DSL NET INC - 10-K Annual Report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________

Form 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2004

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

Commission File Number 001-32264

DSL.net, Inc.

(Exact name of registrant as specified in its charter)

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

545 Long Wharf Drive, New Haven, Connecticut	06511	(203) 772-1000
(Address of principal executive offices)	(Zip Code)	(Telephone No.)

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

Title of Each Class	Name of Each Exchange on which Each Class is Registered
Common Stock, par value $.0005 per share	American Stock Exchange

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

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

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

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

The aggregate market value of the Common Stock held by non-affiliates of the registrant, as of the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $43,357,776 (based on the closing price of the registrant’s Common Stock on that day of $0.31 per share). The number of shares outstanding of the registrant’s Common Stock, par value $.0005 per share, as of March 1, 2005, was 233,619,817.

DSL.net, Inc.

ANNUAL REPORT ON FORM 10-K

YEAR ENDED DECEMBER 31, 2004

TABLE OF CONTENTS

		Page No.
Part I

Item 1.	Business	2
Item 2.	Properties	16
Item 3.	Legal Proceedings	17
Item 4.	Submission of Matters to a Vote of Security Holders	17

Part II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters
	and Issuer Purchases of Equity Securities	19
Item 6.	Selected Financial Data	21
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 7A.	Quantitative and Qualitative Disclosure About Market Risk	61
Item 8.	Financial Statements and Supplementary Data	62
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	107
Item 9A.	Controls and Procedures	107
Item 9B.	Other Information	107

Part III

Item 10.	Directors and Executive Officers of the Registrant	107
Item 11.	Executive Compensation	111
Item 12.	Security Ownership of Certain Beneficial Owners and Management	121
Item 13.	Certain Relationships and Related Transactions	124
Item 14	Principal Accountant Fees and Services	128

Part IV

Item 15.	Exhibits and Financial Statement Schedule	130

SIGNATURES		136

PART I

Item 1. Business

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

General

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

We sell directly to businesses and to third party resellers whose end-users are typically business-class customers. We deploy our own local communications equipment primarily in select first and second tier cities. As of March 1, 2005, we operated equipment in approximately 340 cities in the United States. In certain markets where we have not deployed our own equipment, we utilize the local facilities of other carriers to provide service.

In addition to a number of high-speed, high-performance DSL-based data communications and Internet connectivity solutions specifically designed for businesses, our product offerings include T-1 Internet connectivity and data communications services, integrated voice and data services (provisioned over SDSL or T-1 lines), Web hosting, domain name system management, enhanced e-mail, on-line data backup and recovery services, firewalls, nationwide dial-up services, private frame relay services and virtual private networks. Our services offer customers high-speed digital connections and related services at prices that we believe are attractive compared to the cost and performance of alternative data communications services.

In September of 2003 we introduced our VoIP and data bundles in the Washington, D.C. metropolitan region. In February of 2004 we introduced our VoIP and data bundles in the New York City metropolitan area.

The DSL.net Solution

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

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

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

Complete Business Solution. We offer our customers a single point of contact for a complete solution that includes all of the necessary equipment and services to establish and maintain digital data communications. Our services include high-speed Internet access and data communications services, integrated voice and data services, frame relay, Web hosting, domain name system management, enhanced e-mail, on-line data backup and recovery services, firewalls, nationwide dial-up services and virtual private networks. Our network is designed to enable us to individually configure each customer's service remotely.

Always-On Connections. With our high-speed service, customers can access the Internet continuously without having to dial into the network for each use. These “always-on” connections provide customers with the ability to readily access the Internet and transfer information. We charge our customers a flat fee per month for high-speed connectivity service rather than billing them based on usage.

Value Proposition. Our DSL and T-1 services offer customers high-speed digital connections at prices that we believe are attractive compared to the cost and performance of certain alternative data communications services, such as multiple dial-up connections, ISDN or traditional frame relay lines. We believe that our services also increase the productivity of network users by decreasing the time they spend connecting to the Internet and waiting for information downloads and transfers. The ability to bundle multiple services, such as Internet access, data communications and voice, over the same access line allows us to offer our services at price points which are significantly less than those of the same communications services if purchased separately.

Customer Support. We provide customer support coverage through a combination of automated systems and live personnel. With our remote monitoring and troubleshooting capabilities, we continuously monitor our network.

Our Services

As part of our service offerings, we often function as our customers' Internet service provider and deliver a range of Internet-based, value-added solutions. Our services currently include all necessary equipment, software and lines required to establish and maintain a digital Internet connection and carrier-class voice service. Our primary services include high-speed data communications, with or without Internet access, integrated voice and data services, and private frame relay and virtual private networks that connect customers’ various offices. Other services provided by DSL.net include firewalls, e-mail, domain name system management and Web hosting, on-line data backup and recovery services and nationwide dial-up services.

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

Customers

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

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

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

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

·	business users that require remote access to corporate local area networks;

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

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

No customer accounted for more than 5% of our total revenue for fiscal years ended December 31, 2004, 2003 and 2002.

Sales and Marketing

Our marketing professionals have developed a methodology to identify the businesses that we believe would most likely benefit from our services. Once we identify businesses in a specific market, we employ a targeted marketing strategy utilizing a variety of media. We also partner with various resellers, wholesalers and referral channels, including local information technology professionals, application service providers and marketing partners, to assist in the sale of our services.

Customer Acquisitions

In addition to our sales and marketing efforts, and our reseller and referral channels, we have supplemented our customer base, from time to time, by acquiring end users of other Internet service providers and companies offering broadband access. We continuously identify and evaluate customer acquisition candidates, and in many cases engage in discussions and negotiations regarding potential transactions. Customer acquisition candidates include both subscriber lines and whole businesses. Our discussions and negotiations may not result in a transaction. Further, if we transact a customer acquisition, through purchase, merger or other form of transaction, the combined business may not operate profitably. We intend to continue to seek additional customer acquisition opportunities, which we believe represent commercially viable opportunities to acquire large and select groups of customers for our business. However, our ability to pursue a future customer acquisition for cash is dependent upon our ability to raise additional capital.

Customer Support and Operations

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

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

Maintenance. Our network operations centers provide network surveillance for all equipment in our network. We are able to detect and correct many of our customers' maintenance problems remotely, often before our customer is aware of the problem. Customer-initiated maintenance

and repair requests are managed and resolved primarily through our customer service department. Our information management system, which generates reports for tracking maintenance problems, allows us to communicate maintenance problems from our network operations centers to our customer service center.

Operations Support Systems. Our operations support systems are intended to improve many of our business processes, including customer billing, service activation, inventory control, customer care reports and maintenance reports. They have been designed to provide us with accurate, up-to-date information in these areas. Additional enhancements of these systems were made in 2004, including improved automation and support for (i) the provisioning of services into our billing system, (ii) the distribution of milestone communications to our customers in respect to the installation process, and (iii) the consolidation of our provisioning and trouble ticketing systems. We believe that our operations support systems provide us with the flexibility to support additional customers and additional services.

Our Network

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

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

Intelligent End-To-End Network Management. Our network is designed to allow us to monitor network components and customer traffic from a central location. We can perform network diagnostics and equipment surveillance continuously. From our network operations centers, we have visibility across our entire network, allowing us to identify and address network problems quickly and to provide quality service and performance.

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

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

Security. Our network is designed to reduce the possibility of unauthorized access and to allow our customers to safely transmit and receive sensitive information and applications. The third-party modems and routers we sell or lease to our customers for use in support of subscribed services are designed to work in conjunction with installed security systems and network servers in an effort to provide safe connections to the Internet and a secure operating environment. All of our IP core sites are equipped with the Nortel Shasta BSN 5000. This network aggregation device allows us to provision and maintain efficiently a standardized network-based state-full firewall solution. Since this is a network-based

product, customers receive the benefit of this advanced solution without the need to purchase expensive termination and firewall equipment.

Network Components. The primary components of our network are:

Network Backbone; Connection To The Internet. Network traffic gathered at each of our central offices is directed to one of our regional hubs, if applicable in support of the customer’s service, and then to the Internet. In certain areas where we offer service from more than one central office, network traffic is directed from each central office in that area to a local hub which aggregates its traffic along with the traffic from the other central offices located in that area and directs the traffic to a regional hub. At our regional hubs, we also connect to other carriers’ networks via high-speed connections. Our hubs contain extra equipment and backup power to provide backup facilities in the event of an equipment failure and are actively monitored from our network operations centers. We lease space for our hubs in facilities designed to host network equipment. Our hubs are connected to one another via high-speed data communications lines. We have agreements with MCI, Level 3 Communications and other carriers to provide this service. Internet connectivity is provided by various transit arrangements.

Central Office Collocation. Through our interconnection agreements, we secure space to locate our equipment in certain central offices of traditional local telephone companies and offer our services from these locations. These collocation spaces are designed to offer the same high reliability and availability standards as the telephone companies’ own central office spaces. We install the equipment necessary to provide high-speed DSL or T-1 service to our customers in these spaces. We have continuous access to these spaces to install and maintain our equipment located in these central offices. In markets where we have not deployed our own equipment, we utilize the local facilities installed in central offices by other carriers, to provide high-speed connections to our customers.

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

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

Modems, Routers and On-Site Connections. We purchase modems and routers and provide them to our customers, as appropriate, depending on our customers’ specific needs and contractual service agreements. We configure the modem or router and arrange for the installation of the modem or router along with the on-site wiring needed to connect the modem or router to the copper telephone line. In areas where we have deployed our own

local facilities, we either perform these services ourselves or we contract with independent field service organizations to perform these services on our behalf. In areas where we utilize the local facilities of other carriers, these other carriers (or their contractors) provide these installation services. We will either lease or sell customer premise equipment (modem or router) to our customers. When we lease the customer premise equipment, we charge the customer for the use of this equipment as part of our monthly service fee. These modems and routers are capitalized and depreciated over their estimated useful life of three years. Such leased equipment remains our exclusive property. When we sell customer premise equipment (modem or router) to the customer, we recognize the revenue from the sale and expense the cost of this equipment at the time of sale.

Network Operations Centers. Our network is managed from our network operations centers located in New Haven, Connecticut, and in Herndon, Virginia. We provide network management 24 hours per day, seven days per week. From the network operations centers, we are able to monitor the performance of individual subscriber lines and the equipment and circuits in our network.

Competition

We face competition from many companies with significantly greater financial resources, well-established brand names and large installed customer bases. Our industry has and continues to experience consolidation and we expect that such activities will continue and that the level of competition in our markets may intensify in the future. We expect competition from:

Other Broadband Carriers/Competitive Local Exchange Carriers. A number of competitive carriers, including Covad Communications and New Edge Networks, offer DSL and T-1 services to residential and business customers. The Telecommunications Act of 1996 (the “1996 Telecommunication Act”) specifically grants competitive telecommunications companies, including other DSL providers, the right to negotiate interconnection agreements with traditional telephone companies, including interconnection agreements that may be identical in all respects to, or more favorable than, our agreements.

Internet Service Providers. Several national and regional Internet service providers, including Speakeasy, EarthLink and MegaPath, offer high-speed Internet access, along with other products and services. These companies generally provide Internet access to residential and business customers through a host of methods, including DSL and T-1 services. These companies leverage wholesale arrangements to resell broadband access they purchase from facility-based broadband providers.

Next Generation Voice and Data Providers. A number of competitive carriers, including Broadview, Conversant and CTC, offer converged voice and data products to residential and business customers. These companies provide services over a single data connection primarily using DSL and T-1 access methods.

Traditional Local Telephone Companies. Many of the traditional local telephone companies, including BellSouth, SBC Communications, Qwest and Verizon, have deployed DSL and T-1-based services, either directly or through affiliated companies. These companies have established brand names, possess sufficient capital to deploy DSL equipment rapidly, have their own copper telephone lines and can bundle digital data services with their existing voice services to achieve a competitive advantage in serving customers. In addition, these companies also offer high-speed

data communications services that use other technologies, including fiber loops that may offer greater capacity to end users than our T-1 services. We depend on these traditional local telephone companies to enter into agreements for interconnection and to provide us access to individual elements of their networks. Although the traditional local telephone companies are required to negotiate in good faith in connection with these agreements, future interconnection agreements may contain less favorable terms and result in a competitive advantage to the traditional local telephone companies.

National Long Distance Carriers. National long distance carriers, such as AT&T, Sprint, and MCI, have deployed large-scale data networks, sell connectivity to businesses and residential customers, and have high brand recognition. They also have interconnection agreements with many of the traditional local telephone companies, and many offer competitive DSL and T-1 services.

Other Fiber-Based Carriers. Companies such as Williams Communications, XO Communications and Choice One have extensive fiber networks in many metropolitan areas, primarily providing high-speed data and voice circuits to small and large corporations. They also have interconnection agreements with the traditional local telephone companies under which they have acquired collocation space in many large markets, and some offer competitive DSL and T-1 services.

Cable Modem Service Providers. Cable modem service providers, such as Time-Warner Cable, Comcast and RCN, offer high-speed Internet access over cable networks primarily to residential consumers. Where deployed, these networks provide high-speed local access services, in some cases at speeds higher than DSL service. They typically offer these services at lower prices than our services, in part by sharing the capacity available on their cable networks among multiple end users.

Wireless and Satellite Data Service Providers. Several companies, including Hughes Communications and Clearwire, are emerging as wireless and satellite-based data service providers. These companies use a variety of new and emerging technologies to provide high-speed data services.

Broadband over Powerline (“BPL”) Providers. Electric companies, including Pacific Gas and Electric and Cinergy Corp, along with AT&T, have been developing BPL technology to deliver high speed Internet and voice services over electric lines. Where deployed, such technology could provide high speed data and voice services at potentially higher speeds and potentially improved voice sound quality compared to DSL service.

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

Interconnection Agreements with Traditional Local Telephone Companies

Under the 1996 Telecommunications Act, the traditional local telephone companies (which are often also referred to as “regional Bell operating companies” and “incumbent local exchange carriers”) have a statutory duty to negotiate in good faith with us for agreements for interconnection and unbundled access to certain individual elements of their networks that the Federal Communications Commission (“FCC”) or a state utility commission has required them to provide to competitors such as us. This interconnection process is subject to review and approval by the state regulatory commissions. We have signed interconnection agreements with BellSouth, Cincinnati Bell, SBC Communications, Qwest, Sprint, and Verizon, or their subsidiaries, which govern our relationships with the traditional local telephone companies in 49 states and the District of Columbia. These agreements govern, among other things:

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

·	the prices we pay both to direct the installment of, and to lease, copper telephone lines;

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

·	the price we pay to access the telephone company's transmission facilities; and

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

We are negotiating renewal agreements with these carriers as the current agreements expire and are also negotiating amendments to existing agreements. Future interconnection agreements may contain terms and conditions less favorable to us than those in our current agreements and could increase our costs of operations, particularly when there are changes to the federal or state legal requirements applicable to such agreements. The FCC adopted new unbundling rules in August 2003 and again in February 2005 that have not yet been implemented in our interconnection agreements. These new rules are less favorable in many significant respects than those embodied in our existing agreements, and are likely to have an impact on our business as early as March 2005, as discussed below.

During our interconnection agreement negotiations, either the telephone company or we may submit disputes to the state regulatory commissions for mediation. Also, after the expiration of the statutory negotiation period set forth in the 1996 Telecommunications Act, we may submit outstanding disputes to the states for binding arbitration, in which the state regulatory commissions may arbitrate a new agreement or particular portions thereof.

Under the 1996 Telecommunications Act, most states have completed regulatory proceedings to determine the pricing of individual elements of networks and services. The results of these proceedings determine the price we pay for, and whether it is economically attractive for us to use, these elements and services. These prices may be subject to change as the result of ongoing and future regulatory proceedings.

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

agreements on favorable terms. In addition, the traditional local telephone companies may seek to materially increase the pricing of the network elements that we lease from them and that are necessary for us to service our new and existing customers. Further, disputes have arisen and will likely arise in the future as a result of differences in interpretations of various rules which govern the interconnection agreements. These disputes have, in the past, delayed the deployment of our networks. Finally, the interconnection agreements are subject to state regulatory commission, FCC and judicial oversight. These government authorities may modify the terms of the interconnection agreements in ways that are harmful to our business.

Government Regulations

Significant portions of the services that we offer are subject to regulation at the federal and/or state levels. The FCC and state public utility commissions regulate telecommunications common carriers, which are companies that offer telecommunications services to the public or to all prospective users on standardized rates and terms. Our DSL and other facilities-based data transport services are common carrier services.

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

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

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

Federal Regulation and Legislation

We must comply with the requirements of a common carrier under the Communications Act

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

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

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

The 1996 Telecommunications Act places substantial interconnection requirements on the traditional local telephone companies, including the following obligations that are, to varying degrees and/or at varying times, relevant to our business:

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

Traditional local telephone companies are required to unbundle certain, but not all, components of their local service networks so that other providers of local service can compete for a wide range of local service customers. This requirement is designed to provide us flexibility to purchase only the network elements we require to deliver our services and is integral to our business.

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

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

The 1996 Telecommunications Act generally sets forth the rights and obligations of competing carriers. The FCC issues regulations interpreting the 1996 Telecommunications Act and imposing more specific requirements upon which we and our competitors rely. The outcome of various ongoing FCC rulemaking proceedings or judicial appeals of such proceedings could

materially affect our business and financial prospects by increasing the cost or decreasing our flexibility in providing services.

The FCC’s rules to implement the unbundling requirements of the 1996 Telecommunications Act have been vacated (at least in part) three times by federal courts (the 1996 rules in 1999, the 1999 rules in 2002, and the 2003 rules in 2004). The FCC’s Triennial Review Remand Order (TRRO) adopted new rules, effective March 11, 2005, to replace those that were most recently vacated, but these rules will also likely be appealed. We cannot predict the outcome of these proceedings. In the meantime, however, more so than prior FCC orders, the TRRO will likely have a significant and possibly immediate impact on portions of our business. The TRRO limits the traditional local telephone companies’ unbundling obligations for DS1 loops originating from, and DS1 and DS3 dedicated transport facilities between, certain telephone company wire centers that are deemed to be sufficiently competitive based upon the number of fiber collocators or the number of business access lines within such central offices so as to no longer necessitate impairment price protection discounts for competitive local exchange carriers. While we have arguments that these changes should not immediately become effective, especially with respect to SBC and Verizon, the traditional local telephone companies have announced that they disagree with these arguments and intend to implement the changes immediately. Under their planned terms for implementation, the TRRO would have the following consequences for the Company:

As of March 11, 2005, the traditional local telephone companies have indicated that they will no longer provide unbundled high capacity DS1 and DS3 circuits on certain transport routes that meet the TRRO’s no impairment criteria at the discounted rates we now receive under the 1996 Telecommunications Act. We use these circuits to connect our equipment located at the traditional local telephone company’s wire centers which enables us to efficiently aggregate traffic at our hubs. Specifically, we would no longer be able to obtain new discounted unbundled DS1 transport circuits between a pair of wire centers both of which contain at least four fiber-based collocators or at least 38,000 business access lines, or DS3 transport on routes which connect a pair of wire centers both of which contain at least three fiber-based collocators or at least 24,000 business access lines. While there will likely be disputes related to which routes meet these criteria, some of our routes, particularly for larger markets, will be affected. Also, to obtain new transport arrangements on these routes, we would need to purchase higher-priced “special access” services from the traditional local telephone companies or find competitive alternatives.

As of March 11, 2005, the traditional local telephone companies have indicated that they will no longer provide new unbundled DS1 loops at the discounted rates we now receive under the 1996 Telecommunications Act to buildings served by wire centers that contain both 60,000 or more business lines and 4 or more fiber-based collocators. These thresholds will be met most often in urban centers of large metropolitan areas. We use DS1 loops to provide our T-1 services to end- users. To obtain new DS1 loops to these buildings, we would need to purchase higher-priced “special access” services from the traditional local telephone companies or find competitive alternatives.

·	Certain restrictions were also established for higher-capacity DS3 loops, but we do not use any significant number of such loops.

·	As for our existing loop and transport arrangements that fall within these criteria, we would be able to keep them until March 10, 2006, generally at a 15% price increase. By the end of that period, we would be required to transition these existing facilities to alternative

arrangements, such as competitive facilities or the higher-priced “special access services” offered by the traditional telephone companies.

The traditional local telephone companies have identified the wire centers that they believe fall within the above criteria, and we are still evaluating their analysis. We are currently assessing the potential impact on our network costs resulting from the TRRO, as well as evaluating our network configuration alternatives to minimize increases to our network costs. We plan to attempt to negotiate agreements that will cover terms and conditions for existing facilities and future installations of such facilities in these offices. We cannot predict the outcome or success of these negotiations.

In addition to the impact of the TRRO, at least one portion of the FCC’s August 2003 Triennial Review Order (the “TRO”) that was not vacated by the D.C. Circuit could materially affect our business in the long-term. The TRO exempted from unbundling obligations certain loop transmission facilities that use fiber or new technologies. This exemption arguably applies only for loops that serve residential customers and “very small” businesses. The FCC has not defined “very small” business, and if it does not do so in a rulemaking proceeding the definition will probably be established in interconnection agreement arbitrations at the state commissions. Subsequent to the TRO, the FCC has on two occasions added additional loop architectures to this exemption, and it has also held that the ILECs do not have to make these facilities available to competitors at any price, discounted or otherwise. The traditional local telephone companies are continuing to lobby the FCC to expand these exemptions much deeper into the business market, and alternatively at times appear to suggest that the exemption already applies to all markets. Depending on how these rules are implemented, the traditional local telephone companies over time may decide to modify, characterize or replace their facilities in ways that would qualify them for this exemption and thereby preclude us from accessing these facilities pursuant to the terms of their interconnection agreements. Without access to these facilities, we may not be able to provide all or certain of our services in these areas. In addition, if we are unable to obtain unbundled access to these fiber facilities, we may not be able to offer services that are competitive with the new offerings of the traditional local telephone companies.

In addition to the TRO and TRRO proceedings and related judicial activity, the FCC in February 2002 initiated a new proceeding that will reevaluate the appropriate degree of regulation of broadband services offered by the traditional local telephone companies, including whether they should continue to be required to offer network access to competitors such as us. This proceeding appeared to stall after the Ninth Circuit vacated the FCC’s decision to classify cable modem services as information services, rather than regulated telecommunications services. The Supreme Court will soon review this decision, after which it is possible that the FCC’s broadband proceeding could resume. Any changes to the obligation of the traditional local telephone companies to provide us with unbundled copper loops and/or interoffice transport could have significant adverse consequences for our business. It is currently unclear when a rule or decision regarding this specific matter will be issued.

In a separate rulemaking proceeding, the FCC is considering changes to the formula used to determine the rates we must pay the traditional local telephone companies for unbundled access to their networks. In addition, the TRO included changes to the FCC’s pricing formula, and state commissions where we do business may have to revise prices we pay for access to the local telephone company’s network accordingly. Changes to this formula could have an adverse impact on our business.

The traditional local telephone companies have also lobbied numerous state legislatures to

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

Pursuant to the 1996 Telecommunications Act, the FCC requires all telecommunications carriers providing interstate telecommunications services to contribute to a universal service fund used to provide subsidies to carriers that provide service to individuals that live in rural, insular, and high-cost areas, and to provide telecommunications-related services and facilities for schools, libraries and certain rural health care providers. The telecommunications portion of our service is currently subject to this requirement. For the fourth quarter of 2004, the FCC has established a contribution rate of 8.9% and the first quarter 2005 contribution rate is 10.7% of our interstate telecommunications revenues. We pass the cost of our universal service fund contributions along to our customers.

The FCC's implementation of universal service requirements remains subject to judicial and additional FCC review. In several new proceedings, the FCC will consider the degree to which companies providing services such as ours should be obligated to contribute to this fund. We are unable to predict the outcome of these proceedings and their impact on our business at this time.

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

State Regulation

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

Also, some of our services that are not limited to interstate access potentially may be classified as intrastate services subject to state regulation. All of the states where we operate require some degree of state regulatory commission approval to provide certain intrastate services and maintain ongoing regulatory supervision. In most states, intrastate tariffs are also required for various intrastate services, although our services are not subject to price or rate of return regulation. Actions by state public utility commissions could cause us to incur substantial legal and administrative expenses and adversely affect our business.

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

Local Government Regulation

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

Intellectual Property

We regard our products, services and technology as proprietary and attempt to protect them with patents, copyrights, trademarks, service marks, trade secret laws, restrictions on disclosure and other methods, as applicable. For example, we own a federal supplemental registration and claim rights in the name, “DSL.net.” There can be no assurance these methods will be sufficient to protect our technology and intellectual property. We also generally enter into confidentiality agreements with our employees, consultants and business partners, and generally control access to and distribution of our documentation and other proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our proprietary information without authorization, or to develop similar information independently. Effective patent, copyright, trademark and trade secret protection may be unavailable or limited in certain foreign countries, and the global nature of the Internet makes it virtually impossible to control the ultimate destination of our technology or proprietary information. There can be no assurance that the steps we have taken will prevent misappropriation or infringement of our technology or proprietary information. In addition, litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on our business, operating results and financial condition. In addition, some of our information, including our competitive carrier status in individual states and our interconnection agreements, is a matter of public record and can be readily obtained by our competitors and potential competitors, possibly to our detriment.

Employees

As of March 1, 2005, we had 140 employees. We believe that our future success will depend in part on our continued ability to attract, hire and retain qualified personnel. Competition for qualified personnel can be intense, and we may be unable to identify, attract and retain such personnel in the future. In addition, reductions in our workforce that we undertook in the last several years may make it difficult to attract, hire and retain qualified personnel. None of our employees is represented by a labor union or is the subject of a collective bargaining agreement. We have never experienced a work stoppage and believe that our employee relations are good.

Item 2. Properties

Our headquarters consists of approximately 31,500 square feet in an office building in New Haven, Connecticut. We also lease other offices in Minneapolis, Minnesota; Wilmington, North

Carolina and Herndon, Virginia. On December 31, 2004, our lease of office space in Santa Cruz, California expired and was not renewed. We vacated the Santa Cruz office in December 2001, and sublet said facility through July 2003. In addition, we lease warehouse space to store network equipment and other inventory in a number of other locations. With respect to our arrangements to use space in traditional telephone companies’ central offices, please see Item 1 - Business, “Interconnection Agreements with Traditional Local Telephone Companies.”

Item 3. Legal Proceedings

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

A lawsuit was filed against us in Connecticut State Court in the Judicial District of New Haven on January 15, 2004 by an individual who claims that he was offered a sales manager position at the Company in December 2003 but was wrongly deprived of that position at or immediately prior to his initial employment date. The plaintiff’s complaint includes claims for breach of contract, negligent misrepresentation and intentional infliction of emotional distress. We deny the plaintiff’s allegations and believe that his claims are without merit. We have been defending the case vigorously and plan to continue to do so.

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

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

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

Our 2004 Annual Meeting of Stockholders was held on February 9, 2005. Holders of an aggregate of 233,619,817 shares of our common stock and 14,000 shares of our Series Z preferred stock at the close of business on December 20, 2004 were entitled to vote at the meeting. The holders of our common stock and Series Z preferred stock voted together as a single class with respect to the subject proposals. At such meeting, our stockholders voted in favor of all of the proposals submitted in our proxy statement, dated December 22, 2004 for approval at the meeting, as follows:

· Proposal 1. To elect one member of the board of directors to serve for a three-year term as a Class I director, this director to serve for his term or until his successor has been duly elected and qualified, or until his earlier death, resignation or removal.

Director Name	Total Votes for the Nominee	Total Votes Withheld from the Nominee
Robert B. Hartnett, Jr.	218,904,767	2,142,102

No other persons were nominated, or received votes, for election as directors at the 2004 Annual Meeting of Stockholders. Messrs. Duncan Davidson, Robert G. Gilbertson, Paul J. Keeler, William J. Marshall, James D Marver and Kirby G. Pickle each continued their respective terms of office after the 2004 Annual Meeting of Stockholders.

· Proposal 2. To consider and act upon a proposal to approve warrants to purchase up to an aggregate of 19,143,000 shares of our common stock issued to holders of our senior secured promissory notes, and the shares of our common stock to be issued upon exercise of such common stock purchase warrants.

Total Votes for Proposal 2	Total Votes Against Proposal 2	Abstentions from Proposal 2	Broker Non-Votes

108,810,337	3,625,468	223,721	108,387,343

· Proposal 3. To consider and act upon a proposal to approve an amendment to our Amended and Restated 2001 Stock Option and Incentive Plan to increase the number of shares of common stock reserved for issuance thereunder by 20,000,000 shares to an aggregate of 65,000,000 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 5,000,000 shares to 8,000,000 shares and to ratify such plan as amended.

Total Votes for Proposal 3	Total Votes Against Proposal 3	Abstentions from Proposal 3	Broker Non-Votes

108,822,189	7,615,745	221,591	108,387,344

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

As of March 1, 2005, there were approximately 604 holders of record of our common stock. On August 4, 2004, the listing and trading of our common stock moved from the Nasdaq SmallCap Market to the American Stock Exchange. On such date, our common stock trading symbol changed from “DSLNC” to “BIZ.”

The range of high and low bid prices per share of DSL.net's common stock as reported on the Nasdaq SmallCap Market and the American Stock Exchange for the two most recent fiscal years are shown below. The closing price of DSL.net common stock on March 1, 2005 was $0.16 per share.

Quarter Ended	High	Low
March 31, 2003	$0.67	$0.36
June 30, 2003	0.76	0.35
September 30, 2003	1.07	0.51
December 31, 2003	0.77	0.51
March 31, 2004	0.83	0.44
June 30, 2004	0.52	0.27
September 30, 2004	0.43	0.13
December 31, 2004	0.28	0.15

Dividend Policy

We have never declared or paid any cash dividends on our common stock and currently intend to retain any future earnings for the future operation and expansion of our business. We do not anticipate that any cash dividends will be declared or paid on our common stock in the foreseeable future.

Prior to and in preference to any declaration or payment of any cash dividends on our common stock, the holders of our Series X and Series Y preferred stock were entitled to receive cumulative dividends of $120.00 per share per annum when and as declared by the DSL.net Board of Directors. All such dividends on the Series X and Series Y preferred stock accrued monthly were payable in cash, except in the case of the conversion of the Series X or Series Y preferred stock, as the case may be, into common stock, in which case dividends may be paid, at the sole option of DSL.net, in shares of DSL.net common stock. During the second half of 2003 and the first and third quarters of 2004, all of the issued and outstanding shares of our Series Y preferred stock and our Series X preferred stock were converted into shares of our common stock and all accrued dividends on these converted shares were paid in shares of our common stock.

Our Series Z preferred stock provides that we shall not declare, pay or set aside any cash dividends on shares of our common stock unless we simultaneously declare, pay or set aside, respectively, a cash dividend on each outstanding share of our Series Z preferred stock in an amount equal to the dividend so payable with respect to one share of our common stock.

Under the terms of our October 2004 financing transaction with Laurus Master Fund, Ltd. (“Laurus”), we are prohibited from declaring, paying or making any dividend distribution on any class of stock other than any previously issued and outstanding preferred stock without the prior consent of Laurus.

Equity Compensation Plan Information

The following table provides information as of December 31, 2004, with respect to the shares of the Company’s common stock that may be issued under the Company’s existing equity compensation plans:

Plan Category	Number of Securities to be Issued upon Exercise of Outstanding Options	Weighted Average Exercise Price of Outstanding Options	Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in the First Column)
Equity Compensation Plans Approved by Shareholders	30,651,934	$0.77	19,579,375
Equity Compensation Plans Not Approved by Shareholders (1)	10,000,000	$0.48	—
Total	40,651,934	$0.70	19,579,375

(1) In April 2004, as authorized by the Company’s Board of Directors, the Company entered into an employment agreement and related stock option agreement with Kirby G. Pickle, the Company’s new chief executive officer. Under the stock option agreement for Mr. Pickle, an option to purchase a total of 10,000,000 shares of the Company’s common stock, represented in the above table, was granted to Mr. Pickle as an inducement to his employment with the Company.

(Dollars in Thousands, Except Per Shaer Amounts)

Item 6. Selected Financial Data

The following historical data for the years ended December 31, 2004, 2003, 2002, 2001 and 2000, except for “Other Data,” has been derived from our financial statements audited by PricewaterhouseCoopers LLP, independent registered public accounting firm. Our balance sheets at December 31, 2004 and 2003 and the related statements of operations, changes in stockholders' equity and cash flows for the years ended December 31, 2004, 2003 and 2002 and notes thereto appear elsewhere in this Annual Report on Form 10-K.

Reference is also made to “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the more complete financial information included elsewhere in this Annual Report on Form 10-K.

	Year Ended December 31,
	2004			2003			2002			2001			2000
Statement of Operations Data:
Revenue	$	68,449		$	71,333		$	45,530		$	41,969		$	17,789
Operating expenses:
Network (A)		45,727			51,452			33,470			44,451			30,599
Operations (A)		9,864			11,873			7, 949			45,752			32,112
General and administrative (A)		12,601			12,200			11,403			25,229			17,974
Sales and marketing (A)		5,126			8,642			6,969			13,188			25,263
Stock compensation		-			438			1,228			1,202			3,192
Depreciation and amortization		13,132			16,359			20,332			28,043			21,133
Total operating expenses		86,450			100,964			81,351			157,865			130,273

Operating loss		(18,001	)		(29,631	)		(35,821	)		(115,896	)		(112,484	)

Interest income (expense), net		(5,363	)		(2,936	)		(458	)		455			6,730
Other (expense) income, net		135			(2,430	)		185			(13	)		(9	)
Net loss	$	(23,229	)	$	(34,997	)	$	(36,094	)	$	(115,454	)	$	(105,763	)
Dividends on preferred stock		(950	)		(3,698	)		(3,573	)		(122	)		-
Accretion of preferred stock		(8,852	)		(14,327	)		(10,078	)		(348	)		-
Fair value of Series Z Preferred Stock		(2,630	)		-			-			-			-
Net loss applicable to common stockholders	$	(35,661	)	$	(53,022	)	$	(49,745	)	$	(115,924	)	$	(105,763	)

Net Loss Per Common Share Data:
Net Loss per common share, basic and diluted	$	(0.20	)	$	(0.72	)	$	(0.77	)	$	(1.81	)	$	(1.75	)
Shares used in computing net loss per share		181,831			74,126			64,858			63,939			60,593

	December 31,
	2004		2003		2002		2001		2000
Balance Sheet Data:
Cash, cash equivalents, restricted cash
and marketable securities	$	9,511	$	13,784	$	11,319	$	19,631	$	76,435
Total assets		40,862		59,061		53,496		81,024		194,806
Long-term obligations (including current
portion)		14,830		5,529		4,565		7,463		14,114
Mandatorily Redeemable Convertible
Preferred Stock		-		17,019		14,122		470		-
Stockholders’ equity	$	12,106	$	18,300	$	20,751	$	50,725	$	149,417

(Dollars in Thousands, Except Per Shaer Amounts)

	Year Ended December 31,
	2004			2003			2002			2001			2000
Cash Flow Data:
Used in operating activities	$	(7,541	)	$	(13,715	)	$	(17,706	)	$	(62,989	)	$	(74,986	)
Used in investing activities		(3,078	)		(11,135	)		(2,368	)		(2,921	)		(60,225	)
Provided by financing activities	$	3,919		$	27,311		$	12,107		$	12,871		$	141,960

Other Data:
Reconciliation of net loss to Adjusted EBITDA:
Net loss	$	(23,229	)	$	(34,997	)	$	(36,094	)	$	(115,454	)	$	(105,763	)
Add: Interest and other (income) expense, net		5,228			5,366			273			(442	)		(6,721	)
Depreciation and amortization		13,132			16,359			20,332			28,043			21,133
Stock compensation		-			438			1,228			1,202			3,192
Adjusted EBITDA (B)	$	(4,869	)	$	(12,834	)	$	(14,261	)	$	(86,651	)	$	(88,159	)

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

Adjusted EBITDA	$	(4,869	)	$	(12,834	)	$	(14,261	)	$	(86,651	)	$	(88,159	)
Interest and other (expense) income, net		(160	)		(450	)		(444	)		611			6,764
Financing costs (deferrals) expenses		-			(183	)		-			49			21
Bad debt expense		1,119			2,117			2,536			2,996			700
Sales discounts		2			394			1,181			1,498			590
Restructuring / impairment charges		-			-			-			34,083			1,417
Write off / sales of equipment		120			46			555			229			(7	)
Net changes in assets and liabilities		(3,754	)		(2,805	)		(7,273	)		(15,804	)		3,687
Net cash used in operating activities	$	(7,541	)	$	(13,715	)	$	(17,706	)	$	(62,989	)	$	(74,986	)

Capital expenditures	$	651		$	2,405		$	1,647		$	5,345		$	55,943

(A) Excluding stock compensation, depreciation and amortization.

(B) Adjusted EBITDA, shown above under “Other Data,” consists of net loss excluding net interest and other income/expense, taxes, depreciation, amortization of intangibles and non-cash stock compensation expense. We believe that Adjusted EBITDA provides useful information because it is an additional measure of financial performance commonly used for comparing companies in the telecommunications industry in terms of core operating performance, leverage, and ability to incur and service debt. Since the network configurations, assets and related capital expenditures and capital structures vary greatly within the telecommunications industry, a financial measure that excludes interest, depreciation and amortization is useful in comparing the core operating performance that supports and measures the return on a company’s network assets and capital structure and enhances comparability between periods. In addition, Adjusted EBITDA is used by us when reporting operating performance to our senior management and board of directors.

(Dollars in Thousands, Except Per Share Amounts)

Adjusted EBITDA is not a measure determined under generally accepted accounting principles. Adjusted EBITDA should not be considered in isolation from, and you should not construe it as a substitute for:

·	operating loss as an indicator of our operating performance;

·	cash flows from operating activities as a measure of liquidity;

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

·	as a measure of profitability or liquidity.

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

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

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

Overview

Our Business

We provide high-speed data communications, Internet access, and related services to small and medium sized businesses and branch offices of larger businesses and their remote office users, throughout the United States, primarily utilizing digital subscriber line (“DSL”) and T-1 technology. In September 2003, we expanded our service offerings to business customers in the Washington, D.C. metropolitan region to include integrated voice and data services using voice over Internet protocol technology (“VoIP”). In February 2004, we introduced our VoIP and data bundles in the New York City metropolitan area. Our networks enable data transport over existing copper telephone lines at speeds of up to 1.5 megabits per second. Our product offerings also include Web hosting, domain name system management, enhanced e-mail, on-line data

(Dollars in Thousands, Except Per Share Amounts)

backup and recovery services, firewalls, nationwide dial-up services, private frame relay services and virtual private networks.

We sell directly to businesses through our own sales force utilizing a variety of sales channels, including referral channels such as local information technology professionals, application service providers and marketing partners. We also sell directly to third party resellers whose end-users are typically business-class customers. We deploy our own local communications equipment primarily in select first and second tier cities. In certain markets where we have not deployed our own equipment, we utilize the local facilities of other carriers to provide our service.

Our Challenges and Opportunities

Our business is in transition from an earlier strategy focused primarily on growth to a strategy focused primarily on financial performance. In 2003, in an effort to expand our network footprint, customer base and product offerings, we completed the acquisitions of substantially all of the assets and operations of Network Access Solutions Corporation (“NAS”), and TalkingNets, Inc. and its affiliate (collectively, “TalkingNets”). The NAS acquisition significantly increased our facilities-based network in central offices from Virginia to Massachusetts. The TalkingNets acquisition provided us the ability to offer, in the business-intensive, Mid-Atlantic and Northeast regions, carrier-class integrated voice and data services utilizing VoIP technology. We completed the integration of both of these acquisitions into our operations during 2004.

During 2004 we focused on reducing operating losses and increasing gross margins. On March 25 and September 21, 2004, we implemented reductions-in-force of 62 and 32 employees, respectively, as part of our cost reduction measures. In connection with this latter reduction-in-force, during the third quarter of 2004, we began implementing a new sales and marketing strategy by reorganizing our inside sales force, reducing funding for certain sales and marketing activities, and re-directing our focus to sales of multi-line accounts and sales of higher margin services, including our integrated voice and data services and T-1 data services. As a result of these and other cost-savings measures, we achieved positive operating cash flow results in the fourth quarter of 2004 for the first time in our history. However, our cost reduction measures, and particularly, our sales force reductions, have and continue to place downward pressure on our ability to sustain or grow our revenue base. Additionally, like many of our competitors, we experience a degree of customer disconnects or “churn” due to competitive pricing pressures and other factors, which churn is in excess of the rate that we are currently acquiring new customers. In response to this, we have implemented a program pursuant to which our customer retention representatives proactively endeavor to renew existing customers to service agreements prior to or at the time of initial term expiration. While we are taking measures to control customer churn, our ability to generate and sustain positive operating cash flow in future periods will be dependent, in large part, on our ability to obtain additional funding to support our working capital needs and increase our sales and customer acquisition activities, while continuing to further control our operating costs. There can be no assurance that we will be able to obtain additional funding, increase our sales or further control our operating costs in future periods (see “Liquidity and Capital Resources”).

While the foregoing operational and market factors pose significant challenges for our business, we believe our current operating results, facilities-based voice and data network and established customer base favorably position us to leverage opportunities in our industry, provided we obtain the additional financing required to support our operations and growth strategy.

(Dollars in Thousands, Except Per Share Amounts)

Operating Cash Flow. Our operating cash flow for the quarter ended December 31, 2004, was $1,337, a 120% improvement over operating cash flow of negative $6,740 for the same period 2003. Our operating cash flow for the year ended December 31, 2004 was negative $7,541, a 45% improvement over operating cash flow of negative $13,715 for the year ended December 31, 2003.

Greater Utilization of our Network to Drive Higher Margins. We have an extensive facilities-based network with the major portion of our footprint in the densest business communications corridor in the country. We continue to prioritize the sale of services provisioned directly over our network and the sale of T-1 and integrated voice and data services, all of which yield higher margins.

New Market Opportunities. We believe that there continues to be significant revenue growth opportunities for our data/Internet access services and our VoIP suite of integrated voice and data services. However, we will need additional funding to grow our sales channels, further expand our voice network and fund customer acquisitions in order to permit us to capitalize on these growth opportunities.

In addition to pursuing additional financing to support our operations and fund cost-effective growth for our business, we continue to explore various strategic opportunities that would accelerate our growth and/or improve our operating performance (including potential customer acquisitions), and merger and acquisition opportunities. In many cases, we engage in discussions and negotiations regarding such potential transactions. Our discussions and negotiations may not result in a transaction. Further, if we effect any such transaction, it may not result in a positive impact upon our operating results or financial performance.

Critical Accounting Policies and Estimates

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

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

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

(Dollars in Thousands, Except Per Share Amounts)

Revenue Recognition

We recognize revenue in accordance with Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition,” which outlines the four basic criteria that must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed or determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the fee charged for services rendered and products delivered and the collectibility of those fees. Subjectivity and uncertainties are inherent in making such judgments that could result in an overstatement or understatement of revenues.

Revenue is recognized pursuant to the terms of each contract on a monthly service fee basis, which varies based on the speed of the customer’s Internet connection and the services ordered by the customer. The monthly fee includes phone line charges, Internet access charges, the cost of any leased equipment installed at the customer's site and fees for the other services we provide, as applicable. Revenue that is billed in advance of the services provided is deferred until the services are rendered. Revenue related to installation charges is also deferred and amortized to revenue over 18 months which is the expected customer relationship period. Related direct costs incurred (up to the amount of deferred revenue) are also deferred and amortized to expense over 18 months. Any excess of direct costs over installation charges are charged to expense as incurred. In certain instances, we negotiate credits and allowances for service related matters. We establish a reserve against revenue for credits of this nature based on historical experience. Also, from time to time we offer sales incentives to our customers in the form of rebates toward select installation services and customer premise equipment. We establish a reserve based on historical experience for such estimated rebate costs, with a corresponding reduction to revenue and deferred revenue, as applicable. Establishing such reserves requires subjective judgments and estimates primarily pertaining to the number and amounts of such credits, allowances and rebates. Actual results may differ from our estimates that could result in an overstatement or understatement of revenues.

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

Goodwill and Other Long-Lived Assets

We account for our long-lived assets (excluding goodwill) 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 such as technological changes or significant increased competition. If undiscounted expected future cash flows are less than the carrying value of the assets, an impairment loss is to be recognized based on the fair value of the assets, calculated using a discounted cash flow model. There were no impairment

(Dollars in Thousands, Except Per Share Amounts)

charges taken during the years ended 2004, 2003 and 2002. There is inherent subjectivity and judgments involved in cash flow analyses such as estimating revenue and cost growth rates, residual or terminal values and discount rates, which can have a significant impact on the amount of any impairment.

Effective January 1, 2002, we adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” This statement requires that the amortization of goodwill be discontinued and instead an impairment approach be applied. If impairment exists, under SFAS No. 142, the resulting charge is determined by the recalculation of goodwill through a hypothetical purchase price allocation of the fair value and reducing the current carrying value to the extent it exceeds the recalculated goodwill. The impairment tests were performed initially upon adopting SFAS 142 in 2002 and annually thereafter and were based upon the fair value of reporting units rather than an evaluation of the undiscounted cash flows. We estimated the fair value of the goodwill based on discounted forecasts of future cash flows. There is inherent subjectivity and judgments involved in cash flow analyses such as estimating revenue and cost growth rates, residual or terminal values and discount rates, which can have a significant impact on the amount of any impairment. We did not record any goodwill impairment adjustments resulting from our impairment reviews during 2004, 2003 and 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 flows. If impaired, the resulting charge reflects the excess of the asset’s carrying cost over its fair value. As described above, there is inherent subjectivity involved in estimating future cash flows, which can have a significant impact on the amount of any impairment. Also, if market conditions become less favorable, future cash flows (the key variable in assessing the impairment of these assets) may decrease and as a result we may be required to recognize impairment charges in the future.

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Such allowances require management’s estimates and judgments and are computed based on historical experience using varying percentages of aged receivables. Actual experience may differ from our estimates and require larger or smaller charges to income. We primarily sell our services directly to end users mainly consisting of small to medium sized businesses, but we also sell our services to certain resellers, such as to Internet service providers (“ISPs”). We believe that we do not have significant exposure or concentrations of credit risk with respect to any given customer. However, if the country or any region we service, experiences an economic downturn, the financial condition of our customers could be adversely affected, which could result in their inability to make payments to us. This could require additional provisions for allowances. In addition, a negative impact on revenue related to those customers may occur.

With the acquisition of the NAS assets on January 10, 2003, we acquired a number of end users, some of whom we service indirectly through various ISPs. We sell our services to such ISPs who then resell such services to the end users. We have some increased exposure and concentration of credit risk pertaining to such ISPs. However, no individual customer accounted for more than 5% of revenue for the years ended December 31, 2004, 2003 and 2002 or more than 10% of accounts receivable at December 31, 2004 and 2003.

(Dollars in Thousands, Except Per Share Amounts)

Inventory

Inventories consist of modems and routers (generally referred to as customer premise equipment) that we either sell or lease to customers and are required to establish a high-speed DSL or T-1 digital connection. Inventories are stated at the lower of cost or market. Cost of inventory is determined on the “first-in, first-out” or average cost methods. We establish inventory reserves for excess, obsolete or slow-moving inventory based on changes in customer demand, technology developments and other factors. Such reserves require managements’ estimates and judgments primarily relating to forecasts of future usage which could vary from actual results and require adjustments to our estimated reserves.

Fair Value of Financial Instruments and Derivatives

We have issued various debt and equity instruments, some of which have required a determination of their fair value, where quoted market prices were not published or readily available. We base our determinations on valuation techniques that require judgments and estimates including, discount rates used in applying present value analyses, the length of historical look-back used in determining the volatility of our stock, expected future interest rate assumptions and probability assessments. From time to time, we may hire independent valuation specialists to perform and or assist in the fair value determination of such instruments. Actual results may differ from our estimates and assumptions which may require adjustments to the fair value carrying amounts and result in a charge or credit to our statement of operations.

Recently Issued Accounting Pronouncements

In September 2004, the Emerging Issues Task Force (“EITF”) issued EITF Issue No. 04-10 “Applying Paragraph 19 of FASB Statement No. 131, ‘Disclosures about Segments of an Enterprise and Related Information,’ in Determining whether to Aggregate Operating Segments that do not Meet the Quantitative Thresholds”. EITF No. 04-10 presents guidelines for two alternative approaches in determining whether to aggregate operating segments and is effective for fiscal years ending after October 13, 2004. EITF No. 04-10 did not have an impact on our operating segment disclosures.

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

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

(Dollars in Thousands, Except Per Share Amounts)

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

The provisions of this statement are effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. We expect to adopt the standard on July 1, 2005. We are evaluating the requirements of SFAS 123R and have not determined its method of adoption or its impact on our financial condition or results of operations.

In December 2004, the FASB issued SFAS 153, “Exchange of Non-monetary Assets, an amendment of APB Opinion No 29” (“SFAS 153”). SFAS 153 eliminates the exception for non-monetary exchanges of similar productive assets, which were previously required to be recorded on a carryover basis rather than a fair value basis. Instead, this statement provides that exchanges of non-monetary assets that do not have commercial substance be reported at carryover basis rather than a fair value basis. A non-monetary exchange is considered to have commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of this statement are effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. We expect to adopt the standard on July 1, 2005. We are evaluating the requirements of SFAS 153 and have not determined its impact on our financial condition or results of operations.

(Dollars in Thousands, Except Per Share Amounts)

Results of Operations

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

	Year Ended December 31,
	2004			2003			2002
Revenue		100.0	%		100.0	%		100.0	%

Operating expenses: Network (excluding stock compensation and depreciation and amortization)		66.8	%		72.1	%		73.5	%

Operations (excluding stock compensation and depreciation and amortization)		14.4	%		16.6	%		17.4	%

General and administrative (excluding stock compensation and depreciation and amortization)		18.4	%		17.2	%		25.0	%

Sales and marketing (excluding stock compensation and depreciation and amortization)		7.5	%		12.1	%		15.3	%
Stock compensation		0	%		0.6	%		2.7	%
Depreciation and amortization		19.2	%		22.9	%		44.7	%
Total operating expenses		126.3	%		141.5	%		178.7	%
Operating loss		(26.3	)%		(41.5	)%		(78.7	)%
Interest (expense) income, net		(7.8	)%		(4.1	)%		(1.0	)%
Other (expense) income, net		0.2	%		(3.4	)%		0.4	%

Net loss		(33.9	)%		(49.0	)%		(79.3	)%

Net loss applicable to common stockholders:
Net loss		(33.9	%)		(49.0	)%		(79.3	)%
Dividends on preferred stock		(1.4	)%		(5.2	)%		(7.8	)%

Accretion of preferred stock		(12.9	%)		(20.1	)%		(22.1	)%

Fair Value of Series Z Preferred Stock		(3.8	)%		0	%		0	%

Net loss applicable to common stockholders		(52.1	)%		(74.3	)%		(109.3	)%

(Dollars in Thousands, Except Per Share Amounts)

Revenue. Revenue for the year ended December 31, 2004, decreased by approximately $2,884 (4%) to approximately $68,449, from approximately $71,333 for the year ended December 31, 2003. The decrease in revenue primarily resulted from the decrease in the number of customers subscribing to our services.

Revenue for the year ended December 31, 2003, increased by approximately $25,803 (57%) to approximately $71,333 from approximately $45,530 for the year ended December 31, 2002. The revenue increase was primarily due to the expansion of our network, the increased number of customers subscribing for our services and contributions from acquisitions of certain network assets, equipment and associated subscriber lines of NAS during 2003.

The revenue attributable to contributions from acquired businesses was approximately $0, $23,013 and $2,069 and for the years ended December 31, 2004, 2003 and 2002, respectively.

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

Network expenses for the year ended December 31, 2004, decreased by approximately $5,725 (11%) to approximately $45,727 from approximately $51,452 for the year ended December 31, 2003. The decrease resulted primarily from lower telecommunications expenses of approximately $5,250, decreases in other equipment costs of approximately $266, lower installation subcontractor and outside services expenses of approximately $667, lower personnel expenses of approximately $243 and decreases in other miscellaneous expenses of approximately $122, partially offset by increases in other installation costs of approximately $823. The decrease in the aforedescribed network expenses was primarily attributable to savings resulting from the closure of certain duplicative central office locations that were acquired with the NAS acquisition and other network cost containment efforts and decreases in recurring loop costs associated with lower number of subscriber lines.

Network expenses for the year ended December 31, 2003, increased by approximately $17,892 (54%) to approximately $51,452, from approximately $33,470 for the year ended December 31, 2002. The increase in network expenses was primarily attributed to increased telecommunications expenses of approximately $16,299 and increased network engineering and field operations personnel expenses of approximately $1,279 resulting from our acquisition of the NAS assets. The increase was also attributable to increased subcontract labor and consulting fees of approximately $886 related to increased customer installations and the elimination of certain duplicate central offices, and was partially offset by net decreases in miscellaneous other expenses of approximately $483.

Network expenses incurred for certain high capacity loops and transport facilities that we lease from incumbent local exchange carriers that connect to certain of our central offices and our network will increase as early as March 2005, as a result of the FCC’s Triennial Review Remand Order issued February 4, 2005 (the “TRRO”). We are currently assessing the potential impact on our network expenses resulting from the TRRO, as well as evaluating our network configuration alternatives to minimize increases to our network expense.

(Dollars in Thousands, Except Per Share Amounts)

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

Operations expenses for the year ended December 31, 2004, decreased by approximately $2,009 (17%) to approximately $9,864 from approximately $11,873 for the year ended December 31, 2003. The decrease in operations expenses was primarily due to decreases in personnel expenses of approximately $1,168, lower licenses and fees of approximately $357, decreases in professional services expenses of approximately $302, decreases in telecommunication expenses of approximately $144, and decreases in office expenses of approximately $116, partially offset by increases in miscellaneous expenses of approximately $78.

Operations expenses for the year ended December 31, 2003, increased by approximately $3,924 (49%) to approximately $11,873 from approximately $7,949 for the year ended December 31, 2002. The increase in operations expenses was primarily attributed to increases in operations personnel expenses of approximately $2,346, other outside services of approximately $1,230, equipment costs of approximately $95 and net increases in other miscellaneous expenses of approximately $253. All such increases were primarily associated with the acquisition of the NAS assets.

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

General and administrative expenses for the year ended December 31, 2004, increased by approximately $401 (3%) to approximately $12,601 from approximately $12,200 for the year ended December 31, 2003. The increase was primarily due to increases in professional services costs of approximately $1,430 and miscellaneous increases of approximately $33, partially offset by lower bad debt expenses of approximately $903 and lower facilities costs of approximately $159.

General and administrative expenses for the year ended December 31, 2003, increased by approximately $797 (7%) to approximately $12,200 from approximately $11,403 for the year ended December 31, 2002. The increase was primarily due to increases in professional fees of approximately $750, tax expenses of approximately $735, and miscellaneous expenses of approximately $321. These increased expenses were partially offset by reductions in salaries and benefits of approximately $266, bad debt expenses of approximately $481, and insurance expenses of approximately $262.

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. Upon receipt of the research and development credits, we were obligated to pay

(Dollars in Thousands, Except Per Share Amounts)

approximately $402 to a professional service provider as a result of a contingent fee arrangement for professional services in connection with obtaining such credits. During 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. We received the second and third installments of approximately $150 each in 2003 and 2004, respectively, which were recorded as reductions of general and administrative expenses in those respective years.

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 year ended December 31, 2004, decreased by approximately $3,516 (41%) from approximately $8,642 for the year ended December 31, 2003. The decrease was primarily attributable to reductions in salaries and benefits (including commissions of approximately $2,457) stemming from our reductions in force, lower advertising expenses of approximately $881 and sundry other expenses of approximately $178.

Sales and marketing expenses for the year ended December 31, 2003, increased by approximately $1,673 (24%) to approximately $8,642 from approximately $6,969 for the year ended December 31, 2002. The increase was primarily due to increases in salaries and benefits (including commissions) of approximately $1,685 and miscellaneous expenses of approximately $128, which were partially offset by reductions in advertising expenses of approximately $140.

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 below the fair values per share of our common stock at the dates of grant. The stock compensation, if vested, was charged immediately to expense, while non-vested compensation was amortized over the vesting period of the applicable options or stock, which was generally 48 months for initial grants and 36 months for subsequent grants. Unvested options for terminated employees are cancelled and the value of such options is recorded as a reduction of deferred compensation with an offset to additional paid-in-capital.

Non-cash stock compensation expenses were approximately $0, $438 and $1,228 for the years ended December 31, 2004, 2003 and 2002, respectively. As of December 31, 2004 and 2003, respectively, there were no remaining unamortized balances of stock compensation expenses.

As of December 31, 2004 and 2003, options to purchase 40,651,934 and 18,671,766 shares of common stock, respectively, were outstanding, which were exercisable at weighted average exercise prices of $0.70 and $1.07 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 for the year ended December 31, 2004, was approximately $13,132 or $3,227 (20%) lower than depreciation and amortization for the year ended December

(Dollars in Thousands, Except Per Share Amounts)

31, 2003, of approximately $16,359. The decrease was primarily attributable to certain intangible and fixed assets having become fully depreciated and amortized during 2004.

Depreciation and amortization for the year ended December 31, 2003, was approximately $3,973 (20%) lower than depreciation and amortization for the year ended December 31, 2002 of approximately $20,332. The decrease was primarily attributable to certain intangible and fixed assets having become fully depreciated and amortized during 2003, resulting in a decline in depreciation and amortization of approximately $7,371, which was partially offset by increased depreciation and amortization relating to our acquisition of the NAS assets and the TalkingNets assets and associated subscriber lines of approximately $3,398.

Our identified intangible assets (excluding goodwill) consist solely of customer lists, which are amortized over two years. Amortization of intangible assets for the years ended December 31, 2004, 2003 and 2002 was approximately $941, $2,756 and $5,349, respectively. Accumulated amortization of customer lists as of December 31, 2004 and 2003 was approximately $15,437 and $14,496, respectively. The expected future amortization of customer lists as of December 31, 2004, is approximately $47 in 2005, when these intangible assets will be fully amortized.

Depreciation pertaining to network assets was approximately $11,241, $12,300 and $13,719 for the years ended December 31, 2004, 2003 and 2002, respectively. Depreciation and amortization pertaining to general and administrative assets was approximately $1,891, $4,059 and $6,613 for the years ended December 31, 2004, 2003 and 2002, respectively.

Interest Income (Expense), Net. For the year ended December 31, 2004, net interest expense of approximately $5,363 consisted of approximately $5,474 in interest expense, partially offset by approximately $111 in interest income. The increase in interest expense during 2004 of approximately $2,388 (77%) was primarily due to the non-cash amortization of debt discount of approximately $3,748 related to warrants issued as part of our July 2003 note and warrant financing and derivatives issued under our October 2004 convertible note and warrant financing and $279 of interest expense pertaining to notes issued in connection with those transactions, partially offset by lower interest expense of approximately $909 of non-cash interest expense related to the warrants issued during 2003 in consideration for loan guarantees under our Reimbursement Agreement (as defined and discussed below), approximately $318 of lower interest pertaining to the note we issued to NAS in connection with our purchase of the NAS assets which was pre-paid in 2003, and approximately $412 of lower other interest expense primarily due to lower capital lease balances. The decrease in interest income of approximately $39 was primarily due to lower cash balances during 2004.

For the year ended December 31, 2003, net interest expense of approximately $2,936 included approximately $3,086 in interest expense, partially offset by $150 in interest income. For the year ended December 31, 2002, net interest expense of approximately $458 consisted of approximately $790 in interest expense, partially offset by $332 in interest income. The increase in interest expense during 2003 of approximately $2,296 (74%) was primarily attributable to the non-cash amortization of debt discount of approximately $1,266 which related to warrants issued as part of our July 2003 note and warrant financing, and the amortization of deferred non-cash financing costs of approximately $909 which related to the warrants issued in consideration for loan guarantees under our Reimbursement Agreement (as defined and discussed below) and increased interest on new borrowings during 2003 pertaining to the note issued in connection with our acquisition of the NAS assets and the notes issued as part of our July 2003 note and warrant financing of approximately $489, partially offset by decreased other interest expense of

(Dollars in Thousands, Except Per Share Amounts)

approximately $367 primarily due to lower capital lease balances. The decrease in interest income during 2003 of approximately $182 was due to lower interest rates on lower cash balances.

Other (Expense) Income, net. For the year ended December 31, 2004, net other income of $135, included $190 in miscellaneous income, partially offset by $55 representing an increase in the fair value of derivatives. For the year ended December 31, 2003, net other expense of approximately $2,430 included expenses that were primarily attributable to the loss on the sale of assets of approximately $115, the write-off of approximately $184 in unamortized loan origination fees and approximately $5,747 of unamortized deferred non-cash financing costs which related to warrants issued in consideration for loan guarantees under our Reimbursement Agreement (discussed below). These items were written-off as a result of the loan repayment and cancellation of the Credit Agreement (as defined and discussed below) and the Reimbursement Agreement subsequent to our $30,000 note and warrant financing on July 18, 2003. These write-offs were partially offset by miscellaneous income of approximately $116 and a non-cash gain of $3,500 resulting from the $1,500 settlement of the $5,000 note payable to NAS. For the year ended December 31, 2002, net other income of approximately $185 included gains on sale of assets and miscellaneous income.

Restructuring and Impairment Charges. During the year ended December 31, 2004, we charged approximately $540 against our restructuring reserve related to facilities expense associated with the Company’s vacated office space in Santa Cruz, California. The lease on that facility expired in December of 2004 and our restructuring reserve balance was $0 at December 31, 2004. During the year ended December 31, 2003, we increased our reserve for vacated facilities by approximately $252 as a sublet tenant vacated our Santa Cruz facility and we did not anticipate any additional sublets. We also charged approximately $647 against our restructuring reserves; of which, approximately $315 related to payment of certain termination fees associated with the closure of certain central offices during 2001, and approximately $332 related to facilities expense associated with the Company’s vacated office space in Santa Cruz, California. At December 31, 2003, the remaining restructuring reserve balance for our leased Santa Cruz facility of approximately $540 was included in our accrued liabilities. During 2002 we charged approximately $576 against our restructuring reserves pertaining to facilities expense associated with our vacated office space in Santa Cruz, California and the remaining reserve balance at December 31, 2002 of approximately $935 was included in our accrued liabilities.

The following table summarizes the additions and charges to the restructuring reserve and the remaining reserve balances from December 31, 2001 through December 31, 2004.

	Facility Leases			Central Office Term. Fees		Total

Reserve balance at Dec. 31, 2001	$	1,196		$	315	$	1,511

Charges to the reserve		(576	)		-		(576	)

Reserve balance at Dec. 31, 2002		620			315		935

Additions to the reserve		252			-		252

(Dollars in Thousands, Except Per Share Amounts)


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

Reserve balance at Dec. 31, 2003		540			-			540
Charges to the reserve		(540	)		-			(540	)

Reserve balance at Dec. 31, 2004	$	-		$	-		$	-

Net Loss. For reasons explained above, net loss of approximately $23,229 for the year ended December 31, 2004 decreased by approximately $11,768 (34%) from $34,997 for the year ended December 31, 2003. Net loss of approximately 34,997 for the year ended December 31, 2003 decreased by approximately $1,097 (3%) from approximately $36,094 for the year ended December 31, 2002.

Liquidity and Capital Resources

We have financed our capital expenditures, acquisitions and operations primarily with the proceeds from the sale of stock and from borrowings, including equipment lease financings. As of December 31, 2004, we had cash and cash equivalents of approximately $7,079, additional but restricted cash of approximately $2,432 and working capital of approximately $4,273.

Cash Provided By Financing Activities. Net cash provided by financing activities in the years ended December 31, 2004, 2003 and 2002, was approximately $3,919, $27,311 and $12,107, respectively. For 2004, this cash was provided primarily from the sale of a secured convertible note issued together with warrants to purchase our common stock. For 2003, this cash was provided primarily from the sale of our senior secured notes and warrants issued in accordance with the Note and Warrant Purchase Agreement we entered into in July, 2003. For 2002, this cash was provided primarily from the sale of our preferred stock. We have used, and intend to continue using, the proceeds from these financings primarily to implement our business plan and for working capital and general corporate purposes. We have also used, and may in the future use, a portion of these proceeds to acquire complementary businesses or assets.

Details of Cash Provided by Financing Activities. From time to time we have entered into equipment lease financing arrangements with vendors. In the aggregate, there was approximately $50 and $155 outstanding under capital lease obligations at December 31, 2004 and 2003, respectively.

In March of 2002, we received proceeds of $10,000 from the sale of 10,000 shares, of mandatorily redeemable convertible Series X preferred stock. In May 2002, we received net proceeds of $5,000 from the sale of 8,531 shares of Series Y preferred stock and, pursuant to the provisions of the Series Y preferred stock purchase agreement, $3,531 of promissory notes issued to the Series Y preferred stock investors were cancelled.

We entered into a Revolving Credit and Term Loan Agreement, dated as of December 13, 2002 (the “Credit Agreement”), with a commercial bank providing for a revolving line of credit of up to $15,000 (the “Commitment”). Interest on borrowings under the Credit Agreement was payable at 0.5% percent above the Federal Funds Effective Rate. Our ability to borrow amounts available under the Credit Agreement was subject to the bank’s receipt of a like amount of

(Dollars in Thousands, Except Per Share Amounts)

guarantees from certain of our investors and/or other guarantors. On February 3, 2003, we borrowed $6,100 under the Credit Agreement. As of March 5, 2003, certain of our investors had guaranteed $9,100 under the Credit Agreement. On July 18, 2003, we repaid the $6,100 outstanding balance plus accrued interest, and terminated the Credit Agreement. We wrote off approximately $184 of the related unamortized balance of loan origination fees.

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

Pursuant to the terms of the Reimbursement Agreement, on December 27, 2002, we issued warrants to purchase 12,013,893 shares of our common stock to VP and certain of its affiliates and Columbia, in consideration for their guarantees aggregating $6,100. All such warrants 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 VP and certain of its affiliates and Columbia, bringing the total number of warrants issued in connection with the Reimbursement Agreement to 12,950,000. On February 3, 2003, we borrowed $6,100 on the Credit Agreement and the Guarantors’ guarantees of the subject loan became effective.

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

On March 5, 2003, we and VP entered into Amendment No. 1 to the Reimbursement Agreement, pursuant to which VP increased its guarantee by $3,000 bringing the aggregate guarantees by all Guarantors under the Reimbursement Agreement, as amended, to $9,100. As consideration for VP’s increased guarantee, if we closed an equity financing on or before December 3, 2003, we were authorized to issue VP and certain of its affiliates additional warrants to purchase the type of equity securities issued by us in such equity financing. The number of such additional warrants would be determined by dividing the per share price of such equity securities into a thousand dollars. Accordingly, since we closed a financing on July 18, 2003, we issued to VP and certain of its affiliates in December 2003, additional warrants with a three-year life to purchase 2,260,909 shares of our common stock at a per share price of $0.4423.

(Dollars in Thousands, Except Per Share Amounts)

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”), and VantagePoint Venture Partners III (Q), L.P., VantagePoint Venture Partners III, L.P., VantagePoint Communications Partners, L.P. and VantagePoint Venture Partners 1996, L.P. (collectively, “VantagePoint” and, together with Deutsche Bank, the “Senior Noteholders”) relating to the sale and purchase of an aggregate of (i) $30,000 in senior secured promissory notes (the “Notes”) and (ii) warrants to purchase 157,894,737 shares of our common stock for a period of three years at an exercise price of $0.38 per share (the “2003 Warrants”). The aggregate purchase price for the Notes and 2003 Warrants was $30,000.

Subject to the terms and conditions of the Note and Warrant Purchase Agreement, we issued an aggregate of $30,000 in principal amount of Notes to the Senior Noteholders on July 18, 2003. As of December 31, 2004, an aggregate principal amount of $30,000 of Notes remained outstanding. Principal on the Notes is payable in a single payment on July 18, 2006. The Notes provide for an annual interest rate of 1.23%, payable in cash, quarterly in arrears commencing on October 31, 2003, unless we were to elect to capitalize such interest and pay it together with the principal amount of the Notes at maturity on July 18, 2006. Pursuant to the Security Agreement, our obligations under the Notes are secured by a security interest in a majority of our personal property and assets and certain of our subsidiaries. The terms of the Notes also contain provisions that limit our ability to incur additional indebtedness and place other restrictions on our business. Prior to the due date of the first interest payment, we elected to defer all interest payments on the Notes until further notice. Interest expense accrued on the Notes for the years ended December 31, 2004 and 2003, approximated $379 and $171, respectively.

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

On July 18, 2003, we recorded the note and warrant transactions in accordance with Accounting Principles Board Opinion No. 14, “Accounting for Convertible Debt and Debt Issued with Stock purchase Warrants,” whereby a fair value was ascribed to the 157,894,737 2003 Warrants to be issued to the Senior Noteholders (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 2003 Warrants and $0.4423 per share for the 2,260,909 warrants, and (vi) a current market price of $0.83 per share (the closing price of our common stock on July 18, 2003). A fair value was ascribed to the $30,000 Notes using a present value method with a 19% discount rate. The relative fair value of the warrants representing 87% of the combined fair value of the warrants and Notes was applied to the $30,000 proceeds to determine a note discount of approximately $26,063, which was recorded as a reduction to the Notes payable and an increase to additional paid in capital. The note discount is being amortized to interest expense using the “Effective Interest Method” over the 36 month term of the Notes. For the years ended December 31, 2004 and 2003, approximately $4,954 and $1,266, respectively, of this note discount has been amortized to interest expense.

(Dollars in Thousands, Except Per Share Amounts)

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

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

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

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

The Company and Laurus had placed the transactions and funds into escrow on August 31, 2004, pending our procurement of a waiver of certain rights of the Senior Noteholders, represented by Deutsche Bank Trust Company Americas (“DBTCA”), and agreement from such noteholders to subordinate their lien on trade accounts receivable of the Company to the lien granted to Laurus. On October 7, 2004, we reached agreement with Laurus and the Senior Noteholders on subordination terms and the initial financing proceeds of $4,250 were released from escrow, of which $4,024 were deposited into a Company account with DBTCA. Our withdrawal and use of such deposited financing proceeds are subject to the prior approval of DB Advisors, LLC, as advisor to Deutsche Bank, and DBTCA. As of March 1, 2005, we have received approval to withdraw and have received $3,038 of the $4,250 borrowed to date, of which $2,432 was identified as restricted cash at December 31, 2004. As of March 1, 2005, we also received approval to draw down all of the $750 subject to the revolving credit facility.

The Laurus Notes mature on August 1, 2006. Annual interest on the Laurus Notes is equal to the prime rate published in The Wall Street Journal from time to time, plus two percent, provided, that, such annual rate of interest on the Laurus Notes may not be less than six percent or more than seven percent. Notwithstanding the six percent interest rate floor, the interest rate on the Laurus Notes will be decreased two percent per annum for each 25% increase in the price of our common stock above $0.28 per share, if, at that time, we have on file with the SEC a registration statement for the shares of common stock issued or issuable upon conversion of the MB Note and upon exercise of the Laurus Warrant and, if not, the interest rate will be decreased one percent per

(Dollars in Thousands, Except Per Share Amounts)

annum for each 25% increase in the price of our common stock above $0.28 per share. As of February 4, 2005, the Company has an effective registration statement on file with the SEC in respect to the resale of such common stock. Any change in the interest rate on the Laurus Notes will be determined on a monthly basis. In no event will the interest rate on the Laurus Notes be less than 0.00%. Interest on the Laurus Notes is payable monthly in arrears on the first day of each month during the term of the Laurus Notes.

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

The Laurus Warrant grants Laurus the right to purchase up to 1,143,000 shares of our common stock at an exercise price of $0.35 per share. On October 7, 2004, we also issued a warrant to purchase 178,571 shares of our common stock at an exercise price of $0.35, and made a cash payment of approximately $38, to TN Capital Equities, Ltd. (“TN Capital”), as compensation for TN Capital’s having served as the placement agent in the financing transaction with Laurus. The Laurus Warrant and the warrant issued to TN Capital each expire on August 31, 2009. Under the terms of the Minimum Borrowing Note Registration Rights Agreement, Laurus has been afforded certain registration rights with respect to the shares of the Company’s common stock underlying the MB Note and the Laurus Warrant. TN Capital was also afforded piggyback registration rights for the shares of our common stock underlying the warrant it received. On November 5, 2004, we filed with the SEC a preliminary registration statement on Form S-3 covering the potential resale of the shares of common stock underlying the MB Note, Laurus Warrant and the warrant issued to TN Capital. The registration statement was declared effective and we filed with the SEC our Rule 424(b) final prospectus on February 4, 2005.

In exchange for agreement by the Senior Noteholders to subordinate to Laurus their prior lien on certain of our accounts receivable, we issued warrants to the Senior Noteholders (the “2004 Warrants”), allocated ratably in accordance with the Senior Noteholders’ interests in the Company's July 2003 note and warrant financing, to purchase up to an aggregate of 19,143,000 shares of common stock. The 2004 Warrants were approved by our stockholders on February 9, 2005; expire on July 18, 2006; and are exercisable solely in the event of a change of control of the Company where the price paid per share of common stock or the value per share of common stock retained by our common stockholders in any such change of control (the “Change of Control Price”) is less than the then current per share exercise price of the 2003 Warrants. The exercise price of the 2004 Warrants will be calculated at the time of a qualifying change of control of the Company, if any, and will be equal to the Change of Control Price. The Senior Noteholders have been afforded certain registration rights with regard to the 2004 Warrants. As a condition to our issuance of the 2004 Warrants, the Senior

(Dollars in Thousands, Except Per Share Amounts)

Noteholders waived any anti-dilution rights to which they might otherwise be entitled under all warrants previously issued to the Senior Noteholders resulting from the issuance or exercise of the 2004 Warrants. We determined that the fair value of the 2004 Warrants is not material and accordingly no modification to the July 18, 2003, note and warrant transaction was required.

We determined, in accordance with the guidance of SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” that the following derivatives resulted from the Laurus financing transaction described above: (i) the conversion option of the MB Note, and (ii) the 1,321,571 warrants issued to Laurus and TN Capital. Accordingly, we recorded the fair value of these derivatives approximating $231 as a debt discount and a non-current liability on our consolidated balance sheet. The note discount is being amortized to interest expense using the “Effective Interest Method” of amortization over the 22 month term of the MB Note. For the year ended December 31, 2004, approximately $27 of this note discount has been amortized to interest expense. Also, at December 31, 2004, the recorded value of the derivatives, were increased by approximately $55, with a corresponding charge to other expense, to the then current fair value of approximately $286.

Cash Used In Operating Activities. In 2004, 2003 and 2002, net cash used in our operating activities was approximately $7,541, $13,715 and $17,706, respectively.

Net cash used in operating activities of $7,541 in 2004 decreased by $6,174 (45%) from $13,715 in 2003. The improvement in net cash used for operating activities was primarily due to lower net loss of approximately $11,768 primarily due to reduced operating expenses resulting from our cost containment efforts, partially offset by lower non-cash items including: depreciation and amortization, provisions for bad debt expense and sales credits and allowances, stock compensation, amortization of debt issuance costs, amortization of debt discount and gain on note settlement totaling approximately $4,645. Also contributing to the improved operating cash flow was a net improvement in accounts receivable of approximately $6,742 (due to a decrease in accounts receivable of approximately $589 in 2004 primarily resulting from lower revenues combined with improved collections, compared to an increase in 2003 of approximately $6,153 due to the acquisition of the NAS assets). These improvements were partially offset by (i) lower net accrued expenses and accounts payable of approximately $3,776 (caused by a decrease of approximately $2,689 in 2004 combined with an increase of approximately $1,087 in 2003), principally due to payment of previously accrued network costs related to operation of the NAS assets, (ii) a net decrease in deferred revenue of approximately $2,662 (caused by approximately $1,268 decrease in 2004 due to deferred amortization of installation revenue exceeding deferred new installations versus an increase of approximately $1,394 in 2003 resulting from the acquisition of the NAS assets), and (iii) a net increase in other assets of approximately $1,253 (due to approximately $386 increase in 2004 compared to a decrease in 2003 of approximately $867).

Cash Used in Investing Activities. Net cash used in investing activities in 2004, 2003 and 2002, was approximately $3,078, $11,135 and $2,368, respectively. For the year ended December 31, 2004, approximately $651 was used primarily for the purchase of equipment and $2,427 was attributable to an increase in restricted cash resulting from the balance of proceeds of the Laurus financing. For the year ended, December 31, 2003, approximately $2,405 was used primarily for the purchase of equipment and approximately $8,743 was used for acquisition of subscriber lines and a $4 increase in restricted cash, resulting from an increase of the Company’s share of matching contributions for terminated employees in the Company’s 401(k) plan. These expenditures were partially offset by approximately $17 in proceeds from sale of equipment. For the year ended, December 31, 2002, approximately $1,647 was used primarily for the purchase of equipment and approximately $1,150 was used for acquisition of subscriber lines. These expenditures were partially offset by approximately $85 in proceeds from sale of equipment and a $344 decrease in restricted cash, primarily resulting from our settlement of holdback payments attributable to acquisitions.

(Dollars in Thousands, Except Per Share Amounts)

The development and expansion of our business has required significant capital expenditures (we spent approximately $55,942 and $33,811, including collocation application fees, in calendar years 2000 and 1999, respectively). During the last three years, capital expenditures, excluding acquisitions, have been made primarily for maintenance and/or replacement equipment, and were approximately $651, $2,405 and $1,647 for the years ended December 31, 2004, 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. We currently anticipate spending less than $1,000 for capital expenditures, during the year ending December 31, 2005, primarily for the maintenance of our network and for minimal replacement equipment. The actual amounts and timing of our capital expenditures could differ materially both in amount and timing from our current plans. In addition to capital spent on equipment, we have spent the amounts described below for certain acquisitions:

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

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

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

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

(Dollars in Thousands, Except Per Share Amounts)

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

In the third quarter of 2002, we entered into an Asset Purchase Agreement dated as of July 30, 2002 (the “Abacus Asset Purchase Agreement”) with Abacus 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, we were able to migrate and acquire 1,066 lines for a purchase price of approximately $543. The Abacus customer line acquisitions were accounted for under the purchase method of accounting and, accordingly, the purchase price has been allocated to the subscriber lines acquired based on their estimated fair values at the date of acquisition. This amount was amortized on a straight-line basis over two years from the date of purchase.

Contractual Obligations. As of December 31, 2004, we had the following contractual obligations:

	Payments due by period
Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years

Long-Term Debt Obligations (1)	$	35,393	$	-	$	35,393	$	-	$	-
Capital Lease Obligations		51		51		-		-		-
Operating Lease Obligations
Facilities Leases (2)		1,205		789		416		-		-
Operating Equipment & Maintenance Contracts		152		145		7		-		-
Purchase Obligations
Software Maintenance and Support		402		402		-		-		-
Marketing Services		114		108		6		-		-
Network Service Providers (3)		11,771		6,323		5,145		303		-
Total	$	49,088	$	7,818	$	40,967	$	303	$	-

(Dollars in Thousands, Except Per Share Amounts)

Notes:

(1)

Represents $30,000 aggregate principal amount of senior secured notes which mature on July 18, 2006 plus accrued interest of $1,143 and $4,250 aggregate principal amount of secured convertible note which matures on August 1, 2006. Amounts shown on the Company’s balance sheets relating to this indebtedness at December 31, 2004 and 2003 are net of debt discounts.

(2)	Office facility operating leases with minimum lease payments of approximately $788 in 2005, $233 in 2006, $169 in 2007 and $14 in 2008.

(3)	Includes early termination fees that would be assessable in connection with the termination of certain purchase commitments with various service providers.

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

In addition to our contractual obligations identified in the above table, on July 22, 2004, we issued to VantagePoint, pursuant to a recapitalization agreement, 14,000 shares of Series Z preferred stock, with a liquidation preference, in certain circumstances, of up to $1,120 per share, as more fully set forth in our Certificate of Designation of Series Z Preferred Stock under our certificate of incorporation.

Cash Resources and Liquidity Constraints. As of December 31, 2004, we had cash and cash equivalents of approximately $7,079, additional but restricted cash of approximately $2,432 and working capital of approximately $4,273.

We intend to use our cash resources to finance our operating losses, capital expenditures, lease payments, and working capital requirements, and for other general corporate purposes, including the contractual obligations summarized above under the heading, “Contractual Obligations.” The amounts actually expended for these purposes will vary significantly depending on a number of factors, including our ability to raise sufficient additional debt, equity or other capital, market acceptance of our services, revenue growth, planned capital expenditures, cash generated from operations, improvements in operating productivity, the extent and timing of entry into new markets, the introduction of new products or services, the modification or elimination of certain products or services, and, to the extent that we seek additional acquisitions of complementary businesses, subscriber lines and other assets to accelerate our growth and the availability of and prices paid for acquisitions.

We experience end-user disconnections, or “churn,” that significantly impact our ability to sustain or grow our revenue base. End-user churn is the result of several factors, including (i) recent consolidation in our industry and higher competition leading to reduced pricing for the services we offer; (ii) end-users’ closing facilities, moving to new locations or ceasing operations; and (iii) end-users’ determinations that less robust but lower-priced service offerings from competitors are sufficient for their needs. While we are working to reduce our end-user churn, many of the causes of such churn are beyond our control. In addition, in the absence of our

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

	December 31,
ASSETS	2004			2003
Current assets:
Cash and cash equivalents	$	7,079		$	13,779
Accounts receivable (net of allowances of $874 and $902
at December 31, 2004 and 2003, respectively)		6,344			8,054
Inventory		438			477
Deferred costs		424			931
Prepaid expenses and other current assets		3,914			1,002
Total current assets		18,199			24,243

Fixed assets, net		12,719			24,357
Goodwill		8,482			8,482
Other intangible assets, net		47			1,010
Other assets		1,415			969
Total assets	$	40,862		$	59,061


LIABILITIES, MANDATORILY REDEEMABLE, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	5,887		$	3,570
Accrued salaries		730			1,046
Accrued liabilities		2,459			7,529
Deferred revenue		4,800			6,068
Current portion of capital leases payable		50			105
Total current liabilities		13,926			18,318

Capital leases payable		-			50
Notes payable, net of discount		14,544			5,374
Financial instrument derivatives		286			-
Total liabilities		28,756			23,742

Commitments and contingencies (Note 7)

Mandatorily redeemable, convertible preferred stock :
20,000,000 preferred shares authorized: 20,000 shares designated as Series X,
mandatorily redeemable, convertible preferred stock, $.001 par value; 0 and 20,000
shares issued and outstanding as of December 31, 2004 and December 31, 2003,
respectively; liquidation preference: $0 and $24,660 as of December 31, 2004
and December 31, 2003, respectively		-			16,231

20,000,000 preferred shares authorized: 15,000 shares designated as Series Y,
mandatorily redeemable, convertible preferred stock, $.001 par value; 0 and 1,000
shares issued and outstanding as of December 31, 2004 and December 31, 2003,
respectively; liquidation preference: $0 and $1,211 as of December 31, 2004
and December 31, 2003, respectively		-			788

Stockholders’ equity :
Preferred Stock: 20,000,000 preferred shares authorized: 14,000 shares designated as
Series Z, $.001 par value; 14,000 and 0 shares issued and outstanding as of
December 31, 2004 and December 31, 2003, respectively; liquidation preference:
$15,680 and $0 as of December 31, 2004 and December 31, 2003, respectively		2,630			-

Common stock, $.0005 par value; 800,000,000 shares authorized, 233,619,817 and
105,449,054 shares issued and outstanding as of December 31, 2004 and 2003, respectively		117			53
Additional paid-in capital		352,076			337,735
Accumulated deficit		(342,717	)		(319,488	)
Total stockholders’ equity		12,106			18,300

Total liabilities, mandatorily redeemable convertible preferred stock and stockholders’ equity	$	40,862		$	59,061


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

(dollars in thousands)

									Additional
	Preferred Stock				Common Stock				Paid - In			Deferred			Accumulated
	Shares		Amount		Shares		Amount		Capital			Compensation			Deficit			Total

Balance as of December 31, 2001		-	$	-		64,851,462	$	32	$	300,757		$	(1,668	)	$	(248,397	)	$	50,724
Deferred compensation - stock options		-		-		-		-		(2	)		2			-			-
Amortization of deferred compensation		-		-		-		-		-			1,228			-			1,228
Issuance of common stock - employee stock purchase plan		-		-		14,000		-		4			-			-			4
Issuance of common stock - stock options		-		-		64,437		-		9			-			-			9
Beneficial conversion feature of preferred stock		-		-		-		-		18,531			-			-			18,531
Accrued dividends on preferred stock		-		-		-		-		(3,573	)		-			-			(3,573	)
Accretion of beneficial conversion feature of preferred
stock, net of issuance costs		-		-		-		-		(10,078	)		-			-			(10,078	)
Net loss		-		-		-		-		-			-			(36,094	)		(36,094	)
Balance as of December 31, 2002		-		-		64,929,899		32		305,648			(438	)		(284,491	)		20,751

Amortization of deferred compensation		-		-		-		-		-			438			-			438
Valuation of common stock warrants issued for loan guarantees		-		-		-		-		6,656			-			-			6,656
Issuance of common stock - employee stock purchase plan		-		-		15,380		-		5			-			-			5
Issuance of common stock - stock options		-		-		5,363,763		3		2,278			-			-			2,281
Issuance of common stock - preferred stock conversions		-		-		31,629,760		16		13,984			-			-			14,000
Issuance of common stock - dividends on preferred stock conversions		-		-		3,510,252		2		2,520			-			-			2,522
Accrued dividends on preferred stock		-		-		-		-		(3,698	)		-			-			(3,698	)
Accretion of beneficial conversion feature of preferred stock		-		-		-		-		(14,327	)		-			-			(14,327	)
Preferred stock reclassification		-		-		-		-		(1,394	)		-			-			(1,394	)
Debt discount ascribed to warrants and notes payable		-		-		-		-		26,063			-			-			26,063
Net loss		-		-		-		-		-			-			(34,997	)		(34,997	)
Balance as of December 31, 2003		-		-		105,449,054		53		337,735			-			(319,488	)		18,300

Issuance of common stock - employee stock purchase plan		-		-		8,836		-		4			-			-			4
Issuance of common stock - stock options		-		-		39,911		-		12			-			-			12
Issuance of common stock - preferred stock conversions		-		-		113,372,015		57		20,943			-			-			21,000
Issuance of common stock - dividends on preferred stock conversions		-		-		14,336,841		7		5,814			-			-			5,821
Issuance of common stock - warrant exercise		-		-		413,160		-		-			-			-			-
Accrued dividends on preferred stock		-		-		-		-		(950	)		-			-			(950	)
Accretion of beneficial conversion feature of preferred stock		-		-		-		-		(8,852	)		-			-			(8,852	)
Issuance of Series Z preferred stock at fair value		14,000		2,630		-		-		(2,630	)		-			-			-
Net loss		-		-		-		-		-			-			(23,229	)		(23,229	)
Balance as of December 31, 2004		14,000	$	2,630		233,619,817	$	117	$	352,076		$	-		$	(342,717	)	$	12,106


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

DSL.net, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)

	Year ended December 31,
	2004			2003			2002
Cash flows from operating activities:
Net loss	$	(23,229	)	$	(34,997	)	$	(36,094	)

Reconciliation of net loss to net cash (used in)
operating activities:
Depreciation and amortization		13,132			16,359			20,332
Bad debt expense		1,119			2,117			2,536
Sales credits and allowances		2			394			1,181
Amortization of deferred debt issuance costs and debt discount		5,014			7,922			9
Non-cash mark to market adjustment		55			-			-
Stock compensation expense		-			438			1,228
Loss on sale/write-off of fixed assets		120			163			375
Gain on note settlement		-			(3,500	)		-
Non-cash interest on lease payoff		-			194			-
Net changes in assets and liabilities, net of acquired assets:
(Increase) / decrease in accounts receivable		589			(6,153	)		(2,194	)
Decrease / (increase) in prepaid and other current assets		61			(213	)		1,318
Decrease / (increase) in other assets		(447	)		1,080			(1,480	)
Increase / (decrease) in accounts payable		2,317			(1,051	)		294
(Decrease) / increase in accrued salaries		(316	)		(179	)		318
(Decrease) / increase in accrued expenses		(4,690	)		2,317			(5,111	)
(Decrease) / increase in deferred revenue		(1,268	)		1,394			(418	)
Net cash used in operating activities		(7,541	)		(13,715	)		(17,706	)

Cash flows from investing activities:
Purchases of property and equipment		(651	)		(2,405	)		(1,647	)
Proceeds from sales of property and equipment		-			17			85
Acquisitions of businesses and customer lines		-			(8,743	)		(1,150	)
(Increase) / decrease in restricted cash		(2,427	)		(4	)		344
Net cash used in investing activities		(3,078	)		(11,135	)		(2,368	)

Cash flows from financing activities:
Proceeds from credit facility		-			6,100			-
Payments on credit facility		-			(6,100	)		-
Proceeds from common stock issuance		16			2,287			14
Proceeds from preferred stock issuance and bridge note		-			-			15,000
Proceeds from note issuances		4,008			30,000			-
Principal payments under notes and capital lease obligations		(105	)		(4,976	)		(2,907	)

Net cash provided by financing activities		3,919			27,311			12,107

Net (decrease) / increase in cash and cash equivalents		(6,700	)		2,461			(7,967	)
Cash and cash equivalents at beginning of year		13,779			11,318			19,285
Cash and cash equivalents at end of year	$	7,079		$	13,779		$	11,318

Supplemental disclosure:
Cash paid: interest	$	56		$	782		$	819

Fixed asset purchases included in accounts payable	$	32		$	3		$	485

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 4)
The fair value of the assets acquired was $14,737

On September 8, 2003, the Company purchased network assets and associated subscriber lines of
TalkingNets Holdings, LLC (Note 4)
The fair value of the assets acquired was $851

Supplemental disclosure of non-cash financing activities:
During the first and third quarters of 2004, a total of 20,000 shares of Series X Preferred Stock were converted
into 111,111,108 shares of common stock and $5,600 of accrued dividends pertaining thereto were
paid by issuing 14,026,974 shares of common stock (Note 9).

Also during the first quarter 2004, 1,000 shares of Series Y Preferred Stock were converted
into 2,260,910 shares of common stock and $221 of accrued dividends pertaining thereto were
paid by issuing 309,864 shares of common stock. (Note 9).

Also during the first quarter of 2004, the Company issued 413,160 shares of its common stock
upon the exercise of 1,358,025 of stock warrants granted in connection with certain loan guarantees
in a cashless exchange (Note 9).

During the third and fourth quarter 2003, 14,000 shares of Series Y Preferred Stock were converted into
31,629,759 shares of common stock and $2,522 of accrued dividends pertaining thereto were paid by issuing
3,510,255 shares of common stock (Note 9).
The accompanying notes are an integral part of these consolidated financial statements.

	Year Ended December 31,
	2004			2003			2002
Net loss, as reported	$	(23,229	)	$	(34,997	)	$	(36,094	)
Add: Stock-based employee compensation included in net loss		-			438			1,228
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards		(4,889	)		(3,863	)		(4,476	)
Pro forma under SFAS 123	$	(28,118	)	$	(38,422	)	$	(39,342	)

Net loss applicable to common stockholders:
As reported	$	(35,661	)	$	(53,022	)	$	(49,745	)
Pro forma under SFAS 123	$	(40,550	)	$	(56,447	)	$	(52,993	)
Basic and diluted net loss per common share:
As reported	$	(0.20	)	$	(0.72	)	$	(0.77	)
Pro forma under SFAS 123	$	(0.22	)	$	(0.76	)	$	(0.82	)

	Shares of Common Stock
	December 31,
	2004		2003		2002
Options to purchase common stock	40,651,934		18,671,766		23,877,004
Warrants to purchase common stock		192,212,192		173,105,646		13,033,314
Preferred Series X Stock convertible to common stock		-		111,111,111		111,111,111
Preferred Series Y Stock convertible to common stock		-		2,260,909		30,000,000
Convertible note payable		15,178,571		-		-
Total		248,042,697		305,149,432		178,021,429


Stock compensation
Network	$	-	$	10	$	30
Operations		-		11		52
General and administrative		-		69		283
Sales and marketing		-		348		863
Total		-		438		1,228

Depreciation and amortization
Network		11,241		12,300		13,719
General and administrative		1,891		4,059		6,613
Total	$	13,132	$	16,359	$	20,332



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

	Estimated
	Useful
	Lives		2004			2003
Network and computer equipment		3-5 years	$	45,593		$	45,303
Furniture, fixtures, office equipment and software		3-5 years		19,129			18,994
Vehicles		3 years		190			190
Collocation costs		5 years		17,014			16,985
				81,926			81,472
Less-accumulated depreciation and amortization				(69,207	)		(57,115	)
			$	12,719		$	24,357

	Year ended December 31
	2003			2002

Pro forma revenue	$	72,091		$	71,615
Pro forma operating loss		(29,604	)		(43,477	)
Pro forma net loss		(35,016	)		(65,269	)
Pro forma net loss applicable to common stockholders	$	(53,041	)	$	(78,921	)
Pro forma net loss per share, basic and diluted	$	(0.72	)	$	(1.22	)
Shares used in computing pro forma net loss per share, basic and diluted		74,125,513			64,857,869

	Operating	Capital
	Leases	Leases

2005	$ 788	$ 51
2006	233	-
2007	169	-
2008	14	-
	$ 1,204	$ 51
Less: Amount representing interest		1
Present value of future minimum lease payments		$ 50

	Mandatorily Redeemable Convertible Preferred Stock
	Series X						Series Y
	Shares			Amount			Shares			Amount

Balance December 31, 2001		10,000		$	436			6,469		$	35

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

Discount on Series X and Y Preferred Stock resulting from a beneficial conversion feature, net of issuance costs					(10,000	)					(8,531	)
Accrued dividends on Series X and Y Preferred Stock					2,200						1,373

Accretion of beneficial conversion feature of Series X and Y Preferred Stock					6,105						3,973
Balance December 31, 2002		20,000		$	8,741			15,000		$	5,381

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

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

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

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

Preferred Stock reclassification					-						1,394
Balance December 31, 2003		20,000		$	16,231			1,000		$	788

Conversion Series X and Y Preferred Stock to common stock		(20,000	)	$	(20,000	)		(1,000	)	$	(1,000	)

Accrued dividends on Series X and Y Preferred Stock					940						10

Payment of dividends on converted Series X and Y Preferred Stock					(5,600	)					(221	)

Accretion of beneficial conversion feature of Series X and Y Preferred Stock					8,429						423

Balance December 31, 2004		-		$	-			-		$	-

				Weighted Average
	Number of			Fair		Exercise
	Shares			Value		Price

Outstanding at December 31, 2001	13,877,394

Granted		10,891,500		$	0.25	$	0.29
Exercised		(64,433	)			$	0.14
Cancelled		(827,457	)			$	3.47

Outstanding at December 31, 2002		23,877,004

Granted		1,463,000		$	0.47	$	0.56
Exercised		(5,363,763	)			$	0.43
Cancelled		(1,304,475	)			$	1.41

Outstanding at December 31, 2003		18,671,766

Granted		31,950,000		$	0.51	$	0.64
Exercised		39,911				$	0.29
Cancelled		9,929,922				$	0.85

Outstanding at December 31, 2004		40,651,934

	Options Outstanding						Options Exercisable

			Weighted Avg.
			Remaining Life		Weighted Avg.				Weighted Avg.
Exercise Price	Number		(in years)		Exercise Price		Number		Exercise Price

12/31/04
$0.02-0.49		17,807,444		7.7		$ 0.40		7,558,901		$ 0.34
$0.49-1.05		19,148,341		7.7		$ 0.58		8,243,953		$ 0.60
$1.05-2.07		1,379,692		6.9		$ 1.10		1,374,627		$ 1.10
$2.07-5.19		1,963,124		5.4		$ 2.80		1,953,852		$ 2.80
$5.19-7.78		171,833		4.6		$ 6.89		171,833		$ 6.89
$7.78-10.37		80,000		0.2		$ 8.38		80,000		$ 8.38
$10.37-12.96		91,000		5.3		$11.94		91,000		$11.94
$12.96-15.56		8,500		2.7		$14.52		8,500		$14.52
$15.56-$25.94		2,000		5.0		$22.34		2,000		$22.34
		40,651,934		7.5		$ 0.70		19,484,666		$ 0.90


12/31/03
$0.02-0.49	8,026,838	8.5	$ 0.29	2,752,783	$ 0.28
$0.49-1.05	5,953,181	8.2	$ 0.62	2,653,537	$ 0.64
$1.05-2.07	1,799,475	6.9	$ 1.24	1,339,411	$ 1.29
$2.07-5.19	2,314,069	6.8	$ 2.87	1,868,464	$ 2.87
$5.19-7.78	325,745	6.3	$ 6.76	294,496	$ 6.77
$7.78-10.37	81,000	5.8	$ 8.38	81,000	$ 8.38
$10.37-12.96	103,000	6.3	$11.94	94,725	$11.94
$12.96-15.56	62,458	6.0	$14.79	61,213	$14.80
$15.56-$25.94	6,000	6.1	$21.50	5,874	$21.44
	18,671,766	8.0	$ 1.07	9,151,503	$ 1.57

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

	Net Revenue		Operating Loss			Net Loss			Preferred Stock Dividends, Accretion and Fair Value Charges			Net Loss Applicable to Common Stockholders			Net Loss Per Share, Basic and Diluted
Q1 2004 Q2 2004 Q3 2004 Q4 2004	$	17,820 17,686 16,827 16,116	$	(6,156 (4,680 (4,515 (2,650	) ) ) )	$	(7,063 (5,824 (5,919 (4,423	) ) ) )	$	(3,942) (1,008) (7,482) -		$	(11,005 (6,832 (13,401 (4,423	) ) ) )	$	(0.08 (0.05 (0.06 (0.02	) ) ) )

Q1 2003 Q2 2003 Q3 2003 Q4 2003	$	16,765 18,097 18,227 18,244	$	(8,632 (7,890 (5,957 (7,152	) ) ) )	$	(9,243 (8,700 (9,111 (7,943	) ) ) )	$	(4,061 (4,061 (6,363 (3,540	) ) ) )	$	(13,304 (12,761 (15,474 (11,483	) ) ) )	$	(0.20 (0.20 (0.22 (0.12	) ) ) )

Name	Age	Position
Kirby G. Pickle	48	Class III Director and Chief Executive Officer
J. Keith Markley	46	President and Chief Operating Officer
Robert J. DeSantis	49	Chief Financial Officer and Treasurer
Marc R. Esterman	40	Vice President - Corporate Affairs, General Counsel and Secretary
Walter R. Keisch	59	Vice President - Finance
Robert B. Hartnett, Jr. (1)(2)(3)	53	Class I Director
Robert G. Gilbertson (1)(2)(3)	63	Class II Director
Paul J. Keeler (1)(2)(3)	60	Class II Director
William J. Marshall	49	Class II Director
James D. Marver	54	Class III Director
Duncan Davison	52	Class III Director

											Long Term Compensation
Name and Principal Position	Year		Salary ($)		Bonus ($)		Other Annual Compensation		Restricted Stock Award(s)		Securities Underlying Options		All Other Compensation ($)
Kirby G. Pickle (1)		2004		245,000		131,250 (2)		8,500 (3)		—		10,000,000		—
Director and		2003		—		—		—		—		—		—
Chief Executive Officer		2002		—		—		—		—		—		—

David F. Struwas (4) Former Chairman of the Board and		2004 2003		183,508 200,000		— —		— —		— —		— —		— —
Chief Executive Officer		2002		200,000		45,000		—		—		1,700,000		—

Keith Markley President and Chief Operating Officer		2004 2003 2002		207,692 200,000 200,000		— — 45,000		— — —		— — —		1,250,000 — 1,250,000		— — —

Robert J. DeSantis Chief Financial Officer and Treasurer		2004 2003 2002		207,692 200,000 184,615		— — —		— — —		— — —		1,250,000 — 1,000,000		— — 1,018(5	)

Marc R. Esterman Vice President - Corporate Affairs,		2004 2003		171,346 159,856		— —		— —		— —		950,000 —		— —
General Counsel and Secretary		2002		158,684		—		—		—		100,000		—

Walter R. Keisch Vice President Finance		2004 2003 2002		155,769 150,000 150,000		— — 40,000		— — —		— — —		950,000 — 400,000		— — —

	Number of Securities Underlying Options		% of Total Options Granted to Employees in			Exercise Price or Base		Expiration		Potential Net Realizable Value(4)
Name	Granted		Fiscal Year			Price ($)		Date		5%		10%

Kirby G. Pickle (1)		10,000,000		31.30	%		$0.48		4/15/2014		$3,018,694		$3,391,012
David F. Struwas (2)		-		-			-		-		-		-
Keith Markley (3)		1,250,000		3.91	%		$0.56		3/18/2014		$440,226		$494,522
Robert J. DeSantis (3)		1,250,000		3.91	%		$0.56		3/18/2014		$440,226		$494,522
Marc R. Esterman (3)		950,000		2.97	%		$0.56		3/18/2014		$334,571		$375,837
Walter R. Keisch(3)		950,000		2.97	%		$0.56		3/18/2014		$334,571		$375,837

			Number of Securities Underlying Unexercised Options at December 31, 2004		Value of Unexercised In-the- Money Options at December 31, 2004(1)
Name	Shares Acquired on Exercise (#)	Value Realized ($)	Exercisable	Unexercisable	Exercisable	Unexercisable
Kirby G. Pickle	0	$ 0	2,222,222	7,777,778	$ 0	$ 0
Keith Markley	0	$ 0	2,772,223	1,180,557	$ 0	$ 0
Robert J. DeSantis	0	$ 0	2,029,166	1,131,946	$ 0	$ 0
Marc R. Esterman	0	$ 0	411,917	731,946	$ 0	$ 0
David F. Struwas (2)	0	$ 0	3,150,000	0	$ 0	$ 0
Walter R. Keisch	0	$ 0	646,560	802,052	$ 0	$ 0

Name	Common Stock				Series Z Preferred Stock				Combined Voting Power
	Shares		% of Class		Shares		% of Class		Votes		% of Votes
Kirby G. Pickle (1)		3,333,333		1.4%		-		-		3,333,333		1.4%
J. Keith Markley (2)		3,050,001		1.3%		-		-		3,050,001		1.3%
Robert J. DeSantis (3)		2,279,166		*						2,279,166		*
Walter R.Keisch (4)		806,249		*		-		-		806,249		*
Marc R. Esterman (5)		534,884		*		-		-		534,884		*
Robert B. Hartnett, Jr. (6)		697,220		*		-		-		697,220		*
Robert G. Gilbertson (7)		783,248		*		-		-		783,248		*
Paul J. Keeler (8)		747,913		*		-		-		747,913		*
William J. Marshall (9)		932,639		*		-		-		932,639		*
Duncan Davidson		-		*		-		-		-		*
James D. Marver (10)		109,754,713		38.2%		14,000		100%		109,768,713		38.2%
The VantagePoint entities (11) 1001 Bayhill Drive, Suite 300 San Bruno, CA 94066		108,440,263		37.8%		14,000		100%		108,454,263		37.8%
Deutsche Bank AG London (12) 31 West 52^nd Street, 16^th Floor New York, NY 10019		118,421,053		33.6%		-		-		118,421,053		33.6%
All executive officers and directors as a group (11 persons) (13)		122,919,366		40.9%		14,000		100%		122,933,366		40.9%

Stockholder	Shares of Common Stock Held	Shares of Common Stock Issuable Upon Exercise of Warrants	Shares of Series Z Preferred Stock
VantagePoint Venture Partners 1996, L.P.	10,561,178	7,501,826	2,800
VantagePoint Communications Partners, L.P.	10,923,262	7,501,826	2,800
VantagePoint Venture Partners III, L.P.	3,880,430	4,162,163	914.2
VantagePoint Venture Partners III (Q), L.P.	29,562,531	34,160,753	7,485.8
VantagePoint Associates, L.L.C.	186,294	N/A	N/A

	2004		2003
Audit fees (1)	$	555,894	$	444,950
Audit-related fees		195,000		263,000
Tax fees		-		-
All other fees		-		-
Total	$	750,894	$	707,950

2.01	Amended and Restated Asset Purchase Agreement, dated as of December 11, 2002, By and among DSL.net, Inc., Network Access Solutions Corporation, Network Access Solutions LLC, NASOP, Inc. and Adelman Lavine Gold and Levin, A Professional Corporation, as deposit escrow agent (incorporated by reference to Exhibit 2.1 filed with our Form 8-K dated as of January 10, 2003).
3.01	Amended and Restated Certificate of Incorporation of DSL.net, Inc., as amended (incorporated by reference to Exhibit 4.01 filed with our registration statement on Form S-8 (No. 333-89886)).
3.02	Amended and Restated By-laws of DSL.net, Inc. (incorporated by reference to Exhibit 4.02 filed with our registration statement on Form S-8 (No. 333-89886)).
3.03	Amended and Restated Certificate of Incorporation of DSL.net, Inc., as amended (incorporated by reference to Exhibit 4.01 filed with our registration statement on Form S-8 (No. 333- 110131)).
4.01	Specimen Certificate for shares of DSL.net, Inc.’s Common Stock (incorporated by reference to the exhibit of corresponding number filed with our registration statement on Form S-1 (No. 333-80141)).
4.02	Specimen Certificate for shares of DSL.net, Inc.’s Series X Preferred Stock (incorporated by reference to Exhibit 4.01 filed with our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2001).

4.03	Specimen Certificate for shares of DSL.net, Inc.’s Series Y Preferred Stock (incorporated by reference to Exhibit 4.02 filed with our Form 8-K dated as of December 24, 2001).
4.04	Form of Stock Purchase Warrant dated as of October 12, 1999 between DSL.net, Inc. and certain investors (incorporated by reference to Exhibit 4.03 filed with our registration statement on Form S-1 (No. 333-96349)).
4.05	Form of Stock Purchase Warrant dated as of December 27, 2002 between DSL.net, Inc. and certain guarantors (incorporated by reference to Exhibit 4.06 filed with our Annual Report on Form 10-K for the year ended December 31, 2002).
4.06	Form of Stock Purchase Warrant dated as of March 26, 2003 between DSL.net, Inc. and certain guarantors (incorporated by reference to Exhibit 4.07 filed with our Annual Report on Form 10-K for the year ended December 31, 2002).
4.07	Form of Warrant to Purchase Shares of Common Stock of DSL.net, Inc., issued in connection with the Note and Warrant Purchase Agreement, dated as of July 18, 2003, by and among DSL.net, Inc. and the investors named therein (incorporated by reference to Exhibit 4.02 filed with our Current Report on Form 8-K, dated as of August 4, 2003).
4.08	Form of Stock Purchase Warrant dated as of December 22, 2003 between DSL.net, Inc. and each of the VantagePoint entities.
4.09	Description of Capital Stock (filed as Exhibit 6 to the Registrant's Registration Statement on Form 8-A filed on August 3, 2004 pursuant to Section 12(b) of the Exchange Act and incorporated herein by reference).

4.10	Common Stock Purchase Warrant, dated as of August 31, 2004 between DSL.net and Laurus Master Fund, Ltd. (incorporated by reference to Exhibit 10.3 filed with our registration statement on Form S-3 (No. 333-120264)).

4.11	Common Stock Purchase Warrant, dated as of October 7, 2004 between DSL.net and TN Capital Equities, Ltd. (incorporated by reference to Exhibit 10.4 filed with our registration statement on Form S-3 (No. 333-120264)).

4.12	Form of Common Stock Purchase Warrant issued to certain holders of DSL.net's senior debt, issued by DSL.net on October 7, 2004 (incorporated by reference to Exhibit 10.7 filed with our registration statement on Form S-3 (No. 333-120264)).

10.01†	Amended and Restated 1999 Stock Plan (incorporated by reference to the exhibit of corresponding number filed with our registration statement on Form S-1 (No. 333-80141)).
10.02†	1999 Employee Stock Purchase Plan (incorporated by reference to the exhibit of corresponding number filed with our registration statement on Form S-1 (No. 333-80141)).
10.03†	Amended and Restated 2001 Stock Option and Incentive Plan (incorporated by reference to Exhibit 4.03 filed with our registration statement on Form S-8 (No. 333-89886)).
10.04	Amended and Restated Investors' Rights Agreement dated as of July 16, 1999 between DSL.net, Inc. and the purchasers named therein (incorporated by reference to Exhibit 10.03 filed with our registration statement on Form S-1 (No. 333-80141)).

10.05	Amendment No. 1 to Amended and Restated Investors' Rights Agreement (incorporated by reference to Exhibit 10.21 filed with our registration statement on Form S-1 (No. 333-80141)).
10.06	Lease Agreement dated February 5, 1999 by and between DSL.net, Inc. and Long Wharf Drive, LLC, as amended (incorporated by reference to Exhibit 10.07 filed with our registration statement on Form S-1 (No. 333-96349)).

10.07	Amendment No. 1 dated June 9, 1999 to Lease Agreement by and between DSL.net, Inc. and Long Wharf Drive, LLC (incorporated by reference to Exhibit 10.08 filed with our registration statement on Form S-1 (No. 333-96349)).
10.08	Amendment No. 2 dated November 9, 1999 to Lease Agreement by and between DSL.net, Inc. and Long Wharf Drive, LLC (incorporated by reference to Exhibit 10.09 filed with our registration statement on Form S-1 (No. 333-96349)).
10.09	Amendment No. 3 dated January 20, 2000 to Lease Agreement by and between DSL.net, Inc. and Long Wharf Drive, LLC (incorporated by reference to Exhibit 10.10 filed with our registration statement on Form S-1 (No. 333-96349)).
10.10	Amendment No. 4 dated February 8, 2000 to Lease Agreement by and between DSL.net, Inc. and Long Wharf Drive, LLC (incorporated by reference to Exhibit 10.12 filed with our Annual Report on Form 10-K for the fiscal year ended December 31, 2000).
10.11	Amendment No. 5 dated November 12, 2001 to Lease Agreement by and between DSL.net, Inc. and Long Wharf Drive, LLC. (incorporated by reference to Exhibit 10.11 filed with our Annual Report on Form 10-K for the year ended December 31, 2001).
10.12	Amendment No. 6 to Lease, dated as of April 22, 2002, by and between DSL.net, Inc. and Long Wharf Drive, LLC (incorporated by reference to Exhibit 10.2 filed with our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2002).
10.13	Amendment No. 7 to Lease, dated as of December 4, 2002, by and between DSL.net, Inc. and Long Wharf Drive, LLC (incorporated by reference to Exhibit 10.13 filed with our Annual Report on Form 10-K for the year ended December 31, 2002).
10.14	Amended and Restated Shareholders' Agreement, as amended, by and among DSL.net, Inc. and certain investors (incorporated by reference to Exhibit 10.08 filed with our registration statement on Form S-1 (No. 333-80141)).
10.15†	Additional Compensation Agreement dated as of December 29, 1998 between DSL.net, Inc. and David Struwas (incorporated by reference to Exhibit 10.18 filed with our registration statement on Form S-1 (No. 333-80141)).
10.16†	Vector Internet Services, Inc. 1999 Stock Option Plan (incorporated by reference to Exhibit 4.4 filed with our registration statement on Form S-8 (No. 333-39016)).

10.17†	Vector Internet Services, Inc. 1997 Stock Option Plan (incorporated by reference to Exhibit 4.5 filed with our registration statement on Form S-8 (No. 333-39016)).
10.18	Stockholders Agreement dated as of December 24, 2001, by and among DSL.net and the Investors named therein (incorporated by reference to Exhibit 99.02 filed with our Form 8-K dated as of December 24, 2001).
10.19	Amendment No. 1 to Stockholders Agreement dated as of December 24, 2002 by and among DSL.net, Inc. and the investors named therein (incorporated by reference to Exhibit 10.27 filed with our Annual Report on Form 10-K for the year ended 2002).
10.20	Form of Senior Secured Promissory Note of DSL.net, Inc., issued in connection with the Note and Warrant Purchase Agreement, dated as of July 18, 2003, by and among DSL.net, Inc. and the investors named therein (incorporated by reference to Exhibit 4.01 filed with our Current Report on Form 8-K, dated as of August 4, 2003).
10.21	Form of Warrant to Purchase Shares of Common Stock of DSL.net, Inc., issued in connection with the Note and Warrant Purchase Agreement, dated as of July 18, 2003, by and among DSL.net, Inc. and the investors named therein (incorporated by reference to Exhibit 4.02 filed with our Current Report on Form 8-K, dated as of August 4, 2003).
10.22	Note and Warrant Purchase Agreement, dated as of July 18, 2003, by and among DSL.net, Inc. and the investors named therein (incorporated by reference to Exhibit 10.01 filed with our Current Report on Form 8-K, dated as of August 4, 2003).
10.23	Agency, Guaranty and Security Agreement, dated as of July 18, 2003, by and among DSL.net, Inc., certain of DSL.net, Inc.’s subsidiaries, Deutsche Bank Trust Company Americas, as administrative agent, and the investors named therein (incorporated by reference to Exhibit 10.02 filed with our Current Report on Form 8-K, dated as of August 4, 2003).
10.24	Voting Agreement dated as of July 18, 2003, by and between DSL.net, Inc., the stockholders named therein and the investors named therein (incorporated by reference to Exhibit 10.03 filed with our Current Report on Form 8-K, dated as of August 4, 2003).
10.25	Amended and Restated Stockholders Agreement dated as of July 18, 2003, by and among DSL.net, Inc., the stockholders named therein and the investors named therein (incorporated by reference to Exhibit 10.04 filed with our Current Report on Form 8-K, dated as of August 4, 2003.
10.26†	Stock Option Agreement, dated April 15, 2004, between DSL.net, Inc. and Kirby G. Pickle (incorporated by reference to Exhibit 4.01 filed with our Quarterly Report on Form 10-Q, for the quarterly period ended June 30, 2004).
10.27†	Employment Agreement, dated as of April 15, 2004, between DSL.net, Inc. and Kirby G. Pickle (incorporated by reference to Exhibit 10.01 filed with our Quarterly Report on Form 10-Q, for the quarterly period ended June 30, 2004).
10.28†	Amended and Restated 2001 Stock Option and Incentive Plan (incorporated by reference to Exhibit 4.03 filed with our registration statement on Form S-8 (No. 333-110131)).
10.29†	Agreement, dated as of January 1, 2004, between DSL.net, Inc. and David F. Struwas (incorporated by reference to Exhibit 10.38 to our Annual Report on Form 10-K for the year ended December 31, 2003).

10.30†	Agreement, dated as of January 1, 2004, between DSL.net, Inc. and J. Keith Markley (incorporated by reference to Exhibit 10.39 to our Annual Report on Form 10-K for the year ended December 31, 2003).
10.31†	Agreement, dated as of January 1, 2004, between DSL.net, Inc. and Robert J. DeSantis (incorporated by reference to Exhibit 10.40 to our Annual Report on Form 10-K for the year ended December 31, 2003).
10.32	Second Amended and Restated Stockholders Agreement dated as of July 22, 2004, by and among DSL.net, Inc., the stockholders named therein and the investors named therein (incorporated by reference to Exhibit 5 filed on Form 8-A, dated as of August 3, 2004).
10.33	Security Agreement by and between DSL.net, Inc. and Laurus Master Fund, Ltd., dated as of August 31, 2004 (incorporated by reference to Exhibit 10.1 filed with our registration statement on Form S-3 (No. 333-120264)).

10.34	Minimum Borrowing Note Registration Rights Agreement by and between DSL.net, Inc. and Laurus Master Fund, Ltd., dated as of August 31, 2004 (incorporated by reference to Exhibit 10.2 filed with our registration statement on Form S-3 (No. 333-120264)).

10.35	Minimum Borrowing Note issued by DSL.net, Inc. to Laurus Master Fund, Ltd. on August 31, 2004 (incorporated by reference to Exhibit 10.5 filed with our registration statement on Form S-3 (No. 333-120264)).

10.36	Secured Revolving Note issued by DSL.net, Inc. to Laurus Master Fund, Ltd. on August 31, 2004 (incorporated by reference to Exhibit 10.6 filed with our registration statement on Form S-3 (No. 333-120264)).

10.37	Subordination Agreement between DSL.net, Inc. and certain holders of DSL.net, Inc.'s senior debt, dated as of October 7, 2004 (incorporated by reference to Exhibit 10.8 filed with our registration statement on Form S-3 (No. 333-120264)).

10.38*	Waiver to the Agency Agreement, dated as of October 7, 2004, by and among DSL.net, Inc., DSLnet Communications Puerto Rico, Inc., DSLnet Communications VA, Inc., Tycho Networks, Inc., Vector Internet Services, Inc., DSLnet Atlantic LLC, Deutsche Bank Trust Company Americas, as Agent, Deutsche Bank AG London, 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.
10.39*†	Form of Compensation Agreement, dated as of February 3, 2005, between DSL.net, Inc. and certain named officers of DSL.net, Inc., as identified on Schedule A thereto.
10.40*†	Amended and Restated 2001 Stock Option and Incentive Plan, as amended as of February 9, 2005.
21.01	Subsidiaries of DSL.net, Inc. (incorporated by reference to Exhibit 21.01 filed with our Annual Report on Form 10-K for the year ended 2002).

23.01*	Consent of PricewaterhouseCoopers LLP.
24.01*	Power of Attorney (see signature page hereto).

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


	DSL.NET, INC.

Date: March 23, 2005	By:	/s/ Kirby G. Pickle
		Kirby G. Pickle
		Chief Executive Officer

Signature	Title(s)	Date

/s Kirby G. Pickle Kirby G. Pickle	Director; Chief Executive Officer (Principal Executive Officer)	March 23, 2005

/s/ Robert J. DeSantis Robert J. DeSantis	Chief Financial Officer (Principal Financial and Accounting Officer)	March 23, 2005

/s/ Duncan Davidson Duncan Davidson	Director	March 23, 2005

/s/ Robert Gilbertson Robert Gilbertson	Director	March 23, 2005

/s/ Robert B. Hartnett, Jr. Robert B. Hartnett, Jr.	Director	March 23, 2005

/s/ Paul J. Keeler Paul J. Keeler	Director	March 23, 2005


/s/ William J. Marshall William J. Marshall	Director	March 23, 2005

/s/ James D. Marver James D. Marver	Director	March 23, 2005

Allowance for Doubtful Accounts
Year	Balance at Beginning of Period	Additions Charged to Costs and Expenses	Additions Charged to Purchase Accounting	Additions Charged to Sales Credits and Allowances	Additions Charged Against Valuation Allowance	Deductions Charged Against Valuation Allowance	Balance at End of Period

2004	$ 902	$ 1,081	$ -	$ -	$ -	$ (1,109)	$ 874
2003	$ 606	$ 2,047	$ -	$ -	$ -	$ (1,751)	$ 902
2002	$ 3,844	$ 2,583	$ -	$ -	$ -	$ (5,821)	$ 606
Deferred Tax Asset Valuation Allowance
Year	Balance at Beginning of Period	Additions Charged to Costs and Expenses	Additions Charged to Purchase Accounting	Additions Charged to Sales Credits and Allowances	Additions Charged Against Valuation Allowance	Deductions Charged Against Valuation Allowance	Balance at End of Period
2004	$ 116,696	$ -	$ -	$ -	$, 9,131	$ -	$ 125,827
2003	$ 103,875	$ -	$ -	$ -	$ 12,821	$ -	$ 116,696
2002	$ 92,798	$ -	$ -	$ -	$ 11,077	$ -	$ 103,875