<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   ----------

                                    FORM 10-K

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

                   For the fiscal year ended January 31, 2005

                          Commission File Number 0-2180

                          [COVISTA COMMUNICATIONS LOGO]

                          COVISTA COMMUNICATIONS, INC.
               (Exact name of Company as specified in its charter)

           New Jersey                                             22-1656895
(State or other jurisdiction of                                (I.R.S. Employer
 incorporation or organization)                              Identification No.)

                           721 Broad Street, Suite 200
                              Chattanooga, TN 37402
               (Address of principal executive offices)(Zip Code)

                                 (423) 648-9500
                Company's telephone number, including area code:

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

          Securities registered pursuant to Section 12 (g) of the Act:
                     Common Stock, $.05 par value per share

Indicate by check mark whether Covista Communications, Inc. ("Covista" or the
"Company")(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 Covista was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes [X] No [_]

Indicate by check mark 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 Company'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                                                      [_]

Aggregate market value (based upon a $1.79 closing price) of the voting stock
held by nonaffiliates of Covista as of April 1, 2005, was approximately
$9,865,000 (calculated by excluding solely for purposes of this form,
outstanding shares owned by Directors and Executive Officers).

Number of shares of Common Stock outstanding on April 1, 2005: 17,822,025

                      Documents Incorporated By Reference:
                                      None





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                                     PART I

               SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS:

          Certain of the statements contained in this Form 10-K Report may be
considered "forward-looking statements" for purposes of the securities laws.
From time to time, oral or written forward-looking statements may also be
included in other materials released to the public. These forward-looking
statements are intended to provide our management's current expectations or
plans for our future operating and financial performance, based on our current
expectations and assumptions currently believed to be valid. For these
statements, we claim protection of the safe harbor for forward-looking
statements provided by the Private Securities Litigation Reform Act of 1995.
These forward-looking statements can be identified by the use of forward-looking
words or phrases, including, but not limited to, "believes," "estimates,"
"expects," "expected," "anticipates," "anticipated," "plans," "strategy,"
"target," "prospects" and other words of similar meaning in connection with a
discussion of future operating or financial performance. Although we believe
that the expectations reflected in such forward-looking statements are
reasonable, there can be no assurance that such expectations will prove to have
been correct.

          All forward-looking statements involve risks and uncertainties that
may cause our actual results to differ materially from those expressed or
implied in the forward-looking statements. This Form 10-K Report includes
important information as to risk factors in the "Business" section under the
headings "Business" "Competition" and "Regulation" and in "Management's
Discussion and Analysis of Financial Condition and Results of Operations." In
addition to those factors discussed in this Form 10-K Report, you should see our
other reports on Forms 10-K, 10-Q and 8-K filed with the Securities and Exchange
Commission from time to time for information identifying factors that may cause
actual results to differ materially from those expressed or implied in the
forward-looking statements.

ITEM 1. Business

General

          Covista Communications, Inc. ("Covista"), a New Jersey corporation, is
a telecommunications and data services provider that operates three distinct
business segments: retail, residential and wholesale. Retail has been the
largest segment and provides local, long distance and data services to small and
medium sized businesses, principally in the Northeast region of the United
States. Residential, formerly known as KISSLD, is the fastest growing segment
and offers bundled local and long distance services to residential users who are
located primarily in areas supported by our long distance network facilities.
The wholesale segment provides long distance telecommunication services to other
carriers for resale. Covista utilizes its own switching equipment and leased
fiber optic transmission cable. Our products and services include a broad range
of voice and data, including local, long distance and toll-free services,
calling cards, data, Internet access, virtual private network, directory
assistance and teleconferencing services. Covista currently operates three
switches in various locations. Covista processes approximately eighty five
percent of all its long distance call volume through its own switching
facilities.

          In the retail segment, Covista has tailored its service offerings,
sales, marketing approach and network development to provide service in a
cost-effective manner. Covista recently sold a large portion of its retail
customer base to PAETEC Communications. Covista plans to retain and further grow
its remaining retail customer base in new geographic markets, primarily in the
Southeast. Covista sells to retail customers primarily through independent
marketing representatives.

          The residential segment offers discount local and long distance
services to users through direct marketing campaigns, which include mail, space
advertising and web based efforts, in addition to a variety of affinity
relationships with marketing partners. The residential segment has experienced
considerable growth since its 2003 launch and the Company expects this segment
to remain the fastest growing of the three.

          The Company also maintains a wholesale segment that provides primarily
domestic and international long distance services to other carriers. In recent
years, the Company has intentionally reduced its marketing and support efforts
for this wholesale segment in an effort to provide more support to the other two
segments. Both the retail and residential segments offer lower financial risk in
the form of un-collectible accounts and higher gross margins than those
generated from the wholesale segment.

          For Fiscal 2005, Covista had gross revenues of approximately $60
million, derived approximately 57% from retail, 38% from residential, and 5%
from wholesale. This represents an approximately $24 million decrease when
compared to the approximately $84 million of gross revenue generated during the
previous fiscal year, principally due to the sale of selected retail customers
to PAETEC.

          Covista maintains its corporate headquarters and call center facility
in Chattanooga, Tennessee. In addition, the Company operates a network
operations center in Chattanooga to monitor and control its network and to
coordinate its various services. Covista's principal executive offices are
located at 721 Broad Street, Suite 200, Chattanooga, TN, 37402, and its
telephone number is (423) 648-9500.


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Business Strategy

          Covista's strategy has been to develop a large geographic
concentration of revenue producing bundled phone service customers through the
sale of telecommunications services in areas where it has installed switching
platforms. In addition, Covista intends to use the wholesale operating platforms
of incumbent local exchange companies to provide local services. Our business
strategy may be materially impacted by regulatory changes, as discussed further
under Government Regulations.

Current Network

          Currently, Covista operates an advanced telecommunications network,
which includes three Alcatel switches, located in Minneapolis, Minnesota,
Dallas, Texas and Chattanooga, Tennessee. In July 2001, Covista acquired
long-term access to nationwide network facilities comprising 2,822,400,000
channel miles of telecommunications capacity measured by length of voice-grade
circuits. During Fiscal 2005, Covista billed approximately 926,000,000 million
minutes, with approximately 85% of its minutes carried over its own switches.
Covista believes that increasing the traffic carried on its own network should
improve operating margins.

          Covista is interconnected with a number of United States and foreign
wholesale international carriers. The purpose of connecting to a variety of
carriers is to provide state-of-the-art, lowest-cost routing and network
reliability. These interconnected international carriers have been a source of
wholesale international traffic and revenue. Covista is interconnected by SS7
out-of-band digital signaling throughout its network. The SS7 signaling system
reduces connect time delays, thereby enhancing overall network efficiencies.
Additionally, the SS7 technology is designed to permit the anticipated expansion
of Covista's Advanced Intelligent Network ("AIN") capabilities throughout its
network. Covista's advanced switching platform would enable it to (i) deploy
features and functions quickly throughout its entire network, (ii) expand switch
capacity in a cost-effective manner, and (iii) lower maintenance costs through
reduced training and spare parts requirements.

          Covista has a Network Operating Center (NOC) in Chattanooga,
Tennessee, which monitors and controls Covista's network and coordinates its
various services from a central location, increasing the security, reliability
and efficiency of Covista's operations. Centralized electronic monitoring and
control of Covista's network allows Covista to avoid duplication of this
function in each switch site. The NOC also helps reduce Covista's per-customer
monitoring and customer service costs. In addition, Covista's network employs an
"authorized access" architecture. Unlike many telecommunications companies which
allow universal access to their network, Covista utilizes an automatic number
identification security screening architecture which ensures only the Automatic
Number Identification (ANIs) of those users who have subscribed to Covista's
services and have satisfied Covista's credit and provisioning criteria have
access to the network. Covista believes that this architecture provides Covista
the ability to better control bad debt and fraud in a manner, which is invisible
and nonintrusive to the customer. This architecture also allows Covista to
better manage network capacity, as unauthorized users cannot access the network.


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                         PRINCIPAL PRODUCTS AND SERVICES

Product and Service Offerings

          Retail Services. Covista provides telecommunications services to over
81,000 retail customers, primarily small and medium-sized businesses, located in
the Northeastern region of the United States. Covista sells retail services
through independent marketing representatives and web based marketing programs.
Retail services accounted for approximately $34 million or 57% of Covista's
Fiscal 2005 total revenue. This compares to approximately $62.4 million of
retail revenue in Fiscal 2004.

          Residential, Covista targets residential customers via direct
marketing programs in locations supported by the existing company network. At
year-end, over 79,000 customers were being billed on a monthly basis.
Residential revenues accounted for approximately $23 million or 38% of Covista's
Fiscal 2005 total revenue. This compares to approximately $17 million of
residential revenue in Fiscal 2004. In previous years this segment was named
KISSLD.

          Wholesale Services. Covista offers domestic and international
termination, switch ports, colocation facilities and transport services to a
broad spectrum of domestic and international carriers. Wholesale revenues were
approximately $3.2 million and $4.4 million during Fiscal 2005 and Fiscal 2004,
respectively.

Covista's services include the following:

     o    Long Distance: Covista offers a full range of switched and dedicated
          domestic and international long distance services, including "1+"
          outbound service in all 50 states along with global termination to
          over 200 countries. Long distance services include intra-LATA (Local
          Access Terminating Area), inter-LATA, and worldwide international
          services. Long distance features include both verified and
          non-verified accounting codes, station-to-station calling, third-party
          calling, directory assistance and operator-assisted calling.

     o    Toll-free Services: Covista offers a full range of switched and
          dedicated domestic toll-free services, including toll-free origination
          in all 50 states, international toll-free origination from over 30
          countries, and toll-free directory assistance. AIN enhanced toll-free
          services include the following features: Command Routing, Dialed
          Number Identification Service Area Code/Exchange Routing, Real Time
          Automatic Number Identification Delivery, Day-of-Year Routing,
          Day-of-Week Routing, Time-of-Day Routing, Percentage Allocation
          Routing, PIN protected 800 services, integrated voice response
          services and store locator services.

     o    Access Options: Covista offers its long distance and toll-free
          customers multiple access options, including dedicated access at DS0,
          DS1, and DS3 speed(s) and switched access.

     o    Calling Card and Services: Covista offers nationwide switched access,
          customized calling card services. Customers have the option of calling
          cards which are personalized, branded or generic.

     o    Data Services: Covista offers advanced data transmission services,
          including private line and Frame Relay services. Data services have
          multiple access options, including dedicated access at DS0, DS1, and
          DS3 speed(s) and switched access.

     o    Customer Management Control Features: All of Covista's customers have
          the option of customized management reporting features, including
          interstate/intrastate area code summaries, international destination
          matrix, daily usage summaries, state summaries, time of day summaries,
          duration distribution matrix, exception reporting of long duration
          calls, and incomplete and blocked call reporting.

     o    Local Services: The unbundled network element platform of the
          incumbent local exchange companies offer to us, in an individual or
          combined form, a series of unbundled network elements, or UNEs, that
          comprise the most important facilities, features, functions and
          capabilities of an incumbent local exchange company's network. When
          offered in the combination known as the unbundled network element
          platform, these components include the loop and switching elements
          needed to provide local telephone service to a customer. Our cost of
          purchasing unbundled network elements will most likely increase as the
          result of recent regulatory changes, as discussed further under
          Government Regulations.

          Our bundled service generally includes: unlimited local usage
          dependent upon the service plan, long distance service and calling
          cards, one convenient invoice available both in paper and
          electronically, and choices of various features such as caller ID,
          call waiting, voice mail and three-way calling.

          The unbundled network element operating platform of the incumbent
          local exchange companies generally provides us with certain
          advantages, including: (i) offering local telephone service to
          customers located virtually anywhere without having to deploy local
          switching facilities; (ii) providing the same services as the
          incumbent local exchange companies; (iii) delivering higher margins
          than comparable service offered through resale agreements; and (iv)
          eliminating the requirement to pay certain local network access fees
          while collecting local network access fees for calls delivered to our
          local telephone customers.


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Information Systems

          We have integrated order processing, provisioning, billing, payment,
collection, customer service and information systems that enable us to offer and
deliver high-quality, competitively priced telecommunication services to our
customers and process millions of call records each day. These operational
support systems were developed by our employees and customized for our business
and operational requirements and, due to the system's component-based
architecture, provide an extensive framework for the introduction of new
products and services. Through dedicated electronic connections with our long
distance network and the incumbent local exchange companies, we have designed
our systems to process information on a "real time" basis.

          In addition, we maintain our own web sites at www.covista.com,
www.kissld.com, and others to provide for customer sign-up and to provide
customers and potential customers with information about our products and
services as well as billing information and customer service. We provide these
services and features using our web-enabled technologies that allow us to offer
our customers:

          o    Detailed rate schedules and product and service related
               information.

          o    Online sign-up for our telecommunication services.

          o    Credit card billing.

          o    Real-time and 24 x 7 billing services and online information,
               providing customers with up to the hour billing information.

          The information functions of our systems are designed to provide easy
access to all information about a customer, including volumes and patterns of
use. This information can be used to identify emerging customer trends and to
respond with services to meet customers' changing needs. This information also
allows us to identify unusual usage by an individual customer, which may
indicate fraud. FCC rules, however, may limit our use of customer proprietary
network information. See "Regulation."

Sales and Marketing

          We use diverse sales and marketing channels to reach the residential
and small business markets with our service offerings. Our sales and marketing
efforts focus on marketing a bundle of local and long distance telephone
services directly to customers under our own brand and the brands of our agent
and affinity partners. We currently market our bundled services to customers in
five states where we can profitably offer services at competitive prices. We
intend to market in additional states (or certain areas of a particular state)
in which our pricing and cost structure permit us to profitably offer services
in those areas at competitive rates.

          We employ a targeted approach to customer acquisition and use
database-marketing tools to identify and prioritize target customers. We offer
diverse calling and service plans tailored to fit the needs of the broader
residential market with low base prices and free features. Customers can switch
to us online or through an authorized agent, each of which uses consultative
sales tools to assist the customer's selection of the right plan for its
telecommunications needs. Customers are able to keep their same phone lines and
number, can easily add features, and, generally within days of the sale, are
switched to our service and receive a personalized welcome kit explaining their
service. We market our bundled services within our targeted markets through the
following channels:

     o    Direct Mail: We purchase small business and residential lead databases
          utilized for demographically targeted direct mail campaigns designed
          to direct inbound calls to our telemarketing centers.

     o    Referrals: We solicit, through the use of referral promotions, the
          names of potential customers or referrals from our existing customers.

     o    Online Marketing: We have developed an online marketing presence
          through traditional online media and business relationships.

     o    Direct Sales: Utilizing independent agents, we solicit new customers
          in targeted geographic areas.

          We focus on targeting, acquiring and retaining profitable customers by
providing savings, simplicity and service. We continue to seek new marketing
partners and arrangements to expand both our opportunities to attract other
customers to our services and the products and services that we offer to our
customer base.


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                                   COMPETITION

          The telecommunication industry is highly competitive. Major
participants in the industry regularly introduce new services and marketing
activities. Competition in the telecommunication industry is based upon pricing,
customer service, billing services and perceived quality. We compete against
numerous telecommunication companies, which offer essentially the same services
as we do. Many of our competitors, including the incumbent local exchange
companies, are substantially larger and have greater financial, technical and
marketing resources. Our success will depend upon our continued ability to
provide high quality, high value services at prices generally competitive with,
or lower than, those charged by our competitors.

          The incumbent local exchange companies and the major carriers,
including SBC, Verizon, BellSouth, AT&T, Sprint and MCI Inc., have targeted
price plans at residential customers - one of our primary target markets - with
significantly simplified rate structures and with bundles of local services with
long distance, which may lower overall local and long distance prices.
Competition is also fierce for the small businesses that we serve. Additional
pricing pressure has also been introduced by new technologies, such as Voice
over Internet Protocol, or VoIP. VoIP providers seek to offer voice
communications at a cost below that of traditional circuit-switched service. In
addition, wireless carriers have marketed their services as an alternative to
traditional long distance and local services, further increasing competition.
Reductions in prices charged by competitors may have a material adverse effect
on us.

          The incumbent local exchange companies are well-capitalized,
well-known companies that have the capacity to "bundle" other services, such as
local and wireless telephone services and high speed Internet access, with long
distance telephone and entertainment services. The incumbent local exchange
companies' name recognition in their existing markets, the established
relationships that they have with their existing local service customers, their
ability to take advantage of those relationships, and the possibility that
interpretations of the Telecommunications Act may be favorable to the incumbent
local exchange companies, also make it more difficult for us to compete with
them.

Seasonal Nature of Business

          The Company's business is not seasonal.

Patents, Trademarks, Licenses, etc.

          The Company does not hold any material patents, franchises or
concessions.

                             GOVERNMENT REGULATIONS

General

          We are subject to federal, state, local and foreign laws, regulations,
and orders affecting the rates, billing, terms, and conditions of certain of our
service offerings, our costs and other aspects of our operations, including our
relations with other service providers. Regulation varies in each jurisdiction
and may change in response to judicial proceedings, legislative and
administrative proposals, government policies, competition and technological
developments. We cannot predict what impact, if any, such changes or proceedings
may have on our business or results of operations, and we cannot assure that
regulatory authorities will not raise material issues regarding our compliance
with applicable regulations.

          The FCC has jurisdiction over our facilities and services to the
extent they are used in the provision of interstate or international
communications services or as otherwise required by federal law. State
regulatory commissions, commonly referred to as PUCs, generally have
jurisdiction over facilities and services to the extent they are used in the
provision of intrastate services. Local governments may assert authority to
regulate aspects of our business through zoning requirements, permit or
right-of-way procedures and franchise fees. Foreign laws and regulations apply
to communications that originate or terminate in a foreign country. Generally,
the FCC and State public utility commissions do not regulate Internet, video
conferencing and certain data services, although the underlying communications
components of such offerings may be regulated. Our operations also are subject
to various environmental, building, safety, health and other governmental laws
and regulations.

          Federal law generally preempts state statutes and regulations that
restrict the provision of competitive local, long distance and enhanced
services; consequently, we generally are free to provide the full range of
local, long distance and data services in every state. While this federal
preemption greatly increases our potential for growth, it also increases the
amount of competition to which we may be subject.


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Federal Regulation

          The Communications Act of 1934, as amended, or the 1934 Act, grants
the FCC authority to regulate interstate and foreign communications by wire or
radio. We are regulated by the FCC as a non-dominant carrier and are subject to
less comprehensive regulation than dominant carriers. Nevertheless, we remain
subject to numerous requirements of the Communications Act, applicable to most
common carriers, which require us to offer service upon reasonable request and
pursuant to just and reasonable charges and terms that are not unjustly or
unreasonably discriminatory. The FCC has authority to impose additional
requirements on non-dominant carriers.

          The Telecommunications Act of 1996, or the 1996 Act, amended the 1934
Act to eliminate many barriers to competition in the U.S. communications
industry, by setting standards for relationships between communications
providers, including between new entrants, such as our company, and the Regional
Bell Operating Companies and other incumbent local exchange companies. In
general, the 1996 Act requires incumbent local exchange companies to provide
competitors with nondiscriminatory access to, and interconnection with, the
incumbent local exchange company networks, and to provide unbundled network
elements at cost-based prices. The FCC and state public utility commissions have
adopted extensive rules to implement the 1996 Act, and revisit such regulations
on an ongoing basis in light of court decisions and as marketplaces evolve.

          Several congressmen have recently suggested that Congress should
consider rewriting substantial portions of the 1996 Act. Any effort to reform
the 1996 Act could result in changes that would materially reduce the
obligations of the incumbent local exchange companies to interconnect with, or
provide unbundled network elements to, competitors. Any such legislative change
could have a material adverse impact on our business and operations.

          The announced merger of AT&T with SBC and Verizon's and Qwest's
announced bids for MCI will, if they are completed, effectively eliminate the
two largest long distance and competitive local exchange carriers in the United
States, each of which was a strong voice in federal and state lobbying related
to telecommunications matters. These mergers will place an increased demand on
our resources and employees for lobbying and other regulatory matters and there
can be no assurances that our efforts will prove effective.

Long Distance Competition

          Section 271 of the 1934 Act, enacted as part of the 1996 Act,
established a process by which a Regional Bell Operating Company could obtain
authority to provide long distance service in a state within its region. The
process required demonstrating to the FCC that the Regional Bell Operating
Company has adhered to a 14-point competitive checklist and that granting such
authority would be in the public interest. Each of the Regional Bell Operating
Companies already has received FCC approval to provide long distance services in
each state within its respective region, resulting in increased competition in
certain markets and services. The Regional Bell Operating Companies have a
continuing obligation to comply with the checklist. Section 272 of the 1934 Act
requires that, for a period of three years after receiving Section 271 approval
in any state (absent an FCC extension), a Regional Bell Operating Company must
comply with certain other structural and operational safeguards, including the
provision of in-region long distance service through a separate affiliate.

Local Service Regulation

          The 1996 Act required the FCC to establish national rules implementing
the local competition provisions of the 1996 Act, which impose duties on all
local exchange carriers, including competitive local exchange companies such as
our company, to provide network interconnection, reciprocal compensation,
resale, number portability and access to rights-of-way.

          The 1996 Act imposed additional duties on incumbent local exchange
companies, including the duty to provide access on an unbundled basis to
individual network elements on non-discriminatory terms and cost-based rates; to
allow competitors to interconnect with their networks in a nondiscriminatory
manner at any technically feasible point on their networks; to permit
collocation of competitors' equipment at the incumbent local exchange company
premises; and to offer retail services at wholesale rates to competitive local
exchange companies for resale.

Unbundled Network Elements

          Access to incumbent local exchange companies' unbundled network
elements at cost-based rates is critical to our business. Our local
telecommunications services to date have been provided through the use of
combinations of unbundled network elements, and it is the availability of
cost-based rates for these elements that has enabled us to price our local
telecommunications services competitively. However, the obligation of incumbent
local exchange companies to provide the unbundled network elements upon which we
have relied at such cost-based rates is the subject of recent regulatory action
that will result in the availability of these elements being substantially
reduced or otherwise subject to significantly higher, non-cost-based rates.
These recent actions may limit our ability to offer local services in certain
markets.


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          The 1996 Act required incumbent local exchange companies to provide
requesting telecommunications carriers with nondiscriminatory access to network
elements on an unbundled basis at any technically feasible point on rates, terms
and conditions that are just, reasonable and nondiscriminatory, in accordance
with the other requirements set forth in Sections 251 and 252 of the 1934 Act.
The 1996 Act gave the FCC authority to determine which network elements must be
made available to requesting carriers such as us. For network elements that are
not proprietary, the Commission is required to determine whether the failure to
provide access to such network elements would impair the ability of the carrier
seeking access to provide the services it seeks to offer. The FCC has determined
that most network elements are nonproprietary in nature and, thus, are subject
to the "impair" standard. The FCC's initial list of incumbent local exchange
company network elements that are required to be unbundled on a national basis
was first released in 1996 and has been subject to almost constant review and
revision since then.

          When the FCC first adopted unbundled network element rules, it
indicated that it would reexamine the list of unbundled network elements every
three years. In December 2001, the FCC initiated its first so-called triennial
review of those rules. In August 2003, in the Triennial Review Order, or TRO,
the FCC substantially modified its rules governing access to unbundled network
elements. The FCC redefined the "impair" standard, concluding that a requesting
carrier is impaired when a lack of access to an unbundled network element poses
barriers to entry, including operational and economic barriers that are likely
to make entry into a market uneconomic. The FCC limited requesting carrier
access to certain aspects of the loop, transport, switching and signaling
databases unbundled network elements, but continued to require some unbundling
of these elements. In the TRO, the FCC also determined that certain broadband
elements, including fiber-to-the-home loops in greenfield situations, broadband
services over fiber-to-the-home loops in overbuild situations, packet switching
and the packetized portion of hybrid loops, are not subject to unbundling
obligations.

          All of the FCC's decisions regarding unbundling have been the subject
of judicial review. Most recently, on March 2, 2004, the U.S. Court of Appeals
for the District of Columbia Circuit, or the D.C. Circuit, in United States
Telecom Ass'n v. FCC, or the USTA II decision, vacated certain portions of the
TRO and remanded to the FCC for further proceedings. Specifically, the D.C.
Circuit vacated the FCC's delegation of decision-making authority to State
commissions and several of the FCC's nationwide impairment determinations. The
D.C. Circuit found that the FCC used a flawed methodology when making certain
impairment determinations, including those relating to the mass market switching
and local transport network elements, and remanded those determinations to the
FCC for further analysis and justification. The D.C. Circuit affirmed the FCC's
decision to relieve the incumbent local exchange companies from unbundling
obligations with respect to broadband elements. The D.C. Circuit did not make a
formal pronouncement regarding the status of the FCC's findings regarding
enterprise market loops, batch hot cuts or preemption of inconsistent State
laws.

          The FCC and the United States Solicitor General declined to seek
certiorari from the Supreme Court. The National Association of Regulatory
Utility Commissioners and a coalition of competitive local exchange companies
separately petitioned for certiorari. The Supreme Court has denied those
petitions.

In orders released in August 2004, the FCC extended relief from the unbundling
obligations to fiber-to-the-home loops serving predominantly residential
multiple dwelling units and granted the same relief to fiber-to-the-curb that it
has applied to fiber-to-the-home.

          On October 27, 2004, the FCC issued an order granting requests by the
Regional Bell Operating Companies that the FCC forbear from enforcing the
independent unbundling requirements of Section 271 of the 1934 Act with regard
to the broadband elements that the FCC had determined in the TRO are not subject
to unbundling obligations (fiber-to-the-home loops, fiber-to-the-curb loops, the
packetized functionality of hybrid loops and packet switching). The FCC declined
to address broader forbearance requests by SBC and Qwest, which had asked the
FCC to forbear from applying applicable Section 271 requirements to any element
that the FCC determined no longer meets the impairment standard.

          On December 15, 2004, the FCC adopted rules modifying the unbundling
obligations for incumbent local exchange companies under Section 251 of the 1934
Act, reducing the incumbent local exchange companies' obligation to provide
unbundled local switching as well as certain levels of unbundled loops and
transport. The FCC issued final rules on February 4, 2005. Those rules were
effective on March 11, 2005. In response to the USTA II decision, the FCC
clarified that it evaluated impairment with regard to the capabilities of a
reasonably efficient competitor. The FCC also modified the impairment standard
set forth in the TRO by: (1) setting aside the TRO's qualifying service
interpretation of Section 251(d)(2), but prohibiting the use of unbundled
network elements for the provision of exclusively long distance or exclusively
wireless services; (2) drawing inferences regarding the prospects for
competition in one geographic market based on the state of competition in
another, similar market; and (3) determining that in the context of local
exchange markets, a general rule prohibiting access to unbundled network
elements whenever a requesting carrier is able to compete using an incumbent
local exchange company's tariffed special access offering would be
inappropriate. As a result of these decisions, the availability of unbundled
network elements at cost-based rates has been substantially reduced and may have
a material effect on the way we conduct our business and operations. The Company
is presently evaluating alternative delivery methods, and retail price points
related to specific geographic markets.

The principal parts of the FCC's December 15, 2004 order regarding unbundled
switching and unbundled loops and transport are summarized below:


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<PAGE>


Local Switching: The FCC eliminated an incumbent local exchange company's
obligation to provide local switching (and the unbundled network element
platform, in particular, the one upon which we have historically relied) to
requesting carriers at Total Element Long Run Incremental Cost, or TELRIC,
rates. In doing so, the FCC found that competitive local exchange companies are
not impaired nationwide without access to unbundled local switching. The FCC
adopted a twelve-month transition plan for competitive local exchange companies
to transition away from the unbundled network element platform commencing on
March 11, 2005 and ending on March 10, 2006. The transition plan applies only to
our customer base as it exists on March 11, 2005 and we will continue to be
permitted to obtain local switching for our current customers at a rate per
customer equal to the greater of: (1) the rate at which we leased that
combination of elements on June 15, 2004, plus one dollar; and (2) the rate, if
any, the applicable state public utility commission establishes between June 16,
2004 and the effective date of the FCC's order, for the unbundled network
element platform, plus one dollar.

Local Loops and Transport: The FCC also made impairment findings and placed
certain limitations with respect to local loops and dedicated interoffice
transport. The FCC established 10 DS1s and 12 DS3s as the maximum transport a
carrier can purchase per route. Furthermore, for local loops, the FCC concluded
that competitive local exchange companies are impaired without access to (1)
DS1-capacity loops except in any building within the service area of a wire
center containing 60,000 or more business lines and four or more fiber-based
collocators; and (2) DS3-capacity loops except in any building within the
service area of a wire center containing 38,000 or more business lines and four
or more fiber-based collocations. The FCC determined that competitive local
exchange companies are not impaired without access to dark fiber loops in any
instance. For dedicated transport, the FCC found that competitive local exchange
companies are impaired without access to (1) DS1 transport except on routes
connecting a pair of wire centers where both wire centers contain at least four
fiber-based collocators or at least 38,000 business lines; and (2) DS3 or dark
fiber transport except on routes connecting a pair of wire centers where both
wire centers contain at least three fiber-based collocators or at least 24,000
business lines. The FCC concluded that competitive local exchange companies are
not impaired without access to entrance facilities connecting an incumbent local
exchange company's network with a competitive local exchange company's network
in any instance. The unavailability of these dedicated transport facilities;
dark fiber and entrance facilities under the FCC's rules at cost-based rates
could substantially impede any plans to deploy local network facilities. We
could be forced to use other means to effect this deployment, including the use
of facilities purchased from the incumbent local exchange carrier at higher
tariffed special access rates or transport services purchased from other
competitive access providers. In either event, our cost of service could rise
dramatically and our plans for a service rollout for use of our own network
facilities could be delayed substantially or derailed entirely.

          Although the incumbent local exchange company's unbundling
requirements for local circuit switching arising under Section 251 of the 1996
Act have been eliminated by the FCC's December 15, 2004 order, competitive
carriers access to local circuit switching on an unbundled basis is preserved
under Section 271 of the 1996 Act as a condition to the Regional Bell Operating
Company's ability to provide in-region long distance services. However, the
local circuit switching element, if accessible to competitive carriers only
pursuant to Section 271 of the 1996 Act, may be offered at significantly higher
rates and subject to less favorable terms and conditions imposed by the
incumbent local exchange companies, including the possibility that the incumbent
local exchange companies will not be required to combine unbundled local circuit
switching provided pursuant to Section 271 with other non-unbundled network
elements or tariffed services.

          As of March 11, 2005, local circuit switching effectively became
unavailable to us at then existing rates. Accordingly, for new customers and
possibly new lines for existing customers, we will be unable to offer our
telecommunications services as we have done in the past and will instead be
required to serve customers by other means, including total service resale
agreements with the incumbent local exchange companies, commercial agreements
with the incumbent local exchange companies, through the use of our own network
facilities, by migrating customers onto the networks of other facilities-based
competitive local telephone companies or by purchasing critical network elements
on an unbundled basis at "just and reasonable" rates pursuant to Section 271 of
the 1996 Act, which presumably will be higher than the rates currently available
to us. Since element purchases pursuant to Section 271will be on an unbundled
basis, we will need to pay additional charges to combine these elements. For
existing customers, as detailed earlier, the FCC announced a one-year transition
during which competitors will be obligated to pay an immediate $1 price increase
for existing customer's switching. With the transition period, we will have a
year to transition such customers to other network facilities, resale,
competitive substitutes or elements purchased through Section 271. Our
transition from providing telecommunications services on an unbundled network
element platform basis to providing services on another network or otherwise
will result in a significant reduction in the number of new customers that we
add in the periods after March 11, 2005 compared to prior periods, will prevent
service roll-out in some markets, increase our costs and negatively impact our
business, prospects, operating margins, results of operations, cash flows and
financial condition.

          In anticipation of the recent developments regarding the FCC's
unbundling rules, we have started evaluating the deployment of local switches in
selected markets along with related collocation equipment. The use of our own
local switch could diminish our reliance on incumbent local exchange company-
provided local circuit switching, but could increase our reliance on incumbent
local exchange company unbundled loop and unbundled transport facilities over
time.


                                        9





<PAGE>


          If we were to deploy local switching, the unavailability of dedicated
transport facilities, dark fiber and entrance facilities under the FCC's rules
on an unbundled basis at cost-based rates along certain routes may adversely
impact us. If many routes become effectively unavailable to us under the FCC's
newly adopted rules, our plans to deploy our own network facilities could be
substantially impeded, and we could be forced to use other means to effect this
deployment, including the use of facilities purchased at higher tariffed special
access rates or transport services purchased from other facilities-based
competitive local telephone carriers. In either event, our cost of service could
rise dramatically and our plans for a service rollout for use of our own network
facilities could be delayed substantially or derailed entirely. This would have
a material adverse effect on our business, prospects, operating margins, results
of operations, cash flows and financial condition.

          We believe the loss of the availability of DS3 and DS1 loops at
cost-based rates will result in materially higher prices on loops that we must
purchase from either the incumbent local exchange company or a competitive
access provider. At this time, we cannot determine how many loops will become
unavailable at cost-based rates or the effect upon our network plans.

          On January 18, 2005, the U.S. Court of Appeals for the D.C. Circuit
ordered the FCC to provide promptly a release date for the new rules and on
January 26, 2005, the FCC informed the Court of the FCC Chairman's plans to
release the rules on or before February 4, 2005. The FCC issued its final rules
on February 4, 2005. Appeals of the order have been filed in several U.S.
appellate courts and the appeals have been assigned to the U.S. Court of Appeals
for the Third Circuit, although it is expected that the Regional Bell Operating
Companies will move to transfer the cases to the U.S. Court of Appeals for the
D.C. Circuit. More appeals are expected.

          The FCC has encouraged incumbent local exchange companies and
competitive local exchange companies to engage in commercial negotiations to
provide access to incumbent local exchange company facilities that may no longer
be available as unbundled network elements as a result of the withdrawal of
unbundling obligations, including the unbundled network element platform.
Although a few such agreements have been announced, a majority of competitive
local exchange companies have not negotiated new agreements as of this date.
While we have engaged in general discussions with some of the incumbent local
exchange companies, we have been unable to reach any agreements and there can be
no assurances that we will be able to reach agreement in the future. We have
signed an interim agreement with Verizon.

          FCC rules implementing the local competition provisions of the 1996
Act currently permit competitive local exchange companies to lease unbundled
network elements at rates determined by state public utility commissions
employing the FCC's Total Element Long Run Incremental Cost, or TELRIC, forward
looking, cost-based pricing model. On September 15, 2003, the FCC opened a
proceeding reexamining the TELRIC methodology and wholesale pricing rules for
communications services made available for resale by incumbent local exchange
companies in accordance with the 1996 Act. This proceeding will comprehensively
re-examine whether the TELRIC pricing model produces unpredictable pricing
inconsistent with appropriate economic signals; fails to adequately reflect the
real-world attributes of the routing and topography of an incumbent local
exchange company's network; and creates disincentives to investment in
facilities by understating forward-looking costs in pricing Regional Bell
Operating Company network facilities and overstating efficiency assumptions. We
have participated in this proceeding as a member of a consortium of competitive
local exchange companies. To date, the FCC has not yet issued revised TELRIC
rules. The TELRIC methodology still governs our pricing for loops purchased from
the incumbent local exchange companies. We cannot predict if the FCC will order
new TELRIC pricing or if Congress will amend the 1996 Act, affecting such
pricing. The application and effect of a revised TELRIC pricing model on the
communications industry generally and on certain of our business activities
cannot be determined at this time, but it could have a material impact on our
business.

Interconnection Agreements

          Pursuant to FCC rules implementing the 1996 Act, we negotiate
interconnection agreements with incumbent local exchange companies to obtain
access to unbundled network elements and other services, generally on a
state-by-state basis. These agreements typically have two- to three-year terms.
We currently have interconnection agreements, or their equivalent, in effect
with BellSouth and Verizon in the states where such companies act as the
incumbent local exchange company. Our agreements generally are subject to
amendment based upon a change of law. Following the adoption or vacating of
unbundling rules, the incumbent local exchange companies typically invoke the
change of law provisions in our interconnection agreements. These provisions
generally provide that when a party to the agreement believes that its
obligations under the agreement have changed as a result of a change in
applicable law, it may request that the other party enter into negotiations to
amend the agreement, and that in the event the parties are unable to agree upon
an amendment, the dispute is to be arbitrated either by a neutral arbitrator or
by the relevant state commission. Several of the incumbent local exchange
companies claim to have provided us with such change of law notification,
although we dispute the effectiveness of these notices. We do not know when any
such negotiations, where applicable, might begin or conclude or the impact on
our business of any amendments to our interconnection agreements resulting from
such negotiations. In an increasing number of cases, incumbent local exchange
companies are taking the position that changes of law, including reductions in
incumbent local exchange companies_ unbundling obligations, do not require
negotiations. Rather, incumbent local exchange companies are arguing with
respect to many interconnection agreements that the agreements are amended
automatically and immediately without a written amendment. Additionally,
incumbent local exchange companies are taking the position that they can reject
an order for elements on a route that they deem to be competitive under the
FCC's final rules. We have opposed these positions and cannot predict at this
time whether the incumbent local exchange companies will prevail in their
arguments regarding automatic amendment with respect to any particular
interconnection agreement we currently operate under or their ability to
unilaterally reject orders, nor can we precisely determine what the impact will
be of any such resolution. While we have engaged in discussions with incumbent
local exchange companies regarding our various interconnection agreements, we
have not been successful in entering into any new agreements or amendments
thereto.


                                       10





<PAGE>


Collocation

          FCC rules generally require incumbent local exchange companies to
permit competitors to collocate equipment used for interconnection and/or access
to unbundled network elements. Changes to those rules, upheld in 2002 by the
D.C. Circuit, allow competitors to collocate multifunctional equipment and
require incumbent local exchange companies to provision cross-connects between
collocated carriers. We cannot determine the effect, if any, of future changes
in the FCC's collocation rules on our business or operations.

Access Charges

          We pay access fees to local exchange carriers for the origination and
termination of our long distance communications traffic. Generally, intrastate
access charges are higher than interstate access charges. Therefore, to the
extent access charges increase or a greater percentage of our long distance
traffic is intrastate, our costs of providing long distance services will
increase.

          As a local exchange provider, we bill long distance providers access
charges for the origination and termination of those providers' long distance
calls. Accordingly, in contrast with our long distance operations, our local
exchange business benefits from the receipt of intrastate and interstate long
distance traffic. As an entity that collects and remits access charges, we must
properly track and record the jurisdiction of our communications traffic and
remit or collect access charges accordingly. The result of any changes to the
existing regulatory scheme for access charges or a determination that we have
been improperly recording the jurisdiction of our communications traffic could
have a material adverse effect on our business.

          The FCC has indicated that its existing carrier compensation rules
constitute transitional regimes that will conclude in mid-2005, when a new
interstate intercarrier compensation regime based on bill-and-keep or another
alternative should be in place. Because we both make payments to and receive
payments from other carriers for the exchange of local and long distance calls,
we will be affected by changes in the FCC's intercarrier compensation rules. We
cannot predict the impact that any such changes may have on our business.

          Our costs of providing long distance services, and our revenues for
providing local services, also are affected by changes in access charge rates
imposed on competitive local exchange companies. Pursuant to the FCC's 2001 CLEC
Access Charge Order, which lowered the rates that competitive local exchange
companies may charge long distance carriers for the origination and termination
of calls over local facilities, access rates were reduced during 2003 and were
reduced again during 2004. AT&T and Sprint have appealed the CLEC Access Charge
Order to the D.C. Circuit, arguing that the FCC's benchmark rates are too high.

          The FCC issued the first Access Charge Reform Report and Order in
1997. Although the FCC has since issued five further orders in that docket,
several petitions for reconsideration and clarification of the 1997 Order remain
pending. On December 15, 2003, the FCC issued a public notice requesting that
the parties to such petitions file supplemental notices identifying any issues
that were raised in the petitions and that have not been otherwise resolved. We
cannot predict whether the FCC will further modify its access charge rules as a
result of this proceeding, or the effect that any such changes would have on our
business.

          Over the last several years, the FCC has granted incumbent local
exchange companies significant flexibility in pricing interstate special and
switched access services. In August 1999, the FCC granted immediate pricing
flexibility to many incumbent local exchange companies and established a
framework for granting greater flexibility in the pricing of all interstate
access services once an incumbent local exchange company market satisfies
certain prescribed competitive criteria. In February 2001, the D.C. Circuit
upheld the FCC's prescribed competitive criteria. To date, the FCC has granted
pricing flexibility in numerous specific markets to the Regional Bell Operating
Companies. This pricing flexibility may result in Regional Bell Operating
Companies lowering their prices in high traffic density areas, including areas
where we compete or plan to compete. We anticipate that the FCC will continue to
grant incumbent local exchange companies greater pricing flexibility for access
services if the number of actual and potential competitors increases in each of
these markets.

          The FCC issued a Notice of Public Rulemaking on February 10, 2005 in
WCC Docket No. 05-25. This notice includes a broad examination of the regulatory
framework that is applied to local exchange carriers' interstate special access
services preventing them from exceeding certain prices after June 30, 2005. In
conducting this examination, the FCC announced that it seeks comment on the
special access regulatory regime that should follow the expiration of the
Coalition for Affordable Local and Long Distance Service plan, including whether
to maintain or modify the Commission's pricing flexibility rules for special
access services. We cannot predict whether the FCC will further modify its
access change rules as a result of this proceeding or the effect that any such
changes would have on our business.

          On February 10, 2005, the FCC also adopted a Further Notice of
Proposed Rulemaking, and solicited comment on whether to adopt any of seven
different comprehensive proposals for reform of the FCC's existing rules
relating to intercarrier compensation. Further action in that proceeding could
lead to substantial changes to the way that reciprocal compensation, switched
access and universal charges are established and administered, and could lead to
material reductions in our intercarrier compensation revenues.


                                       11





<PAGE>


Detariffing

          Consistent with other deregulatory measures, the FCC has largely
eliminated carriers' obligations to file tariffs with the FCC containing prices,
terms and conditions of service. All carriers, including us, were required to
complete this detariffing process for interstate domestic commercial, or
customer-specific, services by January 31, 2001, for consumer mass-market
services by July 31, 2001, and for international services by January 2002. In
lieu of federal tariffs, the FCC requires carriers to post information relating
to the rates, terms, and conditions of services on their corporate web sites.
Detariffing precludes our ability to rely on filed rates, terms and conditions
as a means of providing notice to customers of prices, terms and conditions
under which we offer services, and requires us instead to rely on individually
negotiated agreements with end users. We remain subject to the 1934 Act's
requirements that rates, terms and conditions of communications service be just,
reasonable and not discriminatory, and we are subject to the FCC's jurisdiction
over customer complaints regarding our communications services.

          In 2002, a coalition of consumer-protection advocates and state public
utility commissions asked the FCC to require non-dominant interexchange carriers
to give at least 30 days' advance written notice to their presubscribed
customers of any material change to the rates, terms or conditions of a
carrier-customer agreement. The coalition argued that since detariffing took
effect, customer agreements generally offered by interexchange carriers reserve
for the carriers the right to unilaterally change rates, terms and conditions at
any time, thereby preventing consumers from making informed decisions regarding
the terms under which they acquire service from carriers. To date, the FCC has
not instituted such a proceeding. If adopted, such requirements could constrain
our ability to modify our rates, terms and conditions in response to competitive
market pressures.

Advanced Services

          Section 706 of the 1996 Act requires the FCC to encourage the
deployment of advanced telecommunications capabilities to all Americans, and
Section 10 of the 1934 Act requires the FCC to forbear from applying regulation
where forbearance from regulation would be in the public interest. Several
incumbent local exchange companies have petitioned the FCC pursuant to these
provisions to modify or eliminate network unbundling obligations related to
these advanced services, or to forbear from imposing the FCC_s unbundling and
interconnection rules. In addition, incumbent local exchange companies have
filed similar petitions asking the FCC to bar competitive carriers like us from
billing and collecting interexchange carrier switched access charges when
providing service through the use of the local switching unbundled network
element. If any of these petitions for waiver or forbearance are approved by
action or inaction of the FCC, our access to critical unbundled network elements
could be thwarted, or our ability to collect switched access charges could be
forestalled, which could have a material adverse effect on our operations.

Universal Service

          Section 254 of the 1934 Act and the FCC's implementing rules require
all communications carriers providing interstate or international communications
services to periodically contribute to the Universal Service Fund, or USF. The
USF supports four programs administered by the Universal Service Administrative
Company with oversight from the FCC: (i) communications and information services
for schools and libraries, (ii) communications and information services for
rural health care providers, (iii) basic telephone service in regions
characterized by high communications costs or low income levels, and (iv)
interstate common line support. Periodic USF contribution requirements currently
are measured and assessed based on the total subsidy funding needs and each
contributor's percentage of the total of certain interstate and international
end user communications revenues reported to the FCC by all communications
carriers. We measure and report our revenues in accordance with rules adopted by
the FCC. The contribution rate factors are calculated and revised quarterly and
we are billed for our contribution requirements each month based on projected
interstate and international end-user communications revenues, subject to
periodic true up.

          USF contributions may be passed through to consumers on an equitable
and nondiscriminatory basis either as a component of the rate charged for
communications services or as a separately invoiced line item. Since April 1,
2003, communications carriers have been prohibited from using a separate line
item on invoices to identify, as a recovery of USF contributions, amounts that
exceed the rate of actual USF contributions.

          A proceeding pending before the FCC has the potential to significantly
alter our USF contribution obligations. The FCC is considering changing the
basis upon which our USF contributions are determined from a revenue percentage
measurement to a connection or telephone number measurement. Adoption of this
proposal could have a material adverse affect on our costs, our ability to
separately list USF contributions on end-user bills and our ability to collect
these fees from our customers.

          The application and effect of changes to the USF contribution
requirements and similar state requirements on the communications industry
generally and on certain of our business activities cannot be predicted. If our
collection procedures result in over-collection, we could be required to make
reimbursements of such over-collection and be subject to penalty, which could
have a material adverse affect on our business, financial condition and results
of operations. If a federal or state regulatory body determines that we have
incorrectly calculated or remitted any USF contribution, we could be subject to
the assessment and collection of past due remittances as well as interest and
penalties thereon. No such proceeding has been commenced at this time against
us.


                                       12





<PAGE>


Network Information

          FCC rules protect the privacy of certain information about customers
that communications carriers, including us, acquire in the course of providing
communications services. Such protected information, known as Customer
Proprietary Network Information, or CPNI, includes information related to the
quantity, technological configuration, type, destination and the amount of use
of a communications service. The FCC's initial CPNI rules prevented a carrier
from using CPNI to market certain services without the express approval of the
affected customer, referred to as an opt-in approach. In July 2002, the FCC
revised its opt-in rules in a manner that limits our ability to use the CPNI of
our subscribers without first engaging in extensive customer service processes
and record keeping. Certain states have also adopted state-specific CPNI rules.
We use our subscribers' CPNI in accordance with applicable regulatory
requirements. However, if a federal or state regulatory body determines that we
have implemented those guidelines incorrectly, we could be subject to fines or
penalties. In addition, correcting our internal customer systems and CPNI
processes could generate significant administrative expenses.

Regulation of Internet Service Providers and VoIP

          To date, the FCC has treated Internet service providers, or ISPs, as
enhanced service providers exempt from federal and state regulations governing
common carriers, including the obligation to pay access charges and contribute
to the USF. Nevertheless, regulations governing the disclosure of confidential
communications, copyright, excise tax and other requirements may apply to our
Internet access services. In addition, Congress has passed a number of laws that
concern the Internet and Internet users. Generally, these laws limit the
potential liability of ISPs and hosting companies that do not knowingly engage
in unlawful activity. Congress is actively considering a variety of Internet
regulation bills, some of which, if signed into law, could impose obligations on
us to monitor the Internet activities of our customers.

          Where communications service providers have offered enhanced services
in addition to their communications services, the FCC and state public utility
commissions generally have exempted the enhanced service component and its
associated revenue from legacy communications regulations. Some of the services
we provide are enhanced services. Future and pending FCC and state proceedings
may significantly affect our future provision of enhanced services.

          The use of the public Internet and private Internet protocol networks
to provide voice communications services, including voice-over-Internet
protocol, or VoIP, is a relatively recent market development. The provision of
such services is largely unregulated within the United States. In a 1998 Report
to Congress, the FCC declined to conclude that IP telephony services constitute
telecommunications services and stated that it would undertake a subsequent
examination of whether certain forms of phone-to-phone Internet telephony are
information services or telecommunications services. The FCC indicated that, in
the future, it would consider the extent to which phone-to-phone Internet
telephony providers could be considered telecommunications carriers such that
they could be subject to regulations governing traditional telephone companies.
The FCC also stated that, although it did not have a sufficient record upon
which to make a definitive ruling, the record suggested that, to the extent that
certain forms of phone-to-phone IP telephony appear to possess the same
characteristics as traditional communications services and to the extent the
providers of those services utilize circuit-switched access in the same manner
as interexchange carriers, the FCC may find it reasonable to require that IP
telephony providers pay charges similar to access charges. The FCC recognized,
however, that it should consider forbearing from imposing rules that would apply
to phone-to-phone Internet telephony providers if they were classified as
telecommunications carriers. To date, the FCC has not imposed regulatory
surcharges or traditional common carrier regulation upon providers of Internet
communications services.

          Several pending FCC proceedings will affect the regulatory status of
Internet telephony. On February 12, 2004, the FCC adopted a notice of proposed
rulemaking to address, in a comprehensive manner, the future regulation of
services and applications making use of Internet protocol, including VoIP. In
the absence of federal legislation, we expect that through this IP-Enabled
Services proceeding the FCC will resolve certain regulatory issues relating to
VoIP services and develop a regulatory framework that is unique to IP telephony
providers or that subjects VoIP providers to minimal regulatory requirements. We
cannot predict when the FCC may take such actions. The FCC may determine that
certain types of Internet telephony should be regulated like basic interstate
communications services, rendering VoIP calls subject to the access charge
regime that permits local telephone companies to charge long distance carriers
for the use of the local telephone networks to originate and terminate
long-distance calls, generally on a per minute basis. The FCC also may conclude
that Internet telephony providers should contribute to the USF. The FCC's
pending review of intercarrier compensation policies (discussed above) also may
have an adverse impact on enhanced service providers.


                                       13





<PAGE>


          In a series of decisions issued in 2004, the FCC clarified that the
FCC, not the state public utility commissions, has jurisdiction to decide the
regulatory status of certain IP-enabled services, including certain types of
VoIP. On November 12, 2004, in response to a request by Vonage Holdings Corp.
(Vonage), a VoIP services provider, the FCC issued an order preempting the
Minnesota PUC from imposing traditional telephone company regulation of VoIP
service, finding that the FCC alone could make such decisions because the
service cannot be separated into interstate and intrastate communications
without negating federal rules and policies. In September 2003, the Minnesota
PUC had issued an order requiring Vonage to comply with Minnesota laws that
regulate telephone companies. That order was appealed to the U.S. District Court
for the District of Minnesota, which issued a permanent injunction based on its
determination that federal communications law preempts the Minnesota PUC from
imposing state law common carrier telecommunications regulations on information
service providers such as Vonage. The Minnesota PUC appealed the judgment to the
U.S. Court of Appeals for the Eighth Circuit. While the appeal was pending, the
FCC issued its preemption order. In an order filed December 22, 2004, the Eighth
Circuit concluded that the intervening FCC preemption order was binding on the
court and could not be challenged in the litigation. On that basis, the Court of
Appeals affirmed the judgment of the district court, that the Minnesota PUC did
not have jurisdiction to regulate the provision of the Vonage services. Four
state commissions, including Minnesota, and the National Association of State
Utility Consumer Advocates (NASUCA) have asked federal appeals courts to
overturn the FCC's November 2004 order.

          On October 18, 2002, AT&T filed a petition with the FCC seeking a
declaratory ruling that would prevent incumbent local exchange companies from
imposing traditional circuit-switched access charges on phone-to-phone IP
services. In April 2004, the FCC issued an order concluding that, under current
rules, AT&T's phone-to-phone IP telephony service is a telecommunications
service upon which interstate access charges may be assessed. AT&T's service
consists of an interexchange call initiated by an end user who dials 1 + the
called number from a regular telephone. When the call reaches AT&T's network,
AT&T converts it into an IP format and transports it over AT&T's Internet
backbone. AT&T then converts the call back from the IP format and delivers it to
the called party through local exchange carrier local business lines. This
decision is thus limited to interexchange service that: (1) uses ordinary
customer premises equipment with no enhanced functionality; (2) originates and
terminates on the public switched telephone network; and (3) undergoes no net
protocol conversion and provides no enhanced functionality to end users due to
the provider's use of IP technology. The FCC made no determination regarding
retroactive application of its ruling, and stated that the decision does not
preclude it from adopting a different approach when it resolves the IP-Enabled
Services or Intercarrier Compensation rulemaking proceedings.

          On February 5, 2003, pulver.com filed a petition with the FCC seeking
a declaratory ruling that its Free World Dialup service, which facilitates
point-to-point broadband Internet protocol voice communications, is neither
telecommunications nor a telecommunications service as these terms are defined
in the 1934 Act. The FCC granted the pulver.com petition on February 12, 2004,
establishing that Free World Dialup is an information service, as defined in the
1934 Act. The FCC limited this finding to VoIP services that, like Free World
Dialup, exist solely as an Internet application, similar to electronic mail and
instant messaging, and which do not rely on the public switched telephone
network. Information services are subject to federal regulatory authority, but
may not be regulated by state authorities.

          On February 23, 2005, the FCC denied a petition filed by AT&T
requesting that the FCC deem its enhanced prepaid calling card plan interstate
and informational in nature, and thus exempt from universal service and
intrastate access charge payments. The FCC ruled that the AT&T prepaid calling
cards at issue constituted "telecommunications service" that is subject to the
assessment of switched access charges and universal service fund assessments.
The FCC also requested further comment on whether other types of prepaid cards,
including those that provide callers the option to listen to information or are
transmitted using internet protocol technology, are also subject to switched
access charge and universal service fund assessment.

          Other aspects of VoIP and Internet telephony services, such as
regulations relating to the confidentiality of data and communications,
copyright issues, taxation of services, licensing and 911 emergency access, may
be subject to federal or state regulation. For instance, in 2002 the FCC
undertook an examination of whether emergency 911 requirements should be
extended to packet-based networks and services. Similarly, changes in the legal
and regulatory environment relating to the Internet connectivity market,
including regulatory changes that affect communications costs or that may
increase the likelihood of competition from Regional Bell Operating Companies or
other communications companies could increase our costs of providing service.

Taxes and Regulatory Fees

          We are subject to numerous local, state and federal taxes and
regulatory fees, including but not limited to a 3% Federal excise tax on
communications service, FCC regulatory fees and public utility commission
regulatory fees. We have procedures in place to ensure that we properly collect
taxes and fees from our customers and remit such taxes and fees to the
appropriate entity pursuant to applicable law and/or regulation. If our
collection procedures prove to be insufficient or if a taxing or regulatory
authority determines that our remittances were inadequate, we could be required
to make additional payments, which could have a material adverse effect on our
business.

          On July 2, 2004, the Internal Revenue Service issued an advance notice
of proposed rulemaking asking for public comment on expanding the current 3%
excise tax to new communications services, such as VoIP and other IP-based
services, applications, and technologies, to reflect changes in technology. The
comment cycle ended September 30, 2004. We cannot predict the outcome of this
proceeding on our business.


                                       14





<PAGE>


State Regulation

          The 1934 Act maintains the authority of individual states to impose
their own regulation of rates, terms and conditions of intrastate services, so
long as such regulation is not inconsistent with the requirements of federal
law. Because we provide communications services that originate and terminate
within individual states, including both local service and in-state long
distance toll calls, we are subject to the jurisdiction of the PUC and other
regulators in each state in which we provide such services. For instance, we
must obtain a Certificate of Public Convenience and Necessity or similar
authorization before we may commence the provision of communications services in
a state. We have obtained Certificates of Public Convenience and Necessity to
provide facilities-based or resold competitive local and interexchange service
in every state that we provide services. As our local service business expands,
we may offer additional intrastate services and may become subject to additional
state regulations.

          In addition to requiring certification, state regulatory authorities
may impose tariff and filing requirements and obligations to contribute to state
universal service and other funds. State commissions also have jurisdiction to
approve negotiated rates, and to establish rates through arbitration for
interconnection, including rates for unbundled network elements.

          We also are subject to state laws and regulations regarding slamming,
cramming and other consumer protection and disclosure regulations. These rules
could substantially increase the cost of doing business in any particular state.
State commissions have issued or proposed several substantial fines against
competitive local exchange companies for slamming or cramming. The risk of
financial damage from slamming, in the form of fines, penalties and legal fees
and costs, and to business reputation is significant. A slamming complaint
before a state commission could generate substantial litigation expenses. In
addition, state law enforcement authorities may use their consumer protection
authority against us if we fail to meet applicable state law requirements.

          States also retain the right to sanction a service provider or to
revoke certification if a service provider violates relevant laws or
regulations. If any regulatory agency were to conclude that we are or were
providing intrastate services without the appropriate authority, the agency
could initiate enforcement actions, which could include the imposition of fines,
a requirement to disgorge revenues, or refusal to grant regulatory authority
necessary for the future provision of intrastate services.

          We may be subject to requirements in some states to obtain prior
approval for, or notify the state commission of, any transfers of control, sales
of assets, corporate reorganizations, issuance of stock or debt instruments and
related transactions. Although we believe such authorizations could be obtained
in due course, there can be no assurance that state commissions would grant us
authority to complete any of these transactions, or that such authority would be
granted on a timely basis.

          Rates for intrastate-switched access services, which we provide to
long-distance companies to originate and terminate in-state toll calls, are
subject to the jurisdiction of the state in which the call originated and /or
terminated. Such regulation by states could have a material adverse affect on
our revenues and business opportunities within that state. State public utility
commissions also regulate the rates incumbent local exchange companies charge
for interconnection of network elements with, and resale of services by,
competitors. In response to the USTA II decision and the FCC's ongoing TRO
proceedings, some state commissions have continued proceedings to address issues
affecting the rates, terms and conditions of intrastate services while other
states suspended or terminated their proceedings. Any such proceedings may
affect the rates, terms, and conditions contained in our interconnection
agreements. The pricing, terms and conditions under which the incumbent local
exchange company in each of the states in which we currently operate offers such
services may preclude our ability to offer a competitively viable and profitable
product within these and other states prospectively.

          Some states are considering enactment of legislation that would
deregulate incumbent local exchange company broadband facilities and services.
If such legislation became law, it could prevent state regulators from requiring
that incumbent local exchange companies allow competitive carriers to
interconnect with critical facilities used to provide broadband services on
reasonable terms.

Federal and State Regulation of Marketing

          Our current and past direct and partner marketing efforts all require
compliance with relevant federal and state regulations that govern the sale of
telecommunication services. The FCC and many states have rules that prohibit
switching a customer from one carrier to another without the customer's express
consent and specify how that consent must be obtained and verified. Most states
also have consumer protection laws that further define the framework within
which our marketing activities must be conducted. While directed at curbing
abusive marketing practices, the design and enforcement of these rules can have
the incidental effect of entrenching incumbent local exchange companies and
hindering the growth of new competitors, such as our business.


                                       15





<PAGE>


          Our marketing efforts are carried out through a variety of marketing
programs, including referrals from existing customers, outbound telemarketing,
direct sales through independent agents, broadcast media, online marketing
initiatives and direct mail. Restrictions on the marketing of telecommunication
services are becoming stricter in the wake of widespread consumer complaints
throughout the industry about "slamming" (the unauthorized change of a
customer's service from one carrier to another carrier) and "cramming" (the
unauthorized provision of additional telecommunication services). The 1996 Act
strengthened penalties against slamming, and the FCC issued and updated rules
tightening federal requirements for the verification of orders for
telecommunication services and establishing additional financial penalties for
slamming. In addition, many states have been active in restricting marketing
through new legislation and regulation, as well as through enhanced enforcement
activities. On October 1, 2003, the FCC's rules and regulations governing the
creation and enforcement of national "do not call" databases became effective,
which has had the effect of reducing the total number of leads available to us
for outbound telemarketing (which is currently one of our important sales
channels) in a given market. On February 18, 2005, the FCC released new rules
that clarified certain aspects of the national "do not call" database.
Notwithstanding, we can still market to these leads through our other sales
channels, including direct mail. The constraints of federal and state
regulation, as well as increased FCC, Federal Trade Commission and state
enforcement attention, could limit the scope and the success of our marketing
efforts and subject them to enforcement actions, which may have an adverse
effect on us.

          Statutes and regulations designed to protect consumer privacy also may
have the incidental effect of hindering the growth of newer telecommunication
carriers such as us. For example, the FCC rules that restrict the use of
"customer proprietary network information" (information that a carrier obtains
about its customers through their use of the carrier's services) may make it
more difficult for us to market additional telecommunication services (such as
local and wireless), as well as other services and products, to our existing
customers.

Other Domestic Regulation

          We are subject to a variety of federal, state, and local
environmental, safety and health laws, and regulations governing matters such as
the generation, storage, handling, use, and transportation of hazardous
materials, the emission and discharge of hazardous materials into the
atmosphere, the emission of electromagnetic radiation, the protection of
wetlands, historic sites, and endangered species and the health and safety of
employees. We also may be subject to laws requiring the investigation and
cleanup of contamination at sites we own or operate or at third-party waste
disposal sites. Such laws often impose liability even if the owner or operator
did not know of, or was not responsible for, the contamination.

          We operate several sites in connection with our operations. We are not
aware of any liability or alleged liability at any operated sites or third-party
waste disposal sites that would be expected to have a material adverse effect on
us. Although we monitor our compliance with environmental, safety and health
laws and regulations, we cannot give assurances that it has been or will be in
complete compliance with these laws and regulations. We may be subject to fines
or other sanctions by federal, state and local governmental authorities if we
fail to obtain required permits or violate applicable laws and regulations.


                                       16





<PAGE>


                                   PERSONNEL

          As of the April 1, 2005, Covista and its subsidiaries employed 162
full-time and part-time employees in its telecommunication business. Covista
also utilizes the services of approximately 1,000 independent sales agents.
Covista considers its relations with its employees and independent sales agents
to be satisfactory.

ITEM 2. Properties

          On February 6, 1998, Covista entered into a lease for approximately
5,000 square feet of space at 28 W. Flagler Street, Miami, Florida, for use as a
switching facility. The term of the lease is 15 years, commencing February 1,
1998. The annual rental is approximately $116,160, with an annual adjustment
based on the Revised Urban Wage Earners and Clerical Workers Index, capped at a
maximum of 3% increase over the prior year's rental payment. In addition,
Covista is liable for its proportionate share of increases in real estate taxes
and operating expenses over the base year.

          On September 1, 2001, Covista entered into a lease agreement for
approximately 28,000 square feet of office space in Chattanooga, Tennessee, with
Henry G. Luken III, Chairman of the Board, and a principal shareholder of
Covista. The original term of the lease was for five years and has been extended
for an additional five years. The lease provides for annual rent of $86,400 from
September 1, 2001 to August 30, 2002; $115,200 from September 1, 2002 to August
30, 2003; $144,000 from September 1, 2003 to August 30, 2004, with the last two
years to be $144,000 annually adjusted for the Consumer Price Index. Covista
believes that such premises are leased on terms not less favorable than an arm's
length transaction.

          On December 1, 2001, Covista entered into a lease for property located
at 806 East Main Street, Chattanooga, Tennessee, for use as a switching
facility. The lessor is Henry G. Luken III, Chairman of the Board and a
principal shareholder of Covista. The lease expires on November 30, 2006. Annual
rent is payable as follows: $22,500 from December 1, 2001 to November 30, 2002,
$27,000 from December 1, 2002 to November 30, 2003, $31,500 from December 1,
2003 to November 30, 2004, and $36,000 from December 1, 2004 to November 30,
2005. Rental amounts for months beginning after October 1, 2005 will be adjusted
upward for the U.S. Consumer Price Index. The lease may be renewed for an
additional 5 years upon 90 days' written notice prior to the lease expiration
date. Covista believes that such premises are leased on terms not less favorable
than an arm's length transaction.

          On December 15, 2001, Covista entered into a lease for Suite 1350,
1201 Main Street, Dallas, TX, for use as a switching facility and expires on
April 14, 2006. Annual rent is due as follows: $164,475 from April 15, 2000 to
April 14, 2002, $175,440 from April 15, 2002 to April 14, 2004, and $186,405
from April 15, 2004 to April 14, 2006. The lease has no provision for renewal.

          On May 31, 2002, Covista entered into a lease for 2,900 useable (3,335
rentable) square feet at 511-11th Avenue South, Suite 312, Minneapolis,
Minnesota for use as a switching facility. The lease expires on May 31, 2009.
Annual rent is payable as follows: Year 1 = $86,376, Year 2 = $93,047, Year 3 =
$96,382, Year 4 = $99,717, Year 5 = $103,052, Year 6 = $106,387, and Year 7 =
$109,721. The lease may be renewed for an additional 5 years, upon 4 months'
written notice prior to the lease expiration date. Covista pays its
proportionate share of real estate taxes and utilities for the leased space.

          On October 1, 2002, Covista entered into a lease for Suite 200 at 721
Broad Street, Chattanooga, Tennessee, for use as offices for Corporate
Headquarters. The lessor is Henry G. Luken III, Chairman of the Board and a
principal shareholder of Covista. The lease expires on November 30, 2007. Annual
rent is payable as follows: Year 1 = $101,674, Year 2 = $111,670, Year 3 =
$120,000, Year 4 = $120,000, Year 5 = $120,000. Rental amounts for months
beginning after October 1, 2005 will be adjusted upward for the U.S. Consumer
Price Index. The lease may be renewed for an additional 5 years upon 90 days'
written notice prior to the lease expiration date. Covista believes that such
premises are leased on terms not less favorable than an arm's length
transaction.

          As a result of the PAETEC transaction, the Company assigned and
PAETEC assumed responsibility for certain property leases. These included
switching facilities located in New York and Philadelphia in addition to
office facilities in Paramus, NJ and Bensalem, PA.

ITEM 3. Pending Legal Proceedings

          There are no pending legal proceedings, which could be expected to
have a material adverse effect on Covista.

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

          A proxy statement dated September 24, 2004 and mailed to stockholders
on or about September 24, 2004 provided details on the election of six directors
to serve for a term of one year and until their successors were duly elected and
qualified; ratification of the selection of Deloitte & Touche LLP as independent
auditors of the Company for the fiscal year ending January 31, 2005; the
adoption of the Company's Audit Committee Charter; and the transaction of such
other business as properly came before the meeting or any adjournment or
postponement thereof. During the scheduled annual meeting of stockholders on
October 28, 2004, all of the foregoing matters were approved by the requisite
vote of stockholders of Covista.


                                       17





<PAGE>


                                     PART II

ITEM 5. Market for Company's Common Stock and Related Security Holder Matters

Common Stock

          Covista's authorized capital stock consists solely of 50,000,000
shares of Common Stock. Holders of Covista's Common Stock are entitled to
receive such dividends, if any, as may be declared from time to time by the
Board of Directors in its discretion from funds legally available therefore.
Each holder of Common Stock is entitled to one vote for each share held. There
is no right to cumulative voting. Upon liquidation, dissolution, or winding up
of Covista, the holders of Common Stock are entitled to receive a pro rata share
of all assets available for distribution to stockholders. The Common Stock has
no pre-emptive or other subscription rights, and there are no conversion or
redemption rights with respect to such shares.

          As of the date of this report, there were 17,822,025 shares of Common
Stock issued and outstanding, held by approximately 860 persons.

Price Range of the Common Stock

          Covista's Common Stock is traded on the NASDAQ National Market System
under the Symbol CVST. The following table sets forth, for the quarterly fiscal
periods indicated, the high and low closing sale prices for Covista's Common
Stock in such market, as reported by the National Association of Securities
Dealers, Inc.

<TABLE>
<CAPTION>
FISCAL 2004                         HIGH    LOW
-----------                         ----    ----
<S>                                <C>     <C>
February 1, 2003 thru April 30     $3.62   $1.75
May 1 thru July 31                 $4.10   $1.82
August 1 thru October 31           $3.55   $2.60
November 1 thru January 31, 2004   $4.00   $2.21
</TABLE>

<TABLE>
<CAPTION>
FISCAL 2005                         HIGH    LOW
-----------                         ----    ----
<S>                                <C>     <C>
February 1, 2004 thru April 30     $3.55   $2.80
May 1 thru July 31                 $3.15   $2.26
August 1 thru October 31           $2.43   $1.62
November 1 thru January 31, 2005   $2.30   $1.55
</TABLE>

Covista has not paid or declared any cash dividends during the past two fiscal
years and does not anticipate paying any in the foreseeable future.


                                       18





<PAGE>


Compensation Plans and Securities

          The following table sets forth certain information as of January 31,
2005 with respect to compensation plans under which equity securities of the
Company are authorized for issuance:

<TABLE>
<CAPTION>
                                                                                            Number of Securities
                                         Number of Securities to     Weighted-Average     Remaining Available for
                                         be Issued Upon Exercise     Exercise Price of     Future Issuance Under
                                         of Outstanding Options,   Outstanding Options,     Equity Compensation
             Plan Category                 Warrants and Rights      Warrants and Rights          Plans (1)
--------------------------------------   -----------------------   --------------------   -----------------------
<S>                                             <C>                        <C>                   <C>
Equity compensation plans approved by
   security holders                             1,391,958                  $2.90                 1,257,100

Equity compensation plans not approved
   by security holders                                 --                     --                        --
                                                ---------                  -----                 ---------
Total                                           1,391,958                  $2.90                 1,257,100
</TABLE>

(1)  Under all plans, if any shares subject to a previous award are forfeited,
     or if any award is terminated without issuance of shares or satisfied with
     other consideration, the shares subject to such award shall again be
     available for future grants.


                                       19





<PAGE>


ITEM 6. Selected Financial Data

          The following selected consolidated statement of operations data,
balance sheet data, and cash flow data as of and for the years ended January 31,
2005, 2004, 2003, 2002, and 2001 have been derived from our audited consolidated
financial statements. The selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and the
notes hereto.

<TABLE>
<CAPTION>

                                                    (In thousands except per share amounts)
                                                             Year ended January 31,
                                              ---------------------------------------------------
                                                2005      2004      2003        2002       2001
                                              -------   -------   --------    --------   --------
<S>                                           <C>       <C>       <C>         <C>        <C>
RESULTS OF OPERATIONS:
Net Revenues                                  $59,840   $84,056   $100,960    $ 95,313   $133,230
Net Loss                                      $(5,333)  $  (944)  $ (9,407)   $(11,970)  $ (8,629)
Weighted average common shares outstanding:
   Basic                                       17,822    17,796     13,283      10,204      7,324
   Diluted                                     17,822    17,796     13,283      10,204      7,324
Loss per common and equivalent shares:
Basic loss per share                          $  (.30)  $  (.05)  $  (0.71)   $  (1.17)  $  (1.18)
Diluted loss per share                        $  (.30)  $  (.05)  $  (0.71)   $  (1.17)  $  (1.18)
Cash dividends per common share                  None      None       None        None       None
Additions to property and equipment           $   242   $   277   $  4,943(b) $  5,465   $  3,227
Depreciation and amortization                 $ 3,552   $ 5,932   $  7,442    $  4,569   $  3,578

FINANCIAL POSITION:
Working Capital                               $ 4,538   $(6,088)  $ (9,536)   $(11,327)  $ (7,734)
Property and equipment-net                    $ 6,082   $11,654   $ 15,150    $ 12,490   $ 13,021
Total assets                                  $27,231   $40,887   $ 51,050    $ 31,257   $ 39,097
Long-term debt                                $     0   $   573   $  1,811    $ 4,400(a) $    382
Shareholders' Equity                          $13,514   $18,833   $ 19,693    $  1,569   $  5,777
Common shares outstanding                      17,822    17,817     17,783      10,849      7,969
</TABLE>

(a)  $4,400,000 consists of a loan from Covista's Chairman of the Board, which
     was converted to equity in Fiscal 2003 (see ITEM 13).
(b)  Includes $3,400,000 of property contribution from Covista's Chairman of the
     Board (see ITEM 13).


                                       20





<PAGE>


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

          The following discussion is presented to assist in assessing the
changes in financial condition and performance of Covista for the fiscal years
ended January 31, 2003 (Fiscal 2003), January 31, 2004 (Fiscal 2004) and January
31, 2005 (Fiscal 2005). The following information should be read in conjunction
with the financial statements and related notes and other detailed information
regarding Covista included elsewhere in this report.

Special Note Regarding Forward-Looking Statements

          Certain of the statements contained in this Form 10-K Report may be
considered "forward-looking statements" for purposes of the securities laws.
From time to time, oral or written forward-looking statements may also be
included in other materials released to the public. These forward-looking
statements are intended to provide our management's current expectations or
plans for our future operating and financial performance, based on our current
expectations and assumptions currently believed to be valid. For these
statements, we claim protection of the safe harbor for forward-looking
statements provided by the Private Securities Litigation Reform Act of 1995.
These forward-looking statements can be identified by the use of forward-looking
words or phrases, including, but not limited to, "believes," "estimates,"
"expects," "expected," "anticipates," "anticipated," "plans," "strategy,"
"target," "prospects" and other words of similar meaning in connection with a
discussion of future operating or financial performance. Although we believe
that the expectations reflected in such forward-looking statements are
reasonable, there can be no assurance that such expectations will prove to have
been correct.

All forward-looking statements involve risks and uncertainties that may cause
our actual results to differ materially from those expressed or implied in the
forward-looking statements. This Form 10-K Report includes important information
as to risk factors in the "Business" section under the headings "Business"
"Competition" and "Regulation" and in "Management's Discussion and Analysis of
Financial Condition and Results of Operations." In addition to those factors
discussed in this Form 10-K Report, you should see our other reports on Forms
10-K, 10-Q and 8-K filed with the Securities and Exchange Commission from time
to time for information identifying factors that may cause actual results to
differ materially from those expressed or implied in the forward-looking
statements.


                                       21





<PAGE>


                              RESULTS OF OPERATIONS

                     FISCAL 2005 AS COMPARED TO FISCAL 2004

Revenues

          The Company sells telecommunication services to three distinct
segments: a residential segment targeting residential users, a retail segment
consisting primarily of small to medium size businesses and a wholesale segment
with sales to other telecommunications carriers.

          Net sales of telecommunications services for the fiscal year ended
January 31, 2005 were approximately $59,840,000, a decrease of approximately
$24,216,000 or 29% from the approximately $84,056,000 of net sales in Fiscal
2004. These revenues were comprised of retail sales of approximately
$33,639,000, residential revenue of approximately $23,017,000 and wholesale
revenue of approximately $3,184,000. Covista billed approximately 926 million
minutes in Fiscal 2005 as compared to approximately 1.27 billion minutes in
Fiscal 2004, a decrease of 345 million minutes or 27%. The overall decrease is
primarily related to the sale of certain retail customers to PAETEC as further
discussed below and intense competitive pressure in the retail segment.

          Net retail sales for Fiscal 2005 were approximately $33,639,000, a
decrease of approximately $28,781,000, or 46% from the approximately $62,420,000
billed in Fiscal 2004. Current year retail sales includes approximately
$1,452,000 of local service revenue versus approximately $50,000 of local
service revenue in the prior year. Retail billed minutes were approximately 490
million, a decrease of approximately 426 million minutes or 46%, versus the
retail minutes of approximately 917 million billed in Fiscal 2004. The average
blended price per minute of $.067 decreased approximately 1.5% versus the prior
year blended average rate per minute of $.068 as the industry continues to
experience decreased price per minute of usage. Covista does not foresee that
this trend in pricing will abate in the near future. The current year sales
decrease in the retail segment is primarily attributed to the Company's sale of
a major portion of its retail customer base to PAETEC, in addition to the
intense competitive pressure from other providers, especially those which have
the ability to bundle local dial tone with traditional long distance offerings.
The Company does not foresee this intensely competitive climate relaxing in the
near future. The Company plans to continue to support its remaining retail
channel by expanding its competitive local and long distance product offering in
selected markets, primarily in the Southeast.

          Net residential sales for Fiscal 2005 were approximately $23,017,000
for the year, an increase of approximately $5,756,000 or 33% from the
approximately $17,261,000 billed in fiscal 2004. The Company expanded its local
service revenue during the current fiscal year. Residential sales for Fiscal
2005 includes approximately $9,028,000 of local service revenue versus
approximately $477,000 of local service revenue in the prior fiscal year.
Residential billed minutes for Fiscal 2005 were approximately 295 million, a
decrease of approximately 1 million minutes or 0.3% from the approximately 296
million billed in the previous year. The average blended price per minute of
$0.047 decreased approximately 17.5% versus the prior year blended average rate
per minute of $0.057 as the industry continues to experience decreased prices
per minute of usage. Covista does not foresee that this trend in pricing will
abate in the near future. The current year sales increase in the residential
segment is primarily attributed the successful expansion of local service to
these residential users in selected markets, in addition to direct marketing via
mail and web based affinity marketing campaigns. While the Company has launched
local services to the residential segment in certain markets, the Company plans
to expand the number of markets in which it has the ability to offer its local
and long distance bundled product offering. Additionally, the Company plans to
expand its marketing resources to target new geographic market areas where the
Company has the ability to offer competitive bundled services to residential
users. These efforts will be accomplished in conjunction with maintaining the
support required for the retail segment.

          Net wholesale (carrier) sales for Fiscal 2005 were approximately
$3,184,000, a decrease of approximately $1,192,000 or 27% from the approximately
$4,376,000 billed in Fiscal 2004. Fiscal 2005 wholesale revenue includes
approximately $607,000 of access charges billed to other long distance carriers,
which terminate calls to the Company's local customers. The Company did not
record access billing in the previous year since it had an insignificant number
of local customers in the prior year. Billed wholesale minutes amounted to
approximately 142 million, an increase of approximately 84 million minutes or
145% from the billed wholesale minutes of approximately 58 million billed in
Fiscal 2004 as the minute mix shifted to a greater share of domestic versus
international termination. The Company plans to maintain nominal wholesale
volume in the future, based on network capacity and gross margin opportunities
while balancing any possible financial exposure related to un-collectable
balances.


                                       22





<PAGE>


Cost of Revenue

          Cost of revenue for Fiscal 2005 was approximately $32,833,000, a
decrease of approximately $14,506,000 or 31% from the approximately $47,339,000
recorded in Fiscal 2003. The decrease in cost of revenue was favorable in
relationship to the overall revenue decrease of 29% discussed previously.

          In the normal course of business, billings for line costs are often
not received until after the period of service, Covista, therefore, uses certain
estimates to determine its monthly cost of revenue ("line cost") and
corresponding accounts payable to these service providers. These line costs
include fees for network transport, access, egress and facility charges. The
Company completes a detailed bill audit function, which includes a comparison of
invoices received to amounts accrued, contractual rates and applicable tariffs
and engineering data regarding usage. Accrued amounts are adjusted based on the
bill audit function and actual invoices received. These adjustments to actual
expense are typically identified within 90 days following the period of
estimate.

          We structure and price our products in order to maintain network and
line costs as a percentage of revenue at certain targeted levels. There are
several factors that could cause our network and line costs as a percentage of
revenue to increase in the future, including without limitation:

          Determinations by the FCC, courts or state commission(s) that make
unbundled local switching and/or combinations of unbundled network elements
effectively unavailable to us in some or all of our geographic service areas,
requiring us to provide services in these areas through other means, including
local service resale agreements with incumbent local telephone companies,
network elements purchased from the Regional Bell Operating Companies at "just
and reasonable" rates under Section 271 of the Act and the switching facilities
of other non-incumbent carriers, in any case, at significantly increased costs
or to provide services over our own switching facilities, if we were able to
deploy them.

Selling, General and Administrative

          Selling, general and administrative (SG&A) expenses are comprised of
selling and marketing costs, and general and administrative costs. SG&A expenses
for Fiscal 2005 were approximately $27,049,000, a decrease of approximately
$4,354,000 or 14% versus approximately $31,403,000 in the previous year. The
overall decrease was primarily due to an overall decrease in payroll related
costs of approximately $1,840,000; a decrease in commission expense as a result
of lower retail revenue of approximately $3,956,000; increased marketing
expenses related to the residential segment for the launch of local services of
approximately $2,008,000; and general decreases in other categories of
approximately $566,000.

Loss on Disposal of Assets and Restructuring Expense

          As a result of the PAETEC transaction, the Company recorded a pre-tax
charge of approximately $696,000. In addition, the Company recorded a pre-tax
restructuring charge of approximately $376,000 during the year related to
employee severance and other costs associated with the consolidation of back
office functions and other management initiatives.

Depreciation and Amortization

          Depreciation and amortization was approximately $3,552,000 for Fiscal
2005. The decrease of approximately $2,379,000 is primarily due to the sale of
selected assets to PAETEC and the result of certain intangible assets becoming
fully amortized between years.

Other Income and Expense

          Total other income (expense) for Fiscal 2005 was approximately
($487,000), representing an increase of approximately $159,000 versus
approximately ($328,000) of expense from previous fiscal year. The largest
component of other income (expense) is early retirement of debt. As a result of
the PAETEC transaction, the Company terminated and paid its revolving credit
facility with Capital Source Finance, LLC. The Company recorded an early
termination expense of approximately $307,000 related to this payoff.

Stock Compensation Expense

          There was no stock compensation expense recorded for the Fiscal years
ended January 31, 2005 and 2004.

Income Tax

          The Company recorded a tax provision of approximately $180,000 for the
year ended 2005. The provision results from the Alternative Minimum Tax due to
utilization of net operating loss carryforwards from the PAETEC transaction. No
income tax was realized for the year ended January 31, 2004. The Company
continues to provide a full valuation allowance against its net operating loss
carryforwards due to uncertainty of realization.

Net Loss

          For the reasons set forth above, the net loss for Fiscal 2005 of
approximately $5,333,000 represents an increase in net loss of approximately
$4,389,000 over the net loss of approximately $944,000 reported in Fiscal 2004.


                                       23





<PAGE>


                              RESULTS OF OPERATIONS

                     FISCAL 2004 AS COMPARED TO FISCAL 2003

Revenues

          Net sales of telecommunications services for the fiscal year ended
January 31, 2004 were approximately $84,056,000, a decrease of approximately
$16,904,000 or 17% from the approximately $100,960,000 of net sales in Fiscal
2003. These revenues were comprised of retail sales of approximately
$62,420,000, residential revenue of approximately $17,260,000 and wholesale
revenue of approximately $4,376,000. Covista billed approximately 1,270,875,338
minutes in Fiscal 2004 as compared to approximately 1,453,124,000 minutes in
Fiscal 2003, a decrease of 182,248,662 minutes or 13%. The overall decrease is
primarily related to intense competitive pressure in the retail segment combined
with planned reductions in wholesale revenue, as discussed in further details
below.

          Net retail sales for Fiscal 2004 were approximately $62,420,000, a
decrease of approximately $13,035,000, or 17% from the approximately $75,455,000
billed in Fiscal 2003. Retail billed minutes were approximately 916,532,000, a
decrease of approximately 170,763,000 minutes or 16%, versus the retail minutes
of approximately 1,087,295,000 billed in Fiscal 2003. The average blended price
per minute of $.0681 decreased approximately 1.9% versus the prior year blended
average rate per minute of $.0694 as the industry continues to experience
decreased price per minute of usage. Covista does not foresee that this trend in
pricing will abate in the near future. The current year decrease in the retail
segment is primarily attributed to intense competitive pressure from other
providers, especially those which have the ability to bundle local dial tone
with traditional long distance offerings. While the Company has recently
launched local services to the retail segment in certain markets, the Company
has experienced significant loss of former retail customers that have taken
advantage of competitive providers bundled service offerings. The Company does
not foresee this intensely competitive climate relaxing in the near future. The
Company plans to continue to support the retail channel by expanding its
competitive local and long distance product offering across multiple markets as
well as launching a competitive "win back" program.

          Net residential sales for Fiscal 2004 were approximately $17,261,000
for the year, an increase of approximately $4,271,000 or 33% from the
approximately $12,990,000 billed in fiscal 2003. The Company launched local
services, bundled together with long distance, into the residential segment
during the current fiscal year. Net residential sales for Fiscal 2004 includes
approximately $658,000 of bundled local service revenue. Residential billed
minutes for Fiscal 2004 were approximately 296,102,000, an increase of
approximately 100,070,000 minutes or 51% from the approximately 196,032,000
billed in the previous year. The average blended price per minute of $.0561
decreased approximately 15.4% versus the prior year blended average rate per
minute of $.0663 as the industry continues to experience decreased prices per
minute of usage. Covista does not foresee that this trend in pricing will abate
in the near future. The current year increase in the residential segment is
primarily attributed the successful launch of local service to these residential
users in selected markets in addition to direct marketing via mail and web based
affinity marketing campaigns. While the Company has launched local services to
the residential segment in certain markets, the Company plans to expand the
number of markets in which it has the ability to offer its local and long
distance bundled product offering. Additionally, the Company plans to expand its
marketing resources to target new geographic market areas where the Company has
the ability to offer competitive bundled services to residential users. These
efforts will be accomplished in conjunction with maintaining the support
required for the retail segment.

          Net wholesale (carrier) sales for Fiscal 2004 were approximately
$4,376,000, a decrease of approximately $8,138,000 or 65% from the approximately
$12,514,000 billed in Fiscal 2003. Billed wholesale minutes amounted to
approximately 58,241,000, a decrease of approximately 111,556,000 minutes or 66%
from the billed wholesale minutes of approximately 169,797,000 billed in Fiscal
2003. As previously stated, the Company continues its planned efforts to reduce
volume in the wholesale segment. The Company plans to maintain nominal wholesale
volume in the future, based on network capacity and gross margin opportunities,
while balancing any possible financial exposure related to un-collectable
balances.

Cost of Revenue

          Cost of revenue for Fiscal 2004 was approximately $47,339,000, a
decrease of approximately $15,131,000 or 24% from the approximately $62,470,000
recorded in Fiscal 2003. The decrease in cost of revenue was favorable in
relationship to the overall revenue decrease of 17% discussed previously. The
decrease in cost of revenue is primarily a result of the decrease in lower
margin wholesale volume of approximately $7,324,000 and the combined overall
decline in retail and residential volume of approximately $5,445,000. In
addition, the Company has improved its purchasing and line cost auditing
functions. These improvements have allowed the Company to generate an additional
savings of approximately $2,363,000 versus the prior year as a result of overall
rate reductions and improved auditing and dispute resolution capabilities.

          In the normal course of business, billings for telco line costs are
often not received until after the period of service, Covista therefore uses
certain estimates to determine its monthly cost of revenue ("line cost") and
corresponding accounts payable to these service providers. These line costs
include fees for network transport, access, egress and facility charges. The
Company completes a detailed bill audit function, which includes a comparison of
invoices received to amounts accrued, contractual rates and applicable tariffs
and engineering data regarding usage. Accrued amounts are adjusted based on the
bill audit function and actual invoices received. These adjustments to actual
expense are typically identified within 90 days following the period of
estimate.


                                       24





<PAGE>


                              RESULTS OF OPERATIONS

                     FISCAL 2004 AS COMPARED TO FISCAL 2003

Selling, General and Administrative

          Selling, general and administrative (SG&A) expenses are comprised of
selling and marketing costs, and general and administrative costs. SG&A expenses
for Fiscal 2004 were approximately $31,403,000, a decrease of approximately
$8,811,000 or 22% versus approximately $40,215,000 in the previous year. This
decrease is also favorable in relationship to the overall sales decrease of 17%
discussed previously. The overall decrease was primarily due to an overall
decrease in payroll related costs of approximately $1,585,000; a decrease in
commission expense as a result of lower retail revenue of approximately
$1,204,000; a decrease in bad debt expense of approximately $1,058,000 due to
improved collection processes and the substantial reduction of the higher risk
wholesale business; reduced marketing expenses related to the KISSLD segment as
a result of delays needed to adequately prepare for the launch of local
services, of approximately $2,033,000; a decrease in office, telephone, postage
and building rent as a result of further consolidation of approximately
$1,451,000. In addition to other general increases of approximately $1,195,000,
during the quarter ended January 31, 2004, the Company successfully settled an
insurance claim related to losses stemming from the September 11, 2001 terrorist
attacks. Gross proceeds from this final settlement were $3,250,000. The Company
has recognized this settlement, net of $575,000 of expenses, as income from
continuing operations by reducing selling, general and administrative expenses
during the quarter.

Depreciation and Amortization

          Depreciation and amortization was approximately $5,932,000 for Fiscal
2004. The decrease of approximately $1,510,000 is the result of certain
intangible assets becoming fully amortized between years.

Stock Compensation Expense

          There was no stock compensation expense recorded for the Fiscal years
ended January 31, 2004 and 2003.

Income Tax Benefit

          No income tax was realized for the year ended January 31, 2004 as the
Company provided a full valuation allowance against its net operating loss
carryforwards due to uncertainty of realization. During Fiscal 2003, the Company
recorded income related to a tax refund received as a result of recent tax law
changes in the amount of approximately $511,000.

Other Income and Expense

          Total other income (expense) for Fiscal 2004 was approximately
$(328,000), representing a decrease of approximately $424,000 versus the
$(752,000) of expense from previous fiscal year. The largest component of other
income (expense) is interest expense, which decreased by approximately $486,000
between years. This decrease is the result of the shareholder loan that was
outstanding for the majority of the prior fiscal year, which was converted to
equity in December 2002.

Net Loss

          For the reasons set forth above, the net loss for Fiscal 2004 of
approximately $944,000 represents a decrease in net loss of approximately
$8,463,000 over the net loss of approximately $9,407,000 reported in Fiscal
2003.


                                       25





<PAGE>


                         LIQUIDITY AND CAPITAL RESOURCES

Working Capital

          At January 31, 2005, Covista had a positive working capital of
approximately $4,538,000, an increase of approximately $10,626,000 compared to
the working capital deficit of approximately $6,088,000 at January 31, 2004. The
increase in working capital in Fiscal 2005 was primarily attributable to the
sale of selected customers and assets to PAETEC.

          In the opinion of management, cash on hand and cash flow from
operations will be sufficient to meet the operating and capital needs of the
Company for at least the next twelve months.

          The current ratio at January 31, 2005 was 1.33 to 1, representing an
improvement versus the 0.71 to 1 ratio at the end of the previous fiscal year.

Cash Flow Statement

          The cash flow statement of Covista for Fiscal 2005 indicated an
increase in cash and cash equivalents of approximately $4,809,000. Net cash used
in operations was approximately $5,102,000 and the Company used approximately
$2,570,000 in financing activities. The Company generated approximately
$12,481,000 from investing activities, primarily resulting from the sale of
selected customers and assets to PAETEC.

Accounts Receivable

          The Company has entered into offset arrangements with certain carrier
customers, which are also vendors, allowing for the ability to offset payable
balances against the Company's receivable balances.

          Covista experienced consolidated accounts receivable turnover of
approximately 50 days as of January 31, 2005, versus approximately 46 days as of
January 31, 2004. This change is primarily the result of relaxing credit
requirements for a larger portion of the residential customer base.


                                       26





<PAGE>


                          CRITICAL ACCOUNTING POLICIES

Revenue Recognition

          The Company recognizes revenue on telecommunications services in the
period that the service is provided. Revenue is recognized when earned based
upon the following specific criteria: (1) persuasive evidence of arrangement
exists, (2) services have been rendered, (3) seller's price to the buyer is
fixed or determinable, and (4) collectibility is reasonably assured.

          Covista's revenue is generally comprised of fees paid by the end
customers for voice, data services and carrier charges, including access. End
customer revenue includes voice and data services and is comprised of monthly
recurring charges and usage charges. Monthly recurring charges include the fees
paid by customers for facilities in service and additional features on those
facilities. Usage charges consist of usage-sensitive fees paid for calls made.
Carrier access billing comprised of charges paid primarily by inter-exchange
carriers (IXC's) to the Company for the origination and termination of
inter-exchange toll and toll-free calls. Amounts billed to IXC's are recorded
based on the Company's determination of usage, category of traffic and the
associated rate. These items are subject to some degree of estimation and
subsequent adjustments may occur. However, management does not believe such
adjustments will be material to the consolidated financial statements.

Deferred Line Installation Costs

          Deferred line installation costs are costs incurred by the Covista for
new facilities and costs incurred for connections from within the Covista's
network to the network of other telecommunication suppliers. Amortization of
these line installation costs is provided using the straight-line method over
the contract life of the lines ranging from three to five years.

Long-Lived Assets

          Effective February 1, 2002, we adopted Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment of Disposal of
Long-Lived Assets". SFAS 144 establishes a single accounting model for the
impairment or disposal of long-lived assets, including discontinued operations.

          We review the recoverability of the carrying value of long-lived
assets, including intangibles with a definite life, for impairment using the
methodology prescribed in SFAS 144 whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable.

Income Taxes

          Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. In the event the future tax
consequences of differences between the financial reporting bases and the tax
bases of Covista's assets and liabilities result in deferred tax assets, an
evaluation of the probability of being able to realize the future benefits
indicated by such asset is required. A valuation allowance is provided for a
portion of the deferred tax assets when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. In assessing
whether deferred tax assets can be realized, management considers the scheduled
reversals of deferred tax liabilities, projected future taxable income, and
tax-planning strategies.

Recent Accounting Pronouncements

          In December 2004, the FASB issued a revision to SFAS 123, "Share-Based
Payment" (SFAS No. 123R), that amends existing pronouncements for share-based
payment transactions in which an enterprise receives employee and non-employee
services in exchange for (a) equity instruments of the enterprise or (b)
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
SFAS No. 123R eliminates the ability to account for share-based compensation
transactions using APB 25 and generally requires such transactions be accounted
for using a fair-value-based method. SFAS No. 123R's effective date would be
applicable for awards that are granted, modified, become vested, or settled in
cash in interim or annual periods beginning after December 15, 2005. SFAS No.
123R includes three transition methods; one that provides for prospective
application and two that provide for retrospective application. We intend to
adopt SFAS No. 123R prospectively commencing in the first quarter of the fiscal
year ending January 31, 2007; it is expected that the adoption of SFAS No. 123R
will cause us to record, as expense each quarter, a non-cash accounting charge
approximating the fair value of such share based compensation meeting the
criteria outlined in the provisions of SFAS No. 123R; as of January 31, 2005, we
have approximately 483,000 granted stock options outstanding which had not yet
become vested. There are two acceptable methods of valuing options under the
revision, the Black-Sholes method and the binomial method. We are currently
assessing the impact on our 2005 earnings using the two acceptable methods of
valuing these options, and the ability to discount the fair value of unvested
shares.

In March 2005, the FASB issued FIN 47 as an interpretation of FASB Statement
No. 143, Accounting for Asset Retirement Obligations (FASB No. 143). This
interpretation clarifies that the term conditional asset retirement obligation
as used in FASB No. 143, refers to a legal obligation to perform an asset
retirement activity in which the timing and/or method of settlement are
conditional on a future event that may or may not be within the control of the
entity. The obligation to perform the asset retirement activity is unconditional
even through uncertainly exists about the timing and/or method of settlement.
Accordingly, an entity is required to recognize a liability for the fair value
of a conditional asset retirement obligation if the fair value of the liability
can be reasonably estimated. This interpretation also clarifies when an entity
would have sufficient information to reasonably estimate the fair value of an
asset retirement obligation. FIN 47 is effective no later than the end of fiscal
years ending after December 15, 2005. The Company is currently assessing the
impact of the adoption of FIN 47.



                                       27





<PAGE>


                              CAPITAL EXPENDITURES

          Capital expenditures for Fiscal 2005 totaled approximately $242,000.
These expenditures were financed from funds provided from Covista's working
capital. The capital expenditures were used primarily for upgrades to Covista's
switches and switch sites, software and hardware upgrades to Covista's computer
network and furniture, fixtures and equipment.

          Capital expenditures for Fiscal 2006 are estimated not to exceed
approximately $1,000,000 for network expansion and are expected to be financed
from funds provided from operations and existing cash reserves.

Inflation

          Since inflation has slowed in recent years, Covista does not believe
that its business has been materially affected by the relatively modest rate of
price increases in the economy. However, pressures in the industry to reduce
prices, which have impacted Covista in the past, are expected to continue. Also,
the telecommunications industry has recently experienced the failure of several
businesses, some of which have been Covista's wholesale customer and suppliers.
These failures not only have affected Covista's FY 2004 results, but also may
impact future results.

                              ENVIRONMENTAL MATTERS

          Covista is not a party to any legal proceedings or the subject of any
claim regarding environmental matters generally incidental to its business. In
the opinion of Management, compliance with the present environmental protection
laws should not have a material adverse effect upon the financial condition of
Covista.

                             CONTRACTUAL COMMITMENTS

          The following table provides a summary of the Company's contractual
obligations and commercial commitments.

<TABLE>
<CAPTION>
                                              Payment Due by Period (in thousands)
                                ---------------------------------------------------------------
                                 Total    Within 1 year   1-3 years   3-5 years   After 5 years
                                -------   -------------   ---------   ---------   -------------
<S>                             <C>           <C>           <C>          <C>            <C>
Contractual Obligations
Long-term debt                  $   573       $  573        $    0       $  0           $0
Operating leases                $ 3,249       $  717        $1,642       $890           $0
PAETEC purchase
  commitment                    $ 9,600       $3,600        $6,000       $  0           $0
Total Contractual Obligations   $13,422       $4,890        $7,642       $890           $0
</TABLE>

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

          Market risk represents the risk of changes in value of a financial
instrument, derivative or non-derivative, caused by fluctuations in interest
rates, foreign exchange rates and equity prices. The exposure to interest rate
risk relates primarily to the marketable securities held by Covista. Covista
only invests in instruments with high credit quality where a secondary market
exists. Covista does not hold any derivatives related to its interest rate
exposure. Covista also maintains long-term debt at fixed rates. Due to the
nature and amounts of Covista's note payable, an immediate 10% change in
interest rates would not have a material effect in Covista's results of
operations over the next fiscal year. Covista's exposure to adverse changes in
foreign exchange rates is also immaterial to the consolidated financial
statements as a whole.

ITEM 8. Financial Statements and Supplementary Data

          The Financial Statements and Supplementary Data are included under
Item 15 of this Report.

ITEM 9. Changes in and Disagreements With Accountants on Accounting and
     Financial Disclosure

          None.

ITEM 9A. Controls and Procedures

          As of January 31, 2005, we carried out an evaluation under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure
controls and procedures are effective to ensure that information required to be
disclosed by us in reports that we file or submit under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms. Since
the date of their evaluation, there were no significant changes in our internal
controls or in other factors that could significantly affect the disclosure
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.


                                       28





<PAGE>


                                    PART III

ITEM 10. Directors and Executive Officers of Covista

The directors and officers of Covista are as follows:

<TABLE>
<CAPTION>
NAME                  AGE   POSITION
----                  ---   --------
<S>                    <C>  <C>
Henry G. Luken, III    45   Chairman of the Board

A. John Leach, Jr.     42   Director, President & Chief Executive Officer

Jay J. Miller          71   Director

Nicholas Merrick       42   Director

Donald Jones           69   Director

W. Thorpe McKenzie     57   Director

Thomas P. Gunning      67   Treasurer and Secretary

Frank J. Pazera        44   Executive Vice President & Chief Financial Officer
</TABLE>

          Covista's directors all serve for one-year terms and until their
successors are elected and qualify. Officers serve at the pleasure of the Board
of Directors.

          Mr. Luken serves as chairman of Covista Communications and has
extensive business and telecommunications experience. Prior to purchasing a
major interest in Covista, Mr. Luken founded Telco Communications and Long
Distance Wholesale Club in 1993. Telco was a pioneer in dial-around long
distance service with Dial and Save, Inc, which grew into one of the most
successful telecommunication companies of its kind in the United States. Telco
was sold to Excel Communications in 1997 for $1.2 billion. Most recently Mr.
Luken moved the company headquarters from Little Falls, New Jersey to
Chattanooga, Tennessee. Mr. Luken is intimately involved in the strategic growth
plans and operations of the company. Mr. Luken also owns interest in several TV
and radio stations.

          Mr. Leach has served as President and Chief Executive Officer of
Covista Communications, Inc. since May 18, 2000. Prior to Covista
Communications, Mr. Leach was Senior Vice President and General Manager of
Teleglobe, Inc. from 1998 to 2000. Prior to Teleglobe, from 1996 to 1998 Mr.
Leach worked at Telco Communications Group (a subsidiary of Teleglobe, Inc.)
where he held a number of senior management posts and played an integral role in
building a substantial wholesale and agent business that was a highly valued
part of the sale of the company to Teleglobe, Inc. Mr. Leach also held executive
and management positions with BTI and Mobilcomm (a Bell South Company). Mr.
Leach also currently serves as a Director for Covista Communications, Inc. Mr.
Leach is a graduate of Old Dominion University with a BA in Business Management.

          Jay J. Miller, Esq. has served as a Director since 1983. He has been a
practicing attorney for more than 40 years in New York. He is Chairman of the
Board of AmTrust Pacific Ltd., a New Zealand real estate company. He is also a
director of Technology Insurance Company, Inc., a provider of workers'
compensation as well as various insurance products to the technology industry,
and certain of its affiliates. Mr. Miller has performed legal services on behalf
of Covista. See "Certain Relationships and Related Transactions."

          Mr. Gunning has been with Covista since 1992 and served as the
controller and Chief Financial Officer until 2003. Currently Mr. Gunning is
focused on operations as well as legal, compliance and corporate dealings. Mr.
Gunning has played an integral role in Covista's growth, especially in the 90's
where he was one of the key management team members that drove Covista's
revenues beyond the $100 million mark. Prior to joining Covista, Mr. Gunning was
Chief Financial Officer of Flyfaire, Incorporated, a travel wholesale operator
and was senior Audit Manager at Rosenberg, Selsman & Company. Mr. Gunning has
held various positions in both public and private accounting firms. Mr. Gunning
holds a Bachelor's of Business Administration degree from Manhattan College. He
is a Certified Public Accountant licensed by the states of New York and New
Jersey and is a member of the American Institute of Certified Public Accountants
as well as the state societies of New York and New Jersey.

          Donald Jones recently retired from his position as Senior Vice
President for Chapter Services of the American Red Cross, for which he worked
since 1991. Prior to joining the Red Cross, Mr. Jones was Deputy Assistant
Secretary of Defense for Military Manpower and Personnel Policy. Mr. Jones
served in the United States Army for over 35 years and retired in 1991 with the
permanent rank of Lieutenant General.


                                       29





<PAGE>


          Nicholas Merrick currently serves as President of Mt Vernon
Investments, LLC, an investment company, which he has served as President since
January 2002. Mr. Merrick served as Senior Vice President and Chief Financial
Officer of Telergy, Inc., a high-speed fiber optic communications network
company, from May 2000 to July 2001. Telergy filed for reorganization under the
bankruptcy laws in October 2001 and has liquidated. Prior to joining Telergy,
Mr. Merrick was Chief Executive Officer of Up2 Technologies, Inc. and Executive
Vice President of Excel Communications, each of which was a subsidiary of
Teleglobe, Inc. (global communications, e-business services), from 1998 until
2000. From 1996 to 1997, he was Vice President and Chief Financial Officer of
Telco Communications Group, Inc., and from 1985 to 1996, he was Vice President
of Corporate Finance at the Robinson-Humphrey Company, Inc. and Managing
Director of R-H Capital Partners.

          W. Thorpe McKenzie is Managing Director of Pointer Management Company,
Chattanooga, Tennessee, which he co-founded in 1990 to invest in hedge funds and
similar types of partnerships utilizing a fund of funds approach. From 1982
until 1990, he was a private investor in New York City, and a director of
several public and private companies. From 1980 until 1982, he was founding
general partner of TIGER, a global hedge fund. From 1971 until 1980, he was a
Vice President of Kidder, Peabody, & Co., Inc. in New York. McKenzie is a
graduate of the University of North Carolina in Chapel Hill, and the Wharton
Graduate division of the University of Pennsylvania in Philadelphia. He is
currently a director of Novestra AB, a publicly traded venture capital
investment firm located in Stockholm, Sweden.

          Mr. Pazera joined the company in December 2002 and was appointed to
the position of Chief Financial Officer in July 2003. Mr. Pazera brings
extensive public and private sector financial management experience to the
company. Prior to joining Covista, Mr. Pazera held a variety of Executive
Financial Management positions at companies that includes, AirGate PCS, Inc., a
publicly traded wireless services company and Network One, a privately held
regional Competitive Local Exchange Carrier. In addition, Mr. Pazera has held
executive and management positions at Turner Broadcasting, MCI
Telecommunications, and Arthur Andersen & Company. Mr. Pazera holds an MBA in
Finance from the Goizueta Business School at Emory University in Atlanta and his
BBA in Accounting from the University of Wisconsin in Milwaukee, and is a
Certified Public Accountant.

Board of Directors

          Covista's Board of Directors currently consists of six persons, one of
whom is a member of management and five of whom are non-management directors.
During the fiscal year ended January 31, 2005, the Board held five meetings,
each of which was attended by at least 87% of the directors then serving.

          Covista's Board of Directors has Audit and Compensation Committees,
but does not have a Nominating Committee or a committee performing a similar
function. The Audit Committee currently consists of three non-management
directors, Messrs. Nicholas Merrick, Donald Jones and W. Thorpe McKenzie. The
Committee reviews, analyzes and may make recommendations to the Board of
Directors with respect to Covista's financial statements and controls. The
Committee has met and intends to meet from time to time with Covista's
independent public accountants to monitor their activities. The Compensation
Committee consists of Messrs. Henry Luken, Jay J. Miller, Nicholas Merrick and
W. Thorpe McKenzie and is charged with reviewing and recommending the
compensation and benefits payable to Covista's senior executives. Mr. Leach is
an ex-officio member of both the Compensation and Audit Committees.


                                       30





<PAGE>


ITEM 11. Executive Compensation

The following table sets forth the compensation that Covista paid during the
fiscal years ended January 31, 2005, 2004 and 2003 to its Chief Executive
Officer and to each executive officer of Covista or person performing similar
functions whose aggregate remuneration exceeded $100,000, during Covista's
fiscal year ended January 31, 2005 (the "Named Executives").

Summary Compensation Table

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
                              FISCAL
                               YEAR
    NAME &                    ENDED       ANNUAL         ANNUAL      OTHER ANNUAL   COMPENSATION     ALL OTHER
  PRINCIPAL                  JANUARY   COMPENSATION   COMPENSATION   COMPENSATION      AWARDS      COMPENSATION
   POSITION                     31      SALARY ($)      BONUS ($)         ($)        OPTIONS ($)        ($)
---------------------------------------------------------------------------------------------------------------
<S>                            <C>       <C>            <C>               <C>            <C>        <C>
John Leach, President &        2005      $300,000       $150,000          $ 0            $ 0        $ 8,994 (1)
   Chief Executive Officer     2004      $300,000       $150,000          $ 0            $ 0        $12,464 (2)
                               2003      $300,000       $150,000          $ 0            $ 0        $24,292 (3)
---------------------------------------------------------------------------------------------------------------
Thomas P. Gunning,             2005      $119,231       $      0          $ 0            $ 0        $ 5,448 (4)
   Secretary & Treasurer       2004      $155,000       $      0          $ 0            $ 0        $18,062 (5)
                               2003      $155,000       $      0          $ 0            $ 0        $11,320 (6)
---------------------------------------------------------------------------------------------------------------
Frank J. Pazera, Chief         2005      $175,000       $ 43,750          $ 0            $ 0        $ 8,873 (7)
   Financial Officer           2004      $156,731       $ 22,500          $ 0            $ 0        $ 7,648 (8)
                               2003      $ 14,423             --           --             --            --
---------------------------------------------------------------------------------------------------------------
</TABLE>

----------
(1)  The amount shown represents Covista's contributions under its 401(K)
     Deferred Compensation and Retirement Savings Plan of $2,568 and Covista's
     group major medical benefit of $6,426.

(2)  The amount shown represents Covista's contributions under its 401(K)
     Deferred Compensation and Retirement Savings Plan of $6,572 and Covista's
     group major medical benefit of $5,892.

(3)  The amount shown represents Covista's contributions under its 401(K)
     Deferred Compensation and Retirement Savings Plan of $5,500, Covista's
     group major medical benefit of $3,792, and $15,000 in reimbursement for
     certain relocation expenses.

(4)  The amount shown represents Covista's contribution under its 401(K)
     Deferred Compensation and Retirement Savings Plan of $2,209 and Covista's
     group medical benefit of $3,239.

(5)  The amount shown represents Covista's contributions under its 401(K)
     Deferred Compensation and Retirement Savings Plan of $4,650 and Covista's
     group major medical benefit and life insurance of $11,632 and $1,780 for
     use of a company auto for non-business purposes.

(6)  The amount shown represents Covista's contributions under its 401(K)
     Deferred Compensation and Retirement Savings Plan of $4,740, Covista's
     group major medical benefit of $4,800 and $1,780 for the use of a Company's
     vehicle for non-business purposes.

(7)  The amount shown represents Covista's contribution under its 401(K)
     Deferred Compensation and Retirement Savings Plan of $2,447 and Covista's
     group major medical benefit of $6,426.

(8)  The amount shown represents Covista's contribution under its 401(K)
     Deferred Compensation and Retirement Savings Plan of $2,994 and Covista's
     group major medical benefit of $4,654.


                                       31





<PAGE>


          Compensation Pursuant to Plans

          In October, 1996, Covista adopted its 1996 Stock Option Plan; in
February 2000, its 1999 Equity Incentive Plan; in February 2002, its 2001 Equity
Incentive Plan; and in December 2002, adopted its 2002 Equity Incentive Plan
(the "Option Plans"). The Option Plans provide that certain options granted
thereunder are intended to qualify as "incentive stock options" within the
meaning of Section 422A of the United States Internal Revenue Code, while
non-qualified options may also be granted under the Option Plans. Incentive
stock options may be granted only to employees of Covista, while non-qualified
options may be granted to non-executive directors, consultants and others as
well as employees.

          The Option Plans may be administered by the Compensation Committee of
Covista's Board of Directors. Covista has reserved 600,000 shares of Common
Stock under the 1996 Option Plan, 750,000 shares of Common Stock under its 1999
Equity Incentive Plan, 900,000 under its 2001 Equity Incentive Plan, and 750,000
under its 2002 Equity Incentive Plan for issuance to employees, officers,
directors and consultants of Covista.

          No option may be transferred by an optionee other than by will or the
laws of descent and distribution, and during the lifetime of an optionee, an
option may be exercised only by him. In the event of termination of employment
other than by death or disability, the optionee will have one month (subject to
extension not to exceed an additional two months) after such termination during
which he may exercise his option. Upon termination of employment of an optionee
by reason of death or permanent total disability, his option remains exercisable
for one year thereafter to the extent it was exercisable on the date of such
termination. No similar limitation applies to non-qualified options.

          Options under the Option Plans must be granted within 10 years from
the effective date of the respective Option Plan. Incentive stock options
granted under the Option Plans cannot be exercised later than 10 years from the
date of grant. Options granted under the Option Plans permit payment of the
exercise price in cash or by delivery to Covista of shares of Common Stock
already owned by the optionee having a fair market value equal to the exercise
price of the options being exercised, or by a combination of such methods of
payment. Therefore, an optionee may be able to tender shares of Common Stock to
purchase additional shares of Common Stock and may theoretically exercise all of
his stock options with no additional investment other than which he then may
own.

          Any option, which expires, unexercised or that terminates upon an
employee's ceasing to be employed by Covista become available again for issuance
under the Option Plans.

          For further information related to stock option plans, reference is
made to Note 10 in the Notes to the Consolidated Financial Statements.

          Compensation of Directors

          For the fiscal year ended January 31, 2004, each independent director
who was not an employee of Covista was granted non-statutory stock options to
purchase 100,000 shares of the Company's Common Stock. The options were awarded
in accordance with the provisions of the 2002 Stock Option Plan and vest ratably
over 4 years. The options are exercisable at a price of $2.58 per share, which
was the closing price for Covista's Common Stock on December 15, 2003, the date
of the award.

          Employment Contracts, Termination of Employment and Change of Control
Arrangements

          As Covista's Chief Executive Officer, Mr. Leach has a three-year
employment agreement with Covista effective as of May 18, 2000, pursuant to
which Mr. Leach was paid base salary at the rate of $300,000 per annum during
fiscal 2002. Pursuant to this agreement, Mr. Leach was also entitled to receive
a signing bonus in the amount of $25,000 to cover relocation and other expenses.
Mr. Leach is also entitled to receive an annual bonus in an amount not to exceed
100 percent of his then effective base salary, based upon Mr. Leach's attainment
of annual revenue and earnings targets as well as management goals set by the
Board of Directors. Mr. Leach was guaranteed a minimum bonus payment of $150,000
during each year of this agreement. Mr. Leach's contract was extended for an
additional year at May 18, 2004.

          In connection with his appointment as Chief Executive Officer of
Covista, Mr. Leach was granted an option under Covista's 1996 Stock Option Plan
to purchase 288,000 shares of Covista Common Stock. The option granted to Mr.
Leach was scheduled to vest over a period of three years, in six equal
semi-annual installments, the first of which commenced on November 18, 2000. The
exercise price for the option was $14.25 and was based on the fair market value
of the Covista Common Stock on the date of the grant, and the options expire
after ten years. According to the agreement, in the event that the Covista
Common Stock did not close at or above $14.25 for at least 20 consecutive
trading days between May 18, 2000 and May 18, 2001, a new exercise price would
be calculated based on the average closing price of the Covista Common Stock for
the 40 trading days prior to May 18, 2001. In lieu of adjusting the exercise
price of Mr. Leach's options in the manner provided in his employment agreement,
on February 1, 2001 Covista granted to Mr. Leach a new option to purchase
288,000 shares of Covista Common Stock. These options fully vested as a result
of the Capsule merger. The exercise price for the option is $2.00 per share and
is based on the fair market value of the Covista Common Stock on the date of
grant. The option expires after a term of ten years.


                                       32





<PAGE>


Compensation Committee Interlocks and Insider Participation

          Jay J. Miller, a director of Covista, provided various legal services
for Covista. In Fiscal 2005, Covista paid approximately $118,000 to Mr. Miller
for services rendered and accrued during Fiscal 2004 and 2005. As of January 31,
2005, Covista had invoices payable to Mr. Miller totaling approximately $8,000.
Covista believes that Mr. Miller's fees were reasonable for the services
performed and were no less favorable to Covista than could have been obtained
from an unrelated third party.

Report on Executive Compensation

          The following report describes the policies pursuant to which
compensation was paid to executive officers of Covista for performance during
the fiscal year ended January 31, 2005.

          Compensation Philosophy and Approach. Generally, Covista seeks to
attract, retain and motivate its executive officers through a combination of
base salary, incentive awards based upon individual performance and stock option
awards under the Covista Communications, Inc. Equity Incentive Plans and
otherwise. The Board of Directors believes that a substantial portion of the
aggregate annual compensation of each executive officer should be influenced by
the performance of Covista and the individual contribution of the executive
officer.

          Base Salaries. The Board of Directors believes that the base salaries
of Covista's executive officers for fiscal 2005 were generally in line with
those for other comparable positions within the telecommunications service
industry and similar industries. However, Covista places significant emphasis on
incentive awards and stock option grants as a means of motivating and rewarding
its management. The Board of Directors believes that this strategy provides
optimal incentives for management to create long-term stockholder value.

          Incentive Compensation Payments. In addition to base pay, some of
Covista's senior executives (including its Chief Executive Officer) are eligible
to receive bonuses and stock option awards. Bonuses and stock options may be
awarded, based upon the individual performance of each executive officer at the
sole discretion of the Board of Directors.

          Compensation of the Chief Executive Officer. The compensation policies
applicable to Covista's Chief Executive Officer are similar to those applicable
to Covista's other executive officers. Mr. Leach has an employment agreement
with Covista effective as of May 18, 2000, pursuant to which Mr. Leach was paid
base salary at the rate of $300,000 per annum. Pursuant to this agreement, Mr.
Leach was also entitled to receive a signing bonus in the amount of $25,000 to
cover relocation and other expenses. Mr. Leach is also entitled to receive an
annual bonus in an amount not to exceed 100 percent of his then effective base
salary, based upon Mr. Leach's attainment of annual revenue and earning targets,
as well as management goals set by the Board of Directors. Mr. Leach was
guaranteed a minimum bonus payment of $150,000 during each year of the term of
this agreement. Mr. Leach's contract was extended for an additional year at May
18, 2004.

                (THE REST OF THIS PAGE INTENTIONALLY LEFT BLANK)


                                       33





<PAGE>


ITEM 12. Security Ownership of Certain Beneficial Owners and Management

Security Ownership of Certain Beneficial Owners. The following table sets forth
the beneficial ownership of Covista's Common Stock as of March 5, 2005 by each
person or group known by Covista to be the beneficial owner of five percent or
more of the outstanding shares of Covista Common Stock. Unless otherwise
indicated, each such person (alone or with family members) has sole voting and
dispositive power with respect to the shares listed opposite such person's name.

<TABLE>
<CAPTION>
Name and Address of Beneficial Owner   Amount and Nature of Beneficial Ownership (1)   Percentage of Class (2)
------------------------------------   ---------------------------------------------   -----------------------
<S>                                                    <C>                                      <C>
Warren Feldman                                         1,119,578 (3)                             6.3%
45A Samworth Road
Clifton, NJ 07012

W. Thorpe McKenzie                                     2,297,329 (4)                            12.9%
735 Broad Street, Suite 1108
Chattanooga, TN 37402

Henry G. Luken, III                                    9,326,674 (5)                            52.3%
900 Fairway Lane
Soddy Daisy, TN 37379
</TABLE>

(1)  Except as otherwise set forth in the footnotes to this table, all shares
     are beneficially owned and sole investment and voting power is held by the
     persons named above, to the best of Covista's knowledge. Shares of Covista
     Common Stock subject to options that are currently exercisable or
     exercisable within 60 days of October 14, 2004 are deemed to be outstanding
     and to be beneficially owned by the person holding such options for the
     purpose of computing the percentage ownership of such person, but are not
     treated as outstanding for the purpose of computing the percentage
     ownership of any other person.

(2)  Based on 17,822,025 shares outstanding.

(3)  Includes 375,678 shares of Covista Common Stock owned by The Warren H.
     Feldman Family L.L.C., as to which shares Mr. Feldman disclaims beneficial
     ownership. Based on the Schedule 13D/A filed by Mr. Feldman on March 7,
     2003.

(4)  Based on the Form 4 filed by Mr. McKenzie on February 25, 2005. Includes
     25,000 shares of Covista Common Stock issuable to Mr. McKenzie under a
     presently exercisable option.

(5)  Based on the Form 4 filed by Mr. Luken on December 27, 2004.


                                       34





<PAGE>


Security Ownership of Management. The following table sets forth as of March 5,
2005, information concerning the beneficial ownership of Covista Common Stock by
each director, each nominee for election as a director, and each Named
Executive, and for all directors, director nominees and executive officers as a
group:

<TABLE>
<CAPTION>
Name and Address of Beneficial Owner   Amount and Nature of Beneficial Ownership (1)   Percentage of Class (2)
------------------------------------   ---------------------------------------------   -----------------------
<S>                                                 <C>                                         <C>
W. Thorpe McKenzie                                   2,297,329 (3)                              12.9%
Thomas P. Gunning                                       62,300 (4)                                 *
Donald Jones                                            36,000 (5)                                 *
A. John Leach, Jr.                                     444,000 (6)                               2.5%
Henry G. Luken, III                                  9,326,674 (7)                              52.3%
Nicholas Merrick                                        25,100 (8)                                 *
Jay J. Miller                                           60,400 (9)                                 *
Frank J. Pazera                                         59,283 (10)                                *
All directors, director nominees and
   executive officers as a group                    12,311,086 (3)-(10)                         69.1%
</TABLE>

* Less than one percent.

     (1)  Except as otherwise set forth in the footnotes to this table, all
          shares are beneficially owned and sole investment and voting power is
          held by the persons named above, to the best of Covista's knowledge.
          Shares of Covista Common Stock subject to options that are currently
          exercisable or exercisable within 60 days of October 14, 2004 are
          deemed to be outstanding and to be beneficially owned by the person
          holding such options for the purpose of computing the percentage
          ownership of such person, but are not treated as outstanding for the
          purpose of computing the percentage ownership of any other person.

     (2)  Based on 17,822,025 shares outstanding.

     (3)  Based on the Form 4 filed by Mr. McKenzie on February 25, 2005.
          Includes 25,000 shares of Covista Common Stock issuable to Mr.
          McKenzie under a currently exercisable option.

     (4)  Includes 37,000 shares of Covista Common Stock issuable to Mr. Gunning
          under currently exercisable options. Does not include 25,400 shares
          owned by Mr. Gunnings' spouse.

     (5)  Includes 25,000 shares of Covista Common Stock issuable to Mr. Jones
          under a currently exercisable option.

     (6)  Includes 288,000 shares of Covista Common Stock issuable to Mr. Leach
          under currently exercisable options.

     (7)  Based on the Form 4 filed by Mr. Luken on December 27, 2004.

     (8)  Includes 25,000 shares of Covista Common Stock issuable to Mr. Merrick
          under a currently exercisable option.

     (9)  Includes 60,000 shares of Covista Common Stock issuable to Mr. Miller
          under currently exercisable options.

     (10) Includes 58,333 shares of Covista Common Stock issuable to Mr. Pazera
          under a currently exercisable option.

c)   Changes in Control

          The Company knows of no contractual agreement, which may, at a
subsequent date, result in a change of control of the Company.

ITEM 13. Certain Relationships and Related Transactions

          Jay J. Miller, a Director of Covista, provided various legal services
for Covista. In Fiscal 2005, Covista paid approximately $118,000 to Mr. Miller
for services rendered and accrued for in Fiscal 2004 and 2005. As of January 31,
2005, Covista owed Mr. Miller approximately $8,000. Covista believes that Mr.
Miller's fees were reasonable for the services performed and were no less
favorable to Covista than could have been obtained from an unrelated third
party.

          On June 17, 2002, Covista entered into a term loan agreement with a
major bank. The initial principal amount of this note was $3,775,000, payable in
36 monthly installments at a fixed interest rate of 4.495% for the first year
and converting to 2% over LIBOR on June 17, 2003 and thereafter or 3.1%.
Effective June 17, 2003, Covista's Chairman of the Board paid the bank in full
and assumed the remaining balance of this loan under the identical terms and
conditions. This note is secured by certain of the Company's switching
equipment. The balance on this facility was $573,017 at January 31, 2005, which
is classified as current.

          Covista has entered into a lease agreement for 28,000 square feet of
office space in Chattanooga, Tennessee, with Henry G. Luken III who is Covista's
Chairman of the Board and its principal shareholder. The term of the lease is
for five years beginning September 1, 2001. The lease provides for annual rent
of $86,400 from September 1, 2001 to August 30, 2002; $115,200 from September 1,
2002 to August 30, 2003; $144,000 from September 1, 2003 to August 30 2004, with
the last two years to be $144,000 annually adjusted for the Consumer Price
Index. Covista believes that such premises are leased on terms similar to an
arm's length transaction.


                                       35





<PAGE>


          On August 31, 2001, Covista entered into a transaction with Applied
Financial Corp. an unaffiliated firm involving the sale and leaseback of a
telecommunications switch. Covista realized proceeds of approximately $1,250,000
from the sale portion of the transaction, and agreed to lease back the switch
for a three-year period at a cost of approximately $420,000 per annum. Henry G.
Luken, III provided an unconditional guaranty of Covista's payment obligations
to Applied Financial under the lease. Covista did not compensate Mr. Luken for
providing such guaranty.

          On December 1, 2001, Covista entered into a lease for property located
at 806 East Main Street, Chattanooga, Tennessee, for use as a switching
facility. The lessor is Henry G. Luken III, Chairman of the Board and a
principal shareholder of Covista. The lease expires on November 30, 2006. Annual
rent is payable as follows: $22,500 from December 1, 2001 to November 30, 2002,
$27,000 from December 1, 2002 to November 30, 2003, $31,500 from December 1,
2003 to November 30, 2004, and $36,000 from December 1, 2004 to November 30,
2005. Rental amounts for months beginning after October 1, 2005 will be adjusted
upward for the U.S. Consumer Price Index. The lease may be renewed for an
additional 5 years upon 90 days' written notice prior to the lease expiration
date. Covista believes that such premises are leased on terms not less favorable
than an arm's length transaction.

          On October 1, 2002, Covista entered into a lease for Suite 200 at 721
Broad Street, Chattanooga, Tennessee, for use as offices for Corporate
Headquarters. The lessor is Henry G. Luken III, Chairman of the Board and a
principal shareholder of Covista. The lease expires on November 30, 2007. Annual
rent is payable as follows: Year 1 = $101,674, Year 2 = $111,670, Year 3 =
$120,000, Year 4 = $120,000, Year 5 = $120,000. Rental amounts for months
beginning after October 1, 2005 will be adjusted upward for the U.S. Consumer
Price Index. The lease may be renewed for an additional 5 years upon 90 days'
written notice prior to the lease expiration date. Covista believes that such
premises are leased on terms not less favorable than an arm's length
transaction.

ITEM 14. Principal Accountant Fees and Services

          Information required by this Item is incorporated by reference from
the discussion under Proposal 2: Ratification of Independent Certified Public
Accountants in our proxy statement for the 2004 Annual Meeting of Stockholders.

                (THE REST OF THIS PAGE INTENTIONALLY LEFT BLANK)


                                       36





<PAGE>


                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 29th day of April
2005.

                                        COVISTA COMMUNICATIONS, INC.
                                        (Registrant)


                                        By: /S/ Henry G. Luken III
                                            ------------------------------------
                                            Henry G. Luken III
                                            Chairman of the Board

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

<TABLE>
<CAPTION>
Signature                Title                     Date
---------                -----                     ----
<S>                      <C>                       <C>


/S/ Henry G. Luken III   Chairman of the Board     April 29, 2005
----------------------
Henry G. Luken III


/S/ W. Thorpe McKenzie   Director                  April 29, 2005
----------------------
W. Thorpe McKenzie


/S/ Donald Jones         Director                  April 29, 2005
----------------------
Donald Jones


/S/ A. John Leach        Director, President and   April 29, 2005
----------------------   Chief Executive Officer
A. John Leach


/S/ Nicholas Merrick     Director                  April 29, 2005
----------------------
Nicholas Merrick


/S/ Jay J. Miller        Director                  April 29, 2005
----------------------
Jay J. Miller


/S/ Thomas P. Gunning    Secretary and Treasurer   April 29, 2005
----------------------
Thomas P. Gunning


/S/ Frank J. Pazera      Chief Financial Officer   April 29, 2005
----------------------
Frank J. Pazera
</TABLE>


                                       37





<PAGE>


<TABLE>
<CAPTION>
Exhibit No.                         Description of Document
-----------                         -----------------------
<S>            <C>
(3)(a)         Certificate of Incorporation, as amended. Incorporated by
               reference to Exhibits 2-A, 2-B, 2-C and 2-D to Registration
               Statement No. 2-15546 and Registrant's proxy statement relating
               to its 1987 Annual Stockholder's Meeting.

(3)(b)         By-Laws of Registrant. Incorporated by reference to Exhibit A to
               Registrant's Annual Report on Form 10-K for the year ended
               January 31, 1972.

(3)(c)         Amended Certificate of Incorporation to change the name of the
               Corporation from Faradyne Electronics Corp. to Total-Tel USA
               Communications, Inc., dated November 4, l991. Incorporated by
               reference to Exhibit 3 (c) to Registrant's Annual Report on Form
               10-K for the year ended January 31, l992.

(3)(d)         By-Law Amendments incorporated by reference to Form 8K filed on
               April 7, 1998.

(3)(e)         Shareholder Rights plan filed by reference to Form 8K, on April
               12, 1998.

(3)(f)         Amended Certificate of Incorporation to change the name of the
               Corporation from Total-Tel USA Communications, Inc. to Covista
               USA Communications, Inc., dated September 15, 2000. Incorporated
               by reference to Form 8-K filed on September 29, 2000.

(10)(a)        Lease of premises at 140 Little Street, Belleville, New Jersey,
               between Mansol Realty and Mansol Ceramics, dated March 30, 1960.
               Incorporated by reference to Exhibit 13 (e) to Registration
               Statement No. 2-17546.

(10)(a)(1)     Assignment of lease from Mansol Realty Company to Mansol Realty
               Associates. Incorporated by reference to Exhibit 10 (a) (1) to
               Registrant's Annual Report on Form 10-K for the year ended
               January 31, l982.

(10)(b)        Extension Agreement re: Lease of premises at 140 Little Street
               dated October 31, l974. Incorporated by reference to Exhibit 10
               (b) to Registrant's Annual Report on Form 10-K for the year ended
               January 31, l981.

(10)(c)        Lease of premises at 471 Cortland Street, Belleville, New Jersey,
               between Birnfeld Associates and Mansol Ceramics Company, dated
               October 31, 1974. Incorporated by reference to Exhibit 10 (c) to
               Registrant's Annual Report on Form 10-K for the year ended
               January 31, 1981.

(10)(d)        Lease Modification Agreement re: Lease of premises at 471
               Cortland Street dated July 24, 1980. Incorporated by reference to
               Exhibit 10 (d) to Registrant's Annual Report on Form 10-K for the
               year ended January 31, 1981.

(10)(e)(i)     Term Loan Agreement and Term Note both dated April 22, 1983
               between Mansol Ceramics Company and United Jersey Bank in the
               principal amount of $1,192,320. Incorporated by reference to
               Exhibit 10 (e) to Registrants Annual Reporton Form 10-K for the
               year ended January 31, 1983.

(10)(e)(ii)    Installment Note and Equipment Loan and Security Agreement of
               Mansol Ceramics Company and Guaranty of Registrant, dated August
               1, 1988, in connection with extension of the maturity date of the
               loan referenced to in Exhibit 10 (e) (i). Incorporated by
               reference to Registrant's Annual Report on Form 10-K for the year
               ended January 31, 1989.

(10)(f)        Lease of premises at 17-25 Academy Street, Newark, New Jersey
               between Mansol Ceramics Company and Rachlin & Co., dated April
               29, 1983. Incorporated by reference to Exhibit 10 (f) to
               Registrant's Annual Report on Form 10-K for the year ended
               January 31, 1984.

(10)(g)        Lease Modification Agreement re: Lease of Premises at 471
               Cortland Street dated July 24, 1985. Incorporated by reference to
               Exhibit 10 (g) to Registrant's Annual Report on Form 10-K for the
               year ended January 31, l986.

(10)(h)        Master Lease Agreement between Mansol Ceramics Company and
               Fidelcor Services, Inc. dated December 30, l985. Incorporated by
               reference to Exhibit 10 (h) to Registrant's Annual Report on Form
               10-K for the year ended January 31, l986.

(10)(i)        Deed, Mortgage and Mortgage Note between William and Fred
               Schneper as Grantees and Borrowers and Mansol Ceramics Company as
               Grantor and Lender, dated July 26, l985 re: property located in
               Hanover Township, New Jersey. Incorporated by reference 10 (i) to
               Registrant's Annual Report on Form 10-K for the year ended
               January 31, l986.

(10)(j)        Lease of premises at 140 Little Street, Belleville, New Jersey,
               between Mansol Realty Association and Mansol Ceramics Company,
               dated July 31, 1986. Incorporated by reference to Exhibit 10 (j)
               to Registrant's Annual Report on Form 10-K for the year ended
               January 31, l987.
</TABLE>


                                       38





<PAGE>


<TABLE>
<CAPTION>
Exhibit No.                         Description of Document
-----------                         -----------------------
<S>            <C>
(10)(k)        1987 Stock Option Plan. Incorporated by reference to Registrant's
               proxy statement relating to its 1987 Annual Stockholders'
               Meeting.

(10)(k)(1)     Amendment to the 1987 Stock Option Plan. Incorporated by
               reference to Registrant's Form S-8 dated November 13, l995.

(10)(l)        Renewal of Lease and Extension to additional space at 17-25
               Academy Street, Newark, New Jersey (a/k/a 1212 Raymond Boulevard,
               Newark, New Jersey) between Mansol Ceramics Company and Rachlin &
               Co. Incorporated by reference to Exhibit 10 (l) to Registrant's
               Annual Report on Form 10-K for the year ended January 31, l988.
               (See also Exhibit 10 (f)).

(10)(m)        Agreement dated June 13, 1989, between Mansol Ceramics Company
               and Bar-lo Carbon Products, Inc. providing for the sale of
               Ceramics' Carbon fixtures division. Incorporated by reference to
               Exhibit 10 (m) to Registrant's Annual Report on Form 10-k for the
               year ended January 31, 1990.

(10)(n)        Modification of Note and Mortgage from William Schneper, Fred
               Schneper and Leon Schneper (Mortgagor) to Mansol Ceramics Company
               (Mortgagee) dated August 1, l990, extending the term of the Note
               and Mortgage and modifying the interest provision. Incorporated
               by reference to the Registrant's Annual Report on Form 10-K for
               the year ended January 31, 1991.

(10)(o)        Asset Purchase Agreement between Registrant, Mansol Ceramics
               Company and Mansol Industries Inc. dated May 22, l990, including
               Subordinated Term Promissory Note and Security Agreement,
               covering sale of assets and business of Manufacturing Division of
               Mansol Ceramics Company. Incorporated by reference to Exhibits 1,
               2 and 3 to Registrant's Current Report on Form 8-K dated May 22,
               l990.

(10)(p)        Modification of Loan between Mansol Industries, Inc. (borrower)
               and Mansol Ceramics Company (Lender) dated January 31, 1992,
               allowing for the deferral of the principal for twelve months
               through and including the period ending June 22, l992 in
               consideration for personal guarantees from Borrower. Incorporated
               by reference to Exhibit 10 (p) to Registrant's Annual Report on
               Form 10-K for the year ended January 31, 1992.

(10)(q)        Lease of premises at 470 Colfax Avenue, Clifton, New Jersey,
               between Total-Tel USA Communications, Inc. and Broadway Financial
               Investment Services, Inc. dated March 25, 1991. Incorporated by
               reference to Exhibit 10 (q) to Registrant's Annual Report on Form
               10-K for the year ended January 31, l992.

(10)(r)        Lease of premises at 744 Broad Street, Newark, New Jersey between
               Total-Tel USA Inc. and Investment Property Services, Inc. dated
               November 15, 1993. Incorporated by reference to Exhibit 10 (r) to
               the Registrant's Annual Report on Form 10-K for the year ended
               January 31, 1994.

(10)(s)        Lease of premises at 744 Broad Street, Newark, New Jersey between
               Total-Tel USA, Inc. and Investment Property Services, Inc. dated
               December 28, 1993. Incorporated by reference to Exhibit 10 (s) to
               the Registrant's Annual Report on Form 10-K for the year ended
               January 31, 1994

(10)(t)        Lease of premises at 471 Cortland Street, Belleville, New Jersey,
               between Total-Tel USA Inc. and Birnfeld Associates - Belleville
               dated December 1, 1993. Incorporated by reference to Exhibit 10
               (t) to the Registrant's Annual Report on Form 10-K for the year
               ended January 31, 1994.

(10)(u)        Lease of premises at 150 Clove Road, Little Falls, New Jersey,
               between Total-Tel USA, Inc. and the Prudential Insurance Company
               of America dated February 22, 1994. Incorporated by reference to
               Exhibit 10 (u) to the Registrant's Annual Report on Form 10-K for
               the year ended January 31, 1994.

(10)(v)        Lease modification to the lease of the premises at 150 Clove
               Road, Little Falls, New Jersey between TotalTel, Inc. and The
               Prudential Company of America dated May 18, 1994. Incorporated by
               reference to Exhibit 10 (v) to the Registrant's Annual Report on
               Form 10-K for the year ended January 31, l995.

(10)(w)        Second lease modification to the lease of the premises at 150
               Clove Road, Little Falls, New Jersey between TotalTel, Inc. and
               Theta Holding Company, L. P., successor to the Prudential
               Insurance Company of America dated February 9, 1995. Incorporated
               by reference to Exhibit 10 (w) to the Registrant's Annual Report
               on Form 10-K for the year ended January 31, 1995.

(10)(x)        Third lease modification to the lease of the premises at 150
               Clove Road, Little Falls, New Jersey between TotalTel, Inc. and
               Theta Holding Company, L. P., successor to the Prudential
               Insurance Company of America dated January 31, 1997. Incorporated
               by reference to exhibit (10)(x) to the registrants Annual Report
               on Form 10-K for the year ended January 31, l997.
</TABLE>


                                       39





<PAGE>


<TABLE>
<CAPTION>
Exhibit No.                         Description of Document
-----------                         -----------------------
<S>            <C>
(10)(y)        Equipment Facility and Revolving Credit Agreement dated August
               23, 1996 between Total-Tel USA Communications, Inc., TotalTel,
               Inc., TotalTel USA, Inc., and TotalTel Carrier Services, Inc. and
               the Summit Bank in the amount of $10,000,000. Incorporated by
               referral to Exhibit (10)(y) to the Registrants Annual Report on
               Form 10K for the year ended January 3, 1997.

(10)(z)        Lease of premises at 500 Fifth Avenue, New York City, New York
               between TotalTel, Inc. and 1472 Broadway, Inc. dated November 8,
               1996. Incorporated by reference to Form 10K for the year ended
               January 31, 1997.

(10)(AA)       Lease of premises at 40 Rector Street, New York City, New York
               between Total-Tel USA Communications, Inc. and 40 Rector Street
               Company dated November 1, 1996. Incorporated by reference to Form
               10K for the year ended January 31, 1997.

(10)(AB)       1996 Stock Option Plan, Incorporated by reference to Registrant's
               Proxy Statement relating to its 1996 Annual Stockholder Meeting.

(10)(AC)       Lease of premises of 28 West Flagler Street, Miami, Florida
               between TotalTel, Inc. and Mosta Corporation, Inc. dated February
               6, 1998. Incorporated by reference to Form 10K for the year ended
               January 31, 1998.

(10)(AD)       Amended Equipment Facility and Revolving Credit Agreement dated
               August 23, 1996 between Total-Tel USA Communications, Inc.,
               TotalTel, Inc., Total-Tel USA, Inc., and Total-Tel Carrier
               Services, Inc. and the Summit Bank in the amount of 13,000,000.
               Incorporated by reference to Form 10K for the year ended January
               31, 1997.

(10)(AE)       Amendment to the Amended Facility and Revolving Credit Agreement
               dated November 1, 1998 between Total-Tel USA Communications,
               Inc., TotalTel, Inc., Total-Tel USA, Inc., and Total-Tel Carrier
               Services, Inc. and the Summit Bank in the amount of 13,000,000.
               Incorporated by reference to Form 10K for the year ended January
               31, 1999.

(10)(AF)       Lease of premises of 20 Crossways Park North, Woodbury, New York,
               between TotalTel, Inc. and Industrial and Research Associates
               Company, dated August 20, 1999. Incorporated by reference to Form
               10K for the year ended January 31, 2000.

(10)(AG)       Lease of premises of One Landmark Square, Stamford, Connecticut
               between TotalTel, Inc. and Reckson Operating Partnership, LLP,
               dated November 17, 1999. Incorporated by reference to Form 10K
               for the year ended January 31, 2000.

(10)(AH)       Lease of premises of 1810 Chapel Avenue West, Cherry Hill, New
               Jersey between TotalTel, Inc. and Commerce Center Holdings, Inc.,
               dated December 6, 1999. Incorporated by reference to Form 10K for
               the year ended January 31, 2000.

(10)(AI)       The 1999 Equity Incentive Plan Incorporated by reference to the
               Registrant's Proxy Statement relating to its 1999 Annual
               Shareholder Meeting.

(10)(AJ)       Employment agreement of A. John Leach. Incorporated by reference
               to the Registrant's Proxy Statement relating to its 2001 Annual
               Shareholders Meeting.

(10)(AL)       The Covista Communications, Inc. 2001 Equity Incentive Plan dated
               February 1, 2001; incorporated by reference to Form S-4
               Registration Statement No 333-6944 effective January 09,2002.

(10)(AM)       Sale and Lease/Back Master Lease agreement for Alcatel phone
               switch between Covista and Applied Financial dated July 25, 2001.
               Incorporated by reference to the Registrant's Annual Report on
               Form 10-K for the year ended January 31, 2002.

(10)(AO)       Sale and Lease/Back Schedule 1 agreement for Alcatel phone switch
               between Covista and Applied Financial dated July 25, 2001.
               Incorporated by reference to the Registrant's Annual Report on
               Form 10-K for the year ended January 31, 2002.

(10)(AP)       Sale and Lease/Back Schedule 2 agreement for Alcatel phone switch
               between Covista and Applied Financial dated July 25, 2001.
               Incorporated by reference to the Registrant's Annual Report on
               Form 10-K for the year ended January 31, 2002.

(10)(AQ)       Merger agreement between Covista Communications, Inc. and Capsule
               Communications, Inc.; incorporated by reference to Form S-4
               Registration Statement No 333-6944 effective January 09, 2002.

(10)(AR)       Lease of premises at 806 East Main Street, Chattanooga,
               Tennessee.

(10)(AS)       Lease of premises at 721 Broad Street, Chattanooga, Tennessee.

(10)(AT)       Lease of premises at 4803 Highway 58, Chattanooga, Tennessee.
</TABLE>


                                       40





<PAGE>


<TABLE>
<CAPTION>
Exhibit No.                         Description of Document
-----------                         -----------------------
<S>            <C>
(10)(AU)       Revolving Credit and Security Agreement with Capital Source
               Finance, LLC, dated April 16, 2003.

(10)(AV)       The 2002 Equity Incentive Plan Incorporated by reference to the
               Registrant's Proxy Statement dated November 19, 2002 relating to
               its 2002 Annual Shareholders Meeting.

(10)(AX)       Agreement to sell selected assets and customers to PAETEC
               Communications, Inc. incorporated by reference to Form 10Q for
               the quarter ended April 30, 2004

(23)           Consent of Independent Registered Public Accounting Firm

(31.1)         Certification Pursuant to Section 302 of the Sarbanes - Oxley Act
               of 2002

(31.2)         Certification Pursuant to Section 302 of the Sarbanes - Oxley Act
               of 2002

(32.1)         Certification Pursuant to Section 906 of the Sarbanes - Oxley Act
               of 2002

(32.2)         Certification Pursuant to Section 906 of the Sarbanes - Oxley Act
               of 2002
</TABLE>


                                       41





<PAGE>


                          COVISTA COMMUNICATIONS, INC.

                                AND SUBSIDIARIES

ITEM 15. Exhibits and Financial Statements Schedule Years Ended January 31,
     2005, 2004, and 2003

                                      INDEX

          (a) (1) Financial Statements: The following consolidated financial
statements of Covista Communications, Inc. and subsidiaries are included at the
end of this Report:

<TABLE>
<CAPTION>
                    Consolidated Financial Statements:                      Page
                    ----------------------------------                      ----
<S>                                                                         <C>
Report of Registered Independent Public Accounting Firm                      F-1

Consolidated balance sheets - January 31, 2005 and 2004                      F-2

Consolidated statements of operations years ended January 31, 2005, 2004
   and 2003                                                                  F-3

Consolidated statements of shareholders' equity - years ended January 31,
   2005, 2004 and 2003                                                       F-4

Consolidated statements of cash flows - years ended January 31, 2005,
   2004 and 2003                                                             F-5

Notes to consolidated financial statements                                   F-7

(a) (2) Supplementary Data Furnished Pursuant to the Requirements of
FORM 10-K:

Schedule - years ended January 31, 2005, 2004 and 2003


II   Valuation and Qualifying Accounts (Consolidated)                       F-26
</TABLE>

                                 ***************

Schedules other than those listed above are omitted because they are not
required, not applicable or the information has been otherwise supplied.

                (THE REST OF THIS PAGE INTENTIONALLY LEFT BLANK)


                                       42





<PAGE>


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders
Covista Communications, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Covista
Communications, Inc. and subsidiaries (the "Company") as of January 31, 2005 and
2004, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended January
31, 2005. Our audits also included the consolidated financial statement schedule
listed in the Index at Item 15(a)(2). These consolidated financial statements
and consolidated financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and consolidated financial statement schedule
based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Auditing Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Covista
Communications, Inc. and subsidiaries as of January 31, 2005 and 2004, and the
results of their operations and their cash flows for each of the three years in
the period ended January 31, 2005 in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, such
consolidated financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth herein.

Atlanta, Georgia
April 29, 2005


                                       F-1





<PAGE>


                  COVISTA COMMUNICATIONS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                            JANUARY 31, 2005 AND 2004

<TABLE>
<CAPTION>
                                                                   2005           2004
                                                               ------------   ------------
<S>                                                            <C>            <C>
ASSETS
   CURRENT ASSETS:
      Cash and cash equivalents                                $  8,606,407   $  3,797,245
      Trade accounts receivable (net of allowance of
         $1,151,345 and $1,350,001 in 2005 and 2004,
         respectively)                                            9,023,815     10,532,728
      Prepaid expenses and other current assets                     624,188        867,670
                                                               ------------   ------------
      Total current assets                                       18,254,410     15,197,643
                                                               ------------   ------------
      Property and equipment, net                                 6,082,362     11,654,365
      Deferred line installation costs (net of accumulated
         amortization of $154,921 and $146,340 in 2005 and
         2004, respectively)                                        244,240        547,201
      Intangible assets (net of accumulated amortization of
         $1,433,333 and $4,507,676 in 2005 and 2004,
         respectively)                                            2,166,667      4,774,324
      Goodwill                                                      200,000      8,205,850
      Other Assets                                                  283,400        507,449
                                                               ------------   ------------
                                                               $ 27,231,079   $ 40,886,832
                                                               ============   ============
LIABILITIES AND SHAREHOLDERS' EQUITY
   CURRENT LIABILITIES:
      Accounts payable and accrued line cost                   $  6,833,955   $ 10,695,055
      Accrued tax and regulatory fees                             2,384,147      4,374,867
      Accrued commission                                            582,002      1,020,833
      Deferred revenue                                            1,251,235        247,571
      Other accrued liabilities                                   1,618,108      1,966,272
      Salaries and wages payable                                    474,315        396,925
      Current portion of long term debt due to related party        573,017      1,258,327
      Current portion of long-term debt                                  --      1,325,930
                                                               ------------   ------------
      Total current liabilities                                  13,716,779     21,285,780
                                                               ------------   ------------
      Other long-term liabilities                                        --        195,395
      Long-term debt due to related party                                --        573,023
                                                               ------------   ------------

Commitments and contingencies (Notes 7, 10, 12 and 17)

   SHAREHOLDERS' EQUITY:
   Common stock, par value $0.05 per share, authorized
      50,000,000 shares, issued 19,358,444 in 2005 and
      19,353,444 shares in 2004                                $    967,922   $    967,672
   Additional paid-in capital                                    52,931,049     52,916,949
   Accumulated deficit                                          (38,939,231)   (33,606,547)

   Treasury stock at cost 1,536,419 shares in 2005 and 2004)     (1,445,440)    (1,445,440)
                                                               ------------   ------------
   Total shareholders' equity                                  $ 13,514,300   $ 18,832,634
                                                               ------------   ------------
                                                               $ 27,231,079   $ 40,886,832
                                                               ============   ============
</TABLE>

                 See notes to consolidated financial statements


                                      F-2





<PAGE>


                 COVISTA COMMUNICATIONS, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                  YEARS ENDED JANUARY 31, 2005, 2004 AND 2003

<TABLE>
<CAPTION>
                                                     2005          2004          2003
                                                 -----------   -----------   ------------
<S>                                              <C>           <C>           <C>
NET REVENUE                                      $59,839,723   $84,056,341   $100,959,692
                                                 -----------   -----------   ------------
COSTS AND EXPENSES:
   Cost of revenue (excluding depreciation and
      amortization)                               32,832,806    47,338,650     62,470,387
   Selling, general and administrative            27,049,178    31,402,503     40,184,946
   Depreciation and amortization                   3,552,081     5,931,552      7,441,502
   Loss on disposal of assets, net                   696,088            --             --
   Restructuring expense                             375,700            --             --
Total costs and expenses                          64,505,853    84,672,705    110,096,835
                                                 -----------   -----------   ------------
OPERATING LOSS                                    (4,666,130)     (616,364)    (9,137,143)
                                                 -----------   -----------   ------------
OTHER INCOME (EXPENSE):
   Loss on early retirement of debt                 (307,289)           --             --
   Interest income                                    54,532        17,297         48,867
   Interest expense                                 (233,798)     (344,894)      (830,423)
                                                 -----------   -----------   ------------
Total other income (expense), net                   (486,555)     (327,597)      (781,556)
                                                 -----------   -----------   ------------
LOSS BEFORE INCOME TAXES                          (5,152,685)     (943,961)    (9,918,699)
                                                 -----------   -----------   ------------
INCOME TAX PROVISION (BENEFIT)                       180,000            --       (511,220)
                                                 -----------   -----------   ------------
NET LOSS                                         $(5,332,685)  $  (943,961)  $ (9,407,479)
                                                 ===========   ===========   ============
BASIC LOSS PER COMMON SHARE                      $     (0.30)  $     (0.05)  $      (0.71)
                                                 ===========   ===========   ============
DILUTED LOSS PER COMMON SHARE                    $     (0.30)  $     (0.05)  $      (0.71)
                                                 ===========   ===========   ============
</TABLE>

                 See notes to consolidated financial statements


                                       F-3





<PAGE>


                  COVISTA COMMUNICATIONS, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                   YEARS ENDED JANUARY 31, 2005, 2004 AND 2003

<TABLE>
<CAPTION>
                                                                         Additional
                                                  Common      Common      Paid-in      Accumulated     Treasury
                                                  Shares       Stock      Capital        Deficit        Stock         Total
                                                ----------   --------   -----------   ------------   -----------   -----------
<S>                                             <C>          <C>        <C>           <C>            <C>           <C>
BALANCE AT JANUARY 31, 2002                     12,385,757   $619,288   $25,650,098   $(23,255,107)  $(1,445,440)  $ 1,568,839
                                                ==========   ========   ===========   ============   ===========   ===========
Sale of Common Stock                               699,996     35,000     1,971,900                                  2,006,900
Sale of Common Stock to related party              732,484     36,624     2,063,376                                  2,100,000
Exercise of employee stock options                 149,480      7,474       370,073                                    377,547
Issuance of shares to related party for
   telecommunication equipment                   1,185,894     59,295     3,340,705                                  3,400,000
Issuance of shares to related party for debt
   conversion                                    2,441,580    122,079     6,877,921                                  7,000,000
Issuance of shares for acquisition of Capsule    1,724,320     86,216    12,560,911                                 12,647,127
Net loss                                                --         --            --     (9,407,479)                 (9,407,479)
                                                ----------   --------   -----------   ------------   -----------   -----------
BALANCE AT JANUARY 31, 2003                     19,319,511   $965,976   $52,834,984   $(32,662,586)  $(1,445,440)  $19,692,934
                                                ==========   ========   ===========   ============   ===========   ===========
Exercise of employee stock options                  33,933      1,696        81,965                                     83,661
Net loss                                                                                  (943,961)                   (943,961)
                                                ----------   --------   -----------   ------------   -----------   -----------
BALANCE AT JANUARY 31, 2004                     19,353,444   $967,672   $52,916,949   $(33,606,547)  $(1,445,440)  $18,832,634
                                                ==========   ========   ===========   ============   ===========   ===========
Exercise of employee stock options                   5,000        250        14,100                                     14,350
Net loss                                                                                (5,332,685)                 (5,332,685)
                                                ----------   --------   -----------   ------------   -----------   -----------
BALANCE AT JANUARY 31, 2005                     19,358,444   $967,922   $52,931,049   $(38,939,231)  $(1,445,440)  $13,514,300
                                                ==========   ========   ===========   ============   ===========   ===========
</TABLE>

See notes to consolidated financial statements


                                       F-4





<PAGE>


                  COVISTA COMMUNICATIONS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                   YEARS ENDED JANUARY 31, 2005, 2004 AND 2003

<TABLE>
<CAPTION>
                                                                              2005          2004          2003
                                                                          -----------   -----------   -----------
<S>                                                                       <C>           <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net Loss                                                               $(5,332,685)  $  (943,961)  $(9,407,479)
   Adjustments to reconcile net loss to net cash (used in)
      provided by operating activities:
      Depreciation and amortization
      Provision for doubtful accounts                                       3,552,081     5,931,552     7,441,502
                                                                            1,340,243     1,503,600     2,754,712
   Loss on disposal of assets                                                 696,088            --            --
   Change in assets and liabilities, excluding effect of acquisition:
      Trade accounts receivable                                               168,670     3,679,687    (2,647,222)
      Prepaid expenses and other current assets                               280,920      (241,096)      893,966
      Other assets                                                            230,292       139,129       336,150
   Increase (decrease) in liabilities:
      Accounts payable and accrued line cost                               (3,866,547)   (4,378,636)   (7,663,882)
      Other accrued liabilities                                            (1,975,763)   (3,415,113)      623,590
      Other long-term liabilities                                            (195,393)      (28,039)      207,968
                                                                          -----------   -----------   -----------
   Net cash (used in) provided by operating activities                     (5,102,094)    2,247,123    (7,460,695)

CASH FLOWS FROM INVESTING ACTIVITIES:
   Net cash acquired in purchase of business                                       --            --     1,179,172
   Proceeds from sales and maturities of investments available for sale            --            --       439,773
   Purchases of property and equipment                                       (242,182)     (276,519)   (1,542,952)
   Proceeds from sale of customers, property and equipment                 12,875,667            --            --
   Notes receivable from related party                                             --            --       500,000
   Payments for deferred line installation cost                              (152,300)     (219,856)     (654,809)
                                                                          -----------   -----------   -----------
Net cash provided by (used in) investing activities                        12,481,185      (496,375)      (78,816)
                                                                          -----------   -----------   -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from the issuance of Common Stock                                      --            --   $ 4,106,900
   Proceeds from stock options exercised                                       14,350        83,661       377,547
   Proceeds from note payable to related party                                     --            --     2,600,000
   Payment of note payable to related party                                (1,258,333)   (1,248,231)           --
   Net increase (decrease) in bank borrowings                              (1,325,946)     (233,240)    2,520,333
                                                                          -----------   -----------   -----------
   Net cash provided by (used in) financing activities                     (2,569,929)   (1,397,810)    9,604,780
                                                                          -----------   -----------   -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                        4,809,162       352,938     2,065,269
                                                                          -----------   -----------   -----------
CASH AND CASH EQUIVALENTS BEGINNING OF YEAR                                 3,797,245     3,444,307     1,379,038
                                                                          -----------   -----------   -----------
CASH AND CASH EQUIVALENTS END OF YEAR                                     $ 8,606,407   $ 3,797,245   $ 3,444,307
                                                                          -----------   -----------   -----------
</TABLE>


                                       F-5





<PAGE>


<TABLE>
<CAPTION>
                                                                 2005       2004         2003
                                                               --------   --------   ------------
<S>                                                            <C>        <C>        <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
   Cash paid (received) during the year for:
      Interest                                                 $405,124   $822,471   $    830,423
      Income Taxes                                                   --         --       (511,220)
Non-cash:
   Contribution of property from shareholder                         --         --      3,400,000
   Exchange of debt for Common Stock issued to related party         --         --      7,000,000

Business Acquired:
   Fair value of assets excluding cash                               --         --   $ 21,849,458
   Less: liability assumed                                           --         --    (10,056,503)
   Less: stock consideration for business acquired                   --         --    (12,972,127)
   Cash acquired                                                     --         --      1,179,172
</TABLE>

                 See notes to consolidated financial statements


                                       F-6





<PAGE>


                  COVISTA COMMUNICATIONS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               FOR THE YEARS ENDED JANUARY 31, 2005, 2004 AND 2003

1. NATURE OF OPERATIONS

          Covista Communications, Inc. ("Covista"), and its wholly-owned
subsidiaries (collectively, the "Company") operates as a switch based resale
common carrier providing domestic and international long distance and local
telecommunications service to customers throughout the United States. On
September 15, 2000, the Company changed its name from Total-Tel USA
Communications, Inc. to Covista Communications, Inc. Prior to the acquisition on
February 8, 2002 of Capsule Communications, Inc. ("Capsule"), the Company's
principal customers were primarily businesses and other common carriers. As a
result, Capsule became a wholly owned subsidiary of Covista. Capsule was a
switch-based interexchange carrier providing long distance telephone
communications services primarily to small and medium-size business customers as
well as residential accounts. The results of Capsule's operations have been
included in the Company's statement of operations since the acquisition date.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

          Principles of Consolidation - The consolidated financial statements
include the accounts of Covista Communications, Inc. and its subsidiaries, all
of which are wholly owned. All significant inter-company transactions and
balances have been eliminated in the consolidated financial statements.

          Revenue Recognition - The Company recognizes revenue on
telecommunications services in the period that the service is provided. Revenue
is recognized when earned based upon the following specific criteria: (1)
persuasive evidence of arrangement exists, (2) services have been rendered, (3)
seller's price to the buyer is fixed or determinable, and (4) collectibility is
reasonably assured.

          Covista's revenue is generally comprised of fees paid by the end
customers for voice and data services, and carrier charges including access. End
customer revenue includes voice and data services and is comprised of monthly
recurring charges and usage charges. Monthly recurring charges include the fees
paid by customers for facilities in service and additional features on those
facilities. Usage charges consist of usage-sensitive fees paid for calls made.
Carrier access billing is comprised of charges paid primarily by inter-exchange
carriers (IXC's) to the Company for the origination and termination of
inter-exchange toll and toll-free calls. Amounts billed to IXC's are recorded
based on the Company's determination of usage, category of traffic and the
associated rate. These items are subject to some degree of estimation and
subsequent adjustments may occur. However, management does not believe such
adjustments will be material to the consolidated financial statements.

          Property and Equipment - Property and equipment are stated at cost.
Depreciation and amortization is being provided by use of the straight-line
method over the estimated useful lives of the related assets. Leasehold
improvements are amortized over the shorter of the term of the lease or the
useful lives of the asset.

          The estimated useful lives of the principal classes of assets are as
follows:

<TABLE>
<CAPTION>
Classification                             Years
--------------                             -----
<S>                                         <C>
Machinery and equipment                     5-10
Office furniture, fixtures and equipment    5-10
Vehicles                                    3-5
Leasehold improvements                      2-10
Computer equipment and software             5-7
</TABLE>

          Deferred Line Installation Costs - The Company defers charges from
other common carriers related to the cost of installing telephone transmission
facilities (lines). Amortization of these costs is provided using the
straight-line method over the related contract life of the lines ranging from
three to five years.


                                       F-7





<PAGE>


                  COVISTA COMMUNICATIONS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
               FOR THE YEARS ENDED JANUARY 31, 2005, 2004 AND 2003

          Intangible Assets - Prior to the transaction with PAETEC (see Note 17)
intangible assets consist of prepaid network capacity and purchased customer and
agent relationships amortized on a straight-line basis over periods varying
between 10 and 120 months. The Company incurred amortization expense on
intangible assets of approximately $1,431,000, $2,159,000, and $3,400,000 for
the years ended January 31, 2005, 2004, and 2003 respectively. During the
quarter ended October 31, 2004, the Company recorded a charge of approximately
$1.35 million against intangible assets related to restructuring as a result of
the PAETEC transaction. The Company's non-current balance of intangible assets
with a definite life was approximately $2,167,000, net of accumulated
amortization of approximately $1,433,000 at January 31, 2005 and approximately
$4,774,000, net of accumulated amortization of approximately $4,508,000 at
January 31, 2004. Approximate amortization expense on intangible assets for the
next 5 years as of January 31, is as follows:

<TABLE>
<S>          <C>
2006         $400,000
2007         $400,000
2008         $400,000
2009         $400,000
Thereafter   $967,000
</TABLE>

         Goodwill - Goodwill represents the excess of the purchase price over
the net tangible and identifiable intangible assets of acquired businesses and,
in accordance with SFAS No. 142 is not amortized. The Company makes an annual
impairment assessment on January 31st of each year. The annual impairment
assessment made at January 31, 2005 and 2004 did not result in any impairment
charges. A summary of changes to goodwill for the year ended January 31, 2005,
2004 and 2003 is presented below (in thousands):


           Balance - January 31, 2003 and 2004                      $8,206
             Write down resulting from PAETEC transaction           (8,006)
                                                                    ------
           Balance - January 31, 2005                                 $200
                                                                    ======

          Use of Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.

          Reclassifications - Certain amounts for 2004 and 2003 have been
reclassified to conform to the current year presentation.

          Risks and Uncertainties - Future results of operations involve a
number of risks and uncertainties. Factors that could affect future operating
results and cash flows and cause actual results to vary materially from
historical results include, but are not limited to:

          o Changes in government policy, regulation and enforcement or adverse
          judicial or administrative interpretations and rulings or legislative
          action relating to regulations, enforcement and pricing, including,
          but not limited to, changes that affect continued availability of the
          unbundled network element platform of the local exchange carriers
          network and the costs associated therewith

          o Dependence on the availability and functionality of the networks of
          the incumbent local exchange carriers as they relate to the unbundled
          network element platform

          o Increased price competition in local and long distance services,
          including bundled services and overall competition within the
          telecommunications industry.

          o Outcomes unfavorable to the Company of the FCC's rule-making process
          and pending litigation with regards to the availability and pricing of
          various network elements and bundles thereof.

          Negative developments in these areas could have a material adverse
effect on the Company's business, financial condition and results of operations.

          Concentrations of Credit Risk - The Company sells its
telecommunications services and products primarily to small to medium size
businesses, residential and wholesale customers. The Company performs ongoing
credit evaluations of both its retail and wholesale customers. The Company
generally does not require collateral; however, when circumstances warrant,
deposits are required. Recent conditions in the telecommunications industry have
given rise to an increase in potential doubtful accounts. Allowances are
maintained for such potential credit losses. The Company has entered into offset
arrangements with certain of its customers which are also vendors, allowing for
the ability to offset receivables against the Company's payables balance.

          Stock-Based Compensation - The Company has adopted the disclosure
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123,
amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure - an amendment of FASB Statement No. 123".

          The following disclosure complies with the adoption of this statement
and includes pro forma net loss as if the fair value based method of accounting
had been applied.


                                       F-8





<PAGE>


                  COVISTA COMMUNICATIONS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
               FOR THE YEARS ENDED JANUARY 31, 2005, 2004 AND 2003

<TABLE>
<CAPTION>
                                                         (in thousands except per share amounts)
                                                                  Year Ended January 31
                                                         ---------------------------------------
                                                                 2005      2004      2003
                                                               -------   -------   -------
<S>                                                            <C>       <C>       <C>
Net loss as reported                                           $(5,333)  $  (944)  $(9,407)
Stock based employee compensation included in
   reported net loss                                                --        --        --
Total stock-based employee compensation
   (expense) benefit determined under fair value based
   method for all options                                         (768)     (500)     (346)
                                                               -------   -------   -------
Pro forma net loss                                             $(6,101)  $(1,444)  $(9,753)
                                                               =======   =======   =======
Basic loss per share
   As reported                                                 $ (0.30)  $ (0.05)  $ (0.71)
   Pro forma                                                   $ (0.34)  $ (0.08)  $ (0.73)
Diluted loss per share
   As reported                                                 $ (0.30)  $ (0.05)  $ (0.71)
   Pro forma                                                   $ (0.34)  $ (0.08)  $ (0.73)
</TABLE>

          There were no options granted in Fiscal 2005. The fair value of the
option grants is estimated based on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants in Fiscal 2004 and 2003: dividend yield of 0.00% for the three years;
expected volatility 118%, 153% and 165% respectively; risk-free interest rate of
3.1%, 2.0%, and 6.47% respectively; and expected lives of 3 to 5 years for each
of the three years.

          Loss per Share - Basic loss per share is represented by net loss
available to common shareholders divided by the weighted-average number of
common shares outstanding during the period. Diluted loss per share reflects the
potential dilution that could occur if securities or stock options were
exercised or converted into Common Stock during the period, if dilutive (see
Note 13).

          Authorized Common Stock - On February 23, 2000, the Company's
shareholders approved an increase in the number of authorized shares of Common
Stock from 20,000,000 to 50,000,000 shares.

          Cash and Cash Equivalents - The Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents. Cash and cash equivalents consist of cash on hand, demand
deposits and money market accounts.

          Income Taxes - Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax basis. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. In the event the future
tax consequences of differences between the financial reporting bases and the
tax bases of Covista's assets and liabilities result in deferred tax assets, an
evaluation of the probability of being able to realize the future benefits
indicated by such asset is required. A valuation allowance is provided for a
portion of the deferred tax assets when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. In assessing
whether deferred tax assets can be realized, management considers the scheduled
reversals of deferred tax liabilities, projected future taxable income, and
tax-planning strategies.


                                       F-9





<PAGE>


                  COVISTA COMMUNICATIONS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
               FOR THE YEARS ENDED JANUARY 31, 2005, 2004 AND 2003

          Fair Value of Financial Instruments - For cash and cash equivalents,
the carrying value is a reasonable estimate of its fair value. The estimated
fair value of publicly traded financial instruments is determined by the Company
using quoted market prices, dealer quotes and prices obtained from independent
third parties. For financial instruments not publicly traded, fair values are
estimated based on values obtained from independent third parties or quoted
market prices of comparable instruments. The fair value of the debt was
determined based on interest rates that are currently available to the Company
for issuance of debt with similar terms and remaining maturities for debt issues
that are not traded on quoted market prices. However, judgment is required to
interpret market data to develop the estimates of fair value. Accordingly, the
estimates are not necessarily indicative of the amounts that could be realized
in a current market exchange.

          The carrying values were approximately equal to the fair values of
financial instruments as of January 31, 2005 and 2004.

          Long-Lived Assets - Effective February 1, 2002, the Company adopted
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment of Disposal of Long-Lived Assets". SFAS 144 establishes a single
accounting model for the impairment or disposal of long-lived assets, including
discontinued operations. The Company reviews the recoverability of the carrying
value of long-lived assets, including intangibles with a definite life, for
impairment using the methodology prescribed in SFAS 144 whenever events or
changes in circumstances indicate that the carrying amount of such assets may
not be recoverable. The Company uses an undiscounted cash flow methodology and
if not recoverable, adjusts assets to fair value.

          Comprehensive Income - The Company has no items of comprehensive
income or expense. Accordingly, our comprehensive income (loss) and net income
(loss) are equal for all periods presented.

Recent Accounting Pronouncements

          In December 2004, the FASB issued a revision to SFAS 123, "Share-Based
Payment" (SFAS No. 123R), that amends existing pronouncements for share-based
payment transactions in which an enterprise receives employee and on-employee
services in exchange for (a) equity instruments of the enterprise or (b)
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
SFAS No. 123R eliminates the ability to account for share-based compensation
transactions using APB 25 and generally requires such transactions be accounted
for using a fair-value-based method. SFAS No. 123R's effective date would be
applicable for awards that are granted, modified, become vested, or settled in
cash in interim or annual periods beginning after December 15, 2005. SFAS No.
123R includes three transition methods; one that provides for prospective
application and two that provide for retrospective application. The Company
intends to adopt SFAS No. 123R prospectively commencing in the first quarter of
the fiscal year ending January 31, 2007; it is expected that the adoption of
SFAS No. 123R will cause us to record, as expense each quarter, a non-cash
accounting charge approximating the fair value of such share based compensation
meeting the criteria outlined in the provisions of SFAS No. 123R; s of January
31, 2005, the Company has approximately 483,000 granted stock options
outstanding which had not yet become vested. There are two acceptable methods of
valuing options under the revision, the Black-Sholes method and the binomial
method. The Company is currently assessing the impact on its 2005 earnings using
the two acceptable methods of valuing these options, and the ability to discount
the fair value of unvested shares.

In March 2005, the FASB issued FIN 47 as an interpretation of FASB Statement No.
143, Accounting for Asset Retirement Obligations (FASB No. 143). This
interpretation clarifies that the term conditional asset retirement obligation
as used in FASB No. 143, refers to a legal obligation to perform an asset
retirement activity in which the timing and/or method of settlement are
conditional on a future event that may or may not be within the control of the
entity. The obligation to perform the asset retirement activity is unconditional
even though uncertainty exists about the timing and/or method of settlement.
Accordingly, an entity is required to recognize a liability for the fair value
of a conditional asset retirement obligation if the fair value of the liability
can be reasonably estimated. This interpretation also clarifies when an entity
would have sufficient information to reasonably estimate the fair value of an
asset retirement obligation. FIN 47 is effective no later than the end of fiscal
years ending after December 15, 2005. The Company is currently assessing the
impact of the adoption of FIN 47.



                                      F-10





<PAGE>


                  COVISTA COMMUNICATIONS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
               FOR THE YEARS ENDED JANUARY 31, 2005, 2004 AND 2003

3. SEGMENT REPORTING

          The Company sells telecommunication services to three distinct
segments: a residential segment targeting residential users, a retail segment
consisting primarily of small to medium size businesses and a wholesale segment
with sales to other telecommunications carriers. During 2005 the Company changed
the name of the KISSLD segment to the residential segment.

          In addition to direct costs, each segment is allocated a proportion of
the Company's operating expenses, including utilization of its switch and
facilities. The allocation of expenses is based upon the minutes of use flowing
through the Company's switching network. There are no intersegment sales. When
specifically identified, assets are allocated to each segment. All intangible
assets and goodwill have been allocated to the retail segment. Capital
expenditures are allocated based on sales. Other assets are allocated based on
total revenue. Management evaluates performance on operating results of the
three business segments.

          Summarized financial information concerning the Company's reportable
segments is shown in the following table.

<TABLE>
<CAPTION>
                             Residential      Retail      Wholesale        Total
                             -----------   -----------   -----------   ------------
<S>                          <C>           <C>           <C>           <C>
2005
   Net Sales                 $23,016,883   $33,639,083   $ 3,183,757   $ 59,839,723
   Operating profit (loss)   $   (18,212)  $(3,894,760)  $  (753,158)  $ (4,666,130)
   Assets                    $ 9,988,660   $13,778,626   $ 3,463,793   $ 27,231,079
   Capital expenditures      $    92,029   $   138,044   $    12,109   $    242,182

2004
   Net Sales                 $17,260,586   $62,419,631   $ 4,376,124   $ 84,056,341
   Operating profit (loss)   $   957,905   $(2,096,457)  $   522,188   $   (616,364)
   Assets                    $ 5,468,384   $33,481,846   $ 1,936,602   $ 40,886,832
   Capital expenditures      $    41,478   $   235,041   $         0   $    276,519

2003
   Net Sales                 $12,990,418   $75,454,835   $12,514,438   $100,959,692
   Operating profit (loss)   $   830,305   $(7,396,864)  $(2,570,584)  $ (9,137,143)
   Assets                    $ 4,509,380   $41,494,950   $ 5,046,068   $ 51,050,398
   Capital expenditures      $   198,531   $ 1,153,165   $   191,256   $  1,542,952
</TABLE>


                                      F-11





<PAGE>


                  COVISTA COMMUNICATIONS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
               FOR THE YEARS ENDED JANUARY 31, 2005, 2004 AND 2003

4. PROPERTY AND EQUIPMENT

     Property and equipment consists of:

<TABLE>
<CAPTION>
Classification                                       2005           2004
----------------------------------------------   ------------   ------------
<S>                                              <C>            <C>
Machinery and equipment                          $ 12,561,379   $ 24,515,155
Leasehold Improvements                                482,211      1,612,300
Office furniture, fixtures and equipment            1,971,700      4,780,968
Vehicles                                                   --         41,812
Computer equipment and software                     4,249,387     10,418,781
Machinery and equipment in progress                   235,081        387,811
                                                 ------------   ------------
                                                   19,499,758     41,756,827
Less accumulated depreciation and amortization    (13,417,396)   (30,102,462)
                                                 ------------   ------------
                                                 $  6,082,362   $ 11,654,365
                                                 ============   ============
</TABLE>

          Depreciation and amortization expense related to property and
equipment for the years ended January 31, 2005, 2004 and 2003, was $2,062,021,
$3,772,571, and $3,959,144 respectively. Certain amounts from the prior year
have been reclassified to conform to the current year presentation.

5. ACQUISITION OF CAPSULE COMMUNICATIONS

          On February 8, 2002, Covista Communications, Inc. ("Covista")
completed the merger (the "Merger") of its wholly owned subsidiary CCI
Acquisitions, Inc. ("CCI") with and into Capsule Communications, Inc.
("Capsule"), pursuant to the Agreement and Plan of Reorganization dated as of
July 17, 2001 among Covista, CCI and Capsule (the "Merger Agreement") through
the issuance of 1,742,320 shares of Common Stock and the assumption of certain
liabilities and stock options. As a result of the Merger, Capsule became a
wholly owned subsidiary of Covista. The Company has accounted for the
combination with Capsule as a purchase business combination under SFAS
141("Business Combination"). Capsule is a switch-based interexchange carrier
providing long distance telephone communications services primarily to small and
medium-size business customers as well as residential accounts.

          The results of Capsule's operations have been included in the
Company's Consolidated Statement of Loss and Comprehensive Loss since the date
of merger. The total purchase price including certain direct costs was
approximately $12,972,000 plus assumed liabilities of approximately $10,057,000.
Included in the purchase, the Company assumed options from Capsule for the
purchase of 286,975 shares of Common Stock valued at approximately $1.1 million
using the Black-Scholes Valuation Model, using an exercise price of $3.49 to
$20.10, expected lives of 0.5 to 2 years, 156% volatility, 2.69% discount rate,
and a Company stock price of $6.71. In addition, the Company incurred
approximately $0.3 million in acquisition expenses.


                                      F-12





<PAGE>


                  COVISTA COMMUNICATIONS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
               FOR THE YEARS ENDED JANUARY 31, 2005, 2004 AND 2003

          The identifiable intangible assets acquired from Capsule were
classified as its business customer relationships valued at $1,288,000, its
residential customer relationships valued at $376,000, and its agent
relationships valued at $2,526,000. These intangibles were being amortized using
the straight-line method over a weighted average period of 40 months. Goodwill
and intangible assets acquired were not deductible for tax purposes. The
majority of these acquired intangible assets were subsequently written off as a
result of the PAETEC transaction as discussed further in Note 17.

6. INCOME TAXES

     The provision (benefit) for income taxes includes the following:

<TABLE>
<CAPTION>
                       2005     2004      2003
                     --------   ----   ---------
<S>                  <C>         <C>   <C>
Federal
   Current           $149,000     --   $(511,220)
   Deferred                --     --          --
State income taxes
   Current           $ 31,000     --          --
   Deferred                --     --          --
                     --------    ---   ---------
                     $180,000    $--   $(511,220)
                     ========    ===   =========
</TABLE>


                                      F-13





<PAGE>


                 COVISTA COMMUNICATIONS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
              FOR THE YEARS ENDED JANUARY 31, 2005, 2004 AND 2003

          Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Valuation
allowances are provided against assets that are not likely to be realized.

          The income tax effects of significant items comprising the Company's
net deferred tax asset (liability) are as follows:

<TABLE>
<CAPTION>
                                                   2005                        2004
                                        ---------------------------   ------------------------
                                          Current      Long Term       Current      Long Term
                                        -----------    ------------   ---------   ------------
<S>                                     <C>            <C>            <C>         <C>
Deferred tax assets
   Allowance for doubtful accounts      $   540,538             --    $ 300,000   $         --
   Accrued compensation expense              44,290             --       47,704             --
   Accrued expenses                              --             --       70,000             --
   Net operating loss carry              (2,606,773)     8,269,741           --     14,089,205
                                        -----------    -----------    ---------   ------------
   Total gross deferred tax assets      $(2,021,944)   $ 8,269,741    $ 417,704   $ 14,089,205
      Less: valuation allowance           2,021,944     (7,641,741)    (417,704)   (11,011,049)
                                        -----------    -----------    ---------   ------------
   Total net deferred tax asset         $        --    $   628,000    $      --   $  3,078,156
                                        -----------    -----------    ---------   ------------

   Deferred tax liabilities:
      Property and equipment                     --       (628,000)          --     (2,220,000)
      Other                                      --             --           --       (858,156)
                                        -----------    -----------    ---------   ------------
   Total deferred tax liabilities                --       (628,000)          --     (3,078,156)
                                        -----------    -----------    ---------   ------------

                                        -----------    -----------    ---------   ------------
   Net deferred tax asset (liability)   $        --    $        --    $      --   $         --
                                        ===========    ===========    =========   ============
</TABLE>

          A reconciliation from the U.S. statutory tax rate of 34% to the
effective tax rate for income taxes on the consolidated statements of loss is as
follows:

<TABLE>
<CAPTION>
                                                               2005         2004         2003
                                                           -----------   ---------   -----------
<S>                                                        <C>           <C>         <C>
Computed expense at statutory rates                        $(1,684,411)  $(320,947)  $(3,553,921)
(Reductions) increase in taxes resulting from:
State taxes (benefit), net of federal income tax benefit      (129,261)    (37,758)     (626,404)
Valuation allowance                                          1,975,045        (406)     (508,989)
Other                                                           18,627     359,111     4,178,094
                                                           -----------   ---------   -----------
                                                           $   180,000   $      --   $  (511,220)
                                                           ===========   =========   ===========
</TABLE>


                                      F-14





<PAGE>


                 COVISTA COMMUNICATIONS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
              FOR THE YEARS ENDED JANUARY 31, 2005, 2004 AND 2003

          At January 31, 2005, for Federal income tax purposes, the Company had
net operating loss carryforwards of approximately $10 million, which will begin
to expire in stages in the year 2009.

          The utilization of these net operating loss carryforwards and
realization of tax benefits depends predominantly upon the Company's having
taxable income in future years. Further, the utilization of approximately $5
million of these net operating loss carryforwards is subject to annual
limitation as a result of a change in ownership, as defined under Section 382 of
the Internal Revenue Code. The limitation does not reduce the total amount of
such net operating losses that may be taken, but rather substantially limits the
amount that may be used during a particular year. Any future benefits
attributable to all of the Company's net operating loss carryforwards may be
reduced upon further changes in ownership.

7. LEASE COMMITMENTS

          The Company rented various facilities under lease agreements
classified as operating leases. Several of the underlying agreements contained
certain incentives eliminating payments at the inception of the lease. Lease
incentives are amortized on a straight-line basis over the entire lease term.
Under terms of these leases, the Company is required to pay its proportionate
share of increases in real estate taxes, operating expenses and other related
costs.

          Future minimum annual rentals on these leases as of January 31, 2005
are as follows:

<TABLE>
<CAPTION>
Year ending January 31,   Annual Minimum Rentals
-----------------------   ----------------------
<S>                             <C>
2006                               717,174
2007                               576,534
2008                               531,046
2009                               534,381
2009 and thereafter                889,659
                                ----------
TOTAL                           $3,248,794
                                ==========
</TABLE>

          Rental expense for the years ended 2005, 2004 and 2003 was
approximately $1,869,000, $2,246,000 and $2,945,000, respectively.

8. EMPLOYEE BENEFIT PLANS

          The Company has established a savings incentive plan for substantially
all employees of the Company, which is qualified under section 401(k) of the
Internal Revenue Code. The savings plan provides for contributions to an
independent trustee by both the Company and its participating employees. Under
the plan, employees may contribute up to 15% of their pretax base pay. The
Company matches 50% of the first 6% of participant contributions.

          Participants vest immediately in their own contributions and over a
period of five years for the Company's contributions. Company contributions were
approximately $93,000, $148,000, and $148,000, for the years ended January 31,
2005, 2004 and 2003, respectively.


                                      F-15





<PAGE>


                  COVISTA COMMUNICATIONS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
               FOR THE YEARS ENDED JANUARY 31, 2005, 2004 AND 2003

9.   STOCK OPTION PLANS

          The Company has five stock option plans authorizing the granting of
either Incentive Stock Options or Nonqualified Stock Options. The 1996 Stock
Option Plan (the "1996 Plan") provides for the issuance of an aggregate of not
more than 600,000 shares of the Company's Common Stock. The 1999 Equity
Incentive Plan (the "1999 Plan") provides for the issuance of an aggregate of
not more than 750,000 shares of the Company's Common Stock. The 2001 Equity
Incentive Plan (the "2001 Plan") provides for the issuance of an aggregate of
not more than 900,000 shares of the Company's Common Stock. The 2002 Equity
Incentive Plan (the "2002 Plan") provides for the issuance of an aggregate of
not more than 750,000 shares of the Company's Common Stock. The Capsule Equity
Incentive Plan (the "Capsule Plan") provides for the issuance of an aggregate of
not more than 286,975 shares of the Company's Common Stock.

          Incentive Stock Options granted pursuant to the Plans must have an
exercise price equal to the fair market value of the Company's Common Stock at
the time the option is granted, except that the price shall be at least 110% of
the fair market value where the option is granted to an employee who owns more
than 10% of the combined voting power of all classes of the Company's voting
stock.

          Nonqualified Stock Options granted pursuant to the Plans must have an
exercise price equal to at least 50% of the fair market value of the Company's
Common Stock at the time the option is granted. Incentive Stock Options may be
granted only to employees. Nonqualified Stock Options may be granted to
employees as well as directors, independent contractors and agents, as
determined by the Board of Directors. All options available to be granted under
the 1996 Plan, totaling 54,750 at January 31, 2005, must be granted by October
10, 2006. All options available to be granted under the 1999 Plan, totaling
474,692 at January 31, 2005 must be granted by February 23, 2009. All options
available to be granted under the 2001 Plan, totaling 680,658 at January 31,
2005, must be granted by February 8, 2012. All options available to be granted
under the 2002 Plan, totaling 47,000 at January 31, 2005 must be granted by
December 19, 2012.

          As part of the Capsule acquisition, outstanding Capsule stock options
were converted into options to purchase shares of Covista Common Stock. Under
the Capsule stock option plans, options were granted to officers and employees
of Capsule. No option was granted for a term in excess of ten years from the
date of grant. The Capsule stock options were fully vested on the date of
acquisition. The options if not exercised, expire up to 5 years after the date
of grant.

A summary of the status of our option plans follows:

<TABLE>
<CAPTION>
------------------------------------------------------------
                                            Weighted Average
                              Outstanding    Exercise Price
------------------------------------------------------------
<S>                            <C>               <C>
Options at January 31, 2002    1,686,067         $3.60
------------------------------------------------------------
   Granted                       530,975         $7.09
   Cancelled                    (394,006)        $7.37
   Exercised                    (149,559)        $2.56
------------------------------------------------------------
Options at January 31, 2003    1,673,477         $3.90
------------------------------------------------------------
   Granted                       545,000         $2.61
   Cancelled                    (294,882)        $7.18
   Exercised                     (33,933)        $2.47
------------------------------------------------------------
Options at January 31, 2004    1,889,662         $3.05
------------------------------------------------------------
   Granted                             0            --
   Cancelled                    (492,704)        $3.24
   Exercised                      (5,000)        $2.87
------------------------------------------------------------
Options at January 31, 2005    1,391,958         $2.90
------------------------------------------------------------
</TABLE>


                                      F-16





<PAGE>


                  COVISTA COMMUNICATIONS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
               FOR THE YEARS ENDED JANUARY 31, 2005, 2004 AND 2003

          The following table summarizes information about options outstanding
as of January 31, 2005 under the Company's option plans:

<TABLE>
<CAPTION>
                                        Outstanding                                    Exercisable
--------------------------------------------------------------------------------------------------------------
                                          Average                                                 Weighted
   Range of       Number of Shares       Remaining      Weighted Average   Number of Shares   Average Exercise
exercise prices      Outstanding     Contractual Life    Exercise Price       Outstanding           Price
--------------------------------------------------------------------------------------------------------------
<S>                   <C>                   <C>              <C>                <C>                <C>
$2.00-$5.65           1,391,729             5.0              $ 2.90             908,729            $ 3.00
$5.66-$20.47                229              .9              $20.47                 229            $20.47
</TABLE>

10. VENDOR DISPUTES

          The Company records disputed line cost expenses in accordance with
FASB Statement No. 5, "Accounting for Contingencies". Billings from line cost
vendors are compared to the Company's engineering and operations data, with
differences filed with the vendors as a disputed billing. Disputed line cost
billings are recorded by the Company at the estimated liability due based upon
the Company's historical experience in settling similar disputes. Actual
settlement of disputes may differ from original estimates. Management adjusts
the dispute reserve each month. The net reserve for dispute losses at January
31, 2005 and 2004 were approximately $572,000 and $2.3 million respectively and
are included in the accompanying consolidated financial statements.

11. LONG-TERM DEBT

          Effective April 16, 2003, Covista executed a revolving credit and
security agreement with Capital Source Finance, LLC. This credit facility
provided the Company with an $8 million line of credit, of which approximately
$4,300,000 was available at January 31, 2004, based on eligible accounts
receivable. This thirty-six month facility allowed the Company to borrow funds
based on a portion of eligible customer accounts receivable at the Prime Rate
plus 2.00% with a floor of 6.25%. Interest, unused line and collateral
management fees were payable monthly in arrears. The loan was secured by all of
the Company's assets. This facility was paid in full and terminated on August
19, 2004 as the result of the PAETEC transaction. The Company recorded early
termination expense of approximately $307,000 related to this payoff.

          On July 2, 2001, Covista received a loan from Henry G. Luken III, its
Chairman of the Board and principal shareholder, in the amount of $4,000,000.
The loan was scheduled to mature on February 1, 2003, together with accumulated
interest at a rate of 8% per annum. Mr. Luken also advanced the Company,
$400,000, the proceeds of which were used for construction of new facilities.
The agreement called for interest to be accrued at a rate of 8% per annum. The
total balance of the liability was $4,400,000, plus accrued interest at January
31, 2002. During Fiscal 2003, Mr. Luken loaned the Company an additional
$2,600,000. The $7,000,000 loan was converted into Common Stock at $2.87 per
share, which was the market price on the date of shareholder approval in
December of 2002.

          On June 17, 2002, Covista entered into a term loan agreement with a
major bank. The initial principal amount of this note was $3,775,000, payable in
36 monthly installments at a fixed interest rate of 4.495% for the first year
and converting to 2% over LIBOR on June 17, 2003 and thereafter or 3.1%.
Effective June 17, 2003, Covista's Chairman of the Board paid the bank in full
and assumed the remaining balance of this loan under the identical terms and
conditions. This note is secured by certain of the Company's switching
equipment. The balance on this facility was $573,016 at January 31, 2005, which
is classified as current in the accompanying consolidated balance sheet.

12. COMMITMENTS AND CONTINGENCIES

          The Company is involved in various legal and administrative actions
arising in the normal course of business. While the resolution of any such
actions may have an impact on the financial results for the period in which it
is resolved, management believes that the ultimate disposition of these matters
will not have a material adverse effect upon its consolidated results of
operations, cash flows or financial position. The Company has also committed to
the purchase of $12 million in services from PAETEC as a result of the
transaction described in Note 17.


                                      F-17





<PAGE>


                  COVISTA COMMUNICATIONS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
               FOR THE YEARS ENDED JANUARY 31, 2005, 2004 AND 2003

13. LOSS PER SHARE

          Basic loss per share was computed by dividing net loss by the weighted
average number of shares of Common Stock outstanding during each year.
Outstanding stock options to purchase shares of Common Stock were not included
in the computation of diluted loss per share for the years ended January 31,
2004, 2003, and 2002 because to do so would have been antidilutive.

          The reconciliation of the loss and common shares included in the
computation of basic loss per common share and diluted loss per common share for
the years ended January 31, 2004, 2003 and 2002 is as follows:

<TABLE>
<CAPTION>
                                       2005                              2004                            2003
                        ----------------------------------  -----------------------------  -------------------------------
                                                                                     Per                              Per
                                                 Per Share                          Share                            Share
                            Loss       Shares      Amount      Loss      Shares    Amount      Loss       Shares    Amount
                        -----------  ----------  ---------  ---------  ----------  ------  -----------  ----------  ------
<S>                     <C>          <C>          <C>       <C>        <C>         <C>     <C>          <C>         <C>
Basic Loss Per Share    $(5,332,685) 17,822,025   $(0.30)   $(943,961) 17,795,642  $(0.05) $(9,407,479) 13,282,858  $(0.71)
                        ===========  ==========   ======    =========  ==========  ======  ===========  ==========  ======
Diluted loss per share  $(5,332,685) 17,822,025   $(0.30)   $(943,961) 17,795,642  $(0.05) $(9,407,479) 13,282,858  $(0.71)
                        ===========  ==========   ======    =========  ==========  ======  ===========  ==========  ======
</TABLE>

14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
                                                        Amounts in thousands except per share data
                                           --------------------------------------------------------------------
                                           April 30, 2002   July 31, 2002   October 31, 2002   January 31, 2003
                                           --------------   -------------   ----------------   ----------------
<S>                                           <C>              <C>              <C>                <C>
Net sales                                     $24,548          $25,681          $26,773            $23,958
Operating income (loss)                        (2,667)          (3,741)            (298)            (2,461)
Net earnings (loss)                            (2,865)          (3,217)            (431)            (2,895)
Basic earnings (loss) per common share          (0.23)           (0.25)           (0.03)             (0.19)
Diluted earnings (loss) per common share        (0.23)           (0.25)           (0.03)             (0.19)
</TABLE>

<TABLE>
<CAPTION>
                                           April 30, 2003   July 31, 2003   October 31, 2003   January 31, 2004
                                           --------------   -------------   ----------------   ----------------
<S>                                           <C>              <C>              <C>                <C>
Net sales                                     $23,270          $21,457          $20,337            $18,992
Operating income (loss)                          (702)            (794)            (106)               986
Net earnings (loss)                              (778)            (885)            (173)               892
Basic earnings (loss) per common share          (0.04)           (0.05)           (0.01)              0.05
Diluted earnings (loss) per common share        (0.04)           (0.05)           (0.01)              0.05
</TABLE>

<TABLE>
<CAPTION>
                                           April 30, 2004   July 31, 2004   October 31, 2004   January 31, 2005
                                           --------------   -------------   ----------------   ----------------
<S>                                           <C>              <C>              <C>                <C>
Net sales                                     $18,194          $18,355          $12,552            $10,739
Operating income (loss)                        (1,908)          (1,052)          (1,919)               213
Net earnings (loss)                            (2,000)          (1,150)          (2,233)                50
Basic earnings (loss) per common share          (0.11)           (0.06)           (0.13)                --
Diluted earnings (loss) per common share        (0.11)           (0.06)           (0.13)                --
</TABLE>


                                      F-18





<PAGE>


                 COVISTA COMMUNICATIONS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
              FOR THE YEARS ENDED JANUARY 31, 2005, 2004 AND 2003

15. RELATED PARTY TRANSACTIONS

         Jay J. Miller, a Director of Covista, has provided various legal
services for Covista. In Fiscal 2005, Covista paid approximately $118,000 to
Mr., Miller for services rendered and accrued for in Fiscal 2004 and 2005. As of
January 31, 2005, Covista owed Mr. Miller approximately $8,000.

         On June 17, 2002, Covista entered into a term loan agreement with a
major bank. The initial principal amount of this note was $3,775,000, payable in
36 monthly installments at a fixed interest rate of 4.495% for the first year
and converting to 2% over LIBOR on June 17, 2003 and thereafter or 3.1%.
Effective June 17, 2003, Covista's Chairman of the Board paid the bank in full
and assumed the remaining balance of this loan under the identical terms and
conditions. This note is secured by certain of the Company's switching
equipment. The balance on this facility was $573,017 at January 31, 2005, which
is classified as current.

16. INSURANCE SETTLEMENT

         During the quarter ended January 31, 2004, the Company settled an
insurance claim related to losses stemming from the September 11, 2001 terrorist
attacks. Gross proceeds from this final settlement were $3.25 million. The
Company has recognized this settlement, net of $575,000 of expenses, as income
from continuing operations by reducing selling, general and administrative
expenses during the quarter.

17. PAETEC TRANSACTION

         On May 25, 2004, the Company signed a definitive agreement to sell
certain of its retail customers, and the related switches and facilities to
PAETEC Communications, Inc., a Fairport, New York based competitive local
exchange carrier, ("PAETEC") for an aggregate selling price of $14.6 million
(the "Transaction"). This Transaction was consummated in two phases. Phase one
of the transaction was consummated on August 17, 2004, whereby the Company sold
to PAETEC the net assets and relationships serving these retail long distance
customers, which represented approximately 92.5% of the aggregate purchase
price. Phase two of this transaction was consummated on January 31, 2005,
whereby the Company sold to PAETEC the net assets and relationships of these
retail local customers, which represented approximately 7.5% of the aggregate
purchase price.

         Contemporaneously with this transaction, Covista executed an agreement
to purchase $12 million of services from PAETEC over 24 months (the "wholesale
service agreement"). This Wholesale Service Agreement allows the Company to
procure services at market competitive rates and the Company anticipates that it
should fully utilize the commitment during the term. If the Company does not
utilize the full amount within the first 24 months of the agreement, the Company
would then have a commitment to PAETEC equal to 150% of the unused portion at
the end of the 24 month term.

         The Company received aggregate cash proceeds for this transaction of
approximately $12.7 million through January 31, 2005. The balance due with
respect to the total selling price is approximately $1.9 million and is subject
to adjustment based performance of the customer base through May 2005.
Accordingly, the Company has not recognized the remaining $1.9 million due from
PAETEC because collectibility of the remaining amount was not probable as of
January 31, 2005.

         The long-lived, tangible assets sold in the transaction had a carrying
value of approximately $3.9 million and were primarily comprised of switches and
network equipment. In addition, the Company wrote-off intangible assets of
purchased customer and agent relationships with a carrying value of
approximately $1.5 million and goodwill with a carrying value of approximately
$8 million as a part of this transaction. The cash proceeds received of $12.7
million prior to year end, net of the long-lived disposed, and intangible assets
and goodwill written-off resulted in a net loss to the Company of approximately
$700,000 and has been classified as loss on disposal of assets in the
accompanying consolidated statement of operations for the year ended January 31,
2005.

         In addition, a portion of the final amount collected from PAETEC will
be used by the Company to repurchase shares of the Company's outstanding common
stock from the former Chief Operating Officer of the Company. Regardless of the
amount of final payment collected from PAETEC, the Company will be obligated to
purchase a minimum of $250,000 worth of common stock from this former employee
at $2.00 per share. Any repurchased shares will be recorded by the Company at
cost as treasury stock when such repurchase is consummated.

         PAETEC has hired the majority of the Company's employees responsible
for servicing the associated customers and has assumed leases for existing
switch facilities in New York and Philadelphia as well as office locations in
Bensalem, PA and Paramus, NJ. The Company incurred approximately $376,000 of
restructuring charges related to employee severance and other costs associated
with the consolidation of back office functions and other management
initiatives. These amounts have been paid as of January 31, 2005.


                                      F-19





<PAGE>


                 COVISTA COMMUNICATIONS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
              FOR THE YEARS ENDED JANUARY 31, 2005, 2004 AND 2003

Schedule II - Valuation and Qualifying Accounts (Consolidated)

<TABLE>
<CAPTION>
                                                               Charged
                                               Balance at   (Credited) to
                                               Beginning      Cost and                    Balance at End
                                               of Period       Expenses     Deductions       of Period
                                              -----------   -------------   ----------    --------------
<S>                                           <C>             <C>           <C>             <C>
YEAR ENDED JANUARY 31, 2005

Reserves and allowances deducted from asset
accounts:
   Allowance for uncollectible accounts       $ 1,350,001     $1,340,243    $1,538,899      $ 1,151,345
   Valuation reserve on deferred tax asset    $11,428,754     $       --    $5,808,957      $ 5,619,797

YEAR ENDED JANUARY 31, 2004

Reserves and allowances deducted from asset
accounts:                                     $ 5,569,160     $1,503,600    $5,722,759      $ 1,350,001
   Allowance for uncollectible accounts
   Valuation reserve on deferred tax asset    $11,429,160     $       --    $      406      $11,428,754

YEAR ENDED JANUARY 31, 2003

Reserves and allowances deducted from asset
accounts:                                     $ 4,987,130     $2,754,712    $2,172,682(A)   $ 5,569,160
   Allowance for uncollectible accounts
   Valuation reserve on deferred tax asset    $11,938,149     $       --    $  508,989      $11,429,160
</TABLE>

(A) Represents write-off of accounts receivable against the allowance.


                                      F-20