization, the Company is required to make
an initial impairment review of its goodwill in 2002 and an


                                       58

<PAGE>
                                  DSL.net, Inc.
                   Notes to Consolidated Financial Statements
                                   (continued)


annual impairment review thereafter. The Company expects to complete its initial
review during the first quarter of 2002. The Company does not expect the results
of its review to have a material impact on its results of operations.

      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 is
not expected to have a material impact on the Company's 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 this statement is not expected to have a
material impact on the Company's financial position or results of operations.

3.    Fixed Assets

                                                              December 31,
                                                      --------------------------
                                                          2000          2001
                                                      ------------   -----------
Network and computer equipment......................  $ 56,423,741   $35,358,514
Furniture, fixtures, office equipment and software..    16,892,409    18,372,726
Vehicles............................................       148,257       175,693
Collocation costs...................................    28,518,456    12,356,680
                                                      ------------   -----------
                                                       101,982,863    66,263,613
Less-accumulated depreciation and amortization.....     18,710,818    29,402,939
                                                      ------------   -----------
                                                      $ 83,272,045   $36,860,674
                                                      ============  ============


                                       59

<PAGE>

                                  DSL.net, Inc.
                   Notes to Consolidated Financial Statements
                                   (continued)


      As of December 31, 2000 and 2001, the recorded cost of equipment under
capital lease was $12,312,838 and $11,242,703, respectively. Accumulated
depreciation for this equipment under capital lease was $2,172,518 and
$4,637,658 at December 31, 2000 and 2001, respectively.

      As of December 31, 2000 and 2001, the Company had capitalized computer
software costs of $9,665,735 and $9,904,185, respectively, and had recorded
accumulated amortization expense related to these costs of $2,819,057 and
$6,073,054, respectively.

      Depreciation and amortization expense related to fixed assets was
$1,782,003, $16,975,382 and $20,117,967 for the years ended December 31, 1999,
2000 and 2001, respectively.

4.    Acquisitions

      On December 1, 1999, the Company acquired Tycho Networks, Inc ("Tycho"), a
Santa Cruz, California based provider of Internet access, web hosting and
related services throughout central coastal California. The acquisition was
accounted for under the purchase method of accounting and, accordingly, the
purchase price was allocated to the assets acquired and liabilities assumed
based on their estimated fair values at the date of acquisition. The approximate
purchase price, including transaction costs,was $3,392,000. The purchase price
was recorded as goodwill and was amortized on a straight-line basis over its
estimated useful life of five years. During 2001, the remaining unamortized
goodwill balance was determined to be impaired and written off (Note 5). The
results of the acquired operations of Tycho have been included in the
consolidated results of the Company from the date of acquisition.

      On April 3, 2000, the Company acquired certain assets and liabilities of
Trusted Net Media Holdings, LLC ("Trusted Net"). The acquisition was accounted
for under the purchase method of accounting and, accordingly, the purchase price
was allocated to the assets acquired and liabilities assumed based on their
estimated fair values at the date of acquisition. The approximate purchase price
including transaction costs was $2,650,000. The purchase price was recorded as
goodwill and was amortized on a straight-line basis over its estimated useful
life of five years. During 2001, the remaining unamortized goodwill balance was
determined to be impaired and written off (see Note 5). The results of the
acquired operations of Trusted Net have been included in the consolidated
results of the Company from the date of acquisition.

      On May 26, 2000, the Company acquired Vector Internet Services, Inc.
("VISI"), an Internet solutions provider based in Minneapolis, Minnesota. The
acquisition was accounted for under the purchase method of accounting and,
accordingly, the purchase price was allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the date of
acquisition. The approximate purchase price including transaction costs was
$20,421,000. The purchase consideration of the assets acquired and liabilities
assumed was allocated based on the fair values as follows: net assets acquired,
$130,000; customer base, $7,878,000; and goodwill, $12,413,000. The customer
base was valued based on the expected future net cash flows from customers
discounted back to the present value taking into account the expected life cycle
of the customer relationships. This amount is being amortized on a straight-line
basis over its estimated useful life of three years. The excess of the purchase
price over the net identifiable assets has been recorded as goodwill and
amortized on a straight-line basis over its estimated useful life of five years.
The results of the VISI operations have been included in the consolidated
results of the Company from the date of acquisition.

      In December 2000, the Company announced that it would be participating in
the Covad Communications, Inc. ("Covad") Safety Net program. The program
provides customers of


                                       60

<PAGE>

                                  DSL.net, Inc.
                   Notes to Consolidated Financial Statements
                                   (continued)


certain Internet Service Providers ("ISP's"), whose underlying DSL connection is
provided by Covad, an opportunity to maintain their DSL service while switching
ISP's. The program was available to customers of financially distressed ISP's
who felt their current ISP could no longer adequately provide service to them.
Under the program, Covad made referrals to DSL.net for a fee and subsequently
assisted with migrating the customer's service to DSL.net. During 2001, the
Company acquired approximately 1,100 customer lines referred by Covad under the
Covad Safety Net program, for aggregate fees of approximately $696,000. These
customer line acquisitions were accounted for under the purchase method of
accounting and, accordingly, the purchase price was allocated to the customer
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.

      On December 1, 2000, the Company acquired certain assets of Exario
Networks, Inc. ("Exario"). The acquisition was accounted for under the purchase
method of accounting and, accordingly, the purchase price was allocated to the
assets acquired based on their estimated fair values at the date of acquisition.
The approximate purchase price was $4,563,000, including transaction costs and
amounts due to Exario after the closing of approximately $1,561,000 (the
"Holdback Amount"). The purchase consideration for the assets acquired from
Exario, was allocated based on the fair values of such assets, approximately as
follows: net assets acquired, $57,000; and Exario customer base, $4,506,000. The
customer base was valued based on the expected future net cash flows from
customers discounted back to the present value taking into account the expected
life of the customer relationships.

      On April 26, 2001, the Company gave notice to Exario of its intent to
pursue an indemnity claim against the Holdback Amount in accordance with the
provisions of the Asset Purchase Agreement, dated as of December 1, 2000,
between Exario and the Company. The claim, originally estimated at $1,458,000
and subsequently modified to a final settlement amount of $1,415,000, related
primarily to a request by the Company for reimbursement of the purchase price
paid for those certain customer lines acquired from Exario that were on the
NorthPoint Communications' network, which ceased operations during the first
half of 2001.

      During the first quarter of 2001, the Company reduced the estimated useful
life of the Exario customer lines, originally estimated at four years, to two
years and accordingly is amortizing the cost of those customer lines on a
straight-line basis over two years.

      In June 2001, the Company reduced the value of the intangibles related to
the Exario customer base by approximately $1,415,000 to approximately
$3,091,000. In September 2001, the value of the intangibles related to the
Exario customer base was further reduced to approximately $3,001,000. These
reductions related primarily to the customers who were formerly served by
NorthPoint Communications and who were the subject of the Company's settled
indemnity claim.

      During the quarter ended June 30, 2001, the Company entered into
agreements with Covad 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 customer lines whose wholesale circuit connections
were being supported by Covad. In accordance with the Covad agreement, the
anticipated purchase price of $1,467,000 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 $1,075,000 and as of December 31, 2001 the
remaining escrow balance of approximately $392,000 had been returned to the
Company. These Zyan customer line acquisitions were accounted for under the
purchase method of accounting and, accordingly, the


                                       61

<PAGE>

                                  DSL.net, Inc.
                   Notes to Consolidated Financial Statements
                                   (continued)


purchase price was allocated to customer 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 Tycho,
the acquisition of VISI, the acquisition of certain assets of Exario, the
acquisition of end users under the Covad Safety Net program, and the acquisition
of certain former Zyan customers pursuant to the Zyan and Covad transactions
summarized above, as if the transactions occurred at the beginning of the
periods presented. Inclusion of Trusted Net's results would not materially
change the reported pro forma results:

<TABLE>
<CAPTION>
                                                                    Year Ended December 31,
                                                       -----------------------------------------------
                                                            1999            2000              2001
                                                       -------------   --------------   --------------
<S>                                                    <C>             <C>              <C>
Pro forma revenue                                      $ 19,055,299    $  33,691,494    $  45,846,766
Pro forma operating loss                                (29,203,026)    (113,201,285)    (114,449,631)
Pro forma net loss                                      (27,319,947)    (106,480,748)    (114,008,032)
Pro forma net loss applicable to common stockholders   $(39,536,947)   $(106,527,748)   $(114,478,318)
Pro forma net loss per share, basic and diluted        $      (2.35)   $       (1.75)   $       (1.79)
Shares used in computing pro forma net loss
     per share, basic and diluted                        16,835,927       60,712,751       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.

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. Since the carrying value was more than the
expected future net cash flows, the goodwill was reduced by approximately
$3,155,000 to the net present value of the expected future net cash flows. Of
this amount, $2,124,000 related to a reduction in the goodwill for the Company's
acquisition of Tycho and $1,031,000 related to a reduction in the goodwill for
the Company's acquisition of certain assets of Trusted Net (Note 14).

            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
insignificant and, as the carrying value was more than these expected future net
cash flows, the balance of goodwill of approximately $800,000 was written off.
Of this amount, approximately $170,000 and $630,000 pertained to reductions in
the goodwill of Tycho and Trusted Net, respectively (Note 14).

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

                              December 31,
                      -------------------------
                          2000         2001
                      -----------   -----------
Goodwill, net         $15,821,103   $ 8,482,394
Customer lists, net    10,758,547     6,258,625
Other intangibles          48,927            --
                      -----------   -----------
                      $26,628,577   $14,741,019
                      ===========   ===========


                                       62

<PAGE>
                                  DSL.net, Inc.
                   Notes to Consolidated Financial Statements
                                   (continued)


      Amortization expense of goodwill and other intangible assets for the years
ended December 31, 1999, 2000 and 2001 was $63,306, $4,179,155 and 7,924,678,
respectively. Accumulated amortization at December 31, 1999, 2000 and 2001, was
$63,306, $4,242,461 and $10,321,738, respectively.

      In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets",
which became effective in 2002, the Company will cease to amortize approximately
$8,482,400 of goodwill. The Company recorded approximately $2,483,700 of
amortization on this amount during 2001 and would have recorded an equal amount
in 2002. In lieu of amortization, the Company is required to make an initial
impairment review of its goodwill in 2002 and an annual impairment review
thereafter. The Company expects to complete its initial review during the first
quarter of 2002. The Company does not expect the results of its review to have a
material impact on its results of operations.

6. Debt

      In May 1999, the Company entered into a secured credit facility (the
"Credit Facility") with a bank to provide up to $5,000,000 for the purchase of
telecommunications and office equipment and vehicles. The Credit Facility
expired in May 2000 and converted to a term loan payable over 36 months. The
Credit Facility bore interest on outstanding borrowings at 1% over the higher of
the bank's prime rate or the federal funds rate plus 0.5%. As of December 31,
2000 and July 31 2001, amounts outstanding under this line of credit bore
interest at annual rates of 10.5% and 7.75%, respectively. The Credit Facility
was secured by a lien on certain equipment and vehicles owned by the Company
located at its principal office, and imposed certain financial and other
covenants requiring the Company to maintain certain financial ratios and limited
new indebtedness, the creation of liens, types of investments, mergers,
consolidations and the transfer of all or substantially all of the Company's
assets. As of December 31, 2000, there was approximately $3,545,000 outstanding
on this term loan. In April 2001, the Company and the bank amended the term
loan. The financial covenants relating to the maintenance of certain financial
ratios were eliminated in their entirety, the maturity date of the loan was
accelerated to August 1, 2001 and certain certificates of deposit equal to the
outstanding loan amount were pledged as additional collateral. On August 1,
2001, the Company settled its outstanding loan obligation in full and
approximately $37,000 in unamortized deferred costs were written off. Financing
costs associated with the Credit Facility of approximately $83,900 were deferred
over the four-year life of the facility and term loan. Amortization expense
related to the deferred costs for the years ended December 31, 2000 and 2001 was
approximately $20,967 and approximately $48,927, respectively.



                                       63

<PAGE>
                                  DSL.net, Inc.
                   Notes to Consolidated Financial Statements
                                   (continued)

      In December 2001, in conjunction with the Company's sale of Series Y
Preferred Stock, the Company issued a short-term note for proceeds of $3,531,000
to the Series Y Preferred Stock Stockholders (Note 9).

7.    Commitments and Contingencies

Leases

      Rent expense under operating leases was approximately $721,000,
$2,726,000, and $1,918,000 for the years ended December 31, 1999, 2000 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 March 2005.

      The future minimum annual lease payments under the terms of such
non-cancelable leases as of December 31, 2001 are as follows:

                          Operating                    Capital
                            Leases                      Leases
                         -----------                 -----------
 2002                    $ 2,899,042                 $ 3,646,180
 2003                      1,954,524                   3,103,638
 2004                      1,588,977                   1,935,060
 2005                        576,904                      51,289
                         -----------                 -----------
                         $ 7,019,447                 $ 8,736,167
                         ===========                 ===========

Less: Amount representing interest                     1,273,408
                                                     -----------

Present value of future minimum lease payments       $ 7,462,759
                                                     ===========

       In March 1999, the Company entered into a master lease agreement to
provide up to $2,000,000 for capital equipment purchases over an initial
twelve-month period, subject to renewal options. Individual capital leases are
amortized over 30 or 36 month terms and bear interest at 8% to 9% per annum. The
outstanding balance under this agreement at December 31, 2000 and 2001 was
approximately $1,168,000 and $565,000, respectively.

       In July 2000, the Company entered into a 48-month lease agreement with an
equipment vendor to finance the purchase of network equipment. The Company has
leased approximately $8,900,000 under this agreement. Amounts financed under
this lease agreement bear an interest rate of 12% per annum and are secured by
the financed equipment. The outstanding balance under this agreement at December
31, 2000 and 2001, was approximately $8,061,000 and $6,198,000, respectively.


Purchase Commitments

      The Company has long-term purchase commitments with WorldCom and AT&T for
data transport services with minimum payments due even if the Company's usage
does not reach the minimum amounts. The WorldCom commitment began in May 2000
and requires minimum


                                       64

<PAGE>

                                  DSL.net, Inc.
                   Notes to Consolidated Financial Statements
                                   (continued)


purchases of $4,800,000 per contract year. The WorldCom contract ends in
November, 2004. The AT&T commitment was amended on January 23, 2002 (Note 15)
and requires minimum purchases of $1,100,000 for the contract year ending in
November 2002 and $987,000 for the contract year ending in October 2003. The
Company also has a commitment to purchase $17,600 per month of certain
additional network capacity from AT&T throughout the commitment period.

Litigation

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

      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, 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 affect, and allow it to advance its
business plans.

      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 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. However, failure to re-negotiate 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 DSL
equipment, the Company utilizes local DSL 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. Covad emerged from bankruptcy in December 2001, however, there can
be no assurance that Covad or other wholesale providers will be successful in
managing their operations and business plans.

8.    Related Party Transactions

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


                                       65

<PAGE>
                                  DSL.net, Inc.
                   Notes to Consolidated Financial Statements
                                   (continued)


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

      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 mandatorily redeemable convertible Series X Preferred Stock
(the "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 and
December 10, 2001, the Company sold an aggregate of 6,000 shares and 4,000
shares, respectively, of Series X Preferred Stock to VantagePoint for total
proceeds of $10,000,000, before direct issuance costs of $189,128 (Note 9).
Also, in accordance with the Series X Purchase Agreement, VantagePoint purchased
an additional 10,000 shares of Series X Preferred Stock in a subsequent closing
occurring on March 1, 2002 (Note 15). Prior to the sale of the Series X
Preferred Stock, VantagePoint owned approximately 21,956,063 shares, or
approximately 34% of DSL.net's total outstanding common stock. The 20,000 shares
of Series X Preferred Stock purchased by VantagePoint are convertible into
approximately 111,111,111 shares of common stock. As a result, VantagePoint owns
the equivalent of 133,067,174 shares of common stock. Two affiliates of
VantagePoint are members of DSL.net'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 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 mandatorily redeemable convertible Series Y Preferred Stock of the
Company (the "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
$6,469,000, before direct issuance costs of $300,000. Pursuant to the Series Y
Purchase Agreement, the Series Y Investors have committed to purchase 8,531
additional shares of Series Y Preferred Stock in a subsequent closing occurring
after the Company has obtained the required stockholder approvals and satisfied
certain other closing conditions. An affiliate of Columbia Capital became a
member of our Board of Directors on December 28, 2001.

9.     Mandatorily Redeemable Convertible Preferred Stock and Stockholders'
       Equity

Mandatorily Redeemable Convertible Preferred Stock

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

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

      In April 1999, certain holders of the Series A Preferred Stock exchanged
3,500,000 shares of Series A Preferred Stock and the Warrants for 6,500,000
shares of Series B Preferred Stock. Cashless warrant exercises accounted for
2,525,070 of these 6,500,000 shares of Series B Preferred Stock. The exchange
into the remaining 3,974,930 shares of Series B Preferred Stock, which was not
contemplated in the original Series A Preferred Stock purchase agreement,
afforded the holders an exchange rate of $0.57 per share, which was lower than
the deemed fair market value of the preferred stock at the time of exchange of
$3.59 per share and therefore was treated as a beneficial non-monetary exchange
under APB Opinion No. 29, "Accounting for Non-Monetary transactions." The
difference between the carrying value of the Series A Preferred Stock,
$2,272,000, and the deemed fair market value of the Series B Preferred Stock,
$14,270,000, was included in the calculation of net loss per common share,
although no assets of


                                       66

<PAGE>
                                  DSL.net, Inc.
                   Notes to Consolidated Financial Statements
                                   (continued)


the Company were expended. The exchange reduced additional paid-in capital and
increased the carrying value of the Series B Preferred Stock by approximately
$11,998,000 for the year ended December 31, 1999. The exchange was given no
other accounting treatment in the 1999 financial statements of the Company.

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

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

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

      The Series A, B, C, D, and E preferred stock automatically converted into
shares of common stock upon the completion of the Company's initial public
offering.

      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 and December 10, 2001,
the Company sold an aggregate of 6,000 shares and 4,000 shares, respectively, of
Series X Preferred Stock to VantagePoint for total proceeds of $10,000,000,
before direct issuance costs of $189,128. In accordance with the Series X
Purchase Agreement, VantagePoint purchased an additional 10,000 shares of Series
X Preferred Stock in a subsequent closing occurring on March 1, 2002 (Note 15).

      The Series X Preferred Stockholders 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 Series X Preferred Stockholders 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


                                       67

<PAGE>
                                  DSL.net, Inc.
                   Notes to Consolidated Financial Statements
                                   (continued)

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 Series X Preferred Stockholders, 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, the BCF recognized was limited
to the net proceeds received from the issuance of the Series X Convertible
Preferred Stock. The BCF is accreted from each Preferred Stock issue date to the
earliest redemption date of January 1, 2005. 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 $2.00 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.
In connection with the Series Y Preferred Stock Purchase Agreement (described
below), the Company and the Series X holders have agreed to increase the Series
X automatic conversion price from $2.00 to $2.50, subject to stockholder
approval at the Company's 2002 annual meeting of stockholders.

      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
Series X Preferred holders 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 Series X Preferred Stockholders 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 on parity with, or senior 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. In connection with the Series Y Preferred Stock
Purchase Agreement (described below), the Company and the Series X holders have
agreed, subject to stockholder approval at the Company's 2002 annual meeting of
stockholders, to limit to the period ending June 28, 2002, the requirement that
the Company obtain the consent of the holders of at least a majority of the then
outstanding Series X Preferred Stock to authorize or issue, or obligate itself
to issue, equity-related securities having rights, preferences or privileges on
parity with the Series X Preferred Stock.

      The Series X Preferred Stock is redeemable on parity with the Series Y
Preferred Stock, at the option of the holders of a majority of the then
outstanding shares of Series X Preferred Stock


                                       68

<PAGE>
                                  DSL.net, Inc.
                   Notes to Consolidated Financial Statements
                                   (continued)

at any time on or after January 1, 2005 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 Preferred
Stock 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 $6,469,000, before direct issuance costs of $300,000. Pursuant to the
Series Y Purchase Agreement, the Series Y Investors have committed to purchase
8,531 additional shares of Series Y Preferred Stock in a subsequent closing
occurring after the Company has obtained the required stockholder approvals and
satisfied certain other closing conditions.

      In addition, on December 28, 2001, the Company issued promissory notes to
the Series Y Investors in the aggregate principal amount of $3,531,000 in
exchange for proceeds of $3,531,000 (Note 6). The promissory notes provide for
an annual interest rate of 12%. By their terms, the promissory notes will be
repaid from the proceeds of the sale of additional shares of Series Y Preferred
Stock received at the subsequent closing, and all interest on the principal
repaid at the subsequent closings will be forgiven. In the event that all of the
Series Y Preferred Stock has not been sold by June 30, 2002, other than as a
result of a breach of certain obligations by any of the Series Y Investors, the
entire principal and accrued interest then outstanding under the promissory
notes shall be due and payable on July 1, 2002.

      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
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) on a parity basis
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.

      On or after the date on which the Company's certificate of incorporation
is amended to increase the number of authorized shares of common stock to at
least 250,000,000, at the option of the Series Y Preferred Stockholders, each
share of Series Y Preferred Stock may be converted


                                       69

<PAGE>
                                  DSL.net, Inc.
                   Notes to Consolidated Financial Statements
                                   (continued)

into 2,000 shares of common stock, subject to adjustment 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 Y
Purchase Agreement was signed, the Company has recorded a reduction (discount)
to the Preferred Stock and an offset to Additional Paid-in Capital and applied
the same accounting treatment as described above for the Series X Preferred
Stock.

      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
Series Y Preferred Stockholders 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 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 January 1, 2005, 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 obligate them to vote in favor of the required transactions
contemplated by the Series Y Purchase Agreement and related matters. In
addition, a stockholders agreement 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.


                                       70

<PAGE>
                                  DSL.net, Inc.
                   Notes to Consolidated Financial Statements
                                   (continued)

      The Series X 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         10,000,000        6,469         6,469,000

Issuance costs                                                            (189,128)                      (300,000)

Discount on Series X and Y preferred stock resulting
  from a beneficial conversion feature,
  net of issuance costs                                                 (9,810,872)                    (6,169,000)

Accrued dividends on Series X and Y preferred stock                        115,233                          6,380

Accretion of beneficial conversion feature of Series X
  and Y preferred stock                                                    320,697                         27,976
                                                         ------       ------------        -----       -----------
Balance December 31, 2001                                10,000       $    435,930        6,469       $    34,356
                                                         ======       ============        =====       ===========
</TABLE>

Common Stock Transactions

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

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

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

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

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


                                       71

<PAGE>
                                  DSL.net, Inc.
                   Notes to Consolidated Financial Statements
                                   (continued)

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

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

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

      In the first quarter of 2000, the Company recorded non-cash compensation
expense of $870,000 relating to the vesting of stock options held by members of
the Company's former advisory board. The advisory board was dissolved in the
first quarter of 2000 and as a result, all unvested stock options held by such
members were cancelled and the unamortized deferred compensation balance of
$4,163,000, related to unvested stock options held by advisory board members was
reclassified against additional paid-in capital. The 85,604 vested options held
by members of the Company's former advisory board were exercised during the
second quarter of 2000.

      The Company's remaining unamortized deferred compensation balance of
approximately $1,668,000 as of December, 31 2001, relating to stock options and
restricted stock held by employees and directors, is being amortized over the
respective remaining vesting periods.

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

      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.


                                       72

<PAGE>
Common Stock Reserved

                                  DSL.net, Inc.
                   Notes to Consolidated Financial Statements
                                   (continued)

      The Company has reserved shares of common stock as follows:

                                                           December 31,
                                                     -----------------------
                                                        2000          2001
                                                     ----------   -----------
1999 Stock Plan ..................................   10,835,329   10,473,563
2001 Stock Plan ..................................           --    4,000,000
VISI Stock Option Plans ..........................      836,441      679,615
1999 Employee Stock Purchase Plan ................      270,259      244,876
Stock warrants ...................................       83,314       83,314
Series X redeemable convertible preferred stock...           --   55,555,556
                                                     ----------   ----------
                                                     12,025,343   71,036,924
                                                     ==========   ==========

Stock Warrants

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

      At December 31, 2000 and 2001, the Company had outstanding stock purchase
warrants to purchase 83,314 shares of common stock.

10.   Income Taxes

      Due to the Company's net operating loss position, no provision for income
taxes has been recorded for the years ended December 31, 1999, 2000 and 2001,
respectively.

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

<TABLE>
<CAPTION>
                                                      December 31,
                                        ------------------------------------------
                                           1999           2000             2001
                                        ----------    ------------    ------------
<S>                                     <C>           <C>             <C>
Net operating loss carryforwards.....    7,462,759    $ 46,351,085    $ 87,891,278
Other ...............................      554,756       3,381,268       6,801,788
                                        ----------    ------------    ------------
    Gross deferred tax assets........    8,017,515      49,732,353      94,693,066

Depreciation.........................      656,033       2,164,719       1,329,434
Other................................           --         527,713         566,102
                                        ----------    ------------    ------------
    Gross deferred tax liabilities...      656,033       2,692,432       1,895,536

                                        ----------    ------------    ------------
    Net deferred tax assets..........    7,361,482      47,039,921      92,797,530
Valuation allowance..................   (7,361,482)    (47,039,921)    (92,797,530)
                                        ----------    ------------    ------------
    Net deferred taxes...............   $       --    $         --    $         --
                                        ==========    ============    ============
</TABLE>

      The Company has provided a full valuation allowance against the net
deferred tax asset, because management does not believe it is more likely than
not that this asset will be realized. If the Company achieves profitability, the
net deferred tax assets may be available to offset future income tax
liabilities.


                                       73

<PAGE>
                                  DSL.net, Inc.
                   Notes to Consolidated Financial Statements
                                   (continued)

      At December 31, 2001, the Company had $6,801,788 deferred tax assets
classified as "other" in the table above. The principal components of this asset
are book to tax basis differences arising from the amortization of intangibles,
the recognition of bad debt and other accrued liabilities.

      At December 31, 2000 and 2001, the Company had approximately $115 million
and $218 million of federal and state net operating loss carryforwards,
respectively. Of this amount, approximately $2.5 million relates to stock-based
compensation deductions which, when realized will be credited to additional
paid-in-capital rather than a reduction to the income tax provision. The state
and federal net operating loss carryforwards begin to expire in 2004 and 2019,
respectively.

      Pursuant to Internal Revenue Code Section 382, certain substantial
ownership changes may result in an annual limitation on the amount of net
operating loss carryforwards that may be utilized to offset future income taxes.
The Company is currently assessing the potential impact resulting from the
Series X and Series Y Preferred Stock transactions (Note 9).

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

                                                      December 31,
                                              -------------------------
                                              1999       2000      2001
                                              -----     -----     -----
Statutory federal tax rate                   (34.00)%  (34.00)%  (34.00)%
State income tax, net of federal benefit      (6.27)    (6.00)    (6.09)
Permanent differences                          7.29      1.50      0.94
Other                                          4.46        --        --
Deferred tax asset valuation allowance        28.52     38.50     39.15
                                              -----     -----     -----
      Effective federal tax rate                 --%       --%       --%
                                              =====     =====     =====

11.   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 have been authorized under the 2001
Stock Plan.

      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.


                                       74

<PAGE>
                                  DSL.net, Inc.
                   Notes to Consolidated Financial Statements
                                   (continued)

      In conjunction with the acquisition of 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 $6,654,000 at the time
of the acquisition.

      A summary of activity under the Plans as of December 31, 1999, 2000 and
2001 is as follows:

<TABLE>
<CAPTION>
                                                                Weighted Average
                                                              -------------------
                                                Number of      Fair      Exercise
                                                  Shares       Value       Price
                                               ----------     -------    --------
<S>                                            <C>            <C>        <C>
Outstanding at Inception ...............               --       $  --      $  --

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

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

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
</TABLE>

The following summarizes the outstanding and exercisable options under the Plans
as of December 31, 1999, 2000 and 2001:


                                       75

<PAGE>
                                  DSL.net, Inc.
                   Notes to Consolidated Financial Statements
                                   (continued)


<TABLE>
<CAPTION>
                                                  Options Outstanding                  Options Exercisable
                                          ---------------------------------      ------------------------------
                                           Weighted Avg.
                        Number             Remaining Life      Weighted Avg.       Number         Weighted Avg.
Exercise Price        Outstanding           (in years)        Exercise Price     Exercisable     Exercise Price
--------------        -----------         --------------      --------------     -----------     --------------
<S>                   <C>                      <C>                <C>             <C>                <C>
12/31/99
--------
$0.04-0.07             2,383,741               9.2                $ 0.05             96,086           $0.04
$0.39-0.53             2,127,484               9.4                $ 0.47                 --           $  --
$5.00-9.85             1,166,077               9.7                $ 7.73                 --           $  --
$16.50-18.75             197,000               9.9                $17.81                 --           $  --
                      ----------                                                    --------
                       5,874,302                                  $ 2.32             96,086           $0.04

12/31/00
--------
$0.04-2.53             2,787,663               8.1                $ 0.66          1,425,012          $ 0.81
$2.72-5.00             2,712,289               9.7                $ 3.19            306,039          $ 2.99
$6.31-9.85             1,020,128               9.1                $ 7.04            140,002          $ 7.63
$10.63-14.88             584,283               8.9                $12.53             25,000          $10.63
$16.50-18.75              17,250               8.9                $17.28              4,783          $17.26
$20.94-25.94             196,999               2.2                $22.78            149,999          $22.75
                      ----------                                                  ---------
                       7,318,612                                  $ 4.07          2,050,835          $ 3.36

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                                  $ 1.69          3,351,589          $ 2.84
</TABLE>

      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, 1999, 2000 and 2001 would have been
as follows:

<TABLE>
<CAPTION>
                                                         Years ended December 31,
                                               ----------------------------------------------
                                                  1999             2000              2001
                                               ------------    -------------    -------------
<S>                                            <C>             <C>              <C>
Net loss:
   As reported .............................   $(21,988,313)   $(105,763,148)   $(115,453,682)
   Pro forma under FAS 123 .................   $(22,426,281)   $(110,231,819)   $(118,930,730)
Net loss applicable to common stockholders:
   As reported .............................   $(33,986,313)   $(105,763,148)   $(115,923,968)
   Pro forma under FAS 123 .................   $(34,424,281)   $(110,231,819)   $(119,401,016)
                                               ------------    -------------    -------------
Basic and diluted net loss per common share:
   As reported .............................   $   (2.05)      $   (1.75)       $   (1.81)
   Pro forma under FAS 123 .................   $   (2.08)      $   (1.82)       $   (1.87)
</TABLE>

      The estimated fair value at date of grant for options granted for the year
ended December 31, 1999 ranged from $0.23 to $16.27 per share and for the year
ended December 31, 2000 ranged from $0.75 to $17.19 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:

<TABLE>
<CAPTION>
                                                    December 31,
                              --------------------------------------------------------
                                  1999                 2000                    2001
                              ------------          -----------            -----------
<S>                           <C>                   <C>                    <C>
Risk free interest rate         4.88%-6.09%         5.26%-6.72%            4.70%-5.48%
Expected dividend yield            None                 None                  None
Expected life of option           10 years             5 years               3 years
Expected volatility           .0001%-84.52%            75.00%                151.65%
</TABLE>


                                       76

<PAGE>
                                  DSL.net, Inc.
                   Notes to Consolidated Financial Statements
                                   (continued)


      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.

      During the year ended December 31, 1999, deferred compensation of
approximately $13,929,000 was attributed to the common stock options and
restricted stock granted with an exercise price below estimated fair value.
Deferred compensation is recognized to compensation expense generally over the
four year 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 $4,123,000, $3,192,000 and $1,202,000 for the
years ended December 31, 1999, 2000 and 2001, respectively.

Employee Stock Purchase Plan

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

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

      The first offering period of the Purchase Plan began on October 6, 1999
and ended on February 29, 2000. The Company issued a total of 29,741 and 25,383
shares of common stock under the plan during the years ended December 31, 2000
and 2001, respectively.

12.   Employee Savings Plan 401(K)

      On April 1, 2000, the Company started a 401(k) savings plan under which it
matches employee contributions at 50% up to the first 4% of their contribution.
Employees may elect to participate in the plan bi-annually on the enrollment
dates provided they have been 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, 2000 and 2001 was $219,459 and $189,691, respectively.


                                       77

<PAGE>

                                  DSL.net, Inc.
                   Notes to Consolidated Financial Statements
                                   (continued)

13.   Accrued Liabilities

      Accrued liabilities included the following:

                                                      2000               2001
                                                  -----------         ----------

Due to sellers                                     $4,033,658          $ 272,333

Taxes payable - other than
  income taxes                                      3,233,353          2,388,865

Accrued telecommunication
  expenses                                          2,030,000          1,958,470

Other accrued liabilities                           4,859,457          5,015,759
                                                  -----------         ----------
      Total                                       $14,156,468         $9,635,427
                                                  ===========         ==========

14. 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
$3,542,000.

      In March 2001, the Company re-evaluated its restructuring reserve and
booked an increase in the reserve of approximately $831,000, 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 $32,503,000. Included in this amount were: 1) approximately
$272,000 relating to severance expenses for the 90 employees; 2) approximately
$26,079,000 for the costs associated with the Company's decision to close
certain central offices, which includes approximately $2,545,000 relating to
termination and equipment removal fees and approximately $23,534,000 in
write-off of fixed assets; 3) approximately $1,641,000 for additional estimated
costs resulting from delays and expected losses in subleasing vacated office
space located in Santa Cruz, California, Atlanta, Georgia, Milford, Connecticut,
and Chantilly, Virginia; 4) $1,356,000 for write down of additional equipment no
longer in use; and 5) $3,155,000 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, $2,124,000 related to a
reduction in the goodwill for the Company's acquisition of Tycho and $1,031,000
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 $5,000
for Tycho, and from approximately $43,500 to approximately $20,600 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;


                                       78

<PAGE>

                                  DSL.net, Inc.
                   Notes to Consolidated Financial Statements
                                   (continued)


2) closure of the Tycho and Trusted Net facilities in Santa Cruz, CA and
Marietta, GA, respectively; and 3) decision not to install equipment in 100 new
central offices. These actions resulted in additional restructuring and
impairment charges approximating $4,748,000. Included in this amount are
increases of: 1) approximately $4,451,000 relating to the write off of
equipment; 2) approximately $376,000 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 $246,000 in additional
costs for equipment removal fees associated with the Company's previous decision
to close certain central offices; and 4) approximately $800,000 for impairments
of goodwill. These increases in the restructuring reserve were partially offset
by a reduction of approximately $1,125,000 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 $170,000 related to a
reduction in the goodwill for the Company's acquisition of Tycho and
approximately $630,000 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
$511,000. Included in this amount are increases of: 1) approximately $164,000
relating to severance expenses for the 84 employees; and 2) approximately
$500,000 for impairments of long term investments. These increases in the
restructuring reserve were partially offset by a reduction of approximately
$153,000 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.

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


                                       79

<PAGE>

                                  DSL.net, Inc.
                   Notes to Consolidated Financial Statements
                                   (continued)


      The following table summarizes the additions and charges to the
restructuring reserve from December 2000 through December 2001, and the
remaining reserve balances at December 31, 2001:

                             (dollars in thousands)
<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>
Additions to the
 reserve Dec. 2000             $     448    $ 1,078    $   600    $    --    $  1,416    $       --    $  --    $  3,542

Charges to the
  reserve                           (362)                                      (1,416)                            (1,778)
                               ---------    -------    -------    -------    --------    ----------    -----    --------
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
                               =========    =======    =======    =======    ========    ==========    =====    ========
</TABLE>

      The restructuring reserve charges during the year ended December 31, 2000,
of approximately $3,542,000 included approximately $2,263,000, in network and
operations expenses, $161,000 in sales and marketing expenses and approximately
$1,118,000 in general and administrative expenses on the consolidated statements
of operations. At December 31, 2000, approximately $362,000 of severance costs
and approximately $1,416,000 of capitalized collocation application fees had
been charged against the restructuring reserves. The remaining reserve balance
of approximately $1,764,000 is included in the Company's accrued liabilities at
December 31, 2000.

      The restructuring reserve charges for the year ended December 31, 2001
included approximately $31,528,000 in network and operations expenses,
approximately $6,998,000 in general and administrative expenses, and
approximately $67,000 in sales and marketing expenses on the consolidated
statements of operations. The remaining reserve balance of approximately
$1,511,000 is included in the Company's accrued liabilities at December 31,
2001.

15. Subsequent Events

      In January 2002, the Company entered into an Asset Purchase Agreement (the
"Asset Purchase Agreement") with Broadslate Networks, Inc. ("Broadslate") for
the purchase of up to approximately 1,100 business broadband customer accounts
and certain other assets, including accounts receivables related to the acquired
customer accounts for $800,000, subject to certain adjustments. The Asset
Purchase Agreement provides for an initial cash payment of $650,000, with a
$150,000 "holdback" amount retained by the Company, to be paid to Broadslate
after a transition period, subject to certain adjustments, as provided for in
the Asset Purchase Agreement. Certain of the Company's stockholders, including
investment funds affiliated with Columbia Capital, in the aggregate own in
excess of 10% of the capital stock of Broadslate. An affiliate of Columbia
Capital and a member of our Board of Directors, was also a director of
Broadslate until February 2002.


                                       80

<PAGE>


                                  DSL.net, Inc.
                   Notes to Consolidated Financial Statements
                                   (continued)


      On January 23, 2002, the Company amended its long-term purchase commitment
with AT&T for data transport services. The amendment reduced the Company's
minimum purchase commitment to $1,100,000 for the contract year ending in
November 2002 and $987,000 for the contract year ending in October 2003. The
Company also has a commitment to purchase $17,600 per month of certain
additional network capacity from AT&T throughout the commitment period (Note 7).

      In February, 2002, the Company negotiated a termination of its obligations
under its lease for vacated office space located in Milford, CT. The Company had
recorded anticipated losses related to these vacated premises as part of its
restructuring charges during the year ended December 31, 2001. Consequently, no
additional costs related to this lease will be incurred during the year ended
December 31, 2002. ( Note 14).

      On March 1, 2002, the Company issued 10,000 shares of Series X Preferred
Stock to VantagePoint for proceeds of $1,000 per share, or an aggregate of $10
million, in accordance with the provisions of the Series X Purchase Agreement.
With the completion of this Series X Preferred Stock transaction the Series Y
Investors are contractually committed to purchase an additional 8,531 shares of
Series Y Preferred Stock at $1,000 per share, for an aggregate purchase price of
$8,531,000, subject to stockholder approval and certain other conditions. In
accordance with the Series Y Purchase Agreement the Company will use $3,531,000
of the proceeds from such Series Y issuance to repay certain promissory notes,
resulting in additional net proceeds of $5,000,000, (Note 9).

16. Selected Unaudited Quarterly Financial Data

      The following table depicts selected quarterly unaudited financial data
for the years ended December 31, 1999, 2000 and 2001.

<TABLE>
<CAPTION>
                                                                                            Net Loss
                                                          Preferred                           Per
                                                            Stock           Net Loss        Share,
                                                          Exchange,      Applicable to       Basic
                         Operating                        Dividends          Common           and
          Net Revenue       Loss          Net Loss      and Accretion     Stockholders      Diluted
          -----------   ------------    ------------    -------------    -------------       -----
<S>       <C>           <C>             <C>             <C>              <C>                 <C>
Q1 1999   $    48,188   $ (1,693,088)   $ (1,686,614)   $          --    $  (1,686,614)      (0.51)
Q2 1999       135,985     (5,011,774)     (4,810,633)     (11,998,000)     (16,808,633)      (2.45)
Q3 1999       317,492     (6,236,669)     (5,621,484)              --       (5,621,484)      (0.66)
Q4 1999       810,881    (10,929,861)     (9,869,582)              --       (9,869,582)      (0.21)

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

Q1 2001     8,822,319    (27,153,299)    (26,626,674)              --      (26,626,674)      (0.42)
Q2 2001    10,347,878    (56,269,983)    (56,168,995)              --      (56,168,995)      (0.88)
Q3 2001    11,724,199    (21,897,516)    (21,911,744)              --      (21,911,744)      (0.34)
Q4 2001   $11,075,015   $(10,574,483)   $(10,746,269)   $    (470,286)   $ (11,216,555)      (0.17)
</TABLE>

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


                                       81

<PAGE>

Item 9. Changes in and Disagreements with Accountants on Accounting and
        Financial Disclosure

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

                                    PART III

Item 10. Directors and Executive Officers of the Registrant

      The information under the sections "Election of Directors," "Occupations
of Directors and Officers" and "Section 16(a) Beneficial Ownership Reporting
Compliance" from the registrant's definitive proxy statement for the annual
meeting of stockholders to be held on May 29, 2002, which is to be filed with
the Securities and Exchange Commission not later than 120 days after the close
of the registrant's fiscal year ended December 31, 2001, is hereby incorporated
by reference.

Item 11. Executive Compensation

      The information under the sections "Compensation and Other Information
Concerning Directors and Officers" and "Stock Performance Graph" from the
registrant's definitive proxy statement for the annual meeting of stockholders
to be held on May 29, 2002, which is to be filed with the Securities and
Exchange Commission not later than 120 days after the close of the registrant's
fiscal year ended December 31, 2001, is hereby incorporated by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

      The information under the section "Securities Ownership of Certain
Beneficial Owners and Management" from the registrant's definitive proxy
statement for the annual meeting of stockholders to be held on May 29, 2002,
which is to be filed with the Securities and Exchange Commission not later than
120 days after the close of the registrant's fiscal year ended December 31,
2001, is hereby incorporated by reference.

Item 13. Certain Relationships and Related Transactions

      The information under the sections "Compensation and Other Information
Concerning Directors and Officers" and "Certain Relationships and Related
Transactions" from the registrant's definitive proxy statement for the annual
meeting of stockholders to be held on May 29, 2002, which is to be filed with
the Securities and Exchange Commission not later than 120 days after the close
of the registrant's fiscal year ended December 31, 2001, is hereby incorporated
by reference.


                                       82

<PAGE>

                                     PART IV

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

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

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

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

            (3)   Exhibits.

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

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

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

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

3.01*    Amended and Restated Certificate of Incorporation of DSL.net, Inc., as
         amended.

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

3.03*    Form of Promissory Note dated as of December 28, 2002 between DSL.net
         and certain holders of Series Y convertible preferred stock.

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


                                       83

<PAGE>

         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)).

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

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

10.03+   2001 Stock Option and Incentive Plan (incorporated by reference to
         Exhibit 4.4 filed with our registration statement on Form S-8 (No.
         333-75230)).

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.

10.12    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


                                       84

<PAGE>

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

10.13+   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)).

10.14    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)).

10.15    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)).

10.16    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).

10.17    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).

10.18    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).

10.19    Form of Voting Agreement dated as of December 24, 2001, by and between
         DSL.net, the Stockholders named therein and the Investors named therein
         (incorporated by reference to Exhibit 99.03 filed with our Form 8-K
         dated as of December 24, 2001).

10.20    Form of Voting Agreement dated as of December 24, 2001, by and between
         DSL.net and the Investors named therein (incorporated by reference to
         Exhibit 99.04 filed with our Form 8-K dated as of December 24, 2001).

21.01*   Subsidiaries of DSL.net, Inc.

23.01*   Consent of PricewaterhouseCoopers LLP.

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

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

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

(b) Reports on Form 8-K

      The Company filed a Current Report on Form 8-K on January 10, 2002,
reporting on Items 5 and 7, relating to the Series Y Preferred Stock Purchase
Agreement, dated as of December 24, 2001, by and among the Company and the
Investors named therein.


                                       85

<PAGE>

                                   SIGNATURES

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

                                        DSL.NET, INC.

Dated: March 29, 2002                   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
Stephen Zamansky, and each of them singly, our true and lawful attorneys, with
full power to them and each of them singly, to sign for us in our names in the
capacities indicated below, any amendments to this Annual Report on Form 10-K,
and generally to do all things in our names and on our behalf in such capacities
to enable DSL.net, Inc. to comply with the provisions of the Securities Exchange
Act of 1934 and all requirements of the Securities and Exchange Commission.

      Pursuant to the requirements of the Securities Exchange Act of 1934, 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 Chief       March 29, 2002
-------------------------   Executive Officer
David F. Struwas            (Principal Executive Officer)


/s/ Robert J. DeSantis      Chief Financial Officer               March 29, 2002
-------------------------   (Principal Financial and
Robert J. DeSantis          Accounting Officer)


/s/ Robert Gilbertson       Director                              March 29, 2002
-------------------------
Robert Gilbertson

/s/ Harry Hopper            Director                              March 29, 2002
-------------------------
Harry Hopper


                                       86

<PAGE>

Signature                   Title(s)                              Date
---------                   --------                              ----

/s/ Paul Keeler             Director                              March 29, 2002
-------------------------
Paul Keeler

/s/ William J. Marshall     Director                              March 29, 2002
-------------------------
William J. Marshall

/s/James D. Marver          Director                              March 29, 2002
-------------------------
James D. Marver

/s/ William Seifert         Director                              March 29, 2002
-------------------------
William Seifert

/s/ Paul K. Sun             Director                              March 29, 2002
-------------------------
Paul K. Sun


                                       87

<PAGE>

                   Exhibit Index to Annual Report on Form 10-K
                     for Fiscal Year Ended December 31, 2001

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

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

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

3.01*    Amended and Restated Certificate of Incorporation of DSL.net, Inc., as
         amended.

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

3.03*    Form of Promissory Note dated as of December 28, 2002 between DSL.net
         and certain holders of Series Y convertible preferred stock.

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)).

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

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

10.03+   2001 Stock Option and Incentive Plan (incorporated by reference to
         Exhibit 4.4 filed with our registration statement on Form S-8 (No.
         333-75230)).

10.04    Amended and Restated Investors' Rights Agreement dated as of July 16,
         1999 between


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<PAGE>

         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.

10.12    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)).

10.13+   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)).

10.14    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)).

10.15    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)).

10.16    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).

10.17    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).

10.18    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-


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<PAGE>

         K dated as of December 24, 2001).

10.19    Form of Voting Agreement dated as of December 24, 2001, by and between
         DSL.net, the Stockholders named therein and the Investors named therein
         (incorporated by reference to Exhibit 99.03 filed with our Form 8-K
         dated as of December 24, 2001).

10.20    Form of Voting Agreement dated as of December 24, 2001, by and between
         DSL.net and the Investors named therein (incorporated by reference to
         Exhibit 99.04 filed with our Form 8-K dated as of December 24, 2001).

21.01*   Subsidiaries of DSL.net, Inc.

23.01*   Consent of PricewaterhouseCoopers LLP.

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

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

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


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<PAGE>

                      Report of Independent Accountants 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 February 26, 2002, except for the paragraph in Note 15, as to which the
date is March 1, 2002, appearing in this Annual Report on the Form 10-K of
DSL.net, Inc. also included an audit of the financial statement schedule listed
in Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement
schedule presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.


PricewaterhouseCoopers LLP

Stamford, Connecticut
February 26, 2002


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<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, 1999, 2000 and 2001:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
                              Allowance for Doubtful Accounts
-------------------------------------------------------------------------------------------
                                                 Additions     Deductions
                      Additions   Additions     Charged to       Charged
        Balance at    Charged to  Charged to   Sales Credits     Against
        Beginning     Costs and    Purchase         and         Valuation       Balance at
Year    of Period     Expenses    Accounting     Allowances     Allowance     End of Period
-------------------------------------------------------------------------------------------
<S>     <C>          <C>          <C>          <C>             <C>            <C>
1999    $       --   $   62,819   $   16,329   $          --   $   (16,545)   $      62,603
-------------------------------------------------------------------------------------------
2000    $   62,603   $  700,000   $   87,000   $     590,496   $   (87,000)   $   1,353,099
-------------------------------------------------------------------------------------------
2001    $1,353,099   $2,807,239   $       --   $   1,498,498   $(1,814,688)   $   3,844,148
-------------------------------------------------------------------------------------------
</TABLE>


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