**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, 2005**
 
 **OR**
 
 o
              **TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES****EXCHANGE
                  ACT OF 1934**
 
 **Commission
        File Number 001-32264**
 
 **DSL.net,
        Inc.**
 *(Exact
        name of registrant as specified in its charter)*
 **DELAWARE**
                **06-1510312***(State
                    or other jurisdiction of*
                *(I.R.S.
                    Employer**incorporation
                    or organization)*
                *Identification
                    Number)*
  **545
                    Long Wharf Drive, New Haven, Connecticut**
                **06511**
                **(203)
                    772-1000*******(Address
                    of principal executive offices)*
                *(Zip
                    Code)*
                *(Telephone
                    No.)*
 
 **Securities
        registered pursuant to Section 12(b) of the Act:**
 
 **Title
                  of Each Class**
              **Name
                  of Each Exchange on which Each Class is
                  Registered**Common
                  Stock, par value****$.0005
                  per share
              None
 
 **Securities
        registered pursuant to Section 12(g) of the
        Act:** None **.**
 
 Indicate
        by check mark if the registrant is a well-known seasoned issuer as defined
        in
        Rule 405 of the Securities Act. Yes
o No
x
 
 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.  o
 
 Indicate
        by check mark if the registrant is not required to file reports pursuant
        to
        Section 13 or 15(d) of the Exchange Act. Yes
o No
x
 
 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
o
 
 Indicated
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer.
  Large
                  accelerated filer o
              Accelerated
                  filer o
              Non-accelerated
                  filer  x
  Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).  Yes 
        o No
x
 
 The
        aggregate market value of the Common Stock held by non-affiliates of the
        registrant, as of the last business day of the registrant’s most recently
        completed second fiscal quarter, was approximately $14,165,558 (based on
        the
        closing price of the registrant’s Common Stock on that day of $0.08 per share).
        The number of shares outstanding of the registrant’s Common Stock, par value
        $.0005 per share, as of March 1, 2006, was **** 233,620,817.
 
 
 
  **DSL.net,
        Inc.**
 
 **ANNUAL
        REPORT ON FORM 10-K**
 
 **YEAR
        ENDED DECEMBER 31, 2005**
 
 **TABLE
        OF CONTENTS**
 
 Page
                  No.Part
                  IItem
                  1.
              BusinessItem
                  1A.
              Risk
                  Factors
              2Item
                  1B.
              Unresolved
                  Staff Comments
              16Item
                  2.
              Properties
              31Item
                  3.
              Legal
                  Proceedings
              31Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              32Part
                  IIItem
                  5.
              Market
                  for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                  Purchases of Equity Securities
              32Item
                  6.
              Selected
                  Financial Data
              35Item
                  7.
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              37Item
                  7A.
              Quantitative
                  and Qualitative Disclosures About Market Risk
              66Item
                  8.
              Financial
                  Statements and Supplementary Data
              66Item
                  9.
              Changes
                  in and Disagreements with Accountants on Accounting and Financial
                  Disclosure
              119Item
                  9A.
              Controls
                  and Procedures
              119Item
                  9B.
              Other
                  Information
              119Part
                  IIIItem
                  10.
              Directors
                  and Executive Officers of the Registrant
              120Item
                  11.
              Executive
                  Compensation
              123Item
                  12.
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters
              135Item
                  13.
              Certain
                  Relationships and Related Transactions
              138Item
                  14
              Principal
                  Accountant Fees and Services
              141Part
                  IVItem
                  15.
              Exhibits,
                  Financial Statement Schedule
              142SIGNATURES
              147
   
 1
  **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 1A - RISK FACTORS,” “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., itself and through its affiliates (“DSL.net”, “we” or the “Company”),
        provides high-speed data communications, Internet access, and related services
        to small and medium sized businesses and branch offices of larger businesses
        and
        their remote office users, throughout the United States, primarily utilizing
        digital subscriber line (“DSL,” generally, or “SDSL,” in reference to
        symmetrical DSL service) and T-1 technology (“T-1” refers to a digital
        transmission link, provisioned via DS-1 (i.e., North American Digital Signal
        Level One) or substantially equivalent technology). In September of 2003,
        we
        expanded our service offerings to include integrated voice and data services
        using voice over Internet protocol (“VoIP”) technology to business customers in
        select Mid-Atlantic and Northeast markets. Our networks enable data transport
        over existing copper telephone lines at speeds of up to 1.5 megabits per
        second.
        We were organized in 1998 as a corporation under the laws of the State of
        Delaware.
 
 We
        sell
        directly to businesses and to third party resellers whose end-users are
        typically business-class customers. We deploy our own local communications
        equipment primarily in select first and second tier cities. As of March 1,
        2006,
        we operated equipment in approximately 274 cities in the United States. In
        certain markets where we have not deployed our own equipment, we
        utilize the local facilities of other carriers to provide service.
  In
        addition to a number of high-speed, high-performance DSL-based data
        communications and Internet connectivity solutions specifically designed
        for
        businesses, our product offerings include T-1 Internet connectivity and data
        communications services, integrated voice and data services (provisioned
        over
        SDSL or T-1 lines), Web hosting, domain name system management, enhanced
        e-mail,
        on-line data backup and recovery services, firewalls, nationwide dial-up
        services, private frame relay services and virtual private networks. Our
        services offer customers high-speed digital connections and related services
        at
        prices that we believe are attractive and, in some cases, represent the lowest
        price, compared to the cost and performance of alternative data and integrated
        VoIP and data communications services.
 
 In
        September of 2003 we introduced our integrated voice and data bundles in
        the
        Washington, D.C. metropolitan region. In February of 2004 we introduced our
        integrated voice and data bundles in the New York City metropolitan
        area.
  2
 
 During
        2005, we sold all of the issued and outstanding capital stock of our
        wholly-owned subsidiary, Vector Internet Services, Inc., a Minnesota-based,
        Internet service provider (“VISI”). As a result of such transaction, we are
        reporting, separately, in this Annual Report on Form 10-K, balance sheet
        and
        income statement information of the Company as results of continuing operations
        and of VISI as results of discontinued operations. Cash flow information
        is
        reported on a consolidated basis.
 
 We
        continue to experience negative cash flow and will need to raise additional
        capital during 2006 to fund our working capital requirements and to repay
        our
        senior secured debt obligations which mature during the third quarter of
        2006.
        There can be no assurance that we will be able to obtain additional funding
        on
        acceptable terms, if at all. Failure to raise additional funds could have
        a
        material adverse affect on our ability to continue as a going
        concern.
 
 **The
        DSL.net Solution**
 
 We
        provide small and medium sized businesses and branch offices of larger
        businesses and their remote office users with high-speed Internet access
        and
        data communications services, and integrated voice and data services, primarily
        using DSL and T-1 technology. Key elements of our solutions are:
 
 *High-Speed
        Connections* .
        We
        offer Internet access and private network services at speeds of up to 1.5
        megabits per second, via SDSL and T-1 technology. Our network is designed
        to
        provide data transmission at the same speed to and from the customer, known
        as
        symmetrical data transmission, and is also capable of providing service at
        different speeds to and from the customers, known as asymmetrical data
        transmission. We believe that symmetrical data transmission is best suited
        for
        business applications, because business users require fast connections both
        to
        send and receive information, and to host advanced services and
        applications.
 
 *Voice
        over Internet Protocol.* We offer
        a suite of VoIP-based telephony services in conjunction with our high speed
        data
        connections under our Duet sm brand
        name. Each bundle includes unlimited local, unlimited regional, and unlimited
        domestic long-distance calling (subject to certain limitations set forth
        in our
        service agreement). Multiple voice and data bundles varying by the number
        of
        telephone lines, and varying broadband speeds, are available to meet the
        needs
        of a variety of business types and sizes. Our VoIP services are offered over
        a
“quality of service” (“QoS”) controlled network to ensure that telephone calls
        are delivered with carrier-grade quality.
 
 *Complete
        Business Solution* .
        We
        offer our customers a single point of contact for a  complete
        solution that includes all of the necessary equipment and services to establish
        and maintain digital data communications. Our services include high-speed
        Internet access and data communications services, integrated voice and data
        services, frame relay, Web hosting, domain name system management, enhanced
        e-mail, on-line data backup and recovery services, firewalls, nationwide
        dial-up
        services and virtual private networks. Our network is designed to enable
        us to
        individually configure each customer's service remotely.
 
 *Always-On
        Connections* .
        With
        our high-speed service, customers can access the Internet continuously without
        having to dial into the network for each use. These “always-on” connections
        provide customers with the ability to readily access the Internet and transfer
        information. We charge our customers a flat fee per month for high-speed
        connectivity service rather than billing them based on usage.
 
 3
 *Value
        Proposition* .
        Our DSL
        and T-1 services offer customers high-speed digital connections at prices
        that
        we believe are attractive compared to the cost and performance of certain
        alternative data communications services, such as multiple dial-up connections,
        ISDN or traditional frame relay lines. We believe that our services also
        increase the productivity of network users by decreasing the time they spend
        connecting to the Internet and waiting for information downloads and transfers.
        Our ability to bundle multiple services, such as Internet access, data
        communications and voice through our Duet product, over the same access line
        allows us to offer our services at price points which are significantly less
        than those of the same communications services if purchased separately. We
        competitively price these integrated voice and data services in the markets
        we
        serve, and, in some case, our price points for these services are significantly
        less than those of similar services offered by our competitors.
 
 *Customer
        Support* .
        We
        provide customer support coverage through a combination of automated systems
        and
        live personnel. With our remote monitoring and troubleshooting capabilities,
        we
        continuously monitor our network.
 
 **Our
        Services**
 
 As
        part
        of our service offerings, we often 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 and carrier-class
        voice
        service. Our primary services include high-speed data communications, with
        or
        without Internet access, integrated voice and data services, and private
        frame
        relay and virtual private networks that connect customers’ various offices.
        Other services provided by us include firewalls, e-mail, domain name system
        management and Web hosting, on-line data backup and recovery services and
        nationwide dial-up services.
 
 Customers
        typically pay an installation charge and a monthly fee for our service. Revenue
        related to installation charges is deferred and amortized to revenue over
        18
        months, which is the average customer life of the existing customer base.
        The
        monthly fee for our data communications services includes all telephone line
        charges, general Internet access services, e-mail, and domain name system
        management, including the issuance of Internet protocol (“IP”) addresses for
        customers who wish to assign fixed IP addresses to their network computers.
        The
        monthly fee for our integrated voice and data service includes all telephone
        line charges, general Internet access services, local and domestic long distance
        phone service (subject to subscription bundles and other restrictions set
        forth
        in the customer’s service agreement), caller ID, call waiting, call forwarding,
        e-mail, and domain name system management, including the issuance of IP
        addresses. Customers generally contract for our services for a minimum of
        12 or
        24 months, depending upon the service, and are billed for services on a monthly
        basis.
 
 **Customers**
 
 Our
        target customers are primarily small and medium sized businesses and branch
        locations of larger enterprises and their remote office users. We sell to
        these
        customers on a direct basis and through various referral channels. In
        particular, we believe the following market segments are especially attractive
        prospective customers:
 
 ·
              businesses
                  currently using other high-speed data communications services,
                  such as
                  ISDN and frame relay services;
 
 4
 ·
              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;
 
 ·
              business
                  users that require remote access to corporate local area
                  networks;
 
 ·
              businesses
                  that use data-intensive applications, such as financial services,
                  technology and publishing; and
 
 ·
              businesses
                  that cannot afford to pay the costs for maintaining high-speed
                  connections
                  for voice and data services separately, but can justify the cost
                  of a
                  high-speed connection if shared for voice and data
                  services.
 
 No
        customer accounted for more than 5% of our total revenue for fiscal years
        ended
        December 31, 2005, 2004 and 2003.
 
 **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 marketing strategy
        utilizing a variety of media. We also partner with various resellers,
        wholesalers and referral channels, including local information technology
        professionals, application service providers and marketing partners, to assist
        in the sale of our services.
 
 **Customer
        Acquisitions**
 
 In
        addition to our sales and marketing efforts, and our reseller and referral
        channels, we have supplemented our customer base, from time to time, by
        acquiring end users of other Internet service providers and companies offering
        broadband access. We continuously identify and evaluate customer acquisition
        candidates, and in many cases engage in discussions and negotiations regarding
        potential transactions. Customer acquisition candidates include both subscriber
        lines and whole businesses. Our discussions and negotiations may not result
        in a
        transaction. Further, if we transact a customer acquisition, through purchase,
        merger or other form of transaction, the combined business may not operate
        profitably. We intend to continue to seek additional customer acquisition
        opportunities, which we believe represent commercially viable opportunities
        to
        acquire large and select groups of customers for our business. However, our
        ability to pursue a future customer acquisition is dependent upon our ability
        to
        raise additional capital.
 
 **Customer
        Support and Operations**
 
 Our
        customer support professionals work to streamline for our customers the
        ordering, installation and maintenance processes associated with data and
        voice
        communications and Internet access.
 
 *Implementation* .
        We
        manage the implementation of our service for each customer. In areas where
        we
        have installed our own local communications facilities, we lease the copper
        telephone
  5
 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 communications facilities of other carriers, and work with
        these carriers to provide the service. In both cases, field service technicians
        install the modem or router purchased or leased from us and any necessary
        wiring
        at our customers' offices and test the modem or router and network connection
        to
        confirm successful installation.
 
 *Maintenance* .
        Our
        network operations centers provide network surveillance for all equipment
        in our
        network. We are able to detect and correct many of our customers' maintenance
        problems remotely, often before our customer is aware of the problem.
        Customer-initiated maintenance and repair requests are managed and resolved
        primarily through our customer service department. Our information management
        system, which generates reports for tracking maintenance problems, allows
        us to
        communicate maintenance problems from our network operations centers to our
        customer service center.
 
 *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 were made in 2005 to eliminate unnecessary systems, improve
        efficiency and further streamline the customer service process. We believe
        that
        our operations support systems provide us with the flexibility to support
        additional customers and additional services.
 
 **Our
        Network**
 
 Our
        network has been designed to deliver reliable, secure and scaleable high-speed,
        high-performance Internet access, data communication services, local voice
        service as well as domestic and international long distance.
 
 *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 centers, we have visibility across our entire network,
                  allowing
                  us to identify and address network problems quickly and to provide
                  quality
                  service and performance.
 
 ·
              *Next
                  Generation VoIP Technology*.
                  We have deployed state-of-the-art “session initiation protocol”
                  (“SIP”)-based, soft-switching technology to deliver voice services over
                  our existing network backbone. In contrast to certain other VoIP
                  services,
                  our voice services are provided over a facilities-based, fully
                  controlled,
                  QoS-enabled network. This quality-of-service approach is designed
                  to
                  assure that adequate bandwidth is always available for the voice
                  service
                  and that the voice quality is equivalent to traditional voice
                  services.
 
 ·
              *Consistent
                  Performance With The Ability To Expand*.
                  We have designed our network to leverage the economics of DSL technology,
                  to grow with our business and to provide consistent performance.
                  We also
                  use asynchronous transfer mode equipment in our network, which
                  enables
                  high-speed, high volume transmission of
                  data.
 
 6
 ·
              *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 third-party modems and routers
                  we sell
                  or lease to our customers for use in support of subscribed services
                  are
                  designed to work in conjunction with installed security systems
                  and
                  network servers in an effort to provide safe connections to the
                  Internet
                  and a secure operating environment. All of our IP core sites are
                  equipped
                  with the Nortel Shasta BSN 5000. This network aggregation device
                  allows us
                  to provision and maintain efficiently a standardized network-based
                  state-full firewall solution. Since this is a network-based product,
                  customers receive the benefit of this advanced solution without
                  the need
                  to purchase expensive termination and firewall equipment.
 
 *Network
        Components* .
        The
        primary components of our network are:
 
 ·
              *Network
                  Backbone; Connection To The Internet.*Network
                  traffic gathered at each of our central offices is directed to
                  one of our
                  regional hubs, if applicable in support of the customer’s service, and
                  then to the Internet. In certain areas where we offer service from
                  more
                  than one central office, network traffic is directed from each
                  central
                  office in that area to a local hub which aggregates its traffic
                  along with
                  the traffic from the other central offices located in that area
                  and
                  directs the traffic to a regional hub. At our regional hubs, we
                  also
                  connect to other carriers’ networks via high-speed connections. Our hubs
                  contain extra equipment and backup power to provide backup facilities
                  in
                  the event of an equipment failure and are actively monitored from
                  our
                  network operations centers. We lease space for our hubs in facilities
                  designed to host network equipment. Our hubs are connected to one
                  another
                  via high-speed data communications lines. We have agreements with
                  MCI,
                  Level 3 Communications and other carriers to provide this service.
                  Internet connectivity is provided by various transit arrangements.
 
 ·
              *Central
                  Office Collocation.*Through our interconnection agreements, we secure space to locate
                  our
                  equipment in certain central offices of traditional local telephone
                  companies and offer our services from these locations. These collocation
                  spaces are designed to offer the same high reliability and availability
                  standards as the telephone companies’ own central office spaces. We
                  install the equipment necessary to provide high-speed DSL or T-1
                  service
                  to our customers in these spaces. We have continuous access to
                  these
                  spaces to install and maintain our equipment located in these central
                  offices. In markets where we have not deployed our own equipment,
                  we
                  utilize the local facilities installed in central offices by other
                  carriers, to provide high-speed connections to our customers.
 
 ·
              *Soft
                  Switch, PSTN Access and Gateway*.
                  In support of our integrated voice and data offerings, we have
                  deployed
                  our own soft switching equipment, comparable in functionality to
                  traditional Class 4 and Class 5 switches, to deliver business-class,
                  line-side features to customers. We are directly interconnected
                  to the
                  public switched telephone network (“PSTN”), and do not rely on other
                  service providers for access to the PSTN. Our integrated voice
                  and data
                  network uses soft switches, routers, and gateways from Cisco Systems.
                  In
                  addition, we utilize additional software applications to provide
                  voice
                  features and enhanced services. We believe that our integrated
                  voice and
                  data offerings are fully compliant with FCC standards on provisioning
                  of
                  Enhanced 911 emergency services for the services we
                  offer.
 
 7
 ·
              *Copper
                  Telephone Lines*.
                  In areas where we have deployed our own local communications facilities,
                  we lease a copper telephone line running to each customer from
                  our
                  equipment in the local telephone company’s central office under terms
                  specified in our interconnection agreements with these companies.
                  In areas
                  where we utilize the local communications facilities of other carriers,
                  the carrier leases the telephone line from the local telephone
                  company and
                  makes that line available to us for our customer’s use.
 
 ·
              *Modems,
                  Routers and On-Site Connections*.
                  We purchase modems and routers and provide them to our customers,
                  as
                  appropriate, depending on our customers’ specific needs and contractual
                  service agreements. We configure the modem or router and arrange
                  for the
                  installation of the modem or router along with the on-site wiring
                  needed
                  to connect the modem or router to the copper telephone line. In
                  areas
                  where we have deployed our own local facilities, we either perform
                  these
                  services ourselves or we contract with independent field service
                  organizations to perform these services on our behalf. In areas
                  where we
                  utilize the local facilities of other carriers, these other carriers
                  (or
                  their contractors) provide these installation services. We will
                  either
                  lease or sell customer premise equipment (modem or router) to our
                  customers. When we lease the customer premise equipment, we charge
                  the
                  customer for the use of this equipment as part of our monthly service
                  fee.
                  These modems and routers are capitalized and depreciated over their
                  estimated useful life of three years. Such leased equipment remains
                  our
                  exclusive property. When we sell customer premise equipment (modem
                  or
                  router) to the customer, we recognize the revenue from the sale
                  and
                  expense the cost of this equipment at the time of
                  sale.
 
 ·
              *Network
                  Operations Centers*.
                  Our network is managed from our network operations center located
                  in our
                  headquarters office in Connecticut. We provide network management
                  24 hours
                  per day, seven days per week. From the network operations center,
                  we are
                  able to monitor the performance of individual subscriber lines
                  and the
                  equipment and circuits in our
                  network.
 
 **Competition**
 
 We
        face
        competition from many companies with significantly greater financial resources,
        well-established brand names and large installed customer bases. Our industry
        has and continues to experience consolidation and we expect that such activities
        will continue and that the level of competition in our markets may intensify
        in
        the future. We expect competition from:
 
 *Other
        Broadband Carriers/Competitive Local Exchange Carriers.* A number
        of competitive carriers, including Covad Communications and New Edge Networks,
        offer DSL and T-1 services to residential and business customers. The
        Telecommunications Act of 1996, as amended (the “1996 Telecommunication Act”),
        specifically grants competitive telecommunications companies, including other
        DSL providers, the right to negotiate interconnection agreements with
        traditional telephone companies, including interconnection agreements that
        may
        be identical in all respects to, or more favorable than, our agreements.
 
 *Internet
        Service Providers.* Several
        national and regional Internet service providers, including Speakeasy, EarthLink
        and MegaPath, offer high-speed Internet access, along with other products
        and
        services. These companies generally provide Internet access to residential
        and
        business customers through a host of methods, including DSL and T-1 services.
        These companies leverage wholesale arrangements to resell broadband access
        they
        purchase from facility-based broadband providers.
 
 8
 *Next
        Generation Voice and Data Providers.* A
        number
        of competitive carriers, including Broadview, Conversant and CTC, offer
        converged voice and data products to residential and business customers.
        These
        companies provide services over a single data connection primarily using
        DSL and
        T-1 access methods.
 
 *Traditional
        Local Telephone Companies* .
        Many of
        the traditional local telephone companies, including BellSouth, AT&T, Qwest
        and Verizon, have deployed **** DSL
        and
        T-1-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, including
        fiber loops that may offer greater capacity to end users than our T-1 services.
        We depend on these traditional local telephone companies to enter into
        agreements for interconnection and to provide us access to individual elements
        of their networks. Although the traditional local telephone companies are
        required to negotiate in good faith in connection with these agreements,
        future
        interconnection agreements may contain less favorable terms and result in
        a
        competitive advantage to the traditional local telephone companies.
 
 *National
        Long Distance Carriers* .
        National long distance carriers, such as AT&T, Sprint, and MCI, have
        deployed large-scale data networks, sell connectivity to businesses and
        residential customers, and have high brand recognition. They also have
        interconnection agreements with many of the traditional local telephone
        companies, and many offer competitive DSL and T-1 services.
 
 *Other
        Fiber-Based Carriers* .
        Companies such as Williams Communications, XO Communications and Choice One
        have
        extensive fiber networks in many metropolitan areas, primarily providing
        high-speed data and voice circuits to small and large corporations. They
        also
        have interconnection agreements with the traditional local telephone companies
        under which they have acquired collocation space in many large markets, and
        some
        offer competitive DSL and T-1 services.
 
 *Cable
        Modem Service Providers* .
        Cable
        modem service providers, such as Time-Warner Cable, Comcast and RCN, offer
        high-speed Internet access over cable networks primarily to residential
        consumers. Where deployed, these networks provide high-speed local access
        services, in some cases at speeds higher than DSL service. They typically
        offer
        these services at lower prices than our services, in part by sharing the
        capacity available on their cable networks among multiple end
        users.
 
 *Wireless
        and Satellite Data Service Providers* .
        Several
        companies, including Hughes Communications and Clearwire, 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.
  *Broadband
        over Powerline (“BPL”) Providers* .
        Electric companies, including Pacific Gas and Electric and Cinergy Corp,
        along
        with AT&T, have been developing BPL technology to deliver high speed
        Internet and voice services over electric lines. Where deployed, such technology
        could provide high speed data and voice services at potentially higher speeds
        and potentially improved voice sound quality compared to DSL service.
 
 9
 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,
        geographic availability, 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, geographic availability, ease of access and use and customer
        support. Many of our competitors enjoy competitive advantages over us based
        on
        their brand recognition, breadth of product offerings, financial resources,
        customer bases, operating experience and exclusive contracts with
        customers.
 
 **Interconnection
        Agreements with Traditional Local Telephone Companies**
 
 Under
        the
        Communications Act of 1934, as amended (the “Communications Act”), the
        traditional local telephone companies (which are often also referred to as
        “regional Bell operating companies” and “incumbent local exchange carriers”
(“ILECs”)) have a statutory duty to negotiate in good faith with us for
        agreements for interconnection and unbundled access to certain individual
        elements of their networks that the Federal Communications Commission (“FCC”) or
        a state utility commission has required them to provide to competitors such
        as
        us. This interconnection process is subject to review and approval by the
        state
        regulatory commissions. We have interconnection agreements with AllTel,
        BellSouth, Cincinnati Bell, Frontier, SBC Communications, Qwest, Sprint,
        and
        Verizon, or their subsidiaries, which govern our relationships with the
        traditional local telephone companies in 49 states and the District of Columbia.
        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
        prices we pay both to direct the installment of, and 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.
 
 Our
        interconnection agreements generally have terms of one or two years. 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 Communications Act limits the ability of traditional local telephone
        companies not to renew these agreements, we may not succeed in extending
        or
        renegotiating our interconnection agreements on the same or as favorable
        terms.
        Further, disputes have arisen and will likely arise in the future as a result
        of
        differences in interpretations of various rules which govern the interconnection
        agreements. These disputes have, in the past, delayed the deployment of our
        networks. Interconnection agreements are subject to state regulatory commission,
        FCC and judicial oversight. These government authorities may modify the terms
        of
        the interconnection agreements in ways that are harmful to our
        business.
 
 **Government
        Regulations**
 
 Significant
        portions of the services that we offer are subject to regulation at the federal
        and/or state levels. The FCC and state public utility commissions regulate
        telecommunications common carriers, which are companies that offer
        telecommunications services to the public or to all prospective users on
        standardized rates and terms. Our DSL and other facilities-based data transport
        services are common carrier services.
 
 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
  10
 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.
 
 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, which include
        us with respect to the Internet access services that we provide in addition
        to
        common carrier services, are not common carriers. Our ability to provide
        our
        services in areas where we do not have our own facilities is affected by
        regulations imposed upon the carriers whose local transport facilities we
        utilize.
 
 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
        and the
        ILECs have responded, in many cases, by trying to limit that competition.
        The
        FCC and state regulatory commissions have adopted many rules to implement
        those
        laws and to encourage competition. These changes have created new opportunities
        and challenges for us and our competitors. However, certain of these and
        other
        existing federal and state regulations remain the subject of judicial
        proceedings, legislative hearings and administrative proposals, any or all
        of
        which could change, in varying degrees, the manner in which the
        telecommunications industry operates. Neither the outcome of these various
        proceedings nor their impact upon the telecommunications industry or us can
        be
        predicted at this time. Indeed, future federal or state regulations and
        legislation may be less favorable to us than current regulations and legislation
        and, therefore, have a material and adverse impact on our business and financial
        prospects by undermining our ability to provide services at competitive prices.
        In addition, we may expend significant financial and managerial resources
        to
        participate in legislative, regulatory, or judicial proceedings at the federal
        and/or state level, without achieving favorable results.
 
 *Federal
        Regulation and Legislation*
 
 We
        must
        comply with the requirements of a common carrier under the Communications
        Act to
        the extent we provide regulated interstate telecommunications services. These
        requirements include an obligation that our charges, terms and conditions
        for
        telecommunications services must be “just and reasonable” and that we may not
        make any “unjust or unreasonable discrimination” in our charges or terms and
        conditions. The FCC also has jurisdiction to act upon complaints against
        common
        carriers for failure to comply with their statutory obligations. We are not
        currently subject to price cap or rate of return regulation at the federal
        level
        and are not currently required to obtain FCC authorization for the installation,
        acquisition or operation of our facilities.
 
 The
        FCC
        has established different levels of regulation for dominant and non-dominant
        carriers. Of domestic carriers, only the traditional local telephone companies
        are classified as dominant carriers and all other providers of domestic common
        carrier service, including us, are classified as non-dominant carriers. As
        a
        non-dominant carrier, we are subject to less FCC regulation than are dominant
        carriers.
 
 The
        Communications Act places substantial interconnection requirements on the
        traditional local telephone companies, including the following obligations
        that
        are, to varying degrees and/or at varying times, relevant to our
        business:
 
 11
 ·
              Traditional
                  local telephone companies are required to provide physical collocation,
                  which allows companies such as us and other interconnectors to
                  install and
                  maintain their own equipment in the central offices of traditional
                  local
                  telephone companies. This requirement is intended to enable us
                  and other
                  competitive carriers to deploy their equipment on a relatively
                  convenient
                  and economical basis, and is integral to our
                  business.
 
 ·
              Traditional
                  local telephone companies are required to unbundle certain, but
                  not all,
                  components of their local service networks so that other providers
                  of
                  local service can compete for a wide range of local service customers.
                  This requirement is designed to provide us flexibility to purchase
                  only
                  the network elements we require to deliver our services, and is
                  integral
                  to our business.
 
 ·
              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 provide non-discriminatory
                  access to telephone poles, ducts, conduits and rights-of-way, and
                  this
                  requirement is integral to our business.
 
 The
        outcome of various ongoing FCC rulemaking proceedings or judicial appeals
        of
        such proceedings could alter these obligations and materially affect our
        business and financial prospects by increasing the cost or decreasing our
        flexibility in providing services.
  *Triennial
        Review Order and Appeals* . We rely
        on traditional local telephone company’s access to the incumbents’ network,
        including loop and transport network elements purchased as unbundled network
        elements (“UNE(s)”), in order to provide service to our customers. In August
        2003, the FCC released its *Triennial
        Review Order* (“TRO”)
        that largely preserved our access to these UNEs at forward-looking or Total
        Element Long Run Incremental Cost (“TELRIC”) rates, which rates reflect the
        efficient cost of such elements to the ILECs, plus a reasonable profit. These
        rates are substantially lower than rates charged on network elements for
        which
        TELRIC rates do not apply. The TRO reduced or eliminated access to
        packet-switching capability of incumbent networks as well as to fiber/broadband
        connections to mass market end user premises, but largely preserved access
        to
        the copper DS-1 and digital signal level 3 (“DS-3”) loops and transport that we
        currently use. In March 2004, the U.S. Court of Appeals for the District
        of
        Columbia Circuit issued its opinion in *United
        States Telecom Associations v. FCC* ,
        No.
        00-1012 (“USTA
        Decision”) affirming
        the
        de-regulation of access to the incumbent carriers' packet-switching and
        fiber/broadband networks. On February 4, 2005, the FCC issued its Triennial
        Review Remand Order (“TRRO”)
        that again
        modified the unbundling obligations for the DS-1 and DS-3 UNEs that we purchase
        from ILECs. The new rules remove under certain circumstances an ILEC’s
        unbundling obligations with regard to local loops and dedicated transport.
        The
        order also eliminated local switching as a UNE, but this has not affected
        us as
        we own our own switch sites and do not rely on the ILEC for the switching
        UNE.
        The availability of loops and transport UNEs varies based upon the capacity
        of
        the loop and availability of competitive alternatives to the ILEC at or between
        specific ILEC wire centers. Some of the loops and transport that we used
        were
        subject to the new rules. For those loops and transport that are affected,
        we
        were able to obtain them at 15% above regulated rates through March 10, 2006.
        After that date, we are able to purchase affected loops and transport from
        competitors or traditional telephone companies at market prices and/or regulated
        prices as special access. Regardless of the FCC’s UNE rules, we continue to
        purchase some network elements from competitive local telephone companies
        at
        market rates ( *e.g.,* such as
        transport, which is used to
  12
 connect
        parts of our network). The TRRO has been appealed by both ILECs and competitive
        carriers. We cannot anticipate the outcome of that appeal.
  At
        least
        one portion of the TRO that was not vacated by the D.C. Circuit could materially
        affect our business in the long-term. The TRO exempted from unbundling
        obligations certain loop transmission facilities that use fiber or new
        technologies. This exemption arguably applies only for loops that serve
        residential customers and “very small” businesses. The FCC has not defined “very
        small” business, and, if it does not do so in a rulemaking proceeding, the
        definition may be established in interconnection agreement arbitrations at
        the
        state commissions as interconnection agreements are renewed or renegotiated.
        Subsequent to the TRO, the FCC has on two occasions added additional loop
        architectures to this exemption, and it has also held that the ILECs do not
        have
        to make these facilities available to competitors at any price, discounted
        or
        otherwise. The traditional local telephone companies are continuing to lobby
        the
        FCC to expand these exemptions much deeper into the business market, and
        alternatively at times appear to suggest that the exemption already applies
        to
        all markets.  Depending
        on how these rules are implemented, the traditional local telephone companies
        over time may decide to modify, characterize or replace their facilities
        in ways
        that would qualify them for this exemption and thereby preclude us from
        accessing these facilities pursuant to the terms of their interconnection
        agreements. Without access to these facilities, we may not be able to provide
        all or certain of our services in these areas. In addition, if we are unable
        to
        obtain unbundled access to these fiber facilities, we may not be able to
        offer
        services that are competitive with the new offerings of the traditional local
        telephone companies.
  *UNE
        Pricing* .
        In a
        rulemaking proceeding initiated in 2003, the FCC is considering changes to
        the
        formula used to determine the rates we pay the traditional local telephone
        companies for unbundled access to their networks. Changes to this formula
        could
        have an adverse impact on our business. In addition, the TRO included some
        changes to the FCC’s pricing formula. State implementation of the FCC’s existing
        or future pricing formula could also adversely affect our business.
  *Intercarrier
        Compensation* . Since
        2001, the FCC has been examining possible modification to rules governing
        the
        compensation, including access charges and reciprocal compensation that
        telecommunications carriers pay to each other for exchange of traffic. On
        February 8, 2005, the FCC asked for further comment on various plans that
        had
        been submitted to it for reform of intercarrier compensation, including access
        charges and reciprocal compensation. That proceeding could also affect carriers’
obligations to transport traffic to other carriers. It is not clear at this
        point when or whether the FCC will adopt any such reform program or when
        it will
        complete this proceeding.
  *Wireline
        Broadband Proceeding* .
        In
        September 2005, the FCC released an order that determined that
        telecommunications transmission components that local telephone carriers,
        including CLECs, use to provide broadband Internet access service are not
        subject to common carrier regulation. The FCC removed long-standing rules
        that
        require carriers to offer any such transmission component as a common carrier
        offering to third party providers. This order does not appear to impact our
        rights to access ILEC networks to obtain services that we need to provide
        telecommunications service. The FCC’s order has been appealed. We cannot predict
        the outcome of that appeal. In addition, the FCC has asked for comment on
        whether it should apply certain consumer protection obligations to Internet
        service providers like us, including truth-in-billing, rate integration,
        slamming, and privacy regulations. We do not believe that any such consumer
        protection obligations, if imposed, would materially affect our business.
  *Special
        Access* .
        In
        January 2005, the FCC initiated a proceeding to examine its rules governing
        provision of special access services that we buy from ILECs subject to price
        cap
  13
 regulation.
        Under current rules, these carriers may obtain “pricing flexibility” based on
        showings of competition in a metropolitan statistical area. Depending on
        the
        showing of competition, this flexibility includes, among other items, customer
        specific pricing, volume and term discounts for some services, streamlined
        tariffing, and removal from price cap regulation. The FCC is considering
        in this
        proceeding whether pricing flexibility has permitted price cap ILECs to raise
        prices, whether to reset pricing for special access and/or modify the price
        cap
        and pricing flexibility rules governing price cap carrier provision of special
        access service. We are not able to predict the timing or outcome of this
        proceeding.
  *Universal
        Service* . Since
        May 1997, providers of interstate telecommunications service, including us,
        must
        contribute to expanded federal universal service programs that subsidize
        services provided to qualifying schools, libraries and rural health providers,
        and services provided to low-income consumers. Subsequently, the FCC created
        additional subsidies that primarily benefit incumbent telephone companies.
        On a
        quarterly basis, the FCC announces the contribution factor proposed for the
        next
        quarter. For the first quarter of the year 2006, the contribution factor
        is
        10.2% of a provider's interstate and international revenue; the contribution
        factor for fourth quarter 2005 was 10.2% as well. We recover our share of
        these
        costs through charges assessed directly to our customers. Currently, the
        FCC is
        considering proposals to change the way contributions are assessed, as well
        as
        eligibility for participation by carriers in universal service programs.
        We
        cannot predict when or whether the FCC will act on these proposals. However,
        we
        anticipate that any changes will be designed to be competitively neutral
        and not
        disproportionately affect competitive carriers like us.
  *Voice
        Over IP* .
        Due to
        the growing acceptance and deployment of VoIP services, the FCC and state
        public
        utility commissions are conducting regulatory proceedings that could affect
        the
        regulatory duties and rights of entities such as us or our affiliates that
        provide IP-based voice applications. There is regulatory uncertainty as to
        the
        imposition of access charges and other taxes, fees and surcharges on VoIP
        services that use the PSTN. There is regulatory uncertainty as to the imposition
        of traditional retail, common carrier regulation on VoIP products and services.
        The FCC has initiated a rulemaking proceeding to consider changes in FCC
        rules
        for IP-based voice services. While preserving its right to address certain
        matters prior to conclusion of the rulemaking, the FCC has indicated that
        this
        rulemaking may address, among other things, 911 requirements, disability
        access
        requirements, access charges, and universal service requirements.
 
 The
        FCC
        is also considering several petitions filed by individual companies concerning
        the regulatory rights and obligations of providers of IP-based voice services,
        and networks that handle IP-based voice traffic or that exchange that traffic
        with operators of PSTN facilities.
 
 On
        October 18, 2002, AT&T Corporation filed a petition with the FCC requesting
        a declaratory ruling that telephone calls that originate and terminate on
        the
        PSTN, but which may be converted into IP during some part of the transmission,
        are exempt from access charges under existing FCC rules. On April 21, 2004,
        the
        FCC rejected AT&T’s Petition, stating that the calls described by AT&T
        were telecommunications services subject to access charges under existing
        FCC
        rules.
 
 On
        September 22, 2003, Vonage Holdings Corporation (“Vonage”) filed a petition with
        the FCC requesting a declaration that its offerings, which originate on a
        broadband network in IP format and terminate on the PSTN, or vice versa,
        are
        interstate information services not subject to state regulation under the
        Communications Act and existing FCC rules. On November 10, 2004, the FCC
        adopted
        an order ruling that Vonage’s service was an interstate service not subject to
        state regulation. The FCC did not rule whether the service is only an
        information service that is not subject to Title II under the Act. Appeals
        were
        filed in a number of circuits, which appeals
  14
 were
        consolidated and assigned to the U.S. Court of Appeals for the Eighth Circuit.
        Oral arguments were heard on January 12, 2006. A decision is pending. Until
        a
        decision is released, we cannot predict how a ruling might affect our provision
        of VoIP services.
 
 On
        June
        3, 2005, the FCC issued an order requiring all interconnected VoIP providers
        to
        deliver enhanced 911 capabilities to their subscribers by no later than November
        28, 2005, which has been appealed by some VoIP providers. We believe that
        we are
        in compliance with this order.
 
 The
        state
        public utility commissions are also conducting regulatory proceedings that
        could
        impact our rights and obligations with respect to IP-based voice applications.
        Previously, the Minnesota Public Utilities Commission (“MPUC”) ruled that
        Vonage’s Digital Voice service was a telephone service under state law, and
        ordered Vonage to obtain state certification, file tariffs, and comply with
        911
        requirements before continuing to offer the service in the state. Vonage
        filed a
        request in the Federal District Court for the District of Minnesota to enjoin
        the MPUC’s decision. On October 16, 2003, a federal judge granted Vonage’s
        request for an injunction, concluding that Vonage provides an information
        service immune from state regulation and thereby barring the MPUC from enforcing
        its decision. On December 22, 2004, the U.S. Court of Appeals for the Eighth
        Circuit affirmed the District Court’s judgment on the basis of the FCC’s
        determination that Vonage’s service was interstate and noted that the MPUC would
        be free to challenge the injunction if it or another party prevailed on an
        appeal of the FCC’s Vonage Order.
 
 **Legislation**
 
 Congress
        is in the process of considering a number of proposals that, if enacted,
        could
        result in changes to aspects of the regulatory framework governing ILECs
        and
        CLECs including universal service, intercarrier compensation, IP-enabled
        services, and access to some features and functions of ILEC networks. We
        cannot
        predict the precise subject matter of any such legislation or its timing.
        The
        traditional local telephone companies lobby state legislatures to adopt new
        legislation that would limit, or prohibit, the ability of their state utility
        commissions to expand upon certain federal requirements relating to the
        obligations of the traditional local telephone companies to provide access
        to
        competitors such as us. Because the existing FCC framework relies substantially
        on state implementation, the effect of such state legislation, if passed,
        could
        negatively affect our ability to offer services in a state.
 
 Certain
        of our subsidiaries are authorized to provide interstate telecommunications
        services pursuant to its access tariff filed with the FCC in April 1999.
        Although not required for our existing DSL data service offering, on August
        6,
        1999 we obtained authority from the FCC to provide international
        telecommunications services originating from the United States.
 
 *State
        Regulation*
 
 In
        October 1998, the FCC ruled that DSL and other advanced data services provided
        as dedicated access services in connection with interstate services such
        as
        Internet access are interstate services subject to the FCC's jurisdiction.
        Accordingly, we could offer DSL services without state regulatory authority,
        so
        long as we do not also provide local or intrastate telecommunications services
        via our network. This decision allows us to provide our DSL services in a
        manner
        that potentially reduces state regulatory obligations. However, the regulatory
        parameters used to define DSL service are, directly and indirectly, subject
        to
        many pending FCC and judicial proceedings and could change in the
        future.
 
 15
 **Intellectual
        Property**
 
 We
        regard
        our products, services and technology as proprietary and attempt to protect
        them
        with patents, copyrights, trademarks, service marks, trade secret laws,
        restrictions on disclosure and other methods, as applicable. For example,
        we own
        a federal supplemental registration and claim rights in the name, “DSL.net.”
There can be no assurance these methods will be sufficient to protect our
        technology and intellectual property. We also generally enter into
        confidentiality agreements with our employees, consultants and business
        partners, and generally control access to and distribution of our documentation
        and other proprietary information. Despite these precautions, it may be possible
        for a third party to copy or otherwise obtain and use our proprietary
        information without authorization, or to develop similar information
        independently. Effective patent, copyright, trademark and trade secret
        protection may be unavailable or limited in certain foreign countries, and
        the
        global nature of the Internet makes it virtually impossible to control the
        ultimate destination of our technology or proprietary information. There
        can be
        no assurance that the steps we have taken will prevent misappropriation or
        infringement of our technology or proprietary information. In addition,
        litigation may be necessary in the future to enforce our intellectual property
        rights, to protect our trade secrets or to determine the validity and scope
        of
        the proprietary rights of others. Such litigation could result in substantial
        costs and diversion of resources and could have a material adverse effect
        on our
        business, operating results and financial condition. In addition, some of
        our
        information, including our competitive carrier status in individual states
        and
        our interconnection agreements, is a matter of public record and can be readily
        obtained by our competitors and potential competitors, possibly to our
        detriment.
 
 **Employees**
 
 As
        of
        March 1, 2006, we had 98 employees. We believe that our future success will
        depend in part on our continued ability to attract, hire and retain qualified
        personnel. Competition for qualified personnel can be intense, and we may
        be
        unable to identify, attract and retain such personnel in the future. In
        addition, reductions in our workforce that we undertook in the last several
        years may make it difficult to attract, hire and retain qualified personnel.
        None of our employees is represented by a labor union or is the subject of
        a
        collective bargaining agreement. We have never experienced a work stoppage
        and
        believe that our employee relations are good.
 
 **Item
        1A.       Risk Factors**
 
 **Special
        Note Regarding Forward-Looking Statements and Certain Other
        Information**
 
 This
        report contains forward-looking statements within the meaning of Section
        27A of
        the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E
        of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The
        statements contained in this report, which are not historical facts, may
        be
        deemed to contain forward-looking statements. These statements relate to
        future
        events or our future financial or business performance, and are identified
        by
        terminology such as “may,” “might,” “will,” “should,” “expect,” “scheduled,”
“plan,” “intend,” “anticipate,” “believe,” “estimate,” “potential,” or
“continue” or the negative of such terms or other comparable terminology. These
        statements are subject to a variety of risks and uncertainties, many of which
        are beyond our control, which could cause actual results to differ materially
        from those contemplated in these forward-looking statements. In particular,
        the
        risks and uncertainties include, among other things, those described below.
        Each
        of these factors, and others, are discussed from time to time in our filings
        with the Securities and Exchange Commission (the “SEC”) copies of which may be
        accessed through the SEC’s website at http://www.sec.gov . 
        Existing and prospective investors are cautioned not to place undue reliance
  16
 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 report, whether as a result of new information,
        future events or circumstances or otherwise.
 
 **Risks
        Relating To Our Business**
 
 **We
        Have Incurred Losses And Expect Our Losses To Continue**
 
 We
        have
        incurred significant losses since our inception and have experienced negative
        operating cash flow for each fiscal year since our formation. We expect to
        continue to incur significant losses throughout 2006 and there can be no
        assurance that we will achieve positive operating cash flow for any future
        financial periods. Failure to generate sufficient revenues, contain certain
        discretionary spending, achieve certain other business plan objectives or
        raise
        additional funds could have a material adverse affect on our results of
        operations, cash flows and financial position, including our ability to continue
        as a going concern ***.*** Our
        independent registered public accounting firm has noted in its report on
        our
        audited financial statements and related notes for the fiscal year ended
        December 31, 2005 that our sustained operating losses raise substantial doubt
        about our ability to continue as a going concern.
 
 We
        intend
        to use our cash resources to finance our operating losses, capital expenditures,
        lease payments, and working capital requirements, and for other general
        corporate purposes.
 
 Our
        cash
        requirements and financial performance, including our ability to achieve
        and
        sustain profitability or become and remain cash flow positive, may vary based
        upon a number of factors, including:
 
 ·
              our
                  ability to raise sufficient additional
                  capital;
 
 ·
              if
                  our business plans or projections change or prove to be inaccurate;
 
 ·
              if
                  we curtail and/or reorganize our operations, and/or sell all or
                  a portion
                  of our assets;
 
 ·
              the
                  development of the high-speed data and integrated voice and data
                  communications industries and our ability to compete effectively
                  in such
                  industries;
 
 ·
              the
                  amount, timing and pricing of customer revenue;
 
 ·
              the
                  availability, timing and pricing of acquisition opportunities,
                  and our
                  ability to capitalize on such
                  opportunities;
 
 ·
              the
                  identification of and generation of synergies with potential business
                  combination candidates, and our ability to close any transactions
                  with
                  such parties on favorable terms, if at all;
 
 ·
              the
                  commercial acceptance of our services and our ability to attain
                  expected
                  penetration within our target markets;
 
 ·
              our
                  ability to recruit and retain qualified
                  personnel;
 
 ·
              up
                  front sales and marketing expenses;
 
 17
 ·
              the
                  cost and utilization of our network components that we lease from
                  other
                  telecommunications providers and that hinge, in substantial part,
                  on
                  government regulation that has been subject to considerable flux
                  in recent
                  years;
 
 ·
              our
                  ability to establish and maintain relationships with marketing
                  partners;
 
 ·
              the
                  successful implementation and management of financial, information
                  management and operations support systems to efficiently and
                  cost-effectively manage our operations and growth;
                  and
 
 ·
              the
                  favorable outcomes of numerous federal and state regulatory proceedings
                  and related judicial proceedings, including proceedings relating
                  to the
                  Telecommunications Act of 1996, as amended (the “1996 Telecommunications
                  Act”).
 
 There
        can
        be no assurance that we will be able to achieve our business plan objectives
        or
        that we will achieve cash flow positive operating results. If we are unable
        to
        generate adequate funds from our operations or raise additional funds, we
        may
        not be able to repay our existing senior secured debt, continue to operate
        our
        network, respond to competitive pressures or fund our operations. As a result,
        we may be required to sell all or a portion of our assets, significantly
        reduce,
        reorganize, discontinue or shut down our operations, or seek protection under
        the U.S. bankruptcy code. Our financial statements do not include any
        adjustments that might result from the above uncertainties.
 
 **Our
        Independent Registered Public Accounting Firm Has Raised Questions About
        Our
        Ability To Continue As A Going Concern In Their Report On Our Audited Financial
        Statements, Which May Have An Adverse Impact On Our Ability To Raise Additional
        Capital And On Our Stock Price**
 
 Our
        independent registered public accounting firm has included in its report
        on our
        audited financial statements for the fiscal year ended December 31, 2005,
        an
        explanatory paragraph relating to our ability to continue as a going concern.
        This explanatory paragraph includes the following language: “ The
        accompanying consolidated financial statements have been prepared assuming
        that
        the Company will continue as a going concern. As discussed in Note 1 to the
        consolidated financial statements, the Company has suffered recurring losses
        from operations that raise substantial doubt about the Company’s ability to
        continue as a going concern. Management’s plans in regard to these matters are
        also described in Note 1. These consolidated financial statements do not
        include
        any adjustments that might result from the outcome of this
        uncertainty.” The
        inclusion of this explanatory paragraph in the report of our independent
        registered public accounting firm may have an adverse impact on our ability
        to
        raise additional capital and on our stock price. We cannot assure you that
        we
        will be able to continue as a going concern.
 
 **We
        Have Incurred, And May Incur Additional, Significant Amounts Of Debt To
        Implement Our Business Plan And This Indebtedness Creates Greater Financial
        And
        Operating Risk And Limits Our Flexibility**
 
 In
        connection with our convertible note and warrant financing, on October 7,
        2004,
        we issued a minimum borrowing note for $4,250,000 and a revolving note for
        $750,000. In addition, as a result of a series of transactions which closed
        on
        November 2, 2005 and February 1, 2006, we consummated the private placement
        of
        senior secured debentures in aggregate principal
  18
 amount
        of
        $13,000,000.  Those
        notes and debentures contain provisions that limit our ability to incur
        additional indebtedness and place other restrictions on our business. We
        are
        pursuing additional financing, which may include additional debt financing,
        the
        terms of which may create greater financial and/or operating risk and/or
        limit
        our ability to take certain actions. If we incur additional debt, we may
        be
        required to devote increased amounts of our cash flow to service indebtedness.
        Our incurrence of additional debt, and/or our inability to repay or finance
        any
        existing or future senior secured debt, could require us to modify, delay
        or
        abandon certain aspects of our business plan, or require us to sell or a
        portion
        of our assets, significantly reduce, reorganize, discontinue or shut down
        our
        operations, or seek protection under the U.S. bankruptcy code.
 
 **We
        Must Obtain The Prior Approval Of DunKnight Telecom Partners LLC To Effect
        Certain Expenditures**
 
 Pursuant
        to our $13,000,000 aggregate principal amount secured debentures issued to
        DunKnight Telecom Partners LLC (“DunKnight”) and its designated co-investor on
        November 2, 2005 and February 1, 2006, we are prevented from entering into any
        agreement, contract or understanding with any third party, whether for the
        receipt or provision of goods or services, requiring the expenditure by us
        of
        more than $150,000 in any one or a series of related  transactions without
        obtaining the prior written consent of a majority of the outstanding principal
        amount of all such debentures. Such prior approval is in the sole discretion
        of
        such debenture holders, and, therefore, we cannot assure you that we will
        be
        able to fully implement those aspects of our business plan for which debenture
        holder approval is required but not obtained. A failure to obtain such approval
        for any given item or series of items may delay, curtail, prevent or render
        more
        costly our achievement of certain business plan objectives and operational
        initiatives.
 
 **Additional
        Financing Will Be Required If We Are To Sustain Our Operations, Repay All
        Of Our
        Senior Secured Debt Or Achieve Our Strategic and Operating
        Objectives**
 
 Based
        on
        our current business plans and projections, we believe that our existing
        cash
        resources and cash expected to be generated from operations will be sufficient
        to fund our operating losses, capital expenditures, lease payments, and working
        capital requirements through the second quarter of 2006. As a result, we
        will
        need to raise additional financing, through some combination of borrowings
        or
        the sale of equity or debt securities, during the second quarter of 2006
        to
        finance our 2006 cash requirements and to enable us to repay all of our existing
        senior secured debt. We may not be able to raise sufficient additional debt,
        equity or other capital on acceptable terms, if at all. Failure to generate
        sufficient revenues, contain certain discretionary spending, achieve certain
        other business plan objectives, refinance our senior secured debt or raise
        additional funds could have a material adverse affect on our results of
        operations, cash flows and financial position, including our ability to continue
        as a going concern, and may require us to sell all or a portion of our assets,
        significantly reduce, reorganize, discontinue or shut down our operations,
        or
        seek protection under the U.S. bankruptcy code.
 
 **Because
        The High-Speed Data And Integrated Voice And Data Communications Industries
        Continue to Rapidly Evolve, We Cannot Predict Their Future Growth Or Ultimate
        Size**
 
 The
        high-speed data and integrated voice and data communications industries are
        subject to rapid and significant technological change. Because the technologies
        available for high-speed data and integrated voice and 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
  19
 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 and integrated voice and data
        communication services are testing products from numerous suppliers for various
        applications.
 
 **Our
        Business Model Is Unproven, And May Not Be Successful**
 
 We
        do not
        know whether our business model and strategy will be successful. If the
        assumptions underlying our business model are not valid or we are unable
        to
        implement our business plan, achieve acceptable levels 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 Internet service providers and broadband providers. We focus on selling
        directly, and through resellers, to small and medium sized businesses and
        branch
        offices of larger businesses and their remote office users. Our unproven
        business model makes it difficult to predict the extent to which our services
        will achieve market acceptance. It is possible that our efforts will not
        result
        in significant market penetration, favorable operating results or profitability.
 
 **If
        Our Services Fail To Achieve Or Sustain Market Acceptance At Desired Pricing
        Levels, Our Ability To Achieve Profitability Or Positive Cash Flow Would
        Be
        Impaired**
 
 Prices
        for digital communication services have fallen historically. Accordingly,
        we
        cannot predict to what extent we may need to reduce our prices to remain
        competitive or whether we will be able to sustain future pricing levels as
        our
        competitors introduce competing services or similar services at lower prices.
        If
        our services fail to achieve or sustain market acceptance at desired pricing
        levels, our ability to achieve profitability or positive cash flow would
        be
        impaired, which would have a material adverse effect on our business, prospects,
        financial condition and results of operations.
 
 **We
        May Be Subject To Risks Associated With Strategic
        Opportunities**
 
 We
        may
        not be able to compete successfully for strategic opportunities, including
        merger and acquisition, business combination and strategic partnering
        opportunities. We may not have the capital resources available to make strategic
        acquisitions that would accelerate our growth or expand our services and,
        if we
        complete further acquisitions, we may not have sufficient working capital
        to
        operate the acquired assets or businesses profitably. We have made a number
        of
        strategic asset and business acquisitions. We intend to continue to seek
        strategic opportunities that we believe represent distinct market opportunities
        to accelerate our growth. We continuously identify and evaluate strategic
        opportunities, including strategic partnerships, business combinations, and
        merger and acquisition candidates, and in many cases engage in discussions
        and
        negotiations regarding potential transactions. Our discussions and negotiations
        may not result in any transaction. There is significant competition for
        strategic opportunities in our business. As the consolidation in our industry
        continues, this competition may intensify and increase the costs of capitalizing
        on such opportunities. We compete for acquisition opportunities with companies
        that have significantly greater financial and management resources. Our ability
        to pursue a future customer acquisition or similar strategic acquisition
        for
        cash is dependent upon our ability to raise additional capital. Also, to
        the
        extent all or part of the purchase price of any future acquisition is paid
        in
        cash, such payment would deplete our remaining cash resources. In addition,
        an
        acquisition may not produce the revenue, earnings, cash flows or business
        synergies that we anticipate, an acquired asset or business might not perform
        as
        we anticipated, and a strategic transaction such as a merger might not yield
        positive operating results for the combined
  20
 businesses.
        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 or other
        strategic opportunities, our management could spend a significant amount
        of time
        and effort in identifying and completing the transaction 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.
 
 **We
        Need Additional Funding To Support Increased Sales And Marketing Initiatives
        And
        Customer Acquisitions In Order To Offset The Effects of
        Churn**
 
 Like
        many
        of our competitors, we
        experience a degree of customer disconnects or “churn” due to competitive
        pricing pressures, customers’ ceasing their operations, and other factors, which
        churn was, during 2005, in excess of the rate that we acquired new customers.
        While we have taken measures to control churn, our
        ability to generate positive operating cash flow in future periods will be
        dependent, in large part, on our ability to obtain additional funding to
        increase our sales and customer acquisition activities to out-pace customer
        churn and absorb operating expenses. There can be no assurance that we will
        be
        able to obtain additional funding, increase our subscriber line base at a
        rate
        in excess of our churn or obtain positive operating cash flows in future
        periods. In
        the
        absence of our raising additional funding to finance increased sales and
        marketing activities and new customer acquisitions, our subscriber line churn
        may continue to exceed the rate at which we can replace such disconnected
        lines.
        As a result, we anticipate that our subscriber line churn in the near term
        will
        continue to result in declining revenue and will adversely affect our cash
        generated from operations.
 
 **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 cannot
        guarantee that our key employees will desire to continue their employment
        with
        DSL.net over any period of time and thus there is the risk that any or all
        of
        these individuals may seek employment opportunities with other employers
        at any
        time. Further, there is no assurance that we will be able to attract
        highly-qualified employees, as we have in the past, to replace key personnel
        in
        the future.
 
 **If
        We Fail To Retain Our Employees Or Recruit Qualified Personnel In A Timely
        Manner, We Will Not Be Able To Execute Our Business Plan And Our Business
        Will
        Be Harmed**
 
 To
        execute our business plan, we need to hire and retain qualified personnel.
        If we
        are unable to retain our employees or recruit qualified personnel in a timely
        manner, we will not be able to execute our business plan. The reductions
        in
        workforce that we have made since 2000, including the restructuring of our
        sales
        team and our work force reduction in September 2004, the competitive nature
        of
        our industry, and our need for additional working capital may make it difficult
        for us to hire qualified personnel on a timely basis and to retain our
        employees.
 
 **Disappointing
        Quarterly Revenue, Operating Results Or Operating Statistics Could Cause
        The
        Price Of Our Common Stock To Fall**
 
 Our
        quarterly revenue, operating results and operating statistics are difficult
        to
        predict and
  21
 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
        of
        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
                  and legal 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;
 
 ·
              technical
                  difficulties or network service interruptions;
                  and
 
 ·
              the
                  introduction of new services or technologies by our competitors
                  and
                  resulting pressures on the pricing of our
                  services.
 
 **The
        Failure Of Our Customers To Pay Their Bills On A Timely Basis Could Adversely
        Affect Our Cash Flow**
 
 Our
        target customers consist mostly of small and medium sized businesses. We
        bill
        and collect numerous relatively small customer accounts. We may experience
        difficulty in collecting amounts due on a timely basis. In addition, we sell
        our
        services to various resellers, such as Internet service providers, who then
        resell such services to their end users. 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
        Depend On Wholesale DSL And T-1 Providers, Some Of Whom Are Competitors,
        To
        Provide Us With Local Facilities In Areas Where We Have Not Deployed Our
        Own
        Equipment**
 
 In
        markets where we have not deployed our own local DSL and T-1 equipment, we
        utilize local facilities from wholesale providers, including Covad
        Communications, in order to provide service to our end-user customers. In
        these
        cases, we are dependent upon these wholesale carriers to provide, or arrange
        the
        provisioning of, the equipment and on-site wiring required to provide local
        DSL
        or T-1 services to our end-user customers, as well as to provide and maintain
        the local DSL or T-1 line. In general, these carriers may terminate the service
        they provide to us with little or no notice. These carriers may not continue
        to
        provide us with acceptable local services for our customers on the scale,
        at the
        price levels and within the time frames we require, or at all. If we are
        unable
        to obtain acceptable services from these wholesale carriers or they terminate
        the services 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
  22
 obtain
        the space required in a central office on a cost effective basis, if at all,
        or
        that we could provide services to such customers on a timely basis. Our failure
        to install and provide services to customers on a timely basis, or the
        disruption in the services provided to our customers, would likely result
        in the
        loss of many, if not all, of the customers in the affected locations, and
        could
        result in claims brought by these customers against us. This could have a
        material adverse effect on our competitive position, business, results of
        operations, financial position and prospects.
 
 Certain
        wholesale providers with whom we work offer services that compete with ours,
        or
        have other customers whose services compete with ours. Such competing interests
        may affect the ability or willingness of these providers to provide us with
        acceptable services on acceptable terms. In addition, certain of these providers
        are relatively young companies that are facing substantial operational and
        financial challenges. The operational success and abilities of these carriers
        to
        operate their businesses could materially affect our business. The failure
        of
        any of these companies could cause us to lose customers and revenue, expose
        us
        to claims and otherwise have a material adverse effect on our competitive
        position, business, results of operations, financial position and
        prospects.
 
 **Our
        Services Are Subject To Federal, State And Local Regulation, And Changes
        In Laws
        Or Regulations Could Adversely Affect The Way We Operate Our
        Business**
  The
        facilities we use and the services we offer are subject to varying degrees
        of
        regulation at the federal, state and local levels. Changes in applicable
        laws or
        regulations could, among other things, increase our costs, restrict our access
        to the network elements and central offices of the traditional local telephone
        companies, or restrict our ability to provide our services. For example,
        the
        Communications Act of 1934, as amended, which, among other things, requires
        traditional telephone companies to unbundle network elements (“UNE(s)”) and to
        allow competitors such as us to locate their equipment in the traditional
        local
        telephone companies’ central offices, has been the subject of proceedings at the
        federal and state levels, litigation in federal and state courts, and
        legislation in federal and state legislatures. We rely on access to the
        incumbents’ network, including DS-1 loops and DS-1 and DS-3 transport network
        elements purchased as UNEs, in order to provide service to our customers.
        In
        August 2003, the Federal Communications Commission (“FCC”) released its *Triennial
        Review Order* (“TRO”)
        that, among other things, largely preserved our access to these UNEs at
        forward-looking or Total Element Long Run Incremental Cost (“TELRIC”) rates,
        which rates reflect the efficient cost of such elements to the traditional
        telephone companies, plus a reasonable profit. These rates are substantially
        lower than rates charged on network elements for which TELRIC rates do not
        apply. On February 4, 2005, the FCC issued its *Triennial
        Review Remand Order* (“TRRO”)
        that again
        modified the unbundling obligations for the DS-1 and DS-3 UNEs that we purchase
        from traditional telephone companies. The new rules, among other things,
        remove
        under certain circumstances the unbundling obligations of traditional telephone
        companies with regard to local loops and dedicated transport. The availability
        of loops and transport UNEs varies based upon the capacity of the loop and
        availability of competitive alternatives to the traditional telephone company
        at
        or between specific telephone company wire centers. Some of the loops and
        transport that we used were subject to the new rules. For those loops and
        transport that are affected, we were able to obtain them at 15% above regulated
        rates through March 10, 2006. After that date, we are able to purchase affected
        loops and transport from competitors or traditional telephone companies at
        market prices and/or regulated prices as special access. While we have taken
        significant steps to reconfigure our network to avoid or limit our utilization
        of network facilities affected by the TRRO, and have negotiated special rates
        for certain affected network facilities, there can be no assurance that we
        will
        not incur certain increased network costs resulting from the TRRO or that
  23
 we
        will
        continue to be able to negotiate favorable rates for affected network facilities
        with traditional telephone companies and/or alternative providers. The TRRO
        has
        been appealed by both the traditional telephone companies and competitive
        carriers. We cannot anticipate the outcome of that appeal. We also cannot
        predict future legislation or FCC regulatory action or whether such actions
        will
        adversely affect the way we operate our business or our ability to continue
        to
        compete in the market place.
  At
        least
        one portion of the TRO relating to an exemption provided to traditional local
        telephone companies from unbundling obligations on certain loop transmission
        facilities that use fiber and new technologies could materially affect our
        business in the long-term. This exemption arguably applies only for loops
        that
        serve residential customers and “very small” businesses. The FCC has not defined
“very small” business, and, if it does not do so in a rulemaking proceeding, the
        definition may be established in interconnection agreement arbitrations at
        the
        state commissions as interconnection agreements are renewed or renegotiated.
        Subsequent to the TRO, the FCC has on two occasions added additional loop
        architectures to this exemption, and it has also held that the traditional
        local
        telephone companies do not have to make these facilities available to
        competitors at any price, discounted or otherwise. The traditional local
        telephone companies are continuing to lobby the FCC to expand these exemptions
        much deeper into the business market, and alternatively at times appear to
        suggest that the exemption already applies to all markets.  Depending
        on how these rules are implemented, the traditional local telephone companies
        over time may decide to modify, characterize or replace their facilities
        in ways
        that would qualify them for this exemption and thereby preclude us from
        accessing these facilities pursuant to the terms of their interconnection
        agreements. Without access to these facilities, we may not be able to provide
        all or certain of our services in these areas. In addition, if we are unable
        to
        obtain unbundled access to these fiber facilities, we may not be able to
        offer
        services that are competitive with the new offerings of the traditional local
        telephone companies.
 
 **Our
        Success Depends On Negotiating And Entering Into Interconnection Agreements
        With
        Traditional Local Telephone Companies**
 
 We
        must
        enter into and renew interconnection agreements with traditional local telephone
        companies in each market in which we deploy our own equipment. These agreements
        govern, among other things, the price and other terms regarding our location
        of
        equipment in the traditional local telephone companies’ offices, known as
        central offices, and our lease of copper telephone lines that connect those
        central offices to our customers. We have entered into agreements with AllTel,
        BellSouth, Cincinnati Bell, Frontier, SBC Communications, Qwest, Sprint and
        Verizon, or their subsidiaries, which govern our relationships in 49 states
        and
        the District of Columbia. Delays in obtaining or renewing interconnection
        agreements would delay our entrance into new markets or impact our operations
        in
        existing markets, and could have a material adverse effect on our business
        and
        prospects. In addition, disputes have arisen, and will likely arise in the
        future, regarding the interpretation of these interconnection agreements.
        These
        disputes have, in the past, delayed the deployment of our network. Our
        interconnection agreements generally have limited terms of one to two years
        and
        we cannot assure you that new agreements will be negotiated on a timely basis,
        if at all, or that existing agreements will be extended on terms favorable
        to
        us. Interconnection agreements must be approved by state regulators and are
        also
        subject to oversight by the FCC and the courts. These governmental authorities
        may modify the terms or prices of our interconnection agreements in ways
        that
        could adversely affect our ability to deliver service and our business and
        results of operations.
 
 24
 **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 for agreements for interconnection and access
        to
        certain individual elements of their networks that the FCC or a state utility
        commission has required them to provide to competitors such as us. In August
        2003 and again in February 2005, the FCC adopted new unbundling rules for
        network elements that have not yet been fully implemented in all of our
        interconnection agreements. The FCC’s new rules have reduced the traditional
        local telephone companies’ obligations to provide us with certain network
        elements at unbundled element discount prices, including DS1 loops and DS1
        and
        DS3 transport facilities in certain central offices. Consequently, our future
        interconnection agreements with traditional local telephone companies are
        likely
        to contain terms and conditions less favorable to us than those in our current
        agreements and could result in our incurring increased network operating
        costs.
 
 During
        our interconnection agreement negotiations, either the telephone company
        or we
        may submit disputes to the state regulatory commissions for mediation. Also,
        after the expiration of the statutory negotiation period set forth in the
        1996
        Telecommunications Act, we may submit outstanding disputes to the states
        for
        binding arbitration, in which the state regulatory commissions may arbitrate
        a
        new agreement or particular portions thereof. 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.
 
 **Our
        Success Depends On Traditional Local Telephone Companies Providing Acceptable
        Transmission Facilities And Copper Telephone Lines**
 
 We
        interconnect with and use the networks of traditional local telephone companies
        to provide services to our customers in the markets where we have deployed
        our
        own equipment. In markets where we utilize the local facilities of other
        carriers to provide our service, those carriers must interconnect with and
        use
        the networks of traditional local telephone companies to provide this service.
        We cannot assure you that these networks will be able to meet the
        telecommunications needs of our customers or maintain our service standards.
        We
        also depend on the traditional local telephone companies to provide and maintain
        their transmission facilities and the copper telephone lines between our
        network
        and our customers’ premises. The FCC’s decision in 2003 to exempt the
        traditional local telephone companies from their obligation to provide access
        to
        certain loop transmission facilities that use fiber or new technologies to
        competitors such as us may motivate the traditional local telephone companies
        to
        modify, characterize or replace their facilities in ways that would qualify
        them
        for this exemption and thereby preclude us from accessing those facilities.
        Our
        dependence on traditional local telephone companies could cause delays in
        establishing our network and providing our services. Any such delays could
        have
        a material adverse effect on our business. We, and the other competitive
        carriers with which we work, lease copper telephone lines running from the
        central office of the traditional local telephone companies to each customer’s
        location. In many cases, the copper telephone lines must be specially
        conditioned by the telephone company to carry digital signals. We may not
        be
        able to obtain a sufficient number of acceptable telephone lines on acceptable
        terms, if at all. Traditional telephone companies often rely on unionized
        labor
        and labor-related issues have in the past, and may in the future, adversely
        affect the services provided by the traditional telephone
        companies.
 
 25
 **We
        Compete With The Traditional Local Telephone Companies On Which We
        Depend**
 
 Most
        of
        the traditional local telephone companies, including those created by AT&T’s
        divestiture of its local telephone service business, offer DSL-based services.
        In addition, these companies also currently offer high-speed data communications
        services that use other technologies, including T-1 services. Consequently,
        these companies have certain incentives to delay:
 
 ·
              our
                  entry into, and renewals of, interconnection agreements with
                  them;
 
 ·
              our
                  access to their central offices to install our equipment and provide
                  our
                  services;
 
 ·
              provisioning
                  of acceptable transmission facilities and copper telephone lines
                  on our
                  behalf; and
 
 ·
              our
                  introduction and expansion of various
                  services.
 
 Any
        such
        delays could negatively impact our ability to implement our business plan
        and
        harm our competitive position, business and prospects.
 
 In
        addition, the other carriers whose local facilities we utilize in markets
        where
        we have not deployed our own equipment also compete with the traditional
        local
        telephone companies and rely on these companies for the same facilities and
        services that we do. Any delay in the provision of acceptable transmission
        facilities and copper telephone lines provided by the traditional local
        telephone companies to these carriers which are used in the provision of
        our
        service could negatively impact our ability to implement our business plan
        and
        harm our competitive position, business and prospects.
 
 Competition
        from the traditional local telephone companies offering DSL, T-1 or other
        competitive high-speed data and integrated voice and data communications
        services in a specific market may adversely impact our ability to obtain
        customers in that area and harm our competitive position, business and
        prospects. These companies have established brand names and reputations for
        quality in their service areas, possess a large, existing customer base to
        whom
        they can market their various products and services, possess sufficient capital
        to deploy broadband equipment rapidly, have their own copper telephone lines
        and
        can bundle digital data services with their existing voice services to achieve
        a
        competitive advantage in serving customers. In addition, we depend upon these
        traditional local telephone companies to provide us access to their central
        offices and to individual elements of their networks. As a result, they can
        significantly influence the actual and perceived reliability, quality and
        timeliness of our services in their service areas. The perceived relative
        stability of the traditional local telephone companies, particularly in light
        of
        the failure of certain competitive telephone companies and the financial
        and
        operational issues surrounding other such companies, provides the traditional
        local telephone companies a significant competitive advantage.
 
 **We
        Depend On Long Distance Carriers To Connect Our Network**
 
 Data
        is
        transmitted across our network via transmission facilities that we lease
        from
        long distance carriers, including Level 3 Communications and MCI. Failure
        of
        these carriers to provide service or to provide quality service may interrupt
        the use of our services by our
  26
 customers.
        The service provided by these carriers has been interrupted in the past,
        which
        has affected the services we provide to our customers. We cannot be sure
        that
        this service will not be interrupted in the future.
 
 **Intense
        Competition In The High-Speed Data And Integrated Voice And Data Communication
        Services Market May Negatively Affect The Number Of Our Customers And The
        Pricing Of Our Services**
 
 The
        high-speed data and integrated voice and 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 the data communications industry and
        increased competition in the integrated voice and data communications industry
        as technological advances are deployed by our competitors, both established
        and
        new market entrants, in this service area. Our competitors use various high
        speed communications technologies for local access connections such as
        integrated services digital network (“ISDN”), frame relay, T-1,  DSL
        services and wireless, satellite-based and cable networks. We expect
        significant competition from:
 
 ·
              Other
                  providers of DSL and T-1 services, including Covad Communications
                  and New
                  Edge Networks;
 
 ·
              Internet
                  service providers, such as Speakeasy, EarthLink, Netifice and MegaPath,
                  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 deploy DSL and T-1 services and which provide other
                  high-speed data communications services, including fiber loops
                  that may
                  offer greater capacity to end users than our services;
 
 ·
              Competitive
                  carriers offering their own integrated voice and data services,
                  including
                  InfoHighway Communications, Conversent Communications and Broadview
                  Networks;
 
 ·
              National
                  long distance carriers, such as AT&T, Sprint, and Verizon Business,
                  some of which are offering competitive DSL and T-1 services and
                  other
                  high-speed data communications services;
 
 ·
              Cable
                  modem service providers, such as Time-Warner Cable, Comcast and
                  RCN, which
                  are offering high-speed Internet access over cable networks; and
 
 ·
              Providers
                  utilizing alternative technologies, such as fiber optic, broadband
                  over
                  powerlines, 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.
 
 27
 **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 lead referral sources. 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
        or
        other unanticipated interruptions, operational disruption or any other reason,
        could cause interruptions in our services. Any damage or failure that causes
        sustained interruptions in our operations could have a material adverse effect
        on our business.
 
 **A
        Breach Of Our Network Security Could Result In Liability To Us And Deter
        Customers From Using Our Services**
 
 Our
        network may be vulnerable to unauthorized access, computer viruses and other
        disruptive problems. Any of the foregoing problems could result in liability
        to
        us and deter customers from using our service. Unauthorized access could
        jeopardize the security of confidential information stored in the computer
        systems of our customers. Eliminating computer viruses and alleviating other
        security problems may require interruptions, delays or cessation of service
        to
        our customers, cause us to incur significant costs to remedy the problem,
        and
        divert management’s attention. We can provide no assurance that the security
        measures we have implemented will not be circumvented or that any failure
        of
        these measures will not have a material adverse effect on our ability to
        obtain
        and retain customers. Any of these factors could have a material adverse
        effect
        on our business and prospects.
 
 28
 **Our
        Failure To Adequately Protect Our Proprietary Rights May Adversely Affect
        Our
        Business**
 
 We
        rely
        on unpatented trade secrets and know-how to maintain our competitive position.
        Our inability to protect these secrets and know-how could have a material
        adverse effect on our business and prospects. We protect our proprietary
        information by entering into confidentiality agreements with employees and
        consultants and business partners. These agreements may be breached or
        terminated. In addition, third parties, including our competitors, may assert
        infringement claims against us. Any of such claims could result in costly
        litigation, divert management’s attention and resources, and require us to pay
        damages and/or to enter into license or similar agreements under which we
        could
        be required to pay license fees or royalties.
 
 **We
        May Be Exposed To Liability For Information Carried Over Our Network Or
        Displayed On Web Sites That We Host**
 
 Because
        we provide connections to the Internet and host web sites for our customers,
        we
        may be perceived as being associated with the content carried over our network
        or displayed on web sites that we host. We do not and cannot screen all of
        this
        content. As a result, we may face 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.
 
 **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 our quarterly operating results or
                  operating
                  statistics or our financial
                  condition;
 
 ·
              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, dispositions, merger or business
                  combination, strategic partnerships, joint ventures or capital
                  commitments;
 
 ·
              additions
                  or departures of our key personnel;
 
 29
 ·
              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 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.
 
 **Certain
        Investors Have Significant Influence Regarding Most Matters Requiring
        Stockholder Approval, And Certain Corporate and Operational Transactions,
        Which
        Could Prevent Us From Effecting Certain Transactions And/Or Have A Material
        Adverse Effect On The Market Price Of Our Common Stock**
 
 As
        of
        March 1 2006, certain affiliated investment entities known generally as
        VantagePoint Venture Partners (“VantagePoint”) owned of record approximately
        55.1 million shares of our outstanding common stock, which represented
        approximately 24% of the combined voting power of all issued and outstanding
        capital stock of the Company. This concentration of ownership by VantagePoint
        gives VantagePoint an increased ability over other stockholders to influence
        the
        outcome of any given matter submitted for a vote to our common stockholders.
 
 On
        November 2, 2005, DunKnight became a material investor in the Company, and
        gained Board representation, in connection with a secured debt investment
        in the
        Company. Due to certain restrictive provisions in the applicable investment
        documents, DunKnight has the ability to limit or prevent the Company from
        effecting certain significant corporate transactions and certain operational
        matters without their prior consent. Depending upon the circumstances,
        DunKnight’s failure to authorize a given matter over which it has blocking
        rights could prevent or limit our ability to achieve certain business plan
        objectives, which could have a material adverse effect on the market price
        of
        our common stock.
 
 **If
        We Effect An Equity Or Convertible Debt Financing Transaction, It May Result
        In
        Dilution**
 
 We
        are
        currently pursuing additional financing to fund our working capital requirements
        and growth initiatives, which may include a sale of equity and/or convertible
        debt securities to one or more purchasers. At our current market capitalization,
        any significant equity-based investment in the Company at a discount to market
        will in all likelihood be materially dilutive to our common stockholders.
 
 **If
        Certain Transactions Occur, The Value That The Holders Of Our Common Stock
        May
        Receive Will Be Adversely Affected by Our Outstanding Debt Obligations**
 
 If
        the
        Company enters into certain transactions, the value that the holders of our
        common stock may receive as a result of any such transaction will be adversely
        affected by the Company’s outstanding senior secured debt. As of March 1, 2006,
        the Company’s existing secured debt consisted of $13,000,000 in aggregate
        principal amount outstanding under our secured debentures to DunKnight (and
        its
        co-holder) which mature on September 4, 2006 and $4,073,268 in aggregate
        principal amount outstanding under our secured convertible minimum borrowing
        note to Laurus which matures on August 1, 2006. The Company is pursuing
        financing and strategic
  30
 opportunities
        in order to fund our operations, growth and business plan objectives and
        to
        refinance our senior secured debt obligations. As part of this process, the
        Company is also considering various strategic business combination, merger
        and
        acquisition opportunities. These activities may or may not result in a sale
        of
        the Company or some or all of its assets, whether through asset sale, merger
        or
        other business combination. There can be no assurance that a sale transaction,
        merger or liquidating distribution by the Company will result in any minimum
        value or minimum amount of proceeds accreting to the benefit of our common
        stockholders as a result of any such transaction, should one occur.
 
 **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 rights of
        certain significant holders of our capital stock to designate members of
        our
        Board of 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
        1B.      Unresolved Staff
        Comments**
 
 None.
 
 **Item
        2.        
Properties**
 
 Our
        headquarters consists of approximately 31,500 square feet in an office building
        in New Haven, Connecticut. Our lease for such facility expires on May 31,
        2006
        and will not be renewed. We have contracted to sublease approximately 18,387
        square feet of office space in Wallingford, Connecticut to be used for corporate
        offices, network operations center and warehouse purposes. We anticipate
        relocating our New Haven personnel to the Wallingford location in the Spring
        of
        2006, prior to expiration of our New Haven lease. We also lease a “turn-key”
office facility in Reston, Virginia, principally for sales personnel. In
        addition, we lease warehouse space to store network equipment and other
        inventory in a number of other locations. With respect to our arrangements
        to
        use space in traditional telephone companies’ central offices, please see Item 1
        - Business, “Interconnection Agreements with Traditional Local Telephone
        Companies.”
 
 **Item
        3.         Legal
        Proceedings**
 
 A
        lawsuit
        for wrongful termination of employment was filed against us in the Superior
        Court in New Haven, Connecticut on July 29, 1999 by a former officer who
        was
        employed by us for less than two months. That action was subsequently moved
        to
        the Superior Court in Waterbury, Connecticut, Complex Litigation Docket.
        Plaintiff's claims were based chiefly on his allegation that we terminated
        his
        employment because he allegedly voiced concerns to senior management about
        the
        feasibility of certain aspects of our business strategy. The plaintiff had
        been
        principally
  31
 seeking
        compensatory damages for wages and unvested stock options. The parties entered
        into a settlement agreement on or about September 27, 2005, pursuant to which
        this matter was settled (without admission of fault by the Company) and
        dismissed (with prejudice to plaintiff), upon payment of an aggregate settlement
        amount of $20,000.
 
 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 current or former
        employees and claims related to acquisitions. We do not currently believe
        that
        any of these legal claims or proceedings will result in a material adverse
        effect on our business, financial position, results of operations or cash
        flows.
 
 **Item
        4.         Submission of Matters to a
        Vote of Security Holders**
 
 No
        matters were submitted to a vote of our security holders during the fourth
        quarter of 2005.
   **PART
        II**
 
 **Item** **** **5.        
        Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
        Purchases of Equity Securities**
 
 *Market
        Information*
 
 As
        of
        March 1, 2006, there were approximately 595 holders of record of our common
        stock. On August 4, 2004, the listing and trading of our common stock moved
        from
        the Nasdaq SmallCap Market to the American Stock Exchange (“AMEX”). On such
        date, our common stock trading symbol changed from “DSLN” to “BIZ.” On January
        10, 2006, our common stock was removed from listing on the AMEX and commenced
        quotation and trading on the OTC Bulletin Board service (“OTCBB”) under the
        symbol “DSLN.”
 
 The
        range
        of high and low bid prices per share of our common stock as reported on the
        Nasdaq SmallCap Market and the high and low sales prices per share of our
        common
        stock as reported on the AMEX for the two most recent fiscal years are shown
        below. The closing price of our common stock on March 1, 2006 was $0.05 per
        share.
 
 **Quarter
                  Ended**
              
              **High**
              
              **Low**March
                  31, 2005
              
              
              0.37
              
              
              0.14June
                  30, 2005
              
              
              0.14
              
              
              0.08September
                  30, 2005
              
              
              0.11
              
              
              0.08December
                  31, 2005
              
              
              0.09
              
              
              0.04March
                  31, 2004
              
              
              0.83
              
              
              0.44June
                  30, 2004
              
              
              0.52
              
              
              0.27September
                  30, 2004
              
              
              0.43
              
              
              0.13December
                  31, 2004
              
              
              0.28
              
              
              0.15
 
 *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. We do not anticipate that any cash dividends will be declared
        or
        paid on our common stock in the foreseeable future.
 
 32
 Under
        the
        terms of our October 2004 secured financing transaction with Laurus Master
        Fund,
        Ltd., and under the terms of our November 2005 secured financing transaction
        with DunKnight Telecom Partners LLC and its co-investor (separately or
        collectively, as their interests shall appear, “DunKnight”), we are prohibited
        from declaring, paying or making any dividend distribution on any class of
        stock
        without the prior consent of such secured creditors.
 
 Prior
        to
        and in preference to any declaration or payment of any cash dividends on
        our
        common stock, the holders of our Series X and Series Y preferred stock were
        entitled to receive cumulative dividends of $120.00 per share per annum when
        and
        as declared by our Board of Directors. All such dividends on the Series X
        and
        Series Y preferred stock accrued monthly and were 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 were able to be paid,
        at our
        sole option, in shares of DSL.net common stock. During the second half of
        2003
        and the first and third quarters of 2004, all of the issued and outstanding
        shares of our Series Y preferred stock and our Series X preferred stock were
        converted into shares of our common stock and all accrued dividends on these
        converted shares were paid in shares of our common stock.
 
 Our
        Series Z preferred stock provided that we were not permitted to declare,
        pay or
        set aside any cash dividends on shares of our common stock unless we
        simultaneously declared, paid or set aside, respectively, a cash dividend
        on
        each outstanding share of our Series Z preferred stock in an amount equal
        to the
        dividend so payable with respect to one share of our common stock. All of
        our
        issued and outstanding shares of Series Z preferred stock were cancelled
        on
        November 3, 2005, as part of a troubled debt restructuring agreement (discussed
        below under “Item 7 - Management’s Discussion and Analysis of Financial
        Condition and Results of Operations”).
 
 *Equity
        Compensation Plan Information*
 
 The
        following table provides information as of December 31, 2005, with respect
        to
        the shares of the Company’s common stock that may be issued under the Company’s
        existing equity compensation plans:
 
 Plan
                  Category
              Number
                  of Securities to be Issued upon Exercise of Outstanding
                  Options
              Weighted
                  Average Exercise Price of Outstanding Options
              Number
                  of Securities Remaining Available for Future Issuance Under Equity
                  Compensation Plans (Excluding Securities Reflected in the First
                  Column)Equity
                  Compensation Plans Approved by Shareholders
              24,438,569
              $0.49
              45,566,888Equity
                  Compensation Plans Not Approved by Shareholders (1)
              8,333,333
              $0.48
              —Total
              32,771,902
              $0.48
              45,566,888
 
 (1) 
         In April 2004, as authorized by the Company’s Board of Directors, the
        Company entered into an employment agreement and related stock option agreement
        with Kirby G. Pickle, in
  33
 connection
        with Mr. Pickle’s becoming the chief executive officer of the Company. Under the
        stock option agreement for Mr. Pickle, an option to purchase a total of
        10,000,000 shares of the Company’s common stock was granted to Mr. Pickle as an
        inducement to his employment with the Company. In connection with the
        termination of Mr. Pickle’s employment with the Company on November 2, 2005, and
        in accordance with the terms of his stock option agreement, Mr. Pickle’s stock
        options that would otherwise have vested up through November 1, 2006,
        immediately vested, and all of Mr. Pickle’s stock options that would otherwise
        have vested after November 1, 2006, immediately expired. At December 31,
        2005,
        Mr. Pickle held options to purchase a total of 8,333,333 shares of our common
        stock at a per share exercise price of $0.48. All such stock options expire
        on
        November 3, 2006.
 
                     
 34
 **(Amounts
            in Thousands, Except Per Share Amounts)**
  **Item
        6.         Selected Financial
        Data**
  The
        following historical data for the years ended December 31, 2005, 2004, 2003,
        2002 and 2001, except for “Other Data,” has been derived from our consolidated
        financial statements audited by Carlin, Charron & Rosen, LLP, our
        independent registered public accounting firm, for the year ended December
        31,
        2005, and audited by PricewaterhouseCoopers LLP, our independent registered
        public accounting firm for the years ended December 31, 2004, 2003, 2002
        and
        2001. Our balance sheets at December 31, 2005 and 2004 and the related
        statements of operations, changes in stockholders' equity and cash flows
        for the
        years ended December 31, 2005, 2004 and 2003 and notes thereto appear elsewhere
        in this Annual Report on Form 10-K.
 
 Reference
        is also made to “Item 7 - Management’s Discussion and Analysis of Financial
        Condition and Results of Operations” and the more complete financial information
        included elsewhere in this Annual Report on Form 10-K.
 
 **Year
                  Ended December 31,****2005**
              
              **2004**
              
              **2003**
              
              **2002**
              
              **2001****Statement
                  of Operations Data:**Continuing
                  operations:Revenue
              
              $
              49,019
              
              $
              60,755
              
              $
              62,775
              
              $
              37,404
              
              $
              34,307Operating
                  expenses:Network
                  (A)
              
              
              34,972
              
              
              42,924
              
              
              48,061
              
              
              30,469
              
              
              41,711Operations
                  (A)
              
              
              5,155
              
              
              8,212
              
              
              10,202
              
              
              6,419
              
              
              43,950General
                  and administrative (A)
              
              
              10,364
              
              
              11,189
              
              
              10,820
              
              
              9,941
              
              
              23,388Sales
                  and marketing (A)
              
              
              815
              
              
              4,243
              
              
              7,426
              
              
              5,786
              
              
              11,644Stock
                  compensation
              
              
              —
              
              
              —
              
              
              438
              
              
              1,228
              
              
              1,202Depreciation
                  and amortization
              
              
              4,990
              
              
              12,370
              
              
              15,645
              
              
              19,699
              
              
              27,484Total
                  operating expenses
              
              
              56,296
              
              
              78,938
              
              
              92,592
              
              
              73,542
              
              
              149,379Operating
                  loss
              
              
              (7,277
              )
              
              (18,183
              )
              
              (29,817
              )
              
              (36,138
              )
              
              (115,072
              )Interest
                  income (expense), net
              
              
              (9,322
              )
              
              (5,363
              )
              
              (2,932
              )
              
              (428
              )
              
              540Other
                  income (expense), net
              
              
              13,663
              
              
              135
              
              
              (2,430
              )
              
              185
              
              
              (10
              )Loss beforeincome
                  taxes
              
              
              (2,936
              )
              
              (23,411
              )
              
              (35,180
              )
              
              (36,381
              )
              
              (114,542
              )Income
                  tax benefit
              
              
              —
              
              
              62
              
              
              62
              
              
              98
              
              
              —Net
                  loss from continuing operations, net
                of
                  income taxes
              
              
              (2,936
              )
              
              (23,349
              )
              
              (35,118
              )
              
              (36,283
              )
              
              (114,542
              )Net
                  (loss) income from discontinued
                operations,
                  net of taxes
              
              
              (5,498
              )
              
              120
              
              
              121
              
              
              189
              
              
              (912
              )Net
                  loss
              
              
              (8,434
              )
              
              (23,229
              )
              
              (34,997
              )
              
              (36,094
              )
              
              (115,454
              )Dividends
                  on preferred stock
              
              
              —
              
              
              (950
              )
              
              (3,698
              )
              
              (3,573
              )
              
              (122
              )Accretion
                  of preferred stock
              
              
              —
              
              
              (8,852
              )
              
              (14,327
              )
              
              (10,078
              )
              
              (348
              )Fair
                  value of Series Z Preferred Stock
              
              
              2,630
              
              
              (2,630
              )
              
              —
              
              
              —
              
              
              —Net
                  loss applicable to common stockholders
              
              $
              (5,804
              )
              $
              (35,661
              )
              $
              (53,022
              )
              $
              (49,745
              )
              $
              (115,924
              )**Net
                  Loss Per Common Share Data:**Net
                  Loss per common share, basic and
                diluted
                  from continuing operations
              
              
              nil
              
              $
              (0.20
              )
              $
              (0.72
              )
              $
              (0.77
              )
              $
              (1.80
              )Net
                  Loss per common share, basic and
                diluted
                  from discontinued operations
              
              $
              (0.02
              )
              
              nil
              
              
              nil
              
              
              nil
              
              $
              (0.01
              )Net
                  Loss per common share, basic and
                diluted
              
              $
              (0.02
              )
              $
              (0.20
              )
              $
              (0.72
              )
              $
              (0.77
              )
              $
              (1.81
              )Shares
                used in computing net loss per share
              
              
              233,621
              
              
              181,831
              
              
              74,126
              
              
              64,858
              
              
              63,939
  35
 **(Amounts
            in Thousands, Except Per Share Amounts)**
 **December
                  31,****2005**
              
              **2004**
              
              **2003**
              
              **2002**
              
              **2001****Balance
                  Sheet Data**(B)**:**Cash,
                    cash equivalents, restricted cash and marketable
                    securities
              
              $
              8,767
              
              $
              9,511
              
              $
              13,784
              
              $
              11,319
              
              $
              19,631Total
                  assets
              
              $
              22,842
              
              $
              40,862
              
              $
              59,061
              
              $
              53,496
              
              $
              81,024Long-term
                  obligations (including current portion)
              
              $
              10,332
              
              $
              14,830
              
              $
              5,529
              
              $
              4,565
              
              $
              7,463Mandatorily
                    Redeemable Convertible Preferred Stock
              
              $
              —
              
              $
              —
              
              $
              17,019
              
              $
              14,122
              
              $
              470Stockholders’
                  equity
              
              $
              3,672
              
              $
              12,106
              
              $
              18,300
              
              $
              20,751
              
              $
              50,725
 
 **Year
                  Ended December 31,****2005**
              
              **2004**
              
              **2003**
              
              **2002**
              
              **2001****Cash
                  Flow Data**(B)**:**Used
                  in operating activities
              
              $
              (3,904
              )
              $
              (7,541
              )
              $
              (13,715
              )
              $
              (17,706
              )
              $
              (62,989
              )Provided
                  by (used in) investing activities
              
              $
              5,312
              
              $
              (3,078
              )
              $
              (11,135
              )
              $
              (2,368
              )
              $
              (2,921
              )Provided
                  by financing activities
              
              $
              328
              
              $
              3,919
              
              $
              27,311
              
              $
              12,107
              
              $
              12,871**Other
                  Data**(B)**:**Reconciliation
                  of net loss to Adjusted EBITDA:Net
                  loss
              
              $
              (8,434
              )
              $
              (23,229
              )
              $
              (34,997
              )
              $
              (36,094
              )
              $
              (115,454
              )Add:  
                  Interest and other expense (income),net
              
              
              1,352
              
              
              5,228
              
              
              5,366
              
              
              273
              
              
              (442
              )Depreciation
                  and amortization
              
              
              5,522
              
              
              13,132
              
              
              16,359
              
              
              20,332
              
              
              28,043Stock
                  compensation
              
              
              —
              
              
              —
              
              
              438
              
              
              1,228
              
              
              1,202Adjusted
                  EBITDA (C)
              
              $
              (1,560
              )
              $
              (4,869
              )
              $
              (12,834
              )
              $
              (14,261
              )
              $
              (86,651
              )
 
 Reconciliation
                  of Adjusted EBITDA to netcash
                  used in operating activities:Adjusted
                  EBITDA
              
              $
              (1,560
              )
              $
              (4,869
              )
              $
              (12,834
              )
              $
              (14,261
              )
              $
              (86,651
              )Cash
                  paid for interest and other (expense)income,
                  net
              
              
              (635
              )
              
              (160
              )
              
              (450
              )
              
              (444
              )
              
              611Financing
                  costs (deferrals) expenses
              
              
              
              
              
              —
              
              
              (183
              )
              
              —
              
              
              49Bad
                  debt expense
              
              
              897
              
              
              1,119
              
              
              2,117
              
              
              2,536
              
              
              2,996Sales
                  discounts
              
              
              56
              
              
              2
              
              
              394
              
              
              1,181
              
              
              1,498Restructuring
                  / impairment charges
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              34,083Write
                  off / sales of equipment
              
              
              (3
              )
              
              120
              
              
              46
              
              
              555
              
              
              229Net
                  changes in assets and liabilities
              
              
              (2,659
              )
              
              (3,754
              )
              
              (2,805
              )
              
              (7,273
              )
              
              (15,804
              )Net
                  cash used in operating activities
              
              $
              (3,904
              )
              $
              (7,541
              )
              $
              (13,715
              )
              $
              (17,706
              )
              $
              (62,989
              )Capital
                expenditures
              
              $
              392
              
              $
              651
              
              $
              2,405
              
              $
              1,647
              
              $
              5,345
  36
 **(Amounts
            in Thousands, Except Per Share Amounts)**
  
 (A)
        Excluding stock compensation, depreciation and amortization.
 (B) 
        Includes discontinued operations
 (C)
        Adjusted EBITDA, shown above under “Other Data,” consists of net loss excluding
        net interest and other income/expense, taxes, depreciation, amortization
        of
        intangibles and non-cash stock compensation expense. We believe that Adjusted
        EBITDA provides useful information because it is an additional measure of
        financial performance commonly used for comparing companies in the
        telecommunications industry in terms of core operating performance, leverage,
        and ability to incur and service debt. Since the network configurations,
        assets
        and related capital expenditures and capital structures vary greatly within
        the
        telecommunications industry, a financial measure that excludes interest,
        depreciation and amortization is useful in comparing the core operating
        performance that supports and measures the return on a company’s network assets
        and capital structure and enhances comparability between periods. In addition,
        Adjusted EBITDA is used by us when reporting operating performance to our
        senior
        management and Board of Directors.
 
 Adjusted
        EBITDA is not a measure determined under generally accepted accounting
        principles, and should not be considered as a measure of profitability or
        liquidity. 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;
                  or
 
 ·
              other
                  consolidated statement of operations or cash flows data presented
                  in
                  accordance with generally accepted accounting
                  principles.
 
 The
        above
        financial data includes the operating results of acquisitions from their
        acquisition date, which consequently will affect the comparability of such
        financial data from year to year.
 
 **Item
        7.         Management’s Discussion and
        Analysis of Financial Condition and Results of Operations**
 
 THE
        FOLLOWING DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS
        OF
        OPERATIONS SHOULD BE READ IN CONJUNCTION WITH “ITEM 6 - SELECTED 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 “ITEM 1A - 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.
  37
 **(Amounts
            in Thousands, Except Per Share Amounts)**
  **Overview**
 
 *Our
        Business*
 
 We
        provide high-speed data communications, Internet access, and related services
        to
        small and medium sized businesses and branch offices of larger businesses
        and
        their remote office users, throughout the United States, primarily utilizing
        digital subscriber line (“DSL”) and T-1 technology. In September 2003, we
        expanded our service offerings to business customers in the Washington, D.C.
        metropolitan region to include integrated voice and data services using voice
        over Internet protocol technology (“VoIP”). In February 2004, we introduced our
        integrated voice and data bundles in the New York City metropolitan area.
        Our
        networks enable data transport over existing copper telephone lines at speeds
        of
        up to 1.5 megabits per second. Our product offerings also include Web hosting,
        domain name system management, enhanced e-mail, on-line data backup and recovery
        services, firewalls, nationwide dial-up services, private frame relay services
        and virtual private networks.
 
 We
        sell
        directly to businesses through our own sales force utilizing a variety of
        sales
        channels, including referral channels such as local information technology
        professionals, application service providers and marketing partners. We also
        sell directly to third party resellers whose end-users are typically
        business-class customers. We deploy our own local communications equipment
        primarily in select first and second tier cities. In certain markets where
        we
        have not deployed our own equipment, we
        utilize the local facilities of other carriers to provide our
        service.
 
 During
          2005, we sold all of the issued and outstanding capital stock of our
          wholly-owned subsidiary, Vector Internet Services, Inc., a Minnesota-based,
          Internet service provider (“VISI”) .
          As a
          result, we have reclassified VISI’s operations as discontinued operations and,
          accordingly, have segregated the assets, liabilities, revenue and expenses
          of
          the discontinued operations in our Consolidated Balance Sheets, Statements
          of
          Operations and notes thereto in this Annual Report on Form 10-K. Cash flows
          pertaining to discontinued operations are not disclosed separately in the
          Consolidated Statements of Cash Flows in this Annual Report on Form
          10-K.
  We
        continue to experience negative cash flow and will need to raise additional
        capital during 2006 to fund our working capital requirements and to repay
        our
        senior secured debt obligations which mature during the third quarter of
        2006.
        There can be no assurance that we will be able to obtain additional funding
        on
        acceptable terms, if at all. Failure to raise additional funds could have
        a
        material adverse affect on our ability to continue as a going
        concern.
 
 *Our
        Strategy*
 
 Our
        business is in transition from an earlier strategy focused primarily on
        expanding our network footprint and capacity to a strategy focused primarily
        on
        financial performance and on increasing our market penetration in our core
        network footprint between Boston, Massachusetts and the greater Washington,
        D.C.
        metropolitan area.
 
 During
        2003, in an effort to expand our network footprint, customer base and product
        offerings, we completed the acquisitions of substantially all of the assets
        and
        operations of Network Access Solutions Corporation (“NAS”), and TalkingNets,
        Inc. and its affiliate (collectively, “TalkingNets”). The NAS acquisition
        significantly increased our facilities-based network in central offices from
        Virginia to Massachusetts. The TalkingNets acquisition provided us the ability
        to offer, in the business-intensive, Mid-Atlantic and Northeast regions,
        carrier-class integrated voice and data services utilizing VoIP technology.
 
 38
 **(Amounts
            in Thousands, Except Per Share Amounts)**
 During
        2004, we completed the integration of the NAS and TalkingNets acquisitions
        into
        our operations. In addition, we implemented various cost reduction measures,
        including reductions in our workforce and in our sales and marketing
        initiatives, to improve our financial performance.
 
 During
        2005, we continued our focus on reducing costs; disposed of certain non-core
        assets, including VISI; initiated a significant re-grooming of our network
        to
        eliminate non-core central offices; and initiated the re-branding of our
        integrated (VoIP) voice and data service offering under our Duet sm brand
        name at aggressive price points in the New York City and Washington, D.C.
        metropolitan areas. While some of these efforts have placed downward pressure,
        near term, on our ability to sustain or grow our revenue and achieve positive
        operating cash flow, we believe these actions were necessary to preserve
        our
        business enterprise and, if we obtain additional funding, to position us
        to
        increase our market penetration for data and integrated voice and data business
        customers in our core network area. We will need additional funding in the
        second quarter of 2006 to support our working capital needs, increase our
        sales
        and customer acquisition activities and favorably position us to leverage
        opportunities in the markets we serve. There can be no assurance that we
        will be
        able to obtain additional funding, increase our sales or sustain or grow
        our
        business (see “Liquidity and Capital Resources” below).
 
 *Operating
        Cash Flow*
 
 Our
        operating cash flow for the year ended December 31, 2005 was negative $3,904,
        a
        48% improvement over operating cash flow of negative $7,541 for the year
        ended
        December 31, 2004. ** We
        continue to focus on strategic and cost reduction initiatives (further discussed
        below) in our attempt to improve our operating cash flows.
 
 *Greater
        Utilization of our Network to Drive Higher Margins*
 
 We
        have
        an extensive facilities-based network with the major portion of our footprint
        in
        the densest business communications corridor in the country. We continue
        to
        prioritize the sale of services provisioned directly over our network and
        the
        sale of T-1 and integrated voice and data services, all of which yield higher
        margins.
 
 *New
        Market Opportunities*
 
 We
        believe that there continues to be significant revenue growth opportunities
        for
        our data/Internet access services and our Duet sm suite of
        integrated (VoIP) voice and data services. However, we will need additional
        funding to grow our sales channels, further expand our voice network and
        fund
        customer acquisitions in order to permit us to capitalize on these growth
        opportunities.
 
 In
        addition to pursuing additional financing to support our operations and fund
        cost-effective growth for our business, we continue to explore various strategic
        opportunities that would accelerate our growth and/or improve our operating
        performance (including potential customer acquisitions), and merger and
        acquisition opportunities. In many cases, we engage in discussions and
        negotiations regarding such potential transactions. Our discussions and
        negotiations may not result in a transaction. Further, if we effect any such
        transaction, it may not result in a positive impact upon our operating results
        or financial performance.
  39
 **(Amounts
            in Thousands, Except Per Share Amounts)**
 
 *Customer
        Churn*
 
 Like
        many
        of our competitors, we
        experience a degree of customer subscriber line disconnects or “churn” due to
        competitive pricing pressures and other factors, which churn is in excess
        of the
        rate that we are currently acquiring new customers. In response to this,
        we
        initiated in 2004, and have continued, a plan under which our customer retention
        representatives proactively endeavor to renew existing customers to service
        agreements prior to or at the time of initial term expiration. While these
        measures help to control and reduce customer churn, in the absence of our
        raising additional funding to finance increased sales and marketing activities
        and new customer acquisitions, our subscriber line churn may continue to
        exceed
        the rate at which we can replace such disconnected lines. We anticipate that
        our
        subscriber line churn in the near term will continue to result in declining
        revenue and will adversely affect our
        ability to generate and sustain positive operating cash flow. There can be
        no
        assurance that we will be able to obtain additional funding, increase our
        sales
        or control our customer churn in future periods (see “Liquidity and Capital
        Resources” below).
 
 *Strategic
        and Cost Reduction Initiatives*
 
 *Sale
        of our Minnesota Subsidiary.* During
        the third quarter of 2005, we initiated a plan to sell VISI, and solicited
        and
        received several offers for its sale. We determined that VISI was a potential
        source of cash (if sold), and, although it was profitable, it was not aligned
        with our strategic and VoIP initiatives, in as much as it was an ISP servicing
        both consumers and businesses in a limited regionalized greater Minneapolis
        market. Based on the offers received for the sale of VISI, we determined
        that
        the carrying value of VISI as of September 30, 2005, of $9,033 (including
        $8,482
        of goodwill recorded on our consolidated financial statements) exceeded its
        fair
        value and, accordingly, recorded an impairment loss of $6,033 against its
        carrying value as of September 30, 2005. We
        completed the sale on December 7, 2005, for $3,300 and recognized a gain
        of $341
        representing the excess of the proceeds over the carrying value of VISI’s net
        assets (at December 7, 2005), net of professional fees related to the
        sale.
 
 *Debt
        Restructuring.* On
        November 2, 2005, we closed a debt financing transaction whereby we received
        $6,000 on November 2, 2005, and $4,000 on February 1, 2006, in exchange for
        the
        issuance of $13,000 in secured debentures at an 18% annual interest rate,
        maturing on September 4, 2006 (see “Liquidity and Capital Resources” below).
        $5,500 of the initial proceeds from this financing was used to extinguish,
        at a
        substantial discount, approximately $30,870 (including accrued but unpaid
        interest) in senior secured debt due July 6, 2006, and cancel all outstanding
        shares of the our Series Z Preferred Stock that carried a liquidation preference
        of $15,680 and warrants to purchase approximately 190,890,621 shares of our
        common stock (see “Liquidity and Capital Resources” below).
 
 *Restructure
        of our Business Operations.* In
        November 2005, we began restructuring our business operations with a focus
        on
        our core network footprint of 352 central offices in the Verizon territory
        spanning from Boston, MA along the Eastern seaboard through the greater
        Washington, D.C. metropolitan area, and commenced a robust network re-grooming
        initiative (scheduled for completion early in the second quarter of 2006)
        to
        close approximately 100 of our central offices and core sites outside the
        Verizon and SNET territories that will significantly reduce recurring network
        operating costs.
 
 *Re-launch
        VoIP Marketing Campaign.* In
        January 2006, we re-launched our integrated (VoIP) voice and data service
        in the
        New York City and Washington, D.C. metropolitan markets
  40
 **(Amounts
            in Thousands, Except Per Share Amounts)**
 at
        aggressive price points under our new Duet sm brand,
        backed the launch with a direct mailing campaign, initiated a
        feet-on-the-street sales campaign in New York City, launched a new
        Duet website ( www.getduet.com )
        designed to support online sales of our integrated voice and data services,
        re-designed our corporate DSL.net website ( www.dsl.net )
        to
        drive greater sales, and began implementation of online marketing
        campaigns.
 
 **Critical
        Accounting Policies and Estimates**
 
 Management’s
        discussion and analysis of financial condition and results of operations
        are
        based upon our consolidated financial statements, which have been prepared
        in
        accordance with generally accepted accounting principles. The preparation
        of
        financial statements in accordance with generally accepted accounting principles
        requires management to make estimates and assumptions that affect the reported
        amounts of assets and liabilities, including the recoverability of tangible
        and
        intangible assets, disclosure of contingent assets and liabilities as of
        the
        date of the financial statements, and the reported amounts of revenues and
        expenses during the reporting periods. The markets for our services are
        characterized by intense competition, rapid technological development,
        regulatory and legislative changes, and frequent new product introductions,
        all
        of which could impact the future value of our assets and liabilities.
 
 We
        evaluate our estimates on an on-going basis. The most significant estimates
        relate to revenue recognition, goodwill, intangible assets and other long-lived
        assets, the allowance for doubtful accounts, the fair value of financial
        instruments and derivatives, contingencies and litigation. We base our estimates
        on historical experience and on various other assumptions that we believe
        to be
        reasonable under the circumstances, the results of which form the basis for
        making judgments about the carrying values of assets and liabilities that
        are
        not readily apparent from other sources. Actual results may differ materially
        from those estimates.
 
 The
        following is a brief discussion of the critical accounting policies and methods
        and the judgments and estimates used by us in their application:
 
 *Revenue
        Recognition*
 
 We
        recognize revenue in accordance with Securities and Exchange Commission (“SEC”)
        Staff Accounting Bulletin (“SAB”) No. 104, “ *Revenue
        Recognition,”* which
        outlines the four basic criteria that must be met before revenue can be
        recognized: (1) persuasive evidence of an arrangement exists; (2) delivery
        has
        occurred or services have been rendered; (3) the fee is fixed or 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. Subjectivity and uncertainties are inherent in making such judgments
        that could result in an overstatement or understatement of revenue.
 
 Revenue
        is recognized pursuant to the terms of each contract on a monthly service
        fee
        basis, which varies based on the speed of the customer’s Internet connection and
        the services ordered by the customer. The monthly fee includes phone line
        charges, Internet access charges, the cost of any leased equipment installed
        at
        the customer's site and fees for 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 which is the expected customer
        relationship period. Related direct costs incurred (up to the amount of deferred
        revenue) are also deferred and amortized to expense over
  41
 **(Amounts
            in Thousands, Except Per Share Amounts)**
 18
        months. Any excess of direct costs over installation charges are charged
        to
        expense as incurred. In certain instances, we negotiate credits and allowances
        for service related matters. We establish a reserve against revenue for credits
        of this nature based on historical experience. Also, from time to time we
        offer
        sales incentives to our customers in the form of rebates toward select
        installation services and customer premise equipment. We establish a reserve
        based on historical experience for such estimated rebate costs, with a
        corresponding reduction to revenue and deferred revenue, as applicable.
        Establishing such reserves requires subjective judgments and estimates primarily
        pertaining to the number and amounts of such credits, allowances and rebates.
        Actual results may differ from our estimates that could result in an
        overstatement or understatement of revenue.
 
 We
        seek
        to price our services competitively. The market for high-speed data
        communications services and Internet access is rapidly evolving and intensely
        competitive. While many of our competitors and potential competitors enjoy
        competitive advantages over us, we are pursuing a significant market that,
        we
        believe, is currently under-served. Although pricing is an important part
        of our
        strategy, we believe that direct relationships with our customers and
        consistent, high quality service and customer support are 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*
 
 Effective
        January 1, 2002, we adopted Statement of Financial Accounting Standards (“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. 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.
        The
        impairment tests were performed initially upon adopting SFAS 142 in 2002
        and
        annually thereafter and were based upon the fair value of reporting units
        rather
        than an evaluation of the undiscounted cash flows. We estimated the fair
        value
        of the goodwill based on discounted forecasts of future cash flows. There
        is
        inherent subjectivity and judgments involved in cash flow analyses such as
        estimating revenue and cost growth rates, residual or terminal values and
        discount rates, which can have a significant impact on the amount of any
        impairment. We recorded an impairment loss on assets held for sale during
        2005
        (including goodwill recorded on our consolidated financial statements) of
        $6,033
        (discussed below). There was no impairment of goodwill at December 31, 2004
        and
        2003.
 
 We
        account for our long-lived assets (excluding goodwill) in accordance with
        SFAS
        No. 144, “ *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 such as technological changes or
        significant increased competition. 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, calculated using a discounted
        cash flow model. There is inherent subjectivity and judgments involved in
        cash
        flow analyses such as estimating revenue and cost growth rates, residual
        or
        terminal values and discount rates, which can have a significant impact on
        the
        amount of any impairment.
 
 During
        the third quarter of 2005, we initiated a plan to sell VISI, our wholly-owned,
        Minnesota-based subsidiary, and solicited and received several offers for
        its
        sale. Based on the
  42
 **(Amounts
            in Thousands, Except Per Share Amounts)**
 offers
        received for the sale of VISI, we determined that the carrying value of VISI
        of
        $9,033 exceeded its fair value and, accordingly, recorded an impairment loss
        of
        $6,033 against its carrying value. There
        was
        no impairment of long-lived assets at December 31, 2004 and 2003.
 
 Other
        long-lived assets, such as identifiable intangible assets and fixed assets,
        are
        amortized or depreciated over their estimated useful lives. These assets
        are
        reviewed for impairment whenever events or circumstances provide evidence
        that
        suggests that the carrying amount of the assets may not be recoverable, with
        impairment being based upon an evaluation of the identifiable undiscounted
        cash
        flows. If impaired, the resulting charge reflects the excess of the asset’s
        carrying cost over its fair value. As described above, there is inherent
        subjectivity involved in estimating future cash flows, which can have a
        significant impact on the amount of any impairment. Also, 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 in the future.
 
 *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. Such allowances
        require management’s estimates and judgments and are computed based on
        historical experience using varying percentages of aged receivables. Actual
        experience may differ from our estimates and require larger or smaller charges
        to income. We primarily sell our services directly to end users mainly
        consisting of small to medium sized businesses, but we also sell our services
        to
        certain resellers, such as to Internet service providers (“ISPs”). We believe
        that we do not have significant exposure or concentrations of credit risk
        with
        respect to any given customer. However, if the country or any region we service
        experiences an economic downturn, the financial condition of our customers
        could
        be adversely affected, which could result in their inability to make payments
        to
        us. This could require additional provisions for allowances. In addition,
        a
        negative impact on revenue related to those customers may occur.
 
 With
        the
        acquisition of the NAS assets on January 10, 2003, we acquired a number of
        end
        users, some of whom we service indirectly through various ISPs. We sell our
        services to such ISPs who then resell such services to the end users. We
        have
        some increased exposure and concentration of credit risk pertaining to such
        ISPs. However, no individual customer accounted for more than 5% of revenue
        for
        the years ended December 31, 2005, 2004 and 2003 or more than 10% of accounts
        receivable at December 31, 2005 and 2004.
 
 *Inventory*
 
 Inventories
        consist of modems and routers (generally referred to as customer premise
        equipment) that we either sell or lease to customers and are required to
        establish a high-speed DSL or T-1 digital connection. Inventories are stated
        at
        the lower of cost or market. Cost of inventory is determined on the “first-in,
        first-out” or average cost methods. We establish inventory reserves for excess,
        obsolete or slow-moving inventory based on changes in customer demand,
        technology developments and other factors. Such reserves require managements’
estimates and judgments primarily relating to forecasts of future usage which
        could vary from actual results and require adjustments to our estimated
        reserves.
 
 *Fair
        Value of Financial Instruments and Derivatives*
 
 We
        have
        issued various debt and equity instruments, some of which have required a
  43
 **(Amounts
            in Thousands, Except Per Share Amounts)**
 determination
        of their fair value, where quoted market prices were not published or readily
        available. We base our determinations on valuation techniques that require
        judgments and estimates including, discount rates used in applying present
        value
        analyses, the length of historical look-back used in determining the volatility
        of our stock, expected future interest rate assumptions and probability
        assessments. From time to time, we may hire independent valuation specialists
        to
        perform and or assist in the fair value determination of such instruments.
        Actual results may differ from our estimates and assumptions which may require
        adjustments to the fair value carrying amounts and result in a charge or
        credit
        to our statement of operations.
  **Recently
        Issued Accounting Pronouncements**
 
 On
        December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS
        No. 123 (revised 2004) *“Share-Based
        Payment”* (“SFAS
        123R”), which is a revision of Statement No. 123, *“Accounting
        for Stock-Based Compensation”* (“SFAS
        123”), supersedes APB Opinion No. 25, *“Accounting
        for Stock Issued to Employees,”* and
        amends FASB Statement No. 95, *“Statement
        of Cash Flows.”* Generally, the approach in SFAS 123R is similar to the approach described
        in
        SFAS 123. However, SFAS 123R requires all share-based payments to employees,
        including grants of employee stock options, to be recognized in the income
        statement based on their fair values. Pro forma disclosure is no longer an
        alternative.
 
 Under
        SFAS 123R, we must determine the appropriate fair value model to be used
        for
        valuing share-based payments, the amortization method for compensation cost
        and
        the transition method to be used at the date of adoption. The transition
        alternatives include retrospective and prospective adoption methods. Under
        the
        retrospective method, prior periods may be restated based on the amounts
        previously recognized under SFAS 123 for purposes of pro forma disclosures
        either for all periods presented or as of the beginning of the year of adoption.
 
 The
        prospective method requires that compensation expense be recognized beginning
        with the effective date, based on the requirements of SFAS 123R, for all
        share-based payments granted after the effective date, and based on the
        requirements of SFAS 123, for all awards granted to employees prior to the
        effective date of SFAS 123R that remain unvested on the effective date.
 
 The
        provisions of this statement are effective as of the beginning of the first
        annual reporting period that begins after June 15, 2005. We are required
        to
        adopt SFAS 123R effective as of the beginning of the first quarter of 2006.
        We
        are evaluating the requirements of SFAS 123R and have not yet determined
        our
        method of adoption or the impact it will have on our financial condition
        or
        results of operations. ****
 
 In
        December 2006, the FASB issued SFAS No. 155, “ *Accounting
        for Certain Hybrid Financial Instruments - an amendment to FASB Statements
        No
        133 and 140* ,”
and
        in
        May 2005, the FASB issued SFAS No. 154, *“Accounting
        and Error Corrections - a replacement of APB opinion No. 20 and FASB Statement
        No. 3.”* We are
        not significantly impacted by these statements and do not expect their
        implementation to have a material impact on our financial statements.
 
  44
 **(Amounts
            in Thousands, Except Per Share Amounts)**
 
 **Results
        of Operations**
 
 The
        following table depicts our results of operations data and the components
        of net
        loss as a percentage of revenue:
 
 December
                  31,2005
              
              2004
              
              2003Revenue
              
              
              100.0%
              
              
              100.0%
              
              
              100.0%Operating
                  expensesNetwork
                  (a)
              
              
              71.3%
              
              
              70.7%
              
              
              76.6%Operations
                  (a)
              
              
              10.5%
              
              
              13.5%
              
              
              16.3%General
                  and administrative (a)
              
              
              21.1%
              
              
              18.4%
              
              
              17.2%Sales
                  and marketing (a)
              
              
              1.7%
              
              
              7.0%
              
              
              11.8%Stock
                  compensation
              
              
              0.0%
              
              
              0.0%
              
              
              0.7%Depreciation
                  and amortization
              
              
              10.2%
              
              
              20.4%
              
              
              24.9%Total
                  operating expenses
              
              
              114.8%
              
              
              129.9%
              
              
              147.5%Operating
                  loss
              
              
              -14.8%
              
              
              -29.9%
              
              
              -47.5%Interest
                  (expense) income
              
              
              -19.0%
              
              
              -8.8%
              
              
              -4.7%Gain
                  on extinguishment of debt
              
              
              27.4%
              
              
              0.0%
              
              
              5.6%Other
                  income (expense), net
              
              
              0.5%
              
              
              0.2%
              
              
              -9.4%Loss
                  from continuing operations before incometaxes
              
              
              -6.0%
              
              
              -38.5%
              
              
              -56.0%Income
                  tax benefit
              
              
              0.0%
              
              
              0.1%
              
              
              0.1%Loss
                  from continuing operations, net of incometaxes
              
              
              -6.0%
              
              
              -38.4%
              
              
              -55.9%(Loss)
                  income from discontinued operations, net ofincome
                  taxes
              
              
              -11.2%
              
              
              0.2%
              
              
              0.2%Net
                  loss
              
              
              -17.2%
              
              
              -38.2%
              
              
              -55.7%
 
 **2005
        Compared to 2004**
 
 **Results
        of Continuing Operations**
 
 *Revenue* .
        Revenue
        for the year ended December 31, 2005, decreased by approximately $11,736
        (19%)
        to approximately $49,019, from approximately $60,755 for the year ended December
        31, 2004. The decrease in revenue primarily resulted from the decrease in
        the
        number
  45
 **(Amounts
            in Thousands, Except Per Share Amounts)**
 of
        customers subscribing to our services as customer disconnects continued to
        outpace new customer installations.
 
 There
        was
        no revenue attributable to contributions from acquired businesses during
        2005 or
        2004.
 
 *Network
        Expenses* .
        Our
        network expenses include costs related to network engineering and network
        field
        operations personnel, costs for telecommunications lines between customers,
        central offices, network service providers and our network, costs for rent
        and
        power at our central offices, costs to connect to the Internet, costs of
        customer line installations and the costs of customer premise equipment when
        sold to our customers. We lease high-speed lines and other network capacity
        to
        connect our central office equipment and our network. Costs incurred to connect
        to the Internet are expected to vary as the volume of data communications
        traffic generated by our customers varies.
 
 Network
        expenses for the year ended December 31, 200 5,
        decreased by approximately $7,952 (19%) to approximately $34,972 from
        approximately $42,924 for the year ended December 31, 2004. The decrease
        resulted primarily from lower telecommunications expenses of approximately
        $6,518, lower personnel expenses of approximately $665, lower installation
        subcontractor and outside services expenses of approximately $528, lower
        customer installation costs of approximately $190 and decreases in other
        miscellaneous expenses of approximately $51. The decrease in the aforedescribed
        network expenses was primarily attributable to network cost containment efforts
        and decreases in customer installations and recurring loop costs associated
        with
        lower number of subscriber lines.
 
 Network
        expenses incurred for certain high capacity loops and transport facilities
        that
        we lease from incumbent local exchange carriers that connect to certain of
        our
        central offices and our network (collectively, “Unimpaired Facilities”)
        increased by up to a maximum of 15% commencing on March 11, 2005, as a result
        of
        the FCC’s Triennial Review Remand Order issued February 4, 2005 (the “TRRO”).
        Such increases did not have a material adverse effect on our network expenses
        for 2005. Under the TRRO, as of March 11, 2006, incumbent local exchange
        carries
        are no longer capped by the 15% maximum rate increase for Unimpaired Facilities
        and these carriers are currently able to charge higher special access or
        negotiated rates for such facilities. During 2005 and the first quarter of
        2006,
        we engaged in a substantial network re-grooming exercise to, among other
        things,
        restructure our network to eliminate our need for or reduce our use of
        Unimpaired Facilities. Where we continue to have a need for such facilities,
        we
        have negotiated special rates. As a result of these efforts, we do not
        anticipate that we will incur any material increase in network expenses in
        2006
        associated with our use of Unimpaired Facilities.
 
 *Operations
        Expenses.* Our
        operations expenses include costs related to customer care, customer
        provisioning, customer billing, customer technical assistance, purchasing,
        headquarters facilities operations, operating systems maintenance and support
        and other related overhead expenses.
 
 Operations
        expenses for the year ended December 31, 200 5,
        decreased by approximately $3,057 (37%) to approximately $5,155 from
        approximately $8,212 for the year ended December 31, 2004. The decrease in
        operations expenses was primarily due to decreases in personnel expenses
        of
        approximately $1,536, decreases in professional and temporary services expenses
        of approximately $969, decreases in equipment and software maintenance expenses
        of approximately $251, lower licenses and fees of approximately $136, decreases
        in
  46
 **(Amounts
            in Thousands, Except Per Share Amounts)**
 telecommunication
        expenses of approximately $84, and decreases in miscellaneous expenses of
        approximately $81.
 
 *General
        and Administrative* .
        Our
        general and administrative expenses consist primarily of costs relating to
        human
        resources, finance, executive, administrative services, recruiting, insurance,
        public reporting, legal and auditing services, leased office facilities rent
        and
        bad debt expenses.
 
 General
        and administrative expenses for the year ended December 31, 2005, decreased
        by
        approximately $825 (7%) to approximately $10,364 from approximately $11,189
        for
        the year ended December 31, 2004. The decrease was primarily due to decreases
        in
        professional services costs of approximately $728, decreases in bad debt
        expenses of approximately $304, decreases in licenses and fees of approximately
        $113, decreases in taxes of approximately $106 and decreases in miscellaneous
        expenses of approximately $39, partially offset by higher deferred financing
        cost amortization of approximately $203, higher payroll costs of approximately
        $133 and higher facilities costs of approximately $129.
 
 *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 of $815 for the year ended December 31, 2005, decreased
        by
        approximately $3,428 (81%) from approximately $4,243 for the year ended December
        31, 2004. The decrease was primarily attributable to reductions in salaries
        and
        benefits including commissions of approximately $2,563, stemming from our
        reductions in force, lower referral fees and advertising expenses of
        approximately $780 and lower sundry other expenses of approximately
        $85.
 
 *Stock
        Compensation* .
        We have
        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 below the fair values per share
        of
        our common stock at the dates of grant. The stock compensation, if vested,
        was
        charged immediately to expense, while non-vested compensation was amortized
        over
        the vesting period of the applicable options or stock, which was generally
        48
        months for initial grants and 36 months for subsequent grants. Unvested options
        for terminated employees are cancelled and the value of such options is recorded
        as a reduction of deferred compensation with an offset to additional
        paid-in-capital.
 
 We
        had no
        non-cash stock compensation expenses for the years ended December 31, 2005
        and
        2004. As of December 31, 2005 and 2004, respectively, there were no remaining
        unamortized balances of stock compensation expenses.
 
 As
        of
        December 31, 2005 and 2004, options to purchase 32,771,902 and 40,651,934
        shares
        of common stock, respectively, were outstanding, which were exercisable at
        weighted average exercise prices of $0.48 and $0.70 per share, respectively.
 
 *Depreciation
        and Amortization.* Depreciation and amortization is primarily attributable to the following:
        (i)
        depreciation of network and operations equipment and Company-owned modems
        and
        routers installed at customer sites, (ii) depreciation of information systems
        and computer hardware and software, (iii) amortization and depreciation of
        the
        costs of obtaining, designing and building our collocation space and corporate
        facilities and (iv) amortization of intangible capitalized costs pertaining
        to
        acquired businesses and customer line acquisitions.
 
 47
 **(Amounts
            in Thousands, Except Per Share Amounts)**
 Depreciation
        and amortization for the year ended December 31, 2005, was approximately
        $4,990
        or approximately $7,380 (60%) lower than depreciation and amortization for
        the
        year ended December 31, 2004, of approximately $12,370. The decrease was
        primarily attributable to certain intangible and fixed assets having become
        fully depreciated and amortized during 2005 combined with minimal capital
        expenditures over the last several years.
 
 Our
        identified intangible assets (excluding goodwill) consist solely of customer
        lists, which are amortized over two years. Amortization of intangible assets
        for
        the years ended December 31, 2005 and 2004 was approximately $47 and $941,
        respectively. Accumulated amortization of customer lists as of December 31,
        2005
        and 2004 was approximately $15,483 and $15,437, respectively. Customer lists
        were fully amortized at December 31, 2005.
 
 Depreciation
        pertaining to network assets was approximately $4,548 and $10,480 for the
        years
        ended December 31, 2005 and 2004, respectively. Depreciation and amortization
        pertaining to general and administrative assets was approximately $442 and
        $1,890 for the years ended December 31, 2005 and 2004,
        respectively.
 
 *Interest
        Income (Expense), Net* .
        For the
        year ended December 31, 2005, net interest expense of approximately $9,322
        consisted of approximately $9,547 in interest expense, partially offset by
        approximately $225 in interest income. Interest expense during 2005, of $9,547
        compared to interest expense of $5,474 in 2004 increased by approximately
        $4,073
        (74%) and was primarily attributable to the (i) amortization of debt discount
        of
        approximately $3,104 related to warrants issued as part of our July 2003
        note
        and warrant financing, (ii) increased amortization of debt discount related
        to
        derivatives issued under our October 2004 convertible note and warrant financing
        of approximately $197, and approximately $232 of interest expense pertaining
        to
        notes issued in connection with that transaction, (iii) and approximately
        $236
        of interest expense and $371 amortization of debt discount related to notes
        issued with our November 2, 2005 debt financing (further discussed below),
        partially offset by lower interest expense of approximately $59 related our
        July
        2003 note and warrant financing and lower interest expense pertaining to
        capital
        leases of approximately $9. Interest Income during 2005 was approximately
        $225
        compared to approximately $111 for 2004. The increase in interest income
        of
        approximately $114 was primarily due to higher average cash balances during
        2005.
 
 *Gain
        on Extinguishment of Debt.* On
        November 3, 2005, we used $5,500 of the proceeds of the first closing of
        the
        DunKnight Telecommunications Partners LLC debenture financing (discussed
        below
        under “Liquidity and Capital Resources”) to eliminate, at a substantial
        discount, $30,870 (inclusive of accrued but unpaid interest) in senior secured
        debt due July 6, 2006, originally issued to Deutsche Bank AG London, acting
        through DB Advisors LLC as Investment Agent (“Deutsche Bank”), and VantagePoint
        Venture Partners III (Q), L.P., VantagePoint Venture Partners III, L.P.,
        VantagePoint Communications Partners, L.P. and VantagePoint Venture Partners
        1996, L.P. (collectively, “VantagePoint” and, together with Deutsche Bank, the
“2003 Investors”) on July 18, 2003; cancel all outstanding shares of our Series
        Z Preferred Stock previously issued to VantagePoint that carried a liquidation
        preference of $15,680; and cancel warrants to purchase approximately 190,890,621
        shares of our common stock previously issued to the 2003 Investors.
 
 The
        above
        described transaction constituted a troubled debt restructuring in accordance
        with the guidance of SFAS 15, as concessions were granted by the 2003 Investors
        for economic reasons related to our financial difficulties that they would
        not
        otherwise have considered. The 2003 Investors, as debt holders, expected
        to
        obtain more cash and an increased probability of
  48
 **(Amounts
            in Thousands, Except Per Share Amounts)**
 receiving
        such cash by granting the concessions as opposed to refusing to grant such
        concessions.
  As
        a
        result of the above described troubled debt restructuring, we recorded a
        gain on
        the extinguishment of debt in the measurement of net income as
        follows:
  Face
                  value of notes
              
              $
              30,000Accrued
                  Interest at November 2, 2005
              
              
              870Subtotal
              
              
              30,870Debt
                  discount balance at November 2, 2005
              
              
              (11,785
              )Notes,
                  net of discount
              
              
              19,085Debt
                  pay-off amount
              
              
              (5,500
              )Subtotal
              
              
              13,585Unamortized
                  balance of deferred financing costs
              
              
              (142
              )Professional
                  fees to negotiate debt pay-off
              
              
              (25
              )Gain
                  on extinguishment of debt
              
              $
              13,418
 
 When
        calculating the gain on debt extinguishment, we did not allocate any portion
        of
        the settlement payments to the cancelled warrants or the carrying value of
        the
        Series Z preferred stock because the realizable value of those instruments
        in a
        potential bankruptcy scenario would have been *de
        minimus* .
        We also
        recognized a $2,630 positive adjustment included in net loss applicable to
        common stockholders, resulting from cancellation of the Series Z preferred
        stock, whereby the carrying value of the Series Z preferred stock was eliminated
        by an increase to additional paid-in capital.
 
 *Other
        Income (Expense), Net.* Other
        income (expense), net of approximately $245 for the year ended December 31,
        2005, was comprised of income principally related to mark to market adjustments
        reflecting a decrease in the fair value of our financial instrument derivatives.
        Other income (expense), net, of approximately $135 for the year ended December
        31, 2004, included approximately $190 of miscellaneous income, partially
        offset
        by approximately $55 of expense related to mark to market adjustments reflecting
        an increase in the fair value of our financial instrument
        derivatives.
 
 *Restructuring
        and Impairment Charges* . There
        were no increases to restructuring reserves during the year ended December
        31,
        2005 or 2004. During the year ended December 31, 2004, we charged approximately
        $540 against our restructuring reserves related to facilities expense associated
        with our vacated office space in Santa Cruz, California. The lease on that
        facility expired in December of 2004 and our restructuring reserve balance
        was
        $0 at December 31, 2004.
 
 *Income
        tax benefit.* Income
        tax benefit was approximately $0 and $62 for the years ended December 31,
        2005
        and 2004, respectively.
 
 *Loss
        from Continuing Operations, Net of Income Taxes* .
        For
        reasons explained above, loss from continuing operations, net of income taxes
        of
        approximately $2,936 for the year ended December 31, 2005 decreased by
        approximately $20,413 (87%) from $23,349 for the year ended December 31,
        2004.
   49
 **(Amounts
            in Thousands, Except Per Share Amounts)**
 **Discontinued
        Operations**
 
 We
        sold
        VISI on December 7, 2005 (as described above). As a result, we have reclassified
        VISI’s operations as discontinued operations and, accordingly, have segregated
        the assets, liabilities, revenue and expenses of the discontinued operations
        in
        our Consolidated Balance Sheets, Statements of Operations and notes thereto.
        Cash flows pertaining to discontinued operations are not disclosed separately
        in
        the Consolidated Statements of Cash Flows. Cash balances which were expected
        to
        be sold with the discontinued operations of $50 are included in assets of
        discontinued operations on the December 31, 2004 Consolidated Balance Sheet.
  Assets
        and liabilities of discontinued operations
        at December 31, 2005 and 2004 are as follows:
  December
                  31,2005
              
              2004Assets
                  of discontinued operations:Cash
              
              $
              —
              
              $
              50Accounts
                  receivable, net
              
              
              —
              
              
              412Other
                  current assets
              
              
              —
              
              
              209Fixed
                  assets, net
              
              
              —
              
              
              1,041Other
                  assets
              
              
              —
              
              
              8Goodwill,
                  net
              
              
              —
              
              
              8,482Total
              
              $
              —
              
              $
              10,202Liabilities
                  of discontinued operations:Accounts
                  payable
              
              $
              —
              
              $
              231Accrued
                  salaries
              
              
              —
              
              
              73Other
                  current liabilities
              
              
              —
              
              
              65Deferred
                  revenue
              
              
              —
              
              
              518Total
              
              $
              —
              
              $
              887
   
 50
 **(Amounts
            in Thousands, Except Per Share Amounts)**
  
 Summary
        results of discontinued operations for the years ended December 31, 2005
        compared to 2004 are as follows:
 
 Years
                    Ended December 31,2005
                
                2004Revenue
                
                $
                6,336
                
                $
                7,695Operating
                    expenses
                
                
                6,142
                
                
                7,513Income
                    from discontinued operations
                
                
                194
                
                
                182Impairment
                    loss
                
                
                (6,033
                )
                
                -Gain
                    on sale
                
                
                341
                
                
                -(Loss)
                    income from discontinuedoperations
                    before income taxes
                
                
                (5,498
                )
                
                182Income
                    taxes
                
                
                -
                
                
                (62
                )(Loss)
                    income from discontinuedoperations,
                    net of income taxes
                
                $
                (5,498
                )
                $
                120Per
                    share, basic and diluted
                
                $
                (0.02
                )
                
                nil
 
 **2004
        Compared to 2003**
 
 **Continuing
        Operations**
 
 *Revenue.* Revenue
        for the year ended December 31, 2004, decreased by approximately $2,020 (3%)
        to
        approximately $60,755, from approximately $62,775 for the year ended December
        31, 2003. The decrease in revenue primarily resulted from the decrease in
        the
        number of customers subscribing to our services as customer disconnects
        continued to outpace new customer installations.
 
 The
        revenue attributable to contributions from acquired businesses was $0, and
        $23,013 for the years ended December 31, 2004 and 2003,
        respectively.
 
 *Network
        Expenses.* Network
        expenses for the year ended December 31, 2004, decreased by approximately
        $5,137
        (11%) to approximately $42,924 from approximately $48,061 for the year ended
        December 31, 2003. The decrease resulted primarily from lower telecommunications
        expenses of approximately $4,916, lower installation subcontractor and outside
        services expenses of approximately $667, lower personnel expenses of
        approximately $243 and decreases in enhanced email and web hosting service
        expenses of approximately $134, partially offset by increases in other
        installation costs of approximately $823. The decrease in the aforedescribed
        network expenses was primarily attributable to savings resulting from the
        closure of certain duplicative central office locations that were acquired
        with
        the NAS acquisition and other network cost containment efforts and decreases
        in
        recurring loop costs associated with lower number of subscriber
        lines.
 
 *Operations
        Expenses.* Operations
        expenses for the year ended December 31, 2004, decreased by approximately
        $1,990
        (20%) to approximately $8,212 from approximately $10,202 for the year ended
        December 31, 2003. The decrease in operations expenses was primarily due
        to
  51
 **(Amounts
            in Thousands, Except Per Share Amounts)**
 decreases
        in personnel expenses of approximately $1,143, lower licenses and fees of
        approximately $363, decreases in professional services expenses of approximately
        $331, decreases in telecommunication expenses of approximately $146, and
        decreases in office expenses of approximately $90, partially offset by increases
        in miscellaneous expenses of approximately $83.
 
 *General
        and Administrative Expenses.* General
        and administrative expenses for the year ended December 31, 2004, increased
        by
        approximately $369 (3%) to approximately $11,189 from approximately $10,820
        for
        the year ended December 31, 2003. The increase was primarily due to increases
        in
        professional services costs of approximately $1,318 and miscellaneous increases
        of approximately $53, partially offset by lower bad debt expenses of
        approximately $847 and lower facilities costs of approximately
        $155.
 
 *Sales
        and Marketing Expenses.* Sales
        and
        marketing expenses of $4,243 for the year ended December 31, 2004, decreased
        by
        approximately $3,183 (43%) from approximately $7,426 for the year ended December
        31, 2003. The decrease was primarily attributable to reductions in salaries
        and
        benefits (including commissions of approximately $2,458) stemming from our
        reductions in force, lower advertising expenses of approximately $626 and
        sundry
        other expenses of approximately $99.
 
 *Stock
        Compensation Expenses.* Non-cash
        stock compensation expenses were approximately $0 and $438 for the years
        ended
        December 31, 2004 and 2003. As of December 31, 2004 and 2003, respectively,
        there were no remaining unamortized balances of stock compensation
        expenses.
 
 *Depreciation
        and Amortization.* Depreciation
        and amortization for the year ended December 31, 2004, was approximately
        $12,370
        or $3,275 (21%) lower than depreciation and amortization for the year ended
        December 31, 2003, of approximately $15,645. The decrease was primarily
        attributable to certain intangible and fixed assets having become fully
        depreciated and amortized during 2004 combined with minimal capital expenditures
        over the last several years.
 
 Our
        identified intangible assets (excluding goodwill) consist solely of customer
        lists, which are amortized over two years. Amortization of intangible assets
        for
        the years ended December 31, 2004 and 2003 was approximately $941 and $2,756,
        respectively. Accumulated amortization of customer lists as of December 31,
        2004
        and 2003 was approximately $15,437 and $14,496, respectively.
 
 Depreciation
        pertaining to network assets was approximately $10,480 and $11,586 for the
        years
        ended December 31, 2004 and 2003, respectively. Depreciation and amortization
        pertaining to general and administrative assets was approximately $1,890
        and
        $4,059 for the years ended December 31, 2004 and 2003,
        respectively.
 
 *Interest
        Income (Expense), Net* .
         For the year ended December 31, 2004, net interest expense of
        approximately $5,363 consisted of approximately $5,474 in interest expense,
        partially offset by approximately $111 of interest income. The increase in
        interest expense during 2004 of approximately $2,392 (78%) was primarily
        due to
        the non-cash amortization of debt discount of approximately $3,748 related
        to
        warrants issued as part of our July 2003 note and warrant financing and
        derivatives issued under our October 2004 convertible note and warrant financing
        and $279 of interest expense pertaining to notes issued in connection with
        those
        transactions, partially offset by lower interest expense of approximately
        $909
        pertaining to non-cash interest expense related to warrants issued during
        2003
        in consideration for loan guarantees under our
  52
 
 **(Amounts
            in Thousands, Except Per Share Amounts)**
  Reimbursement
          Agreement (as defined and discussed below), approximately $318 of lower
          interest
          pertaining to the note we issued to NAS in connection with our purchase
          of the
          NAS assets which was pre-paid in 2003, and approximately $408 of lower
          other
          interest expense primarily due to lower capital lease balances. The decrease
          in
          interest income of approximately $39 was primarily due to lower cash balances
          during 2004.
 
 *Gain
        on Extinguishment of Debt.* Gain on
        extinguishment of debt was approximately $0 and $3,500 for the years ended
        December 31, 2004 and 2003, respectively. The 2003 gain resulted from a $1,500
        settlement of a $5,000 note payable to NAS.
 
 *Other
        (Expense) Income, Net.* For the
        year ended December 31, 2004, net other income of $135, included $190 in
        miscellaneous income, partially offset by $55 representing an increase in
        the
        fair value of derivatives. For the year ended December 31, 2003, net other
        expense of approximately $5,930 included expenses that were primarily
        attributable to the loss on the sale of assets of approximately $115, the
        write-off of approximately $184 in unamortized loan origination fees and
        approximately $5,747 of unamortized deferred non-cash financing costs which
        related to warrants issued in consideration for loan guarantees under our
        Reimbursement Agreement (discussed below). These items were written-off as
        a
        result of the loan repayment and cancellation of the Credit Agreement (as
        defined and discussed below) and the Reimbursement Agreement subsequent to
        our
        $30,000 note and warrant financing on July 18, 2003. These write-offs were
        partially offset by miscellaneous income of approximately $116.
 
 *Restructuring
        and Impairment Charges* . During
        the year ended December 31, 2004, we charged approximately $540 against our
        restructuring reserve related to facilities expense associated with our vacated
        office space in Santa Cruz, California. The lease on that facility expired
        in
        December of 2004 and our restructuring reserve balance was $0 at December
        31,
        2004. During the year ended December 31, 2003, we increased our reserve for
        vacated facilities by approximately $252 as a sublet tenant vacated our Santa
        Cruz facility and we did not anticipate any additional sublets. We also charged
        approximately $647 against our restructuring reserves; of which, approximately
        $315 related to payment of certain termination fees associated with the closure
        of certain central offices during 2001, and approximately $332 related to
        facilities expense associated with our vacated office space in Santa Cruz,
        California. At December 31, 2003, the remaining restructuring reserve balance
        for our leased Santa Cruz facility of approximately $540 was included in our
        accrued liabilities.
    
 53
 **(Amounts
            in Thousands, Except Per Share Amounts)**
  
 The
        following table summarizes the additions and charges to the restructuring
        reserve from December 2002 through December 2004, and the remaining reserve
        balance at December 31, 2004:
 
 **Facility**
                **Leases**
              
              **Central**
                **Office**
                **Term.**
                **Fees**
              
              **Total**Reserve
                  balance atDec.
                  31, 2002
              
              $
              620
              
              $
              315
              
              $
              935Additions
                  to thereserve
              
              
              252
              
              
              —
              
              
              252Charges
                  to thereserve
              
              
              (332
              )
              
              (315
              )
              
              (647
              )Reserve
                  balance atDec.
                  31, 2003
              
              
              540
              
              
              —
              
              
              540Charges
                  to thereserve
              
              
              (540
              )
              
              —
              
              
              (540
              )Reserve
                  balance atDec.
                  31, 2004
              
              $
              —
              
              $
              —
              
              $
              —
 
 *Income
        tax benefit.* Income
        tax benefit was approximately $62 and $62 for the years ended December 31,
        2004
        and 2003, respectively.
 
 *Loss
        from Continuing Operations, Net of Income Taxes* .
        For
        reasons explained above, loss from continuing operations, net of income taxes
        of
        approximately $23,349 for the year ended December 31, 2004 decreased by
        approximately $11,769 (33%) from $35,118 for the year ended December 31,
        2004.
 
 **Discontinued
        Operations**
 
 Summary
        results of discontinued operations for the years ended December 31, 2004
        compared to 2003 are as follows:
     
 54
 **(Amounts
            in Thousands, Except Per Share Amounts)**
   Year
                  Ended December 31,2004
              
              2003Revenue
              
              $
              7,695
              
              $
              8,558Operating
                  expenses
              
              
              7,513
              
              
              8,375Income
                  from discontinuedOperations
                  before income taxes
              
              
              182
              
              
              183Income
                  taxes
              
              
              (62
              )
              
              (62
              )Income
                  from discontinuedoperations,
                  net of income taxes
              
              $
              120
              
              $
              121Per
                  share, basic and diluted
              
              
              nil
              
              
              nil
 
 **Liquidity
        and Capital Resources**
 
 We
        have
        financed our capital expenditures, acquisitions and operations primarily
        with
        the proceeds from the sale of stock and from borrowings, including equipment
        lease financings. As of December 31, 2005, we had cash and cash equivalents
        of
        approximately $8,765 and negative working capital of approximately $3,824.
        Working capital has been negatively impacted by our secured debt of
        approximately $10,289 at December, 31, 2005, net of discounts, which matures
        during the third quarter of 2006. On February 1, 2006, we incurred $5,000
        of
        additional secured debt in connection with the second closing of our financing
        transaction with DunKnight Telecommunications Partners LLC and its co-investor,
        which also matures during the third quarter of 2006.
 
 *Discontinued
        Operations:*
 
 Cash
        provided to us from discontinued operations (included in the consolidated
        cash
        flow discussions below) were comprised as follows:
 
 Year
                  Ended December 31,2005
              
              2004
              
              2003Cash
                  provided by operating activities
              
              $
              768
              
              $
              940
              
              $
              949Cash
                  used in investing activities -purchases
                  of property and equipment
              
              
              (268
              )
              
              (201
              )
              
              (511
              )Cash
                  used in financing activities -principal
                  payments on capital leases
              
              
              —
              
              
              (13
              )
              
              (15
              )Net
                  Cash provided to Parent Company
              
              $
              500
              
              $
              726
              
              $
              423
 
 *Cash
        Provided By Financing Activities.* Net cash
        provided by financing activities in the years ended December 31, 2005, 2004
        and
        2003, was approximately $328, $3,919 and $27,311, respectively. For 2005,
        this
        cash was provided from the initial $6,000 proceeds from our debt restructuring
        financing which occurred in November of 2005 (discussed below) and $93 of
        proceeds from an equipment lease. We used $5,500 of the initial $6,000 proceeds
        from this financing to extinguish, at a substantial discount, approximately
        $30,870 (including accrued but
  55
 **(Amounts
            in Thousands, Except Per Share Amounts)**
 unpaid
        interest) in senior secured debt due July 6, 2006, and cancel all outstanding
        shares of our Series Z preferred stock that carried a liquidation preference
        of
        $15,680 and cancel warrants to purchase approximately 190,890,621 shares
        of our
        common stock. We also repaid approximately $177 principal of our $4,250 secured
        convertible note and approximately $88 principal on our equipment lease.
        For
        2004, this cash was provided primarily from the sale of a secured convertible
        note issued together with warrants to purchase our common stock. For 2003,
        this
        cash was provided primarily from the sale of our senior secured notes and
        warrants issued in accordance with the Note and Warrant Purchase Agreement
        we
        entered into in July, 2003 with the 2003 Investors (the “Note and Warrant
        Purchase Agreement”). 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 a portion of these
        proceeds to acquire complementary businesses or assets. ** From
        time
        to time we have entered into equipment lease financing arrangements with
        vendors. In the aggregate, there was approximately $54 and $50 outstanding
        under
        capital lease obligations at December 31, 2005 and 2004,
        respectively.
 
 *Details
        of Cash Provided by Financing Activities.*
 
 *2005
        Financing Activities* .
        On
        November 2, 2005, pursuant to the terms of a Securities Purchase Agreement
        dated
        such date between DunKnight Telecom Partners LLC (“DunKnight”) and the Company
        (as amended on January 3, 2006, the “DunKnight Purchase Agreement”), we
        consummated a private placement to DunKnight of 18% Secured Debentures, at
        a
        discount to their face principal amount, due September 4, 2006 (the
“Debentures”). Pursuant to the terms of the DunKnight Purchase Agreement, as
        described in more detail below, we borrowed an aggregate of $10,000 in exchange
        for our issuance of an aggregate $13,000 in face principal amount of Debentures.
 
 At
        the
        first closing under the DunKnight Purchase Agreement on November 2, 2005,
        we
        issued a $8,000 face principal amount Debenture to DunKnight and received
        $6,000
        in gross cash proceeds. At the second closing on February 1, 2006, we issued
        an
        additional $5,000 in face principal amount of Debentures to DunKnight and
        its
        co-investor (Knight Vision Foundation) and received an additional $4,000
        in
        gross cash proceeds. Each Debenture matures on September 4, 2006 and carries
        an
        annual interest rate of 18%, payable monthly in arrears in cash based on
        the
        face principal amount of the Debenture. Interest is based on a 360-day year
        and
        the actual number of days elapsed. The monthly cash requirements in respect
        of
        interest payments are approximately $120 following the first closing, commencing
        on December 1, 2005, and an additional $75 following the second closing,
        commencing on March 1, 2006, for an aggregate approximate $195 per month.
        Overdue interest is subject to an additional annual interest rate of 10.5%
        and,
        upon an event of default, the interest rate will increase by an additional
        10.5%. Upon the occurrence of an event of default, DunKnight may declare
        all
        amounts under the Debentures immediately due and payable in cash and, in
        such
        event, we would be required to pay 112% of the principal amount of the
        Debentures, plus all accrued and unpaid interest and any unpaid penalties
        or
        late fees. We may prepay the entire principal amount due under the Debentures
        at
        any time without any additional premium or penalty.
 
 We
        recorded the $2,000 discount between the $6,000 cash received and the $8,000
        face principal of the first closing as a debt discount which is being amortized
        to interest expense over the term of the Debenture, using the effective interest
        method. We amortized $371 of this discount to interest expense in
        2005.
 
 Pursuant
        to the terms of that certain Implementation Agreement dated November 2, 2005,
  56
 
 **(Amounts
            in Thousands, Except Per Share Amounts)**
  among
          us
          and the 2003 Investors (the “Implementation Agreement”), on November 3, 2005, we
          used $5,500 of the proceeds of the first closing of the DunKnight Debenture
          financing to eliminate, at a substantial discount, $30,870 (inclusive of
          accrued
          but unpaid interest) in senior secured debt due July 6, 2006 originally
          issued
          to the 2003 Investors on July 18, 2003; cancel all outstanding shares of
          our
          Series Z preferred stock previously issued to VantagePoint that carried
          a
          liquidation preference of $15,680; and cancel warrants to purchase approximately
          190,890,621 shares of our common stock previously issued to or held by
          the 2003
          Investors. In addition, the Implementation Agreement terminated ,
          subject
          to exceptions for certain limited surviving provisions, all
          previously existing agreements under which the 2003 Investors and their
          affiliates had imposed numerous financial, operational, and other contractual
          obligations on us.
 
 As
        a
        result of the above described debt financing (which qualifies as a troubled
        debt
        restructuring in accordance with the guidance of SFAS 15, as concessions
        were
        granted by the 2003 Investors for economic reasons related to our financial
        difficulties that they would not otherwise have considered), we recorded
        a gain
        on the extinguishment of debt in the measurement of net income as
        follows:
  Face
                  value of notes
              
              $
              30,000Accrued
                  Interest at November 2, 2005
              
              
              870Subtotal
              
              
              30,870Debt
                  discount balance at November 2, 2005
              
              
              (11,785
              )Notes,
                  net of discount
              
              
              19,085Debt
                  pay-off amount
              
              
              (5,500
              )Subtotal
              
              
              13,585Unamortized
                  balance of deferred financing costs
              
              
              (142
              )Professional
                  fees to negotiate debt pay-off
              
              
              (25
              )Gain
                  on extinguishment of debt
              
              $
              13,418
 
 When
        calculating the gain on debt extinguishment, we did not allocate any portion
        of
        the settlement payments to the cancelled warrants or the carrying value of
        the
        Series Z preferred stock because the realizable value of those instruments
        in a
        bankruptcy scenario would have been *de
        minimus* .
        We
        recognized a $2,630 positive adjustment included in net loss applicable to
        common stockholders, resulting from cancellation of the Series Z preferred
        stock, whereby the carrying value of the Series Z preferred stock was eliminated
        by an increase to additional paid-in capital.
 
 *2004
        Financing Activities* .
        On
        October 7, 2004, we closed a financing transaction with Laurus Master Fund,
        Ltd.
        (“Laurus”), pursuant to which we sold to Laurus convertible notes and a warrant
        to purchase our common stock. The securities issued to Laurus were a $4,250
        Secured Convertible Minimum Borrowing Note (the “MB Note”), a $750 Secured
        Revolving Note (the “Revolving Note” and, together with the MB Note, the “Laurus
        Notes”), and a Common Stock Purchase Warrant to purchase 1,143,000 shares of our
        common stock (the “Laurus Warrant”). As part of the financing transaction with
        Laurus, we paid Laurus a closing fee of $163. Our obligations under the Laurus
        Notes are secured by a security interest and first priority lien on certain
        of
        our trade accounts receivable. As of December 31, 2005, our outstanding
        principal debt to Laurus under the MB Note and the Revolving Note, respectively,
        was $4,073 and $0.
 
 57
 **(Amounts
            in Thousands, Except Per Share Amounts)**
 We and
        Laurus placed the transactions and funds into escrow on August 31, 2004,
        pending
        our procurement of a waiver of certain rights of the 2003 Investors, represented
        by Deutsche Bank Trust Company Americas (“DBTCA”), and agreement from the 2003
        Investors to subordinate their lien on our trade accounts receivable to the
        lien
        granted to Laurus. On October 7, 2004, we reached agreement with Laurus and
        the
        2003 Investors on subordination terms and the initial financing proceeds
        of
        $4,250 were released from escrow, of which $4,024 were deposited into a Company
        account with DBTCA. Our withdrawal and use of such deposited financing proceeds
        were subject to the prior approval of DB Advisors, LLC, as advisor to Deutsche
        Bank, and DBTCA, which approvals we obtained in March of 2005.
 
 The
        Laurus Notes mature on August 1, 2006. Annual interest on the Laurus Notes
        is
        equal to the prime rate published in The Wall Street Journal from time to
        time,
        plus two percent, provided, that, such annual rate of interest on the Laurus
        Notes may not be less than six percent or more than seven percent.
        Notwithstanding the six percent interest rate floor, the interest rate on
        the
        Laurus Notes will be decreased two percent per annum for each 25% increase
        in
        the price of our common stock above $0.28 per share, if, at that time, we
        have
        on file with the SEC a registration statement for the shares of common stock
        issued or issuable upon conversion of the MB Note and upon exercise of the
        Laurus Warrant and, if not, the interest rate will be decreased one percent
        per
        annum for each 25% increase in the price of our common stock above $0.28
        per
        share. Any change in the interest rate on the Laurus Notes will be determined
        on
        a monthly basis. In no event will the interest rate on the Laurus Notes be
        less
        than 0.00%.  Interest
        on the Laurus Notes is payable monthly in arrears on the first day of each
        month
        during the term of the Laurus Notes. As of December 31, 2005 the interest
        rate
        on the Laurus Notes was 7%.
 
 The
        initial fixed conversion price under the Laurus Notes is $0.28 per share.
        The
        initial conversion price and the number of shares of our common stock issuable
        upon conversion of each of the Laurus Notes are subject to adjustment in
        the
        event that we reclassify, subdivide or combine our outstanding shares of
        common
        stock or issue additional shares of our common stock as a dividend on our
        outstanding shares of common stock. The fixed conversion price is subject
        to
        anti-dilution protection adjustments, on a weighted average basis, upon our
        issuance of additional shares of common stock at a price that is less than
        the
        then current fixed conversion price. Subject to certain limitations, Laurus
        may,
        at any time, convert the outstanding indebtedness of each of the Laurus Notes
        into shares of our common stock at the then applicable conversion price.
        Subject
        to certain trading volume and other limitations, the MB Note will automatically
        convert at the then applicable conversion price into shares of our common
        stock
        if, at any time while an effective registration statement under the Securities
        Act of 1933, as amended, for the resale of our common stock underlying the
        MB
        Note and Laurus Warrant is outstanding, the average closing price of our
        common
        stock for ten consecutive trading days is at least $0.31, subject to certain
        adjustments. The Revolving Note is potentially convertible into more than
        $750
        worth of our common stock, depending upon the amount of aggregate borrowings
        by
        us under the Revolving Note and the amount of conversions by Laurus.
 
 The
        Laurus Warrant grants Laurus the right to purchase up to 1,143,000 shares
        of our
        common stock at an exercise price of $0.35 per share. On October 7, 2004,
        we
        also issued a warrant to purchase 178,571 shares of our common stock at an
        exercise price of $0.35, and made a cash payment of approximately $38, to
        TN
        Capital Equities, Ltd. (“TN Capital”), as compensation for TN Capital’s having
        served as the placement agent in the financing transaction with Laurus. The
        Laurus Warrant and the warrant issued to TN Capital each expire on August
        31,
        2009.
 
 In
        exchange for agreement by the 2003 Investors to subordinate to Laurus their
        prior lien
  58
 **(Amounts
            in Thousands, Except Per Share Amounts)**
  on
        certain of our accounts receivable, we issued warrants to the 2003 Investors
        (the “2004 Warrants”), allocated ratably in accordance with their interests in
        our July 2003 note and warrant financing, to purchase up to an aggregate
        of
        19,143,000 shares of our common stock. The 2004 Warrants were approved by
        our
        stockholders on February 9, 2005; were to expire on July 18, 2006; and were
        exercisable solely in the event of a change of control of the Company where
        the
        price paid per share of common stock or the value per share of common stock
        retained by our common stockholders in any such change of control was less
        than the then current per share exercise price of the warrants issued to
        the
        2003 Investors. We determined that the fair value of the 2004 Warrants was
        not
        material and accordingly no modification to the July 18, 2003 note and warrant
        transaction was required. On November 3, 2005, the 2004 Warrants were cancelled
        pursuant to the terms of the Implementation Agreement.
 
 We
        determined, in accordance with the guidance of SFAS 133, “ *Accounting
        for Derivative Instruments and Hedging Activities,”* that
        the
        following derivatives resulted from the Laurus financing transaction described
        above: (i) the conversion option of the MB Note, and (ii) the 1,321,571 warrants
        issued to Laurus and TN Capital. Accordingly, we recorded the fair value
        of
        these derivatives approximating $231 as a debt discount and a non-current
        liability on our consolidated balance sheet. The note discount is being
        amortized to interest expense using the “Effective Interest Method” of
        amortization over the 22 month term of the MB Note. For the years ended December
        31, 2005 and 2004, approximately $125 and $27, respectively, of this note
        discount was amortized to interest expense. Also, at December 31, 2005, the
        value of the derivatives was decreased by approximately $243 to the then
        current
        fair value of approximately $43 with a corresponding credit to other income.
        At
        December 31, 2004, the value of the derivatives was increased by approximately
        $55 to the then current fair value of approximately $286 with a corresponding
        charge to other expense. We will continue to mark these derivatives to market
        on
        a quarterly basis. Also, on December 31, 2005, our borrowing base calculation
        based on eligible accounts receivable balances fell below the note balance
        and
        accordingly we paid down approximately $177 of the MB Note principal, leaving
        a
        MB Note principal balance of approximately $4,073.
 
 *2002
        and 2003 Financing Activities* **.** We
        entered into a Revolving Credit and Term Loan Agreement, dated as of December
        13, 2002 (the “Credit Agreement”), with a commercial bank providing for a
        revolving line of credit of up to $15,000.  Interest on borrowings under
        the Credit Agreement was payable at 0.5% percent above the Federal Funds
        Effective Rate. Our ability to borrow amounts available under the Credit
        Agreement was subject to the bank’s receipt of a like amount of guarantees from
        certain of our investors and/or other guarantors. On February 3, 2003, we
        borrowed $6,100 under the Credit Agreement. As of March 5, 2003, certain
        of our
        investors had guaranteed $9,100 under the Credit Agreement. On July 18, 2003,
        we
        repaid the $6,100 outstanding balance plus accrued interest, and terminated
        the
        Credit Agreement. We wrote off approximately $184 of the related unamortized
        balance of loan origination fees.
 
 We
        entered into a Reimbursement Agreement, dated as of December 27, 2002 (the
        “Reimbursement Agreement”), with VantagePoint Venture Partners III (Q), L.P.
        (“VP”), as agent and guarantor, and Columbia Capital Equity Partners (together
        with its co-guarantors, “Columbia”) and other holders of our Series X preferred
        stock and Series Y preferred stock or their affiliates (the “Guarantors”), and a
        related Security Agreement. Pursuant to the terms of the Reimbursement
        Agreement, on December 27, 2002, VP and Columbia issued guarantees in an
        aggregate amount of $6,100 to support certain of our obligations under the
        Credit Agreement. On July 18, 2003, in connection with the termination of
        the
        Credit Agreement, the guarantees, the Reimbursement Agreement and the related
        Security Agreement were terminated.
 
 59
 **(Amounts
            in Thousands, Except Per Share Amounts)**
 Pursuant
        to the terms of the Reimbursement Agreement, on December 27, 2002, we issued
        warrants to purchase 12,013,893 shares of our common stock to VP and certain
        of
        its affiliates and Columbia, in consideration for their guarantees aggregating
        $6,100. All such warrants had a ten year life and an exercise price of $0.50
        per
        share. **** On
        March
        26, 2003, we issued additional warrants, exercisable for ten years, to purchase
        a total of 936,107 shares of our common stock at $0.50 per share, to VP and
        certain of its affiliates and Columbia, bringing the total number of warrants
        issued in connection with the Reimbursement Agreement to 12,950,000. All
        of the
        foregoing warrants held by Columbia were either exercised or transferred
        to VP
        and its affiliates. On November 3, 2005, all of the warrants held by VP and
        its
        affiliates were cancelled pursuant to the terms of that certain Implementation
        Agreement with the 2003 Investors.
 
 On
        February 3, 2003, we borrowed $6,100 under the Credit Agreement and the
        Guarantors’ guarantees of the subject loan became effective. On February 3,
        2003, we valued the 12,950,000 warrants at $0.514 each with a total value
        of
        approximately $6,656. The valuation was performed using a Black-Scholes
        valuation model with the following assumptions: (i) a risk free interest
        rate of
        4.01% (ten-year Treasury rate), (ii) a zero dividend yield, (iii) a ten year
        expected life, (iv) an expected volatility of 153%, (v) an option exercise
        price
        of $0.50 per share and (vi) a current market price of $0.52 per share (the
        closing price of our common stock on February 3, 2003). Since the warrants
        were
        issued in consideration for loan guarantees, which enabled us to secure
        financing at below market interest rates, we recorded their value as a deferred
        debt financing cost to be amortized to interest expense over the term of
        the
        loan (approximately 57 months) using the “Effective Interest Method” of
        amortization. On July 18, 2003, we repaid our outstanding loan balance that
        was
        secured by these loan guarantees, and terminated the Credit Agreement.
        Accordingly, we wrote-off approximately $5,747 of the related unamortized
        balance of deferred financing costs to other expense. For the year ended
        December 31, 2003, expense relating to amortized deferred financing costs
        approximated $909.
 
 On
        March
        5, 2003, we and VP entered into Amendment No. 1 to the Reimbursement Agreement,
        pursuant to which VP increased its guarantee by $3,000, bringing the aggregate
        guarantees by all Guarantors under the Reimbursement Agreement, as amended,
        to
        $9,100. As consideration for VP’s increased guarantee, if we closed an equity
        financing on or before December 3, 2003, we were authorized to issue VP and
        certain of its affiliates additional warrants to purchase the type of equity
        securities issued by us in such equity financing. The number of such additional
        warrants would be determined by dividing the per share price of such equity
        securities into a thousand dollars. Accordingly, since we closed a financing
        on
        July 18, 2003, we issued to VP and certain of its affiliates in December
        2003,
        additional warrants with a three-year life to purchase 2,260,909 shares of
        our
        common stock at a per share price of $0.4423. On November 3, 2005, all of
        these
        warrants were cancelled pursuant to the terms of the Implementation Agreement
        with the 2003 Investors.
 
 On
        July
        18, 2003, we entered into the Note and Warrant Purchase Agreement with the
        2003
        Investors relating to the sale and purchase of an aggregate of (i) $30,000
        in
        senior secured promissory notes (the “Notes”) and (ii) warrants to purchase
        157,894,737 shares of our common stock for a period of three years at an
        exercise price of $0.38 per share (the “2003 Warrants”). The aggregate purchase
        price for the Notes and 2003 Warrants was $30,000.
 
 Subject
        to the terms and conditions of the Note and Warrant Purchase Agreement, we
        issued an aggregate of $30,000 in principal amount of Notes to the 2003
        Investors on July 18, 2003. Principal on the Notes was payable in a single
        payment on July 18, 2006. The Notes provided for an annual interest rate
        of
        1.23%, payable in cash, quarterly in arrears commencing
  60
 **(Amounts
            in Thousands, Except Per Share Amounts)**
 on
        October 31, 2003, unless we were to elect to capitalize such interest and
        pay it
        together with the principal amount of the Notes at maturity on July 18, 2006.
        Pursuant to that certain Security Agreement entered into by and among the
        applicable parties in connection with the Note and Warrant Purchase Agreement,
        our obligations under the Notes were secured by a security interest in a
        majority of our personal property and assets and certain of our subsidiaries. The
        terms
        of the Notes also contained provisions that limited our ability to incur
        additional indebtedness and place other restrictions on our business. Prior
        to
        the due date of the first interest payment, we elected to defer all interest
        payments on the Notes until further notice. Interest expense accrued on the
        Notes for the years ended December 31, 2005, 2004 and 2003, approximated
        $320,
        $379 and $171, respectively.
 
 Subject
        to the terms and conditions of the Note and Warrant Purchase Agreement, we
        issued a warrant to purchase 12,950,000 shares of our common stock to Deutsche
        Bank on or about August 12, 2003. We issued the remaining 2003 Warrants to
        purchase an aggregate of 144,944,737 shares of our common stock to Deutsche
        Bank
        (105,471,053 shares) and VantagePoint (39,473,684 shares) on or about December
        9, 2003. On November 3, 2005, the Notes and the 2003 Warrants were cancelled
        pursuant to the terms of the Implementation Agreement with the 2003 Investors.
 
 On
        July
        18, 2003, we recorded the note and warrant transactions in accordance with
        Accounting Principles Board Opinion No. 14, “ *Accounting
        for Convertible Debt and Debt Issued with Stock purchase Warrants,”* whereby
        a
        fair value was ascribed to the 157,894,737 2003 Warrants to be issued to
        the
        2003 Investors (related to the Note and Warrant Purchase Agreement) together
        with the 2,260,909 warrants to be issued to VP and certain of its affiliates
        (related to VP’s increased guarantee under Amendment No. 1 to the Reimbursement
        Agreement) using a Black-Scholes valuation model with the following assumptions:
        (i) a risk free interest rate of 2.24% (three-year Treasury rate), (ii) a
        zero
        dividend yield, (iii) a three-year life, (iv) an expected volatility of 152%,
        (v) a warrant option price of $0.38 per share for the 157,894,737 2003 Warrants
        and $0.4423 per share for the 2,260,909 warrants, and (vi) a current market
        price of $0.83 per share (the closing price of our common stock on July 18,
        2003). A fair value was ascribed to the $30,000 Notes using a present value
        method with a 19% discount rate. The relative fair value of the warrants
        representing 87% of the combined fair value of the warrants and Notes was
        applied to the $30,000 proceeds to determine a note discount of approximately
        $26,063, which was recorded as a reduction to the Notes payable and an increase
        to additional paid in capital. The note discount was being amortized to interest
        expense using the “Effective Interest Method” over the 36 month term of the
        Notes. For the years ended December 31, 2005, 2004 and 2003, approximately
        $8,058, $4,954 and $1,266, respectively, of the note discount had been amortized
        to interest expense.
 
 Also,
        on
        July 18, 2003, in connection with the Note and Warrant Purchase Agreement, we ,
        the
        2003 Investors and certain of our stockholders entered an Amended and Restated
        Stockholders Agreement (the “Amended and Restated Stockholders Agreement”),
        which provided for rights relating to election of directors, the registration
        of our common
        stock and certain protective provisions. On November 3, 2005, the Amended
        and
        Restated Stockholders Agreement was cancelled and terminated pursuant to
        the
        terms of the Implementation Agreement with the 2003 Investors.
 
 As
        part
        of the agreements negotiated in conjunction with our $30,000 financing on
        July
        18, 2003, we and holders of a majority of the Series X preferred stock and
        Series Y preferred stock agreed to extend the redemption dates of the Series
        X
        preferred stock and Series Y preferred stock from January 1, 2005 to July
        18,
        2006. Also, as a result of this financing
  61
 **(Amounts
            in Thousands, Except Per Share Amounts)**
 transaction,
        in accordance with the terms of the Series Y preferred stock, the Series
        Y
        preferred stock conversion price was adjusted from $0.50 per share (each
        Series
        Y preferred share was convertible into 2,000 shares of common stock) to $0.4423
        per share (each Series Y preferred share became convertible into approximately
        2,260.9 shares of common stock).
 
 A
        portion
        of the proceeds from the sale of the 2003 Notes and Warrants was used by
        us to
        pre-pay approximately $10,200 for the complete repayment of approximately
        $14,600 of our debt and lease obligations.
  The
          following table depicts our outstanding debt balances at December 31, 2005
          and
          2004:
 December
                      31,2005
                  
                  2004DunKnight
                      secured debentures
                  
                  $
                  8,000
                  
                  $
                  —Unamortized
                      debt discount
                  
                  
                  (1,628
                  )
                  
                  —Subtotal
                  
                  
                  6,372
                  
                  
                  —Deutsche
                      Bank/VantagePoint secured notes
                  
                  
                  —
                  
                  
                  30,000Accrued
                      interest
                  
                  
                  —
                  
                  
                  550Unamortized
                      debt discount
                  
                  
                  —
                  
                  
                  (19,843
                  )Subtotal
                  
                  
                  —
                  
                  
                  10,707Laurus
                      secured convertible note
                  
                  
                  4,073
                  
                  
                  4,250Unamortized
                      debt discount - derivatives
                  
                  
                  (79
                  )
                  
                  (204
                  )Unamortized
                      debt discount - closing fees
                  
                  
                  (77
                  )
                  
                  (209
                  )Subtotal
                  
                  
                  3,917
                  
                  
                  3,837Total
                      debt, net of discount
                  
                  
                  10,289
                  
                  
                  14,544Less
                      current portion
                  
                  
                  (10,289
                  )
                  
                  —Non-current
                      portion
                  
                  $
                  —
                  
                  $
                  14,544
  *Cash
        Used In Operating Activities.* In 2005,
        2004 and 2003, net cash used in our operating activities was approximately
        $3,904, $7,541 and $13,715, respectively. Net cash used in operating activities
        of $3,904 in 2005, decreased by $3,637 (48%) from $7,541 in 2004. The
        improvement in net cash used for operating activities was attributable to
        lower
        net loss of approximately $14,795 primarily due to reduced operating expenses
        resulting from our reductions in force during 2004 and other cost containment
        efforts, partially offset by net lower non-cash items of approximately $11,955,
        including: depreciation and amortization, provisions for bad debt expense,
        sales
        credits and allowances, stock compensation, impairment charge on discontinued
        operations, amortization of debt issuance costs, amortization of debt discount
        and gain on extinguishment of debt. Also contributing to the improved operating
        cash flow were a higher reduction in accounts receivable of approximately
        $269,
        a net decrease in prepaid and other assets of approximately $919, partially
        offset by lower net accounts payable, accrued expenses and deferred revenue
        of
        approximately $93. Net cash used in operating activities of $7,541 in 2004
        decreased by $6,174 (45%) from $13,715 in 2003. The improvement in net cash
        used
        for operating activities was primarily due to lower net loss of approximately
        $11,768 primarily due to reduced operating expenses resulting from our cost
        containment efforts, partially offset by lower non-cash items including:
        depreciation and amortization, provisions for bad debt expense and sales
        credits
        and allowances, stock compensation, amortization of debt issuance costs,
        amortization of debt discount and gain on note settlement totaling approximately
        $4,645. Also contributing to the improved operating cash flow was a net
        improvement in accounts receivable of approximately $6,742 (due to a decrease
        in
        accounts receivable of approximately $589 in 2004 primarily resulting from
        lower
        revenues combined with improved collections, compared to an increase in 2003
        of
        approximately $6,153 due to the acquisition of the NAS assets). These
        improvements were partially offset by (i) lower net accrued expenses and
        accounts payable of approximately $3,776 (caused by a decrease of approximately
        $2,689 in 2004 combined with an increase of approximately $1,087 in 2003),
        principally due to payment of previously accrued network costs related to
        operation of the NAS assets, (ii) a net decrease in deferred revenue of
        approximately $2,662, (caused by approximately $1,268 decrease in 2004 due
        to
        deferred amortization of installation revenue exceeding deferred new
        installations versus an increase of approximately $1,394 in 2003 resulting
        from
        the acquisition of the NAS assets), and (iii) a net increase in other assets
        of
        approximately $1,253 (due to approximately $386 increase in 2004 compared
        to a
        decrease in 2003 of approximately $867).
 
 *Cash
        Used in Investing Activities.* Net cash
        provided by investing activities in 2005 was $5,312, while net cash used
        in
        investing activities for 2004 and 2003, was approximately $3,078 and $11,135,
        respectively. For the year ended December 31, 2005, approximately $3,275
        was
        provided from the sale of discontinued operations, net of cash acquired by
        the
        purchaser and approximately $2,429 was provided through release of restricted
        cash from the Laurus financing and from our share from matching contributions
        for terminated employees in our 401(k) plan. The cash provided was partially
        offset by approximately $392 of cash used for the purchase of equipment.
        For the
        year ended December 31, 2004, approximately $651 was used primarily for
  62
 
 **(Amounts
            in Thousands, Except Per Share Amounts)**
  the
          purchase of equipment and $2,427 was attributable to an increase in restricted
          cash resulting from the balance of proceeds of the Laurus financing. For
          the
          year ended, December 31, 2003, approximately $2,405 was used primarily
          for the
          purchase of equipment and approximately $8,743 was used for acquisition
          of
          certain network assets and associated subscriber lines of NAS and TalkingNets.
          Also, a $4 increase in restricted cash, resulted from an increase of our
          share
          of matching contributions for terminated employees in our 401(k) plan.
          These
          expenditures were partially offset by approximately $17 in proceeds from
          sale of
          equipment.
 
 The
        development and expansion of our business required significant start-up capital
        expenditures (we spent approximately $55,942 and $33,811, including collocation
        application fees, in calendar years 2000 and 1999, respectively). During
        the
        last three years, capital expenditures, excluding acquisitions, have been
        made
        primarily for maintenance and/or replacement equipment, and were approximately
        $392, $651 and $2,405 for the years ended December 31, 2005, 2004 and 2003,
        respectively. The actual amounts and timing of our future capital expenditures
        will vary depending on the speed at which we expand and implement our VoIP
        network facilities and implement service for our customers. We currently
        anticipate spending less than $500 for capital expenditures, during the year
        ending December 31, 2006, primarily for the maintenance of our network and
        for
        minimal replacement equipment. The actual amounts and timing of our capital
        expenditures could differ materially both in amount and timing from our current
        plans. In addition to capital spent on equipment, we have spent the amounts
        described below for certain acquisitions:
 
 In
        December of 2002, the U.S. Bankruptcy Court for the District of Delaware
        approved our bid to purchase the on-network assets and associated subscriber
        lines of NAS for $14,000, consisting of $9,000 in cash and $5,000 in a note
        payable to NAS. We closed the transaction on January 10, 2003, whereby we
        acquired NAS’s operations and network
        assets, associated equipment in approximately 300 central offices and
        approximately 11,500 associated subscriber lines. In connection with the
        closing
        of the NAS transaction, on January 10, 2003, we hired approximately 78 former
        NAS employees. No pre-closing liabilities were assumed in connection with
        the
        NAS transaction. The cash portion of the purchase price was paid from our
        existing cash. The NAS note had a term of approximately 5 years and carried
        interest at 12% and was secured by the NAS network assets acquired. During
        August 2003, we
        paid $1,500 to repurchase and cancel the $5,000 note issued by us to NAS.
        The
        difference between the $5,000 note and the $1,500 settlement amount was recorded
        as other income during 2003.
 
 In
        connection with the integration of the NAS business, on January 17, 2003,
        we had
        a reduction in force of 35 employees at our headquarters facility in New
        Haven,
        Connecticut. We paid approximately $62 **** in
        severance to the terminated employees.
 
 On
        September 8, 2003, in accordance with the terms of an asset purchase agreement
        by and among the TalkingNets entities and the Company, dated April 8, 2003,
        we
        completed the transaction to acquire certain assets and subscribers of
        TalkingNets (the “TalkingNets Assets”) for approximately $726 in cash (the
“TalkingNets Asset Purchase Agreement”). As TalkingNets had filed a voluntary
        petition for Chapter 11 reorganization in February 2003, the TalkingNets
        Asset
        Purchase Agreement was subject to the approval of the U.S. Bankruptcy Court
        for
        the Eastern District of Virginia. On April 9, 2003, the TalkingNets Asset
        Purchase Agreement and the transactions contemplated thereby were approved
        by
        the Bankruptcy Court. On April 11, 2003, we paid the full purchase price
        of
        approximately $726 into escrow.
 
 The
        TalkingNets acquisition has been accounted for under the purchase method
        of
        accounting in accordance with SFAS No. 141. The results of TalkingNets’
operations have been included in
  63
 **(Amounts
            in Thousands, Except Per Share Amounts)**
 our
        consolidated financial statements since September 8, 2003 (the closing date).
        The allocated estimated fair values of the acquired assets at the date of
        acquisition exceeded the purchase price and, accordingly, were written down
        on a
        pro-rata basis by asset group to the purchase price of approximately $851
        ($726
        plus associated direct acquisition costs of approximately $125) as follows:
        (i)
        certain accounts receivables of approximately $55, (ii) intangible assets
        pertaining to approximately 90 acquired subscriber lines of approximately
        $111,
        and (iii) property and equipment of $685.
 
 *Contractual
        Obligations.* As
        of
        December 31, 2005, we had the following contractual obligations:
 
 Payments
                  due by periodContractual
                  obligations
              
              Total
              
              Less
                  than 1 year
              
              1-3
                  years
              
              3-5
                  years
              
              More
                  than 5 yearsSecured
                  debt obligations (1)
              
              $
              12,073
              
              $
              12,073
              
              $
              —
              
              $
              —
              
              $
              —Capital
                  lease obligations
              
              
              54
              
              
              54
              
              
              —
              
              
              —
              
              
              —Operating
                  lease obligationsFacilities
                  leases
              
              
              450
              
              
              450
              
              
              —
              
              
              —
              
              
              —Operating
                  equipment &maintenance
                  contracts
              
              
              213
              
              
              170
              
              
              43
              
              
              —
              
              
              —Purchase
                  obligationsSoftware
                  maintenance andsupport
              
              
              155
              
              
              150
              
              
              5
              
              
              —
              
              
              —Marketing
                  services
              
              
              54
              
              
              54
              
              
              —
              
              
              —
              
              
              —Network
                  service providers (2)
              
              
              4,549
              
              
              2,688
              
              
              1,753
              
              
              108
              
              
              —Total
              
              $
              17,548
              
              $
              15,639
              
              $
              1,801
              
              $
              108
              
              $
              —
 
 Notes:
 (1)
              Represents
                  $8,000 aggregate principal amount of senior secured debentures
                  which
                  mature on September 4, 2006 and $4,073 aggregate principal amount
                  of a
                  secured convertible note which matures on August 1, 2006. Amounts
                  shown on
                  our balance sheets relating to this indebtedness at December 31,
                  2005 and
                  2004 are net of debt discounts. On February 1, 2006, we issued
                  an
                  additional $5,000 aggregate amount of senior secured debentures
                  which also
                  mature on September 4, 2006.
 (2)
              Includes
                  early termination fees that would be assessable in connection with
                  the
                  termination of certain purchase commitments with various service
                  providers.
 
 We
        transmit data across our network via transmission facilities that are leased
        from certain carriers, including Level 3 Communications, Inc. and MCI. The
        failure of any of our data transport carriers to provide acceptable service
        on
        acceptable terms could have a material adverse effect on our operations.
 
 *Cash
        Resources and Liquidity Constraints.* Our
        independent registered public accounting firm has noted in their report on
        our
        financial statements that our sustained operating losses raise substantial
        doubt
        about our ability to continue as a going concern. Based on our current business
        plans and projections, we believe that our existing cash resources and cash
        expected to be generated from operations will be sufficient to fund our
        operating losses, capital expenditures, lease payments, and working capital
        requirements through the second quarter of 2006. As a
  64
 **(Amounts
            in Thousands, Except Per Share Amounts)**
 result,
        we will need to raise additional financing, through some combination of
        borrowings or the sale of equity or debt securities, during 2006 to finance
        our
        2006 requirements and to enable us to repay all of our existing secured debt.
        We
        are pursuing financing alternatives to fund our anticipated cash deficiency
        and
        to refinance our existing secured debt. We may not be able to raise sufficient
        additional debt, equity or other capital on acceptable terms, if at all.
        Failure
        to generate sufficient revenues, contain certain discretionary spending,
        achieve
        certain other business plan objectives, refinance our secured term debt or
        raise
        additional funds could have a material adverse affect on our results of
        operations, cash flows and financial position, including our ability to continue
        as a going concern, and may require us to significantly reduce, reorganize,
        discontinue or shut down our operations, or seek protection under the U.S.
        bankruptcy code. Our financial statements do not include any adjustments
        that
        might result from this uncertainty.
 
 We
        intend
        to use our cash resources to finance our operating losses, capital expenditures,
        lease payments, and working capital requirements, and for other general
        corporate purposes, including the contractual obligations summarized above
        under
        the heading, “Contractual Obligations.” The amounts actually expended for these
        purposes will vary significantly depending on a number of factors, including
        our
        ability to raise sufficient additional debt, equity or other capital, market
        acceptance of our services, revenue growth, planned capital expenditures,
        cash
        generated from operations, improvements in operating productivity, the extent
        and timing of entry into new markets, the introduction of new products or
        services, the modification or elimination of certain products or services,
        and,
        to the extent that we seek additional acquisitions of complementary businesses,
        subscriber lines and other assets to accelerate our growth and the availability
        of and prices paid for acquisitions.
 
 We
        experience end-user disconnections, or “churn,” that significantly impact our
        ability to sustain or grow our revenue base. End-user churn is the result
        of
        several factors, including (i) r ecent
        consolidation in our industry and higher competition leading to reduced pricing
        for the services we offer; (ii) e nd-users’
        closing facilities, moving to new locations or ceasing operations; and (iii)
        end-users’ determinations that less robust but lower-priced service offerings
        from competitors are sufficient for their needs .
        While
        we are working to reduce our end-user churn, many of the causes of such churn
        are beyond our control. In addition, in the absence of our raising additional
        funding to finance increased sales and marketing activities and new customer
        acquisitions, our end-user churn will in all likelihood continue to exceed
        the
        rate at which we can replace such disconnecting customers. As a result, we
        anticipate that our end-user churn in the near term will continue to result
        in
        declining revenue and will adversely affect our cash generated from
        operations.
 
 Our
        actions during 2004 to reduce operating losses included a decision to eliminate
        certain sales channels, reorganize our sales force and suspend certain marketing
        initiatives. While such actions positively impacted our overall financial
        performance for 2005 and 2004, these actions have and continue to place downward
        pressure on our ability to sustain or grow our revenue base. Additionally,
        if
        our end-user churn increases or we are not able to offset such churn by
        increases in new sales, we will experience increasing operating losses and
        decreasing cash generated from operations in future periods.
 
 **Off-balance
        Sheet Arrangements**
 
 None.
 
 65
 **(Amounts
            in Thousands, Except Per Share Amounts)**
 **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.
  
 **Item
        8.         Financial Statements and
        Supplementary Data**
 
 The
        following are included in this Item 8, below:
 
 Reports
        of Independent Registered Public Accounting Firms;
 
 Consolidated
        Balance Sheets as of December 31, 2005 and 2004;
 
 Consolidated
        Statements of Operations for the years ended December 31, 2005, 2004 and
        2003;
 
 Consolidated
        Statements of Changes in Stockholders’ Equity for the years ended December 31,
        2005, 2004 and 2003;
 
 Consolidated
        Statements of Cash Flows for the years ended December 31, 2005, 2004 and
        2003;
        and
 
 Notes
        to
        Consolidated Financial Statements.
 
 
             
 
  66
   **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 
 To
        the
        Stockholders and Board of Directors of
 DSL.net,
        Inc.
 
 We
        have
        audited the accompanying consolidated balance sheet of DSL.net, Inc. and
        subsidiaries (the “Company”) as of December
        31, 2005, and
        the
        related consolidated statements of operations, changes in stockholders’ equity
        and cash flows for the year then ended. These consolidated financial statements
        are the responsibility of the Company’s management. Our responsibility is to
        express an opinion on these consolidated financial statements based on our
        audit.
 
 We
        conducted our audit in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the
        consolidated financial statements are free of material misstatement. The
        Company
        is not required to have, nor were we engaged to perform, an audit of its
        internal control over financial reporting. Our audit included consideration
        of
        internal control over financial reporting as a basis for designing audit
        procedures that are appropriate in the circumstances, but not for the purpose
        of
        expressing an opinion on the effectiveness of the Company’s internal control
        over financial reporting. Accordingly, we express no such opinion. An audit
        includes examining, on a test basis, evidence supporting the amounts and
        disclosures in the consolidated financial statements, assessing the accounting
        principles used and significant estimates made by management, as well as
        evaluating the overall financial statement presentation. We believe that
        our
        audit provides a reasonable basis for our opinion.
 
 In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the financial position of DSL.net, Inc. and
        subsidiaries as of December
        31, 2005, and the
        results of their operations and their cash flows for the year then ended
        in
        conformity with accounting principles generally accepted in the United States
        of
        America.
 
 The
        accompanying consolidated financial statements have been prepared assuming
        that
        the Company will continue as a going concern. As discussed in Note 1 to the
        consolidated financial statements, the Company has suffered recurring losses
        from operations that raise substantial doubt about the Company’s ability to
        continue as a going concern. Management’s plans in regard to these matters are
        also described in Note 1. These consolidated financial statements do not
        include
        any adjustments that might result from the outcome of this
        uncertainty.
 
 */s/
                Carlin, Charron & Rosen, LLP*
 Glastonbury,
        Connecticut
 March
        24,
        2006
    
  67
  
 
 **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 
 To
        the
        Board of Directors and Stockholders of DSL.net, Inc.:
 
 In
        our
        opinion, the consolidated balance sheet 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, 2004 and the results of their operations
        and
        their cash flows for each of the two years in the period ended December 31,
        2004, 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 the standards of the Public Company Accounting
        Oversight Board (United States). Those standards require that we plan and
        perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. An audit includes examining,
        on a
        test basis, evidence supporting the amounts and disclosures in the financial
        statements, assessing the accounting principles used and significant estimates
        made by management, and evaluating the overall financial statement presentation.
        We believe that our audits provide a reasonable basis for our opinion.
 
 The
        accompanying consolidated financial statements have been prepared assuming
        that
        the Company will continue as a going concern. As discussed in Note 1 to the
        financial statements, the Company has suffered recurring losses from operations
        that raise substantial doubt about its ability to continue as a going concern.
        Management's plans in regard to these matters are also described in Note
        1. The
        consolidated financial statements do not include any adjustments that might
        result from the outcome of this uncertainty.
 
 
 
 */s/
        PricewaterhouseCoopers LLP*
 Stamford,
        CT
 March
        22,
        2005, except for Note 3, as to which the date is March 31, 2006.
 
 
  68


**DSL.net,
      Inc.**


**CONSOLIDATED
      BALANCE SHEETS**


(dollars
        in thousands, except per share data)


December
                    31,ASSETS
                
                2005
                
                2004Current
                    assets:Cash
                    and cash equivalents
                
                $
                8,765
                
                $
                7,029Accounts
                    receivable (net of allowances of $794 and $846at
                    December 31, 2005 and 2004, respectively)
                
                
                4,210
                
                
                5,932Inventory
                
                
                215
                
                
                377Deferred
                    costs
                
                
                110
                
                
                424Prepaid
                    expenses and other current assets
                
                
                2,009
                
                
                3,766Assets
                    of discontinued operations (Notes 2 and 3)
                
                
                —
                
                
                10,202Total
                    current assets
                
                
                15,309
                
                
                27,730Fixed
                    assets, net
                
                
                6,859
                
                
                11,678Other
                    intangible assets, net
                
                
                —
                
                
                47Other
                    assets
                
                
                674
                
                
                1,407Total
                    assets
                
                $
                22,842
                
                $
                40,862LIABILITIES
                    AND STOCKHOLDERS’
                    EQUITYCurrent
                    liabilities:Accounts
                    payable
                
                $
                3,211
                
                $
                5,656Accrued
                    salaries
                
                
                591
                
                
                657Accrued
                    liabilities
                
                
                2,031
                
                
                2,394Deferred
                    revenue
                
                
                2,950
                
                
                4,282Equipment
                    lease payable
                
                
                54
                
                
                50Notes
                    payable, net of discount
                
                
                10,289
                
                
                —Financial
                    instrument derivatives, current portion
                
                
                6
                
                
                —Liabilities
                    of discontinued operations (Notes 2 and 3)
                
                
                —
                
                
                887Total
                    current liabilities
                
                
                19,133
                
                
                13,926Notes
                    payable, net of discount
                
                
                —
                
                
                14,544Financial
                    instrument derivatives, less current portion
                
                
                37
                
                
                286Total
                    liabilities
                
                
                19,170
                
                
                28,756Commitments
                    and contingencies (Note 8)Stockholders’
                    equity :Preferred
                    Stock: 20,000,000 preferred shares authorized: 14,000 shares
                    designated asSeries
                    Z, $.001 par value; 0 and 14,000 shares issued and outstanding
                    as ofDecember
                    31, 2005 and December 31, 2004, respectively; liquidation preference:$0
                    and $15,680 as of December 31, 2005 and December 31, 2004,
                    respectively
                
                
                —
                
                
                2,630Common
                    stock, $.0005 par value; 800,000,000 shares authorized, 233,620,817
                    and233,619,817
                    shares issued and outstanding as of December 31, 2005 and 2004,
                    respectively
                
                
                117
                
                
                117Additional
                    paid-in capital
                
                
                354,706
                
                
                352,076Accumulated
                    deficit
                
                
                (351,151
                )
                
                (342,717
                )Total
                    stockholders’
                    equity
                
                
                3,672
                
                
                12,106Total
                    liabilities and stockholders’
                    equity
                
                $
                22,842
                
                $
                40,862
   The
            accompanying notes are an integral part of these consolidated financial
            statements.
  69


**DSL.net,
      Inc.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


(dollars
        in thousands, except per share data)


Year
                      ended December 31,2005
                  
                  2004
                  
                  2003Revenue
                  
                  $
                  49,019
                  
                  $
                  60,755
                  
                  $
                  62,775Operating
                      expensesNetwork
                      (a)
                  
                  
                  34,972
                  
                  
                  42,924
                  
                  
                  48,061Operations
                      (a)
                  
                  
                  5,155
                  
                  
                  8,212
                  
                  
                  10,202General
                      and administrative (a)
                  
                  
                  10,364
                  
                  
                  11,189
                  
                  
                  10,820Sales
                      and marketing (a)
                  
                  
                  815
                  
                  
                  4,243
                  
                  
                  7,426Stock
                      compensation
                  
                  
                  —
                  
                  
                  —
                  
                  
                  438Depreciation
                      and amortization
                  
                  
                  4,990
                  
                  
                  12,370
                  
                  
                  15,645Total
                      operating expenses
                  
                  
                  56,296
                  
                  
                  78,938
                  
                  
                  92,592Operating
                      loss
                  
                  
                  (7,277
                  )
                  
                  (18,183
                  )
                  
                  (29,817
                  )Interest
                      (expense) income, net
                  
                  
                  (9,322
                  )
                  
                  (5,363
                  )
                  
                  (2,932
                  )Gain
                      on extinguishment of debt (Note 7)
                  
                  
                  13,418
                  
                  
                  —
                  
                  
                  3,500Other
                      income (expense), net
                  
                  
                  245
                  
                  
                  135
                  
                  
                  (5,929
                  )Loss
                      from continuing operations before income taxes
                  
                  
                  (2,936
                  )
                  
                  (23,411
                  )
                  
                  (35,179
                  )Income
                      tax benefit
                  
                  
                  —
                  
                  
                  62
                  
                  
                  62Loss
                      from continuing operations, net of income taxes
                  
                  
                  (2,936
                  )
                  
                  (23,349
                  )
                  
                  (35,117
                  )(Loss)
                      income from discontinued operations, net of income taxes (Notes 2
                      and
                      3)
                  
                  
                  (5,498
                  )
                  
                  120
                  
                  
                  121Net
                      loss
                  
                  $
                  (8,434
                  )
                  $
                  (23,229
                  )
                  $
                  (34,996
                  )Per
                      share amounts (Note 2):Net
                      loss applicable to common stockholders fromcontinuing
                      operations
                  
                  $
                  (306
                  )
                  $
                  (35,781
                  )
                  $
                  (53,143
                  )Net
                      (loss) income applicable to common stockholders fromdiscontinued
                      operations
                  
                  $
                  (5,498
                  )
                  $
                  120
                  
                  $
                  121Net
                      loss applicable to common stockholders
                  
                  $
                  (5,804
                  )
                  $
                  (35,661
                  )
                  $
                  (53,022
                  )Net
                      loss per share, basic and diluted from continuing
                      operations
                  
                  
                  nil
                  
                  $
                  (0.20
                  )
                  $
                  (0.72
                  )Net
                      loss per share, basic and diluted from discontinued
                      operations
                  
                  $
                  (0.02
                  )
                  
                  nil
                  
                  
                  nilNet
                      loss per share, basic and diluted
                  
                  $
                  (0.02
                  )
                  $
                  (0.20
                  )
                  $
                  (0.72
                  )(a)  
                      Stock compensation and depreciation and amortization were excluded
                      from
                      the following operating expense line items and presented as
                      separate operating expense line items:Stock
                      compensation:Network
                  
                  $
                  —
                  
                  $
                  —
                  
                  $
                  10Operations
                  
                  
                  —
                  
                  
                  —
                  
                  
                  11General
                      and administrative
                  
                  
                  —
                  
                  
                  —
                  
                  
                  69Sales
                      and marketing
                  
                  
                  —
                  
                  
                  —
                  
                  
                  348Total
                  
                  $
                  —
                  
                  $
                  —
                  
                  $
                  438Depreciation
                      and amortization:Network
                  
                  $
                  4,548
                  
                  $
                  10,480
                  
                  $
                  11,586General
                      and administrative
                  
                  
                  442
                  
                  
                  1,890
                  
                  
                  4,059Total
                  
                  $
                  4,990
                  
                  $
                  12,370
                  
                  $
                  15,645


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




70




**DSL.net,
      Inc.**


**CONSOLIDATED
      STATEMENTS OF CHANGES IN STOCKHOLDERS’
      EQUITY**


(dollars
        in thousands)




AdditionalPreferred
                      Stock
                  
                  Common
                      Stock
                  
                  Paid
                      - In
                  
                  Deferred
                  
                  AccumulatedShares
                  
                  Amount
                  
                  Shares
                  
                  Amount
                  
                  Capital
                  
                  Compensation
                  
                  Deficit
                  
                  TotalBalance
                      as of December 31, 2002
                  
                  
                  —
                  
                  $
                  —
                  
                  
                  64,929,899
                  
                  $
                  32
                  
                  $
                  305,648
                  
                  $
                  (438
                  )
                  $
                  (284,491
                  )
                  $
                  20,751Amortization
                      of deferred compensation
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  438
                  
                  
                  —
                  
                  
                  438Valuation
                      of common stock warrants issued for loan guarantees
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  6,656
                  
                  
                  —
                  
                  
                  —
                  
                  
                  6,656Issuance
                      of common stock - employee stock purchase plan
                  
                  
                  —
                  
                  
                  —
                  
                  
                  15,380
                  
                  
                  —
                  
                  
                  5
                  
                  
                  —
                  
                  
                  —
                  
                  
                  5Issuance
                      of common stock - stock options
                  
                  
                  —
                  
                  
                  —
                  
                  
                  5,363,763
                  
                  
                  3
                  
                  
                  2,278
                  
                  
                  —
                  
                  
                  —
                  
                  
                  2,281Issuance
                      of common stock - preferred stock conversions
                  
                  
                  —
                  
                  
                  —
                  
                  
                  31,629,760
                  
                  
                  16
                  
                  
                  13,984
                  
                  
                  —
                  
                  
                  —
                  
                  
                  14,000Issuance
                      of common stock - dividends on preferred stock conversions
                  
                  
                  —
                  
                  
                  —
                  
                  
                  3,510,252
                  
                  
                  2
                  
                  
                  2,520
                  
                  
                  —
                  
                  
                  —
                  
                  
                  2,522Accrued
                      dividends on preferred stock
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (3,698
                  )
                  
                  —
                  
                  
                  —
                  
                  
                  (3,698
                  )Accretion
                      of beneficial conversion feature of preferred stock
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (14,327
                  )
                  
                  —
                  
                  
                  —
                  
                  
                  (14,327
                  )Preferred
                      stock reclassification
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (1,394
                  )
                  
                  —
                  
                  
                  —
                  
                  
                  (1,394
                  )Debt
                      discount ascribed to warrants and notes payable
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  26,063
                  
                  
                  —
                  
                  
                  —
                  
                  
                  26,063Net
                      loss
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (34,997
                  )
                  
                  (34,997
                  )Balance
                      as of December 31, 2003
                  
                  
                  —
                  
                  
                  —
                  
                  
                  105,449,054
                  
                  
                  53
                  
                  
                  337,735
                  
                  
                  —
                  
                  
                  (319,488
                  )
                  
                  18,300Issuance
                      of common stock - employee stock purchase plan
                  
                  
                  —
                  
                  
                  —
                  
                  
                  8,836
                  
                  
                  —
                  
                  
                  4
                  
                  
                  —
                  
                  
                  —
                  
                  
                  4Issuance
                      of common stock - stock options
                  
                  
                  —
                  
                  
                  —
                  
                  
                  39,911
                  
                  
                  —
                  
                  
                  12
                  
                  
                  —
                  
                  
                  —
                  
                  
                  12Issuance
                      of common stock - preferred stock conversions
                  
                  
                  —
                  
                  
                  —
                  
                  
                  111,372,018
                  
                  
                  57
                  
                  
                  20,943
                  
                  
                  —
                  
                  
                  —
                  
                  
                  21,000Issuance
                      of common stock - dividends on preferred stock conversions
                  
                  
                  —
                  
                  
                  —
                  
                  
                  14,336,838
                  
                  
                  7
                  
                  
                  5,814
                  
                  
                  —
                  
                  
                  —
                  
                  
                  5,821Issuance
                      of common stock - warrant exercise
                  
                  
                  —
                  
                  
                  —
                  
                  
                  413,160
                  
                  
                  —
                  
                  
                  -
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —Accrued
                      dividends on preferred stock
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (950
                  )
                  
                  —
                  
                  
                  —
                  
                  
                  (950
                  )Accretion
                      of beneficial conversion feature of preferred stock
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (8,852
                  )
                  
                  —
                  
                  
                  —
                  
                  
                  (8,852
                  )Issuance
                      of Series Z preferred stock at fair value
                  
                  
                  14,000
                  
                  
                  2,630
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (2,630
                  )
                  
                  —
                  
                  
                  —
                  
                  
                  —Net
                      loss
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (23,229
                  )
                  
                  (23,229
                  )Balance
                      as of December 31, 2004
                  
                  
                  14,000
                  
                  
                  2,630
                  
                  
                  231,619,817
                  
                  
                  117
                  
                  
                  352,076
                  
                  
                  —
                  
                  
                  (342,717
                  )
                  
                  12,106Issuance
                      of common stock - employee stock purchase plan
                  
                  
                  —
                  
                  
                  —
                  
                  
                  1,000
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —Cancellation
                      of Series Z preferred stock
                  
                  
                  (14,000
                  )
                  
                  (2,630
                  )
                  
                  —
                  
                  
                  —
                  
                  
                  2,630
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —Net
                      loss
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (8,434
                  )
                  
                  (8,434
                  )Balance
                      as of December 31, 2005
                  
                  
                  —
                  
                  $
                  —
                  
                  
                  231,620,817
                  
                  $
                  117
                  
                  $
                  354,706
                  
                  $
                  —
                  
                  $
                  (351,151
                  )
                  $
                  3,672


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




71


**DSL.net,
      Inc.**


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


(dollars
        in thousands)


Year
                      ended December 31,2005
                  
                  2004
                  
                  2003Cash
                      flows from operating
                      activities:Net
                      loss
                  
                  $
                  (8,434
                  )
                  $
                  (23,229
                  )
                  $
                  (34,997
                  )Reconciliation
                      of net loss to net cash (used in)operating
                      activities:Depreciation
                      and amortization
                  
                  
                  5,522
                  
                  
                  13,132
                  
                  
                  16,359Bad
                      debt expense
                  
                  
                  897
                  
                  
                  1,119
                  
                  
                  2,117Sales
                      credits and allowances
                  
                  
                  56
                  
                  
                  2
                  
                  
                  394Amortization
                      of deferred debt issuance costs and debt discount
                  
                  
                  8,686
                  
                  
                  5,014
                  
                  
                  7,922Non-cash
                      mark to market adjustment
                  
                  
                  (243
                  )
                  
                  55
                  
                  
                  —Stock
                      compensation expense
                  
                  
                  —
                  
                  
                  —
                  
                  
                  438Non-cash
                      impairment charge on discontinued operations
                  
                  
                  6,033
                  
                  
                  —
                  
                  
                  —Gain
                      on sale of discontinued operations
                  
                  
                  (341
                  )
                  
                  —
                  
                  
                  —(Gain)
                      loss on sale/write-off of fixed assets
                  
                  
                  (3
                  )
                  
                  120
                  
                  
                  163Gain
                      on extinguishment of debt
                  
                  
                  (13,418
                  )
                  
                  —
                  
                  
                  (3,500
                  )Non-cash
                      interest on lease payoff
                  
                  
                  —
                  
                  
                  —
                  
                  
                  194Net
                      changes in assets and liabilities, net of acquired assets:Decrease
                      / (increase) in accounts receivable
                  
                  
                  858
                  
                  
                  589
                  
                  
                  (6,153
                  )(Increase)
                      / decrease in prepaid expenses and other current assets
                  
                  
                  (200
                  )
                  
                  61
                  
                  
                  (213
                  )Decrease
                      / (increase) in other assets
                  
                  
                  733
                  
                  
                  (447
                  )
                  
                  1,080(Decrease)
                      / increase in accounts payable
                  
                  
                  (2,570
                  )
                  
                  2,317
                  
                  
                  (1,051
                  )(Decrease)
                      in accrued salaries
                  
                  
                  (26
                  )
                  
                  (316
                  )
                  
                  (179
                  )(Decrease)
                      / increase in accrued liabilities
                  
                  
                  (146
                  )
                  
                  (4,690
                  )
                  
                  2,317(Decrease)
                      / increase in deferred revenue
                  
                  
                  (1,308
                  )
                  
                  (1,268
                  )
                  
                  1,394Net
                      cash used in operating activities
                  
                  
                  (3,904
                  )
                  
                  (7,541
                  )
                  
                  (13,715
                  )Cash
                      flows from investing activities:Purchases
                      of property and equipment
                  
                  
                  (392
                  )
                  
                  (651
                  )
                  
                  (2,405
                  )Proceeds
                      from sales of property and equipment
                  
                  
                  —
                  
                  
                  —
                  
                  
                  17Acquisitions
                      of businesses and customer lines
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (8,743
                  )Proceeds
                      from sale of discontinued operations, net of cashacquired
                      by purchaser
                  
                  
                  3,275
                  
                  
                  —
                  
                  
                  —Decrease
                      / (increase) in restricted cash
                  
                  
                  2,429
                  
                  
                  (2,427
                  )
                  
                  (4
                  )Net
                      cash provided by (used in) investing activities
                  
                  
                  5,312
                  
                  
                  (3,078
                  )
                  
                  (11,135
                  )Cash
                      flows from financing activities:Proceeds
                      from credit facility
                  
                  
                  —
                  
                  
                  —
                  
                  
                  6,100Payments
                      on credit facility
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (6,100
                  )Proceeds
                      from common stock issuance
                  
                  
                  —
                  
                  
                  16
                  
                  
                  2,287Proceeds
                      from equipment lease payable
                  
                  
                  93
                  
                  
                  —
                  
                  
                  —Proceeds
                      from note issuances
                  
                  
                  6,000
                  
                  
                  4,008
                  
                  
                  30,000Principal
                      payments on notes and capital lease obligations
                  
                  
                  (5,765
                  )
                  
                  (105
                  )
                  
                  (4,976
                  )Net
                      cash provided by financing activities
                  
                  
                  328
                  
                  
                  3,919
                  
                  
                  27,311Net
                      increase / (decrease) in cash and cash equivalents
                  
                  
                  1,736
                  
                  
                  (6,700
                  )
                  
                  2,461Cash
                      and cash equivalents at beginning of year
                  
                  
                  7,029
                  
                  
                  13,729
                  
                  
                  11,268Cash
                      and cash equivalents at end of year
                  
                  $
                  8,765
                  
                  $
                  7,029
                  
                  $
                  13,729Supplemental
                      disclosure:Cash
                      paid: interest
                  
                  $
                  417
                  
                  $
                  56
                  
                  $
                  782Fixed
                      asset purchases included in accounts payable
                  
                  $
                  —
                  
                  $
                  32
                  
                  $
                  3
 Supplemental
          disclosure of non-cash investing activities:
 On
        January 10, 2003, the Company purchased network assets and associated subscriber
        lines of Network Access Solutions Corporation (Note 6).
 The
        fair
        value of the assets acquired was $14,737.
  On
        September 8, 2003, the Company purchased network assets and associated
        subscriber lines of TalkingNets Holdings, LLC (Note 6).
 The
        fair
        value of the assets acquired was $851.
  Supplemental
        disclosure of non-cash financing activities:
 During
        the fourth quarter of 2005, the Company cancelled 14,000 shares of Series
        Z
        preferred stock with a liquidation value of $15,680 and cancelled 190,890,621
        of
        common stock
        warrants as part of a negotiated settlement of a debt and warrant obligation
        (Note 7).
  During
          the first and third quarters of 2004, a total of 20,000 shares of Series
          X
          Preferred Stock were converted into 111,111,108 shares of common stock
          and
          $5,600 of accrued dividends pertaining thereto were paid by issuing 14,026,974
          shares of common stock (Note 10).
  Also
        during the first quarter of 2004, 1,000 shares of Series Y Preferred Stock
        were
        converted into 2,260,910 shares of common stock and $221 of accrued
        dividends pertaining thereto were paid by issuing 309,864 shares of common
        stock
        (Note 10).
  Also
        during the first quarter of 2004, the Company issued 413,160 shares of its
        common stock upon the exercise of 1,358,025 of common stock warrants
        granted in connection with certain loan guarantees in a cashless exchange
        (Note
        10).
  During
        the third and fourth quarters of 2003, 14,000 shares of Series Y Preferred
        Stock
        were converted into 31,629,760 shares of common stock thereto and
        $2,522 of accrued dividends pertaining thereto were paid by issuing 3,510,255
        shares of common stock (Note 10).
  The
        accompanying notes are an integral part of these consolidated financial
        statements.
  72
 
 **DSL.net,
            Inc.Notes to Consolidated Financial Statements(Dollars in Thousands,
            Except Per Share Data)**


**1.**
            **Formation
                and Operations of the
                Company**





DSL.net,
      Inc. (the “Company”) was incorporated in Delaware on March 3, 1998 and
      operations commenced on March 28, 1998. The Company combines its facilities,
      nationwide network infrastructure, and Internet service capabilities to provide
      various broadband communications services to businesses throughout the United
      States, primarily using digital subscriber line (“DSL”) and T-1 technology. In
      certain markets where it has not deployed its own equipment, the Company
      utilizes the local facilities of other carriers to provide service. The
      Company’s product offerings include T-1 and business-class DSL network
      connectivity and Internet access, virtual private networks (VPNs), frame relay,
      Web hosting, domain name services management, enhanced e-mail, online data
      backup and recovery services, firewalls and nationwide dial-up services, as
      well
      as integrated voice and data offerings under its Duet sm brand in
      select markets.





The
      Company has incurred substantial losses and negative cash flows from operations
      in every fiscal year since inception. For the year ended December 31, 2005,
      the
      Company incurred operating losses of $7,277 and negative operating cash flows
      of
      $3,904 that were financed primarily by proceeds from debt and sale of
      discontinued operations. The Company had accumulated deficits of $351,151 and
      $342,717 at December 31, 2005 and 2004, respectively. The Company expects its
      operating losses, net operating cash outflows and capital expenditures to
      continue through 2006.





On
      November 2, 2005, the Company closed a debt financing transaction whereby it
      received $6,000 on November 3, 2005, and $4,000 on February 1, 2006, in exchange
      for issuance of $13,000 in debentures at an 18% annual interest rate, maturing
      on September 4, 2006 (Note 7). $5,500 of the initial proceeds from this
      financing were used to extinguish, at a substantial discount, approximately
      $30,870 (including accrued but unpaid interest) in senior secured debt due
      July
      6, 2006 and cancel all outstanding shares of the Company’s Series Z Preferred
      Stock that carried a liquidation preference of $15,680 and cancel warrants
      to
      purchase approximately 190,890,621 shares of the Company’s common stock (Note
      7). In addition, on October 7, 2004, the Company raised $4,250 in a secured
      convertible note and warrant financing (Note 7). The Company’s independent
      registered public accounting firm has noted in their report that the Company’s
      sustained operating losses raise substantial doubt about its ability to continue
      as a going concern. Based on its current business plans and projections, the
      Company believes that its existing cash resources and cash expected to be
      generated from operations will be sufficient to fund its operating losses,
      capital expenditures, lease payments, and working capital requirements through
      the second quarter of 2006. As a result, the Company will need to raise
      additional financing, through some combination of borrowings or the sale of
      equity or debt securities, during 2006 to finance its 2006 requirements and
      to
      enable it to repay all of its secured debt obligations which mature during
      2006.
      The Company is pursuing financing alternatives to fund its anticipated cash
      deficiency and to refinance its existing secured debt. The Company may not
      be
      able to raise sufficient additional debt, equity or other capital on acceptable
      terms, if at all. Failure to generate sufficient revenues, contain certain
      discretionary spending, achieve certain other business plan objectives,
      refinance our long-term debt or raise additional funds could have a material
      adverse affect on the Company’s results of operations, cash flows and financial
      position, including its ability to continue as a going concern, and may require
      it to significantly reduce, reorganize, discontinue or shut down its operations,
      or seek protection under the U.S. bankruptcy code.











73
 **DSL.net,
          Inc.Notes to Consolidated Financial Statements (continued)(Dollars in
          Thousands, Except Per Share Data)**


The
      Company’s cash requirements and financial performance, including its ability to
      achieve and sustain profitability or become and remain cash flow positive,
      may
      vary based upon a number of factors, including:





·
            its
                ability to raise sufficient additional
                capital;





·
            its
                business plans or projections change or prove to be inaccurate;





·
            if
                the Company curtails and/or reorganizes its
                operations;





·
            the
                development of the high-speed data and integrated voice and data
                communications industries and the Company’s ability to compete effectively
                in such industries;





·
            the
                amount, timing and pricing of customer revenue;





·
            the
                availability, timing and pricing of acquisition opportunities, and
                the
                Company’s ability to capitalize on such
                opportunities;





·
            the
                identification of and generation of synergies with potential business
                combination candidates, and the Company’s ability to close any
                transactions with such parties on favorable terms, if at all;





·
            the
                commercial acceptance of the Company’s services and the Company’s ability
                to attain expected penetration within its target markets;





·
            the
                Company’s ability to recruit and retain qualified
                personnel;





·
            up
                front sales and marketing expenses;





·
            the
                cost and utilization of the Company’s network components that it leases
                from other telecommunications providers and that hinge, in substantial
                part, on government regulation that has been subject to considerable
                flux
                in recent years;





·
            the
                Company’s 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
                the
                Company’s operations and growth;
                and





·
            favorable
                outcomes of numerous federal and state regulatory proceedings and
                related
                judicial proceedings, including proceedings relating to the
                Telecommunications Act of 1996, as
                amended.





There
      can
      be no assurance that the Company will be able to achieve its business plan
      objectives or that it will achieve cash flow positive operating results. If
      the
      Company is unable to generate adequate funds from its operations or raise
      additional funds, it may not be able to repay its existing debt, continue to
      operate its network, respond to competitive pressures or fund its operations.
      As
      a result, the Company may be required to significantly reduce, reorganize,
      discontinue or shut down its operations. The Company’s financial statements do
      not include any




74
 **DSL.net,
          Inc.Notes to Consolidated Financial Statements (continued)(Dollars in
          Thousands, Except Per Share Data)**




adjustments
      that might result from this uncertainty.





**2.**
            **Summary
                of Significant Accounting Policies**





**Principles
      of Consolidation**





The
      accompanying consolidated financial statements include the transactions and
      balances of DSL.net, Inc. and its wholly owned subsidiaries, including without
      limitation DSLnet Communications, LLC, DSLnet Communications VA, Inc., DSLnet
      Atlantic, LLC, and Vector Internet Services, Inc (“VISI”). All material
      intercompany transactions and balances have been eliminated.





**Reclassifications
      - Discontinued Operations**





The
      Company sold its wholly owned subsidiary, VISI, on December 7, 2005 (Note 3).
      As
      a result, the Company has reclassified VISI’s operations as discontinued
      operations and, accordingly, has segregated the assets, liabilities, revenue
      and
      expenses of the discontinued operations in its Consolidated Balance Sheets,
      Statements of Operations and notes thereto. Cash flows pertaining to
      discontinued operations are not disclosed separately in the Consolidated
      Statements of Cash Flows. Cash balances which were expected to be sold with
      the
      discontinued operations of $50 are included in assets of discontinued operations
      on the December 31, 2004 Consolidated Balance Sheet.





**Use
      of Estimates**





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





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





**Cash
      Equivalents**





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


75
 **DSL.net,
          Inc.Notes to Consolidated Financial Statements (continued)(Dollars in
          Thousands, Except Per Share Data)**


**Restricted
      Cash**





Restricted
      cash is included with other current assets in the Company’s Consolidated Balance
      Sheets. Restricted cash at December 31, 2005 and 2004, was approximately $2
      and
      $2,432, respectively, and represents the balance of unvested amounts of the
      Company’s share of matching contributions for terminated employees in the
      Company’s 401(k) plan and is restricted for future funding of matching
      contributions to the Company’s 401(k) plan, and in 2004, included $2,429 of cash
      proceeds restricted from the 2004 convertible debt financing (Note
      7).





**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 and accounts receivable.
      The
      Company’s cash and investment policies limit investments to short-term,
      investment grade instruments. Concentrations of credit risk with respect to
      accounts receivable are limited due to the large number of customers comprising
      the Company’s customer base. No individual customer accounted for more than 5%
      of the Company’s revenue for the years ended December 31, 2005, 2004 or
      2003.





The
      Federal Deposit Insurance Corporation’s (“FDIC”) maximum insurance against bank
      failures for deposits is $100 per institution. From time to time, the Company’s
      funds maintained at its banking institutions exceed the insured amounts.
      However, the Company believes that these financial institutions are sufficiently
      stable so as not to pose a material risk to the Company. The Company’s
      short-term investment grade instruments are not insured by the
      FDIC.





In
      certain markets where the Company has not deployed its own DSL or T-1 equipment,
      the Company utilizes local DSL or T-1 facilities from wholesale providers,
      including Covad Communications, Inc. (“Covad”), in order to provide service to
      its end-user customers. These wholesale providers may terminate their service
      with little or no notice. The failure of Covad to provide acceptable service
      on
      acceptable terms could have a material adverse effect on the Company’s
      operations and cash flows.





The
      Company transmits data across its network via transmission facilities that
      are
      leased from certain carriers, including Level 3 Communications, Inc. and MCI.
      The failure of any of the Company’s data transport carriers to provide
      acceptable service on acceptable terms could have a material adverse effect
      on
      the Company’s operations and cash flows.





**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. Such
      allowances require management’s estimates and judgments and are computed based
      on historical experience using varying percentages of aged receivables. The
      Company principally sells its services directly to end users mainly consisting
      of small to medium sized businesses, but the Company also sells its services
      to
      certain resellers, such as Internet service providers (“ISPs”). The Company
      believes that it does not have significant exposure or concentrations of credit
      risk with respect to any given customer. However, if the country or any region
      the Company services experiences an economic downturn, the financial condition
      of the Company’s customers could be adversely affected, which




76
 **DSL.net,
          Inc.Notes to Consolidated Financial Statements (continued)(Dollars in
          Thousands, Except Per Share Data)**




could
      result in their inability to make payments to the Company. This could require
      additional provisions for allowances. In addition, a negative impact on revenue
      and cash flows related to those customers may occur.





With
      its
      acquisition of certain of the assets of Network Access Solutions Corporation
      (“NAS”) on January 10, 2003, the Company acquired a number of end users, some of
      whom it serves indirectly through various ISPs. The Company sells its services
      to such ISPs who then resell such services to the end user. The Company has
      some
      increased exposure and concentration of credit risk pertaining to such ISPs.
      However, no individual customer accounted for more than 5% of revenue for 2005,
      2004 and 2003.





**Inventory**





Inventories
      consist of modems and routers (generally referred to as customer premise
      equipment) that the Company sells or leases to customers and are required to
      establish a high speed DSL or T-1 digital connection. Inventories are stated
      at
      the lower of cost or market. Cost of inventory is determined on the “first-in,
      first-out” or average cost methods. The Company establishes inventory reserves
      for excess, obsolete or slow-moving inventory based on changes in customer
      demand, technology developments and other factors.





**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
      represents the excess purchase price over the fair value of identifiable net
      assets of businesses acquired and is not amortized. Other intangible assets
      are
      amortized on a straight-line basis over the estimated future periods to be
      benefited, ranging from two to five years.




77
 **DSL.net,
          Inc.Notes to Consolidated Financial Statements (continued)(Dollars in
          Thousands, Except Per Share Data)**





The
      Company reviews the recoverability of goodwill annually and when events and
      circumstances change by comparing the estimated fair values, based on a
      discounted forecast of future cash flows, of reporting units with their
      respective net book values. If the fair value of a reporting unit exceeds its
      carrying amount, the goodwill of the reporting unit is not considered impaired.
      If the carrying amount of the reporting unit exceeds its fair value, the
      goodwill impairment loss is measured as the excess of the carrying value of
      goodwill over its implied fair value. The Company recorded an impairment loss
      on
      assets held for sale during 2005 (including goodwill recorded on the Company’s
      consolidated financial statements) of $6,033 (discussed below). There was no
      impairment of goodwill at December 31, 2004 and 2003.





**Long-Lived
      Assets**





The
      Company accounts for its long-lived assets in accordance with Statement of
      Financial Accounting Standards (“SFAS”) No. 144, “ *Accounting
      for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed
      of,”* 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.





During
      the third quarter of 2005, the Company initiated a plan to sell VISI, and
      solicited and received several offers for its sale. Based on the offers received
      for the sale of VISI, the Company determined that the carrying value of VISI
      of
      $9,033 exceeded its fair value and, accordingly, recorded an impairment loss
      of
      $6,033 against its carrying value .





**Other
      Assets**





Other
      assets include: (i) refundable deposits held as security on certain lease or
      other obligations, and (ii) the non-current portion of deferred financing costs
      which are amortized to general and administrative expense over the respective
      terms of the related debt, and (iii) the non-current portion of prepaid
      directors’ and officers’ liability insurance. The following table shows the
      composition of other assets at December 31, 2005 and 2004:





December
                31,2005
            
            2004Refundable
                security deposits
            
            $
            674
            
            $
            520Deferred
                financing costs, less current portion
            
            
            —
            
            
            162Prepaid
                Directors and Officers liability insurance, less current
                portion
            
            
            —
            
            
            725$
            674
            
            $
            1,407





**Accounting
      for Derivative Instruments**





The
      Company accounts for derivative instruments in accordance with SFAS No. 133 *“Accounting
      for Derivative Instruments and Hedging Activities, as amended,”* which
      establishes accounting and reporting standards for derivative instruments and
      hedging activities, including certain derivative instruments embedded in other
      financial instruments or contracts and requires recognition of all derivatives
      on the balance sheet at fair value, regardless of the hedging relationship
      designation. Accounting for the changes in the fair value of the derivative
      instruments depends on whether the derivatives qualify as hedge relationships
      and the types of the




78
 **DSL.net,
          Inc.Notes to Consolidated Financial Statements (continued)(Dollars in
          Thousands, Except Per Share Data)**




relationships
      designated are based on the exposures hedged. Changes in the fair value of
      derivatives designated as fair value hedges are recognized in earnings along
      with fair value changes of the hedged item. Changes in the fair value of
      derivatives designated as cash flow hedges are recorded in other comprehensive
      income (loss) and are recognized in earnings when the hedged item affects
      earnings. Changes in the fair value of derivative instruments which are not
      designated as hedges are recognized in earnings as other income (loss). At
      December 31, 2005 and 2004, the Company did not have any derivative instruments
      that were designated as hedges.





**Fair
      Value of Financial and Derivative Instruments**





The
      Company has issued various financial debt and/or equity instruments, some of
      which have required a determination of their fair value and/or the fair value
      of
      certain related derivatives, where quoted market prices were not published
      or
      readily available. The Company bases its fair value determinations on valuation
      techniques that require judgments and estimates including, discount rates used
      in applying present value analyses, the length of historical look-backs used
      in
      determining the volatility of its stock, expected future interest rate
      assumptions and probability assessments. From time to time, the Company may
      hire
      independent valuation specialists to perform and or assist in the fair value
      determination of such instruments.





**Income
      Taxes**





The
      Company uses the liability method of accounting for income taxes, as set forth
      in SFAS No. 109, “ *Accounting
      for Income Taxes.* ”
Under
      this method, deferred tax assets and liabilities are recognized for the expected
      future tax consequences of temporary differences between the carrying amounts
      and the tax bases of assets and liabilities and net operating loss
      carryforwards, all calculated using presently enacted tax rates.





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





**Revenue
      Recognition**





The
      Company recognizes revenue in accordance with Securities and Exchange Commission
      (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104, “ *Revenue
      Recognition,”* which
      outlines the four basic criteria that must be met before revenue can be
      recognized: (1) persuasive evidence of an arrangement exists; (2) delivery
      has
      occurred or services have been rendered; (3) the fee is fixed or 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.




79
 **DSL.net,
          Inc.Notes to Consolidated Financial Statements (continued)(Dollars in
          Thousands, Except Per Share Data)**





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





The
      Company seeks to price its services competitively. The market for high-speed
      data communications services and Internet access is rapidly evolving and
      intensely competitive. While many competitors and potential competitors may
      enjoy competitive advantages over the Company, it is pursuing a significant
      market that, it believes, is currently under-served. Although pricing is an
      important part of the Company’s strategy, management believes that direct
      relationships with customers and consistent, high quality service and customer
      support will be key to generating customer loyalty. During the past several
      years, market prices for many telecommunications services and equipment have
      been declining, which is a trend that might continue.





**Stock
      Compensation**





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





Stock
      compensation expense includes amortization of deferred compensation and charges
      related to stock grants. Stock compensation expense for the years ended December
      31, 2005, 2004 and 2003 was approximately $0, $0 and $438,
      respectively.




80
 **DSL.net,
          Inc.Notes to Consolidated Financial Statements (continued)(Dollars in
          Thousands, Except Per Share Data)**





If
      stock
      option compensation expense 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, 2005, 2004 and 2003, would have
      been
      as follows:





Year
                Ended December 31,2005
            
            2004
            
            2003Net
                loss as reported
            
            $
            (8,434
            )
            $
            (23,229
            )
            $
            (34,997
            )Add:
                stock-based employee compensation included in net loss
            
            
            —
            
            
            —
            
            
            438Deduct:
                total stock-based employee compensation expense determined under
                fair
                value based method for all awards
            
            
            (2,710
            )
            
            (4,889
            )
            
            (3,863
            )Pro
                forma under SFAS 123
            
            $
            (11,144
            )
            $
            (28,118
            )
            $
            (38,422
            )Net
                loss applicable to common stockholders:As
                reported
            
            $
            (5,804
            )
            $
            (35,661
            )
            $
            (53,022
            )Pro
                forma under SFAS 123
            
            $
            (8,514
            )
            $
            (40,550
            )
            $
            (56,447
            )Basic
                and diluted net loss per common share:As
                reported
            
            $
            (0.02
            )
            $
            (0.20
            )
            $
            (0.72
            )Pro
                forma under SFAS 123
            
            $
            (0.04
            )
            $
            (0.22
            )
            $
            (0.76
            )





**Earnings
      (Loss) Per Share**





The
      Company computes net loss per share pursuant to SFAS No. 128, “ *Earnings
      Per Share.”* ****** **** Basic
      earnings (loss) per share is computed by dividing income or loss applicable
      to
      common stockholders by the weighted average number of shares of the Company’s
      common stock outstanding during the period, excluding shares subject to
      repurchase.





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




81
 **DSL.net,
          Inc.Notes to Consolidated Financial Statements (continued)(Dollars in
          Thousands, Except Per Share Data)**





Net
      (loss) income per share for the years ending December 31, 2005, 2004 and
      2003, respectively, are calculated as follows:





Years
                Ending December 31,2005
            
            2004
            
            2003Net
                loss applicable to common stockholders fromcontinuing
                operations:Net
                loss
            
            $
            (2,936
            )
            $
            (23,349
            )
            $
            (35,118
            )Dividends
                on preferred stock
            
            
            —
            
            
            (950
            )
            
            (3,698
            )Accretion
                of preferred stock
            
            
            —
            
            
            (8,852
            )
            
            (14,327
            )Fair
                value of Series Z preferred stock
            
            
            —
            
            
            (2,630
            )
            
            —Cancellation
                of Series Z preferred stock
            
            
            2,630
            
            
            —
            
            
            —Net
                loss applicable to common stockholders
              from
                continuing operations
            
            $
            (306
            )
            $
            (35,781
            )
            $
            (53,143
            )Net
                loss per share, basic and diluted from continuing
                operations
            
            
            nil
            
            $
            (0.20
            )
            $
            (0.72
            )Net
                (loss) income applicable to common stockholders
              from
                discontinued operations:Net
                (loss) Income
            
            $
            (5,498
            )
            $
            120
            
            $
            121Dividends
                on preferred stock
            
            
            —
            
            
            —
            
            
            —Accretion
                of preferred stock
            
            
            —
            
            
            —
            
            
            —Fair
                value of Series Z preferred stock
            
            
            —
            
            
            —
            
            
            —Cancellation
                of Series Z preferred stock
            
            
            —
            
            
            —
            
            
            —Net
                (loss) income applicable to common stockholders
              from
                discontinued operations
            
            $
            (5,498
            )
            $
            120
            
            $
            121Net
                (loss) income per share, basic and diluted from
              discontinued
                operations
            
            $
            (0.02
            )
            
            nil
            
            
            nilNet
                loss applicable to common stockholders:Net
                loss
            
            $
            (8,434
            )
            $
            (23,229
            )
            $
            (34,997
            )Dividends
                on preferred stock
            
            
            —
            
            
            (950
            )
            
            (3,698
            )Accretion
                of preferred stock
            
            
            —
            
            
            (8,852
            )
            
            (14,327
            )Fair
                value of Series Z preferred stock
            
            
            —
            
            
            (2,630
            )
            
            —Cancellation
                of Series Z preferred stock
            
            
            2,630
            
            
            —
            
            
            —Net
                loss applicable to common stockholders
            
            $
            (5,804
            )
            $
            (35,661
            )
            $
            (53,022
            )Net
                loss per share, basic and diluted
            
            $
            (0.02
            )
            $
            (0.20
            )
            $
            (0.72
            )Shares
                used in computing net loss per share, basic and diluted
            
            
            233,620,653
            
            
            181,831,059
            
            
            74,125,513





82
 **DSL.net,
          Inc.Notes to Consolidated Financial Statements (continued)(Dollars in
          Thousands, Except Per Share Data)**





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





Shares
                of Common StockDecember
                31,2005
            
            2004
            
            2003Options
                to purchase common stock
            
            
            32,771,902
            
            
            40,651,934
            
            
            18,671,766Warrants
                to purchase common stock
            
            
            1,321,571
            
            
            192,212,192
            
            
            173,105,646Preferred
                Series X Stock convertible to common stock
            
            
            —
            
            
            —
            
            
            111,111,108Preferred
                Series Y Stock convertible to common stock
            
            
            —
            
            
            —
            
            
            2,260,910Convertible
                note payable
            
            
            15,178,571
            
            
            15,178,571
            
            
            —Total
            
            
            49,272,044
            
            
            248,042,697
            
            
            305,149,430





**Business
      Operating Segments**





The
      Company has one reportable segment under the requirements of SFAS No.
      131.





**Recently
      Issued Accounting Pronouncements**





On
      December 16, 2004, the FASB issued SFAS No. 123 (revised 2004) *“Share-Based
      Payment”* (“SFAS
      123R”), which is a revision of Statement No. 123, *“Accounting
      for Stock-Based Compensation”* (“SFAS
      123”), and supersedes APB Opinion No. 25, *“Accounting
      for Stock Issued to Employees,”* and
      amends FASB Statement No. 95, *“Statement
      of Cash Flows.”* Generally, the approach in SFAS 123R is similar to the approach described in
      SFAS 123. However, SFAS 123R requires all share-based payments to employees,
      including grants of employee stock options, to be recognized in the income
      statement based on their fair values. Pro forma disclosure is no longer an
      alternative.





Under
      SFAS 123R, the Company must determine the appropriate fair value model to be
      used for valuing share-based payments, the amortization method for compensation
      cost and the transition method to be used at the date of adoption. The
      transition alternatives include retrospective and prospective adoption methods.
      Under the retrospective method, prior periods may be restated based on the
      amounts previously recognized under SFAS 123 for purposes of pro forma
      disclosures either for all periods presented or as of the beginning of the
      year
      of adoption.





The
      prospective method requires that compensation expense be recognized beginning
      with the effective date, based on the requirements of SFAS 123R, for all
      share-based payments granted after the effective date, and based on the
      requirements of SFAS 123, for all awards granted to employees prior to the
      effective date of SFAS 123R that remain unvested on the effective date.





The
      provisions of this statement are effective as of the beginning of the first
      annual reporting period that begins after June 15, 2005. The Company is required
      to adopt SFAS 123R effective as of the beginning of the first quarter of 2006.
      The Company is evaluating the requirements of




83
 **DSL.net,
          Inc.Notes to Consolidated Financial Statements (continued)(Dollars in
          Thousands, Except Per Share Data)**




SFAS
      123R
      and has not yet determined the Company’s method of adoption or the impact it
      will have on the Company’s financial condition or results of operations.





In
      December 2006, the FASB issued SFAS No. 155, “ *Accounting
      for Certain Hybrid Financial Instruments - an amendment to FASB Statements
      No
      133 and 140* ,”
and
      in
      May 2005, the FASB issued SFAS No. 154, *“Accounting
      and Error Corrections - a replacement of APB opinion No. 20 and FASB Statement
      No. 3.”* The
      Company is not significantly impacted by these statements and does not expect
      their implementation to have a material impact on the Company’s financial
      statements.





**3.**
            **Discontinued
                Operations**





During
      the third quarter of 2005, the Company initiated a plan to sell VISI, and
      solicited and received several offers for its sale. Based on the offers received
      for the sale of VISI, the Company determined that the carrying value of VISI
      of
      $9,033 (including $8,482 of goodwill recorded on the Company’s consolidated
      financial statements) exceeded its fair value and, accordingly, recorded an
      impairment loss of $6,033 against its carrying value in accordance with the
      provisions and guidance of SFAS 144. The
      Company completed the sale on December 7, 2005, for $3,300 and recognized a
      gain
      of $341 representing the excess of the proceeds over the carrying value of
      VISI’s net assets (at December 7, 2005), net of professional fees related to the
      sale. As a result, the Company has reclassified VISI’s operations as
      discontinued operations and, accordingly, has segregated the assets,
      liabilities, revenue and expenses of the discontinued operations in its
      Consolidated Balance Sheets, Statements of Operations and notes
      thereto.




84
 **DSL.net,
          Inc.Notes to Consolidated Financial Statements (continued)(Dollars in
          Thousands, Except Per Share Data)**




Assets
      and liabilities of discontinued operations
      at December 31, 2005 and 2004 are as follows:




December
                31,2005
            
            2004Assets
                of discontinued operations:Cash
            
            $
            —
            
            $
            50Accounts
                receivable, net
            
            
            —
            
            
            412Other
                current assets
            
            
            —
            
            
            209Fixed
                assets, net
            
            
            —
            
            
            1,041Other
                assets
            
            
            —
            
            
            8Goodwill,
                net
            
            
            —
            
            
            8,482Total
            
            $
            —
            
            $
            10,202Liabilities
                of discontinued operations:Accounts
                payable
            
            $
            —
            
            $
            231Accrued
                salaries
            
            
            —
            
            
            73Other
                current liabilities
            
            
            —
            
            
            65Deferred
                revenue
            
            
            —
            
            
            518Total
            
            $
            —
            
            $
            887





Summary
      results of discontinued operations for the years ended December 31, 2005, 2004
      and 2003 are as follows:





Years
                Ended December 31,2005
            
            2004
            
            2003Revenue
            
            $
            6,336
            
            $
            7,695
            
            $
            8,558Operating
                expenses
            
            
            6,142
            
            
            7,513
            
            
            8,375Income
                from discontinued operations
            
            
            194
            
            
            182
            
            
            183Impairment
                loss
            
            
            (6,033
            )
            
            —
            
            
            —Gain
                on sale
            
            
            341
            
            
            —
            
            
            —(Loss)
                income from discontinued
              operations
                before income taxes
            
            
            (5,498
            )
            
            182
            
            
            183Income
                taxes
            
            
            —
            
            
            (62
            )
            
            (62
            )(Loss)
                income from discontinued
              operations,
                net of income taxes
            
            $
            (5,498
            )
            $
            120
            
            $
            121Per
                share, basic and diluted
            
            $
            (0.02
            )
            
            nil
            
            
            nil







85
 **DSL.net,
          Inc.Notes to Consolidated Financial Statements (continued)(Dollars in
          Thousands, Except Per Share Data)**


**4.**
            **Goodwill
                and Other Intangible
                Assets**





In
      accordance with the provisions SFAS No. 142, “ *Goodwill
      and Other Intangible Assets* ”
(“SFAS
      No. 142”), which became effective on January 1, 2002, the Company ceased to
      amortize $8,482 of goodwill, net of accumulated amortization through December
      31, 2001. In lieu of amortization, the Company made an initial impairment review
      of its goodwill in January of 2002 which did not result in any impairment
      adjustments. Annual impairment reviews were also performed in December of 2004
      and 2003. The Company recorded an impairment loss of $6,033 during 2005 related
      to the carrying amount of goodwill and the net assets of its subsidiary, which
      was sold on December 7, 2005 (Note 3).





The
      following table shows the gross and unamortized balances of other intangible
      assets which are comprised solely of customer lists:





December
                31, 2005
            
            December
                31, 2004Accumulated
            
            
            
            
            
            AccumulatedGross
            
            Amortization
            
            Net
            
            Gross
            
            Amortization
            
            NetCustomer
                lists
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            15,483
            
            $
            15,436
            
            $
            47





Amortization
      expense of other intangible assets for the years ended December 31, 2005 and
      2004 was $47 and $940, respectively. Accumulated amortization at December 31,
      2005 and 2004 (including goodwill which the Company ceased to amortize beginning
      January 1, 2002, as discussed below), was $0 and $19,367, respectively.





**5.**
            **Fixed
                Assets**





Fixed
      assets are comprised of the following:


EstimatedUsefulLives
            
            2005
            
            2004Network
                and computer equipment
            
            
            3-5
                years
            
            $
            41,836
            
            $
            41,797Furniture,
                fixtures, office equipment and software
            
            
            3-5
                years
            
            
            19,029
            
            
            18,944Vehicles
            
            
            3
                years
            
            
            190
            
            
            190Collocation
                costs
            
            
            5
                years
            
            
            17,014
            
            
            17,01478,069
            
            
            77,945Less-accumulated
                depreciation and amortization
            
            
            
            
            
            (71,210
            )
            
            (66,267
            )$
            6,859
            
            $
            11,678





As
      of
      December 31, 2005 and 2004, the recorded cost of equipment under capital lease
      was $393 and $393, respectively, and included in furniture, fixtures, office
      equipment and software. Accumulated depreciation for equipment under capital
      lease at December 31, 2005 and 2004, was $393 and $347,
      respectively.





As
      of
      December 31, 2005 and 2004, the Company had capitalized computer software costs
      of $10,914 and $10,675, respectively, and had recorded accumulated amortization
      expense related to these costs of $10,711 and $10,322, respectively.
      Depreciation and amortization expense from continuing operations, related to
      fixed assets was $4,943, $11,430 and $12,889, for the years ended December
      31,
      2005, 2004 and 2003, respectively.




86
 **DSL.net,
          Inc.Notes to Consolidated Financial Statements (continued)(Dollars in
          Thousands, Except Per Share Data)**





**6.**
            **Acquisitions**





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





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





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





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





The
      acquisition was accounted for under the purchase method of accounting in
      accordance with SFAS No. 141 “ *Business
      Combinations”* (“SFAS
      No. 141”). The results of NAS’s operations have been included in the
      consolidated financial statements since January 10, 2003 (the acquisition date).
      The estimated fair values of the acquired assets at the date of acquisition




87
 **DSL.net,
          Inc.Notes to Consolidated Financial Statements (continued)(Dollars in
          Thousands, Except Per Share Data)**




exceeded
      the purchase price and, accordingly, the acquired assets were written down
      on a
      pro-rata basis by asset group to the purchase price of approximately $14,737
      ($14,000 plus associated direct acquisition costs of approximately $737) as
      follows: (i) intangible assets pertaining to approximately 11,500 acquired
      subscriber lines of $1,480 and (ii) property and equipment of $13,113 and
      inventory of $144. In July, 2003, the Company paid $1,500 into escrow for the
      negotiated repurchase and cancellation of the $5,000 note issued by the Company
      to NAS as part of the purchase price for the NAS Assets. The payment was subject
      to approval by the bankruptcy court presiding over NAS’s bankruptcy petition. On
      August 25, 2003, the court approved the transaction, and the $1,500 held in
      escrow was paid to NAS in full satisfaction of the note.





The
      following table sets forth the unaudited pro forma consolidated financial
      information of the Company, giving effect to the acquisition of the NAS assets
      as if the transaction occurred at the beginning of the periods presented.
      Inclusion of the TalkingNets Acquisition would not materially change the pro
      forma results. There were no acquisitions during 2005 and 2004.





2003Pro
                forma revenue
            
            $
            72,091Pro
                forma operating loss
            
            $
            (29,604
            )Pro
                forma net loss
            
            $
            (35,016
            )Pro
                forma net loss applicable to common stockholders
            
            $
            (53,041
            )Pro
                forma net loss per share, basic and diluted
            
            $
            (0.72
            )Shares
                used in computing pro forma net loss
              per
                share, basic and diluted
            
            
            74,125,513





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.





**7.**
            **Debt**





On
      January 10, 2003, t he
      Company issued a $5,000 note to NAS in conjunction with its acquisition of
      the
      NAS Assets (Note 6). The Company negotiated settlement of the note for $1,500,
      which was approved by the bankruptcy court on August 25, 2003 and resulted
      in a
      gain of $3,500 in other income.





The
      Company entered into a Revolving Credit and Term Loan Agreement, dated as of
      December 13, 2002 (the “Credit Agreement”), with a commercial bank providing for
      a revolving line of credit of up to $15,000.   Interest on borrowings
      under the Credit Agreement was payable at 0.5% percent above the Federal Funds
      Effective rate. The Company’s ability to borrow amounts available under the
      Credit Agreement was subject to the bank’s receipt of a like amount of
      guarantees from certain of the Company’s investors and/or other guarantors.





On
      February 3, 2003, the Company borrowed $6,100 under the Credit Agreement. As
      of
      March 5, 2003, certain of the Company’s investors had guaranteed $9,100 under
      the Credit Agreement. On July 18, 2003, the Company repaid the $6,100
      outstanding balance plus accrued interest and terminated the Credit Agreement
      and wrote off approximately $184 of the related unamortized balance of loan
      origination fees.




88
 **DSL.net,
          Inc.Notes to Consolidated Financial Statements (continued)(Dollars in
          Thousands, Except Per Share Data)**





The
      Company entered into a Reimbursement Agreement (the “Reimbursement Agreement”)
      and related Security Agreement, dated as of December 27, 2002, with VantagePoint
      Venture Partners III (Q), L.P. (“VP”) and Columbia Capital Equity Partners
      (together with its co-guarantors, “Columbia”) and other holders of or affiliates
      of holders of the Company’s Series X and Series Y preferred stock (the
“Guarantors”). Pursuant to the terms of the Reimbursement Agreement, on December
      27, 2002, VP and Columbia issued guarantees in an aggregate amount of $6,100
      to
      support certain obligations of the Company under the Credit Agreement. On July
      18, 2003, in connection with the termination of the Credit Agreement, the
      guarantees, the Reimbursement Agreement and the related Security Agreement
      were
      terminated.




Pursuant
      to the terms of the Reimbursement Agreement, on December 27, 2002, the Company
      issued warrants to purchase an aggregate of 12,013,893 shares of its common
      stock to VP and certain of its affiliates and Columbia, in consideration for
      their guarantees aggregating $6,100. All such warrants had a ten year life
      and
      an exercise price of $0.50 per share. **** On
      March
      26, 2003, the Company issued additional warrants, exercisable for ten years,
      to
      purchase a total of 936,107 shares of its common stock at $0.50 per share to
      VP
      and certain of its affiliates and Columbia, bringing the total number of
      warrants issued in connection with the Reimbursement Agreement to 12,950,000.
      All of the foregoing warrants held by Columbia were either exercised or
      transferred to VP and its affiliates. On November 3, 2005, all of the warrants
      held by VP and its affiliates were cancelled pursuant to the terms of that
      certain Implementation Agreement (described below).





On
      February 3, 2003, the Company borrowed on the Credit Agreement and the
      Guarantors’ guarantees of the subject loan became effective.





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





On
      March
      5, 2003, the Company and VP entered into Amendment No. 1 to the Reimbursement
      Agreement, pursuant to which VP increased its guarantee by $3,000 bringing
      the
      aggregate guarantees by all Guarantors under the Reimbursement Agreement, as
      amended, to $9,100. As consideration for VP’s increased guarantee, if the
      Company closed an equity financing on or before December 3, 2003, it was
      authorized to issue VP and certain of its affiliates additional warrants to
      purchase the type of equity securities issued by the Company in such equity
      financing. The number of such additional warrants would be determined by
      dividing the per share price of such equity securities into a thousand dollars.
      Accordingly, since the Company closed a financing on July 18, 2003, the Company
      issued to VP and certain of its affiliates in December 2003, additional warrants
      with a three year life, to purchase 2,260,909




89
 **DSL.net,
          Inc.Notes to Consolidated Financial Statements (continued)(Dollars in
          Thousands, Except Per Share Data)**




shares
      of
      its common stock at a per share price of $0.4423. On November 3, 2005, all
      of
      these warrants were cancelled pursuant to the terms of the certain
      Implementation Agreement (described below).





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





Subject
      to the terms and conditions of the Note and Warrant Purchase Agreement, the
      Company issued an aggregate of $30,000 in principal amount of Notes to the
      2003 Investors on July 18, 2003. Principal on the Notes was payable in a
      single payment on July 18, 2006. The Notes provide for an annual interest rate
      of 1.23%, payable in cash quarterly in arrears commencing on October 31, 2003,
      unless the Company elects to defer payment of such interest and pay it together
      with the principal amount of the Notes at maturity on July 18, 2006. Pursuant
      to
      the terms of the Security Agreement, the Company’s obligations under the Notes
      were secured by a security interest in a majority of the personal property
      and
      assets of the Company and certain of its subsidiaries. Interest expense accrued
      on the Notes for the years ended December 31, 2005, 2004 and 2003 approximated
      $320, $379 and $171. Prior to the due date of the first interest payment, the
      Company elected to defer all interest payments until further
      notice.





Subject
      to the terms and conditions of the Note and Warrant Purchase Agreement, the
      Company issued a warrant to purchase 12,950,000 shares of its common stock
      to
      Deutsche Bank on or about August 12, 2003. The Company issued the remaining
      2003
      Warrants to purchase an aggregate of 144,944,737 shares of its common stock
      to
      Deutsche Bank (105,471,053 shares) and VantagePoint (39,473,684 shares) on
      or
      about December 9, 2003. All of these warrants were issued with an exercise
      price
      of $0.38 per share. On November 3, 2005, the Notes and the 2003 Warrants were
      cancelled pursuant to the term of that certain Implementation Agreement
      (described below).





On
      July
      18, 2003, the Company recorded the Note and Warrant transactions in accordance
      with Accounting Principles Board Opinion No. 14, “ *Accounting
      for Convertible Debt and Debt Issued with Stock Purchase Warrants,”* whereby
      a
      fair value was ascribed to the 157,894,737 2003 Warrants to be issued to the
      Investors (related to the Note and Warrant Purchase Agreement) together with
      the
      2,260,909 warrants to be issued to VP and certain of its affiliates (related
      to
      VP’s increased guarantee under Amendment No. 1 to the Reimbursement Agreement)
      using a Black-Scholes valuation model with the following assumptions: (i) a
      risk
      free interest rate of 2.24% (three-year Treasury rate), (ii) a zero dividend
      yield, (iii) a three-year life, (iv) an expected volatility of 152%, (v) a
      warrant option price of $0.38 per share for the 157,894,737 2003 Warrants and
      $0.4423 per share for the 2,260,909 warrants and (vi) a current market price
      of
      $0.83 (the closing price of the Company’s common stock on July 18, 2003) per
      share. A fair value was ascribed to the Notes using a present value method
      with
      a 19% discount rate. The relative fair value of the warrants representing 87%
      of
      the combined fair value of the warrants




90
 **DSL.net,
          Inc.Notes to Consolidated Financial Statements (continued)(Dollars in
          Thousands, Except Per Share Data)**




and
      Notes
      was applied to the $30,000 proceeds to determine a note discount of
      approximately $26,063 which was recorded as a reduction to the Notes payable
      and
      an increase to additional paid in capital. The note discount was being amortized
      to interest expense using the “Effective Interest Method” of amortization over
      the 36 month term of the Notes. For the years ended December 31, 2005, 2004,
      and
      2003, approximately $8,058, $4,954 and $1,266, respectively, of this note
      discount was amortized to interest expense.





On
      July
      18, 2003, in connection with the Note and Warrant Purchase Agreement, the
      Company, the 2003 Investors and certain of the stockholders of the Company
      entered an Amended and Restated Stockholders Agreement, which provided for
      rights relating to the election of directors, the registration of the Company’s
      common stock and certain protective provisions. On November 3, 2005, the Amended
      and Restated Stockholders Agreement was cancelled and terminated pursuant to
      that certain Implementation Agreement (described below).





A
      portion
      of the proceeds from the sale of the Notes and 2003 Warrants was used by the
      Company to repay certain debt and lease obligations. During 2003, the Company
      pre-paid approximately $10,200 for the complete repayment of approximately
      $14,600 of its debt and lease obligations.





On
      October 7, 2004, the Company closed a financing transaction with Laurus Master
      Fund, Ltd. (“Laurus”), pursuant to which the Company sold to Laurus convertible
      notes and a warrant to purchase common stock of the Company. The securities
      issued to Laurus were a $4,250 Secured Convertible Minimum Borrowing Note (the
      “MB Note”), a $750 Secured Revolving Note (the “Revolving Note” and, together
      with the MB Note, the “Laurus Notes”), and a Common Stock Purchase Warrant to
      purchase 1,143,000 shares of the Company’s common stock (the “Laurus Warrant”).
      As part of the financing transaction with Laurus, the Company paid Laurus a
      closing fee of $163. The Laurus Notes are collateralized by a security interest
      and first priority lien on certain trade accounts receivable. As of December
      31,
      2005, the Company’s outstanding principal debt to Laurus under the MB Note and
      the Revolving Note, respectively, was $4,073 and $0.





The
      Company and Laurus placed the transactions and funds into escrow on August
      31,
      2004, pending the Company’s procurement of a waiver of certain rights of the
      2003 Investors, represented by Deutsche Bank Trust Company Americas, the
      administrative agent to the Investors (“DBTCA”), and agreement from the 2003
      Investors to subordinate their lien on trade accounts receivable of the Company
      to the lien granted to Laurus. On October 7, 2004, the Company reached agreement
      with Laurus and the 2003 Investors on subordination terms and the initial
      financing proceeds of $4,250 were released from escrow, of which $4,024 were
      deposited into a Company account with DBTCA. The Company’s withdrawal and use of
      such financing proceeds were subject to the prior approval of DB Advisors
      L.L.C., as advisor to Deutsche Bank, and DBTCA. As of March 1, 2005, the Company
      received approval to withdraw and received $3,038 of the $4,250 borrowed, of
      which $2,429 was included with restricted cash at December 31, 2004. During
      March of 2005, the Company received approval to withdraw and received the
      remaining $1,212 of the 4,250 borrowed.





The
      Laurus Notes mature on August 1, 2006. Annual interest on the Laurus Notes
      is
      equal to the prime rate published in The Wall Street Journal from time to
      time, plus two percent, provided, that, such annual rate of interest on the
      Laurus Notes may not be less than six percent or more than seven percent.
      Notwithstanding the six percent interest rate




91
 **DSL.net,
          Inc.Notes to Consolidated Financial Statements (continued)(Dollars in
          Thousands, Except Per Share Data)**




floor,
      the interest rate on the Laurus Notes will be decreased two percent per annum
      for each 25% increase in the price of the Company’s common stock above $0.28 per
      share, if, at that time, the Company has on file with the SEC an effective
      registration statement for the resale of shares of common stock issued or
      issuable upon conversion of the MB Note and upon exercise of the Laurus Warrant
      and, if not, the interest rate will be decreased one percent per annum for
      each
      25% increase in the price of the Company’s common stock above $0.28 per
      share.  Any change in the interest rate on the Laurus Notes will be
      determined on a monthly basis. In no event will the interest rate on the Laurus
      Notes be less than 0.00%.  Interest
      on the Laurus Notes is payable monthly in arrears on the first day of each
      month
      during the term of the Laurus Notes.   At December 31, 2005, the
      interest rate on the Laurus Notes was 7%.





The
      initial fixed conversion price under the Laurus Notes is $0.28 per share. The
      initial conversion price and the number of shares of the Company’s common stock
      issuable upon conversion of the each of the Laurus Notes are subject to
      adjustment in the event that the Company reclassifies, subdivides or combines
      its outstanding shares of common stock or issues additional shares of its common
      stock as a dividend on its outstanding shares of common stock. The fixed
      conversion price is subject to anti-dilution protection adjustments, on a
      weighted average basis, upon the Company’s issuance of additional shares of
      common stock at a price that is less than the then current fixed conversion
      price. Subject to certain limitations, Laurus may, at any time, convert the
      outstanding indebtedness of each of the Laurus Notes into shares of the
      Company’s common stock at the then applicable conversion price. Subject to
      certain trading volume and other limitations, the MB Note will automatically
      convert at the then applicable conversion price into shares of the Company’s
      common stock if, at any time while an effective registration statement under
      the
      Securities Act of 1933, as amended (the “Securities Act”), for the resale of the
      Company’s common stock underlying the MB Note and Laurus Warrant is outstanding,
      the average closing price of the Company’s common stock for ten consecutive
      trading days is at least $0.31, subject to certain adjustments. The Revolving
      Note is potentially convertible into more than $750 worth of the Company’s
      common stock, depending upon the amount of aggregate borrowings by the Company
      under the Revolving Note and the amount of conversions by Laurus.





The
      Laurus Warrant grants Laurus the right to purchase up to 1,143,000 shares of
      the
      Company’s common stock at an exercise price of $0.35 per share. On October 7,
      2004, the Company also issued a warrant to purchase 178,571 shares of the
      Company’s common stock at an exercise price of $0.35, and made a cash payment of
      approximately $38, to TN Capital Equities, Ltd. (“TN”), as compensation for TN
      having served as the placement agent in the financing transaction with Laurus.
      The Laurus Warrant and the warrant issued to TN each expire on August 31, 2009.
      Under the terms of the Minimum Borrowing Note Registration Rights Agreement,
      Laurus has been afforded certain registration rights with respect to the shares
      of the Company’s common stock underlying the MB Note and the Laurus Warrant. TN
      was also afforded piggyback registration rights for the shares of the Company’s
      common stock underlying the warrant it received.





In
      exchange for agreement by the 2003 Investors to subordinate to Laurus their
      prior lien on certain of the Company’s accounts receivable, the Company issued
      warrants to the 2003 Investors (the “2004 Warrants”), allocated ratably in
      accordance with the 2003 Investors’ interests in the Company’s July 2003
      note and warrant financing, to purchase up to an aggregate of 19,143,000 shares
      of common stock. The 2004 Warrants were approved by the Company’s stockholders
      on




92
 **DSL.net,
          Inc.Notes to Consolidated Financial Statements (continued)(Dollars in
          Thousands, Except Per Share Data)**




February
      9, 2005; were to expire on July 18, 2006; and were exercisable solely in the
      event of a change of control of the Company where the price paid per share
      of
      common stock or the value per share of common stock retained by the Company’s
      common stockholders in any such change of control is less than the then
      current per share exercise price of the 2003 Warrants. The Company determined
      that the fair value of the 2004 Warrants was not material and accordingly no
      modifications to the July 18, 2003, Note and Warrant transaction was required.
      On November 3, 2005, the 2004 Warrants were cancelled pursuant to the terms
      of
      that certain Implementation Agreement (described below).





The
      Company determined, in accordance with the guidance of SFAS 133, “ *Accounting
      for Derivative Instruments and Hedging Activities,”* that
      the
      following derivatives resulted from the Laurus financing transaction described
      above: (i) the conversion option of the MB Note and (ii) the 1,321,571 warrants
      issued to Laurus and TN. Accordingly, the Company recorded the fair value of
      these derivatives approximating $231 as a debt discount and a non-current
      liability on its consolidated balance sheet. The note discount is being
      amortized to interest expense using the “Effective Interest Method” of
      amortization over the 22 month term of the MB Note. For the years ended December
      31, 2005 and 2004, approximately $125 and $27, respectively, of this note
      discount was amortized to interest expense. Also, at December 31, 2005 the
      value
      of the derivatives were decreased by approximately $243 to the then current
      fair
      value of approximately $43 with a corresponding credit to other income. At
      December 31, 2004 the value of the derivatives were increased by approximately
      $55 to the then current fair value of approximately $286 with a corresponding
      charge to other expense. The Company will continue to mark these derivatives
      to
      market on a quarterly basis.





On
      November 2, 2005, pursuant to the terms of a Securities Purchase Agreement
      dated
      such date between DunKnight Telecom Partners LLC (“DunKnight”) and the Company,
      as amended on January 3, 2006 (the “DunKnight Purchase Agreement”), the Company
      consummated a private placement to DunKnight of 18% Secured Debentures, at
      a
      discount to their face principal amount, due September 4, 2006 (the
“Debentures”). Pursuant to the terms of the DunKnight Purchase Agreement, as
      described in more detail below, the Company borrowed an aggregate of $10,000
      in
      exchange for its issuance of an aggregate $13,000 in face principal amount
      of
      Debentures.





At
      the
      first closing under the DunKnight Purchase Agreement, which occurred on November
      2, 2005, the Company issued a $8,000 face principal amount Debenture and
      received $6,000 in gross cash proceeds on November 3, 2005. At the second
      closing, which occurred on February 1, 2006, the Company issued an additional
      $5,000 in face principal amount of Debentures to DunKnight and its co-investor
      (Knight Vision Foundation) and received an additional $4,000 in gross cash
      proceeds. Each Debenture matures on September 4, 2006 and carries an annual
      interest rate of 18%, payable monthly in arrears in cash based on the face
      principal amount of the Debenture. Interest is based on a 360-day year and
      the
      actual number of days elapsed. The monthly cash requirements in respect of
      interest payments are approximately $120 following the first closing, commencing
      on December 1, 2005, and an additional $75 following the second closing,
      commencing on March 1, 2006, for an aggregate approximate $195 per month.
      Overdue interest is subject to an additional annual interest rate of 10.5%
      and,
      upon an event of default, the interest rate will increase by an additional
      10.5%. Upon the occurrence of an event of default, DunKnight may declare all
      amounts under the Debentures immediately due and payable in cash and, in such
      event, the Company would be required to pay 112% of the principal amount of
      the
      Debentures, plus all accrued and unpaid interest and any unpaid penalties or
      late fees. The




93
 **DSL.net,
          Inc.Notes to Consolidated Financial Statements (continued)(Dollars in
          Thousands, Except Per Share Data)**




Company
      may prepay the entire principal amount due under the Debentures at any time
      without any additional premium or penalty.





The
      Company recorded the $2,000 discount between the $6,000 cash received and the
      $8,000 face principal of the first closing as a debt discount which is being
      amortized to interest expense over the term of the note, using the effective
      interest method. The Company amortized $371 of this discount to interest expense
      in 2005.





Pursuant
      to the terms of that certain Implementation Agreement dated November 2, 2005,
      among the Company and the 2003 Investors (the “Implementation Agreement”), on
      November 3, 2005, the Company used $5,500 of the proceeds of the first closing
      of the DunKnight Debenture financing to eliminate, at a substantial discount,
      $30,870 (inclusive of accrued but unpaid interest) in senior secured debt due
      July 6, 2006 originally issued to the 2003 Investors on July 18, 2003; cancel
      all outstanding shares of the Company’s Series Z preferred stock previously
      issued to VantagePoint that carried a liquidation preference of $15,680; and
      cancel warrants to purchase approximately 190,890,621 shares of the Company’s
      common stock previously issued to the 2003 Investors. In addition, the
      Implementation Agreement terminated ,
      subject
      to exceptions for certain limited surviving provisions, all
      previously existing agreements under which the 2003 Investors and their
      affiliates had imposed numerous financial, operational, and other contractual
      obligations on the Company.





The
      above
      described transaction constitutes a troubled debt restructuring in accordance
      with the guidance of SFAS 15, as concessions were granted by the 2003 Investors
      for economic reasons related to the Company’s financial difficulties that they
      would not otherwise have considered. The 2003 Investors, as debt holders,
      expected to obtain more cash and an increased probability of receiving such
      cash
      by granting the concessions a opposed to refusing to grant such concessions.





As
      a
      result of the above described troubled debt restructuring, the Company recorded
      a gain on the extinguishment of debt in the measurement of net income as
      follows:




Face
                value of notes
            
            $
            30,000Accrued
                Interest at November 2, 2005
            
            
            870Subtotal
            
            
            30,870Debt
                discount balance at November 2, 2005
            
            
            (11,785
            )Notes,
                net of discount
            
            
            19,085Debt
                pay-off amount
            
            
            (5,500
            )Subtotal
            
            
            13,585Unamortized
                balance of deferred financing costs
            
            
            (142
            )Professional
                fees to negotiate debt pay-off
            
            
            (25
            )Gain
                on extinguishment of debt
            
            $
            13,418





When
      calculating the gain on debt extinguishment, the Company did not allocate any
      portion of the settlement payments to the cancelled warrants or the carrying
      value of the Series Z preferred stock because the realizable value of those
      instruments in a bankruptcy scenario would have been *de
      minimus* .
      The
      Company recognized a $2,630 positive adjustment included in net loss applicable
      to common stockholders, resulting from cancellation of the Series Z preferred




94
 **DSL.net,
          Inc.Notes to Consolidated Financial Statements (continued)(Dollars in
          Thousands, Except Per Share Data)**




stock,
      whereby the carrying value of the Series Z preferred stock was eliminated by
      an
      increase to additional paid-in capital.


The
        following table depicts the Company’s outstanding debt balances at December 31,
        2005 and 2004:


December
                  31,2005
              
              2004DunKnight
                  secured debentures
              
              $
              8,000
              
              $
              —Unamortized
                  debt discount
              
              
              (1,628
              )
              
              —Subtotal
              
              
              6,372
              
              
              —Deutsche
                  Bank/VantagePoint secured notes
              
              
              —
              
              
              30,000Accrued
                  interest
              
              
              —
              
              
              550Unamortized
                  debt discount
              
              
              —
              
              
              (19,843
              )Subtotal
              
              
              —
              
              
              10,707Laurus
                  secured convertible note
              
              
              4,073
              
              
              4,250Unamortized
                  debt discount - derivatives
              
              
              (79
              )
              
              (204
              )Unamortized
                  debt discount - closing fees
              
              
              (77
              )
              
              (209
              )Subtotal
              
              
              3,917
              
              
              3,837Total
                  debt, net of discount
              
              
              10,289
              
              
              14,544Less
                  current portion
              
              
              (10,289
              )
              
              —Non-current
                  portion
              
              $
              —
              
              $
              14,544




**8.**
            **Commitments
                and Contingencies**





**Leases**





Rent
      expense under operating leases was approximately $1,520, $1,392 and $1,480,
      for
      the years ended December 31, 2005, 2004 and 2003, respectively.





The
      Company leases space in several buildings, which are used for office, warehouse
      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 September
      2006.





The
      future minimum annual lease payments under the terms of such non-cancelable
      leases as of December 31, 2005 are as follows:





**Operating**
            
            **Capital****Leases**
            
            **Leases**2006
            
            $
            450
            
            $
            54Less:
                Amount representing interest
            
            
            
            
            
            —Present
                value of future minimum lease payments
            $
            54





In
      March
      of 2006, the Company signed a five year lease for its headquarters operations
      which will be relocated from New Haven, Connecticut to Wallingford, Connecticut.
      Also, in March of 2006, the Company signed a six month lease for "turn-key"
      office space in Reston, Virginia and allowed to expire without renewal its
      former office lease in Herndon, Virginia.  Future minimum annual lease
      payments under these two new leases are: $153 in 2006, $219 in 2007, $222
      in 2008, $222 in 2009, $222 in 2010, and $55 in 2011.





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 had leased
      approximately $8,900 under this agreement. In July 2003, the Company paid $2,600
      in full settlement of this outstanding capital lease obligation approximating
      $3,728. The difference between the lease carrying value and the purchase price
      of the assets, of approximately $1,128, was recorded as a reduction of the
      carrying value of the assets acquired under the lease obligation. Amounts
      financed under this lease agreement carried an interest rate of 12% per annum
      and were secured by the financed equipment.





In
      July
      2005, the Company exercised its purchase option at the end of the lease term
      to
      acquire certain telephone equipment for $93, which is being repaid over 12
      months. In the aggregate, there were capital lease obligations of approximately
      $54 and $50 at December 31, 2005 and 2004, respectively.




95
 **DSL.net,
          Inc.Notes to Consolidated Financial Statements (continued)(Dollars in
          Thousands, Except Per Share Data)**





**Purchase
      Commitments**





The
      Company has varying purchase commitments with certain service providers that
      range from one to five years all of which may be cancelled with prior written
      notice of which some are subject to early termination fees.





**Litigation**





A
      lawsuit
      for wrongful termination of employment was filed against the Company in the
      Superior Court in New Haven, Connecticut on July 29, 1999 by a former officer
      who was employed by the Company for less than two months. That action was
      subsequently moved to the Superior Court in Waterbury, Connecticut, Complex
      Litigation Docket. Plaintiff’s claims were based chiefly on his allegation that
      the Company terminated his employment because he allegedly voiced concerns
      to
      senior management about the feasibility of certain aspects of the Company’s
      business strategy. The plaintiff had been principally seeking compensatory
      damages for wages and unvested stock options. The parties entered into a
      settlement agreement on or about September 27, 2005, pursuant to which this
      matter was settled (without admission of fault by the Company) and dismissed
      (with prejudice to plaintiff), upon payment of an aggregate settlement amount
      of
      $20.





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. Future interconnection agreements may contain terms and conditions
      less
      favorable to the Company than those in its current agreements and could increase
      the Company’s costs of operations, particularly when there are changes to the
      federal or state legal requirements applicable to such agreements. The FCC
      adopted new unbundling rules in August 2003 and again in February 2005 that
      have
      increased the cost to the Company for certain high capacity loops and transport
      facilities from and between certain of the Company’s central offices located
      within the central offices of incumbent local exchange carriers. Effective
      March
      11, 2005, the cost of the affected circuits increased by up to a maximum of
      15%.
      Effective March 11, 2006, the 15% cap on increased costs for these affected
      circuits was lifted and incumbent local exchange carriers may now charge higher
      “special access” or negotiated rates for these affected circuits. During 2005
      and the first quarter of 2006, the Company engaged in a substantial network
      re-grooming exercise to, among other things, restructure its network to
      eliminate the Company’s need for, and reduce the Company’s use of, these
      affected circuits. Where the Company continues to have a need for such
      facilities, the Company has negotiated special rates. As a result of these
      efforts, the Company does not anticipate that it will incur any material
      increase in network expenses in 2006 associated the FCC’s 2003 and 2005
      unbundling rules.




96
 **DSL.net,
          Inc.Notes to Consolidated Financial Statements (continued)(Dollars in
          Thousands, Except Per Share Data)**





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





The
      Company transmits data across its network via transmission facilities that
      are
      leased from certain carriers, including Level 3 Communications, Inc. and MCI.
      The failure of any of the Company’s data transport carriers to provide
      acceptable service on acceptable terms could have a material adverse effect
      on
      the Company’s operations.





In
      connection with the Company’s 2004 convertible debt financing with Laurus, the
      Company granted Laurus certain registration rights for the common stock
      underlying the MB Note and Laurus Warrant, and filed and caused to become
      effective a registration statement with the SEC on Form S-3. As a result of
      the
      cessation of the Company’s common stock listing on the American Stock Exchange
      (“AMEX”), and the quotation of the Company’s common stock on the OTC Bulletin
      Board service (“OTCBB”), the Company’s eligibility for continued use of Form S-3
      for resale registrations will lapse. Laurus may require the Company to file
      and
      cause to become effective a registration statement on Form S-1, for the resale
      by Laurus of the common stock underlying the MB Note and Laurus Warrant. If
      the
      Company fails to cause said registration statement to become effective within
      the time period set forth in the transaction documents with Laurus, the Company
      may become subject to certain penalties in an amount not in excess of $255.





**9.**
            **Related
                Party Transactions**





On
      February 3, 2005, the Company entered into compensation agreements with four
      of
      its executive officers (representing all of its then current executive officers
      other than the Company’s chief executive officer). Under the terms of the
      agreements, each of the subject individuals was eligible to receive a fixed
      dollar cash compensation amount, in three equal installments, on June 30, 2005,
      August 31, 2005 and December 31, 2005, provided such individual was employed
      by
      the Company on each of such dates. If, prior to a payment date, the individual
      was terminated by the Company for cause, or resigned other than for good reason,
      he would forfeit the right to receive any remaining unvested payments. Upon
      the
      occurrence of a change in control of the Company, or if the individual was
      terminated without cause or terminated his employment with the Company for
      good
      reason, the individual would immediately fully vest in all remaining payments
      that would have become due and payable under such agreement but for the passage
      of time and the individual’s continued employment with the Company, and he would
      have the right to immediately receive the total amount of all remaining payments
      under the agreement. The total amount of potential payments which could have
      become due and owing under these agreements, for all four individuals in the
      aggregate, was $350. Each of Mr. DeSantis and Mr. Markley received $83.3 in
      payments before forfeiting any remaining rights under his agreement due to
      their
      respective resignations from the Company in September 2005. Each of Mr. Keisch
      and Mr. Esterman received $50 in payments under these agreements, of which
      amount, $16.6 was paid in January of 2006. These agreements effectively expired
      with the last payments made thereunder.




97
 **DSL.net,
          Inc.Notes to Consolidated Financial Statements (continued)(Dollars in
          Thousands, Except Per Share Data)**





On
      September 23, 2005, Walter R. Keisch, who served as an executive officer of
      the
      Company in the capacity of Vice President - Finance prior to that date, was
      appointed the Company’s Chief Financial Officer and Treasurer. In connection
      with such promotion, the Company’s Board of Directors provided Mr. Keisch with a
      $25 increase in his base salary.





On
      November 2, 2005, pursuant to the terms of the DunKnight Purchase Agreement,
      the
      Company consummated a private placement to DunKnight of 18% Secured Debentures,
      at a discount to their face principal amount. Pursuant to the terms of the
      DunKnight Purchase Agreement, as described in more detail above (Note 3), the
      Company borrowed an aggregate of $10,000 in exchange for its issuance of an
      aggregate of $13,000 in face principal amount of Debentures.





Effective
      as of January 3, 2006, the Company entered into an agreement (the “Amendment”)
      with DunKnight, extending the maturity date of the Company’s issued and
      outstanding Debenture, dated November 2, 2005, in face principal amount of
      $8,000, from August 2, 2006 until September 4, 2006, and delaying the date
      on
      which DunKnight was required to lend an additional $4,000 to the Company from
      January 3, 2006 to February 1, 2006.




Upon
      the
      occurrence of an event of default, DunKnight may declare all amounts under
      the
      Debentures immediately due and payable in cash and, in such event, the Company
      would be required to pay 112% of the principal amount of the Debentures, plus
      all accrued and unpaid interest and any unpaid penalties or late fees. The
      Company may prepay the entire principal amount due under the Debentures at
      any
      time without any additional premium or penalty.





Keir
      Kleinknecht, a member of the Board of Directors of the Company as on November
      3,
      2005, is the sole managing member and founder of DunKnight. Additionally, David
      F. Struwas, the Chief Executive Officer, President and a member of the Board
      of
      Directors of the Company as of November 3, 2005, acquired
      a non-managing membership interest in DunKnight (an approximate 4% interest
      for
      a $250 capital contribution) prior to the DunKnight financing transaction with
      the Company. Prior
      to
      the DunKnight financing, the Company had no material relationship with
      DunKnight. At
      the
      time of the DunKnight financing, Mr. Struwas owned 63,250 shares of common
      stock
      of the Company. Mr. Struwas, a former founder, director and executive officer
      of
      the Company during the period from 1998-2004, was not affiliated with DunKnight
      during his prior tenure with the Company.





Pursuant
      to the terms of that certain Implementation Agreement, as described in more
      detail above (Note 3), on November 3, 2005, the Company used $5,500 of the
      proceeds of the first closing of the DunKnight Debenture financing to eliminate,
      at a substantial discount, $30,870 (inclusive of accrued but unpaid interest)
      in
      senior secured debt due July 6, 2006 originally issued to the 2003 Investors
      on
      July 18, 2003; cancel all outstanding shares of the Company’s Series Z Preferred
      Stock previously issued to VantagePoint that carried a liquidation preference
      of
      $15,600; and cancel warrants to purchase approximately 190,890,621 shares of
      Company common stock previously issued to the 2003 Investors. In addition,
      the
      Implementation Agreement terminated, subject to exceptions for certain limited
      surviving provisions, all previously existing agreements under which the 2003
      Investors and their affiliates had imposed numerous financial, operational
      and
      other contractual obligations on the Company. During the course of the
      negotiation and approval of the Implementation Agreement, William J. Marshall




98
 **DSL.net,
          Inc.Notes to Consolidated Financial Statements (continued)(Dollars in
          Thousands, Except Per Share Data)**




served
      as
      Deutsche Bank’s designated representative on the Company’s Board of Directors;
      Mr. Marshall resigned from the Board in connection with the closing of the
      transactions contemplated by the Implementation Agreement.





In
      connection with the DunKnight Debenture financing, the employment of Kirby
      G.
“Buddy” Pickle with the Company was effectively terminated on November 2, 2005.
      Mr. Pickle’s termination of employment triggered severance benefits under his
      employment agreement with the Company dated April 14, 2004 (the “Existing
      Employment Agreement”). Additionally, on November 2, 2005, the Company entered
      into an amendment to the Existing Employment Agreement with Mr. Pickle (the
      “Amendment Agreement”) to address considerations arising from the American Jobs
      Creation Act of 2004 (the “Jobs Act”). Pursuant to the Existing Employment
      Agreement, the Company (i) is obligated to continue to pay Mr. Pickle, as
      severance, his base salary for the eighteen months following his termination
      of
      employment, in an aggregate amount of $525 in accordance with regular payroll
      practices, and (ii) is obligated to pay for Mr. Pickle’s COBRA costs for
      the continuation of his medical benefits for the eighteen month period, subject
      to Mr. Pickle’s compliance with the surviving provisions of the Existing
      Employment Agreement. Pursuant to the Amendment Agreement, Mr. Pickle and the
      Company agreed to defer all severance payments of base compensation under the
      Existing Employment Agreement for a period of six months and one day from his
      termination date. On the first payroll date after such six month and one day
      period, all payments otherwise payable to Mr. Pickle during such period will
      be
      paid in a lump sum. Monthly severance payments will continue thereafter for
      the
      remainder of the 18 month period. Pursuant to Mr. Pickle’s existing stock option
      agreement, the vesting of Mr. Pickle’s options accelerated such that all
      unvested shares subject to the options that would otherwise have vested over
      the
      period of 12 months following the date of termination of Mr. Pickle’s employment
      with the Company immediately vested and remain exercisable until the first
      anniversary of the termination date. In consideration for these payments, Mr.
      Pickle executed and delivered a standard release and waiver in favor of the
      Company. Mr. Pickle’s non-compete obligations under the Existing Employment
      Agreement continue for the term of the severance payments.




In
      connection with the Company’s closing of the Debenture financing with DunKnight,
      the Company’s Board of Directors awarded one-time transaction bonuses to Mr.
      Pickle, in the amount of $350, and to Marc R. Esterman, the Company’s General
      Counsel and fellow executive officer, in the amount of $25.




Effective
      on November 3, 2005, the Company entered into an employment agreement with David
      F.
      Struwas, who succeeded Mr. Pickle as the Company’s new chief executive officer
      as part of the Company’s financing transaction with DunKnight on that date. The
      employment agreement provides for a $300 annual base salary, which is subject
      to
      annual review by the Board of Directors, a one-time, $100 signing bonus, payable
      in twelve substantially equal monthly installments, and benefits, paid vacation,
      sick leave, and personal leave comparable to the benefits and leave offered
      to
      the Company’s other senior executive officers. Provided that he has not been
      terminated for “cause” and has not resigned for other than “good reason,” each
      as defined in the employment agreement, Mr. Struwas will be eligible for a
      bonus
      for his work during fiscal year 2006, to be paid at the discretion of the Board
      of Directors based on the Company’s achievement of operating results targeted in
      the Company’s 2006 operating plan in the form approved by the Company’s Board.
      Thereafter, the employment agreement anticipates that Mr. Struwas will be
      eligible for annual performance bonuses in the discretion of the Board of
      Directors.




99
 **DSL.net,
          Inc.Notes to Consolidated Financial Statements (continued)(Dollars in
          Thousands, Except Per Share Data)**





The
      Board
      of Directors also granted Mr. Struwas non-qualified stock options to acquire
      8,000,000 and 4,850,000 shares of the Company’s common stock, on November 3,
      2005 and January 4, 2006, respectively, pursuant to the Company’s Amended and
      Restated 2001 Stock Option and Incentive Plan (the “2001 Stock Plan”). The
      options vest over three years with no shares vesting until the six month
      anniversary of the grant date, 16.7% of the shares vesting on the six month
      anniversary date and 2.78% of the shares vesting on each successive month
      thereafter until fully vested on the three-year anniversary of the grant date.
      The 8,000,000 options carry an exercise price of $0.06 per share, which was
      the
      market value of the Company’s common stock on the Determination Date (as defined
      in the 2001 Stock Plan) under the 2001 Stock Plan; the 4,850,000 options carry
      an exercise price of $0.04 per share, which was the market value of the
      Company’s common stock on the Determination Date under the 2001 Stock Plan.





Struwas’
      employment agreement entitles him to severance under certain circumstances.
      If
      Mr. Struwas is terminated without “cause” or if he resigns for “good reason,”
then he will be entitled to receive continuation of his base salary and medical
      benefits for (i) twelve months, if he is terminated or resigns before the
      twelve month anniversary of his employment, or (ii) eighteen months, if he
      is terminated or resigns anytime thereafter. Severance is conditioned upon
      Mr.
      Struwas executing and delivering a general release and waiver in favor of the
      Company. If Mr. Struwas is terminated for “cause,” or quits other than for “good
      reason”, he is entitled to no severance payments. All severance payments of base
      compensation will be accelerated so that they are paid no later than March
      15th
      of the year following the year in which Mr. Struwas is terminated from
      employment in order to address considerations arising from the Jobs
      Act.





Mr.
      Struwas’ employment is at-will, and his Employment Agreement contains
      non-compete covenants and confidentiality obligations.





On
      October 7, 2004, in exchange for the agreement by the 2003 Investors to
      subordinate to Laurus their prior lien on the Company’s trade accounts
      receivable in connection with the closing of the Company’s $5,000 convertible
      notes and warrant financing with Laurus, the Company issued to the 2003
      Investors the 2004 Warrants. As a further condition to the agreement by the
      2003
      Investors to subordinate to Laurus their prior lien on certain of the Company’s
      trade accounts receivable, the Company agreed to deposit the proceeds from
      the
      Laurus convertible notes and warrant financing into a Company account maintained
      at DBTCA. The Company’s withdrawal and use of the proceeds of the Laurus
      convertible notes and warrant financing were subject to the prior approval
      of
      DBTCA and of DB Advisors L.L.C., as advisor to Deutsche Bank. As of March 1,
      2005, the Company received approval to withdraw and received $3,038 of the
      $4,250 borrowed, of which $2,429 was included with restricted cash at December
      31, 2004. During March of 2005, the Company received approval to withdraw and
      received the remaining $1,212 of the 4,250 borrowed.





Additionally,
      certain of the Company’s directors as of the date of the Laurus transaction
      (through their affiliation with the 2003 Investors) had direct or indirect
      interests in the Laurus financing transaction, as follows: (1) former director
      Duncan Davidson, who served as a director of the Company at the time of the
      Laurus transaction, was, at such time, a venture partner with VantagePoint,
      (2)
      former director James D. Marver, who served as a director of the Company at
      the
      time of the Laurus transaction, was, at such time, a managing partner of the
      general partner of the VantagePoint entities, (3) former director Roderick
      Glen
      MacMullin, who resigned from the




100
 **DSL.net,
          Inc.Notes to Consolidated Financial Statements (continued)(Dollars in
          Thousands, Except Per Share Data)**




Company’s
      Board of Directors on November 19, 2004 and who was a member of the Board at
      the
      time of the Laurus financing transaction, was, as of the time period of the
      Laurus financing, affiliated with Xavier Sussex, LLC, an investment advisory
      firm that had performed investment advisory services to DB Advisors, L.L.C.
      (“DB
      Advisors”), the investment advisor to Deutsche Bank, (4) former director Roger
      Ehrenberg, who resigned from the Company’s Board of Directors on September 8,
      2004, prior to the
      closing of the Laurus financing, was
      a
      member of the Board during the negotiation and approval of the Laurus financing
      and during such time was affiliated with DB Advisors, and (5) former director
      William J. Marshall, who served as a director of the Company at the time of
      the
      Laurus transaction and through November 2, 2005, was, at the time of the Laurus
      transaction, a principal of RockRidge Capital Partners, Inc., an investment
      advisory firm that had performed investment advisory services to DB
      Advisors.





During
      2004, VantagePoint converted 20,000 shares of Series X preferred stock into
      125,138,082 shares of the Company’s common stock (inclusive of shares of common
      stock issued in lieu of cash to pay accrued dividends on the Series X preferred
      stock).





During
      2003, the Series Y Investors (including Columbia) converted 14,000 shares of
      Series Y preferred stock into 35,140,012 shares of the Company’s common stock
      (including shares issued as dividends) (Note 9). As of December 31, 2003, funds
      affiliated with one remaining Series Y Investor (Charles River Partnership,
      L.P.) owned 1,000 shares of Series Y preferred stock which are convertible
      into
      approximately 2,260,909 shares of the Company’s common stock (Note 9). These
      remaining 1,000 shares of Series Y preferred stock were converted into common
      shares in February, 2004. In addition, resulting from guarantees issued under
      the Reimbursement Agreement (Note 7), Columbia had warrants to acquire
      approximately 1,358,025 shares of the Company’s common stock. These warrants
      were exercised in February 2004. An affiliate of Columbia, Harry Hopper, was
      a
      member of the Company’s Board of Directors until August 5, 2003.





Pursuant
      to the terms of the Reimbursement Agreement, on December 27, 2002, the Company
      issued warrants to purchase 10,379,420 shares of its common stock to
      VantagePoint and warrants to purchase 1,634,473 shares of its common stock
      to
      Columbia (Columbia subsequently transferred 445,254 of such warrants to
      VantagePoint), in consideration for their guarantees aggregating $6,100. The
      Company issued additional warrants to purchase 767,301 shares of its common
      stock to VantagePoint and 168,806 shares of its common stock to Columbia during
      the first quarter of 2003, bringing the total number of warrants issued to
      12,950,000. All such warrants were exercisable for ten years at an exercise
      price of $0.50 per share (Note 7). Prior to the execution of the Reimbursement
      Agreement, VantagePoint beneficially owned 21,956,063 shares of the Company’s
      common stock and 20,000 shares of the Company’s Series X preferred stock, which
      were convertible into 111,111,111 shares of the Company’s common stock, and
      Columbia owned 15,000 shares of the Company’s Series Y preferred stock, which
      were convertible into 30,000,000 shares of the Company’s common stock (Note 9). At
      the
      time of the transactions described immediately above, Mr. Marver was an
      affiliate of VantagePoint and a member of the Board of Directors. Mr. Hopper,
      an
      affiliate of the Columbia entities, was a member of the Company’s Board of
      Directors from December 28, 2001 to August 5, 2003.





On
      March
      5, 2003, the Company and certain of the Guarantors entered into Amendment No.
      1
      to the Reimbursement Agreement, pursuant to which VP increased its guarantee
      by
      $3,000 bringing the aggregate guarantees by all Guarantors under the
      Reimbursement Agreement, as amended, to $9,100. As consideration for VP’s
      increased guarantee, if the Company closed an




101
 **DSL.net,
          Inc.Notes to Consolidated Financial Statements (continued)(Dollars in
          Thousands, Except Per Share Data)**




equity
      financing on or before December 3, 2003, it was authorized to issue VantagePoint
      additional warrants to purchase the type of equity securities issued by the
      Company in such equity financing. The number of such additional warrants would
      be determined by dividing the per share price of such equity securities into
      a
      thousand dollars. Accordingly, since the Company closed a financing on July
      18,
      2003, the Company issued to VantagePoint in December 2003, additional warrants
      with a three-year life, to purchase 2,260,909 shares of its common stock at
      a
      per share price of $0.4423 (Note 7). At the time of these transactions, two
      of
      the Company’s Directors, Mr.
      Marver and Mr. Yagemann, were affiliated with VantagePoint.





Mr.
      Yagemann resigned from the Board of Directors on July 7, 2004. Mr. Marver resigned
      from the Board of Directors on April 18, 2005 .





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





On
      July
      22, 2004, the Company entered into a recapitalization agreement with
      VantagePoint, pursuant to which all of the then remaining issued and outstanding
      shares of Series X preferred stock of the Company were converted into shares
      of
      the Company’s common stock and 14,000 shares of newly issued Series Z preferred
      stock of the Company were issued to VantagePoint as an inducement to such
      conversion (Note 9). During the negotiation and closing of this transaction,
      two
      affiliates of VantagePoint (Messrs. Marver and Yagemann) served on the Company’s
      Board of Directors.





**10.**
            **Mandatorily
                Redeemable Convertible Preferred Stock and Stockholders**’**Equity**





**Mandatorily
      Redeemable Convertible Preferred Stock**





On
      November 14, 2001, the Company entered into a 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 (the “Series X Purchase
      Agreement”). Pursuant to the Series X Purchase Agreement, on November 14, 2001,
      December 10, 2001 and March 1, 2002 the Company sold an aggregate of 6,000
      shares, 4,000 shares and 10,000 shares, respectively, of Series X preferred
      stock to VantagePoint for total proceeds of $20,000, before direct issuance
      costs of $189.





The
      holders of the Series X preferred stock were 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 accrued monthly and were payable
      in
      cash, except in the case of the conversion of the Series X preferred stock
      into
      common stock, in which case such dividends were, at the sole option of the
      Company, able to be paid in shares of common stock. The accrued but unpaid
      dividends were payable upon the earliest to occur of (i) the liquidation,
      dissolution, winding up or change in control (as described below) of the
      Company, (ii) the conversion of the Series X preferred stock into common stock
      and (iii) the redemption of the Series X preferred stock.





In
      the
      event of the liquidation, dissolution or winding up of the Company, the holders
      of the Series X preferred stock were 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




102
 **DSL.net,
          Inc.Notes to Consolidated Financial Statements (continued)(Dollars in
          Thousands, Except Per Share Data)**




below).
      Remaining assets, if any, were to 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 was not limited to a fixed sum or
      percentage of assets, on a pro rata basis assuming full conversion into the
      Company’s common stock of all preferred stock. Unless a majority of the holders
      of the then outstanding Series X preferred stock elect otherwise, (i) an
      acquisition, merger or consolidation which results in a majority ownership
      change or (ii) the sale of all or substantially all of the assets of the Company
      (i.e., a “change in control”) would have been deemed to be a liquidation of the
      Company.





At
      the
      option of the holders of the Series X preferred stock, each share of Series
      X
      preferred stock was
      convertible at any time, into approximately 5,555.56 shares of common stock,
      which was 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 X Purchase Agreement was
      signed (“the Series X commitment date”), the Company recorded a Beneficial
      Conversion Feature (“BCF”) by a reduction (discount) to Preferred Stock in
      accordance with the guidance under EITF 00-27. The BCF was determined using
      the
      intrinsic value method which is defined as the “accounting conversion price”
less the quoted market price of the common stock on the Series 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 preferred stock. The BCF is accreted from
      the
      Preferred Stock issuance dates to the redemption date of July 18, 2006. The
      accreted BCF is included in the calculation of net loss applicable to common
      stockholders.





The
      Series X preferred stock was to 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 exceeded $2.50 per share (as adjusted for any stock splits, stock
      dividends, recapitalizations or the like) for a period of 45 consecutive trading
      days beginning after May 13, 2002.





The
      Series X preferred stock had voting rights similar to common stock based on
      the
      number of shares into which such Series X preferred stock was initially
      convertible. So long as at least 50% of the Series X preferred stock issued
      pursuant to the Series X Purchase Agreement remained outstanding, the holders
      of
      the Company’s Series X preferred stock had 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 remained outstanding, the holders of the Company’s Series X preferred
      stock had 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 X
      preferred stock, (ii) any alteration or change to the rights, preferences or
      privileges of the Series X preferred stock or (iii) any reclassification of
      the
      Series X preferred stock. The Series X preferred stock was redeemable, on parity
      with the Series Y preferred stock (discussed below), at the option of the
      holders of a majority of the then outstanding shares of Series X preferred
      stock
      at any time on or after January 1, 2005 (which date was subsequently extended
      to
      July 18, 2006, as discussed below) at a price equal to $1,000 per share plus
      all
      unpaid accrued dividends (whether or not declared).





On
      December 24, 2001, the Company entered into a purchase agreement with Columbia
      Capital Equity Partners III (QP), L.P., Columbia Capital Equity Partners II
      (QP), L.P., The Lafayette Investment Fund, L.P., Charles River Partnership
      X, A
      Limited Partnership and N.I.G. -




103
 **DSL.net,
          Inc.Notes to Consolidated Financial Statements (continued)(Dollars in
          Thousands, Except Per Share Data)**




Broadslate,
      Ltd. (the “Series Y Investors”) relating to the sale and purchase of up to an
      aggregate of 15,000 shares of Series Y Preferred Stock of the Company at a
      purchase price of $1,000 per share (the “Series Y Purchase Agreement”). Subject
      to the terms and conditions of the Series Y Purchase Agreement, on December
      28,
      2001, the Company sold an aggregate of 6,469 shares of Series Y preferred stock
      to the Series Y Investors for an aggregate purchase price of $6,469, before
      direct issuance costs of $300. In addition, on December 28, 2001, the Company
      issued promissory notes to the Series Y Investors in the aggregate principal
      amount of $3,531 in exchange for proceeds of $3,531 (Note 7). The promissory
      notes provided for an annual interest rate of 12%. On May 29, 2002, in
      accordance with the terms of the Series Y Purchase Agreement, the Company sold
      8,531 additional shares of Series Y preferred stock for net proceeds of $5,000
      in cash and delivered the promissory notes for cancellation. All accrued
      interest of approximately $145 on the promissory notes was
      forgiven.





The
      holders of Series Y preferred stock were 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 accrued monthly and were
      payable in cash, except in the case of the conversion of the Series Y preferred
      stock into common stock, dividends were, at the sole option of the Company,
      able
      to be paid in shares of common stock. Notwithstanding the foregoing, accrued
      but
      unpaid dividends were 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 were entitled to receive $1,000 per share plus
      all
      unpaid accrued dividends (whether or not declared) in parity with the holders
      of
      the Company’s Series X preferred stock. Remaining assets, if any, were to 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”)
      would have been deemed to be a liquidation of the Company.





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




104
 **DSL.net,
          Inc.Notes to Consolidated Financial Statements (continued)(Dollars in
          Thousands, Except Per Share Data)**




July
      18,
      2006. The accreted BCF is included in the calculation of net loss applicable
      to
      common stockholders.





The
      Series Y preferred stock was to automatically convert into common stock upon
      the
      close of business on the date on which the closing sale price of the common
      stock 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 had the right to 978.5 votes and, except
      as
      otherwise provided in the Company’s certificate of incorporation or required by
      law, voted 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 remained outstanding, the holders
      of
      the Company’s **** Series
      Y
      preferred stock had 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 was redeemable, on parity with the Series X preferred
      stock and any other class or series of the Company’s capital stock entitled to
      redemption that is on parity with the Series X preferred stock, at the option
      of
      a majority of the holders of the then outstanding shares of Series Y preferred
      stock at any time on or after July 18, 2006, at a price equal to $1,000 per
      share plus all unpaid accrued dividends (whether or not declared).





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





Due
      to
      the effects of the Company’s $30,000 debt financing issued with warrants to
      purchase common stock at $0.38 per share ( Note
      7)
      on July18, 2003, the Series Y conversion price was adjusted from $0.50 per
      share
      (each share of Series Y preferred stock was convertible into 2,000 shares of
      common stock) to $0.4423 per share (each share of Series Y preferred stock
      is
      convertible into approximately 2,260.9 shares of common stock) in accordance
      with certain anti-dilution provisions of the Series Y preferred stock.
      Accordingly, the Company recorded an additional BCF. In addition, the Company
      and holders of a majority of the Series X preferred stock and Series Y preferred
      stock agreed to extend the redemption dates of the Series X preferred stock
      and
      Series Y preferred stock from January 1, 2005 to July 18, 2006.





In
      the
      third quarter of 2003, 88 shares of Series Y preferred stock were converted
      into
      176,000 shares of the Company’s common stock at a conversion price of $0.50 per
      share and, in accordance with the terms of the Series Y preferred stock, the
      Company elected to pay accrued




105
 **DSL.net,
          Inc.Notes to Consolidated Financial Statements (continued)(Dollars in
          Thousands, Except Per Share Data)**




dividends
      approximating $11 by issuing 22,431 shares of its common stock, based on an
      average fair market value for the ten days preceding conversion of approximately
      $0.51 per share.





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





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





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





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





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





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





As
      a
      result of the above described conversions of 6,000 shares of Series X preferred
      stock and 1,000 shares of Series Y preferred stock in 2004, the Company was
      required to accelerate the unaccreted beneficial conversion feature related
      to
      such shares, which amounted to an additional $2,850 of preferred stock accretion
      charged in the first quarter of 2004.





On
      July
      22, 2004, the Company entered into a Recapitalization Agreement with
      VantagePoint, the holder of all of the then remaining issued and outstanding
      shares of Series X preferred stock (the “Recapitalization Agreement”). In
      accordance with the Recapitalization




106
 **DSL.net,
          Inc.Notes to Consolidated Financial Statements (continued)(Dollars in
          Thousands, Except Per Share Data)**




Agreement,
      the remaining 14,000 shares of Series X preferred stock were converted into
      77,777,775 shares of the Company’s common stock at a conversion price of $0.18
      per share and, in accordance with the terms of the Series X preferred stock,
      the
      Company elected to pay accrued dividends approximating $4,040 by issuing an
      additional 11,710,142 shares of its common stock at a per share price of $0.345,
      calculated based on the average fair market value for the ten days ending three
      days preceding the conversion. As a result of these conversions, the Company
      was
      required to accelerate the unaccreted beneficial conversion feature related
      to
      such converted shares, which resulted in $4,812 of preferred stock accretion
      charged in the third quarter of 2004.





For
      the
      year ended December 31, 2004, there was $7,662 of additional preferred stock
      accretion related to the conversion of 20,000 shares of Series X preferred
      stock
      and the conversion of 1,000 shares of Series Y preferred stock.





All
      of
      the Series X and Series Y preferred stock was converted into shares of the
      Company’s common stock during 2004. The Series X preferred stock and Series Y
      preferred stock activity for the years ended December 31, 2004 and 2003, is
      summarized as follows :





Mandatorily
                Redeemable Convertible Preferred StockSeries
                X
            
            Series
                YShares
            
            Amount
            
            Shares
            
            AmountBalance
                December 31, 2002
            
            
            20,000
            
            $
            8,741
            
            
            15,000
            
            $
            5,381Conversion
                of Series Y Preferred Stock to
              Common
                stock
            
            
            
            
            
            
            
            
            (14,000
            )
            $
            (14,000
            )Payment
                of dividends on converted Series
              Y
                Preferred Stock
            
            
            
            
            
            
            
            
            
            
            
            (2,522
            )Accrued
                dividends on Series X and Y
              Preferred
                Stock
            
            
            
            
            
            2,345
            
            
            
            
            
            1,353Accretion
                of beneficial conversion feature
              of
                Series X and Y Preferred Stock
            
            
            
            
            
            5,145
            
            
            
            
            
            9,182Preferred
                Stock reclassification
            
            
            
            
            
            
            
            
            
            
            
            1,394Balance
                December 31, 2003
            
            
            20,000
            
            $
            16,231
            
            
            1,000
            
            $
            788Conversion
                Series X and Y Preferred Stock
              to
                common stock
            
            
            (20,000
            )
            $
            (20,000
            )
            
            (1,000
            )
            $
            (1,000
            )Accrued
                dividends on Series X and Y Preferred Stock
            
            
            
            
            
            940
            
            
            
            
            
            10Payment
                of dividends on converted Series X and Y
              Preferred
                Stock
            
            
            
            
            
            (5,600
            )
            
            
            
            
            (221
            )Accretion
                of beneficial conversion feature of Series X
              and
                Y Preferred Stock8,429
            
            
            
            
            
            423Balance
                December 31, 2004
            
            
            —
            
            $
            —
            
            
            —
            
            $
            —





In
      accordance with the above described Recapitalization Agreement, the Company
      issued to




107
 **DSL.net,
          Inc.Notes to Consolidated Financial Statements (continued)(Dollars in
          Thousands, Except Per Share Data)**




VantagePoint
      14,000 shares of Series Z preferred stock, with a liquidation preference of
      up
      to $1,120 per share ($15,680 in the aggregate) and a total fair value of $2,630
      (further discussed below). The Series Z preferred stock was issued to
      VantagePoint in the recapitalization to induce them to convert their remaining
      14,000 shares of Series X preferred stock and to preserve, for a period up
      to
      four years, VantagePoint’s liquidation preference rights, which would otherwise
      have terminated upon such conversion. VantagePoint had the right to a
      liquidation preference on the shares of Series Z preferred stock it held in
      the
      event of any liquidation, dissolution or winding up of the Company (including
      a
      transaction approved in advance by the board of directors of the Company for:
      (i) the sale of the Company to another entity in a reorganization, merger,
      consolidation or otherwise, if following such transaction or series of
      transactions the holders of the outstanding voting power of the Company prior
      to
      such transaction would own less than a majority of the voting power of the
      surviving entity or (ii) the sale of substantially all of the assets of the
      Company). The Series Z preferred stock did not contain any conversion or
      mandatory redemption provisions, nor did it have any special dividend or special
      voting rights. The
      Series Z preferred stock’s liquidation preference was to be eliminated, and the
      shares of Series Z preferred stock cancelled, on July 18, 2008.  In
      addition, the liquidation preference amount
      was to be reduced upon the occurrence of the following events:





·
            if
                the Company became subject to a petition under the U.S. Bankruptcy
                Code
                and sold all or substantially all of its assets other than in a
                transaction of series of transactions in which the business of the
                Company
                was acquired by a third party as a business and VantagePoint had
                sold more
                than 39 million shares, but less than 58 million shares, of the Company’s
                common stock issued in connection with the transactions contemplated
                by
                the Recapitalization Agreement, then the liquidation preference would
                have
                been reduced to $8,680 in the aggregate;
                and





·
            upon
                the first of any of the following, the liquidation preference would
                have
                been reduced to $0 in the aggregate and the Series Z Preferred Stock
                cancelled:





§
            July
                18, 2008;


§
            the
                Company became subject to a petition under the U.S. Bankruptcy Code
                and
                sold in or pursuant to such proceeding all or substantially all of
                its
                assets and VantagePoint had sold more than 58 million shares of the
                Company’s common stock issued in connection with the transactions
                contemplated by the Recapitalization
                Agreement;


§
            VantagePoint
                owned more than 50% of the Company’s common stock;
                or


§
            the
                Company’s common stock closed above $1.50 per share for 45 consecutive
                trading days.





The
      Company has recorded the $2,630 fair value of Series Z preferred stock in the
      equity section of its statement of financial position, and included that amount
      as a charge in the calculation of net loss applicable to common
      stockholders.




The
      fair
      value of the Series Z preferred stock of $2,630 was determined based on a number
      of factors including, but not limited to: (i) review of the Recapitalization
      Agreement and the Certificate of Designation of the Series Z Preferred Stock,
      (ii) consideration of the Company’s historical financial results, (iii) review
      of certain criteria for similar companies obtained from published sources,
      and
      (iv) the use of probability analyses.





The
      Series Z preferred stock was cancelled on November 3, 2005, pursuant to the
      terms of an




108
 **DSL.net,
          Inc.Notes to Consolidated Financial Statements (continued)(Dollars in
          Thousands, Except Per Share Data)**




Implementation
      Agreement dated November 2, 2005, among the Company and the 2003 Investors
      (Note
      7).





**Common
      Stock Transactions**





In
      the
      first quarter of 2005, the Company issued 1,000 shares of its common stock
      for
      shares purchased under its employee stock purchase plan (discussed below).
      As of
      March 1, 2005, there were no employees participating in the stock purchase
      plan.





During
      2004, the Company issued 127,708,856 shares of its common stock upon conversion
      of 20,000 shares and 1,000 shares of Series X and Series Y convertible preferred
      stock, respectively, including common stock issued for accrued but unpaid
      dividends (discussed above), 39,911 shares of its common stock upon exercise
      of
      vested stock options, and 8,836 shares of its common stock for shares purchased
      under its employee stock purchase plan (discussed below). Also in February
      2004,
      the company issued 413,160 shares of its common stock in a cashless exercise
      of
      1,358,025 warrants owned by Columbia.





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





**Common
      Stock Reserved**





The
      Company has reserved shares of common stock as follows:





2005
            
            20041999
                Stock Plan
            
            
            1,575,191
            
            
            5,745,9192001
                Stock Plan
            
            
            22,863,378
            
            
            24,886,823VISI
                Stock Option Plans
            
            
            —
            
            
            19,192Kirby
                Pickle Stock Option Plan
            
            
            8,333,333
            
            
            10,000,0001999
                Employee Stock Purchase Plan
            
            
            205,660
            
            
            206,660Stock
                Warrants
            
            
            1,321,571
            
            
            192,212,192Convertible
                Minimum Borrowing Note
            
            
            15,178,571
            
            
            15,178,571Total
            
            
            49,477,704
            
            
            248,249,357





**Stock
      Warrants**





On
      October 7, 2004, in exchange for agreement by the 2003 Investors to subordinate
      to Laurus their prior lien on certain of the Company’s accounts receivable, the
      Company issued the 2004 Warrants to the 2003 Investors, allocated ratably in
      accordance with the 2003 Investors’ interests in the Company’s July 2003 note
      and warrant financing, which warrants provided for the purchase of up to an
      aggregate of 19,143,000 shares of common stock (Note 7). The 2004 Warrants
      were
      to expire on July 18, 2006 and were exercisable solely in the event of a
      qualifying change of control.  On November 3, 2005, all of the 2004
      Warrants were cancelled pursuant to the terms of the Implementation Agreement.





Also
      on
      October 7, 2004, as part of the Laurus financing, the Company issued a warrant
      to




109
 **DSL.net,
          Inc.Notes to Consolidated Financial Statements (continued)(Dollars in
          Thousands, Except Per Share Data)**




Laurus
      to
      purchase up to 1,143,000 shares of the Company’s common stock at an exercise
      price of $0.35 per share. The Company also issued a warrant to purchase 178,571
      shares of the Company’s common stock, at an exercise price of $0.35 per share,
      to TN, as compensation for TN’s having served as the placement agent in the
      financing transaction with Laurus. The Laurus Warrant and the warrant issued
      to
      TN each expire on August 31, 2009 (Note 7).





Pursuant
      to the terms of the Reimbursement Agreement, in December 2002, the Company
      issued warrants to purchase 12,013,893 shares of its common stock and in March
      2003, the Company issued warrants to purchase 936,107 shares of its common
      stock, to VantagePoint and Columbia, in consideration for their loan guarantees
      aggregating $6,100. All such warrants had a ten-year life and an exercise price
      of $0.50 per share (Note 7). The Company issued additional warrants in December
      2003, to purchase 2,260,909 shares of its common stock to VantagePoint in
      consideration for their additional $3,000 loan guarantee. Such warrants had
      a
      ten-year life and an exercise price of $0.4423 per share. Certain of the
      warrants were exercised in 2004 and the remaining warrants were cancelled on
      November 3, 2005, pursuant to the terms of the Implementation Agreement (Note
      7).





In
      July
      2003, pursuant to the Note and Warrant Purchase Agreement, the Company issued
      to
      Deutsche Bank and VantagePoint, warrants to purchase 157,894,737 shares of
      its
      common stock. All such warrants had a three-year life and an exercise price
      of
      $0.38 per share. On November 3, 2005, all of these warrants were cancelled
      pursuant to the terms of the Implementation Agreement (Note 7).





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





At
      December 31, 2005 and 2004, the Company had outstanding warrants to purchase
      1,321,571 and 192,212,192 shares of common stock, respectively.





**11.**
            **Income
                Taxes**





The
      Company has recorded income tax provisions on the net earnings of its
      discontinued operations for the years ended December 31, 2004 and 2003, of
      $62
      and $62, respectively, with equal offsetting income tax benefits on the net
      losses of its continuing operations in the same respective years, as the Company
      files consolidated tax returns and the Company generated consolidated net
      operating losses for those respective years.


110
 **DSL.net,
          Inc.Notes to Consolidated Financial Statements (continued)(Dollars in
          Thousands, Except Per Share Data)**





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





December
                31,2005
            
            2004
            
            2003Gross
                deferred tax asset:Net
                operating loss carryforwards
            
            $
            126,158
            
            $
            122,014
            
            $
            111,175Depreciation
            
            
            —
            
            
            —
            
            
            195Other
            
            
            4,963
            
            
            5,636
            
            
            6,189Gross
                deferred tax assets
            
            
            131,121
            
            
            127,650
            
            
            117,559Gross
                deferred tax liability:Depreciation
            
            
            1,977
            
            
            1,227
            
            
            —Other
            
            
            945
            
            
            596
            
            
            863Gross
                deferred tax liabilities
            
            
            2,922
            
            
            1,823
            
            
            863Net
                deferred tax assets
            
            
            128,199
            
            
            125,827
            
            
            116,696Valuation
                allowance
            
            
            (128,199
            )
            
            (125,827
            )
            
            (116,696
            )Net
                deferred taxes
            
            $
            —
            
            $
            —
            
            $
            —





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





At
      December 31, 2005 and 2004, the Company had approximately $325,665 and $313,074
      of federal and state net operating loss carryforwards, respectively. Of this
      amount, approximately $6,000 relates to stock-based compensation deductions
      which, when realized, will be accounted for as a credit to additional
      paid-in-capital rather than a reduction to the income tax provision. The federal
      net operating loss carryforwards begin to expire in 2019 and the state net
      operating loss carryforwards began to expire in 2004. A significant portion
      of
      the net operating loss carryforwards may be subject to limitations under the
      U.S. federal income tax laws due to changes in the capital structure of the
      Company.





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





**December
                31,****2005**
            
            **2004**
            
            **2003**Statutory
                federal tax rate
            
            
            (34.00
            )%
            
            (34.00
            )%
            
            (34.00
            )%State
                income tax, net of federal benefit
            
            
            (4.72
            )
            
            (4.96
            )
            
            (4.62
            )Permanent
                differences
            
            
            0.15
            
            
            0.06
            
            
            2.39Deferred
                tax state rate change
            
            
            8.96
            
            
            0.00
            
            
            0.00Deferred
                tax asset valuation allowance
            
            
            29.61
            
            
            38.90
            
            
            36.23Effective
                federal tax rate
            
            
            —
            %
            
            —
            %
            
            —
            %





111
 **DSL.net,
          Inc.Notes to Consolidated Financial Statements (continued)(Dollars in
          Thousands, Except Per Share Data)**





**12.**
            **Research
                and Development Expenditure Credits**





In
      March
      2002, the Company filed an application with the Connecticut Department of
      Revenue Services for research and development expenditure credits for the 1999
      and 2000 calendar years. The credits were approved as a reduction against the
      Connecticut corporation business tax. With regard to credits approved for the
      2000 calendar year, the Company was entitled to elect a cash refund at 65
      percent of the approved credit. The Company elected to receive the 2000 calendar
      year credit as a cash refund of approximately $1,301. The 1999 calendar year
      credit of approximately $671 is available as a carry forward to offset future
      State of Connecticut corporation business taxes. In July 2002, the Company
      received the first installment of the cash refund pertaining to the 2000
      calendar year of approximately $1,000. Upon receipt of the research and
      development credits, the Company was obligated to pay approximately $402 to
      a
      professional service provider as a result of a contingent fee arrangement for
      professional services in connection with obtaining such credits. In 2003 and
      2004, the Company received the second and third installments of approximately
      $150 and $151, respectively.





For
      the
      years ended December 31, 2004, 2003 and 2002, the Company recorded the
      approximate $151, $150 and $1,000 refunds, respectively, as a reduction in
      its
      state corporate franchise tax expenses which are included in general and
      administrative expenses. The approximate $402 related professional services
      fee
      was recorded in general and administrative expenses during 2002.





**13.**
            **Incentive
                Stock Award Plans**





**Employee
      Stock Option Plan**








In
      February 2005, the Company further amended the 2001 Stock Plan to (i) increase
      the number of shares of common stock authorized under the 2001 Stock Plan to
      a
      total of 65,000,000, and to (ii) increase the number of options that may be
      issued to an employee in any calendar year from 5,000,000 shares to 8,000,000
      shares.





Options
      granted to employees under the Company’s Amended and Restated 1999 Stock Plan
      (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) 16.7% after six months and
      a
      day, then ratably over the next thirty months. Once vested, the options under
      both plans are exercisable for ten years from the date of grant.





In
      conjunction with its acquisition of VISI in 2000, 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 were granted by the Company under the VISI
      stock option plans. The VISI options were valued at $6,654 at the time of the
      acquisition.





In
      April
      2004, as authorized by the Company’s Board of Directors, the Company entered
      into an employment agreement and related stock option agreement with Kirby
      G.
      Pickle, in connection with Mr. Pickle becoming the chief executive officer
      of
      the Company. Under the




112
 **DSL.net,
          Inc.Notes to Consolidated Financial Statements (continued)(Dollars in
          Thousands, Except Per Share Data)**




stock
      option agreement for Mr. Pickle, an option to purchase a total of 10,000,000
      shares of the Company’s common stock was granted to Mr. Pickle as an inducement
      to his employment with the Company. In connection with the termination of Mr.
      Pickle’s employment with the Company on November 2, 2005, and in accordance with
      the terms of his stock option agreement, Mr. Pickle’s stock options that would
      otherwise have vested up through November 1, 2006, immediately vested, and
      all
      of Mr. Pickle’s stock options that would otherwise have vested after November 1,
      2006, immediately expired. At December 31, 2005, Mr. Pickle held options to
      purchase a total of 8,333,333 shares of the
      Company’s common stock at a per share exercise price of $0.48. All such stock
      options expire on November 3, 2006.





A
      summary
      of activity under the Plans for the years ended December 31, 2003, 2004 and
      2005
      is as follows:







Weighted
                    AverageNumber
                    of
                
                Fair
                
                ExerciseShares
                
                Value
                
                PriceOutstanding
                    at December 31, 2002
                
                
                23,877,004Granted
                
                
                1,463,000
                
                $
                0.47
                
                $
                0.56Exercised
                
                
                (5,363,763
                )
                
                
                
                $
                0.43Cancelled
                
                
                (1,304,475
                )
                
                
                
                $
                1.41Outstanding
                    at December 31, 2003
                
                
                18,671,766Granted
                
                
                31,950,000
                
                $
                0.51
                
                $
                0.64Exercised
                
                
                (39,911
                )
                
                
                
                $
                0.29Cancelled
                
                
                (9,929,921
                )
                
                
                
                $
                0.85Outstanding
                    at December 31, 2004
                
                
                40,651,934Granted
                
                
                8,135,000
                
                $
                0.05
                
                $
                0.06Exercised
                
                
                —Cancelled
                
                
                (16,015,032
                )
                
                
                
                $
                0.80Outstanding
                    at December 31, 2005
                
                
                32,771,902

















113
 **DSL.net,
          Inc.Notes to Consolidated Financial Statements (continued)(Dollars in
          Thousands, Except Per Share Data)**





The
      following summarizes the outstanding and exercisable options under the Plans
      as
      of December 31, 2005, 2004 and 2003:


Options
                  Outstanding
              
              Options
                  ExercisableWeighted
                  Avg.Remaining
                  Life
              
              Weighted
                  Avg.
              
              
              
              Weighted
                  Avg.Exercise
                  Price
              
              Number
              
              (in
                  years)
              
              Exercise
                  Price
              
              Number
              
              Exercise
                  Price12/31/05$0.02-0.49
              
              
              20,167,408
              
              
              5.5
              
              $
              0.28
              
              
              11,201,773
              
              $
              0.43$0.49-1.05
              
              
              11,819,286
              
              
              7.5
              
              $
              0.57
              
              
              7,727,249
              
              $
              0.61$1.05-2.07
              
              
              58,958
              
              
              5.1
              
              $
              1.21
              
              
              58,958
              
              $
              1.21$2.07-5.19
              
              
              496,750
              
              
              4.8
              
              $
              2.71
              
              
              496,750
              
              $
              2.71$5.19-7.78
              
              
              132,000
              
              
              4.3
              
              $
              6.84
              
              
              132,000
              
              $
              6.84$7.78-10.37
              
              
              0$10.37-12.96
              
              
              91,000
              
              
              4.3
              
              $
              11.94
              
              
              91,000
              
              $
              11.94$12.96-15.56
              
              
              4,500
              
              
              4.1
              
              $
              14.65
              
              
              4,500
              
              $
              14.65$15.56-$25.94
              
              
              2,000
              
              
              4.1
              
              $
              22.34
              
              
              2,000
              
              $
              22.3432,771,902
              
              
              6.2
              
              $
              0.48
              
              
              19,714,230
              
              $
              0.6512/31/04$0.02-0.49
              
              
              17,807,444
              
              
              7.7
              
              $
              0.40
              
              
              7,558,901
              
              $
              0.34$0.49-1.05
              
              
              19,148,341
              
              
              7.7
              
              $
              0.58
              
              
              8,243,953
              
              $
              0.60$1.05-2.07
              
              
              1,379,692
              
              
              6.9
              
              $
              1.10
              
              
              1,374,627
              
              $
              1.10$2.07-5.19
              
              
              1,963,124
              
              
              5.4
              
              $
              2.80
              
              
              1,953,852
              
              $
              2.80$5.19-7.78
              
              
              171,833
              
              
              4.6
              
              $
              6.89
              
              
              171,833
              
              $
              6.89$7.78-10.37
              
              
              80,000
              
              
              0.2
              
              $
              8.38
              
              
              80,000
              
              $
              8.38$10.37-12.96
              
              
              91,000
              
              
              5.3
              
              $
              11.94
              
              
              91,000
              
              $
              11.94$12.96-15.56
              
              
              8,500
              
              
              2.7
              
              $
              14.52
              
              
              8,500
              
              $
              14.52$15.56-$25.94
              
              
              2,000
              
              
              5.0
              
              $
              22.34
              
              
              2,000
              
              $
              22.3440,651,934
              
              
              7.5
              
              $
              0.70
              
              
              19,484,666
              
              $
              0.9012/31/03$0.02-0.49
              
              
              8,026,838
              
              
              8.5
              
              $
              0.29
              
              
              2,752,783
              
              $
              0.28$0.49-1.05
              
              
              5,953,181
              
              
              8.2
              
              $
              0.62
              
              
              2,653,537
              
              $
              0.64$1.05-2.07
              
              
              1,799,475
              
              
              6.9
              
              $
              1.24
              
              
              1,339,411
              
              $
              1.29$2.07-5.19
              
              
              2,314,069
              
              
              6.8
              
              $
              2.87
              
              
              1,868,464
              
              $
              2.87$5.19-7.78
              
              
              325,745
              
              
              6.3
              
              $
              6.76
              
              
              294,496
              
              $
              6.77$7.78-10.37
              
              
              81,000
              
              
              5.8
              
              $
              8.38
              
              
              81,000
              
              $
              8.38$10.37-12.96
              
              
              103,000
              
              
              6.3
              
              $
              11.94
              
              
              94,725
              
              $
              11.94$12.96-15.56
              
              
              62,458
              
              
              6.0
              
              $
              14.79
              
              
              61,213
              
              $
              14.80$15.56-$25.94
              
              
              6,000
              
              
              6.1
              
              $
              21.50
              
              
              5,874
              
              $
              21.4418,671,766
              
              
              8.0
              
              $
              1.07
              
              
              9,151,503
              
              $
              1.57





The
      estimated fair value at date of grant for options granted for the year ended
      December 31, 2005, ranged from $0.05 to $0.20 per share, for the year ended
      December 31, 2004, ranged from $0.18 to $0.71 per share, for the year ended
      December 31, 2003, ranged from $0.43 to $0.63 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:




114
 **DSL.net,
          Inc.Notes to Consolidated Financial Statements (continued)(Dollars in
          Thousands, Except Per Share Data)**


December
                  31,2005
              
              2004
              
              2003Risk
                  free interest rate
              
              
              3.38%-4.50%
              
              
              1.96%-3.67%
              
              
              2.15%-3.06%Expected
                  dividend yield
              
              
              None
              
              
              None
              
              
              NoneExpected
                  life of option
              
              
              3-4
                  years
              
              
              3-4
                  years
              
              
              3-4
                  yearsExpected
                  volatility
              
              
              96%
                  - 141%
              
              
              134%
                  - 145%
              
              
              152%





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





The
      Company records deferred compensation when common stock options and shares
      of
      restricted stock are granted with an exercise price below estimated fair value.
      Deferred compensation is recognized to compensation expense generally over
      the
      vesting period. Unvested options for terminated employees are cancelled and
      the
      value of such options are recorded as a reduction of deferred compensation
      with
      an offset to additional-paid-in-capital. Stock compensation expense totaled
      approximately $0, $0 and $438 for the years ended December 31, 2005, 2004 and
      2003, respectively .





**Employee
      Stock Purchase Plan**





The
      Company’s 1999 Employee Stock Purchase Plan (the “Purchase Plan”) authorized the
      issuance of up to a total of 300,000 shares of common stock to participating
      employees.





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





During
      the years ended December 31, 2005, 2004 and 2003, the Company issued 1,000,
      8,836 and 15,380 shares of its common stock, respectively, under the Purchase
      Plan. As of March 1, 2005 there were no employees participating in the Purchase
      Plan.





**14.**
            **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




115
 **DSL.net,
          Inc.Notes to Consolidated Financial Statements (continued)(Dollars in
          Thousands, Except Per Share Data)**




December
      31, 2005, 2004 and 2003, totaled $126, $110 and $166, respectively.





**15.**
            **Accrued
                Liabilities**





Accrued
      liabilities included the following:





December
                31,2005
            
            2004Taxes
                payable - other than
              income
                taxes
            
            $
            727
            
            $
            906Accrued
                telecommunication
              expenses
            
            
            508
            
            
            531Other
                accrued liabilities
            
            
            796
            
            
            957Total
            
            $
            2,031
            
            $
            2,394





**16.**
            **Restructuring
                and Impairments**





There
      were no increases or charges to restructuring reserves during the year ended
      December 31, 2005, and there were no restructuring reserve balances at December
      31, 2005 and December 31, 2004.





During
      the year ended December 31, 2004, the Company charged approximately $540 against
      the restructuring reserve related to facilities expense associated with the
      Company’s vacated office space in Santa Cruz, California. The lease on that
      facility expired in December of 2004 and the restructuring reserve balance
      was
      $0 at December 31, 2004.





During
      the year ended December 31, 2003, the Company increased its reserve for vacated
      facilities by approximately $252 as a sublet tenant vacated its Santa Cruz
      facility and no additional sublets were anticipated. The Company also charged
      approximately $647 against its restructuring reserves; of which, approximately
      $315 related to payment of certain termination fees associated with the closure
      of certain central offices during 2001, and approximately $332 related to
      facilities expense associated with the Company’s vacated office space in Santa
      Cruz, California. At December 31, 2003, the remaining restructuring reserve
      balance for the leased Santa Cruz facility of approximately $540 was included
      in
      accrued liabilities.





116
 **DSL.net,
          Inc.Notes to Consolidated Financial Statements (continued)(Dollars in
          Thousands, Except Per Share Data)**





The
      following table summarizes the additions and charges to the restructuring
      reserve from December 2002 through December 2004, and the remaining reserve
      balance at December 31, 2004:




**Facility**
                **Leases**
              
              
              **Central**
                **Office**
                **Term.**
                **Fees**
              
              
              **Total**Reserve
                  balance at
                Dec.
                  31, 2002
              
              $
              620
              
              $
              315
              
              $
              935Additions
                  to the
                reserve
              
              
              252
              
              
              —
              
              
              252Charges
                  to the
                reserve
              
              
              (332
              )
              
              (315
              )
              
              (647
              )Reserve
                  balance at
                Dec.
                  31, 2003
              
              
              540
              
              
              —
              
              
              540Charges
                  to the
                reserve
              
              
              (540
              )
              
              —
              
              
              (540
              )Reserve
                  balance at
                Dec.
                  31, 2004
              
              $
              —
              
              $
              —
              
              $
              —





**17.**
            **Subsequent
                Events**





On
      January 9, 2006 the Company’s common stock was cleared for quotation on the
      OTCBB under the symbol “DSLN.” Commencement of quotation on the OTCBB was
      facilitated by efforts of an applying market maker, whose sponsorship of the
      Company’s common stock was approved by appropriate regulatory authorities. The
      Company’s common stock had previously been traded on the AMEX under the symbol
“BIZ”. The move from the AMEX to the OTCBB was prompted by the Company’s receipt
      of a suspension and delisting notice from AMEX due to the low selling price
      of
      the Company’s common stock.





On
      February 1, 2006, the Company received $4,000 representing the second
      installment from the November 2, 2005, debt financing transaction with
      DunKnight, for which the Company issued an additional $5,000 in face principal
      amount of Debentures to DunKnight and its co-investor (Knight Vision Foundation)
      at 18% interest per annum, maturing on September 4, 2006 (Note 7).




117
 **DSL.net,
          Inc.Notes to Consolidated Financial Statements (continued)(Dollars in
          Thousands, Except Per Share Data)**




**18.**
            **Selected
                Unaudited Quarterly Financial
                Data**




**First**
            
            **Second**
            
            **Third**
            
            **Fourth****2005**
            
            **Quarter**
            
            **Quarter**
            
            **Quarter**
            
            **Quarter**
            
            **Total**Revenue
            
            $
            13,674
            
            $
            12,706
            
            $
            11,716
            
            $
            10,923
            
            $
            49,019Operating
                loss
            
            $
            (1,518
            )
            $
            (677
            )
            $
            (1,865
            )
            $
            (3,217
            )
            $
            (7,277
            )(Loss)
                income from continuing operations, net of income taxes
            
            $
            (3,489
            )
            $
            (3,089
            )
            $
            (4,804
            )
            $
            8,445
            
            $
            (2,936
            )(Loss)
                income from discontinued operations, net of income taxes
            
            $
            (13
            )
            $
            7
            
            $
            (5,952
            )
            $
            460
            
            $
            (5,498
            )Net
                (loss) income
            
            $
            (3,502
            )
            $
            (3,082
            )
            $
            (10,756
            )
            $
            8,905
            
            $
            (8,434
            )Preferred
                Stock dividends, accretion and fair value changes
            
            
            —
            
            
            —
            
            
            —
            
            
            2,630
            
            
            2,630Net
                (loss) income applicable to common stockholders
            
            $
            (3,502
            )
            $
            (3,082
            )
            $
            (10,756
            )
            $
            11,535
            
            $
            (5,804
            )Net
                (loss) income per share from continuing operations, basic and
                diluted
            
            $
            (0.01
            )
            $
            (0.01
            )
            $
            (0.02
            )
            $
            0.04
            
            $
            0.00Net
                (loss) income per share from discontinued operations, basic and
                diluted
            
            $
            (0.00
            )
            $
            0.00
            
            $
            (0.02
            )
            $
            0.00
            
            $
            (0.02
            )Net
                (loss) income per share, basic and diluted
            
            $
            (0.01
            )
            $
            (0.01
            )
            $
            (0.04
            )
            $
            0.04
            
            $
            (0.02
            )**2004**Revenue
            
            $
            15,879
            
            $
            15,748
            
            $
            14,899
            
            $
            14,228
            
            $
            60,755Operating
                loss
            
            $
            (6,076
            )
            $
            (4,871
            )
            $
            (4,569
            )
            $
            (2,666
            )
            $
            (18,183
            )Loss
                from continuing operations, net of income taxes
            
            $
            (7,010
            )
            $
            (5,951
            )
            $
            (5,945
            )
            $
            (4,444
            )
            $
            (23,349
            )(Loss)
                income from discontinued operations, net of income taxes
            
            $
            (53
            )
            $
            127
            
            $
            26
            
            $
            20
            
            $
            120Net
                loss
            
            $
            (7,063
            )
            $
            (5,824
            )
            $
            (5,919
            )
            $
            (4,423
            )
            $
            (23,229
            )Preferred
                Stock dividends, accretion and fair value changes
            
            
            (3,942
            )
            
            (1,008
            )
            
            (7,482
            )
            
            —
            
            
            (12,432
            )Net
                loss applicable to common stockholders
            
            $
            (11,005
            )
            $
            (6,832
            )
            $
            (13,401
            )
            $
            (4,423
            )
            $
            (35,661
            )Net
                loss per share from continuing operations, basic and
                diluted
            
            $
            (0.08
            )
            $
            (0.05
            )
            $
            (0.06
            )
            $
            (0.02
            )
            $
            (0.20
            )Net
                (loss) income per share from discontinued operations, basic and
                diluted
            
            
            nil
            
            
            nil
            
            
            nil
            
            
            nil
            
            
            nilNet
                loss per share, basic and diluted
            
            $
            (0.08
            )
            $
            (0.05
            )
            $
            (0.06
            )
            $
            (0.02
            )
            $
            (0.20
            )





118


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





On
      April
      21, 2005, the Company dismissed PricewaterhouseCoopers LLP as the Company’s
      independent registered public accounting firm and engaged Carlin, Charron &
Rosen, LLP as its new independent registered public accounting firm. The change
      in independent registered public accounting firms was not the result of any
      disagreements with PricewaterhouseCoopers LLP.





During
      the fiscal years ended December 31, 2005 and 2004, there were no disagreements
      with our independent registered public accounting firms on any matter of
      accounting principles or practices, financial statement disclosure, or auditing
      scope or procedure.





**Item
      9A.  Controls and Procedures**





a) *Evaluation
      of Disclosure Controls and Procedures* .





Under
      the
      supervision and with the participation of the Company’s management, including
      the Company’s principal executive officer and principal financial officer, the
      Company has evaluated the Company’s disclosure controls and procedures (as
      defined in the Securities and Exchange Act of 1934, as amended (the “Exchange
      Act”), Rules 13a-15(e) and 15d-15(e)) as of December 31, 2005. Based on this
      evaluation, the principal executive officer and principal financial officer
      concluded that the Company’s disclosure controls and procedures were effective
      to provide reasonable assurance that material information required to be
      disclosed in our filings and submissions under the Exchange Act is recorded,
      processed, summarized and reported within the time periods specified in the
      Securities and Exchange Commission’s (“SEC”) rules and forms.





b) *Changes
      in Internal Controls*





There
      have been no changes in the Company’s internal controls over financial
      reporting, or, to the Company’s knowledge, in other factors during the fourth
      quarter of 2005 that could materially affect these controls, subsequent to
      the
      date of evaluation of the Company’s disclosure controls and procedures referred
      to above.





**Item
      9B.  Other Information**





None.


119


**PART
      III**





**Item
      10.  Directors and Executive Officers of the
      Registrant**





**Occupations
      of Directors and Officers**





Pursuant
      to the Company’s certificate of incorporation, the Company has three classes of
      directors, each serving for a three year term. Class III was last elected at
      our
      annual meeting of stockholders held on October 14, 2003. Class I was last
      elected at our annual meeting of stockholders held on February 9, 2005. Class
      II
      shall be up for election at our next annual meeting of stockholders.




Set
      forth
      below is information relating to the directors and executive officers as of
      March 1, 2006:




*Name*
              *Age*
              *Position*David
                  F. Struwas
              57
              Class
                  III Director, President and Chief Executive OfficerWalter
                  R. Keisch
              60
              Chief
                  Financial Officer and TreasurerMarc
                  R. Esterman
              41
              Sr.
                  Vice President - Corporate Affairs, General Counsel and
                  SecretaryRobert
                  B. Hartnett, Jr. (1)(2)(3)
              54
              Class
                  I DirectorRobert
                  G. Gilbertson (1)(2)(3)
              64
              Class
                  II DirectorPaul
                  J. Keeler (1)(2)(3)
              61
              Class
                  II DirectorKeir
                  Kleinknecht
              30
              Class
                  I Director(1)  Member
                  of the Audit Committee(2)
                Member of the Compensation Committee(3)
                Member of the Nominating and Corporate Governance
                Committee




**Understandings
      or Agreements with regard to the Election of Directors**




The
      Board
      of Directors of the Company has taken action to authorize and establish a
      five-member board, pursuant to powers provided by Delaware law and the Company’s
      certificate of incorporation and by-laws. Under the terms of the transaction
      documents governing the Company’s secured debt financing with DunKnight, for so
      long as the DunKnight debentures remain outstanding, the holders of a majority
      in principal amount of outstanding debentures shall be entitled to nominate
      one
      person to the Board and the Company shall thereafter use its commercially
      reasonable best efforts to maintain such Board seat and include such designee
      on
      all applicable proxies soliciting the election of such designee, subject to
      and
      in accordance with applicable law and the Company’s governing organizational
      instruments. Any vacancy in the office of the DunKnight director designee may
      be
      filled only by a designated representative of DunKnight. Notwithstanding the
      foregoing, the Company and the DunKnight debenture holders have agreed to take
      such actions as may reasonably be required in the Board’s determination to
      maintain such number of directors as may be required to provide for such number
      of independent directors as required by applicable SEC rules and regulations
      and
      the rules and regulations of any market or exchange on which the Company’s
      securities are then traded.





**Biographical
      Information of Directors and Executive Officers**





*David
      F. Struwas* ** was
      one
      of the original founders of the Company and, since November 2005, has served
      as
      the Company’s President and Chief Executive Officer, and as a Director. During
      his initial tenure with the Company, he served as President from November 1998
      to




120




November
      2000, as a Director and Chief Executive Officer from January 1999 to April
      2004,
      and as Chairman of the Board of Directors from November 2000 to April 2004.
      He
      has also served as a consultant in the telecommunications industry, and has
      held
      key positions with Brooks Fiber-Worldcom, where he served as General Manager
      from January 1997 to August 1998, and with Southern New England
      Telecommunications Corporation (now part of AT&T), where he served in
      various positions from May 1980 to January 1997, most recently as Director
      of
      Marketing.





*Marc
      R. Esterman* has
      served as Sr. Vice President - Corporate Affairs, General Counsel and Secretary
      for the Company since January 2006. Prior to being named to his current position
      in January 2006, Mr. Esterman served as Vice President - Corporate Affairs,
      General Counsel and Secretary from December 2003 to January 2006, as Vice
      President - Corporate Affairs and Associate General Counsel of DSL.net from
      May
      2003 to December 2003, and as Associate General Counsel of the Company from
      June
      2000 to May 2003. From 1990 until 2000, Mr. Esterman worked in private practice
      as a corporate attorney with the law firms of Cummings and Lockwood, from March
      1996 - June 2000, and Winthrop, Stimson, Putnam & Roberts, from September
      1990 - March 1996.





*Walter
      R. Keisch* has
      served as  Chief
      Financial Officer and Treasurer of the Company since September 2005. Previously,
      he served as Vice President - Finance from March 2001 to September 2005. From
      January to March 2001, he served as Corporate Controller. From July 2000 through
      December 2000, Mr. Keisch served as Chief Financial Officer for a start-up
      e-business unit of GE Capital Real Estate. From December 1997 to October 1999
      he
      served as Vice President of Finance, Chief Financial Officer and Secretary
      for
      E-Sync Networks, Inc., an e-business service provider. From February 1990 to
      July 1997, he served as Controller at Textron Lycoming/Allied Signal Aerospace,
      Engines Division. Mr.
      Keisch has also served in a number of executive financial capacities with United
      Technologies and KPMG. Mr. Keisch is a CPA and brings over 25 years of
      senior-level financial experience to the Company.





*Robert
      G. Gilbertson* has
      served as a director of the Company since January 1999. He served as the
      Chairman of the Board of Directors of Motia, Inc., a smart antenna company,
      from
      November 2002 until November 2004. He has been a venture investor since 1996,
      and currently manages a large portfolio of public and private securities. From
      October 1999 through June 2001, he served as a Venture Partner and consultant
      at
      Sprout Group, a venture affiliate of Credit Suisse First Boston. In addition,
      Mr. Gilbertson served as Chairman of the Board of Directors of Network Computing
      Devices, Inc. from August 1999 until December 2001 and as President and Chief
      Executive Officer from May 1996 to August 1999. From April 1996 to April 1997,
      Mr. Gilbertson also served as Chairman of Avidia Systems Inc.





*Robert
      B. Hartnett, Jr.* has
      served as a director of the Company since May 2002. Currently, Mr. Hartnett
      is a
      private investor. From April 2002 until August 2004, he served as the Chairman
      of the Board of Directors and Chief Executive Officer of Blue Ridge Networks,
      a
      privately held Internet security company. Mr. Hartnett was President of Business
      Markets at Worldcom and Chief Executive Officer of UUNET from July 2000 until
      April 2001. Previously, Mr. Hartnett was President of global accounts at MCI
      Worldcom from August 1998 to June 2000. Prior to its merger with Worldcom in
      1998, Mr. Hartnett was President of business sales and service at MCI
      Communications.




*Paul
      J. Keeler* has
      served as a director of the Company since June 2001. Mr. Keeler served as Senior
      Managing Director-Global Sales and Marketing, at Medley Global Advisors, LLC
      from May 2005 to March 2006. He is currently a managing partner at Convergence
      Consulting Group,




121




LLC,
      a
      financial and business consulting firm, and a member of the Board of Directors
      of SmartServ Online, Inc. From February 1991 to February 2001, Mr. Keeler was
      a
      Principal at Morgan Stanley & Co., and Head of Global Sales and Service for
      Morgan Stanley Capital International, a joint venture between Morgan Stanley
      & Company, Inc. and Capital Group Companies. Prior to that, Mr. Keeler
      served as Vice President of Morgan Stanley Technology Services; President,
      Chief
      Executive Officer and Vice Chairman of Tianchi Telecommunications Corp.;
      President and Chief Operating Officer of Westinghouse Communications Software,
      Inc.; Vice President of Strategic Accounts and Business Development for Reuters
      Holdings, PLC; and Director, Northeast Metro Region, of MCI Communications.
      He
      also served as President and CEO of Halcyon Securities Corporation and is a
      former member of the New York and American Stock Exchanges.







*Keir
      Kleinknecht* has
      served as a director of the Company since November 2005. Mr. Kleinknecht is
      the
      President, sole managing member and founder of DunKnight Telecom Partners LLC,
      a
      material investor in the Company. Since February 2001, he has served as Managing
      Partner and founder of Voltron Ventures LP, a private equity firm based in
      New
      York City. Since October 1999, he has served as Managing Partner of E-Goo
      Ventures, a venture capital firm. Mr. Kleinknecht also serves on the Boards
      of
      Directors of Audium Corporation, DSLi and Quickfilter Technologies, as well
      as
      boards and advisory boards of several venture firms. His background includes
      financial positions at the Commodities Exchange and Merrill Lynch, serving
      as a
      founder of MD Ventures LP, and experience in the mergers and acquisitions arena
      in the telecommunications industry.





**Section
      16(a) Beneficial Ownership Reporting Compliance**





Section
      16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s
      directors, executive officers and persons who own more than ten percent of
      a
      registered class of our equity securities to file reports of ownership and
      changes in ownership with the SEC. Such persons are required by regulations
      of
      the SEC to furnish the Company with copies of all such filings. Based solely
      on
      our review of copies of such filings received with respect to the fiscal year
      ended December 31, 2005, the Company believes that all such persons’ filings
      made by them in the fiscal year ended December 31, 2005 timely complied with
      all
      Section 16(a) filing requirements. The Company notes that VantagePoint, and
      one
      of its managing members, James D. Marver, filed respective Forms 4 with the
      SEC
      on March 16, 2006 reflecting the redemption and cancellation of VantagePoint’s
      Series Z Preferred Stock and common stock purchase warrants effected in
      connection with the Company’s November 2005 financing with DunKnight.





**Audit
      Committee**





The
      Company’s Audit Committee is comprised of Messrs. Robert G. Gilbertson, Robert
      B. Hartnett, Jr. and Paul J. Keeler, all of whom are outside directors. Mr.
      Gilbertson serves as the Chairman of the Audit Committee. The Board of Directors
      of the Company has determined that Mr. Gilbertson is an “audit committee
      financial expert,” as such term is defined by regulations promulgated by the
      SEC, and that such attributes were acquired through relevant education and/or
      experience. Upon its evaluation, the Board of Directors has determined and
      believes that all of such persons are capable of exercising independent judgment
      as members of the Company’s Audit Committee and are also “independent” under
      applicable securities laws.


122





**Code
      of Ethics**





On
      May 4,
      2004, the Company’s Board of Directors adopted a formal, written code of ethics
      entitled “Code of Business Conduct and Ethics,” within the specific guidelines
      of Item 406 of Regulation S-K, promulgated under the Securities Act. The Company
      has communicated said code of ethics to all of its employees, including its
      officers, and in support of the principals of Item 406 has also established
      formal “whistle blower” procedures for the anonymous reporting by employees of
      alleged violations of our code of ethics. Such code of ethics can be viewed
      by
      clicking on the Investor Relations link from our website, http://www.dsl.net.





**Item
      11.  Executive Compensation**





**Compensation
      And Other Information Concerning Directors And Officers**





**Summary
      Compensation Table**




The
      following summary compensation table sets forth the total compensation paid
      or
      accrued for the 2005 fiscal year for our named executive officers, including
      our
      chief executive officer, the four other most highly compensated executive
      officers who were serving as of December 31, 2005, and those individuals who
      would have been one of our four most highly compensated officers had they served
      as an officer on December 31, 2005.




123





**Summary
      Compensation Table**





Long
                Term
              CompensationName
                and Principal Position
            
            Year
            
            Salary
                ($)
            
            Bonus
                ($)
            
            Other
              Annual
                Compensation ($)
            
            Restricted
              Stock
              Award(s)
            
            Securities
                Underlying Options
            
            All
                Other Compensation
              ($)Kirby
                G. Pickle (1)
              Former
                Director, President
              and
                Chief Executive Officer
            
            
            2005
              2004
              2003
            
            
            327,115
              245,000
              —
            
            
            350,000
              131,250
              —
            (2)
              (5)
            
            10,000
              8,500
              —
            (3)
              (6)
            
            —
              —
              —
            
            
            —
              10,000,000
              —
            
            
            525,000
              —
              —
            (4)David
                F. Struwas (7)
              Director,
                President and
              Chief
                Executive Officer
            
            
            2005
              2004
              2003
            
            
            42,692
              183,508
              200,000
            
            
            16,666
              —
              —
            (8)
            
            —
              —
              —
            
            
            —
              —
              —
            
            
            8,000,000
              —
              —
            
            
            —
              —
              —J.
                Keith Markley (9)
              Former
                President and Chief
              Operating
                Officer
            
            
            2005
              2004
              2003
            
            
            161,537
              207,692
              200,000
            
            
            —
              —
              —
            
            
            83,333
              —
              —
            (10)
            
            —
              —
              —
            
            
            —
              1,250,000
              —
            
            
            —
              —
              —Robert
                J. DeSantis (11)
              Former
                Chief Financial
              Officer
                and Treasurer
            
            
            2005
              2004
              2003
            
            
            164,615
              207,692
              200,000
            
            
            —
              —
              —
            
            
            83,333
              —
              —
            (12)
            
            —
              —
              —
            
            
            —
              1,250,000
              —
            
            
            —
              —
              —Marc
                R. Esterman
              Sr.
                Vice President -
              Corporate
                Affairs, General
              Counsel
                and Secretary
            
            
            2005
              2004
              2003
            
            
            171,191
              171,346
              159,856
            
            
            25,000
              —
              —
            (13)
            
            33,333
              —
              —
            (14)
            
            —
              —
              —
            
            
            —
              950,000
              —
            
            
            —
              —
              —Walter
                R. Keisch
              Chief
                Financial Officer
            
            
            2005
              2004
              2003
            
            
            172,211
              155,769
              150,000
            
            
            —
              —
              —
            
            
            33,333
              —
              —
            (15)
            
            —
              —
              —
            
            
            —
              950,000
              —
            
            
            —
              —
              —





1.
            Mr.
                Pickle ceased service as an executive officer of the Company on November
                2, 2005.





2.
            Represents
                a one-time transaction bonus awarded in connection with the closing
                by the
                Company of the DunKnight financing.





3.
            Represents
                Mr. Pickle’s car allowance during 2005.





4.
            Mr.
                Pickle’s termination as an employee of the Company in connection with the
                DunKnight financing triggered Mr. Pickle’s contractual right to severance
                under his employment agreement, as amended. He is entitled to severance
                in
                the amount of $525,000, of which approximately one-third is due and
                payable in lump sum on May 1, 2006 and the balance is payable in
                accordance with the Company’s payroll periods in approximately equal
                installments over the 12 months following May 1,
                2006.





5.
            Represents
                Mr. Pickle’s sign-on bonus in 2004.





6.
            Represents
                Mr. Pickle’s car allowance during
                2004.





7.
            Mr.
                Struwas returned as an executive officer of the Company on November
                3,
                2005.




124




8.
            Represents
                the portion of Mr. Struwas’ $100,000 sign-on bonus paid to him during
                2005; the remainder will be payable monthly through October
                2006.





9.
            Mr.
                Markley ceased service as an executive officer of the Company on
                September
                16, 2005.





10.
            Represents
                supplemental compensation paid pursuant to a compensation agreement
                dated
                as of February 3, 2005.





11.
            Mr.
                DeSantis ceased service as an executive officer of the Company on
                September 22, 2005.





12.
            Represents
                supplemental compensation paid pursuant to a compensation agreement
                dated
                as of February 3, 2005.





13.
            Represents
                a one-time transaction bonus awarded in connection with the closing
                by the
                Company of the DunKnight financing.





14.
            Represents
                supplemental compensation paid pursuant to a compensation agreement
                dated
                as of February 3, 2005.





15.
            Represents
                supplemental compensation paid pursuant to a compensation agreement
                dated
                as of February 3, 2005.





**Option
      Grants in Last Fiscal Year**





The
      following table provides information concerning grants of options to purchase
      common stock made during the period from January 1, 200 5
      through
      December 31, 2005 to the named executive officers:


125




**Option/SAR
      Grants In Last Fiscal Year**





**Potential**
              **Net**
              **Realizable**
              **Value(2)****Name**
            
            **Number
                  of**
                **Securities**
                **Underlying**
                **Options****Granted**
            ****
            **%
                  of Total**
                **Options**
                **Granted
                  to**
                **Employees**
                **in****Fiscal
                Year**
            ****
            **Exercise**
                **Price
                  or**
                **Base****Price
                ($)**
            ****
            **Expiration****Date**
            
            **5%**
            
            **10%**Kirby
                G. Pickle
            
            —
            
            —
            
            —
            
            —
            
            —
            
            —David
                F. Struwas (1)
            
            
            8,000,000
            
            
            98.34%
            
            
            $ 0.06
            
            
            11/03/2015
            
            
            $ 301,869
            
            
            $ 339,101J.
                Keith Markley
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Robert
                J. DeSantis
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Marc
                R. Esterman
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Walter
                R. Keisch
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —





(1)
            These
                options, which were granted under Mr. Struwas’ employment agreement, dated
                as of November 3, 2005, become exercisable with respect to approximately
                16.67% of the total number of such shares on May 3, 2006. Thereafter,
                approximately 2.78% of the total number of such shares become exercisable
                monthly over the next 30 months.





(2)
            We
                recommend caution in interpreting the financial significance of the
                figures representing the potential realizable value of the stock
                options.
                Amounts reported in these columns represent amounts that may be realized
                upon exercise of the options immediately prior to the expiration
                of their
                term assuming the specified compounded rates of appreciation (5%
                and 10%)
                on our common stock over the term of the options. These numbers are
                calculated based on rules promulgated by the SEC and do not reflect
                our
                estimate of future stock price growth. Actual gains, if any, on stock
                option exercises and common stock holdings are dependent on the timing
                of
                such exercise and the future performance of our common stock. There
                can be
                no guarantee that the market value of the common stock will reflect
                the
                rates of appreciation assumed in this table at the time that the
                options
                are exercisable.






**Option
      Exercises and Fiscal Year End Values**




The
      following table sets forth information with respect to the exercise of stock
      options during the year ended December 31, 2005 and the number and value of
      shares of our common stock underlying the unexercised options held by the named
      executive officers as of December 31, 2005.


126




**Aggregated
      Option/SAR Exercises In Last Fiscal Year**


**And
      Fiscal Year-End Option/SAR Values**





**Number
                of Securities**
              **Underlying
                Unexercised**
              **Options
                at December 31, 2005**
            
            **Value
                of Unexercised In-the-**
              **Money
                Options at**
              **December 31, 2005(1)****Name**
            
            **Shares**
              **Acquired
                on**
              **Exercise
                (#)**
            
            **Value**
              **Realized
                ($)**
            
            **Exercisable**
            
            **Unexercisable**
            
            **Exercisable**
            
            **Unexercisable**Kirby
                G. Pickle (2)
            
            
            —
            
            $
            —
            
            
            8,333,333
            
            
            —
            
            $
            —
            
            $
            —J.
                Keith Markley (3)
            
            
            —
            
            $
            —
            
            
            —
            
            
            —
            
            $
            —
            
            $
            —Robert
                J. DeSantis (4)
            
            
            —
            
            $
            —
            
            
            —
            
            
            —
            
            $
            —
            
            $
            —Marc
                R. Esterman
            
            
            —
            
            $
            —
            
            
            748,029
            
            
            395,834
            
            $
            —
            
            $
            —David
                F. Struwas
            
            
            —
            
            $
            —
            
            
            —
            
            
            8,000,000
            
            $
            —
            
            $
            —Walter
                R. Keisch
            
            
            —
            
            $
            —
            
            
            1,052,778
            
            
            395,834
            
            $
            —
            
            $
            —








(1)
            Value
                is based on the difference between the option exercise price and
                $0.04,
                the fair market value of the Company’s common stock on December 31, 2005,
                multiplied by the number of shares of common stock underlying the
                options.





(2)
            As
                of November 2, 2005, Mr. Pickle ceased to be an officer and employee
                of
                the Company.





(3)
            As
                of September 16, 2005, Mr. Markley ceased to be an officer and employee
                of
                the Company.





(4)
            As
                of September 22, 2005, Mr. DeSantis ceased to be an officer and employee
                of the Company.





**Compensation
      Committee Interlocks and Insider Participation**




The
      Compensation Committee of our Board of Directors, which in fiscal year 2005
      was
      comprised of Messrs. Gilbertson, Hartnett and Keeler, reviewed salaries and
      incentive compensation for our executive officers during fiscal year
      2005. **** No
      member
      of our Compensation Committee (i) was, during the last fiscal year, an officer
      or employee of our Company or any of its subsidiaries; (ii) was formerly an
      officer of our Company or any of its subsidiaries; or (iii) had any relationship
      requiring disclosure under any paragraph of Item 404 of Regulation S-K. None
      of
      our executive officers has served as a director or member of the compensation
      committee, or other committee serving an equivalent function, of any other
      entity whose executive officers served as a director or member of our
      Compensation Committee.


127





**Compensation
      of Directors**




Pursuant
      to policies adopted by the Company’s Board of Directors in March 2004, the
      Company pays the following compensation, quarterly in equal installments, only
      to the Company’s outside directors, for services rendered to the Company as a
      director:





·
            an
                annual retainer of $20,000;


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


·
            an
                annual retainer of $7,500 for each Audit Committee
                member;


·
            an
                annual retainer of $5,000 for the Chairman of the Audit
                Committee;


·
            an
                annual retainer of $5,000 for each Compensation Committee
                member;


·
            an
                annual retainer of $2,500 for the Chairman of the Compensation
                Committee;


·
            an
                annual retainer of $2,000 for each Nominating and Corporate Governance
                Committee member; and


·
            an
                annual retainer of $1,000 for the Chairman of the Nominating and
                Corporate
                Governance Committee.





**Employment
      Contracts and Termination of Employment and Change-in-Control Arrangements**





On
      February 3, 2005, the Company entered into compensation agreements with each
      of
      the following then current executive officers of the Company: J. Keith Markley,
      President and Chief Operating Officer; Robert J. DeSantis, Chief Financial
      Officer and Treasurer; Marc R. Esterman, Vice President - Corporate Affairs,
      General Counsel and Secretary, and Walter R. Keisch, Vice President - Finance.
      Under the terms of the agreements, each of those individuals was eligible to
      receive a fixed dollar cash compensation amount, in three equal installments,
      on
      June 30, 2005, August 31, 2005 and December 31, 2005, provided such individual
      was employed by the Company on each of such dates. If, prior to a payment date,
      the individual was terminated by the Company for cause, or resigned other than
      for good reason, he would forfeit the right to receive any remaining unvested
      payments. Upon the occurrence of a change in control of the Company, or if
      the
      individual was terminated without cause or terminated his employment with the
      Company for good reason, the individual would immediately fully vest in all
      remaining payments that would have become due and payable under such agreement
      but for the passage of time and the individual’s continued employment with the
      Company, and he would have the right to immediately receive the total amount
      of
      all remaining payments under the agreement. The total amount of potential
      payments which could have become due and owing under these agreements, for
      all
      four individuals in the aggregate, was $350,000. Each of Mr. DeSantis and Mr.
      Markley received $83,333 in payments before forfeiting any remaining rights
      under his agreement due to their respective resignations from the Company in
      September 2005. Each of Mr. Keisch and Mr. Esterman received $50,000 in payments
      under these agreements, of which amount, $16,666 was paid in January of 2006.
      These agreements effectively expired with the last payments made thereunder.





Effective
      as of November 2, 2005, the Company and Kirby G. Pickle, the Company’s former
      President and Chief Executive Officer, entered into an amendment to Mr. Pickle’s
      employment agreement, dated as of April 15, 2004, in connection with Mr.
      Pickle’s termination of employment as part of the Company’s financing
      transaction with DunKnight. Pursuant to the amendment, to address considerations
      arising from the American Jobs Creation Act of 2004 (the




128




“Jobs
      Act”), Mr. Pickle and the Company agreed to defer all severance payments of base
      compensation to which Mr. Pickle was entitled under the employment agreement
      stemming from his replacement as the Company’s Chief Executive Officer as part
      of the DunKnight financing, for a period of six months and one day from his
      termination date of November 2, 2005. On the first payroll date after such
      six
      month and one day period, all payments otherwise payable to Mr. Pickle during
      such period shall be paid in a lump sum. Monthly severance payments will
      continue thereafter for the remainder of the 18 month period provided under
      the
      employment agreement. The aggregate severance to which Mr. Pickle is entitled
      under the employment agreement is $525,000. He is also entitled to payment
      of
      health and dental insurance coverage under COBRA (to the extent Mr. Pickle
      elects to continue such coverage in accordance with the provisions of COBRA
      following the date of termination) during such severance period. Mr. Pickle
      executed a release in favor of the Company as a condition to receiving any
      such
      severance.





Effective
      on November 3, 2005, the Company entered into an employment agreement with David
      F.
      Struwas, who succeeded Mr. Pickle as the Company’s new Chief Executive Officer
      as part of the Company’s financing transaction with DunKnight on that date. The
      employment agreement provides for a $300,000 annual base salary, which is
      subject to annual review by the Board of Directors, a one-time, $100,000 signing
      bonus, payable in twelve equal monthly installments, and benefits, paid
      vacation, sick leave, and personal leave comparable to the benefits and leave
      offered to the Company’s other senior executive officers. Provided that he has
      not been terminated for “cause” and has not resigned for other than “good
      reason,” each as defined in the employment agreement, Mr. Struwas will be
      eligible for a bonus for his work during fiscal year 2006, to be paid at the
      discretion of the Board of Directors based on the Company’s achievement of
      operating results targeted in the Company’s 2006 operating plan in the form
      approved by the Company’s Board. Thereafter, the employment agreement
      anticipates that Mr. Struwas will be eligible for annual performance bonuses
      in
      an amount of up to 100% of his base salary, based on the Company’s achievement
      of performance targets, as determined by the Board of Directors in its
      discretion.





The
      Board
      of Directors also granted Mr. Struwas non-qualified stock options to acquire
      8,000,000 and 4,850,000 shares of the Company’s common stock, on November 3,
      2005 and January 4, 2006, respectively, pursuant to the Company’s Amended and
      Restated 2001 Stock Option and Incentive Plan (the “2001 Stock Plan”). The
      options vest over three years with no shares vesting until the six month
      anniversary of the grant date, 16.7% of the shares vesting on the six month
      anniversary date and 2.78% of the shares vesting on each successive month
      thereafter until fully vested on the three-year anniversary of the grant date.
      The 8,000,000 options carry an exercise price of $0.06 per share, which was
      the
      market value of the Company’s common stock on the Determination Date (as defined
      in the 2001 Stock Plan) under the 2001 Stock Plan; the 4,850,000 options carry
      an exercise price of $0.04 per share, which was the market value of the
      Company’s common stock on the Determination Date under the 2001 Stock Plan.





Mr.
      Struwas’ employment agreement entitles him to severance under certain
      circumstances. If Mr. Struwas is terminated without “cause” or if he resigns for
“good reason,” then he will be entitled to receive continuation of his base
      salary and medical benefits for (i) twelve months, if he is terminated or
      resigns before the twelve month anniversary of his employment, or
      (ii) eighteen months, if he is terminated or resigns anytime thereafter.
      Severance is conditioned upon Mr. Struwas executing and delivering a general
      release and waiver in favor of the Company. If Mr. Struwas is terminated for
      “cause,” or quits other than for “good reason”, he is entitled to no severance
      payments. All severance payments of base compensation will be accelerated so
      that




129




they
      are
      paid no later than March 15th of the year following the year in which Mr.
      Struwas is terminated from employment in order to address considerations arising
      from the Jobs Act.





Mr.
      Struwas’ employment is at-will, and the employment agreement contains
      non-compete covenants and confidentiality obligations.





**Board
      Of Directors’ Report On Executive Compensation**




**Introduction**





During
      fiscal year 2005, the Compensation Committee of the Board of Directors was
      responsible for developing executive compensation policies and advising the
      Company’s Board of Directors with respect to those policies and for maintaining
      and administering the Company’s Amended and Restated 1999 Stock Plan (the “1999
      Stock Plan”), 1999 Employee Stock Purchase Plan (the “Purchase Plan”), and 2001
      Stock Plan. During fiscal year 2005, the members of the Company’s Compensation
      Committee were Messrs. Gilbertson, Keeler and Hartnett, all non-employee,
“independent” directors. The Committee’s goal is to create and implement a
      compensation program that will attract and retain talented executives and
      provide incentives to management to enhance the Company’s performance by basing
      a significant portion of annual and long-term compensation on performance.
      On
      September 1, 2004, the Compensation Committee adopted a new Compensation
      Committee charter, subject to Board approval. Our Board of Directors ratified
      the new charter on September 9, 2004, and such charter which remains in full
      force and effect, can be viewed by clicking on the Investor Relations link
      from
      DSL.net’s website, http://www.dsl.net .
      Under
      this charter, the Compensation Committee reviews and makes recommendations
      to
      management on company-wide compensation programs and practices; takes final
      action with respect to individual salary, bonus and equity arrangements of
      our
      executive officers; and recommends, subject to approval by our Board of
      Directors, any equity-based plans and any material amendments thereto (including
      increases to the number of shares of common stock available for grant as options
      or otherwise thereunder) for which stockholder approval is required.





**Executive
      Compensation Program**





The
      Company’s executive compensation program consists of two elements: salary and
      equity interests, principally in the form of restricted stock or stock options
      (the Company’s stock option plans, copies of which are on file with the SEC,
      also allow for grants of other forms of equity-based compensation, such as
      restricted stock awards). This program applies to the Company’s key management
      positions, including the position of chief executive officer. All of the
      Company’s executives also are eligible for employee benefits offered to all
      employees, including life, health, disability and dental insurance, and the
      Company’s 401(k) profit sharing plan and the Company’s employee stock purchase
      plan.





*Salary.* The
      Compensation Committee reviews and approves cash compensation for the chief
      executive officer and all other executive officers’ salaries. Base salaries for
      executive officers are established after considering various competitive and
      comparative factors, including amounts paid to senior executives with comparable
      qualifications, experience and responsibilities at other companies of similar
      size and engaged in a similar business to that of the Company, the Company’s
      performance relative to comparable companies, and the Company’s overall salary
      structure and general financial performance. During 2005, the Company did not
      have any specific corporate performance targets in place, the achievement of
      which would guarantee any increase in any executive officer’s base salary, but
      the Company did consider generally the




130




relationship
      between corporate performance and executive compensation.




The
      salary compensation of the executive officers is based upon their
      qualifications, experience and responsibilities, as well as on the attainment
      of
      planned objectives and other factors deemed relevant by the Compensation
      Committee and /or
      the
      Board of Directors, including, in the case of existing executives, past
      performance of the given executive. The chief executive officer makes
      recommendations to the Compensation Committee regarding compensation levels
      for
      executive officers other than himself.





*Equity
      Interests* .
      Executives are eligible to receive stock option grants or other stock awards
      under the 1999 Stock Plan and the 2001 Stock Plan. As of March 1, 2006,
      6,116,137 shares remained available for grant under the 1999 Stock Plan and
      35,372,247 shares remained available for grant under the 2001 Stock Plan. The
      1999 Stock Plan and the 2001 Stock Plan are designed to provide long-term
      performance and retention incentives for top management and other employees.
      An
      executive’s participation in this program is determined by the Compensation
      Committee and approved by the such Committee and/or Board of Directors.





The
      stock
      options granted to executives under the 1999 Stock Plan and the 2001 Stock
      Plan
      have an exercise price equal to the fair market value of the Company’s common
      stock at the time of grant. Historically, stock options granted to new
      executives were generally exercisable as to 25% of the total number of option
      shares on the one-year anniversary of such executive’s start date, and monthly
      thereafter become exercisable as to approximately 2.08% of the total number
      of
      option shares. In recent practice, however, the Company has used a three-year
      vesting schedule and six-month “cliff” for senior executive officer hires.
      Options granted to existing executives are generally exercisable as to
      approximately 16.67% of the total number of option shares on the day after
      the
      six-month anniversary of the date of grant of the options, and monthly
      thereafter become exercisable as to approximately 2.78% of the total number
      of
      option shares until fully vested.





In
      November 2005, as authorized by the Company’s Board of Directors, the Company
      entered into an employment agreement and related stock option agreement with
      David F. Struwas, the Company’s new chief executive officer. Under the stock
      option agreement for Mr. Struwas, an option to purchase a total of 8,000,000
      shares of the Company’s common stock was granted to Mr. Struwas as an inducement
      to his employment with the Company, under the 2001 Stock Plan. Options granted
      under this agreement vest approximately 16.67% on the date six months following
      the grant date, and thereafter vest ratably on a monthly basis over the next
      thirty months. Once vested, the options are exercisable at an exercise price
      of
      $0.06 per share for ten years from the date of the grant.





*Bonuses.* The
      Company did not have an established bonus plan for executives in fiscal year
      2005. From time to time, at the discretion of the Compensation Committee and/or
      the Company’s Board of Directors, bonuses are paid to certain executives in
      recognition of the executive’s performance. During 2005, the only executive
      officers who received a bonus payment were as follows: Mr. Struwas, who received
      a sign-on bonus, as discussed below, in connection with his appointment as
      Chief
      Exeuctive Officer of the Company in November 2005; Mr. Pickle, who received
      a
      one-time transaction bonus in the amount of $350,000 (representing one times
      his
      annual base salary) in connection with the closing by the Company of the
      DunKnight financing in November 2005; and Mr. Esterman, who received a one-time
      transaction bonus in the amount of $25,000 in connection with the closing by
      the
      Company of the DunKnight financing in November 2005.




131





In
      February 2005, the Company entered into compensation agreements with four of
      its
      executive officers (representing all of its then current executive officers
      other than the Company’s chief executive officer). Under the terms of the
      agreements, each of the subject individuals was eligible to receive a fixed
      dollar cash compensation amount, in three equal installments, on June 30, 2005,
      August 31, 2005 and December 31, 2005, provided such individual was employed
      by
      the Company on each of such dates. If, prior to a payment date, the individual
      was terminated by the Company for cause, or resigned other than for good reason,
      he would forfeit the right to receive any remaining unvested payments. Upon
      the
      occurrence of a change in control of the Company, or if the individual was
      terminated without cause or terminated his employment with the Company for
      good
      reason, the individual would immediately fully vest in all remaining payments
      that would have become due and payable under such agreement but for the passage
      of time and the individual’s continued employment with the Company, and he would
      have the right to immediately receive the total amount of all remaining payments
      under the agreement. The total amount of potential payments which could have
      become due and owing under these agreements, for all four individuals in the
      aggregate, was $350,000. Each of Mr. DeSantis and Mr. Markley received $83,333
      in payments before forfeiting any remaining rights under his agreement due
      to
      their respective resignations from the Company in September 2005. Each of Mr.
      Keisch and Mr. Esterman received $50,000 in payments under these agreements,
      of
      which amount, $16,666 was paid in January of 2006. These agreements effectively
      expired with the last payments made thereunder.





**Chief
      Executive Officer**’**s Compensation**





Mr.
      Pickle’s compensation for 2005 was determined in accordance with his employment
      contract which was approved by the Board of Directors. Mr. Pickle ceased serving
      as an executive officer and employee of the Company on November 2, 2005. Mr.
      Struwas’ compensation for 2005 was determined in accordance with his employment
      contract which was approved by the Board of Directors. Mr. Struwas succeeded
      Mr.
      Pickle as the Company’s Chief Executive Officer on November 3, 2005.





*Salary.* Mr.
      Pickle received $327,115 in salary during 2005, representing the ratable portion
      of his contracted annual salary of $350,000. Mr. Pickle’s last day of employment
      with the Company was November 2, 2005. Mr. Struwas received $42,692 in salary
      during 2005, representing the ratable portion of his contracted annual salary
      of
      $300,000. Mr. Struwas’ first day of renewed employment with the Company was
      November 3, 2005.





*Equity
      Interests* .
      Mr.
      Pickle held 0 shares of the Company’s common stock, and options to purchase up
      to a total of 8,333,333 shares of the Company’s common stock at an exercise
      price of $0.48 per share, as of the date of this report. Mr. Pickle’s options
      expire on November 3, 2006. In November 2005, Mr. Struwas was granted options
      to
      purchase up to a total of 8,000,000 shares of the Company’s common stock, under
      the 2001 Stock Plan, on November 3, 2005, in connection with his appointment
      as
      the Company’s new chief executive officer. Options granted under this agreement
      vest approximately 16.67% on the date six months following the grant date,
      and
      thereafter vest ratably on a monthly basis over the next thirty months until
      fully vested. Once vested, the options are exercisable at an exercise price
      of
      $0.06 per share for ten years from the date of the grant.





*Bonus* .
      Mr.
      Pickle received a one-time transaction bonus of $350,000 (representing one
      times
      his annual base salary) in November 2005 in connection with the closing by
      the
      Company of its financing trasnactino with DunKnight. In November 2005, pursuant
      to his new employment agreement with the Company, Mr. Struwas was awarded a
      sign-on bonus of $100,000, payable in




132




approximately
      equal amounts over 12 monthly pay periods, in accordance with the Company’s
      payroll cycles, in connection with his appointment as the Company’s new chief
      executive officer.





Each
      of
      Mr. Pickle’s and Mr. Struwas’ total compensation for 2005 is set out in detail
      in the Summary Compensation Table, above.





**Compliance
      with Internal Revenue Code Section 162(m)**





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





**Board
      of Directors of DSL.net, Inc.**








Robert
      G.
      Gilbertson*


Robert
      B.
      Hartnett, Jr.*


Paul
      J.
      Keeler*


Keir
      Kleinknecht


David
      F.
      Struwas





**Member
      of Compensation Committee.*


133


**Stock
      Performance Graph**





The
      following graph compares the yearly change in the cumulative total stockholder
      return on the Company’s common stock during the period from December 31, 2000
      through December 31, 2005, with the cumulative total return on (i) the Nasdaq
      Stock Market, (ii) the AMEX Stock Market and (iii) the Nasdaq Telecommunications
      Index. The comparison assumes that $100 was invested on December 31, 2000 in
      common stock and in each of the foregoing indices and assumes reinvestment
      of
      dividends, if any:










134





**Item
      12.  Security Ownership of Certain Beneficial Owners and Management and
      Related Stockholder Matters**





**Equity
      Compensation Plan Information**





The
      following table provides information, as of December 31, 2005, with respect
      to
      the shares of the Company’s common stock that may be issued under the Company’s
      existing equity compensation plans:




Plan
                Category
            Number
                of
              Securities
                to be
              Issued
                upon
              Exercise
                of
              Outstanding
              Options
            Weighted
                Average
              Exercise
                Price of
              Outstanding
              Options
            Number
                of Securities
              Remaining
                Available for
              Future
                Issuance Under Equity
              Compensation
                Plans
              (Excluding
                Securities
              Reflected
                in the First Column)Equity
              Compensation
                Plans
              Approved
                by
              Shareholders
            24,438,569
            $0.49
            45,566,888Equity
              Compensation
                Plans
              Not
                Approved by
              Shareholders
                (1)
            8,333,333
            $0.48
            —Total
            32,771,902
            $0.48
            45,566,888





(1) In
      April
      2004, as authorized by the Company’s Board of Directors, the Company entered
      into an employment agreement and related stock option agreement with Kirby
      G.
      Pickle, in connection with Mr. Pickle’s becoming the Chief Executive Officer of
      the Company. Under the stock option agreement for Mr. Pickle, options to
      purchase a total of 10,000,000 shares of the Company’s common stock were granted
      to Mr. Pickle as an inducement to his employment with the Company. In connection
      with the termination of Mr. Pickle’s employment with the Company on November 2,
      2005, and in accordance with the terms of his stock option agreement, Mr.
      Pickle’s stock options that would otherwise have vested up through November 1,
      2006, immediately vested, and all of Mr. Pickle’s stock options that would
      otherwise have vested after November 1, 2006, immediately expired. At December
      31, 2005, Mr. Pickle held options to purchase a total of 8,333,333 shares of
      our
      common stock at a per share exercise price of $0.48. All such stock options
      expire on November 3, 2006.





**Securities
      Ownership Of Certain Beneficial Owners And Management**





The
      following table sets forth certain information regarding beneficial ownership
      of
      the Company’s capital stock as of March 1, 2006, by:





·
            each
                person known by the Company to be the beneficial owner of more than
                5% of
                the Company’s common stock;




135




·
            each
                named executive officer;





·
            each
                of the Company’s directors; and





·
            all
                executive officers and directors as a
                group.





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





Beneficial
      ownership is determined in accordance with the rules of the SEC. In determining
      the number of shares of common stock beneficially owned, shares of capital
      stock
      issuable by the Company to a person pursuant to options or warrants, in each
      case which may be exercised within sixty days after March 1, 2006, are deemed
      to
      be beneficially owned and outstanding for purposes of calculating the number
      of
      shares of common stock and the percentage beneficially owned by that person.
      Shares deemed to be beneficially owned by a person in accordance with the above
      rules are not deemed to be beneficially owned and outstanding for purposes
      of
      computing the percentage beneficially owned by any other
      person.




Name
            
            Common
                StockShares
            
            %
                of
              ClassKirby
                G. Pickle (1)
            
            8,333,333
            
            3.4%David
                F. Struwas (2)
            
            63,250
            
            *J.
                Keith Markley (3)
            
            0
            
            *Robert
                J. DeSantis (4)
            
            0
            
            *Walter
                R.Keisch (5)
            
            1,158,334
            
            *Marc
                R. Esterman (6)
            
            859,885
            
            *Robert
                B. Hartnett, Jr. (7)
            
            1,024,999
            
            *Robert
                G. Gilbertson (8)
            
            1,108,249
            
            *Paul
                J. Keeler (9)
            
            1,074,999
            
            *Keir
                Kleinknecht
            
            0
            
            *The
                VantagePoint entities
              1001
                Bayhill Drive, Suite 300
              San
                Bruno, CA 94066 (10)
            
            55,146,727
            
            23.6%All
                executive officers and directors as a group (10 persons)
                (11)
            
            13,623,049
            
            5.5%


__________________





*
      Indicates less than 1%.




136




(1)
            Includes
                8,333,333****shares
                issuable upon exercise of options held by Mr. Pickle that are exercisable
                within 60 days after March 1, 2006. Mr. Pickle ceased serving as
                an
                executive officer and as a director on November 2,
                2005.




(2)
            Does
                not include 1,328,000 shares issuable upon exercise of options held
                by Mr.
                Struwas that are exercisable on May 3, 2006 (63 days after March
                1,
                2006).




(3)
            Mr.
                Markley resigned as an executive officer on September 16,
                2005.




(4)
            Mr.
                DeSantis resigned as an executive officer on September 22,
                2005.




(5)
            Includes
                1,158,334 shares issuable upon exercise of options held by Mr. Keisch
                that
                are exercisable within 60 days after March 1,
                2006.




(6)
            Includes
                853,585 shares issuable upon exercise of options held by Mr. Esterman
                that
                are exercisable within 60 days after March 1,
                2006.




(7)
            Includes
                1,024,999 shares issuable upon exercise of options held by Mr. Hartnett
                that are exercisable within 60 days after March 1,
                2006.




(8)
            Includes
                1,108,249 shares issuable upon exercise of options held by Mr. Gilbertson
                that are exercisable within 60 days after March 1,
                2006.




(9)
            Includes
                1,074,999 shares issuable upon exercise of options held by Mr. Keeler
                that
                are exercisable within 60 days after March 1,
                2006.




(10)
            The
                entities listed below owned the shares of capital stock of the Company
                indicated in the table below as of March 1,
                2006.




**Stockholder**
            **Shares
                of Common**
              **Stock
                Held**VantagePoint
                Venture Partners 1996, L.P.
            10,561,178VantagePoint
                Communications Partners, L.P.
            10,923,262VantagePoint
                Venture Partners III, L.P.
            3,880,430VantagePoint
                Venture Partners III (Q), L.P.
            29,562,531VantagePoint
                Associates, L.L.C.
            219,326




VantagePoint
      Associates, L.L.C. is the general partner of VantagePoint Venture Partners
      1996,
      L.P.; VantagePoint Communications Associates, L.L.C. is the general partner
      of
      VantagePoint Communications Partners, L.P.; and VantagePoint Venture Associates
      III, L.L.C. is the general partner of VantagePoint Venture Partners III, L.P.
      and VantagePoint Venture Partners III (Q), L.P. Messrs. Marver and Alan Salzman
      are managing members of each of these limited liability companies. Messrs.
      Marver and Salzman may be deemed to share voting and investment power with
      respect to the shares beneficially owned by the VantagePoint entities and
      disclaim beneficial ownership of those shares, except to the extent of their
      respective proportionate pecuniary interest therein. Thus, the VantagePoint
      entities,




137




together
      with VantagePoint Associates, L.L.C., are considered the beneficial owners
      of a
      total of 55,146,727 shares of common stock of the Company as of March 1,
      2006.




(11)
            See
                Notes 1 through 9 above. Includes 13,623,049 shares issuable upon
                exercise
                of options held by the named officers and directors that are exercisable
                within 60 days after March 1, 2006.





**Item
      13.  Certain Relationships and Related Transactions**





On
      February 3, 2005, the Company entered into compensation agreements with four
      of
      its executive officers (representing all of its then current executive officers
      other than the Company’s chief executive officer). Under the terms of the
      agreements, each of the subject individuals was eligible to receive a fixed
      dollar cash compensation amount, in three equal installments, on June 30, 2005,
      August 31, 2005 and December 31, 2005, provided such individual was employed
      by
      the Company on each of such dates. If, prior to a payment date, the individual
      was terminated by the Company for cause, or resigned other than for good reason,
      he would forfeit the right to receive any remaining unvested payments. Upon
      the
      occurrence of a change in control of the Company, or if the individual was
      terminated without cause or terminated his employment with the Company for
      good
      reason, the individual would immediately fully vest in all remaining payments
      that would have become due and payable under such agreement but for the passage
      of time and the individual’s continued employment with the Company, and he would
      have the right to immediately receive the total amount of all remaining payments
      under the agreement. The total amount of potential payments which could have
      become due and owing under these agreements, for all four individuals in the
      aggregate, was $350,000. Each of Mr. DeSantis and Mr. Markley received $83,333
      in payments before forfeiting any remaining rights under his agreement due
      to
      their respective resignations from the Company in September 2005. Each of Mr.
      Keisch and Mr. Esterman received $50,000 in payments under these agreements,
      of
      which amount, $16,666 was paid in January of 2006. These agreements effectively
      expired with the last payments made thereunder.





On
      November 2, 2005, pursuant to the terms of a Securities Purchase Agreement
      dated
      such date between DunKnight and the Company (the “DunKnight Purchase
      Agreement”), the Company consummated a private placement to DunKnight of 18%
      Secured Debentures, at a discount to their face principal amount (the
“Debentures”). Pursuant to the terms of the DunKnight Purchase Agreement, as
      described in more detail below, the Company borrowed an aggregate of $10,000,000
      in exchange for its issuance of an aggregate of $13,000,000 in face principal
      amount of Debentures.





Effective
      as of January 3, 2006, the Company entered into an agreement (the “Amendment”)
      with DunKnight, extending the maturity date of the Company’s issued and
      outstanding Debenture, dated November 2, 2005, in face principal amount of
      $8,000,000, from August 2, 2006 until September 4, 2006, and delaying the date
      on which DunKnight was required to lend an additional $4,000,000 to the Company
      from January 3, 2006 to February 1, 2006.




At
      the
      first closing under the DunKnight Purchase Agreement, which occurred on November
      2, 2005, the Company issued to DunKnight a $8,000,000 face principal amount
      Debenture and received $6,000,000 in gross cash proceeds on November 3, 2005.
      At
      the second closing, which occurred on February 1, 2006, the Company issued
      an
      additional $5,000,000 in face principal amount of Debentures to DunKnight and
      to
      its co-investor (Knight Vision Foundation) and received an additional $4,000,000
      in gross cash proceeds. Each of the Debentures matures on September 4, 2006
      and
      carries an annual interest rate of 18%, payable monthly in arrears in cash




138




based
      on
      the face principal amount of the Debenture. Upon the occurrence of an event
      of
      default, DunKnight may declare all amounts under the Debentures immediately
      due
      and payable in cash and, in such event, the Company would be required to pay
      112% of the principal amount of the Debentures, plus all accrued and unpaid
      interest and any unpaid penalties or late fees. The Company may prepay the
      entire principal amount due under the Debentures at any time without any
      additional premium or penalty. Keir Kleinknecht, a member of the Board of
      Directors of the Company as of November 3, 2005, is the sole managing member
      and
      founder of DunKnight. David F. Struwas, the Chief Executive Officer, President
      and a member of the Board of Directors of the Company as of November 3,
      2005, acquired
      a non-managing membership interest in DunKnight (an approximate 4% interest
      for
      a $250,000 capital contribution) prior to the DunKnight financing transaction
      with the Company. Prior to
      the DunKnight financing, the Company had no material relationship with
      DunKnight. At
      the
      time of the DunKnight financing, Mr. Struwas, a former founder, director and
      executive officer of the Company during the period from 1998-2004, owned 63,250
      shares of common stock of the Company. Mr. Struwas was not affiliated with
      DunKnight during his prior tenure with the Company.





Pursuant
      to the terms of that certain Implementation Agreement dated November 2, 2005
      (the “Implementation Agreement”), by and among the Company, Deutsche Bank AG
      London, acting through DB Advisors LLC as Investment Agent (“Deutsche Bank”),
      and VantagePoint Venture Partners III (Q), L.P., VantagePoint Venture Partners
      III, L.P., VantagePoint Communications Partners, L.P. and VantagePoint Venture
      Partners 1996, L.P. (collectively, “VantagePoint” and, together with Deutsche
      Bank, the “2003 Investors”), on November 3, 2005, the Company used $5,500,000 of
      the proceeds of the first closing of the DunKnight Debenture financing to
      eliminate, at a substantial discount, $30,870,000 (inclusive of accrued but
      unpaid interest) in senior secured debt due July 6, 2006 originally issued
      to
      the 2003 Investors on July 18, 2003; cancel all outstanding shares of the
      Company’s Series Z Preferred Stock previously issued to VantagePoint that
      carried a liquidation preference of $15,680,000; and cancel warrants to purchase
      approximately 190,890,621 shares of Company common stock previously issued
      to
      the 2003 Investors. In addition, the Implementation Agreement terminated,
      subject to exceptions for certain limited surviving provisions, all previously
      existing agreements under which the 2003 Investors and their affiliates had
      imposed numerous financial, operational and other contractual obligations on
      the
      Company. During the course of the negotiation and approval of the Implementation
      Agreement, William J. Marshall served as Deutsche Bank’s designated
      representative on the Company’s Board of Directors; Mr. Marshall resigned from
      the Board in connection with the closing of the transactions contemplated by
      the
      Implementation Agreement.





In
      connection with the Debenture financing, the employment of Kirby G. “Buddy”
Pickle with the Company was effectively terminated and, on November 2, 2005,
      Mr.
      Pickle resigned from his positions as a Director and as the Chief Executive
      Officer and President of the Company (and from all positions with the Company’s
      subsidiaries). Mr. Pickle’s termination of employment triggered severance
      benefits under his employment agreement with the Company dated April 14, 2004.
      Additionally, on November 2, 2005, the Company entered into an amendment to
      the
      employment agreement with Mr. Pickle to address considerations arising from
      the
      Jobs Act. Pursuant to Mr. Pickle’s employment agreement, the Company (i) will
      continue to pay Mr. Pickle, as severance, his base salary for the eighteen
      months following his termination of employment, in an aggregate amount of
      $525,000 in accordance with regular payroll practices, and (ii) will pay
      for Mr. Pickle’s COBRA costs for the continuation of his medical benefits for
      the eighteen month period, subject to Mr. Pickle’s compliance with the surviving
      provisions of his employment agreement. Pursuant to the amendment, Mr. Pickle
      and the Company agreed to defer all severance payments of base compensation
      under the employment agreement for a period




139




of
      six
      months and one day from his termination date. On the first payroll date after
      such six month and one day period, all payments otherwise payable to Mr. Pickle
      during such period will be paid in a lump sum. Monthly severance payments will
      continue thereafter for the remainder of the 18 month period. Pursuant to Mr.
      Pickle’s existing stock option agreement, the vesting of Mr. Pickle’s options
      accelerated such that all unvested shares subject to the options that would
      otherwise have vested over the period of 12 months following the date of
      termination of Mr. Pickle’s employment with the Company immediately vested and
      remain exercisable until the first anniversary of the termination date. In
      consideration for these payments, Mr. Pickle executed and delivered a standard
      release and waiver in favor of the Company. Mr. Pickle’s non-compete obligations
      under his employment agreement continue for the term of the severance
      payments.




In
      connection with the Company’s closing of the Debenture financing with DunKnight,
      the Company’s Board of Directors awarded one-time transaction bonuses to Mr.
      Pickle, in the amount of $350,000, and to Marc R. Esterman, the Company’s
      General Counsel and fellow executive officer, in the amount of $25,000.




Effective
      on November 3, 2005, the Company entered into an employment agreement with David
      F.
      Struwas, who succeeded Mr. Pickle as the Company’s Chief Executive Officer as
      part of the Company’s financing transaction with DunKnight on that date. The
      employment agreement provides for a $300,000 annual base salary, which is
      subject to annual review by the Board of Directors, a one-time, $100,000 signing
      bonus, payable in twelve equal monthly installments, and benefits, paid
      vacation, sick leave, and personal leave comparable to the benefits and leave
      offered to the Company’s other senior executive officers. Provided that he has
      not been terminated for “cause” and has not resigned for other than “good
      reason,” each as defined in the employment agreement, Mr. Struwas will be
      eligible for a bonus for his work during fiscal year 2006, to be paid at the
      discretion of the Board of Directors based on the Company’s achievement of
      operating results targeted in the Company’s 2006 operating plan in the form
      approved by the Company’s Board. Thereafter, the employment agreement
      anticipates that Mr. Struwas will be eligible for annual performance bonuses
      in
      an amount of up to 100% of his base salary, based on the Company’s achievement
      of performance targets, as determined by the Board of Directors in its
      discretion.





The
      Board
      of Directors also granted Mr. Struwas non-qualified stock options to acquire
      8,000,000 and 4,850,000 shares of the Company’s common stock, on November 3,
      2005 and January 4, 2006, respectively, pursuant to the 2001 Stock Plan. The
      options vest over three years with no shares vesting until the six month
      anniversary of the grant date, 16.67% of the shares vesting on the six month
      anniversary date and 2.78% of the shares vesting on each successive month
      thereafter until fully vested on the three-year anniversary of the grant date.
      The 8,000,000 options carry an exercise price of $0.06 per share, which was
      the
      market value of the Company’s common stock on the Determination Date (as defined
      in the 2001 Stock Plan) under the 2001 Stock Plan; the 4,850,000 options carry
      an exercise price of $0.04 per share, which was the market value of the
      Company’s common stock on the Determination Date under the 2001 Stock Plan.





Mr.
      Struwas’ employment agreement entitles him to severance under certain
      circumstances. If Mr. Struwas is terminated without “cause” or if he resigns for
“good reason,” then he will be entitled to receive continuation of his base
      salary and medical benefits for (i) twelve months, if he is terminated or
      resigns before the twelve month anniversary of his employment, or
      (ii) eighteen months, if he is terminated or resigns anytime thereafter.
      Severance is conditioned upon Mr. Struwas executing and delivering a general
      release and waiver in favor of the Company. If Mr. Struwas is terminated for
      “cause,” or quits other than for “good reason”, he is entitled to no




140




severance
      payments. All severance payments of base compensation will be accelerated so
      that they are paid no later than March 15th of the year following the year
      in
      which Mr. Struwas is terminated from employment in order to address
      considerations arising from the Jobs Act.





Mr.
      Struwas’ employment is at-will, and his employment agreement contains
      non-compete covenants and confidentiality obligations.





**Item
      14.  Principal Accountant Fees and Services**





The
      total
      fees and related expenses for professional services provided by the Company’s
      independent registered public accounting firm, Carlin, Charron & Rosen, LLP,
      for the year ended December 31, 2005 are presented in the table below. The
      Audit
      Committee has determined that the provision of these services by Carlin, Charron
      & Rosen, LLP, is compatible with the accountants’ independence.




2005Audit
                fees
            
            $
            320,000
            (1)Audit-related
                fees
            
            
            —Tax
                fees
            
            
            —All
                other fees
            
            
            —Total
            
            $
            320,000(1)
                Includes $183,000 for 2005 to be paid in 2006.




The
      total
      fees and related expenses for professional services provided by the Company’s
      former independent registered public accounting firm, PricewaterhouseCoopers,
      LLP, for the year ended December 31, 2004 are presented in the table below.
      The
      Audit Committee had determined that the provision of these services by
      PricewaterhouseCoopers, LLP is compatible with the accountants’ independence.





2004Audit
                fees
            
            $
            608,186
            (1)Audit-related
                fees
            
            
            258,484
            (2)Tax
                fees
            
            
            —All
                other fees
            
            
            —Total
            
            $
            866,670(1)
Includes
              $339,447 for 2004 which was paid in 2005.(2) Includes
              $63,484 for 2004 paid in 2005.




Audit
      fees include fees and expenses associated with the annual audit of the Company’s
      financial statements included in the Company’s Annual Report on Form 10-K,
      reviews of its quarterly reports on Form 10-Q and fees related to the audit
      of
      the Company’s 401(k) plan. Audit related fees include fees and expenses for
      accounting consultations, reviews of its miscellaneous SEC filings and advice
      and audit services associated with certain of the Company’s
      acquisitions.





**Audit
      Committee’s Pre-approval Policies and Procedures**





The
      Company’s Audit Committee has implemented certain policies and procedures
      dealing with the pre-approval of services rendered by the Company’s independent
      registered public accounting firm. The Company ’s
      Audit
      Committee, as mandated in its current charter,




141




must
      consider in advance whether or not to approve any audit or non-audit services
      to
      be performed by the Company’s independent registered public accounting firm, as
      required by applicable rules and regulations. Further, the Chairman of the
      Audit
      Committee has been authorized by the full Audit Committee to approve, on behalf
      of the Audit Committee, the engagement of Carlin, Charron & Rosen, LLP, the
      Company’s independent registered public accounting firm to perform such
      non-audit related services for the Company not covered by such firm’s audit
      services engagement letter with the Company or otherwise approved by the Audit
      Committee that are deemed necessary or advisable and in the best interests
      of
      the Company in such individual’s determination, provided that the
      fees paid for such non-audit services do not exceed an aggregate amount of
      $75,000 in any given calendar year. Otherwise, as more fully set forth in its
      charter, the
      Audit
      Committee shall:





1.
            instruct
                the independent registered public accounting firm as to its accountability
                to, and reporting responsibility to, the Audit
                Committee;





2.
            review
                and approve the independent registered public accounting firm’s
                compensation, the proposed term of its engagement, and its independence;
                and





3.
            meet
                with the independent registered public accounting firm prior to the
                audit
                of the Company’s financial statements to review the planning and staffing
                of the audit and consider whether or not to approve the auditing
                services
                proposed to be provided.





**PART
      IV**





**Item
      15. Exhibits, Financial Statement Schedules**





(a)  The
      following documents are filed as part of this Annual Report on Form
      10-K:





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





(2)
            Financial
                Statement Schedules.





The
                following Financial Statement Schedules of DSL.net, Inc. and related
                reports are required to be filed by Item 8 hereof and paragraph (c)
                below:





Reports
      of Independent Registered Public Accounting Firms on Financial Statement
      Schedule; and





Schedule
      II: Valuation and Qualifying Accounts.





All
      other
      schedules for which provisions are made in the applicable accounting regulations
      of the SEC are not required under the related instructions or are inapplicable
      and have been omitted.





(3)
            Exhibits.





(b)  Exhibits:





See
                the Exhibit Index included as the last part of this Annual Report
                on Form
                10-K,


142
  which
                  Index is incorporated herein by this reference.


(c) Financial
          Statement Schedule:





Refer
      to
      Item 15(a) above for listing of Financial Statement Schedules.





143





**REPORT
      OF INDEPENDENT** **REGISTERED
      PUBLIC ACCOUNTING FIRM**


**ON** **FINANCIAL
      STATEMENT SCHEDULE**











To
      the
      Stockholders and Board of Directors of


DSL.net,
      Inc.








We
      have
      audited the consolidated financial statements of DSL.net, Inc. and subsidiaries
      (the “Company”) as of December 31, 2005, and for the year then ended, and have
      issued our report thereon dated March 24, 2006; such consolidated financial
      statements and report are included in the Company’s Annual Report on Form 10-K
      for the year ended December 31, 2005 and are incorporated herein by reference.
      Our audit also included the financial statement schedule of the Company, listed
      in Item 15(a)(2) of Form 10-K.  This financial statement schedule is the
      responsibility of the Company’s management. Our responsibility is to express an
      opinion based on our audit. In our opinion, such financial statement schedule,
      when considered in relation to the basic consolidated financial statements
      as of
      December 31, 2005, and for the year then ended, taken as a whole, presents
      fairly, in all material respects, the information set forth
      therein.


*/s/
                Carlin, Charron & Rosen, LLP*





Glastonbury,
      Connecticut


March
      24,
      2006





144


**REPORT
      OF INDEPENDENT** **REGISTERED
      PUBLIC ACCOUNTING FIRM**


**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 March 22, 2005, except for Note
      3, as
      to which the date is March 31, 2006, appearing in this Annual Report Form 10-K
      of DSL.net, Inc. also included an audit of the financial statement schedule
      for
      each of the two years in the period ended December 31, 2004 listed in Item
      15(a)
      (2) of this Form 10-K. In our opinion, this financial statement schedule
      presents fairly, in all material respects, the information set forth therein
      when read in conjunction with the related consolidated **** financial
      statements.














*/s/
      PricewaterhouseCoopers LLP*


Stamford,
      CT


March
      22,
      2005, except for Note 3, as to which the date is March 31, 2006.





145


**SCHEDULE
      II. Valuation and Qualifying Accounts**





The
      following table depicts the activity in the Company’s valuation accounts for the
      years ended December 31, 2005, 2004 and 2003:





(Dollars
      in Thousands)





Allowance
                for Doubtful AccountsYear
            
            Balance
                at
              Beginning
                of
              Period
            
            Additions
              Charged
                to
              Costs
                and
              Expenses
            
            Additions
              Charged
                to
              Purchase
              Accounting
            
            Additions
              Charged
                to
              Sales
                Credits
              and
              Allowances
            
            Additions
              Charged
              Against
              Valuation
              Allowance
            
            Deductions
              Charged
              Against
              Valuation
              Allowance
            
            Balance
                at
              End
                of
              Period2005
            
            $
            874
            
            $
            841
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            (921
            )
            $
            7942004
            
            $
            902
            
            $
            1,081
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            (1,109
            )
            $
            8742003
            
            $
            606
            
            $
            2,047
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            (1,751
            )
            $
            902Deferred
                Tax Asset Valuation AllowanceYear
            
            
            Balance
                at
              Beginning
                of
              Period
            
            
            Additions
              Charged
                to
              Costs
                and
              Expenses
            
            
            Additions
              Charged
                to
              Purchase
              Accounting
            
            
            Additions
              Charged
                to
              Sales
                Credits
              and
              Allowances
            
            
            Additions
              Charged
              Against
              Valuation
              Allowance
            
            
            Deductions
              Charged
              Against
              Valuation
              Allowance
            
            
            Balance
                at
              End
                of
              Period2005
            
            $
            125,827
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            2,372
            
            $
            —
            
            $
            128,1992004
            
            $
            116,696
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            9,131
            
            $
            —
            
            $
            125,8272003
            
            $
            103,875
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            12,821
            
            $
            —
            
            $
            116,696









146




**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 31, 2006
            By:
            */s/ David
              F. Struwas*David
              F. StruwasChief
              Executive Officer




POWER
      OF
      ATTORNEY AND SIGNATURES





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





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








Signature
              Title(s)
              Date*/s
                  David F. Struwas*
                David
                  F. Struwas
              Director;
                  Chief Executive
                Officer
                  (Principal Executive
                Officer)
              March
                  31, 2006*/s/
                  Walter R. Keisch*
                Walter
                  R. Keisch
              Chief
                  Financial Officer
                (Principal
                  Financial and
                Accounting
                  Officer)
              March
                  31, 2006*/s/
                  Robert G. Gilbertson*
                Robert
                  G. Gilbertson
              Director
              March
                  31, 2006*/s/
                  Robert B. Hartnett, Jr.*
                Robert
                  B. Hartnett, Jr.
              Director
              March
                  31, 2006
  147
  */s/
                  Paul J. Keeler*
                Paul
                  J. Keeler
              Director
              March
                  31, 2006*/s/
                  Keir Kleinknecht*
                Keir
                  Kleinknecht
              Director
              March
                  31, 2006





148





Exhibit
      Index to Annual Report on Form 10-K


for
      Fiscal Year Ended December 31, 2005





**EXHIBIT**





**EXHIBIT**


**NO.**





2.01
            Amended
                and Restated Asset Purchase Agreement, dated as of December 11, 2002,
                by
                and among DSL.net, Inc., Network Access Solutions Corporation, Network
                Access Solutions LLC, NASOP, Inc. and Adelman Lavine Gold and Levin,
                a
                Professional Corporation, as deposit escrow agent (incorporated by
                reference to Exhibit 2.1 filed with the Company’s Form 8-K dated as of
                January 10, 2003).3.01
            Amended
                and Restated By-laws of DSL.net, Inc. (incorporated by reference
                to
                Exhibit 4.02 filed with the Company’s registration statement on Form S-8
                (No. 333-89886)).3.02
            Amended
                and Restated Certificate of Incorporation of DSL.net, Inc., as amended
                (incorporated by reference to Exhibit 4.01 filed with the Company’s
                registration statement on Form S-8 (No. 333- 110131)).4.01
            Specimen
                Certificate for shares of DSL.net, Inc.’s Common Stock (incorporated by
                reference to the exhibit of corresponding number filed with the Company’s
                registration statement on Form S-1 (No. 333-80141)).4.02
            Description
                of Capital Stock (filed as Exhibit 6 to the Registrant’s Registration
                Statement on Form 8-A filed on August 3, 2004 pursuant to Section
                12(b) of
                the Exchange Act and incorporated herein by reference).4.03
            Common
                Stock Purchase Warrant, dated as of August 31, 2004 between DSL.net,
                Inc.
                and Laurus Master Fund, Ltd. (incorporated by reference to Exhibit
                10.3
                filed with the Company’s registration statement on Form S-3 (No.
                333-120264)).4.04
            Common
                Stock Purchase Warrant, dated as of October 7, 2004 between DSL.net,
                Inc.
                and TN Capital Equities, Ltd. (incorporated by reference to Exhibit
                10.4
                filed with the Company’s registration statement on Form S-3 (No.
                333-120264)).10.01†
            Amended
                and Restated 1999 Stock Plan (incorporated by reference to the exhibit
                of
                corresponding number filed with the Company’s 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 the Company’s registration statement on
                Form S-1 (No. 333-80141)).10.03
            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 the Company’s registration statement on Form S-1 (No.
                333-96349)).10.04
            Amendment
                No. 1 to Lease Agreement, dated June 9, 1999, by and between DSL.net,
                Inc.
                and Long Wharf Drive, LLC (incorporated by reference to Exhibit 10.08
                filed with the Company’s registration statement on Form S-1 (No.
                333-96349)).




149




10.05
            Amendment
                No. 2 to Lease Agreement, dated November 9, 1999, by and between
                DSL.net,
                Inc. and Long Wharf Drive, LLC (incorporated by reference to Exhibit
                10.09
                filed with the Company’s registration statement on Form S-1 (No.
                333-96349)).10.06
            Amendment
                No. 3 to Lease Agreement, dated January 20, 2000, by and between
                DSL.net,
                Inc. and Long Wharf Drive, LLC (incorporated by reference to Exhibit
                10.10
                filed with the Company’s registration statement on Form S-1 (No.
                333-96349)).10.07
            Amendment
                No. 4 to Lease Agreement, dated February 8, 2000, by and between
                DSL.net,
                Inc. and Long Wharf Drive, LLC (incorporated by reference to Exhibit
                10.12
                filed with the Company’s Annual Report on Form 10-K for the fiscal year
                ended December 31, 2000).10.08
            Amendment
                No. 5 to Lease Agreement dated November 12, 2001, by and between
                DSL.net,
                Inc. and Long Wharf Drive, LLC. (incorporated by reference to Exhibit
                10.11 filed with the Company’s Annual Report on Form 10-K for the year
                ended December 31, 2001).10.09
            Amendment
                No. 6 to Lease Agreement, dated as of April 22, 2002, by and between
                DSL.net, Inc. and Long Wharf Drive, LLC (incorporated by reference
                to
                Exhibit 10.2 filed with the Company’s Quarterly Report on Form 10-Q for
                the quarterly period ended June 30, 2002).10.10
            Amendment
                No. 7 to Lease Agreement, dated as of December 4, 2002, by and between
                DSL.net, Inc. and Long Wharf Drive, LLC (incorporated by reference
                to
                Exhibit 10.13 filed with the Company’s Annual Report on Form 10-K for the
                year ended December 31, 2002).10.11†
            Vector
                Internet Services, Inc. 1999 Stock Option Plan (incorporated by reference
                to Exhibit 4.4 filed with the Company’s registration statement on Form S-8
                (No. 333-39016)).10.12†
            Vector
                Internet Services, Inc. 1997 Stock Option Plan (incorporated by reference
                to Exhibit 4.5 filed with the Company’s registration statement on Form S-8
                (No. 333-39016)).10.13†
            Stock
                Option Agreement, dated April 15, 2004, between DSL.net, Inc. and
                Kirby G.
                Pickle (incorporated by reference to Exhibit 4.01 filed with the
                Company’s
                Quarterly Report on Form 10-Q, for the quarterly period ended June
                30,
                2004)*.*10.14†
            Employment
                Agreement, dated as of April 15, 2004, between DSL.net, Inc. and
                Kirby G.
                Pickle (incorporated by reference to Exhibit 10.01 filed with the
                Company’s Quarterly Report on Form 10-Q, for the quarterly period ended
                June 30, 2004).10.15†
            Agreement,
                dated as of January 1, 2004, between DSL.net, Inc. and David F. Struwas
                (incorporated by reference to Exhibit 10.38 to the Company’s Annual Report
                on Form 10-K for the year ended December 31, 2003).10.16†
            Agreement,
                dated as of January 1, 2004, between DSL.net, Inc. and J. Keith Markley
                (incorporated by reference to Exhibit 10.39 to the Company’s Annual Report
                on Form 10-K for the year ended December 31,
                2003).




150




10.17†
              Agreement,
                  dated as of January 1, 2004, between DSL.net, Inc. and Robert J.
                  DeSantis
                  (incorporated by reference to Exhibit 10.40 to the Company’s Annual Report
                  on Form 10-K for the year ended December 31, 2003).10.18
              Security
                  Agreement by and between DSL.net, Inc. and Laurus Master Fund,
                  Ltd., dated
                  as of August 31, 2004 (incorporated by reference to Exhibit 10.1
                  filed
                  with the Company’s registration statement on Form S-3 (No.
                  333-120264)).10.19
              Minimum
                  Borrowing Note Registration Rights Agreement by and between DSL.net,
                  Inc.
                  and Laurus Master Fund, Ltd., dated as of August 31, 2004 (incorporated
                  by
                  reference to Exhibit 10.2 filed with the Company’s registration statement
                  on Form S-3 (No. 333-120264)).10.20
              Minimum
                  Borrowing Note issued by DSL.net, Inc. to Laurus Master Fund, Ltd.
                  on
                  August 31, 2004 (incorporated by reference to Exhibit 10.5 filed
                  with the
                  Company’s registration statement on Form S-3 (No.
                  333-120264)).10.21
              Secured
                  Revolving Note issued by DSL.net, Inc. to Laurus Master Fund, Ltd.
                  on
                  August 31, 2004 (incorporated by reference to Exhibit 10.6 filed
                  with the
                  Company’s registration statement on Form S-3 (No.
                  333-120264)).10.22
              Subordination
                  Agreement between DSL.net, Inc. and certain holders of DSL.net,
                  Inc.’s
                  senior debt, dated as of October 7, 2004 (incorporated by reference
                  to
                  Exhibit 10.8 filed with the Company’s registration statement on Form S-3
                  (No. 333-120264)).10.23†
              Form
                  of Compensation Agreement, dated as of February 3, 2005, between
                  DSL.net,
                  Inc. and certain named officers of DSL.net, Inc., as identified
                  on
                  Schedule A thereto (incorporated by reference to Exhibit 10.39
                  filed with
                  the Company’s Annual Report on Form 10-K for the fiscal year ended
                  December 31, 2004).10.24†
              Amended
                  and Restated 2001 Stock Option and Incentive Plan (incorporated
                  by
                  reference to Exhibit 10.40 filed with the Company’s Annual Report on Form
                  10-K for the fiscal year ended December 31, 2004).10.25
              Securities
                  Purchase Agreement, dated as of November 2, 2005, among DSL.net,
                  Inc. and
                  DunKnight Telecom Partners LLC (incorporated by reference to Exhibit
                  10.1
                  filed with the Company’s Quarterly Report on Form 10-Q for the quarter
                  ended September 30, 2005).10.26
              18%
                  Secured Debenture, made by DSL.net, Inc. on November 2, 2005 in
                  favor of
                  DunKnight Telecom Partners LLC, in face principal amount of $8,000,000
                  (incorporated by reference to Exhibit 10.2 filed with the Company’s
                  Quarterly Report on Form 10-Q for the quarter ended September 30,
                  2005).10.27
              Agency,
                  Guaranty and Security Agreement, dated as of November 2, 2005,
                  by and
                  among DSL.net, Inc., DSLnet Atlantic, LLC, Vector Internet Services,
                  Inc.,
                  the Investors listed on Schedule 2 thereto and DunKnight Telecom
                  Partners
                  LLC, as administrative agent (incorporated by reference to Exhibit
                  10.3
                  filed with the Company’s Quarterly Report on Form 10-Q for the quarter
                  ended September 30, 2005).
  151
  10.28
              Consent
                  and Waiver of Laurus Master Fund, Ltd., dated November 2, 2005,
                  for
                  DunKnight Telecom Partners LLC Debt Financing of DSL.net, Inc.
                  (incorporated by reference to Exhibit 10.4 filed with the Company’s
                  Quarterly Report on Form 10-Q for the quarter ended September 30,
                  2005).10.29
              Subordination
                  Agreement, dated as of November 2, 2005, entered into among Laurus
                  Master
                  Fund, Ltd., DunKnight Telecom Partners LLC, as agent, the Second
                  Lien
                  Lenders referred to therein and DSL.net, Inc. (incorporated by
                  reference
                  to Exhibit 10.5 filed with the Company’s Quarterly Report on Form 10-Q for
                  the quarter ended September 30, 2005).10.30
              Implementation
                  Agreement, dated as of November 2, 2005, by and among DSL.net,
                  Inc.,
                  VantagePoint Venture Partners III (Q), L.P., VantagePoint Ventures
                  Partners III, L.P., VantagePoint Communications Partners, L.P.,
                  VantagePoint Venture Partners 1996, L.P., Deutsche Bank AG London
                  and
                  Deutsche Bank Trust Company Americas, as administrative agent for
                  the
                  Investors identified therein (incorporated by reference to Exhibit
                  10.6
                  filed with the Company’s Quarterly Report on Form 10-Q for the quarter
                  ended September 30, 2005).10.31†
              Employment
                  Agreement, dated as of November 3, 2005, between DSL.net, Inc.
                  and David
                  F. Struwas (incorporated by reference to Exhibit 10.7 filed with
                  the
                  Company’s Quarterly Report on Form 10-Q for the quarter ended September
                  30, 2005).10.32†
              Amendment
                  No. 1 to Employment Agreement, dated November 2, 2005, between
                  DSL.net,
                  Inc. and Kirby G. Pickle (incorporated by reference to Exhibit
                  10.8 filed
                  with the Company’s Quarterly Report on Form 10-Q for the quarter ended
                  September 30, 2005).10.33*
              Amendment
                  Agreement, dated as of January 3, 2006, between DSL.net, Inc. and
                  DunKnight Telecom Partners LLC, as Agent and Purchaser.10.34*†
              Executive
                  Officer Compensation Summary.10.35†
              Director
                  Compensation Summary (incorporated by reference to Exhibit 10.2
                  filed with
                  the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30,
                  2005).21.01*
              Subsidiaries
                  of DSL.net, Inc.23.01*
              Consent
                  of Carlin, Charron & Rosen, LLP.23.02*
              Consent
                  of PricewaterhouseCoopers LLP.24.01*
              Power
                  of Attorney (see signature page hereto).31.01*
              Certification
                  Pursuant to Rule 13a-14(a) of the Exchange Act, as Adopted Pursuant
                  to
                  Section 302 of the Sarbanes-Oxley Act of 2002.31.02*
              Certification
                  Pursuant to Rule 13a-14(a) of the Exchange Act, as Adopted Pursuant
                  to
                  Section 302 of the Sarbanes-Oxley Act of 2002.32.01*
              Certification
                  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of 2002.32.02*
              Certification
                  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of 2002.


*  Filed
      herewith




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




152