<PAGE>
================================================================================


                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-Q

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

               FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999.

                        Commission file number: 000-25271

                        COVAD COMMUNICATIONS GROUP, INC.
             (Exact name of registrant as specified in its charter)


                 DELAWARE                                 77-0461529
      (State or other jurisdiction                    (I.R.S. Employer
    of incorporation or organization)               Identification Number)



          2330 CENTRAL EXPRESSWAY                            95050
          SANTA CLARA, CALIFORNIA
   (Address of principal executive offices)                (Zip Code)

                                  (408) 844-7500
               (Registrant's telephone number, including area code)

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

     As of November 9, 1999,  96,573,005 shares of the Registrants Common Stock,
$0.001 par value, were issued and outstanding.


================================================================================
<PAGE>
                         COVAD COMMUNICATIONS GROUP, INC.
                                      INDEX
<TABLE>
<CAPTION>


                                                                        PAGE NO.

<S>                                                                        <C>
PART I.     FINANCIAL INFORMATION

  Item 1.  Consolidated Financial Statements (Unaudited)
             Consolidated Balance Sheets as of September 30, 1999 and
               December 31, 1998 and ........................................  3
             Consolidated  Statements of Operations  for the Three and Nine
               Months Ended September 30, 1999 and 1998......................  4
             Condensed  Consolidated  Statements of Cash Flows for the Nine
               Months Ended September 30, 1999 and 1998......................  5
             Notes to Consolidated Financial Statements......................  6
  Item 2.  Management's Discussion and Analysis of Financial Condition and
             Results of Operations...........................................  9

PART II.    OTHER INFORMATION

  Item 1.   Legal Proceedings................................................ 16
  Item 2.   Changes in Securities............................................ 17
  Item 6.   Exhibits and Reports on Form 8-K................................. 17

SIGNATURES................................................................... 18

INDEX TO EXHIBITS............................................................ 19
</TABLE>









                                       2
<PAGE>

PART I.  FINANCIAL INFORMATION

ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS

                        COVAD COMMUNICATIONS GROUP, INC.

                           CONSOLIDATED BALANCE SHEETS
             (AMOUNTS IN 000'S, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>

                                                          SEPTEMBER 30,     DECEMBER 31,
                                                              1999             1998
                                                          (UNAUDITED)        (NOTE 1)
                                                         -------------     ------------

                            ASSETS

<S>                                                         <C>           <C>
CURRENT ASSETS:
Cash and cash equivalents ...............................    $ 181,803     $  64,450
Accounts receivable, net ................................       10,996         1,933
Short term investments ..................................       36,698            --
Unbilled revenue ........................................        3,935           663
Inventories .............................................        7,753           946
Prepaid expenses ........................................        4,924         1,183
Other current assets ....................................        2,138           514
                                                             ---------     ---------
    Total current assets ................................      248,247        69,689
PROPERTY AND EQUIPMENT:
Networks and communication equipment ....................      187,321        55,189
Computer equipment ......................................       15,616         4,426
Furniture and fixtures ..................................        2,206         1,119
Leasehold improvements ..................................        3,085         1,887
                                                             ---------     ---------
                                                               208,228        62,621
Less accumulated depreciation and amortization ..........      (20,852)       (3,476)
                                                             ---------     ---------
    Net property and equipment ..........................      187,376        59,145
OTHER ASSETS:
Restricted investments ..................................       63,473           225
Deposits ................................................          692           337
Deferred debt issuance costs (net) ......................       12,693         8,112
Deferred charge (net) ...................................       22,622            --
Other long term assets ..................................        8,687         1,911
                                                             ---------     ---------
    Total other assets ..................................      108,167        10,585
                                                             ---------     ---------
    Total assets ........................................    $ 543,790     $ 139,419
                                                             =========     =========

         LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)

CURRENT LIABILITIES:
Accounts payable ........................................    $  36,880     $  14,975
Unearned revenue ........................................        3,195           551
Accrued network costs ...................................        8,895         1,866
Other accrued liabilities ...............................       13,691         3,854
Current portion of capital lease obligations ............          294           263
                                                             ---------     ---------
    Total current liabilities ...........................       62,955        21,509

Long-term debt (net of discount) ........................      368,922       142,300
Long-term capital lease obligations .....................           88           316
                                                             ---------     ---------
    Total liabilities ...................................      431,965       164,125
STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY):
Convertible preferred stock ($0.001 par value):
  Authorized shares--0 at September 30, 1999 and
  30,000,000 at December 31, 1998,
  Issued and outstanding shares--0 at September 30, 1999
  and 18,246,162 at December 31, 1998 ...................           --            18
Preferred stock ($0.001 par value):
  Authorized shares--5,000,000 at September 30, 1999 and
  0 at December 31, 1998,
  Issued and outstanding shares--0 at September 30, 1999
  and 0 at December 31, 1998 ............................           --            --
Common stock ($0.001 par value):
  Authorized shares--190,000,000 at September 30, 1999
  and 65,000,000 at December 31, 1998,
  Issued and outstanding shares--72,919,240 at September
  30, 1999 and 17,660,995 at December 31,1998 ...........           73            18
Common stock--Class B ($0.001 par value):
  Authorized shares--10,000,000 September 30, 1999 and 0
  at December 31, 1998,
  Issued and outstanding shares--6,379,177 at September
  30, 1999 and 0 at December 31, 1998 ...................            6            --
Additional paid-in capital ..............................      274,092        30,679
Deferred compensation ...................................       (3,450)       (4,688)
Accumulated other comprehensive income ..................       16,698            --
Accumulated deficit......................................     (175,594)      (50,733)
                                                             ---------     ---------
  Total stockholders' equity (net capital deficiency) ...      111,825       (24,706)
                                                             ---------     ---------
  Total liabilities and stockholders' equity (net capital
    deficiency)..........................................    $ 543,790     $ 139,419
                                                             =========     =========
</TABLE>


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


                                       3
<PAGE>



                        COVAD COMMUNICATIONS GROUP, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS
             (AMOUNTS IN 000'S, EXCEPT SHARE AND PER SHARE AMOUNTS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                   THREE MONTHS ENDED              NINE MONTHS ENDED
                                                      SEPTEMBER 30,                  SEPTEMBER 30,
                                                 ----------------------          ---------------------
                                                  1999          1998              1999          1998
                                                  ----          ----              ----          ----
<S>                                          <C>            <C>            <C>            <C>
Revenues ................................   $     19,141    $      1,565    $     35,570    $      2,560
Operating expenses:
    Network and product costs ...........         16,694           1,355          32,219           2,316
    Sales, marketing, general and
       administrative ...................         37,697          10,681          80,786          17,231
    Amortization of deferred compensation          1,008           1,837           3,895           2,695
    Depreciation and amortization .......         10,593             738          23,911           1,348
                                            ------------    ------------    ------------    ------------
       Total operating expenses .........         65,992          14,611         140,811          23,590
                                            ------------    ------------    ------------    ------------
Income (loss) from operations ...........        (46,851)        (13,046)       (105,241)        (21,030)
Interest income (expense):
    Interest income .....................          4,770           1,526          12,864           3,673
    Interest expense ....................        (12,024)         (5,037)        (32,484)        (10,904)
                                            ------------    ------------    ------------    ------------
    Net interest income (expense) .......         (7,254)         (3,511)        (19,620)         (7,231)
                                            ------------    ------------    ------------    ------------
 Net income (loss) ......................   $    (54,105)   $    (16,557)   $   (124,861)   $    (28,261)
                                            ------------    ------------    ------------    ------------
Preferred dividends .....................             --              --          (1,146)             --
                                            ------------    ------------    ------------    ------------
Net income (loss) available to common
  shareholders ..........................   $    (54,105)   $    (16,557)   $   (126,007)   $    (28,261)
                                            ============    ============    ============    ============
Basic and diluted net income (loss)
  per common share ......................   $      (0.70)   $      (1.84)   $      (1.90)   $      (3.51)

Weighted average shares used in computing
basic and diluted net loss per share ....     77,082,969       9,017,415      66,368,810       8,062,386


</TABLE>



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


                                      4
<PAGE>

                        COVAD COMMUNICATIONS GROUP, INC.

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                               (AMOUNTS IN 000'S)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                         NINE MONTHS ENDED
                                                                           SEPTEMBER 30,
                                                                        -----------------
                                                                          1999      1998
                                                                          -----     -----
<S>                                                                  <C>          <C>

NET CASH USED IN OPERATING ACTIVITIES ............................   $ (65,721)   $  (4,196)

INVESTING ACTIVITIES:
Purchase of restricted investments ...............................     (74,353)         (23)
Redemption of restricted investments .............................      13,214           --
Purchase of investments ..........................................     (20,000)          --
Deposits .........................................................        (355)        (251)
Other long-term assets ...........................................      (6,776)        (887)
Purchase of property and equipment ...............................    (145,607)     (32,303)
                                                                     ---------    ---------
Net cash used in investing activities ............................    (233,877)     (33,464)

FINANCING ACTIVITIES:
Net proceeds from issuance of long-term debt and warrants ........          --      129,328
Net proceeds from issuance of long-term debt .....................     205,049           --
Principal payments under capital lease obligations ...............        (197)        (183)
Proceeds from common stock issuance, net of offering costs             152,176           13
Proceeds from preferred stock issuance ...........................      60,000        1,200
Preferred dividends ..............................................         (77)          --
                                                                       -------      -------
Net cash provided by financing activities ........................     416,951      130,358
                                                                       -------      -------
Net increase in cash and cash equivalents ........................     117,353       92,698
Cash and cash equivalents at beginning of period .................      64,450        4,378
                                                                        ------        -----
Cash and cash equivalents at end of period .......................   $ 181,803    $  97,076
                                                                     =========    =========
Supplemental disclosures of cash flow information:
    Interest paid ................................................   $  13,257    $      78
Supplemental schedule of non-cash investing and financing
  activities:
    Equipment purchased through capital leases ...................   $    --      $      34
Warrants issued for equity commitment ............................   $    --      $   2,928
    Common stock issued for preferred dividends ..................   $   1,069           --
                                                                     =========    =========
</TABLE>




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


                                      5
<PAGE>

                        COVAD COMMUNICATIONS GROUP, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                   (UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    A. BASIS OF PRESENTATION

     The  preparation  of financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions that affect the amounts reported in the financial statements. Actual
results may differ from those estimates.  The consolidated  financial statements
of the Company  include the  accounts of all of its  wholly-owned  subsidiaries.
There were no intercompany accounts and transactions which required elimination.

     The  consolidated  financial  statements  at September 30, 1999 and for the
three and nine month  periods ended  September 30, 1999 and 1998 are  unaudited,
but include all adjustments  (consisting only of normal  recurring  adjustments)
that the  Company  considers  necessary  for a fair  presentation  of  financial
position and operating  results.  Operating results for the three and nine month
periods  ended  September  30, 1999 and 1998 are not  necessarily  indicative of
results that may be expected for any future periods.

     The  consolidated  balance sheet at December 31, 1998 has been derived from
the audited consolidated  financial statements at that date but does not include
all of the information and footnotes required by generally  accepted  accounting
principles for complete financial statements.

     The information  included in this report should be read in conjunction with
the  Company's  audited  consolidated  financial  statements  and notes  thereto
included in the Company's 1998 Annual Report on Form 10-K.

    B. EARNINGS (LOSS) PER SHARE

     Basic earnings per share is computed by dividing  income or loss applicable
to common shareholders by the weighted average number of shares of the Company's
common stock ("Common Stock"),  after giving  consideration to shares subject to
repurchase, outstanding during the period.

     Diluted  earnings  per  share is  determined  in the same  manner  as basic
earnings  per share  except  that the  number of  shares is  increased  assuming
exercise of dilutive  stock options and warrants using the treasury stock method
and conversion of the Company's convertible preferred stock ("Preferred Stock").
In addition,  income or loss is adjusted for  dividends  and other  transactions
relating  to  preferred  shares for which  conversion  is  assumed.  The diluted
earnings  per share amount has not been  reported  because the Company has a net
loss and the impact of the assumed  exercise of the stock  options and  warrants
and the assumed preferred stock conversion is not dilutive.

     Under the Company's Certificate of Incorporation, all outstanding Preferred
Stock converted into Common Stock on a one-for-one  basis upon the completion of
the Company's initial public offering of Common Stock (see note 5).

     The consolidated  financial statements applicable to the prior periods have
been  restated  to reflect a  two-for-one  stock  split  effective  May 1998,  a
three-for-two stock split effective August 1998, and a three-for-two stock split
effective May 1999.


                                       6
<PAGE>

     The  following  table  presents  the  calculation  of basic and diluted net
income (loss) per share (in thousands, except share and per share amounts):
<TABLE>
<CAPTION>

                                                                  THREE MONTHS ENDED           NINE MONTHS ENDED
                                                                     SEPTEMBER 30,               SEPTEMBER 30,
                                                                ---------------------------------------------------
                                                                  1999            1998        1999           1998
                                                                ---------------------------------------------------
<S>                                                       <C>             <C>                <C>            <C>

Net loss ...............................................   $    (54,105)   $    (16,557)     $  (124,861)  $  (28,261)
  Preferred dividends ..................................             --              --           (1,146)         --
                                                           ------------    ------------      -----------   ----------
Net loss available to common stockholders ..............   $    (54,105)   $    (16,557)     $  (126,007)  $  (28,261)
Basic and diluted:
  Weighted average shares of common stock
    outstanding ........................................     81,835,344      17,383,540       72,020,379   17,169,006
    Less: Weighted average shares subject
    to repurchase ......................................      4,752,375       8,366,125        5,651,569    9,106,620
                                                           ------------    ------------      -----------   ----------
Weighted average shares used in computing
basic and diluted net income (loss) per share ..........     77,082,969       9,017,415       66,368,810    8,062,386

Basic and diluted net income (loss) per share ..........   $      (0.70)   $      (1.84)     $     (1.90)  $   (3.51)

</TABLE>


2.   COMPREHENSIVE INCOME

    Comprehensive  income for the three and nine months ended September 30, 1999
and 1998 was as follows (in thousands):

<TABLE>
<CAPTION>

                                                                   THREE MONTHS ENDED             NINE MONTHS ENDED
                                                                     SEPTEMBER 30,                  SEPTEMBER 30,
                                                                 ---------------------------------------------------
                                                                    1999            1998         1999        1998
                                                                 ---------------------------------------------------
<S>                                                            <C>              <C>            <C>         <C>
Net loss...............................................         $(54,105)        $(16,557)     $(124,861)   $(28,261)
   Unrealized holding gains (losses) ..................           (8,940)              --         16,698          --
                                                                --------         --------      ---------    --------
Comprehensive income ..................................         $(63,045)        $(16,557)     $(108,163)   $(28,261)

</TABLE>


3.   SHORT-TERM INVESTMENTS

    Short-term  investments at September 30, 1999 consisted of the following (in
thousands):

Equity position in WebMD, Inc. ........................          $     15,000
Equity position in Efficient Networks, Inc. ...........                 5,000
Unrealized holding gains (losses) .....................                16,698
                                                                 ------------
                                                                 $     36,698

    The costs of these investments are reflected on the balance sheet along with
their  related  unrealized  holding  gain or loss in order to  approximate  fair
market value.

4.   DEBT

     On February 18,  1999,  the Company  completed a private  placement of $215
million  aggregate  principal  amount of the Company's 12 1/2% senior notes (the
"1999 Notes") due 2009. The 1999 Notes are unsecured senior

                                       7
<PAGE>

obligations  of the Company  maturing on February 15, 2009 and are redeemable at
the option of the Company any time after February 14, 2004 at stated  redemption
prices plus accrued and unpaid interest theron.

     Net proceeds from the 1999 Notes were approximately  $205.1 million,  after
discounts,  commissions  and  other  transaction  costs  of  approximately  $9.9
million.  The discount and debt issuance costs are being amortized over the life
of  the  1999  Notes.  For  the  nine  months  ended  September  30,  1999,  the
amortization of debt discount and debt issuance costs was $277,000 and $316,000,
respectively.

    Concurrently with the closing of the offering,  approximately  $74.1 million
of the net  proceeds  was used to purchase  government  securities  representing
sufficient  funds to pay the first six scheduled  interest  payments on the 1999
Notes.  This  reserve,  along with earned  interest,  is recorded as  restricted
investments on the accompanying balance sheet.

    On June 1, 1999, the Company  completed an offer to exchange all outstanding
12 1/2% Senior Notes due February 15, 2009 for 12 1/2% Senior Notes due February
15, 2009, which have been registered under the Securities Act of 1933.

5.   STOCKHOLDERS' EQUITY

COVAD COMMUNICATIONS GROUP, INC.

   STRATEGIC INVESTMENT:

    In January 1999, the Company entered into strategic  relationships with AT&T
Corp.   ("AT&T"),   NEXTLINK   Communications,   Inc.   ("NEXTLINK")  and  Qwest
Communications  Corporation ("Qwest"). As part of these strategic relationships,
the Company received equity investments totaling  approximately $60 million. The
Company  recorded  intangible  assets of $28.7  million  associated  with  these
transactions which will be amortized over periods of three to six years.

    INITIAL PUBLIC OFFERING:

    On  January  27,  1999,   the  Company   completed  the  IPO  of  13,455,000
split-adjusted shares of the Company's common stock at a split-adjusted price of
$12.00 per share.  Net proceeds to the Company from the IPO were $150.2  million
after deducting  underwriting  discounts and commissions and estimated  offering
expenses  payable  by  the  Company.   As  a  result  of  the  IPO,   27,369,243
split-adjusted  shares of Common  Stock and  6,379,177  shares of Class B Common
Stock (which are  convertible  into  9,568,765  split-adjusted  shares of Common
Stock) were issued upon the conversion of Preferred Stock, 89,058 split-adjusted
shares of Common Stock were issued for cumulative but unpaid dividends on series
A and series B Preferred  Stock and  2,699,626  split-adjusted  shares of Common
Stock were issued upon the exercise of common warrants.

    SECONDARY OFFERING:

     On June 23,  1999,  the Company  completed a public  offering of  8,625,000
shares of Common Stock sold by certain  stockholders of the Company. The Company
did not  sell  any  shares  in this  offering.  Accordingly,  there  were no net
proceeds to the  Company  from this  offering.  The  Company  incurred  offering
expenses of approximately $600,000.

     On November 3, 1999 the Company  completed a public  offering of 14,950,000
shares of common  stock sold by the  Company  and  certain  stockholders  of the
Company.  The net proceeds to the Company from this offering are estimated to be
approximately  $568.8  million  after  deducting   underwriting   discounts  and
commissions and estimated offering expenses.


                                       8
<PAGE>

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

      THE  FOLLOWING  DISCUSSION  OF THE  FINANCIAL  CONDITION  AND  RESULTS  OF
OPERATIONS OF THE COMPANY  SHOULD BE READ IN CONJUNCTION  WITH THE  CONSOLIDATED
FINANCIAL  STATEMENTS AND THE RELATED NOTES THERETO  INCLUDED  ELSEWHERE IN THIS
FORM 10-Q AND THE CONSOLIDATED  AUDITED  FINANCIAL  STATEMENTS AND NOTES THERETO
AND MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF
OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 INCLUDED IN THE COMPANY'S ANNUAL
REPORT ON FORM 10-K. THIS  DISCUSSION  CONTAINS  FORWARD-LOOKING  STATEMENTS THE
ACCURACY OF WHICH  INVOLVES  RISKS AND  UNCERTAINTIES.  OUR ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THE  FORWARD-LOOKING  STATEMENTS FOR
MANY REASONS  INCLUDING,  BUT NOT LIMITED TO, THOSE DISCUSSED  HEREIN AND IN OUR
REGISTRATION  STATEMENT  ON FORM S-1 (SEC FILE NO.  333-88757).  WE DISCLAIM ANY
OBLIGATION TO UPDATE INFORMATION  CONTAINED IN ANY FORWARD-LOOKING  STATEMENT OR
IN THE REASONS WHY SUCH  FORWARD-LOOKING  STATEMENTS MAY DIFFER  MATERIALLY FROM
ACTUAL  RESULTS,  WHICH  REASONS SPEAK AS OF THEIR DATES.  SEE "FORWARD  LOOKING
STATEMENTS"

OVERVIEW

     We are a leading provider of broadband  communications services to Internet
service provider,  enterprise and  telecommunications  carrier customers.  Since
March 1998, we have raised $569.0 million of gross proceeds from debt and equity
financings to fund the deployment and expansion of our networks. As of September
30, we offered our services in 51  metropolitan  statistical  areas.  We plan to
build  our  networks  and  offer  our  services  in a total of 100  metropolitan
statistical areas  nationwide.  As of September 30, 1999, our networks passed 25
million homes and businesses, and we had installed 31,000 end-user lines.

      In connection with our expansion within existing metropolitan  statistical
areas and into new  metropolitan  statistical  areas, we expect to significantly
increase  our  capital  expenditures,   as  well  as  our  sales  and  marketing
expenditures,  to deploy our networks and support additional  end-users in those
regions.  Accordingly,  we expect to incur substantial and increasing net losses
for at least the next several years.

     We derive revenue from monthly  recurring  service  charges for connections
from  the  end-user  to our  facilities  and  for  backhaul  services  from  our
facilities  to the  customer;  service  order  set-up  and  other  non-recurring
charges;  and the sale of  customer  premise  equipment  that we  provide to our
customers  due to the  general  unavailability  of  customer  premise  equipment
through retail channels.

      We  expect  prices  for  the  major   components  of  both  recurring  and
non-recurring  revenues  to  decrease  each year in part due to the  effects  of
competitive  pricing and future volume  discounts.  We believe our revenues from
the sale of customer  premise  equipment  will decline over time,  as prices for
such equipment  decrease and customer premise  equipment  becomes more generally
available. We expect that the prices we charge to customers for customer premise
equipment will decrease each year.

     The  following  factors  comprise  our network and service  costs:  Monthly
non-recurring  and  recurring  circuit  fees  -  we  pay  traditional  telephone
companies and other competitive  telecommunications  companies non-recurring and
recurring fees for services  including  installation,  activation,  monthly line
costs,  maintenance  and  repair of  circuits  between  and  among  our  digital
subscriber  line access  multiplexers  and our regional data  centers,  customer
backhaul,  and end-user  lines.  As our end-user base grows,  we expect that the
largest  element of network and product cost will be the  traditional  telephone
companies'  charge for our leased copper wires;  and

     Other  costs - Other costs that we incur  include  those for  materials  in
installation  and the  servicing of  customers  and  end-users,  and the cost of
customer premise equipment.


                                       9
<PAGE>

      The  development  and expansion of our business  will require  significant
expenditures.  The principal  capital  expenditures  incurred during the buildup
phase of any metropolitan  statistical area involve the procurement,  design and
construction  of  our  central  office  cages,  end-user  DSL  line  cards,  and
expenditures  for other elements of our network design.  Currently,  the average
cost to deploy our  facilities  in a central  office,  excluding  end-user  line
cards, is approximately $85,000 per central office facility.  This cost may vary
in the future due to the quantity and type of equipment we initially deploy in a
central  office  facility  as  well as  regulatory  limitations  imposed  on the
traditional  phone  companies  relative  to  pricing of  central  office  space,
including cageless physical  collocation.  Following the buildout of our central
office space,  the major portion of our capital  expenditures is the purchase of
line cards to support incremental end-users.  We expect that the average cost of
such line cards will decline over the next several years.  Network  expenditures
will  continue  to  increase  with the  number of  end-users.  However,  once an
operating  region is fully built out, a  substantial  majority  of the  regional
capital  expenditures will be tied to incremental  customer and end-user growth.
In addition to developing  our  networks,  we will use our capital for marketing
our   services,   acquiring   Internet   service   provider,   enterprise,   and
telecommunication  carrier  customers,  and funding our customer  care and field
service operations.

      In  connection  with  rolling  out  service  on a  national  basis we have
commenced a branding  campaign to  differentiate  our service  offerings  in the
marketplace.  As a result,  we expect our  selling,  general and  administrative
expenses to increase  significantly in future periods as we implement  increased
marketing efforts as part of the campaign.

RECENT DEVELOPMENTS

     On November 3, 1999, we completed a public offering of 14,950,000 shares of
common  stock at a price of $43.00  per share,  13,655,000  shares of which were
sold by the Company and the remaining  1,295,000 shares by certain  stockholders
of  the  Company.  We  received  proceeds  of  $568.8  million  after  deducting
underwriting commissions and expenses.

RESULTS OF OPERATIONS

   REVENUES

      We recorded revenues of $19.1 million for the three months ended September
30, 1999 compared to $1.6 million for the three months ended September 30, 1998.
Revenue was $35.6 million for the nine months ended  September 30, 1999 compared
to $2.6 million for the nine months ended  September 30, 1998.  This increase is
attributable  to growth in the number of customers and end-users  resulting from
our  increased  sales and  marketing  efforts and the  expansion of our national
network.  We expect  revenues  to  increase  in future  periods as we expand our
network within our existing regions, deploy networks in new regions and increase
our sales and marketing efforts in all of our regions.

   NETWORK AND PRODUCT COSTS

      We  recorded  network  and  product  costs of $16.7  million for the three
months  ended  September  30, 1999 and $1.4  million for the three  months ended
September,  1998.  Network  and  product  costs were $32.2  million for the nine
months  ended  September  30, 1999 and $2.3  million  for the nine months  ended
September  30,  1998.  This  increase is  attributable  to the  expansion of our
networks and increased orders resulting from our sales and marketing efforts. We
expect network and product costs to increase significantly in future periods due
to increased sales activity and expected revenue growth.

   SALES, MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES

      Sales, marketing, general and administrative expenses consist primarily of
salaries,  expenses for the  development  of our business,  the  development  of
corporate  identification,  promotional and advertising materials,  expenses for
the  establishment  of  our  management  team,  and  sales  commissions.  Sales,
marketing,  general and administrative expenses were $37.7 million for the three
months  ended  September  30, 1999 and $10.7  million for the three months ended
September 30, 1998. Sales,  marketing,  general and administrative expenses were
$80.8 million for the nine months ended September 30, 1999 and $17.2 million for
the nine months ended  September  30, 1998.


                                       10
<PAGE>

This  increase  is  attributable  to  growth  in  headcount  in all areas of our
company,  continued expansion of our sales and marketing efforts,  deployment of
our networks and building of our  operating  infrastructure.  Sales,  marketing,
general and administrative expenses are expected to increase significantly as we
continue to expand our business.

   DEFERRED COMPENSATION

     Through  September  30, 1999,  we recorded a total of  approximately  $11.6
million of deferred  compensation,  with an unamortized balance of approximately
$3.5 million on our  September 30, 1999  consolidated  balance  sheet.  Deferred
compensation is a result of us granting stock options to our employees,  certain
of our directors,  and certain  contractors with exercise prices per share below
the fair values per share for  accounting  purposes  of our common  stock at the
dates of grant.  We are  amortizing the deferred  compensation  over the vesting
period of the applicable option using the graded vesting method. Amortization of
deferred  compensation was $1.0 million for the three months ended September 30,
1999  and  $1.8  million  for  the  three  months  ended   September  30,  1998.
Amortization of deferred compensation was $3.9 million for the nine months ended
September  30, 1999 and $2.7  million for the nine months  ended  September  30,
1998.

   DEPRECIATION AND AMORTIZATION

     Depreciation  and amortization  includes  depreciation of network costs and
related equipment;  depreciation of information systems, furniture and fixtures;
amortization  of  improvements  to central  offices,  regional  data centers and
network operations center facilities and corporate  facilities;  amortization of
capitalized software costs; and amortization of intangible assets.

     In January  1999, we recorded  intangible  assets of $28.7 million from the
issuance of preferred stock to AT&T Ventures,  NEXTLINK and Qwest.  Amortization
of these  assets was $2.1  million  and $6.1  million  during the three and nine
months ended September 30, 1999,  respectively,  and is included in depreciation
amortization on the accompanying  consolidated  statement of operations.  Annual
amortization of these assets will be  approximately  $8.4 million in each of the
years  in the  three  year  period  ending  December  31,  2001,  decreasing  to
approximately  $1.2 million per year for each  subsequent  year through the year
ending December 31, 2004.

      Depreciation  and  amortization  was  approximately  $10.6 million for the
three  months ended  September  30, 1999 and $738,000 for the three months ended
September  30, 1998.  Depreciation  and  amortization  was  approximately  $23.9
million for the nine months  ended  September  30, 1999 and $1.3 million for the
nine months ended  September 30, 1998.  This increase was due to the increase in
equipment  and  facilities  placed in service  throughout  the period as well as
amortization of intangible  assets.  We expect  depreciation and amortization to
increase  significantly  as we increase our capital  expenditures  to expand our
networks.

   NET INTEREST INCOME AND EXPENSE

      Net interest income and expense  consists  primarily of interest income on
our cash balance and interest  expense  associated  with our debt.  Net interest
expense for the three and nine months ended September 30, 1999, was $7.3 million
and $19.6  million,  respectively.  Net interest  expense  during these  periods
consisted primarily of interest expense on the 1998 notes and the 1999 notes and
capital lease  obligations  partially offset by interest income earned primarily
from the  investment of the proceeds  raised from the issuance of the 1998 notes
and the 1999 notes as well as our initial  public  offering  and our issuance of
preferred stock to AT&T Ventures,  NEXTLINK and Qwest.  Net interest expense for
the three and nine months ended  September  30, 1998,  was $3.5 million and $7.2
million,  respectively.  Net interest  expense  during these  periods  consisted
primarily of interest  expense on the 1998 notes and capital lease  obligations,
partially  offset by interest income earned primarily from the investment of the
proceeds raised from the issuance of the 1998 notes. We expect interest  expense
to increase significantly over time, primarily because the 1998 notes accrete to
$260 million by March 15, 2003.


                                      11
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

      Our  operations  have  required  substantial  capital  investment  for the
procurement,  design and  construction of our central office cages, the purchase
of telecommunications  equipment and the design and development of our networks.
capital expenditures were approximately $145.6 million for the nine months ended
September   30,  1999.  We  expect  that  our  capital   expenditures   will  be
substantially  higher in future  periods  in  connection  with the  purchase  of
infrastructure  equipment  necessary  for the  development  and expansion of our
networks and the  development  of new  regions.  We have also  recently  begun a
branding  campaign to increase  recognition of our name which we expect to incur
substantial additional expenses over the next 12 months.

      From our inception  through September 30, 1999, we financed our operations
primarily  through  private  placements of $10.6  million of equity  securities,
$129.3  million in net  proceeds  raised  from the  issuance  of the 1998 notes,
$150.2 million in net proceeds  raised from our initial public  offering,  $60.0
million in net proceeds  raised from  strategic  investors and $205.1 million in
net  proceeds  raised from the issuance of the 1999 notes.  As of September  30,
1999,  we had an  accumulated  deficit  of  $175.6  million,  and  cash and cash
equivalents of $181.8 million.

      Net cash used in our operating  activities  was $65.7 million for the nine
months ended  September  30, 1999.  The net cash used for  operating  activities
during  this period was  primarily  due to net losses and  increases  in current
assets,  offset by non-cash  expenses  and  increases  in  accounts  payable and
accrued  liabilities.  Net cash  used in our  investing  activities  was  $233.9
million for the nine months  ended  September  30,  1999.  The net cash used for
investing  activities  during  this period was  primarily  due to  purchases  of
property and equipment,  the purchase of $74.1 million of restricted investments
which were  pledged as  collateral  for the  payment of the first six  scheduled
interest  payments  on the 1999  notes,  and an  aggregate  $20  million  equity
investment made in WebMD, Inc. and Efficient Networks, Inc.

     Net  cash  provided  by  financing  activities  for the nine  months  ended
September 30, 1999 was $417.0 million which primarily  related to the following:
Equity investments of $25 million from AT&T Ventures,  $20 million from NEXTLINK
and $15 million from Qwest,  representing an aggregate equity  investment of $60
million.  Net  proceeds of $150.2  million from our initial  public  offering of
13,455,000 split-adjusted shares of our common stock at a split-adjusted initial
public  offering price of $12.00 per share.  Net proceeds of $205.0 million from
the  issuance  of the 1999 notes with an  aggregate  principal  amount of $215.0
million.

      Net cash  provided by  financing  activities  was  partially  offset by an
estimated  $680,000 in offering  costs  applicable to our secondary  offering of
7,500,000 shares in June 1999 for which we received no proceeds.

     We  believe  that  our  current  cash,  cash   equivalents  and  short-term
investments,  including  the  proceeds  received  from  our  recently  completed
secondary  offering in November 1999, will be sufficient to meet our anticipated
cash needs for working capital and capital expenditures through at least the end
of 2000.

      We expect to  experience  substantial  negative  cash flow from  operating
activities and negative cash flow before  financing  activities for at least the
next  several  years due to continued  development,  commercial  deployment  and
expansion of our networks.  We may also make  investments in and acquisitions of
businesses that are complementary to ours to support the growth of our business.
Our future  cash  requirements  for  developing,  deploying  and  enhancing  our
networks and operating our business,  as well as our revenues,  will depend on a
number of factors including:


                                      12
<PAGE>

     the number of regions  entered,  the timing of entry and services  offered;
     network  development  schedules  and  associated  costs;  the rate at which
     customers  and  end-users  purchase  our  services  and the pricing of such
     services;  the level of marketing  required to acquire and retain customers
     and to attain a competitive position in the marketplace;  the rate at which
     we invest in engineering  and development  and  intellectual  property with
     respect to existing and future technology; and unanticipated opportunities.

      We will be required to raise additional capital,  the timing and amount of
which we cannot predict.  We expect to raise additional  capital through debt or
equity  financings,  depending on market  conditions,  to finance the  continued
development, commercial deployment and expansion of our networks and for funding
operating losses or to take advantage of unanticipated opportunities.  If we are
unable to obtain  required  additional  capital or are  required to obtain it on
terms  less  satisfactory  than we  desire,  we may be  required  to  delay  the
expansion of our business or take or forego  actions,  any or all of which could
harm our business.

      In addition, we may wish to selectively pursue possible acquisitions of or
investments in businesses, technologies or products complementary to ours in the
future  in order  to  expand  our  geographic  presence  and  achieve  operating
efficiencies.  We may not have  sufficient  liquidity,  or we may be  unable  to
obtain  additional  debt or equity  financing on  favorable  terms or at all, in
order to finance such an acquisition or investment.

YEAR 2000 ISSUES

      Many currently  installed computer systems and software products are coded
to accept only two-digit  entries in the date code field and cannot  distinguish
21st century dates from 20th century dates.  These date code fields will need to
distinguish  21st century dates from 20th century  dates and, as a result,  many
companies'  software and computer systems may need to be upgraded or replaced in
order to comply with such "Year 2000" requirements.

      We have reviewed our internally developed  information  technology systems
and programs and believe that our systems are Year 2000 compliant and that there
are no significant Year 2000 issues within our systems or services.  We have not
reviewed our non-information technology systems for Year 2000 issues relating to
embedded  microprocessors.  To the extent that such issues exist,  these systems
may need to be replaced or  upgraded to become Year 2000  compliant.  We believe
that our  non-information  technology  systems will not present any  significant
Year  2000  issues,  although  there  can be no  assurance  in this  regard.  In
addition,  we utilize  third-party  equipment  and software  and  interact  with
traditional telephone companies that have equipment and software that may not be
Year 2000  compliant.  Failure  of such  third-party  or  traditional  telephone
company  equipment or software to operate  properly with regard to the year 2000
and thereafter  could require us to incur  unanticipated  expenses to remedy any
problems, which could have a material adverse effect on our business, prospects,
operating results and financial condition.

      Furthermore,  the purchasing patterns of our Internet service provider and
enterprise  customers  may be affected by Year 2000 issues as  companies  expend
significant resources to correct their current systems for Year 2000 compliance.
These expenditures may result in reduced funds available for our services, which
could have a  material  adverse  effect on our  business,  prospects,  operating
results and financial condition.

      We are  currently  assessing  the  Year  2000  risks  associated  with our
third-party or traditional  telephone  company equipment or software or with our
Internet service provider and enterprise customers.  We are evaluating the risks
associated with the reasonably likely worst case scenario,  but we have not made
any contingency plans to address such risks. However, we intend to devise a Year
2000 contingency plan prior to December 31, 1999.


                                      13
<PAGE>

FORWARD LOOKING STATEMENTS

     The statements  contained in this report that are not historical  facts are
"forward-looking  statements"  (as such term is defined  in  Section  27A of the
Securities Act of 1933 and section 21E of the Securities  Exchange Act of 1934),
which  can be  identified  by the  use of  forward-looking  terminology  such as
"estimates," "projects," "anticipates," "expects," "intends," "believes," or the
negative thereof or other variations  thereon or comparable  terminology,  or by
discussions of strategy that involve risks and  uncertainties.  Examples of such
forward-looking statements include:

          our plans to expand our  existing  networks or to commence  service in
          new MSA's;  estimates regarding the timing of launching our service in
          new MSA's  expectations  as to pricing for our services in the future;
          the  possibility  that we may  obtain  significantly  increased  sales
          volumes;  the impact of our  national  advertising  campaign  on brand
          recognition and operating  results;  the estimates of future operating
          results;  our anticipated capital  expenditures;  and other statements
          contained in this report  regarding  matters  that are not  historical
          facts.

     These  statements are only  estimates or  predictions  and cannot be relied
upon. We can give you no assurance that future results will be achieved.  Actual
events or results may differ materially as a result of risks facing us or actual
results  differing from the assumptions  underlying such statements.  Such risks
and  assumptions  that could cause actual  results to vary  materially  from the
future  results  indicated,   expressed  or  implied  in  such   forward-looking
statements include our ability to:  successfully  market our services to current
and new customers;  generate  customer demand for our services in the particular
regions  where we plan to market  services;  achieve  favorable  pricing for our
services;  respond to increasing  competition;  manage growth of our operations;
and access regions and negotiate  suitable  interconnection  agreements with the
traditional phone companies,  all in a timely manner, at reasonable costs and on
satisfactory  terms and conditions  consistent with regulatory,  legislative and
judicial developments.

     All written and oral  forward-looking  statements  made in connection  with
this report  which are  attributable  to us or persons  acting on our behalf are
expressly qualified in their entirety by the "Risk Factors" and other cautionary
statements  included in our registration  statement on Form S-3 (Commission File
No. 333-88757).  We disclaim any obligation to update  information  contained in
any forward-looking statement.


                                      14
<PAGE>

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Our exposure to financial market risk,  including changes in interest rates
and  marketable  equity  security  prices,  relates  primarily to our investment
portfolio  and  outstanding  debt  obligations.  We  typically do not attempt to
reduce or eliminate our market exposure on our investment  securities  because a
substantial   majority  of  our  investments   are  in  fixed-rate,   short-term
securities.  We do not have any  derivative  instruments.  The fair value of our
investments  portfolio or related income would not be significantly  impacted by
either a 100 basis point  increase  or decrease in interest  rates due mainly to
the fixed-rate,  short-term nature of the substantial majority of our investment
portfolio.  In addition,  substantially  all of our outstanding  indebtedness at
September 30, 1999  including  our 1998 notes and our 1999 notes,  is fixed-rate
debt.


















                                      15
<PAGE>

                          COVAD COMMUNICATIONS GROUP, INC.

PART II.   OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

      We are engaged in a variety of  negotiations,  arbitrations and regulatory
and court  proceedings  with multiple  traditional  telephone  companies.  These
negotiations,  arbitrations  and proceedings  concern the traditional  telephone
companies'  denial of physical  central  office  space to us in certain  central
offices,  the cost and  delivery  of central  office  spaces,  the  delivery  of
transmission   facilities  and  telephone   lines,   billing  issues  and  other
operational  issues.  For  example,  we are  currently  involved  in  commercial
arbitration  proceedings with Pacific Bell over these issues. We have also filed
a lawsuit against Pacific Bell and its affiliates,  including  Southwestern Bell
Telephone  Company,  in federal  court.  We are  pursuing a variety of contract,
tort,  antitrust and other claims, such as violations of the  Telecommunications
Act, in these  proceedings.  In November  1998,  we prevailed in our  commercial
arbitration  proceeding  against Pacific Bell. The arbitration  panel found that
Pacific Bell breached its interconnection agreement with us and failed to act in
good faith on multiple counts.  The arbitration panel ruled in favor of awarding
us direct  damages,  as well as  attorneys'  fees and costs of the  arbitration.
Pacific Bell is currently  attempting to have the decision  vacated.  Meanwhile,
the arbitration  panel is evaluating our claim for additional  damages.  We have
also filed a lawsuit  against Bell Atlantic and it affiliates in federal  court.
We are pursuing  antitrust and other claims in this lawsuit.  In addition,  Bell
Atlantic has separately filed suit against us asserting infringement of a patent
issued to them in September  1998  entitled  "Variable  Rate and  Variable  Mode
Transmission  System".  We believe  that we do not  infringe  the Bell  Atlantic
patent and have defenses to infringement and liability.  However,  litigation is
inherently unpredictable and there is no guarantee that we will prevail. Failure
to resolve the  various  legal  disputes  and  controversies  between us and the
various traditional  telephone companies without excessive delay and cost and in
a manner that is favorable to us could harm our business.

      We are not  currently  engaged  in any  other  legal  proceedings  that we
believe  could  have a  material  adverse  effect  on our  business,  prospects,
operating results and financial  condition.  We are,  however,  subject to state
commission,  FCC and court  decisions as they relate to the  interpretation  and
implementation  of  the  1996  Telecommunications  Act,  the  interpretation  of
competitive telecommunications company interconnection agreements in general and
our interconnection agreements in particular. In some cases, we may be deemed to
be bound by the  results of  ongoing  proceedings  of these  bodies or the legal
outcomes of other contested  interconnection  agreements that are similar to our
agreements. The results of any of these proceedings could harm our business.


                                      16
<PAGE>

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

      In June 1999, we issued 7,307,317 shares of common stock upon the exercise
of warrants that were issued in connection  with the offering of our 1998 notes.
The issuance of these shares was pursuant to the "net  exercise" of the warrants
and,  therefore,  we received no cash  proceeds from the issuance of the shares.
The shares were issued in reliance on an exemption from  registration  under the
Securities Act provided by Section 4(2) of such act and the rules and regulation
promulgated thereunder.

      Of these shares, 7,088,654 were sold by the holders in a registered public
offering  under the  Securities  Act that was  underwritten  by a  syndicate  of
underwriters led by Bear, Stearns & Co. Inc, Morgan Stanley & Co.  Incorporated,
Credit  Suisse  First  Boston   Corporation,   Deutsche  Bank  Securities  Inc.,
Donaldson, Lufkin & Jenrette Securities Corporation and Wit Capital Corporation.

      In January 1999, we commenced and completed a firm commitment underwritten
initial public offering of 13,455,000 split-adjusted shares of our common stock,
including   1,755,000   split-adjusted   shares  related  to  the  underwriter's
over-allotment option, at a split-adjusted price of $12.00 per share. The shares
were  registered  with the  Securities  and  Exchange  Commission  pursuant to a
registration statement on Form S-1 (No. 333-63899), which was declared effective
on January 21,  1999.  The public  offering was  underwritten  by a syndicate of
underwriters  led by Bear,  Stearns & Co.  Inc.,  BT Alex.  Brown  Incorporated,
Donaldson, Lufkin & Jenrette Securities Corporation and Goldman, Sachs & Co., as
their representatives. After deducting underwriting discounts and commissions of
$10.0 million and expenses of $1.2  million,  we received net proceeds of $150.2
million.

      As of  September  30, 1999,  we had  invested  the net  proceeds  from our
initial  public  offering in short- and long-term  investments  in order to meet
anticipated  cash needs for future  working  capital.  We invested our available
cash  principally in high-quality  corporate  issuers and in debt instruments of
the U.S. Government and its agencies. The use of proceeds from the offering does
not  represent  a  material  change  in the  use of  proceeds  described  in the
Registration  Statement.  None of the net  proceeds  of the  offering  were paid
directly or  indirectly to any director,  officer,  general  partner of Covad or
their  associates,  persons  owning  10  percent  or more of any class of equity
securities of Covad, or an affiliate of Covad.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

    a.  Exhibits:
Exhibit Number      Description of Exhibit
--------------      ----------------------


27.1                Financial Data Schedules for the nine months ended September
                    30, 1999.
------------


    b.  Reports on Form 8-K

           There have been no reports on Form 8-K filed during the quarter ended
           September 30, 1999.



                                       17
<PAGE>





                                    SIGNATURES

      Pursuant to the  requirements of the Securities  Exchange Act of 1934, the
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.

                                               COVAD COMMUNICATIONS GROUP, INC.

Date:  November 4, 1999                   BY:       /s/ Timothy P. Laehy
                                              ----------------------------------
                                         Timothy P. Laehy
                                         Chief Financial Officer
                                         (Principal Financial
                                         and Accounting Officer)















                                      18
<PAGE>

                                 INDEX TO EXHIBITS


Exhibit Number      Description of Exhibit
--------------      ----------------------

27.1                Financial Data Schedules for the nine months ended September
                    30, 1999.
--------------

















                                      19