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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2003

OR

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

Commission File Number: 000-27525


DSL.NET, INC.
(Exact name of registrant as specified in its charter)


Delaware 06-1510312
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)


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


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

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 reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).

Yes [ ] No [X]

As of November 7, 2003 the registrant had 95,179,736 shares of Common Stock
outstanding.
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DSL.NET, INC.

INDEX

Page
Number
------
Part I - Financial Information


Item 1. Consolidated Financial Statements ...................................2

Consolidated Balance Sheets (unaudited) at December 31, 2002
and September 30, 2003...........................................2

Consolidated Statements of Operations (unaudited) for the
three and nine months ended September 30, 2002 and 2003..........3

Consolidated Statements of Cash Flows (unaudited)
for the nine months ended September 30, 2002 and 2003............4

Notes to Consolidated Financial Statements.........................5

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................23

Item 3. Quantitative and Qualitative Disclosures about Market Risk..........41

Item 4. Controls and Procedures.............................................41

Part II - Other Information

Item 2. Change in Securities and Use of Proceeds............................41

Item 4. Submission of Matters to a Vote of Security Holders.................45

Item 6. Exhibits and Reports on Form 8-K....................................48

Signature...................................................................50

Exhibit Index...............................................................51

1

PART I - FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS



DSL.net, Inc.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
(unaudited)

December 31, September 30,
2002 2003
---------- ----------

ASSETS
Current assets:
Cash and cash equivalents $ 11,318 $ 21,082
Restricted cash 1 4
Accounts receivable (net of allowances of $606 and $1,016
at December 31, 2002 and September 30, 2003, respectively) 4,358 8,038
Inventory 707 558
Deferred costs 615 862
Prepaid expenses and other current assets 726 921
---------- ----------
Total current assets 17,725 31,465

Fixed assets, net 23,066 27,387
Goodwill and other intangible assets 10,656 9,795
Other assets 2,049 1,287
---------- ----------
Total assets $ 53,496 $ 69,934
========== ==========


LIABILITIES, MANDATORILY REDEEMABLE, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY


Current liabilities:
Accounts payable $ 4,621 $ 3,615
Accrued salaries 1,225 1,346
Accrued liabilities 4,621 11,041
Deferred revenue 3,591 5,982
Current portion of capital leases payable 2,676 110
---------- ----------
Total current liabilities 16,734 22,094

Capital leases payable 1,889 76
Notes payable, net of discount (Note 7) -- 4,519
---------- ----------
Total liabilities 18,623 26,689
---------- ----------
Commitments and contingencies (Note 8)

Preferred stock: 20,000,000 preferred shares authorized (Note 9)
20,000 shares designated as Series X, mandatorily redeemable, convertible
preferred stock, $.001 par value; 20,000 and 20,000 shares issued and outstanding
as of December 31, 2002 and September 30, 2003, respectively (liquidation preference
$22,315 and $24,115 as of December 31, 2002 and September 30, 2003, respectively). 8,741 14,877

15,000 shares designated as Series Y, mandatorily redeemable, convertible
preferred stock, $.001 par value; 15,000 and 5,050 shares issued and outstanding
as of December 31, 2002 and September 30, 2003, respectively (liquidation preference
$16,380 and $5,982 as of December 31, 2002 and September 30, 2003, respectively). 5,381 3,171

Stockholders' equity (Notes 3 and 9)
Common stock, $.0005 par value; 400,000,000 and 400,000,000 shares authorized;
64,929,899 and 95,179,736 shares issued and outstanding 32 48
Additional paid-in capital 305,647 336,694
Deferred compensation (437) --
Accumulated deficit (284,491) (311,545)
---------- ----------
Total stockholders' equity 20,751 25,197
---------- ----------
Total liabilities, preferred stock and stockholders' equity $ 53,496 $ 69,934
========== ==========

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

2


DSL.net, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
(unaudited)

Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2002 2003 2002 2003
------------ ------------ ------------ ------------

Revenue, net $ 11,262 $ 18,227 $ 34,239 $ 53,089
------------ ------------ ------------ ------------
Operating expenses:
Network (excluding $7, $0, $22 and $11
of stock compensation, respectively) 8,079 13,070 25,157 38,412
Operations (excluding $12, $0, $41 and $10
of stock compensation, respectively) 1,966 3,060 6,071 8,935
General and administrative (excluding $58, $0, $226 and $69
of stock compensation, respectively) 2,305 2,618 9,081 8,891
Sales and marketing (excluding $218, $0, $648 and $348
of stock compensation, respectively) 1,870 2,116 4,644 6,238
Stock compensation 295 -- 937 438
Depreciation and amortization 5,138 3,319 15,526 12,654
------------ ------------ ------------ ------------

Total operating expenses $ 19,653 $ 24,183 $ 61,416 $ 75,568
------------ ------------ ------------ ------------

Operating loss $ (8,391) $ (5,956) $ (27,177) $ (22,479)

Interest expense, net (70) (728) (306) (2,139)
Other income (expense), net 2 (2,427) 177 (2,436)
------------ ------------ ------------ ------------

Net loss $ (8,459) $ (9,111) $ (27,306) $ (27,054)
============ ============ ============ ============

Net loss applicable to common stockholders:
Net loss (8,459) (9,111) (27,306) (27,054)
Dividends on preferred stock (1,050) (1,045) (2,523) (3,145)
Accretion of preferred stock, net of issuance costs (3,011) (1,779) (7,068) (7,800)
------------ ------------ ------------ ------------
Net loss applicable to common stockholders $ (12,520) $ (11,935) $ (36,897) $ (37,999)
============ ============ ============ ============
Net loss per share, basic and diluted $ (0.19) $ (0.17) $ (0.57) $ (0.57)
============ ============ ============ ============
Shares used in computing net loss per share, basic and diluted 64,887,681 70,161,057 64,833,595 66,726,872
============ ============ ============ ============


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

3


DSL.net, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands, except per share data)
(unaudited)

Nine Months Ended
September 30,
-----------------------------
2002 2003
------------ ------------

Cash flows from operating activities:
Net loss $ (27,306) $ (27,054)

Reconciliation of net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 15,526 12,654
Bad debt expense 1,979 1,739
Sales credits and allowances 1,094 339
Amortization of deferred debt issuance costs and debt discount 9 7,165
Stock compensation expense 937 438
Loss on sale/write-off of fixed assets 356 134
Gain on note settlement -- (3,500)
Non-cash interest on lease payoff -- 194
Net changes in assets and liabilities, net of acquired assets:
(Increase) in accounts receivable (1,924) (5,692)
Decrease / (increase) in prepaid and other current assets 608 (293)
(Increase) / decrease in other assets (345) 762
(Decrease) in accounts payable (266) (1,006)
(Decrease) / increase in accrued salaries (41) 121
(Decrease) / increase in accrued expenses (3,972) 5,717
(Decrease) / increase in deferred revenue (274) 1,307
------------ ------------
Net cash used in operating activities (13,619) (6,975)
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (1,328) (1,840)
Proceeds from sales of property and equipment 85 --
Acquisitions of businesses and customer lines (1,150) (8,743)
Decrease / (increase) in restricted cash 63 (3)
------------ ------------
Net cash used in investing activities (2,330) (10,586)
------------ ------------
Cash flows from financing activities:
Proceeds from credit facility -- 6,100
Proceeds from common stock issuance 14 2,270
Proceeds from preferred stock issuance 15,000 --
Proceeds from note issuances -- 30,000
Payments on credit facility -- (6,100)
Principal payments under notes and capital lease obligations (2,224) (4,945)
------------ ------------
Net cash provided by financing activities 12,790 27,325
------------ ------------
Net increase / (decrease) in cash and cash equivalents (3,159) 9,764
Cash and cash equivalents at beginning of period 19,285 11,318
------------ ------------
Cash and cash equivalents at end of period $ 16,126 $ 21,082
============ ============


Supplemental disclosure of non-cash investing activities:
On January 10, 2003, the Company purchased network assets and associated
subscriber lines of Network Access Solutions Corporation (Note 5)

The fair value of the assets acquired was $14,750

On September 8, 2003, the Company purchased network assets and associated
subscriber lines of TalkingNets Holdings, LLC (Note 5)

The fair value of the assets acquired was $796

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





DSL.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


1. Summary of Significant Accounting Policies

A. Basis of Presentation

The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
including the recoverability of tangible and intangible assets, disclosure of
contingent assets and liabilities as of the date of the financial statements,
and the reported amounts of revenues and expenses during the reported period.
The markets for the Company's (as defined below) services are characterized by
intense competition, rapid technological development, regulatory and legislative
changes, and frequent new product introductions, all of which could impact the
future value of the Company's assets and liabilities. Actual results may differ
from those estimates. Certain prior period amounts have been reclassified to
conform to the 2003 presentation. The consolidated financial statements
("financial statements") at September 30, 2003 and for the three and nine months
ended September 30, 2002 and 2003 are unaudited, but in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments) that DSL.net, Inc. ("DSL.net" or the "Company") considers necessary
for a fair presentation of its financial position and operating results.
Operating results for the three and nine months ended September 30, 2003 are not
necessarily indicative of results that may be expected for any future periods.

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

The Company believes the following critical accounting policies affect the
Company's more significant judgments and estimates used in the preparation of
its consolidated financial statements:

REVENUE RECOGNITION

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

Revenue is recognized pursuant to the terms of each contract on a monthly
service fee basis, which varies based on the speed of the customer's broadband
connection and the services ordered by the customer. The monthly fee includes
phone line charges, Internet access charges, the cost of any leased equipment
installed at the customer's site and the other services, as applicable. Revenue
that is billed in advance of the services provided is deferred until the
services are provided by the

5


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


Company. Revenue related to installation charges is also deferred and amortized
to revenue over 18 months. Related direct costs incurred (up to the amount of
deferred revenue) are also deferred and amortized to expense over 18 months. Any
excess direct costs over installation charges are charged to expense as
incurred. In certain instances, the Company negotiates credits and allowances
for service related matters. The Company establishes a reserve against revenue
for such credits based on historical experience.

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.

GOODWILL AND OTHER 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.

Effective January 1, 2002, the Company adopted SFAS No. 142, "GOODWILL AND
OTHER INTANGIBLE ASSETS" ("SFAS 142"). This statement requires that the
amortization of goodwill be discontinued and instead an impairment approach be
applied. The impairment tests were performed during January and December of 2002
and will be performed annually thereafter (or more often if adverse events
occur) and are based upon a fair value approach rather than an evaluation of the
undiscounted cash flows. If impairment exists, under SFAS 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 Company did not
record any goodwill impairment adjustments resulting from its impairment reviews
during 2002.

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

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

6


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


ALLOWANCE FOR DOUBTFUL ACCOUNTS

The Company maintains an allowance for doubtful accounts for estimated
losses resulting from the inability of its customers to make required payments.
The Company principally sells its services directly to end users mainly
consisting of small to medium sized businesses, as opposed to selling to
Internet service providers ("ISPs") who then resell such services. The Company
believes that it does not have significant exposure or concentrations of credit
risk with respect to any given customer. However, if the country or any region
the Company services experiences an economic downturn, the financial condition
of the Company's customers could be adversely affected, which could result in
their inability to make payments to the Company. This could require additional
provisions for allowances. In addition, a negative impact on revenue 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 the first nine months of 2003.

INCOME TAX

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

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

LITIGATION

From time to time, the Company may be involved in litigation concerning
claims arising in the ordinary course of its business, including claims brought
by former employees and claims related to acquisitions. The Company records
liabilities when a loss is probable and can be reasonably estimated. These
estimates are based on analyses made by internal and external legal counsel who
consider information known at the time. The Company believes it has made
reasonable estimates in the past; however, court decisions and other factors
could cause liabilities to be incurred in excess of estimates.

7


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


The accompanying unaudited interim financial statements have been prepared
with the assumption that users of the interim financial information have either
read or have access to the Company's financial statements for the year ended
December 31, 2002. Accordingly, footnote disclosures that would substantially
duplicate the disclosures contained in the Company's December 31, 2002 audited
financial statements have been omitted from these unaudited interim financial
statements. These financial statements have been prepared in accordance with the
instructions to Form 10-Q and the rules and regulations of the Securities and
Exchange Commission ("SEC"). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
instructions, rules and regulations. While management believes the disclosures
presented are adequate to make these financial statements not misleading, these
financial statements should be read in conjunction with the Company's audited
financial statements and related notes included in the Company's Annual Report
on Form 10-K for the year ended December 31, 2002, and with the Company's
unaudited interim financial statements and related notes filed on Forms 10-Q for
the quarterly periods ending March 31, 2003 and June 30, 2003, which have been
filed with the SEC.

B. Earnings (Loss) Per Share

Basic earnings (loss) per share is computed by dividing income or loss
applicable to common stockholders by the weighted average number of shares of
the Company's common stock outstanding during the period, excluding shares
subject to repurchase.

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

As of December 31, 2002, the Company had 64,929,899 shares of common stock
issued and outstanding. As of September 30, 2003, the Company had 95,179,736
shares of common stock issued and outstanding. The increase of 30,249,837 shares
primarily resulted from common stock issued during the third quarter of 2003
(primarily in September, 2003) for preferred stock conversions and for employee
stock option exercises (Note 3). The weighted average number of outstanding
common shares used in computing earnings per share for the three months ended
September 30, 2002 and 2003 was 64,887,681 and 70,161,057, respectively. The
weighted average number of outstanding common shares used in computing earnings
per share for the nine months ended September 30, 2002 and 2003 was 64,833,595
and 66,726,872, respectively.

C. Incentive Stock Award Plans

As of September 30, 2003, the Company had five stock-based employee
compensation plans, which are described more fully in the Company's audited
financial statements and related notes included in the Company's Annual Report
on Form 10-K for the year ended December 31, 2002. The Company accounts for
stock-based compensation under the intrinsic value method in accordance with
Accounting Principles Board Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES" ("APB 25"). Accordingly, compensation expense is not recognized when
options are granted at the fair market value on the date of grant.

8


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


The Company has elected to continue following APB 25 to account for its
stock-based compensation plans. The following table presents the effect on the
Company's net loss and net loss per share as if the Company had applied the fair
value method of accounting for stock-based compensation in accordance with SFAS
No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION" ("SFAS 123"):


Three Months Ended Nine Months Ended
September 30, September30,
2002 2003 2002 2003
-------- -------- -------- --------

Net loss, as reported ($8,459) ($9,111) ($27,306) ($27,054)
Deduct: total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (1,383) (899) (3,905) (3,697)
-------- -------- -------- --------
Pro forma under SFAS 123 ($9,842) ($10,010) ($31,211) ($30,751)

Net loss applicable to common stockholders:
As reported ($12,520) ($11,935) ($36,897) ($37,999)
Pro forma under SFAS 123 ($13,903) ($12,834) ($40,802) ($41,696)
Basic and diluted net loss per common share:
As reported ($0.19) ($0.17) ($0.57) ($0.57)
Pro forma under SFAS 123 ($0.21) ($0.18) ($0.63) ($0.62)


The estimated fair value at date of grant for options granted during the
three and nine months ended September 30, 2002 ranged from $0.25 to $0.94 per
share. The estimated fair value at date of grant for options granted during the
three and nine months ended September 30, 2003 ranged from $0.43 to $0.58 per
share. The minimum value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions:

Three Months Ended Nine Months Ended
------------------ ------------------
September 30, September 30,
2002 2003 2002 2003
---- ---- ---- ----

Risk free interest rate 2.97-3.50% 2.15-3.06% 2.97-4.42% 2.15-3.06%
Expected dividend yield None None None None
Expected life of option 4 Years 4 Years 4 Years 4 Years
Expected volatility 138% 152% 138% 152%


9


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


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

D. Recently Issued Accounting Pronouncements

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

In December 2002, SFAS No. 148, "ACCOUNTING FOR STOCK-BASED COMPENSATION -
TRANSITION AND DISCLOSURE - AN AMENDMENT OF SFAS NO. 123" ("SFAS 148") was
issued. SFAS 148 amends SFAS 123 to provide alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, SFAS 148 amends the disclosure
requirements of SFAS 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. As
provided for in SFAS 148, the Company has elected not to transition to the fair
value based method of accounting for stock based employee compensation; it has,
however, adopted the amended disclosure requirements provided under SFAS 148 and
incorporated those requirements into its financial statements included in this
Form 10-Q under the heading "Incentive Stock Award Plans".

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

In May 2003, FASB issued SFAS No. 150, "ACCOUNTING FOR CERTAIN FINANCIAL
INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY" ("SFAS 150").
SFAS 150 establishes standards for the classification and measurement of certain
financial instruments with characteristics of both liabilities and equity. The
changes are intended to result in a more complete depiction of an entity's
liabilities and equity and will, thereby, assist investors and creditors in
assessing the amount, timing, and likelihood of potential future cash outflows
and equity share issuances. This statement also requires that certain
obligations that could be settled by issuance of an entity's equity but lack
other characteristics of equity be reported as liabilities even though the
obligation does not meet the definition of a liability. The requirements of SFAS
150 became effective for the Company for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. SFAS 150 is to be
implemented by reporting the cumulative effect of a change in an accounting
principle for financial instruments created before the issuance date of the
statement and still existing at the beginning of the interim period of adoption.
The Company has evaluated the impact of SFAS 150 to determine the effect it

10


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


may have on its consolidated results of operations or financial position and has
concluded that the adoption of this statement is not expected to have a material
affect on the Company's financial position or results of operations.

2. Liquidity

As reflected in the Company's audited financial statements and related
notes included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002, the Company incurred operating losses of approximately
$35,821 and negative operating cash flows of approximately $17,706 during the
year ended December 31, 2002. During the nine months ended September 30, 2003,
the Company incurred operating losses of approximately $22,479 and negative
operating cash flows of approximately $6,975. These operating losses and
negative operating cash flows have been financed primarily by proceeds from
equity and note issuances. The Company had accumulated deficits of approximately
$284,491 at December 31, 2002 and approximately $311,545 at September 30, 2003.

The Company expects its operating losses, net operating cash outflows and
capital expenditures to continue through 2003 and into 2004. The Company
successfully completed rounds of private equity and bridge loan financings
totaling approximately $35,000 as follows: approximately $20,000 in the fourth
quarter of 2001, $10,000 in March 2002 and $8,531 in May 2002 (which, after
cancellation of certain bridge loans, yielded net proceeds of approximately
$5,000) (Note 9). In addition, on July 18, 2003, the Company successfully raised
approximately $30,000 in additional financing (Note 7). The Company believes
that its existing cash and cash equivalents and cash expected to be generated
from operations will be sufficient to fund its operating losses, capital
expenditures and working capital requirements through at least the end of 2004,
based on its current business plans and projections. The Company intends to use
these cash resources to finance its capital expenditures and for working capital
and other general corporate purposes. The Company may also use a portion of
these cash resources to acquire complementary businesses, subscriber lines or
other assets. The amounts actually expended for these purposes will vary
significantly depending on a number of factors, including market acceptance of
the Company's services, revenue growth, planned capital expenditures, cash
generated from operations, improvements in operating productivity, the extent
and timing of entry into new markets and availability and prices paid for
acquisitions. Failure to generate sufficient revenues, contain certain
discretionary spending or achieve certain other business plan objectives could
have a material adverse affect on the Company's results of operations and
financial position.


3. Stockholders' Equity

During the second quarter of 2003, the Company's remaining unamortized
deferred compensation balance relating to stock options and restricted stock
held by employees and directors became fully amortized. Consequently, there was
no remaining unamortized deferred compensation balance as of September 30, 2003.

During the three months ended September 30, 2003, the Company issued
22,473,078 and 2,445,895 shares of its common stock, respectively, upon the
conversion of 9,950 shares of Series Y Preferred Stock and as payment for
approximately $1,793 of accrued dividends on such converted shares of Series Y
Preferred Stock (Note 9). The Company also issued 4,946,384 and 5,315,484 shares
of common stock, respectively, upon exercises of stock options during the three
and nine months ended September 30, 2003. In addition, the Company issued 7,380
and 15,380 shares of

11


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


common stock, respectively, during the three and nine months ended September 30,
2003 to employees participating in the Company's 1999 Employee Stock Purchase
Plan.


4. Restructuring

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

The Company's restructuring reserve balance as of September 30, 2003, of
approximately $422, was included in the Company's accrued liabilities and
represents previously reserved amounts associated with real estate charges for
anticipated costs pertaining to its vacated facilities.


5. Acquisitions

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

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

In December of 2002, the U.S. Bankruptcy Court for the District of
Delaware approved the Company's bid to purchase certain network assets,
equipment and associated subscriber lines of NAS for $14,000, consisting of
$9,000 in cash and $5,000 in a note payable to NAS. The Company closed the
transaction on January 10, 2003, whereby it acquired certain of NAS's network
assets, equipment in approximately 300 central offices and approximately 11,500
associated subscriber lines (the "NAS Assets"), pursuant to that certain Amended
and Restated Asset Purchase Agreement, dated as of December 11, 2003, by and
among the Company, NAS, Network Access Solutions LLC, NASOP, Inc., and Adelman,
Lavine, Gold and Levin (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

12


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


Agreement, DSL.net negotiated a $1,083 reduction in the cash paid at the
closing, representing DSL.net'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, providing it with increased opportunities to sell more higher-margin
facilities-based services.

The acquisition has been accounted for under the purchase method of
accounting in accordance with SFAS No. 141 "BUSINESS COMBINATIONS" ("SFAS 141").
The results of NAS's operations have been included in the consolidated financial
statements since January 10, 2003 (the acquisition date). The allocated
estimated fair values of the acquired assets at the date of acquisition exceeded
the purchase price and, accordingly, have been written down on a pro-rata basis
by asset group to the purchase price of approximately $14,750 ($14,000 plus
associated direct acquisition costs of approximately $750) as follows: (i)
intangible assets pertaining to approximately 11,500 acquired subscriber lines
of $1,476, and (ii) property and equipment of $13,274. The Company is still in
the process of finalizing certain estimates of certain property and equipment
and, thus, the allocation of the purchase price is subject to further
adjustment. In July, 2003, the Company paid $1,500 into escrow for the
negotiated repurchase and cancellation of the $5,000 note issued by the Company
to NAS as part of the purchase price for the NAS Assets. The payment was subject
to approval by the bankruptcy court presiding over NAS' bankruptcy petition. On
August 25, 2003, the court approved the transaction, and the $1,500 held in
escrow was paid to NAS in full satisfaction of the note.

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

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 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. In accordance with the terms of the TalkingNets Asset
Purchase Agreement, the Company had a transition period of up to 150 days to
integrate TalkingNets' operations into its own operations and obtain all
requisite approvals prior to final closing of the transaction. During the
transition period, the Company was entitled to the cash collections from the
proposed acquired customers and was obligated to reimburse TalkingNets for
certain related operating expenses. The excess of TalkingNet's reimbursed
expenses over cash collections, included in the Company's operating expenses
during the transition period, for the three and nine months ended September 30,
2003, was approximately $159 and $394, respectively.

13


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


On September 8, 2003, in accordance with the TalkingNets Asset
Purchase Agreement, the Company completed its transaction to acquire the
TalkingNets Assets. This acquisition has been accounted for under the purchase
method of accounting in accordance with SFAS No. 141. The results of
TalkingNets' operations have been included in the Company's consolidated
financial statements since September 8, 2003 (the closing date). The allocated
estimated fair values of the acquired assets at the date of acquisition exceeded
the purchase price and, accordingly, have been written down on a pro-rata basis
by asset group to the purchase price of approximately $851 ($726 plus associated
direct acquisition costs of approximately $125) as follows: (i) certain accounts
receivables of $55, (ii) intangible assets pertaining to approximately 90
acquired subscriber lines of $58, and (iii) property and equipment of $738. The
Company is still in the process of finalizing certain estimates of certain
property and equipment and, thus, the allocation of the purchase price is
subject to further adjustment.

The following table sets forth the unaudited pro forma consolidated
financial information of the Company, giving effect to the acquisition of the
Broadslate and Abacus customers and the acquisition of the NAS Assets, as if the
transactions had occurred at the beginning of the periods presented. Inclusion
of the TalkingNets Assets would not materially change the reported unaudited pro
forma results.

PRO FORMA
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------
2002 2003
---------- ----------

Pro forma revenue $ 53,320 $ 53,847
Pro forma operating loss $ (27,721) $ (22,452)
Pro forma net loss $ (29,862) $ (27,073)
Pro forma net loss applicable to common stockholders $ (39,453) $ (38,018)
Pro forma net loss per share, basic and diluted $ (0.61) $ (0.57)

Shares used in computing pro forma net loss per share 64,833,595 66,726,872


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

The actual revenue attributable to customer lines acquired during the
period was approximately $1,392 and $18,036 for the nine months ended September
30, 2002 and 2003, respectively.

6. Goodwill and Other Intangible Assets

In accordance with SFAS No. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS",
which became effective January 1, 2002, the Company has ceased to amortize
approximately $8,482 of goodwill. In lieu of amortization, the Company made an
initial impairment review of its goodwill in January of 2002 and another
impairment review in December of 2002. The Company did not record any goodwill
impairment adjustments resulting from its impairment reviews. The Company will
continue to perform annual impairment reviews, unless a change in circumstances
requires a review in the interim.

14


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


The Company's identified intangible assets consist of customer lists,
which are amortized over two years. Amortization expense of intangible assets
for the three and nine months ended September 30, 2002 was approximately $1,388
and $4,082, respectively. For the three and nine months ended September 30,
2003, amortization expense was approximately $345 and $2,395, respectively.
Accumulated amortization of customer lists as of September 30, 2002 and 2003 was
$14,404 and $18,067, respectively. The expected future amortization of customer
lists as of September 30, 2003 is $350 for the remainder of 2003, $925 in 2004
and $38 in 2005.

7. Debt

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

On January 10, 2003, the Company issued a $5,000 note to NAS in
conjunction with its acquisition of the NAS Assets (Note 5). The NAS note had a
term of 5 years, bore interest at 12% per annum and was collateralized by the
network equipment acquired from NAS. Interest was payable monthly in arrears on
the unpaid principal balance. The note requires interest-only payments for the
first 21 months after which principal payments were to commence monthly and be
paid in 39 equal monthly installments together with interest on the unpaid
principal balance. 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. The payment was subject to approval by the bankruptcy court. 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 difference between the $5,000
note and the $1,500 settlement amount was recorded as other income in the third
quarter of 2003. Interest expense under the NAS note for the three and nine
months ended September 30, 2003 approximated $68 and $318, respectively.

The Company entered into a Revolving Credit and Term Loan Agreement, dated
as of December 13, 2002 (the "Credit Agreement"), with a commercial bank
providing for a revolving line of credit of up to $15,000 (the "Commitment").
Borrowings and repayments under the Credit Agreement could be made until the
revolving credit maturity date of December 12, 2004, at which time all amounts
outstanding would convert into a term loan payable in 12 quarterly installments.
Interest was payable on all amounts outstanding under the Credit Agreement in
arrears at the end of each calendar quarter at a variable interest rate equal to
the higher of the bank's prime rate equivalent or 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
acceptable to the bank and to certain other conditions set forth in the Credit
Agreement. On February 3, 2003, the Company borrowed $6,100 under the Credit
Agreement. As of March 3, 2003, the Company's investors had guaranteed $9,100
under the Credit Agreement. On July 18, 2003, the Company repaid the $6,100
outstanding balance plus accrued interest and terminated the Credit Agreement.
The Company wrote off approximately $184 of the related unamortized balance of
loan origination fees.

15


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


The Company entered into a Reimbursement Agreement, dated as of December
27, 2002, with several private investment funds affiliated with VantagePoint
Venture Partners (collectively, "VantagePoint"), Columbia Capital Equity
Partners ("Columbia"), The Lafayette Investment Fund, L.P. and Charles River
Partnership, L.P. (collectively the "Guarantors") and VantagePoint Venture
Partners III (Q), L.P., as administrative agent (the "Reimbursement Agreement").
The Guarantors were all holders of or affiliates of holders of the Company's
Series X Preferred Stock and Series Y Preferred Stock. Pursuant to the terms of
the Reimbursement Agreement, on December 27, 2002, VantagePoint and Columbia
issued guarantees in an aggregate amount of $6,100 to support certain
obligations of the Company under the Credit Agreement. The Reimbursement
Agreement obligated the Company to reimburse the Guarantors for any payments
they may be required to make in accordance with their guarantees. The Company's
obligations under the Reimbursement Agreement were guaranteed by certain of the
Company's wholly-owned subsidiaries and collateralized by an Agency, Guaranty
and Security Agreement by and among the Company, certain of the Company's
subsidiaries, Deutsche Bank Trust Company Americas, as administrative agent, and
the Investors (as defined below), pursuant to which the Company and certain of
its wholly-owned subsidiaries pledged a significant portion of the Company's
consolidated assets as collateral (the "Security Agreement"). On July 18, 2003,
in connection with the termination of the Credit Agreement, the guarantees,
Reimbursement Agreement and related Security Agreement were terminated.

Pursuant to the terms of the Reimbursement Agreement, on December 27,
2002, the Company issued warrants to purchase an aggregate of 12,013,893 shares
of its common stock to VantagePoint and Columbia, in consideration for their
guarantees aggregating $6,100. All such warrants have a ten year life and an
exercise price of $0.50 per share. On March 26, 2003, the Company issued
additional warrants, exercisable for ten years, to purchase a total of 936,107
shares of its common stock at $0.50 per share to VantagePoint and Columbia,
bringing the total number of warrants issued in connection with the
Reimbursement Agreement to 12,950,000. Pursuant to the terms of the
Reimbursement Agreement, in the event that the Company did not borrow any
amounts under the Credit Agreement on or before March 31, 2003, the Credit
Agreement and all Guarantees issued under the Reimbursement Agreement would have
been terminated and any warrants issued to the Guarantors in connection with the
transactions contemplated by the Reimbursement Agreement would have been deemed
terminated. Since the Company borrowed amounts under the Credit Agreement on
February 3, 2003, the Guarantors' guarantees of the subject loan became
effective on February 3, 2003 and the contingency related to the validation of
the warrants was eliminated.

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 which would
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 three and nine months ended September
30, 2003, expense relating to amortized deferred financing costs was
approximately $93 and $909, respectively.

16


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


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

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

Subject to the terms and conditions of the Note and Warrant Purchase
Agreement, the Company issued an aggregate of $30,000 in principal amount of
Notes to the Investors on July 18, 2003. Principal on the Notes is payable in a
single payment on July 18, 2006. The Notes provide for an annual interest rate
of 1.23%, payable in cash quarterly in arrears commencing on October 31, 2003,
unless the Company elects to defer payment of such interest and pay it together
with the principal amount of the Notes at maturity on July 18, 2006. Pursuant to
the terms of the Security Agreement, the Company's obligations under the Notes
are secured by a security interest in a majority of the personal property and
assets of the Company and certain of its subsidiaries. Interest expense accrued
on the Notes for the three and nine months ended September 30, 2003 approximated
$74. The Company elected, on or about October 31, 2003, to defer the interest
payments until further notice.

Subject to the terms and conditions of the Note and Warrant Purchase
Agreement, the Company issued a warrant (the "Initial Warrant") to purchase
12,950,000 shares of its common stock to Deutsche Bank. Deutsche Bank may not
exercise or transfer the Initial Warrant until the issuance of the Additional
Warrants (as defined below), except in certain circumstances set forth in the
Note and Warrant Purchase Agreement.

The Company agreed to issue to the Investors (or their assignees) the
remaining Warrants (the "Additional Warrants") to purchase an aggregate of
144,944,737 shares of its common stock after the following conditions have been
met:

o Receipt of stockholder approval of (i) amendments to the Company's
certificate of incorporation to, among other things, increase the
authorized number of shares of the Company's common stock, and (ii)
the issuance of the Additional Warrants (collectively, the "Required
Stockholder Approvals"); and

o Receipt of regulatory approvals from certain state public utility
commissions.

17


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


In connection with the Note and Warrant Purchase Agreement, certain
holders of the Company's Series X Preferred Stock and Series Y Preferred Stock
entered into a voting agreement which obligated them to vote in favor of the
Required Stockholder Approvals. The Company obtained the Required Stockholder
Approvals at its 2003 annual meeting of stockholders on October 14, 2003, but
still had not received all required regulatory approvals from certain state
public utility commissions as of that time.

The proceeds from the sale of the Notes and Warrants will be (and portions
already have been) used by the Company for general corporate purposes, including
acquisitions, the roll out of the Company's integrated voice and data service
product offering, the expansion of the Company's sales and marketing activities
and repayment of certain debt and lease obligations. As of September 30, 2003,
the Company has paid approximately $10,200 for the complete repayment of
approximately $14,600 of its debt and lease obligations.

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

On July 18, 2003, the Company recorded the Note and Warrant transactions
in accordance with Accounting Principals Board Opinion No. 14, "ACCOUNTING FOR
CONVERTIBLE DEBT AND DEBT ISSUED WITH STOCK PURCHASE WARRANTS," whereby a fair
value was ascribed to the 157,894,737 Warrants to be issued to the Investors
(related to the Note and Warrant Purchase Agreement) together with the 2,260,909
warrants to be issued to VantagePoint (related to VantagePoint's increased
guarantee under Amendment No. 1 to the Reimbursement Agreement) using a
Black-Scholes valuation model with the following assumptions: (i) a risk free
interest rate of 2.24% (three-year Treasury rate), (ii) a zero dividend yield,
(iii) a three-year life, (iv) an expected volatility of 152%, (v) a warrant
option price of $0.38 per share for the 157,894,737 Warrants and $0.4423 per
share for the 2,260,909 warrants and (vi) a current market price of $0.83 (the
closing price of the Company's common stock on July 18, 2003) per share. A fair
value was ascribed to the Notes using a present value method with a 19% discount
rate. The relative fair value of the warrants representing 87% of the combined
fair value of the warrants and Notes was applied to the $30,000 proceeds to
determine a note discount of approximately $26,063, which was recorded as a
reduction to the Notes payable and an increase to additional paid in capital.
The note discount will be amortized to interest expense using the "Effective
Interest Method" of amortization over the 36 month term of the Notes. For the
three and nine months ended September 30, 2003, approximately $509 of this note
discount has been amortized to interest expense.


8. Commitments and Contingencies

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

18


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


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

Effective May 1, 2003, the Company entered into a 35 month lease for
office space in Herndon, Virginia, with minimum lease payments of approximately
$164 in 2003, $256 in 2004, $268 in 2005 and $68 in 2006.

Under the Company's facility operating leases, minimum office facility
operating lease payments are approximately $1,638 in 2003, $2,000 in 2004, $766
in 2005, $233 in 2006, $169 in 2007 and $28 in 2008. The Company also has
long-term purchase commitments with MCI, AT&T (which commitment ends in October,
2003), Sprint and other vendors for data transport and other services with
minimum payments due even if its usage does not reach the minimum amounts.
Minimum payments under its long-term purchase commitments are approximately
$3,668 in 2003, $2,396 in 2004 and $57 in 2005.

In July, 2003, the Company paid $2,600 in full settlement of certain
outstanding capital lease obligations approximating $3,728. The difference
between the lease carrying value and the purchase price of the assets,
approximately $1,128, was recorded as a reduction of the carrying value of the
assets acquired under the lease obligation.


9. Mandatorily Redeemable Convertible Preferred Stock

As more fully described in the Company's audited financial statements and
related notes included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2002, the Company entered into a Series X Preferred Stock
Purchase Agreement with VantagePoint on November 14, 2001 (the "Series X
Purchase Agreement"), relating to the sale and purchase of up to an aggregate of
20,000 shares of Series X Preferred Stock at a purchase price of $1,000 per
share. On December 24, 2001, the Company entered into a Series Y Preferred Stock
Purchase Agreement (the "Series Y Purchase Agreement") with Columbia Capital
Equity Partners III, L.P., Columbia Capital Equity Partners II, L.P., The
Lafayette Investment Fund, L.P., Charles River Partnership X, a Limited
Partnership, and N.I.G. Broadslate (collectively with their assigns, the "Series
Y Investors"), relating to the sale and purchase of up to an aggregate of 15,000
shares of Series Y Preferred Stock at a purchase price of $1,000 per share.

19


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


Pursuant to the Series X Purchase Agreement, in November and December
2001, the Company sold an aggregate of 10,000 shares of Series X Preferred Stock
to VantagePoint for total proceeds of $10,000, before direct issuance costs of
approximately $189. Pursuant to the Series X Purchase Agreement, on March 1,
2002, the Company sold an additional 10,000 shares of Series X Preferred Stock
to VantagePoint for total proceeds of $10,000.

Pursuant to the Series Y Purchase Agreement, in December 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 approximately $300, which costs pertain to all funding transactions
under the Series Y Purchase Agreement.

In addition, in December 2001, the Company issued the Promissory Notes to
the Series Y Investors in the aggregate principal amount of $3,531 in exchange
for proceeds of $3,531. The Promissory Notes provided for an annual interest
rate of 12%. In May 2002, in accordance with the terms of the Series Y Purchase
Agreement, the Company sold 8,531 additional shares of Series Y Preferred Stock
for $5,000 in cash and delivery of the Promissory Notes for cancellation. All
accrued interest on the Promissory Notes, of approximately $145, was forgiven
(Note 7).

The Series X Preferred Stock and Series Y Preferred Stock activity during
the nine months ended September 30, 2002 is summarized as follows:

MANDATORILY
REDEEMABLE CONVERTIBLE PREFERRED STOCK
------------------------------------------
SERIES X SERIES Y
-------------------- --------------------
SHARES AMOUNT SHARES AMOUNT
-------- ---------- -------- ----------

Balance December 31, 2001 10,000 $ 436 6,469 $ 34

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

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

Accrued dividends on Series X and Y Preferred Stock 1,600 923

Accretion of beneficial conversion feature of Series X
and Y Preferred Stock 4,431 2,637
-------- ---------- -------- ----------
Balance September 30, 2002 20,000 $ 6,467 15,000 $ 3,594
======== ========== ======== ==========


20


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

The Series X Preferred Stock and Series Y Preferred Stock activity during
the nine months ended September 30, 2003 is summarized as follows:

MANDATORILY
REDEEMABLE CONVERTIBLE PREFERRED STOCK
------------------------------------------
SERIES X SERIES Y
------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------- ---------- -------- ----------

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

Conversion of Series Y Preferred Stock to common stock (9,950) (5,226)

Payment of dividends on converted Series Y Preferred Stock (1,793)

Accrued dividends on Series X and Y Preferred Stock 1,800 1,345

Accretion of beneficial conversion feature of Series X
and Y Preferred Stock 4,336 3,464
-------- ---------- -------- ----------
Balance September 30, 2003 20,000 $ 14,877 5,050 $ 3,171
======== ========== ======== ==========


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


As part of the agreements negotiated in conjunction with the Company's
$30,000 financing on July 18, 2003 (Note 7), 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. Also, as a result of this
financing transaction, on July 18, 2003, in accordance with the terms of the
Series Y Preferred Stock, 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).

During the three months ended September 30, 2003, 88 shares of Series Y
Preferred Stock were converted into 176,000 shares of the Company's common stock
at a conversion price of $0.50 per share and, in accordance with the terms of
the Series Y Preferred Stock, the Company elected to pay accrued dividends
approximating $11 by issuing 22,431 shares of its common stock, based on an
average fair market value for the ten days preceding conversion of approximately
$0.51 per share.

During the three months ended September 30, 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.

21


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


10. Related Party Transactions

As of September 30, 2003, primarily resulting from the $30,000 financing
transaction and guarantees issued under the Reimbursement Agreement (Note 7),
VantagePoint had options and warrants issued and to be issued to acquire
approximately 53,364,628 shares of the Company's common stock. In addition,
VantagePoint owned approximately 463,357 shares of the Company's common stock
and 20,000 shares of the Company's Series X Preferred Stock which are
convertible into approximately 111,111,111 shares of common stock (Note 9). As a
result, VanatagePoint beneficially owned the equivalent of approximately
164,939,096 shares of the Company's common stock. Two affiliates of VantagePoint
are members of the Company's Board of Directors.

As of September 30, 2003, as a result of the $30,000 financing
transaction (Note 7), Deutsche Bank has warrants issued and to be issued to
acquire approximately 118,421,053 shares of the Company's common stock. Two
affiliates of Deutsche Bank are members of the Company's Board of Directors.

During the third quarter of 2003, the Series Y Investors (including
Columbia) converted 9,950 shares of Series Y Preferred Stock into approximately
24,572,278 shares of the Company's common stock (including shares issued as
payment for accrued dividends) (Note 9). As of September 30, 2003, the Series Y
Investors (including Columbia) owned 5,050 shares of Series Y Preferred Stock
which are convertible into approximately 11,417,590 shares of common stock (Note
9). In addition, resulting from guarantees issued under the Reimbursement
Agreement (Note 7), Columbia had warrants to acquire approximately 1,803,279
shares of the Company's common stock. An affiliate of Columbia was a member of
the Company's Board of Directors until August 5, 2003.












22


(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

The following discussion of the financial condition and results of
operations of DSL.net should be read in conjunction with the financial
statements and the related notes thereto included elsewhere in this Form 10-Q
and the interim unaudited financial statements and notes thereto filed on Forms
10-Q for the quarterly periods ending March 31, 2003 and June 30, 2003, and the
audited financial statements and notes thereto and Management's Discussion and
Analysis of Financial Condition and Results of Operations included in our Annual
Report on Form 10-K for the year ended December 31, 2002, which has been filed
with the Securities and Exchange Commission (the "SEC").

OVERVIEW

We combine our own 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 we have not
deployed our own equipment, we utilize the local facilities of other carriers to
provide service. DSL.net product offerings include T-1 and business-class DSL
network connectivity and Internet access services, virtual private networks
(VPNs), frame relay, Web hosting, domain name services management, enhanced
e-mail, online data backup and recovery services, firewalls and nationwide
dial-up services, as well as integrated voice and data offerings in select
markets.

In December of 2002, the U.S. Bankruptcy Court for the District of
Delaware approved our bid to purchase certain network assets, equipment and
associated subscriber lines of Network Access Solutions Corporation ("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 certain of NAS's
network assets, equipment in approximately 300 central offices and approximately
11,500 associated subscriber lines (the "NAS Assets"), pursuant to that certain
Amended and Restated Asset Purchase Agreement, dated as of December 11, 2003, by
and among the Company, NAS, Network Access Solutions LLC, NASOP, Inc., and
Adelman, Lavine, Gold and Levin (the "NAS Asset Purchase Agreement"). The cash
portion of the purchase price was paid from our existing cash. In accordance
with the NAS Asset Purchase Agreement, we negotiated a $1,083 reduction in the
cash paid at the closing, representing our portion of January revenue which was
billed and collected by NAS, bringing the net cash paid for the NAS Assets to
$7,917. 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. On July 21, 2003 we paid
$1,500 into escrow as the negotiated repurchase and cancellation of the $5,000
note issued by us to NAS. The payment was subject to approval by the bankruptcy
court overseeing the NAS estate. The bankruptcy court approved the transaction
on August 25, 2003 and the amounts were released from escrow to consummate the
transaction. The difference between the $5,000 note and the $1,500 settlement
amount was recorded as other income during the third quarter 2003.

NAS provided high-speed Internet and virtual private network services to
business customers using DSL, frame relay and T-1 technology via its own network
facilities in the Northeast and Mid-Atlantic markets. The acquisition
significantly increased our subscriber base and our facilities-based footprint
in one of the largest business markets in the United States, providing us with
increased opportunities to sell more higher-margin facilities-based services.

The acquisition has been accounted for under the purchase method of
accounting in accordance with Statement of Financial Accounting Standards
("SFAS") No. 141 "BUSINESS COMBINATIONS"

23


(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


("SFAS 141"). The results of NAS's operations have been included in our
consolidated financial statements since January 10, 2003 (the acquisition date).
The allocated estimated fair values of the acquired assets at the date of
acquisition exceeded the purchase price and, accordingly, have been written down
on a pro-rata basis by asset group to the purchase price of approximately
$14,750 ($14,000 plus associated direct acquisition costs of approximately $750)
as follows: (i) intangible assets pertaining to approximately 11,500 acquired
subscriber lines of $1,476, and (ii) property and equipment of $13,274. We are
still in the process of finalizing estimates of certain property and equipment
and, thus, the allocation of the purchase price is subject to further
adjustment.

As reflected in our audited financial statements and related notes
included in our Annual Report on Form 10-K for the year ended December 31, 2002,
we incurred operating losses of approximately $35,821 and negative operating
cash flows of approximately $17,706 during the year ended December 31, 2002.
During the nine months ended September 30, 2003, we incurred operating losses of
approximately $22,479 and negative operating cash flows of approximately $6,975.
These operating losses and negative operating cash flows have been financed
primarily by proceeds from equity and note issuances. We had accumulated
deficits of approximately $284,491 at December 31, 2002 and $311,545 at
September 30, 2003.

We expect our operating losses, net operating cash outflows and capital
expenditures to continue through 2003 and into 2004. We successfully completed
rounds of private equity and bridge loan financings totaling approximately
$35,000 as follows: approximately $20,000 in the fourth quarter of 2001, $10,000
in March 2002, and $8,531 in May 2002 (which, after cancellation of the bridge
loans, yielded net proceeds of approximately $5,000). In addition, on July 18,
2003, we raised approximately $30,000 in additional financing. We believe that
our existing cash and cash expected to be generated from operations will be
sufficient to fund our operating losses, capital expenditures, and working
capital requirements into at least the end of 2004, based on our current
business plans and projections. We intend to use these cash resources to finance
our capital expenditures and for our working capital and other general corporate
purposes. We may also use a portion of these cash resources to acquire
complementary businesses, subscriber lines and other assets. The amounts
actually expended for these purposes will vary significantly depending on a
number of factors, including market acceptance of our services, revenue growth,
planned capital expenditures, cash generated from operations, improvements in
operating productivity, the extent and timing of entry into new markets, and
availability and prices paid for acquisitions. Failure to generate sufficient
revenues, contain certain discretionary spending or achieve certain other
business plan objectives could have a material adverse affect on our results of
operations and financial position.


CRITICAL ACCOUNTING POLICIES, ESTIMATES AND RISKS

Financial Reporting Release No. 60, which was released in December 2001 by
the Securities and Exchange Commission (the "SEC"), requires all companies to
include a discussion of critical accounting policies or methods used in the
preparation of financial statements. Note 2 to our audited financial statements
included in our Annual Report on Form 10-K for the year ended December 31, 2002,
which has been filed with the SEC, includes a complete summary of the
significant accounting policies and methods used in the preparation of our
financial statements. The following is a brief discussion of the more
significant accounting policies and methods used by us.

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

24


(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


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

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

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

REVENUE RECOGNITION

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

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

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

25


(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


GOODWILL AND OTHER LONG-LIVED ASSETS

We account for our long-lived assets 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. If undiscounted
expected future cash flows are less than the carrying value of the assets, an
impairment loss is to be recognized based on the fair value of the assets.

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

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

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

ALLOWANCE FOR DOUBTFUL ACCOUNTS

We maintain an allowance for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. We
principally sell our services directly to end users mainly consisting of small
to medium sized businesses, as opposed to selling to Internet service providers
("ISPs") who then resell such services. We believe that we do not have
significant exposure or concentrations of credit risk with respect to any given
customer. However, if the country or any region we service experiences an
economic downturn, the financial condition of our customers could be adversely
affected, which could result in their inability to make payments to us. This
could require additional provisions for allowances. In addition, a negative
impact on revenue related to those customers may occur.

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

INCOME TAX

We use 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

26


(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


recognized for the expected future tax consequences of temporary differences
between the carrying amounts and the tax basis of assets and liabilities and net
operating loss carryforwards, all calculated using presently enacted tax rates.

We have not generated any taxable income to date and, therefore, have not
paid any federal income taxes or state taxes based on income, since inception.
Our state and federal net operating loss carryforwards begin to expire in 2004
and 2019, respectively. Use of our net operating loss carryforwards may be
subject to significant annual limitations resulting from a change in control due
to our sales of Series X Preferred Stock and Series Y Preferred Stock in 2001
and 2002 and from the sale of $30,000 in notes and warrants in 2003. We are
currently assessing the potential impact resulting from these transactions. We
have provided a valuation allowance for the full amount of the net deferred tax
asset since management has not determined that these future benefits will more
likely than not be realized.

LITIGATION

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

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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

In December 2002, SFAS No. 148 "ACCOUNTING FOR STOCK-BASED COMPENSATION -
TRANSITION AND DISCLOSURE - AN AMENDMENT OF SFAS NO. 123" ("SFAS 148") was
issued. SFAS 148 amends SFAS No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION"
("SFAS 123"), to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS
123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. As provided for in SFAS
148, we have elected not to transition to the fair value based method of
accounting for stock based employee compensation; we have, however, adopted the
amended disclosure requirements provided under SFAS 148 and incorporated those
requirements into our financial statements included in this Form 10-Q under the
heading "Incentive Stock Award Plans".

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT
GUARANTEES OF INDEBTEDNESS OF OTHERS," ("FIN 45"). FIN 45 expands previously
issued accounting guidance and disclosure requirements for certain guarantees.
FIN 45 requires an entity to recognize an initial liability for the fair value
of an obligation assumed by issuing a guarantee. The disclosure requirements of
FIN 45 are effective for all financial statements issued after December 15,
2002. The provision for initial

27


(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


recognition and measurement of the liability will be applied on a prospective
basis to guarantees issued or modified after December 31, 2002. The adoption of
FIN 45 did not have a material adverse impact on our financial position or
results of operations.

In May 2003, the FASB issued SFAS No. 150, "ACCOUNTING FOR CERTAIN
FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY"
("SFAS 150"). SFAS 150 establishes standards for the classification and
measurement of certain financial instruments with characteristics of both
liabilities and equity. The changes are intended to result in a more complete
depiction of an entity's liabilities and equity and will, thereby, assist
investors and creditors in assessing the amount, timing, and likelihood of
potential future cash outflows and equity share issuances. This Statement also
requires that certain obligations that could be settled by issuance of an
entity's equity but lack other characteristics of equity be reported as
liabilities even though the obligation does not meet the definition of a
liability. The requirements of SFAS 150 became effective for us for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. SFAS 150 is to be implemented by reporting the cumulative effect of a
change in an accounting principle for financial instruments created before the
issuance date of the statement and still existing at the beginning of the
interim period of adoption. We have evaluated the impact of SFAS 150 to
determine the effect it may have on our consolidated results of operations,
financial position and have concluded that the adoption of this statement is not
expected to have a material affect on our financial position or results of
operations.


RESULTS OF OPERATIONS

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

Revenue for the three months ended September 30, 2003 increased by 62% to
approximately $18,227, from approximately $11,262 for the three months ended
September 30, 2002. Revenue for the nine months ended September 30, 2003
increased by 55% to approximately $53,089, from approximately $34,239 for the
nine months ended September 30, 2002. The increase in revenue in 2003 was
primarily due to an increase in subscriber lines resulting from our acquisition
of the NAS Assets. The actual revenue attributable to customer lines acquired
for the three months ended September 30, 2002 and 2003 was approximately $608
and $5,925, respectively. For the nine months ended September 30, 2002 and 2003,
actual revenue attributable to customer lines acquired was approximately $1,392
and $18,036, respectively. We expect revenue to continue to increase in 2003 as
compared to 2002 as a result of our acquisition of the NAS Assets, and as we
continue our sales and marketing efforts, introduce additional services,
including our integrated voice and data service offering, and, possibly, acquire
additional businesses and/or subscriber lines.

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

28


(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


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 increase as the volume
of data communications traffic generated by our customers increases.

Network expenses for the three months ended September 30, 2003 increased
approximately 62%, to approximately $13,070, compared to approximately $8,079
for the three months ended September 30, 2002. This increase of approximately
$4,991 was primarily attributable to increased telecommunications expenses of
approximately $4,514 and increased network engineering and field operations
personnel expenses of approximately $309 resulting from our acquisition of the
NAS Assets, as well as increased subcontract labor and consulting fees of
approximately $301, partially offset by decreased other expenses of
approximately $133. For the nine months ended September 30, 2003, network
expenses increased approximately 53%, to approximately $38,412, compared to
approximately $25,157 for the nine months ended September 30, 2002. This
increase of approximately $13,255 was primarily attributable to increased
telecommunications expenses of approximately $12,039 and increased network
engineering and field operations personnel expenses of approximately $874
resulting from our acquisition of the NAS Assets. The increase was also
attributable to increased subcontract labor and consulting fees of approximately
$579 related to increased customer installations and the elimination of certain
duplicate central offices, and was partially offset by net decreases in
miscellaneous other expenses of approximately $237. We expect our network
expenses, including costs for subscriber lines, to increase in 2003, as compared
to 2002, as a result of our acquisition of the NAS Assets, and as we add
customers.

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 three months ended September 30, 2003 were
approximately $3,060, compared to operations expenses for the three months ended
September 30, 2002 of approximately $1,966. This 56% increase of approximately
$1,094 was primarily due to increases in operations personnel expenses of
approximately $543, other outside services of approximately $374 and other
miscellaneous expenses of approximately $177. Operations expenses for the nine
months ended September 30, 2003 were approximately $8,935, compared to
operations expenses for the nine months ended September 30, 2002 of
approximately $6,071. This 47% increase of approximately $2,864 was primarily
due to increases in operations personnel expenses of approximately $1,701, other
outside services of approximately $716 and other miscellaneous expenses of
approximately $447. We expect our operations expenses to continue to increase in
future periods, as compared to 2002, as a result of increased costs associated
with our acquisition of the NAS Assets.

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

General and administrative expenses were approximately $2,618 for the
three months ended September 30, 2003, compared to general and administrative
expenses for the three months ended September 30, 2002 of approximately $2,305.
This 14% increase of approximately $313 was primarily due to increases in
property and corporate related taxes of approximately $867 (as further discussed
below) and increases in miscellaneous expenses of approximately $54, partially
offset by decreases in professional and consulting services of approximately
$344 and decreases in bad debt expense of approximately $264. For the nine
months ended September 30, 2003, general and administrative expenses were
approximately $8,891, compared to general and administrative expenses for the
nine months ended September 30, 2002 of approximately $9,081. This 2%

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reduction of approximately $190 was primarily due to decreases in executive
bonus expense of approximately $280, decreases in insurance expense of
approximately $216, decreases in bad debt related expenses of approximately
$332, and decreases in other expenses of $157. These were partially offset by
increases in professional and consulting services of approximately $105 and
increases in property and corporate related taxes of approximately $690. The
increase in taxes resulted from lower research and development expenditure
credits received of approximately $850 (as further discussed below) partially
offset by lower tax expenses of approximately $160.

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

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 for the three months ended September 30, 2003
were approximately $2,116, compared to sales and marketing expenses for the
three months ended September 30, 2002 of approximately $1,870, representing a
13% increase of approximately $246. The increase in sales and marketing expenses
was primarily attributable to increased salaries, benefits and commissions
approximating $417 resulting from our acquisition of the NAS Assets, partially
offset by decreased advertising, direct mail marketing and referrals fees of
approximately $165 and decreased miscellaneous expenses of approximately $6.
Sales and marketing expenses for the nine months ended September 30, 2003 were
approximately $6,238, compared to sales and marketing expenses for the nine
months ended September 30, 2002 of approximately $4,644, representing a 34%
increase of approximately $1,594. The increase in sales and marketing expenses
was primarily attributable to increased salaries, benefits and commissions
approximating $1,486 resulting from our acquisition of the NAS Assets, increased
advertising, direct mail marketing and referral fees of approximately $46, and
increased miscellaneous expenses of approximately $62. We expect our sales and
marketing expenses to increase in future periods, as compared to 2002, primarily
as a result of our acquisition of the NAS Assets and increased sales and
marketing activities.

STOCK COMPENSATION. We incurred non-cash stock compensation expenses as a
result of the granting of stock and stock options to employees, directors and
members of our former board of advisors with exercise prices per share
subsequently determined to be below the fair values per share of our common
stock for financial reporting purposes at the dates of grant. The stock
compensation, if vested, was charged immediately to expense, while non-vested
compensation is being amortized over the vesting period of the applicable
options or stock, which is generally 48 months. Unvested options for terminated
employees are cancelled and the value of such options are recorded as a
reduction of deferred compensation with an offset to additional paid-in-capital.

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Non-cash stock compensation expense was approximately $0 and $295 for the
three months ended September 30, 2003 and 2002, respectively. For the nine
months ended September 30, 2003 and 2002, non-cash stock compensation expense
was approximately $438 and $937, respectively. These expenses consisted of
charges and amortization related to stock options and restricted stock granted
to our employees and directors and became fully amortized during the second
quarter of 2003. The unamortized balances as of December 31, 2002 and September
30, 2003 were approximately $437 and $0, respectively.

As of December 31, 2002 and September 30, 2003, options to purchase
23,877,004 and 17,993,260 shares of common stock, respectively, were
outstanding, which were exercisable at weighted average exercise prices of $0.98
per share and $1.09 per share, respectively.

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

Depreciation and amortization expenses were approximately $3,319 for the
three months ended September 30, 2003, compared to depreciation and amortization
expenses of approximately $5,138 for the three months ended September 30, 2002.
The 35% decrease in depreciation and amortization expenses of approximately
$1,819 was primarily attributable to certain intangible and fixed assets having
become fully depreciated and amortized during 2002 and 2003, resulting in a
decline in depreciation and amortization expense of approximately $2,695, which
was partially offset by increased depreciation and amortization expenses
relating to our acquisition of the NAS Assets of approximately $876.
Depreciation and amortization expenses were approximately $12,654 for the nine
months ended September 30, 2003, compared to depreciation and amortization
expenses of approximately $15,526 for the nine months ended September 30, 2002.
The 18% decrease in depreciation and amortization expenses of approximately
$2,872 was primarily attributable to certain intangible and fixed assets having
become fully depreciated and amortized during 2002 and 2003, resulting in a
decline in depreciation and amortization expense of approximately $5,419, which
was partially offset by increased depreciation and amortization expenses
relating to our acquisition of the NAS Assets and associated subscriber lines of
approximately $2,547.

Our identified intangible assets consist of customer lists, which are
amortized over two years. Amortization expense of intangible assets for the
three and nine months ended September 30, 2002 was approximately $1,388 and
$4,082, respectively. For the three and nine months ended September 30, 2003,
amortization expense of intangible assets was approximately $345 and $2,395,
respectively. Accumulated amortization of customer lists as of September 30,
2002 and 2003 was $14,404 and $18,067, respectively. The expected future
amortization of customer lists as of September 30, 2003 is $350 in 2003, $925 in
2004 and $38 in 2005.

Depreciation expenses pertaining to assets related to network and
operations expenses were approximately $2,666 and $3,390 for the three months
ended September 30, 2003 and 2002, respectively, and approximately $9,279 and
$10,520 for the nine months ended September 30, 2003 and 2002, respectively.
Depreciation and amortization expenses pertaining to assets related to general
and administrative expenses were approximately $653 and $1,748 for the three
months ended September 30, 2003 and 2002, respectively, and approximately $3,375
and $5,006 for the nine months ended September 30, 2003 and 2002, respectively.

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Also, in accordance with SFAS 142, we discontinued amortization of
goodwill beginning January 1, 2002, and completed an impairment review during
January and December of 2002. We did not record any impairment adjustments
resulting from these impairment reviews and will continue to make annual
reviews, unless a change in circumstances requires a review in the interim.

INTEREST EXPENSE, NET. Net interest expense of approximately $728 for the
three months ended September 30, 2003 included approximately $779 of interest
expense, which was partially offset by approximately $51 in interest income. Net
interest expense of approximately $70 for the three months ended September 30,
2002 included approximately $174 of interest expense, which was partially offset
by approximately $104 of interest income. The increase in net interest expense
of approximately $658 was primarily attributed to the amortization of deferred
non-cash financing costs of approximately $509 which related to the warrants
issued under the Note and Warrant Purchase Agreement (discussed below), accrued
interest on the Notes of approximately $74, the amortization of deferred
non-cash financing costs of approximately $93 which related to the warrants
issued in consideration for loan guarantees under our Reimbursement Agreement
(discussed below), and increased interest expense of approximately $80
pertaining to the note payable to NAS and borrowings under the Credit Agreement
(discussed below), decreased interest income of approximately $53 due to lower
interest rates, partially offset by decreased other interest expense of
approximately $151, primarily due to lower outstanding capital lease balances.

Net interest expense of approximately $2,139 for the nine months ended
September 30, 2003 included approximately $2,228 of interest expense, which was
partially offset by approximately $89 in interest income. Net interest expense
of approximately $306 for the nine months ended September 30, 2002 included
approximately $580 of interest expense, which was partially offset by
approximately $274 of interest income. The increase in net interest expense of
approximately $1,833 was primarily attributable to the amortization of deferred
non-cash financing costs of approximately $509 which related to the warrants
issued under the Note and Warrant Purchase Agreement (discussed below), accrued
interest on the Notes of approximately $74, the amortization of deferred
non-cash financing costs of approximately $909 which related to the warrants
issued in consideration for loan guarantees under our Reimbursement Agreement
(discussed below), and increased interest expense of approximately $435
pertaining to the note payable to NAS and borrowings under the Credit Agreement
(discussed below), decreased interest income of approximately $184 due to lower
cash balances, and lower interest rates, partially offset by decreased other
interest expense of approximately $278.

OTHER (EXPENSE) INCOME, NET. Net other expense was approximately $2,427
for the three months ended September 30, 2003 compared to net other income of $2
for the three months ended September 30, 2002, an increase of $2,429. Net other
expense was approximately $2,436 for the nine months ended September 30, 2003
compared to net other income of $177 for the nine months ended September 30,
2002, a change of $2,613. The expense increases for the three and nine month
periods were primarily attributable to the write-off of approximately $184 in
unamortized loan origination fees and approximately $5,747 of unamortized
deferred non-cash financing costs which related to the warrants issued in
consideration for loan guarantees under our Reimbursement Agreement (discussed
below). These items were written-off as a result of the loan repayment and
cancellation of the Credit Agreement and Reimbursement Agreement subsequent to
our $30,000 financing on July 18, 2003. These write-offs were partially offset
by a non-cash gain of $3,500 recorded in August 2003, resulting from the $1,500
settlement of the $5,000 note payable to NAS.

NET LOSS. Net loss was approximately $9,111 and $8,459 for the three
months ended September 30, 2003 and 2002, respectively, and approximately
$27,054 and $27,306 for the nine months ended September 30, 2003 and 2002,
respectively.

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(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


LIQUIDITY AND CAPITAL RESOURCES

We have financed our capital expenditures and operations primarily with
the proceeds from the sale of stock and from borrowings, including equipment
lease financings. As of September 30, 2003, we had cash and cash equivalents of
approximately $21,086 and working capital of approximately $9,371.

Net cash provided by financing activities for the nine months ended
September 30, 2003 was approximately $27,325, primarily related to the Note and
Warrant Purchase Agreement we entered into in July 2003. Net cash provided by
financing activities for the nine months ended September 30, 2002 of
approximately $12,790 resulted from the sale of our preferred stock. We have
used, and intend to continue using, proceeds from our financings for general
corporate purposes. We have used, and may in the future use, a portion of such
proceeds to acquire complementary businesses or assets.

In July 2000, we entered into a 48-month lease agreement with an equipment
vendor to finance the purchase of network equipment. We had leased approximately
$8,900 under this agreement and in July 2003 we negotiated a prepaid settlement
to pay off all remaining amounts owed under this lease obligation. 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 agreement bore interest at 12% per annum and were secured by the financed
equipment. In addition, during 1999 and 2000, we purchased and assumed through
acquisition certain equipment and computer software under other capital leases,
which are being repaid over periods ranging from 24 months to 60 months at
annual interest rates ranging from 7.5% to 15%. In the aggregate, there was
approximately $4,565 and $186, outstanding under capital leases at December 31,
2002 and September 30, 2003, respectively.

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

In December 2001, in conjunction with our sale of 6,469 shares of
mandatorily redeemable convertible Series Y preferred stock (the "Series Y
Preferred Stock"), we issued short-term promissory notes (the "Promissory
Notes") for aggregate proceeds of $3,531 to the holders of shares of Series Y
Preferred Stock. The Promissory Notes provided for an annual interest rate of
12%. In May 2002, in accordance with the terms of the Series Y Purchase
Agreement, we sold an additional 8,531 shares of Series Y Preferred Stock for
$5,000 in cash and delivery of the Promissory Notes for cancellation. All
accrued interest on the Promissory Notes, of approximately $145, was forgiven.

We entered into a Revolving Credit and Term Loan Agreement, dated as of
December 13, 2002 (the "Credit Agreement"), with a commercial bank providing for
a revolving line of credit of up to $15,000 (the "Commitment"). Borrowings and
repayments under the Credit Agreement could be made until the revolving credit
maturity date of December 12, 2004, at which time all amounts outstanding would
convert into a term loan payable in twelve quarterly installments. Interest was
payable on all amounts outstanding under the Credit Agreement in arrears at the
end of each calendar quarter at a variable interest rate equal to the higher of
the bank's prime rate equivalent or 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 acceptable to the bank and to
certain other conditions set forth in the Credit Agreement. On February 3, 2003,
we borrowed $6,100 under the Credit Agreement. As of March 3, 2003, 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.

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(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


We entered into a Reimbursement Agreement, dated as of December 27, 2002,
with several private investment funds affiliated with VantagePoint Venture
Partners (collectively, "VantagePoint"), Columbia Capital Equity Partners
("Columbia"), The Lafayette Investment Fund, L.P. and Charles River Partnership,
L.P. (collectively the "Guarantors") and VantagePoint Venture Partners III (Q),
L.P., as administrative agent (the "Reimbursement Agreement"). The Guarantors
were all holders of or affiliates of holders of our Series X Preferred Stock and
Series Y Preferred stock. Pursuant to the terms of the Reimbursement Agreement,
on December 27, 2002, VantagePoint and Columbia issued guarantees in an
aggregate amount of $6,100 to support certain of our obligations under the
Credit Agreement. The Reimbursement Agreement obligated us to reimburse the
Guarantors for any payments they may be required to make in accordance with
their guarantees. Our obligations under the Reimbursement Agreement were also
guaranteed by certain of our wholly-owned subsidiaries and collateralized by an
Agency, Guaranty and Security Agreement by and among the Company, certain of the
Company's subsidiaries, Deutsche Bank Trust Company Americas, as administrative
agent, and the Investors (as defined below), pursuant to which the Company and
certain of our wholly-owned subsidiaries pledged a significant portion of our
consolidated assets as collateral (the "Security Agreement").

Pursuant to the terms of the Reimbursement Agreement, on December 27,
2002, we issued warrants to purchase 12,013,893 shares of our common stock to
VantagePoint and Columbia, in consideration for their guarantees aggregating
$6,100. All such warrants have a ten year life and an exercise price of $0.50
per share. On March 26, 2003, we issued additional warrants, exercisable for ten
years, to purchase a total of 936,107 shares of our common stock at $0.50 per
share, to VantagePoint and Columbia, bringing the total number of warrants
issued in connection with the Reimbursement Agreement to 12,950,000. Pursuant to
the terms of the Reimbursement Agreement, in the event that we did not borrow
any loans under the Credit Agreement on or before March 31, 2003, the Credit
Agreement and all guarantees issued under the Reimbursement Agreement would have
terminated and any warrants issued to the Guarantors in connection with the
transactions contemplated would have been terminated. Since we borrowed amounts
under the Credit Agreement on February 3, 2003, the Guarantors' guarantees of
the subject loan became effective on February 3, 2003 and the contingency
related to the validation of the warrants was eliminated.

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 $5,737 of the related
unamortized balance of deferred financing costs to other expense. For the three
and nine months ended September 30, 2003, expense relating to amortized deferred
financing costs approximated $93 and $909, respectively.

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

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(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


equity financing on or before December 3, 2003, we were authorized to issue
VantagePoint additional warrants to purchase the type of equity securities
issued by us in such equity financing. The number of such additional warrants
would be determined by dividing $1,000 by the per share price of such equity
securities. Accordingly, since we closed a financing on July 18, 2003, we intend
to issue to VantagePoint additional warrants to purchase 2,260,909 shares of our
common stock at a per share price of $0.4423.

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

Subject to the terms and conditions of the Note and Warrant Purchase
Agreement, we issued an aggregate of $30,000 in principal amount of Notes to the
Investors on July 18, 2003. Principal on the Notes is payable in a single
payment on July 18, 2006. The Notes provide for an annual interest rate of
1.23%, payable in cash, quarterly in arrears commencing on October 31, 2003,
unless we elect to capitalize such interest and pay it together with the
principal amount of the Notes at maturity on July 18, 2006. Pursuant to the
Security Agreement, our obligations under the Notes are secured by a security
interest in a majority of our personal property and assets and certain of our
subsidiaries. Interest expense accrued on the Notes for the three and nine
months ended September 30, 2003 approximated $74. We elected on or about October
31, 2003, to defer the interest payments until further notice.

Subject to the terms and conditions of the Note and Warrant Purchase
Agreement, we issued a warrant (the "Initial Warrant") to purchase 12,950,000
shares of our common stock to Deutsche Bank. Deutsche Bank may not exercise or
transfer the Initial Warrant until the issuance of the Additional Warrants (as
defined below), except in certain circumstances set forth in the Note and
Warrant Purchase Agreement.

We agreed to issue to the Investors (or their assignees) the remaining
Warrants (the "Additional Warrants") to purchase an aggregate of 144,944,737
shares of our common stock after the following conditions have been met:

o Receipt of stockholder approval of (i) amendments to our certificate
of incorporation to, among other things, increase the authorized
number of shares of our common stock, and (ii) the issuance of the
Additional Warrants (collectively, the "Required Stockholder
Approvals"); and

o Receipt of regulatory approvals from certain state public utility
commissions.

In connection with the Note and Warrant Purchase Agreement, certain
holders of our Series X Preferred Stock and Series Y Preferred Stock entered
into a voting agreement which obligated them to vote in favor of the Required
Stockholder Approvals. We obtained the Required Stockholder Approvals at our
2003 annual meeting of stockholders on October 14, 2003, but still had not
received all required regulatory approvals from certain state public utility
commissions as of such date.

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(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


The proceeds from the sale of the Notes and Warrants will be (and portions
already have been) used by us for general corporate purposes, including
acquisitions, the expansion of our sales and marketing activities and repayment
of certain debt and lease obligations. As of September 30, 2003, we have paid
approximately $10,200 for the complete repayment of approximately $14,600 of our
debt and lease obligations.

On July 18, 2003, we recorded the Note and Warrant transactions in
accordance with Accounting Principals Board Opinion No. 14, "ACCOUNTING FOR
CONVERTIBLE DEBT AND DEBT ISSUED WITH STOCK PURCHASE WARRANTS," whereby a fair
value was ascribed to the 157,894,737 Warrants to be issued to the Investors
(related to the Note and Warrant Purchase Agreement) together with the 2,260,909
warrants to be issued to VantagePoint (related to VantagePoint's increased
guarantee under Amendment No. 1 to the Reimbursement Agreement) using a
Black-Scholes valuation model with the following assumptions: (i) a risk free
interest rate of 2.24% (three-year Treasury rate), (ii) a zero dividend yield,
(iii) a three-year life, (iv) an expected volatility of 152%, (v) a warrant
option price of $0.38 per share for the 157,894,737 Warrants and $0.4423 per
share for the 2,260,909 warrants, and (vi) a current market price of $0.83 per
share (the closing price of our common stock on July 18, 2003). A fair value was
ascribed to the $30,000 Notes using a present value method with a 19% discount
rate. The relative fair value of the warrants representing 87% of the combined
fair value of the warrants and Notes was applied to the $30,000 proceeds to
determine a note discount of approximately $26,063, which was recorded as a
reduction to the Notes payable and an increase to additional paid in capital.
The note discount will be amortized to interest expense using the "Effective
Interest Method" over the 36 month term of the Notes. For the three and nine
months ended September 30, 2003, approximately $509 of this note discount has
been amortized to interest expense.

On July 18, 2003, in connection with the termination of the Credit
Agreement, the related guarantees by holders of our Series X and Y Preferred
Stock were terminated, along with the related Reimbursement Agreement and
Security Agreement.

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

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

On September 8, 2003, in accordance with the TalkingNets Asset Purchase
Agreement, we completed the transaction to acquire certain assets and
subscribers of TalkingNets (the "TalkingNets Assets") for $726 in cash (the
"TalkingNets Asset Purchase Agreement"). As TalkingNets 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 $726
into escrow. In accordance with the terms of the TalkingNets Asset Purchase
Agreement, we had a transition period of up to 150 days to integrate
TalkingNets' operations into our own operations and obtain all requisite
approvals prior to final closing of the transaction. During the transition
period, we were entitled to the cash collections

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(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


from the proposed acquired customers and were obligated to reimburse TalkingNets
for certain related operating expenses. The excess of TalkingNet's reimbursed
expenses over cash collections, included in our operating expenses during the
transition period for the three and nine months ended September 30, 2003, was
approximately $159 and $394, respectively.

On September 8, 2003, in accordance with the TalkingNets Asset Purchase
Agreement, we completed the transaction to acquire the TalkingNets assets. This
acquisition has been accounted for under the purchase method of accounting in
accordance with SFAS No. 141. The results of TalkingNets' operations have been
included in our consolidated financial statements since September 8, 2003 (the
closing date). The allocated estimated fair values of the acquired assets at the
date of acquisition exceeded the purchase price and, accordingly, have been
written down on a pro-rata basis by asset group to the purchase price of
approximately $851 ($726 plus associated direct acquisition costs of
approximately $125) as follows: (i) certain accounts receivables of $55, (ii)
intangible assets pertaining to approximately 90 acquired subscriber lines of
$58, and (iii) property and equipment of $738. We are still in the process of
finalizing certain estimates of certain property and equipment and, thus, the
allocation of the purchase price is subject to further adjustment.

As a result of the development of our operating infrastructure and
acquisitions, we have entered into certain long-term agreements providing for
fixed payments. Under our facility operating leases, minimum office facility
operating lease payments are approximately $1,638 in 2003, $2,000 in 2004, $766
in 2005, $233 in 2006, $169 in 2007 and $28 in 2008. We also have long-term
purchase commitments with MCI (formerly known as WorldCom), AT&T (which
commitment ends in October, 2003), Sprint and other vendors for data transport
and other services with minimum payments due even if our usage does not reach
the minimum amounts. Minimum payments under our long-term purchase commitments
are approximately $3,668 in 2003, $2,396 in 2004 and $57 in 2005.

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

For the nine months ended September 30, 2003, the net cash used in our
operating activities was approximately $6,975. This cash was used for a variety
of operating expenses, including salaries, network operations, sales, marketing
and promotional activities, consulting and legal expenses, and overhead
expenses.

Net cash used in investing activities for the nine months ended September
30, 2003 was approximately $10,586. Of this amount, approximately $7,917 was
used for the acquisition of the NAS Assets, approximately $1,840 was used for
the purchase of equipment and approximately $826 was used for the acquisition of
the TalkingNets Assets.

37


(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


The development and expansion of our business has required capital
expenditures. Capital expenditures, including collocation fees but excluding
acquisitions, were approximately $1,840 and $1,328 for the nine months ended
September 30, 2003 and 2002, respectively, and customer assets and line
acquisitions were approximately $8,743 and $1,150 for the nine months ended
September 30, 2003 and 2002, respectively. The actual amounts and timing of our
future capital expenditures will vary depending on the speed at which we expand
and implement our network and implement service for our customers. Our planned
capital expenditures for 2003 are currently expected to be primarily for the
upgrade of our network to support our integrated voice and data service
offering. We currently anticipate spending approximately $2,200 to $2,500 for
capital expenditures, excluding acquisitions, during the year ending December
31, 2003. The actual amounts and timing of our capital expenditures could differ
materially both in amount and timing from our current plans.

As discussed above, on July 18, 2003, we raised approximately $30,000 in
additional financing. We believe that our existing cash and cash equivalents and
cash expected to be generated from operations will be sufficient to fund our
operating losses, capital expenditures and working capital requirements at least
until the end of 2004, based on our current business plans and projections. We
intend to use these cash resources to finance our capital expenditures and for
our working capital and other general corporate purposes. We may also use a
portion of these cash resources to acquire complementary businesses, subscriber
lines and other assets. The amounts actually expended for these purposes will
vary significantly depending on a number of factors, including market acceptance
of our services, revenue growth, planned capital expenditures, cash generated
from operations, improvements in operating productivity, the extent and timing
of entry into new markets, and availability and prices paid for acquisitions.
Failure to generate sufficient revenues, contain certain discretionary spending
or achieve certain other business plan objectives could have a material adverse
affect on our results of operations and financial position.

On July 22, 2002, The Nasdaq Stock Market, Inc. ("Nasdaq") transferred the
listing of our common stock from the Nasdaq National Market to the Nasdaq
SmallCap Market. We applied for such transfer as a result of our non-compliance
with Nasdaq's Marketplace Rule 4450(a)(5), which required us to maintain a bid
price of $1.00 per share for at least 10 consecutive trading days during the
last ninety day period prior to July 17, 2002 in order to remain qualified for
listing on the Nasdaq National Market. On October 16, 2002, Nasdaq notified us
that, while we had not regained compliance by October 15, 2002 with the $1.00
bid price per share requirement generally required for continued listing on the
Nasdaq SmallCap Market, we did continue to meet the initial listing requirements
for the Nasdaq SmallCap Market under Rule 4310(c)(2)(A). As a result, we had an
additional 180 calendar days, or until April 14, 2003, to comply with the
minimum bid price of $1.00 per share for 10 consecutive trading days, or such
greater number of trading days as Nasdaq may determine, in order to remain
listed on the Nasdaq SmallCap Market. On March 11, 2003, Nasdaq amended its
rules to provide that a company that satisfies the initial listing requirements
for the Nasdaq SmallCap Market under Rule 4310(c)(2)(A) would have an additional
90 days (over the 180 days already contemplated by the Nasdaq SmallCap Market
rules) to comply with the minimum bid price of $1.00 per share. On April 15,
2003, Nasdaq notified us that, while we had not regained compliance by April 14,
2003 with the $1.00 bid price per share requirement generally required for
continued listing on the Nasdaq SmallCap Market, we did continue to meet the
initial listing requirements for the Nasdaq SmallCap Market under Rule
4310(c)(2)(A). As a result, we had an additional 90 calendar days, or until July
14, 2003, to comply with the minimum bid price of $1.00 per share for 10
consecutive trading days, or such greater number of trading days as Nasdaq may
determine, in order to remain listed on the Nasdaq SmallCap Market. On July 15,
2003, we received notification from the Nasdaq staff indicating that our common
stock failed to comply with the $1.00 closing bid price per-share requirement
for 10 consecutive trading days as set forth in the

39


(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


Nasdaq's Marketplace Rule 4310(c)(4) and as such our common stock was subject to
delisting from the Nasdaq SmallCap Market. We appealed this determination to a
Listings Qualifications Panel and were subsequently granted an extension until
November 17, 2003, to comply with the minimum bid price of $1.00 per share for a
minimum of 10 consecutive days. On October 9, 2003, Nasdaq notified us that we
had been granted an additional extension until December 8, 2003 to gain
compliance with the minimum bid price rule pending SEC action on certain Nasdaq
proposed rule changes (discussed below). There can be no assurance that we will
be able to continue to remain listed on the Nasdaq SmallCap Market.

Nasdaq has submitted proposed rule changes to the SEC which would, among
other things, modify the grace periods for companies trying to come into
compliance with the bid price requirements for continued listing. There can be
no assurance that the SEC will approve these proposed rule changes, if at all,
in time to affect the possible delisting of our common stock from the Nasdaq
SmallCap Market or that, if the SEC does approve these rule changes it will
extend the time period during which we can remain listed without complying with
the $1.00 minimum bid price requirement. In the event the current proposal
before the SEC is approved, and the Company remains deficient in satisfying the
minimum bid price requirements, Nasdaq may require that the Company promptly
effectuate a reverse stock split sufficient to gain compliance with the $1.00
minimum bid price requirement.


FORWARD LOOKING STATEMENTS

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 under "Risk Factors" in our Annual Report on Form 10-K
for the year ended December 31, 2002, which has been filed with the SEC, and (i)
fluctuations in our quarterly operating results, which could adversely effect
the price of our common stock; (ii) our unproven business model, which may not
be successful; (iii) our ability to execute our business plan in a timely manner
to generate the forecasted financial and operating results, which may not be
achieved if our sales force is not able to generate sufficient sales to
customers or if we are not able to install and commence service for customers in
a timely manner; (iv) failure to generate sufficient revenue, contain certain
discretionary spending or achieve certain other business plan objectives, which
could have a material adverse affect on our results of operations and financial
position; (v) risks associated with the possible removal of our common stock
from the Nasdaq SmallCap Market, which removal could adversely impact the
pricing and trading of our common stock; (vi) risks associated with
acquisitions, including difficulties in identifying and completing acquisitions,
integrating acquired businesses or assets and realizing the revenue, earnings or
synergies anticipated from any acquisitions; (vii) regulatory, legislative, and
judicial developments, which could adversely affect the way we operate our
business; (viii) the risk that the conditions to the issuance of Warrants to the
Investors under the Note and Warrant Purchase Agreement are not satisfied or
waived on or before January 14, 2004 in which case we may then be obligated to
repay the Notes; (ix) risks associated with our reliance on certain carriers,
including MCI, to transmit data across our network; (x) the challenges relating
to the timely installation of service for customers, including our dependence on
traditional telephone companies to provide acceptable telephone lines in a
timely

39


(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


manner; (xi) our dependence on wholesale providers to provide us with local
broadband facilities in areas where we have not deployed our own equipment;
(xii) the need for us to achieve sustained market acceptance of our services at
desired pricing levels; (xiii) competition; (xiv) our limited operating history,
which makes it difficult to evaluate our business and prospects; (xv) the
difficulty of predicting the new and rapidly evolving high-speed data
communications industry; (xvi) our ability to negotiate, enter into and renew
interconnection and collocation agreements with traditional telephone companies;
and (xvii) our ability to recruit and retain qualified personnel, establish the
necessary infrastructure to support our business, and manage the growth of our
operations. 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 report, whether as a result of new
information, future events or circumstances or otherwise.



















40


ITEM 3. 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 money markets and
certificates of deposit and corporate bonds.


ITEM 4. CONTROLS AND PROCEDURES

a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.

Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
have evaluated the disclosure controls and procedures (as defined in the
Exchange Act, Rules 13a-15(e)) as of the end of the period covered by this
quarterly report on Form 10-Q. Based on this evaluation, the principal executive
officer and principal financial officer concluded that our disclosure controls
and procedures were, as of the end of the period covered by this report,
effective to provide reasonable assurances that 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
SEC's rules and forms.

b) CHANGES IN INTERNAL CONTROLS

There were no significant changes in our internal controls over financial
reporting that occurred during the last fiscal quarter that materially affected,
or are reasonably likely to materially affect, our internal controls over
financial reporting.


PART II - OTHER INFORMATION


ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (Dollars in Thousands, except
Per Share Amounts)

DSL.net's annual meeting of stockholders was held on October 14, 2003. At
such meeting, DSL.net's stockholders approved amendments to DSL.net's
certificate of incorporation to:

o Grant discretionary authority to the Company's board of directors to
amend paragraph A of Article IV of DSL.net's certificate of
incorporation to increase the number of authorized shares of DSL.net
common stock from 400,000,000 shares to 800,000,000 shares and the
total number of authorized shares of DSL.net capital stock from
420,000,000 shares to 820,000,000 shares.

o Amend the terms of DSL.net's Series X Preferred Stock to: (i) replace
the full ratchet anti-dilution adjustment mechanism applicable to the
Series X Preferred Stock with a weighted average anti-dilution
mechanism, (ii) exclude from the anti-dilution adjustment mechanism
applicable to the Series X Preferred Stock certain deemed dilutive
issuances of common stock, and (iii) extend the redemption date for
the Series X Preferred Stock from January 1, 2005 to July 18, 2006.

o Amend the terms of DSL.net's Series Y Preferred Stock to: (i) provide
that the conversion price applicable to the Series Y Preferred Stock
from and after July 18, 2003 is $.4423 per share, which is the
conversion price that resulted from the initial issuance of warrants
pursuant to the Company's July 18, 2003 note and warrant financing,
(ii) replace the full

41


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


ratchet anti-dilution adjustment mechanism applicable to the Series Y
Preferred Stock with a weighted average anti-dilution mechanism, (iii)
exclude from the anti-dilution adjustment mechanism applicable to the
Series Y Preferred Stock certain deemed dilutive issuances of common
stock and (iv) extend the redemption date for the Series Y Preferred
Stock from January 1, 2005 to July 18, 2006.

The increase in the authorized shares of DSL.net common stock provides
DSL.net with the flexibility to issue shares of common stock to meet corporate
purposes, including financings, acquisitions and equity-based compensation
plans. The amendments to the Series X Preferred Stock and the Series Y Preferred
Stock were provisions negotiated as part of the July 18, 2003 note and warrant
financing and will, in part, minimize the potential dilutive effect of
subsequent issuances of capital stock upon the common stockholders of the
Company. The extension of the redemption dates for each of the Series X
Preferred Stock and Series Y Preferred Stock defers this obligation to a date
commensurate with the maturity date of the Notes. The granting of authority to
the Company's board of directors to amend the Company's certificate of
incorporation to effect a reverse stock split of the Company's common stock, as
described above, positions the Company to implement a stock split if market
conditions and/or potential Nasdaq delisting actions so warrant, in the board's
determination.

These amendments were implemented on October 17, 2003, by the filing of a
Certificate of Amendment of Amended and Restated Certificate of Incorporation,
as amended, of the Company.

Also, at the Company's annual meeting of stockholders on October 14, 2003,
the stockholders of the Company granted discretionary authority to the Company's
board of directors to amend the Company's certificate of incorporation to effect
a reverse stock split of its common stock at a ratio within the range from
one-for-two to one-for-twenty. The Company's board of directors has not yet
acted to implement such a split following this grant of discretionary authority.

On July 18, 2003, the Company entered into the Note and Warrant Purchase
Agreement with the Investors relating to the sale of an aggregate of (i) $30,000
in 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 aggregate purchase price for the Notes and Warrants was $30,000.

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

Pursuant to the terms of the Security Agreement, the Company's obligations
under the Notes are secured by a security interest in a majority of the personal
property and assets of the Company and certain of its subsidiaries.

The Company will issue to the Investors (or their assignees) the remaining
Warrants (the "Additional Warrants") to purchase an aggregate of 144,944,737
shares of its common stock after receipt of regulatory approvals from certain
state public utility commissions.

The Company will issue to the Investors (or their assignees) the
Additional Warrants to purchase an aggregate of 144,944,737 shares of its common
stock after receipt of regulatory approvals from certain state public utility
commissions.

42


In connection with the Note and Warrant Purchase Agreement, DSL.net,
VantagePoint, certain holders of DSL.net's Series Y Preferred Stock and Deutsche
Bank entered into the Amended and Restated Stockholders Agreement. The Amended
and Restated Stockholders Agreement provides for rights relating to the election
of directors, the registration of DSL.net common stock for resale and certain
protective provisions.

The Amended and Restated Stockholders Agreement provides that DSL.net's
board of directors shall consist of no more than eleven directors unless an
increase is required for DSL.net to comply with its certificate of incorporation
or with the rules and regulations of the SEC or any stock market or exchange on
which DSL.net's common stock is listed relating to director independence. In
connection with the election of the directors, the holders of Series X Preferred
Stock, certain of the holders of the Series Y Preferred Stock and Deutsche Bank
have agreed to vote all their shares of DSL.net capital stock for:

o Four designated representatives of investment funds affiliated with
the VantagePoint entities as directors elected by holders of the
Series X Preferred Stock; provided, however, if the board of directors
consists of ten or fewer directors, the VantagePoint entities shall
only have the right to designate three representatives and the fourth
position will be filled by an independent director;

o So long as there are at least 4,000 shares of Series Y Preferred Stock
outstanding, one designated representative of the holders of at least
a majority of the outstanding Series Y Preferred Stock, as one of the
four directors to be elected by holders of the Series X Preferred
Stock;

o The chief executive officer of DSL.net, as one of the directors to be
elected by all holders of DSL.net capital stock entitled to vote for
the election of directors;

o So long as (A) Deutsche Bank beneficially owns outstanding Notes with
an aggregate principal amount of at least $10,000,000 or at least
52,631,579 shares of common stock issued or issuable upon exercise of
Warrants purchased pursuant to the Note and Warrant Purchase
Agreement, two designated representatives of Deutsche Bank and (B) if
Deutsche Bank (or its assignees) are no longer entitled to designate
directors pursuant to clause (A) above, for so long as Deutsche Bank,
beneficially owns outstanding Notes with an aggregate principal amount
of at least $5,000,000 or at least 26,315,790 shares of common stock
issued or issuable upon exercise of the Warrants purchased pursuant to
the Note and Warrant Purchase Agreement, one designated representative
of Deutsche Bank, such director or directors to be elected by (i) in
the event that the holders of Series X Preferred Stock are entitled to
elect five or more directors, one such director shall be one of the
directors elected by the holders of the Series X Preferred Stock and
(ii) in the event the holders of the Series X Preferred Stock are
entitled to elect four or fewer directors, none of such directors
shall be elected by the holders of Series X Preferred Stock, provided
that any such director not elected by holders of the Series X
Preferred Stock shall be elected by all holders of DSL.net capital
stock entitled to vote for the election of directors; and

o Three independent directors of DSL.net to be elected by all holders of
DSL.net capital stock entitled to vote for the election of directors,
such directors to be nominated by the nominating committee of the
DSL.net board of directors and not to be affiliates of Deutsche Bank
or any holder of Series X Preferred Stock or Series Y Preferred Stock.

Any director not required to be elected as set forth above shall be
designated by the holders of Series X Preferred Stock, if required by DSL.net's
certificate of incorporation, or shall be independent directors.

43


On July 18, 2003, the size of the DSL.net board of directors was increased
to ten members, and Roderick Glen MacMullin and Roger Ehrenberg, designees of
Deutsche Bank, were elected to serve as a Class I Director and as a Class III
Director, respectively.

Under the terms of the Amended and Restated Stockholders Agreement, if
DSL.net proposes to register securities for sale, either for its own account or
for the account of other security holders, the holders of Series X Preferred
Stock, Series Y Preferred Stock and holders of warrants to purchase DSL.net
common stock (including the holders of Warrants issued pursuant to the Note and
Warrant Purchase Agreement) are entitled to notice of the registration. These
holders are also entitled to include their shares of common stock in such
registration. In the event of a registration in connection with an underwritten
public offering, however, the underwriters have the right, subject to certain
conditions, to limit the number of shares included in such registration. If
DSL.net proposes to register securities for sale for its own account, these
holders are entitled to include not less than 30% of the shares of common stock
included in the registration. In addition, holders of (i) at least 50% of the
shares of common stock issued or issuable upon conversion of the Series X
Preferred Stock and upon exercise of common stock purchase warrants beneficially
owned by the holders of the Series X Preferred Stock, (ii) at least 50% of the
shares of common stock issued or issuable upon conversion of the Series Y
Preferred Stock and upon exercise of common stock purchase warrants beneficially
owned by the holders of the Series Y Preferred Stock or (iii) at least 50% of
the shares of common stock issued or issuable upon exercise of warrants to
purchase common stock beneficially owned by Deutsche Bank, respectively, are
entitled to request that DSL.net file a registration statement under the
Securities Act covering the resale of such shares. If DSL.net proposes to
register securities for sale in connection with a request for such registration
made by Deutsche Bank or holders of its Series X Preferred Stock or Series Y
Preferred Stock, notwithstanding the underwriter's right to limit the number of
shares included in such registration, in no event may (i) less than 51% of the
total number of shares of DSL.net common stock held by stockholders to be
included in such underwriting be made available for the sale of shares
beneficially owned by holders of Series X Preferred Stock; (ii) less than 15% of
the total number of shares of DSL.net common stock held by stockholders to be
included in such underwriting be made available for the sale of shares
beneficially owned by holders of Series Y Preferred Stock; and (iii) less than
34% of the total number of shares of DSL.net common stock held by stockholders
to be included in such underwriting be made available for the sale of shares
beneficially owned by Deutsche Bank. Upon the receipt of a request for
registration, DSL.net must use its best efforts to effect the registration of
such securities. DSL.net is not required to effect more than one registration
during any six-month period. In general, all fees, costs and expenses (other
than underwriting discounts and commissions) of a registration will be borne by
DSL.net. DSL.net has agreed to indemnify the holders of registration rights
against, and provide contribution with respect to, certain liabilities relating
to any registration in which any shares of these holders are sold under the
Securities Act.

The Amended and Restated Stockholders Agreement provides that for so long
as at least 3,750 shares of the Series Y Preferred Stock are outstanding, the
holders of the Series X Preferred Stock will not vote their shares of capital
stock to authorize DSL.net or its subsidiaries to authorize or issue, or to
obligate itself to issue, any other equity-related securities having rights,
preferences or privileges which are senior to the Series Y Preferred Stock.

As a result of the Note and Warrant financing, DSL.net became authorized
to issue a common stock purchase warrant to purchase 2,260,909 shares of DSL.net
common stock to VantagePoint Venture Partners III (Q), L.P. pursuant to the
letter agreement dated March 5, 2003 between DSL.net and VantagePoint Venture
Partners III (Q), L.P. Such warrant shall be issued commensurate with the
issuance by the Company of the Additional Warrants, shall be exercisable
immediately upon issuance at an exercise price of $0.4423 per share and shall
remain exercisable until July 18, 2006.

44


The proceeds from the sale of the Notes and Warrants will be used by the
Company for general corporate purposes, including acquisitions, the expansion of
the Company's sales and marketing activities and repayment of debt and lease
obligations. As of September 30, 2003, the Company has paid approximately
$10,200 for the complete repayment of approximately $14,600 of its debt and
lease obligations.

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


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

DSL.net's annual meeting of stockholders was held on October 14, 2003.
Holders of an aggregate of 88,426,578 shares of DSL.net common stock, 20,000
shares of DSL.net Series X Preferred Stock, and 7,782 shares of DSL.net Series Y
Preferred Stock at the close of business on September 22, 2003 were entitled to
vote at the meeting. As of the record date, each share of Series X Preferred
Stock had the right to approximately 5,555.56 votes, each share of Series Y
Preferred Stock had the right to 978.5 votes and each share of common stock had
the right to one vote. At such meeting, DSL.net's stockholders voted in favor of
all of the proposals submitted in the Company's proxy statement for approval at
the meeting, as follows:

PROPOSAL 1. To elect four members of the board of directors to serve for
three-year terms as Class III directors, each director to serve for such term or
until his respective successor has been duly elected and qualified, or until his
earlier death, resignation or removal.


- -----------------------------------------------------------------------------------------------------------------------------------
Series X Series Y Common
- ------------------- ---------------- ------------------ --------------- ------------------ --------------- ------------------
Director Name Total Votes Total Votes Total Votes for Total Votes Total Votes Total Votes
for Each Withheld from Each Each Nominee Withheld from Each for Each Withheld from Each
Nominee Nominee Nominee Nominee Nominee
- ------------------- ---------------- ------------------ --------------- ------------------ --------------- ------------------

Roger Ehrenberg 111,111,111 0 7,614,687 0 6,481,442 410,253
- ------------------- ---------------- ------------------ --------------- ------------------ --------------- ------------------
James D. Marver 111,111,111 0 N/A N/A N/A N/A
- ------------------- ---------------- ------------------ --------------- ------------------ --------------- ------------------
David F. Struwas 111,111,111 0 7,614,687 0 5,745,169 1,146,526
- ------------------- ---------------- ------------------ --------------- ------------------ --------------- ------------------
Michael L. Yagemann 111,111,111 0 N/A N/A N/A N/A
- ------------------- ---------------- ------------------ --------------- ------------------ --------------- ------------------


No other persons were nominated, or received votes, for election as
directors of DSL.net at the 2003 Annual Meeting of Stockholders. Messrs. Robert
B. Hartnett, Jr., Robert G. Gilbertson, Paul Keeler, William J. Marshall and
Roderick Glen MacMullin each continued their respective terms of office after
the 2003 Annual Meeting of Stockholders.

PROPOSAL 2. To consider and act upon a proposal to approve the issuance of
common stock purchase warrants to purchase up to 144,944,737 shares of DSL.net
common stock as contemplated by the Note and Warrant Purchase Agreement dated as
of July 18, 2003 and the shares of DSL.net common stock to be issued upon
exercise of such common stock purchase warrants.

45


- -----------------------------------------------------------------------------------------------------------------------------
Class of Stock Total Votes for Proposal Total Votes Against Proposal Abstentions from Proposal Broker Non-Votes
2 2 2
- ------------------------ ------------------------ ---------------------------- ------------------------- ----------------

Common stock 5,855,410 942,275 94,010 0
- ------------------------ ------------------------ ---------------------------- ------------------------- ----------------
Series X Preferred Stock 111,111,111 0 0 0
- ------------------------ ------------------------ ---------------------------- ------------------------- ----------------
Series Y Preferred Stock 7,614,687 0 0 0
- -----------------------------------------------------------------------------------------------------------------------------


PROPOSAL 3. To consider and act upon a proposal to approve the issuance of a
common stock purchase warrant to purchase up to 2,260,909 shares of DSL.net
common stock to VantagePoint Venture Partners III (Q), L.P. in connection with a
letter agreement dated as of March 5, 2003 and the shares of DSL.net common
stock to be issued upon exercise of such common stock purchase warrant.


- --------------------------------------------------------------------------------------------------------------------
Class of Stock Total Votes for Proposal Total Votes Against Abstentions from Proposal Broker Non-Votes
3 Proposal 3 3
- ------------------------ ------------------------ ------------------- ------------------------- ----------------

Common stock 6,082,429 760,776 48,490 0
- ------------------------ ------------------------ ------------------- ------------------------- ----------------
Series X Preferred Stock 111,111,111 0 0 0
- ------------------------ ------------------------ ------------------- ------------------------- ----------------
Series Y Preferred Stock 6,376,884.5 0 1,237,802.5 0
- --------------------------------------------------------------------------------------------------------------------


PROPOSAL 4. To approve the grant of discretionary authority to the Company's
board of directors to amend paragraph A of Article IV of DSL.net's certificate
of incorporation to increase the number of authorized shares of DSL.net common
stock from 400,000,000 shares to 800,000,000 shares and the total number of
authorized shares of DSL.net capital stock from 420,000,000 shares to
820,000,000 shares.


- ---------------------------------------------------------------------------------------------------------------------
Class of Stock Total Votes for Proposal Total Votes Against Abstentions from Proposal Broker Non-Votes
4 Proposal 4 4
- ------------------------ ------------------------- ------------------- ------------------------- ----------------

Common stock 5,983,746 758,576 149,373 0
- ------------------------ ------------------------- ------------------- ------------------------- ----------------
Series X Preferred Stock 111,111,111 0 0 0
- ------------------------ ------------------------- ------------------- ------------------------- ----------------
Series Y Preferred Stock 7,614,687 0 0 0
- ---------------------------------------------------------------------------------------------------------------------


PROPOSAL 5. To consider and act upon proposed amendments to DSL.net's
certificate of incorporation to amend the terms of DSL.net's Series X Preferred
Stock to: (i) replace the full ratchet anti-dilution adjustment mechanism
applicable to the Series X Preferred Stock with a weighted average anti-dilution
mechanism, (ii) exclude from the anti-dilution adjustment mechanism applicable
to the Series X Preferred Stock certain deemed dilutive issuances of common
stock and (iii) extend the redemption date for the Series X Preferred Stock from
January 1, 2005 to July 18, 2006.

46


- --------------------------------------------------------------------------------------------------------------------
Class of Stock Total Votes for Proposal Total Votes Against Abstentions from Proposal Broker Non-Votes
5 Proposal 5 5
- ------------------------ ------------------------ ------------------- ------------------------- ----------------

Common stock 6,064,914 728,094 98,687 0
- ------------------------ ------------------------ ------------------- ------------------------- ----------------
Series X Preferred Stock 111,111,111 0 0 0
- ------------------------ ------------------------ ------------------- ------------------------- ----------------
Series Y Preferred Stock 7,614,687 0 0 0
- --------------------------------------------------------------------------------------------------------------------


PROPOSAL 6. To consider and act upon proposed amendments to DSL.net's
certificate of incorporation to amend the terms of DSL.net's Series Y Preferred
Stock to: (i) provide that the conversion price applicable to the Series Y
Preferred Stock from and after July 18, 2003 is $0.4423, which is the conversion
price that resulted from the initial issuance of Warrants pursuant to the July
18, 2003 Note and Warrant financing, (ii) replace the full ratchet anti-dilution
adjustment mechanism applicable to the Series Y Preferred Stock with a weighted
average anti-dilution mechanism, (iii) exclude from the anti-dilution adjustment
mechanism applicable to the Series Y Preferred Stock certain deemed dilutive
issuances of common stock and (iv) extend the redemption date for the Series Y
Preferred Stock from January 1, 2005 to July 18, 2006.


- --------------------------------------------------------------------------------------------------------------------
Class of Stock Total Votes for Proposal Total Votes Against Abstentions from Proposal Broker Non-Votes
6 Proposal 6 6
- ------------------------ ------------------------ ------------------- ------------------------- ----------------

Common stock 6,072,909 720,324 98,462 0
- ------------------------ ------------------------ ------------------- ------------------------- ----------------
Series X Preferred Stock 111,111,111 0 0 0
- ------------------------ ------------------------ ------------------- ------------------------- ----------------
Series Y Preferred Stock 7,614,687 0 0 0
- --------------------------------------------------------------------------------------------------------------------


PROPOSAL 7. To consider and act upon a proposal to approve an amendment to
DSL.net's Amended and Restated 2001 Stock Option and Incentive Plan to increase
the number of shares of common stock reserved for issuance thereunder by
25,000,000 shares to an aggregate of 45,000,000 shares and to increase the
maximum number of options or stock appreciation rights to purchase shares of
common stock that may be issued to an employee in any calendar year from
3,000,000 shares to 5,000,000 shares.


- --------------------------------------------------------------------------------------------------------------------
Class of Stock Total Votes for Proposal Total Votes Against Abstentions from Proposal Broker Non-Votes
7 Proposal 7 7
- ------------------------ ------------------------ ------------------- ------------------------- ----------------

Common stock 5,768,379 1,031,386 91,930 0
- ------------------------ ------------------------ ------------------- ------------------------- ----------------
Series X Preferred Stock 111,111,111 0 0 0
- ------------------------ ------------------------ ------------------- ------------------------- ----------------
Series Y Preferred Stock 6,376,884.5 0 1,237,802.5 0
- --------------------------------------------------------------------------------------------------------------------


PROPOSAL 8. To approve the grant of discretionary authority to the Company's
board of directors to amend DSL.net's certificate of incorporation to effect a
reverse stock split of its common stock at a ratio within the range from
one-for-two to one-for-twenty.

47



- ---------------------------------------------------------------------------------------------------------------------
Class Stock Total Votes for Proposal Total Votes Against Abstentions from Proposal Broker Non-Votes
8 Proposal 8 8
- ------------------------ ------------------------- ------------------- ------------------------- ----------------

Common stock 5,514,668 1,337,106 39,921 0
- ------------------------ ------------------------- ------------------- ------------------------- ----------------
Series X Preferred Stock 111,111,111 0 0 0
- ------------------------ ------------------------- ------------------- ------------------------- ----------------
Series Y Preferred Stock 6,376,884.5 0 1,237,802.5 0
- ---------------------------------------------------------------------------------------------------------------------


PROPOSAL 9. To ratify the selection of the firm of PricewaterhouseCoopers LLP as
auditors for the fiscal year ending December 31, 2003.


- --------------------------------------------------------------------------------------------------------------------
Class of Stock Total Votes for Proposal Total Votes Against Abstentions from Proposal Broker Non-Votes
9 Proposal 9 9
- ------------------------ ------------------------ ------------------- ------------------------- ----------------

Common stock 6,574,031 257,897 59,767 0
- ------------------------ ------------------------ ------------------- ------------------------- ----------------
Series X Preferred Stock 111,111,111 0 0 0
- ------------------------ ------------------------ ------------------- ------------------------- ----------------
Series Y Preferred Stock 6,376,884.5 0 1,237,802.5 0
- --------------------------------------------------------------------------------------------------------------------


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits.

- --------------------------------------------------------------------------------
Exhibit No. Exhibit
- --------------------------------------------------------------------------------
4.01 Amended and Restated Certificate of Incorporation, as amended
(incorporated by reference to Exhibit 4.01 filed with our
Registration Statement on Form S-8 (No. 333-110131)).
- ------------ -----------------------------------------------------------------
4.02 Form of Senior Secured Promissory Note dated July 18, 2003
(incorporated by reference to Exhibit 4.01 filed with our
Quarterly Report on Form 10-Q for the quarterly period ended June
30, 2003).
- ------------ -----------------------------------------------------------------
4.03 Form of Warrant to Purchase Shares of Common Stock issuable
pursuant to the Note and Warrant Purchase Agreement dated as of
July 18, 2003, by and among DSL.net, Inc. and the investors named
therein (incorporated by reference to Exhibit 4.02 filed with our
Quarterly Report on Form 10-Q for the quarterly period ended June
30, 2003).
- ------------ -----------------------------------------------------------------
4.04 Amended and Restated 2001 Stock Option and Incentive Plan, as
amended (incorporated by reference to Exhibit 4.01 filed with our
Registration Statement on Form S-8 (No. 333-110131)).
- ------------ -----------------------------------------------------------------
10.01 Note and Warrant Purchase Agreement dated as of July 18, 2003, by
and among DSL.net, Inc. and the investors named therein
(incorporated by reference to Exhibit 10.01 filed with our
Quarterly Report on Form 10-Q for the quarterly period ended June
30, 2003).
- ------------ -----------------------------------------------------------------

48


- ------------ -----------------------------------------------------------------
10.02 Agency, Guaranty and Security Agreement dated as of July 18,
2003, by and among DSL.net, Inc., certain of DSL.net's
subsidiaries, Deutsche Bank Trust Company Americas, as
administrative agent, and the investors named therein
(incorporated by reference to Exhibit 10.02 filed with our
Quarterly Report on Form 10-Q for the quarterly period ended June
30, 2003).
- ------------ -----------------------------------------------------------------
10.03 Voting Agreement dated as of July 18, 2003, by and between
DSL.net, Inc., the stockholders named therein and the investors
named therein (incorporated by reference to Exhibit 10.03 filed
with our Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2003).
- ------------ -----------------------------------------------------------------
10.04 Amended and Restated Stockholders Agreement dated as of July 18,
2003, by and among DSL.net, Inc., the stockholders named therein
and the investors named therein (incorporated by reference to
Exhibit 10.04 filed with our Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 2003).
- ------------ -----------------------------------------------------------------
11.01* Statements of Computation of Basic and Diluted Net Loss Per
Share.
- ------------ -----------------------------------------------------------------
31.1* Certification Pursuant to Rule 13a-14(a) of the Exchange Act,
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
- ------------ -----------------------------------------------------------------
31.2* Certification Pursuant to Rule 13a-14(a) of the Exchange Act, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
- ------------ -----------------------------------------------------------------
32.1* Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- ------------ -----------------------------------------------------------------
32.2* Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- ------------ -----------------------------------------------------------------

* Filed herewith.

(b) Reports on Form 8-K.

The Company filed a Current Report on Form 8-K on August 4, 2003,
reporting on Items 5 and 7, relating to the Note and Warrant Purchase Agreement
entered into by the Company and certain investors.

The Company filed a Current Report on Form 8-K on August 5, 2003,
reporting on Item 12, relating to a press release issued by the Company on
August 5, 2003, relating to the Company's financial results for the quarter
ended June 30, 2003.

The Company filed a Current Report on Form 8-K on September 5, 2003,
reporting on Items 5 and 7, relating the Company's unaudited consolidated
balance sheet as of July 31, 2003. In addition, the Company included an
unaudited pro forma consolidated balance sheet to update July 31, 2003 amounts
to reflect the repurchase and cancellation of the note issued by the Company to
NAS in connection with the Company's acquisition of the NAS Assets, which was
completed during August 2003.

49



SIGNATURE



Pursuant to the requirements 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.


By: /s/ Robert J. DeSantis
-------------------------
Robert J. DeSantis
Chief Financial Officer


Date: November 13, 2003





















50


EXHIBIT INDEX
-------------

- --------------------------------------------------------------------------------
Exhibit No. Exhibit
- --------------------------------------------------------------------------------
4.01 Amended and Restated Certificate of Incorporation, as amended
(incorporated by reference to Exhibit 4.01 filed with our
Registration Statement on Form S-8 (No. 333-110131)).
- ------------ -----------------------------------------------------------------
4.02 Form of Senior Secured Promissory Note dated July 18, 2003
(incorporated by reference to Exhibit 4.01 filed with our
Quarterly Report on Form 10-Q for the quarterly period ended June
30, 2003).
- ------------ -----------------------------------------------------------------
4.03 Form of Warrant to Purchase Shares of Common Stock issuable
pursuant to the Note and Warrant Purchase Agreement dated as of
July 18, 2003, by and among DSL.net, Inc. and the investors named
therein (incorporated by reference to Exhibit 4.02 filed with our
Quarterly Report on Form 10-Q for the quarterly period ended June
30, 2003).
- ------------ -----------------------------------------------------------------
4.04 Amended and Restated 2001 Stock Option and Incentive Plan, as
amended (incorporated by reference to Exhibit 4.01 filed with our
Registration Statement on Form S-8 (No. 333-110131)).
- ------------ -----------------------------------------------------------------
10.01 Note and Warrant Purchase Agreement dated as of July 18, 2003, by
and among DSL.net, Inc. and the investors named therein
(incorporated by reference to Exhibit 10.01 filed with our
Quarterly Report on Form 10-Q for the quarterly period ended June
30, 2003).
- ------------ -----------------------------------------------------------------
10.02 Agency, Guaranty and Security Agreement dated as of July 18,
2003, by and among DSL.net, Inc., certain of DSL.net's
subsidiaries, Deutsche Bank Trust Company Americas, as
administrative agent, and the investors named therein
(incorporated by reference to Exhibit 10.02 filed with our
Quarterly Report on Form 10-Q for the quarterly period ended June
30, 2003).
- ------------ -----------------------------------------------------------------
10.03 Voting Agreement dated as of July 18, 2003, by and between
DSL.net, Inc., the stockholders named therein and the investors
named therein (incorporated by reference to Exhibit 10.03 filed
with our Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2003).
- ------------ -----------------------------------------------------------------
10.04 Amended and Restated Stockholders Agreement dated as of July 18,
2003, by and among DSL.net, Inc., the stockholders named therein
and the investors named therein (incorporated by reference to
Exhibit 10.04 filed with our Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 2003).
- ------------ -----------------------------------------------------------------
11.01* Statements of Computation of Basic and Diluted Net Loss Per
Share.
- ------------ -----------------------------------------------------------------
31.1* Certification Pursuant to Rule 13a-14(a) of the Exchange Act,
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
- ------------ -----------------------------------------------------------------

51


- ------------ -----------------------------------------------------------------
31.2* Certification Pursuant to Rule 13a-14(a) of the Exchange Act, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
- ------------ -----------------------------------------------------------------
32.1* Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- ------------ -----------------------------------------------------------------
32.2* Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- --------------------------------------------------------------------------------

* Filed herewith.
























52