##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended June 30, 2005o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to.
 Commission file number: 001-32588
 COVAD COMMUNICATIONS GROUP, INC.
  Delaware
    
    77-0461529(State or other jurisdiction
    
    (I.R.S. Employerof incorporation or organization)
    
    Identification Number)110 Rio RoblesSan Jose, California(Address of principal executive
    
    95134offices)
    
    (Zip Code)
 (408) 952-6400  (Registrants telephone number, including area code)
 þ o
 þ o
 APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
 þ o




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COVAD COMMUNICATIONS GROUP, INC.
 For the Quarterly Period Ended June 30, 2005
 TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATIONITEM 1. Financial Statements
    
    
    2Condensed Consolidated Balance Sheets
    
    
    2Condensed Consolidated Statements of Operations
    
    
    3Condensed Consolidated Statements of Cash Flows
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    5ITEM 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    24ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    55ITEM 4. Controls and Procedures
    
    
    56PART II. OTHER INFORMATIONITEM 1. Legal Proceedings
    
    
    57ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    58ITEM 3. Defaults Upon Senior Securities
    
    
    58ITEM 4. Submission of Matters to a Vote of Security Holders
    
    
    58ITEM 5. Other Information
    
    
    59ITEM 6. Exhibits
    
    
    59SIGNATURES
    
    
    60EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  1




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 COVAD COMMUNICATIONS GROUP, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (All dollar and share amounts are presented in thousands, except par value)
 June 30,
    
    December 31,2005
    
    2004(Unaudited)
    
    (Note 1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    115,091
    
    
    $
    117,506Short-term investments in debt securities
    
    
    8,191
    
    
    
    33,490Restricted cash and cash equivalents
    
    
    7,695
    
    
    
    2,533Short-term investments in equity securities
    
    
    14,288
    
    
    
    Accounts receivable, net
    
    
    29,401
    
    
    
    30,041Unbilled revenues
    
    
    4,563
    
    
    
    3,825Inventories
    
    
    5,754
    
    
    
    4,629Prepaid expenses and other current assets
    
    
    5,695
    
    
    
    3,757Total current assets
    
    
    190,678
    
    
    
    195,781Property and equipment, net
    
    
    71,494
    
    
    
    78,707Collocation fees and other intangible assets, net
    
    
    26,843
    
    
    
    34,561Goodwill
    
    
    36,626
    
    
    
    36,626Deferred costs of service activation
    
    
    28,198
    
    
    
    30,152Deferred customer incentives, net
    
    
    1,809
    
    
    
    2,683Deferred debt issuance costs, net
    
    
    3,727
    
    
    
    4,231Other long-term assets
    
    
    2,471
    
    
    
    2,484Total assets
    
    $
    361,846
    
    
    $
    385,225LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)Current liabilities:Accounts payable
    
    $
    24,414
    
    
    $
    20,755Accrued compensation
    
    
    17,954
    
    
    
    15,619Accrued collocation and network service fees
    
    
    19,112
    
    
    
    24,160Accrued transaction-based taxes
    
    
    30,764
    
    
    
    33,730Collateralized and other customer deposits
    
    
    9,736
    
    
    
    7,906Unearned revenues
    
    
    4,807
    
    
    
    4,420Other accrued liabilities
    
    
    9,389
    
    
    
    10,127Total current liabilities
    
    
    116,176
    
    
    
    116,717Long-term debt
    
    
    125,000
    
    
    
    125,000Collateralized and other long-term customer deposits
    
    
    44,922
    
    
    
    44,444Deferred gain resulting from deconsolidation of subsidiary
    
    
    
    
    
    
    53,963Unearned revenues
    
    
    48,032
    
    
    
    51,518Other long-term liabilities
    
    
    2,003
    
    
    
    2,218Total liabilities
    
    
    336,133
    
    
    
    393,860Commitments and contingencies (Note 6)Stockholders equity (deficit):Preferred stock, $0.001 par value; 5,000 shares
authorized; no shares issued and outstanding at June 30,
2005 and December 31, 2004
    
    
    
    
    
    
    Common Stock, $0.001 par value; 590,000 shares
authorized; 266,409 shares issued and outstanding at June
30, 2005 (263,681 shares issued and outstanding at
December 31, 2004)
    
    
    266
    
    
    
    264Common Stock  Class B, $0.001 par value; 10,000 shares
authorized; no shares issued and outstanding at June 30,
2005 and December 31, 2004
    
    
    
    
    
    
    Additional paid-in capital
    
    
    1,696,133
    
    
    
    1,695,424Deferred stock-based compensation
    
    
    (52
    )
    
    
    (939
    )Accumulated other comprehensive income (loss)
    
    
    13,794
    
    
    
    (985
    )Accumulated deficit
    
    
    (1,684,428
    )
    
    
    (1,702,399
    )Total stockholders equity (deficit)
    
    
    25,713
    
    
    
    (8,635
    )Total liabilities and stockholders equity (deficit)
    
    $
    361,846
    
    
    $
    385,225
  2




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COVAD COMMUNICATIONS GROUP, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (All dollar and share amounts are presented in thousands, except per share amounts)
(Unaudited)
 Three months ended June 30,
    
    Six months ended June 30,2005
    
    2004
    
    2005
    
    2004Revenues, net
    
    $
    109,741
    
    
    $
    107,326
    
    
    $
    217,459
    
    
    $
    215,803Operating expenses:Cost of sales (exclusive of depreciation and amortization)
    
    
    76,240
    
    
    
    62,748
    
    
    
    148,989
    
    
    
    131,042Selling, general and administrative
    
    
    41,492
    
    
    
    31,878
    
    
    
    83,866
    
    
    
    65,180Depreciation and amortization of property and equipment
    
    
    12,909
    
    
    
    14,162
    
    
    
    26,694
    
    
    
    28,657Amortization of collocation fees and other intangible assets
    
    
    4,717
    
    
    
    5,042
    
    
    
    10,081
    
    
    
    9,793Provision for restructuring expenses
    
    
    
    
    
    
    223
    
    
    
    
    
    
    
    770Total operating expenses
    
    
    135,358
    
    
    
    114,053
    
    
    
    269,630
    
    
    
    235,442Loss from operations
    
    
    (25,617
    )
    
    
    (6,727
    )
    
    
    (52,171
    )
    
    
    (19,639
    )Other income (expense):Interest income
    
    
    1,058
    
    
    
    484
    
    
    
    1,957
    
    
    
    835Gain on sale of equity securities
    
    
    9,421
    
    
    
    
    
    
    
    16,667
    
    
    
    Gain on deconsolidation of subsidiary
    
    
    
    
    
    
    
    
    
    
    53,963
    
    
    
    Interest expense
    
    
    (1,294
    )
    
    
    (1,224
    )
    
    
    (2,532
    )
    
    
    (2,365
    )Miscellaneous income, net
    
    
    29
    
    
    
    61
    
    
    
    87
    
    
    
    232Other income (expense), net
    
    
    9,214
    
    
    
    (679
    )
    
    
    70,142
    
    
    
    (1,298
    )Net income (loss)
    
    $
    (16,403
    )
    
    $
    (7,406
    )
    
    $
    17,971
    
    
    $
    (20,937
    )Earnings (loss) per common share:Basic
    
    $
    (0.06
    )
    
    $
    (0.03
    )
    
    $
    0.07
    
    
    $
    (0.09
    )Diluted
    
    $
    (0.06
    )
    
    $
    (0.03
    )
    
    $
    0.07
    
    
    $
    (0.09
    )Weighted-average number of common shares outstanding:Basic
    
    
    263,918
    
    
    
    242,359
    
    
    
    263,852
    
    
    
    237,593Diluted
    
    
    263,918
    
    
    
    242,359
    
    
    
    309,260
    
    
    
    237,593
  3




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COVAD COMMUNICATIONS GROUP, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (All dollar amounts are presented in thousands) 
(Unaudited)
 Six months ended June 30,2005
    
    2004Operating Activities:Net income (loss)
    
    $
    17,971
    
    
    $
    (20,937
    )Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:Provision for bad debts (bad debt recoveries), net
    
    
    125
    
    
    
    (217
    )Depreciation and amortization
    
    
    36,775
    
    
    
    38,450Loss on disposition of property and equipment
    
    
    54
    
    
    
    176Amortization of deferred stock-based compensation, net
    
    
    (863
    )
    
    
    1,951Amortization of deferred customer incentives
    
    
    874
    
    
    
    874Other stock-based compensation
    
    
    
    
    
    
    13Other non-cash charges
    
    
    504
    
    
    
    304Accretion of interest on investments, net
    
    
    (211
    )
    
    
    (321
    )Gain on sale of equity securities
    
    
    (16,667
    )
    
    
    Gain on deconsolidation of subsidiary
    
    
    (53,963
    )
    
    
    Net changes in operating assets and liabilities, net of assets acquired and
liabilities assumed in purchase acquisition:Accounts receivable
    
    
    515
    
    
    
    (678
    )Unbilled revenues
    
    
    (738
    )
    
    
    (849
    )Inventories
    
    
    (1,125
    )
    
    
    366Prepaid expenses and other assets
    
    
    (1,906
    )
    
    
    228Deferred costs of service activation
    
    
    1,954
    
    
    
    1,080Accounts payable
    
    
    3,659
    
    
    
    (3,327
    )Collateralized and other customer deposits
    
    
    2,308
    
    
    
    (3,918
    )Other current liabilities
    
    
    (6,468
    )
    
    
    (5,692
    )Unearned revenues
    
    
    (3,099
    )
    
    
    (3,671
    )Net cash provided by (used in) operating activities
    
    
    (20,301
    )
    
    
    3,832Investing Activities:Restricted cash and cash equivalents
    
    
    (5,162
    )
    
    
    (50
    )Purchase of short-term investments in debt securities
    
    
    (20,330
    )
    
    
    (108,222
    )Maturities of short-term investments in debt securities
    
    
    45,850
    
    
    
    62,530Proceeds from the sale of equity securities
    
    
    17,148
    
    
    
    Purchase of property and equipment
    
    
    (19,222
    )
    
    
    (19,207
    )Proceeds from sale of property and equipment
    
    
    108
    
    
    
    59Payment of collocation fees and purchase of other intangible assets
    
    
    (2,363
    )
    
    
    (5,580
    )Cash acquired through acquisition
    
    
    
    
    
    
    107Acquisition costs
    
    
    
    
    
    
    (495
    )Decrease in other long-term assets
    
    
    13
    
    
    
    402Net cash provided by (used in) investing activities
    
    
    16,042
    
    
    
    (70,456
    )Financing Activities:Proceeds from the issuance of senior unsecured convertible debentures, net
    
    
    
    
    
    
    120,082Principal payment of long-term debt
    
    
    
    
    
    
    (50,000
    )Principal payments under capital lease obligations
    
    
    (617
    )
    
    
    (4
    )Proceeds from the issuance of common stock
    
    
    2,461
    
    
    
    3,906Proceeds from the issuance of common stock related to acquisition
    
    
    
    
    
    
    1,781Net cash provided by financing activities
    
    
    1,844
    
    
    
    75,765Net increase (decrease) in cash and cash equivalents
    
    
    (2,415
    )
    
    
    9,141Cash and cash equivalents at beginning of period
    
    
    117,506
    
    
    
    65,376Cash and cash equivalents at end of period
    
    $
    115,091
    
    
    $
    74,517Supplemental Disclosures of Cash Flow Information:Cash paid during the period for interest
    
    $
    1,936
    
    
    $
    6,571Supplemental Schedule of Non-Cash Investing and Financing Activities:Equipment purchased through capital leases
    
    $
    453
    
    
    $
    Common stock issued in settlement of claims related to bankruptcy
    
    $
    
    
    
    $
    6,951
  4




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COVAD COMMUNICATIONS GROUP, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (All dollar and share amounts are presented in thousands, except per share amounts)
(Unaudited)
 1. Basis of Presentation and Summary of Significant Accounting Policies
      Use of Estimates
   5




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Earnings (Loss) Per Share
    Three months ended June 30,
    
    ___Six months ended June 30,__2005
    
    2004
    
    2005
    
    2004Basic:Net income (loss) as reported
    
    $
    (16,403
    )
    
    $
    (7,406
    )
    
    $
    17,971
    
    
    $
    (20,937
    )Diluted:Add back interest on 3% convertible debentures
    
    
    
    
    
    
    
    
    
    
    2,379
    
    
    
    Net income (loss) adjusted for assumed conversions
    
    $
    (16,403
    )
    
    $
    (7,406
    )
    
    $
    20,350
    
    
    $
    (20,937
    )
  6




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Three months ended June 30,
    
    Six months ended June 30,2005
    
    2004
    
    2005
    
    2004Basic:Weighted-average number of common shares
outstanding
    
    
    264,014
    
    
    
    242,439
    
    
    
    263,948
    
    
    
    237,634Less weighted-average number of common
shares outstanding subject to repurchase
    
    
    (96
    )
    
    
    (80
    )
    
    
    (96
    )
    
    
    (41
    )Weighted-average number of common shares
outstanding used in the computations of
basic earnings (loss) per share
    
    
    263,918
    
    
    
    242,359
    
    
    
    263,852
    
    
    
    237,593Diluted:Dilutive stock options and warrants
    
    
    
    
    
    
    
    
    
    
    5,932
    
    
    
    Assumed conversion of convertible debentures
    
    
    
    
    
    
    
    
    
    
    39,380
    
    
    
    Common shares subject to repurchase
    
    
    
    
    
    
    
    
    
    
    96
    
    
    
    Weighted-average number of common shares
outstanding used in the computations of
diluted earnings (loss) per share
    
    
    263,918
    
    
    
    242,359
    
    
    
    309,260
    
    
    
    237,593
   Stock Based Compensation
   7




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Three months ended June 30,
    
    Six months ended June 30,2005
    
    2004
    
    2005
    
    2004Basic:Net income (loss), as reported
    
    $
    (16,403
    )
    
    $
    (7,406
    )
    
    $
    17,971
    
    
    $
    (20,937
    )Stock-based employee compensation expense
(reversal) included in the determination
of net income (loss), as reported
    
    
    468
    
    
    
    1,179
    
    
    
    (863
    )
    
    
    1,975Stock-based employee compensation expense
that would have been included in the
determination of net income (loss) if the
fair value method had been applied to all
awards
    
    
    (2,940
    )
    
    
    (5,321
    )
    
    
    (7,130
    )
    
    
    (11,505
    )Net income (loss), pro forma
    
    $
    (18,875
    )
    
    $
    (11,548
    )
    
    $
    9,978
    
    
    $
    (30,467
    )Basic:Weighted-average number of common shares
outstanding used in the computations of
basic earnings (loss) per share
    
    
    263,918
    
    
    
    242,359
    
    
    
    263,852
    
    
    
    237,593Diluted:Dilutive stock options and warrants
    
    
    
    
    
    
    
    
    
    
    3,429
    
    
    
    Common shares subject to repurchase
    
    
    
    
    
    
    
    
    
    
    96
    
    
    
    Weighted-average number of common shares
outstanding used in the computations of
diluted earnings (loss) per share
    
    
    263,918
    
    
    
    242,359
    
    
    
    267,377
    
    
    
    237,593Earnings (loss) per common share, pro forma:Basic
    
    $
    (0.07
    )
    
    $
    (0.05
    )
    
    $
    0.04
    
    
    $
    (0.13
    )Diluted
    
    $
    (0.07
    )
    
    $
    (0.05
    )
    
    $
    0.04
    
    
    $
    (0.13
    )Earnings (loss) per common share, as reported:Basic
    
    $
    (0.06
    )
    
    $
    (0.03
    )
    
    $
    0.07
    
    
    $
    (0.09
    )Diluted
    
    $
    (0.06
    )
    
    $
    (0.03
    )
    
    $
    0.07
    
    
    $
    (0.09
    )
 Comprehensive Income (Loss)
  Cumulative
    
    Three months ended June 30,
    
    Six months ended June 30,amounts
    
    2005
    
    2004
    
    2005
    
    2004Net income (loss)
    
    $
    (1,684,428
    )
    
    $
    (16,403
    )
    
    $
    (7,406
    )
    
    $
    17,971
    
    
    $
    (20,937
    )Unrealized gains (losses)
on available-for-sale
securities
    
    
    14,275
    
    
    
    (13,382
    )
    
    
    (103
    )
    
    
    14,298
    
    
    
    (107
    )Foreign currency
translation adjustment
    
    
    (481
    )
    
    
    289
    
    
    
    
    
    
    
    481
    
    
    
    Comprehensive income (loss)
    
    $
    (1,670,634
    )
    
    $
    (29,496
    )
    
    $
    (7,509
    )
    
    $
    32,750
    
    
    $
    (21,044
    )
 Inventories
  Goodwill
  8




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Collateralized and Other Customer Deposit s
 Revenue Recognition
  Revenue Recognition
 Recent Accounting Pronouncements
  9




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conditional asset retirement obligation ,
   10




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2. Revenue Recognition
  11




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June 30, 2005
    
    December 31, 2004Gross accounts receivable
    
    $
    31,952
    
    
    $
    31,607Allowance for service credits.
    
    
    (2,262
    )
    
    
    (1,405
    )Allowance for bad debts
    
    
    (289
    )
    
    
    (161
    )Accounts receivable, net
    
    $
    29,401
    
    
    $
    30,041
 Significant Customers
  12




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Wholesaler Financial Difficulties
   3. Customer Warrants
  13




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4. Restructuring
 Reduction in Force
  Other Restructuring Activities
  14




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5. Long-Term Debt
    6. Commitments and Contingencies
 Litigation
  15




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16




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17




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Other Contingencies
    Indemnification Agreements
   Commitments
  18




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7. Business Segments
     19




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Total
    
    Corporate
    
    ConsolidatedAs of and for the three months ended June 30, 2005:
    
    Wholesale
    
    Direct
    
    Segments
    
    Operations
    
    TotalRevenues, net
    
    $
    78,170
    
    
    $
    31,571
    
    
    $
    109,741
    
    
    $
    
    
    
    $
    109,741Cost of sales (exclusive of depreciation and
amortization)
    
    
    46,309
    
    
    
    20,259
    
    
    
    66,568
    
    
    
    9,672
    
    
    
    76,240Selling, general and administrative
    
    
    2,387
    
    
    
    13,443
    
    
    
    15,830
    
    
    
    25,662
    
    
    
    41,492Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,626
    
    
    
    17,626Income (loss) from operations
    
    
    29,474
    
    
    
    (2,131
    )
    
    
    27,343
    
    
    
    (52,960
    )
    
    
    (25,617
    )Other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,214
    
    
    
    9,214Net income (loss)
    
    $
    29,474
    
    
    $
    (2,131
    )
    
    $
    27,343
    
    
    $
    (43,746
    )
    
    $
    (16,403
    )Total assets
    
    $
    44,182
    
    
    $
    19,789
    
    
    $
    63,971
    
    
    $
    297,875
    
    
    $
    361,846
 Total
    
    Corporate
    
    ConsolidatedAs of and for the three months ended June 30, 2004:
    
    Wholesale
    
    Direct
    
    Segments
    
    Operations
    
    TotalRevenues net
    
    $
    78,507
    
    
    $
    28,819
    
    
    $
    107,326
    
    
    $
    
    
    
    $
    107,326Cost of sales (exclusive of depreciation and
amortization)
    
    
    43,858
    
    
    
    13,226
    
    
    
    57,084
    
    
    
    5,664
    
    
    
    62,748Selling, general and administrative
    
    
    2,100
    
    
    
    6,196
    
    
    
    8,296
    
    
    
    23,582
    
    
    
    31,878Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,204
    
    
    
    19,204Provision for restructuring expenses
    
    
    92
    
    
    
    131
    
    
    
    223
    
    
    
    
    
    
    
    223Income (loss) from operations
    
    
    32,457
    
    
    
    9,266
    
    
    
    41,723
    
    
    
    (48,450
    )
    
    
    (6,727
    )Other expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    679
    
    
    
    679Net income (loss)
    
    $
    32,457
    
    
    $
    9,266
    
    
    $
    41,723
    
    
    $
    (49,129
    )
    
    $
    (7,406
    )Total assets
    
    $
    51,456
    
    
    $
    18,439
    
    
    $
    69,895
    
    
    $
    355,556
    
    
    $
    425,451
 Total
    
    Corporate
    
    ConsolidatedAs of and for the six months ended June 30, 2005:
    
    Wholesale
    
    Direct
    
    Segments
    
    Operations
    
    TotalRevenues, net
    
    $
    154,431
    
    
    $
    63,028
    
    
    $
    217,459
    
    
    $
    
    
    
    $
    217,459Cost of sales (exclusive of depreciation and
amortization)
    
    
    94,007
    
    
    
    38,078
    
    
    
    132,085
    
    
    
    16,904
    
    
    
    148,989Selling, general and administrative
    
    
    4,325
    
    
    
    27,135
    
    
    
    31,460
    
    
    
    52,406
    
    
    
    83,866Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,775
    
    
    
    36,775Income (loss) from operations
    
    
    56,099
    
    
    
    (2,185
    )
    
    
    53,914
    
    
    
    (106,085
    )
    
    
    (52,171
    )Other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70,142
    
    
    
    70,142Net income (loss)
    
    $
    56,099
    
    
    $
    (2,185
    )
    
    $
    53,914
    
    
    $
    (35,943
    )
    
    $
    17,971
 Total
    
    Corporate
    
    ConsolidatedAs of and for the six months ended June, 2004:
    
    Wholesale
    
    Direct
    
    Segments
    
    Operations
    
    TotalRevenues net
    
    $
    157,604
    
    
    $
    58,199
    
    
    $
    215,803
    
    
    $
    
    
    
    $
    215,803Cost of sales (exclusive of depreciation and
amortization)
    
    
    90,813
    
    
    
    24,916
    
    
    
    115,729
    
    
    
    15,313
    
    
    
    131,042Selling, general and administrative
    
    
    4,617
    
    
    
    11,071
    
    
    
    15,688
    
    
    
    49,492
    
    
    
    65,180Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38,450
    
    
    
    38,450Provision for restructuring expenses
    
    
    278
    
    
    
    254
    
    
    
    532
    
    
    
    238
    
    
    
    770Income (loss) from operations
    
    
    61,896
    
    
    
    21,958
    
    
    
    83,854
    
    
    
    (103,493
    )
    
    
    (19,639
    )Other expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,298
    
    
    
    1,298Net income (loss)
    
    $
    61,896
    
    
    $
    21,958
    
    
    $
    83,854
    
    
    $
    (104,791
    )
    
    $
    (20,937
    )
  8. Acquisition of GoBeam, Inc.
  20




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Total purchase cost:Value of common shares issued
    
    $
    38,910Value of assumed GoBeam options and warrants
    
    
    45439,364Acquisition costs
    
    
    473Total purchase cost
    
    $
    39,837Purchase price allocation:Tangible net liabilities acquired
    
    $
    (4,479
    )Intangible assets acquired:Customer relationships
    
    
    6,600Internal use software
    
    
    1,090Goodwill
    
    
    36,626Total purchase consideration
    
    $
    39,837
      21




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Three months ended
    
    Six months endedJune 30, 2004
    
    June 30, 2004Revenue
    
    $
    108,677
    
    
    $
    218,754Net loss
    
    $
    (12,791
    )
    
    $
    (28,507
    )Basic and diluted net loss per share
    
    $
    (0.05
    )
    
    $
    (0.11
    )
   9. Related Party Transactions
  10. 2003 Employee Stock Purchase Plan
  22




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11. Sale of Investments
   12. Income Taxes
  13. Subsequent Events
   23




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following discussion of our financial condition and results of operations should be read
in conjunction with the unaudited condensed consolidated financial statements and the related notes
thereto included elsewhere in this Report on Form 10-Q and the audited consolidated financial
statements and notes thereto and managements discussion and analysis of financial condition and
results of operations for the year ended December 31, 2004 included in our Annual Report on Form
10-K filed with the Securities and Exchange Commission on March 14, 2005. This discussion contains
forward-looking statements, the accuracy of which is subject to risks and uncertainties. Our actual
results could differ materially from those expressed in forward-looking statements for many reasons
including, but not limited to, those discussed herein and in the Risk Factors section of our
Annual Report on Form 10-K , which is contained in Part I, Item 1, Business  Risk Factors, of
that report. We disclaim any obligation to update information contained in any forward-looking
statement. See Forward Looking Statements.
 (All dollar and share amounts are presented in thousands, except per share amounts)
 Overview
 Our Business
     Our Opportunities and Challenges
  24




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Efficient use of working capital
 Efficiently deliver broadband Internet access services to consumers
  Maintain acceptable line-sharing terms with the ILECs
 Expand and diversify our sources of revenue
 New market opportunities
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Recent Developments
    
    
    Transport services between the telephone companies central offices at
regulated rates where certain criteria are met;
    
    High-capacity unbundled DS-1 and DS-3 loops at regulated rates in locations
where certain criteria are met; and
    
    Dark fiber loops at regulated rates
    Critical Accounting Policies and Estimates
  
    
    We recognize revenues when persuasive evidence of our arrangement with the
customer exists, service has been provided to the customer, the price to the customer is
fixed or determinable and collectibility of the
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sales price is reasonably assured. We recognize up-front fees associated with service
activation over the expected term of the customer relationship, which is presently estimated
to be twenty-four to forty-eight months using the straight-line method. Similarly, we treat
the incremental direct costs of service activation, which consist principally of customer
premises equipment, service activation fees paid to other telecommunications companies and
sales commissions, as deferred charges in amounts no greater than the up-front fees that are
deferred, and such incremental direct costs are amortized to expense using the straight-line
method over a range of twenty-four to forty-eight months.
    
    We perform ongoing credit evaluations of our customers financial condition and
maintain an allowance for estimated credit losses. In addition, we have billing disputes
with some of our customers. These disputes arise in the ordinary course of business in the
telecommunications industry and we believe that their impact on our accounts receivable and
revenues can be reasonably estimated based on historical experience. In addition, certain
customer revenues are subject to refund if the end-user terminates service within thirty
days of service activation. Accordingly, we maintain allowances, through charges to
revenues, based on our estimate of the ultimate resolution of these disputes and future
service cancellations, and our reported revenue in any period could be different than what
is reported if we employed different assumptions in estimating the outcomes of these items.
    
    We state our inventories at the lower of cost or market. In assessing the
ultimate recoverability of inventories, we are required to make estimates regarding future
customer demand.
    
    We record property and equipment and intangible assets at cost, subject to
adjustments for impairment. We depreciate or amortize property and equipment and intangible
assets using the straight-line method over their estimated useful lives. In assessing the
recoverability of our property and equipment and intangible assets, we must make
assumptions regarding estimated future cash flows and other factors to determine the fair
value of the respective assets. If these estimates and assumptions change in the future, we
may be required to record additional impairment charges relating to our property and
equipment and intangible assets.
    
    We record goodwill when the consideration paid for an acquisition exceeds the
fair value of net tangible and intangible assets acquired. We measure and test goodwill for
impairment on an annual basis or more frequently if we believe indicators of impairment
exists. The performance of the test involves a two-step process. The first step compares
the fair value of the reporting unit to its carrying amount, including goodwill. The fair
value of the reporting unit is determined by calculating the market capitalization of the
reporting unit as derived from quoted market prices or other generally accepted valuation
methods if quoted market prices are not available. A potential impairment exists if the
fair value of the reporting unit is lower than its carrying amount. The second step of the
process is only performed if a potential impairment exists, and it involves determining the
difference between the fair values of the reporting units net assets, other than goodwill,
to the fair value of the reporting unit. If the difference is less than the net book value
of goodwill, impairment exists and is recorded. We determine our reporting units, for
purposes of testing for impairment, by determining how we manage our operations, if a
component of an operating unit constitutes a business for which discrete financial
information is available and our management regularly reviews such financial information,
and how the acquired entity is integrated with our operations. Based on these criteria, we
determined that our Wholesale and Direct segments are our reporting units. On June 8, 2004,
we completed the acquisition of all of the outstanding shares of privately-held GoBeam,
Inc., or GoBeam, as described in Note 8 to our condensed consolidated financial statements,
Acquisition of GoBeam, Inc. We integrated and manage the GoBeam business within our
Direct segment. Accordingly, the recorded goodwill from the acquisition of GoBeam was
allocated to the Direct segment for purposes of testing for impairment.
    
    We are a party to a variety of legal proceedings, as either plaintiff or
defendant, and are engaged in other disputes that arise in the ordinary course of business.
We are required to assess the likelihood of any adverse judgments or outcomes to these
matters, as well as potential ranges of probable losses for certain of these matters. The
determination of the liabilities to be recognized, if any, for loss contingencies is made
after analysis of each individual situation based on the facts and circumstances. However,
it is reasonably possible that the liabilities reflected in our condensed consolidated
balance sheets for loss contingencies and business disputes could change in the near term
due to new facts and circumstances, the effects of which could be material to our condensed
consolidated financial position and results of operations.
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
    
    We continue to analyze the applicability of certain transaction-based taxes to
sales of our products and services and purchases of telecommunications circuits from
various carriers. This analysis includes discussions with authorities of jurisdictions in
which we do business and various transaction-based tax experts to determine the extent of
our transaction-based tax liabilities. We believe that these discussions will be concluded
without a material adverse effect on our condensed consolidated financial position and
results of operations. It is reasonably possible that our estimates of our
transaction-based and employment-related tax liabilities could change in the near term, the
effects of which could be material to our condensed consolidated financial position and
results of operations.
    
    We make market development funds, or MDF, available to certain customers for
the reimbursement of co-branded advertising expenses and other purposes. To the extent that
MDF is used by our customers for co-branded advertising, and the customers provide us with
third-party evidence of such co-branded advertising and we can reasonably estimate the fair
value of our portion of the advertising, such amounts are charged to advertising expense as
incurred. Other MDF activities are recorded as reductions of revenues as incurred. Amounts
payable to customers relating to rebates and customer incentives are recorded as reductions
of revenues based on our estimate of sales incentives that will ultimately be claimed by
customers.
    
    We account for income taxes using the liability method, under which deferred
tax assets and liabilities are determined based on differences between the financial
reporting and tax bases of our assets and liabilities. We record a valuation allowance on
our deferred tax assets to arrive at an amount that is more likely than not to be realized.
In the future, should we determine that we are able to realize all or part of our deferred
tax assets, which presently are fully reserved, an adjustment to our deferred tax assets
would increase income in the period in which the determination was made.
    
    We account for stock-based awards to employees using the intrinsic value
method, and non-employees using the fair value method. Under the intrinsic value method,
when the exercise price of our employee stock options equals or exceeds the market price of
the underlying stock on the date of grant, we do not record compensation expense in our
condensed consolidated statements of operations. We use the intrinsic value method in
accounting for employee stock options because the alternative fair value accounting
requires us to use option valuation models that were not developed for use in valuing
employee stock options. Rather, such option valuation models were developed for use in
estimating the fair value of traded options that have no vesting restrictions and are fully
transferable. Because our employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective input
assumptions can materially affect the fair value estimates of these valuation models, we
believe such existing models do not necessarily provide a reliable single measure of the
fair value of our employee stock options.
 Recent Accounting Pronouncements
  28




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conditional asset retirement obligation ,
    29




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Results of Operations For The Three and Six Months Ended June 30, 2005 and 2004
 Business Segment Information
  30




---



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Revenues, net
    31




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Segment Revenues and Significant Customers
  Three months ended June 30,
    
    Six months ended June 30,2005
    
    2004
    
    2005
    
    2004Wholesale
    
    $
    78,170
    
    
    $
    78,507
    
    
    $
    154,431
    
    
    $
    157,604Percent of total net revenues
    
    
    71.2
    %
    
    
    73.1
    %
    
    
    71.0
    %
    
    
    73.0
    %Direct
    
    $
    31,571
    
    
    $
    28,819
    
    
    $
    63,028
    
    
    $
    58,199Percent of total net revenues
    
    
    28.8
    %
    
    
    26.9
    %
    
    
    29.0
    %
    
    
    27.0
    %
     32




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Revenue Recognition
  Wholesaler Financial Difficulties
 Revenue Recognition
 Operating Expenses
   Three months ended June 30,
    
    Six months ended June 30,2005
    
    2004
    
    2005
    
    2004Amount
    
    $
    135,358
    
    
    $
    114,053
    
    
    $
    269,630
    
    
    $
    235,442Percent of net revenues
    
    
    123.3
    %
    
    
    106.3
    %
    
    
    124.0
    %
    
    
    109.1
    %
 Cost of sales (exclusive of depreciation and amortization)
  33




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Three months ended June 30,
    
    Six months ended June 30,2005
    
    2004
    
    2005
    
    2004Amount
    
    $
    76,240
    
    
    $
    62,748
    
    
    $
    148,989
    
    
    $
    131,042Percent of net revenue
    
    
    69.5
    %
    
    
    58.5
    %
    
    
    68.5
    %
    
    
    60.7
    %
   34




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Three months ended June 30,
    
    Six months ended June 30,2005
    
    2004
    
    2005
    
    2004Wholesale Segment
    
    $
    46,309
    
    
    $
    43,858
    
    
    $
    94,007
    
    
    $
    90,813Direct Segment
    
    
    20,259
    
    
    
    13,226
    
    
    
    38,078
    
    
    
    24,916Corporate Operations
    
    
    9,672
    
    
    
    5,664
    
    
    
    16,904
    
    
    
    15,313Total
    
    $
    76,240
    
    
    $
    62,748
    
    
    $
    148,989
    
    
    $
    131,042
   35




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Selling, General and Administrative Expenses
   Three months ended June 30,
    
    Six months ended June 30,2005
    
    2004
    
    2005
    
    2004Amount
    
    $
    41,492
    
    
    $
    31,878
    
    
    $
    83,866
    
    
    $
    65,180Percent of net revenue
    
    
    37.8
    %
    
    
    29.7
    %
    
    
    38.6
    %
    
    
    30.2
    %
   36




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Three months ended June 30,
    
    Six months ended June 30,2005
    
    2004
    
    2005
    
    2004Wholesale Segment
    
    $
    2,387
    
    
    $
    2,100
    
    
    $
    4,325
    
    
    $
    4,617Direct Segment
    
    
    13,443
    
    
    
    6,196
    
    
    
    27,135
    
    
    
    11,071Corporate Operations
    
    
    25,662
    
    
    
    23,582
    
    
    
    52,406
    
    
    
    49,492Total
    
    $
    41,492
    
    
    $
    31,878
    
    
    $
    83,866
    
    
    $
    65,180
   37




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Depreciation and Amortization
    Provision for Restructuring Expenses
  38




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Other Income (Expense)
 Net Interest Expense
  Investment Gains
  Gain on Deconsolidation of Subsidiary
  Income Taxes
  Related Party Transactions
  39




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Liquidity and Capital Resources
   Six months ended June 30,2005
    
    2004Net cash provided by (used in):Operating activities
    
    $
    (20,301
    )
    
    $
    3,832Investing activities
    
    
    16,042
    
    
    
    (70,456
    )Financing activities
    
    
    1,844
    
    
    
    75,765Total
    
    $
    (2,415
    )
    
    $
    9,141
 Operating Activities
  Investing Activities
  40




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Financing Activities
  Liquidity
    
    
    further development of our VoIP capabilities, including systems and software to
expand and improve our VoIP services;
    
    our continuing ability to enter into and maintain agreements with the ILECs to
access line-shared telephone lines, remote terminals, interoffice transport, high-capacity
circuits and other facilities, all at reasonable prices;
    
    rates at which resellers and end-users purchase and pay for our services and the pricing of such services;
    
    financial condition of our customers;
    
    levels of marketing required to acquire and retain customers and to attain a
competitive position in the marketplace;
    
    rates at which we invest in engineering, equipment, development and
intellectual property with respect to existing and future technology;
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
    
    operational costs that we incur to install, maintain and repair end-user lines and our network as a whole;
    
    pending and any future litigation;
    
    existing and future technology;
    
    unanticipated opportunities;
    
    network development schedules and associated costs; and
    
    number of regions entered and the timing of entry and services offered.
 Contractual Cash Obligations
  2005
    
    2006-2007
    
    2008-2009
    
    Thereafter
    
    Total3% convertible debentures
    
    $
    
    
    
    $
    
    
    
    $
    125,000
    
    
    $
    
    
    
    $
    125,000Interest on note payable
    
    
    1,875
    
    
    
    7,500
    
    
    
    4,531
    
    
    
    
    
    
    
    13,906Capital leases
    
    
    425
    
    
    
    132
    
    
    
    13
    
    
    
    
    
    
    
    570Office leases
    
    
    2,459
    
    
    
    8,484
    
    
    
    5,377
    
    
    
    767
    
    
    
    17,087Other operating leases
    
    
    206
    
    
    
    655
    
    
    
    329
    
    
    
    
    
    
    
    1,190Purchase obligations
    
    
    1,238
    
    
    
    281
    
    
    
    
    
    
    
    
    
    
    
    1,519$
    6,203
    
    
    $
    17,052
    
    
    $
    135,250
    
    
    $
    767
    
    
    $
    159,272
        42




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Risk Factors
 Our services are subject to government regulation, and changes in current or future laws or
regulations and the methods of enforcing the law and regulations could adversely affect our
business.
     Charges for network elements are generally outside of our control because they are proposed by the
ILECs and are subject to costly regulatory approval processes.
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Our business will be adversely affected if our interconnection agreements are not renewed or if
they are modified on unfavorable terms.
    We depend on a limited number of customers for the preponderance of our revenues, and we are highly
dependent on sales through our resellers.
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The markets in which we operate are highly competitive, and we may not be able to compete
effectively, especially against established industry competitors with significantly greater
financial resources.
  
    
    develop and adopt new or emerging technologies;
    
    respond to changes in customer requirements more quickly;
    
    devote greater resources to the development, promotion and sale of their products and services;
    
    form new alliances and rapidly acquire significant market share;
    
    undertake more extensive marketing campaigns;
    
    adopt more aggressive pricing policies; and
    
    devote substantially more resources to developing high-speed digital services.
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Failure to complete development, testing and introduction of new services, including VoIP services,
could affect our ability to compete in the industry.
  We may need to raise additional capital under difficult financial market conditions.
   
    
    changes in government regulations and legal actions challenging government regulations;
    
    customer disconnection rates that reduce our revenues;
    
    significant price reductions by our competitors;
    
    higher levels of marketing expense required to acquire and retain end-users
that purchase our services from us and from our resellers;
    
    the need to upgrade our systems by investing in our existing and future technology and infrastructure;
    
    investment opportunities in complementary businesses, acquisitions or other opportunities;
    
    any adverse resolution of lawsuits against us; and
    
    additional risk factors mentioned throughout this section.
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In order to become cash flow positive and to achieve profitability, we must add end-users and sell
additional services to our existing end-users while minimizing the cost to expand our network
infrastructure.
  
    
    acquire new end-users;
    
    enter into and maintain agreements with the RBOCs or obtain favorable
regulatory rulings that provide us with access to unbundled network elements on terms and
conditions that allow us to profitably sell our consumer services;
    
    enhance and improve our VoIP services;
    
    upgrade our network to improve reliability and remain competitive;
    
    expand our direct sales capability and infrastructure in a cost-effective manner; and
    
    continue to implement and improve our management information systems, including
our client ordering, provisioning, dispatch, trouble ticketing, customer billing, accounts
receivable, payable tracking, collection, fixed assets, transaction-based taxes and other
management information systems.
  If we do not reduce our end-user disconnection rate our revenue and end-user growth will decline.
  
    
    move to a new location;
    
    disconnect because of better offers in the market; and
    
    disconnect because they do not like our service or the service provided by our resellers.
  We may experience decreasing margins on the sale of our services, which may impair our ability to
achieve profitability or positive cash flow.
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If our internal controls over financial reporting do not comply with the requirements of the
Sarbanes-Oxley Act, our business, reputation and stock price could be adversely affected.
   Some of our resellers are facing financial difficulties, which makes it more difficult to predict
our revenues.
  The development of our direct business poses operational challenges and may cause our resellers to
place fewer orders with us or may cause us to lose resellers.
  
    
    recruit, hire and train additional direct sales teams;
    
    create effective automated systems to provision, manage and bill for VoIP services;
    
    manage expanding and increasingly diverse distribution channels;
    
    effectively manage additional vendors; and
    
    enhance our network and access products to provide business-class VoIP services.
  48




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The communications industry is undergoing rapid technological changes and new technologies may be
superior to the technology we use.
  
    
    third parties, including some of our competitors and potential competitors, to
develop and provide us with access to new communications and networking technology;
    
    our ability to anticipate or adapt to new technology on a timely basis; and
    
    our ability to adapt to new products and technologies that may be superior to,
or may not be compatible with, our products and technologies.
  A system failure could delay or interrupt service to our customers, which could reduce demand for
our services.
  A breach of network security could delay or interrupt service to our customers, which could reduce
demand for our services.
  Our success depends on our retention of certain key personnel, our ability to hire additional key
personnel and the maintenance of good labor relations.
  49




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We depend on a limited number of third parties for equipment supply, software utilities, service
and installation and if we are unable to obtain these items from these third parties we may not be
able to deliver our services as required.
  
    
    DSLAMs;
    
    customer premises equipment, including modems, routers, bridges and other devices;
    
    network routing and switching hardware;
    
    customer support;
    
    installation services;
    
    customized software design and maintenance;
    
    network management software;
    
    systems management software;
    
    database management software;
    
    collocation space;
    
    software used in our products;
    
    hosting, email and IP provisioning services;
    
    softswitches, used to provide VoIP services; and
    
    Internet connectivity and Internet protocol services.
   
    
    the possibility that some of our vendors will leave the DSL equipment business
or will stop supporting equipment that we already have installed;
    
    the absence of guaranteed capacity;
    
    the possibility that software vendors will stop supporting software that we use; and
    
    reduced control over delivery schedules, quality assurance, production yields and costs.
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We use third-party vendors offshore for tasks that were previously done by our employees.
    We have made and may make acquisitions of complementary technologies or businesses in the future,
which may disrupt our business and be dilutive to our existing stockholders.
    51




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We must pay federal, state and local taxes and other surcharges on our service, the applicability
and levels of which are uncertain.
   We are a party to litigation and adverse results of such litigation matters could negatively impact
our financial condition and results of operations.
  Our intellectual property protection may be inadequate to protect our proprietary rights.
    52




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The price of our common stock may continue to fluctuate significantly.
  
    
    state and federal regulatory and legislative actions;
    
    general economic conditions and the condition of the telecommunications industry;
    
    our ability to maintain existing customers and add new customers and recognize
revenue from distressed customers;
    
    our ability to reach profitability and cash flow positive operations;
    
    adverse litigation results;
    
    announcements of new products, services or pricing by our competitors or the
emergence of new competing technologies;
    
    our failure to meet the expectations of investors or of analysts;
    
    the adoption of new, or changes in existing, accounting rules, guidelines and
practices, which may materially impact our financial statements and may materially alter
the expectations of securities analysts or investors;
    
    the level of demand for broadband Internet access services and VoIP telephony services;
    
    departures of key personnel; and
    
    effective internal controls over financial reporting.
  Substantial leverage and debt service obligations may adversely affect our cash flow. (Refer to
Part I, Item 2  Managements Discussion and Analysis of Financial Condition and Results of
Operations  Liquidity and Capital Resources for additional information)
   
    
    increasing our vulnerability to general adverse economic and industry conditions;
    
    limiting our ability to obtain additional financing;
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
    
    requiring the dedication of a portion of our expected cash flow from operations
to service our indebtedness, thereby reducing the amount of our expected cash flow
available for other purposes, including capital expenditures;
    
    limiting our flexibility in planning for, or reacting to, changes in our
business and the industry in which we compete; and
    
    placing us at a possible competitive disadvantage relative to less leveraged
competitors and competitors that have better access to capital resources.
 Forward-Looking Statements
  
    
    impact of the FCCs recent decisions and related litigation, and our ability to
obtain ILEC network elements and facilities at reasonable rates;
    
    continuing deployment of local voice services by providers other than the ILECs
and our ability to bundle our data services with the voice services of these alternative
providers;
    
    timing of our cash flows;
    
    extent to which customers purchase our services;
    
    relationships with our strategic partners and other potential third parties;
    
    pricing for our services in the future;
    
    margins on our service offerings;
    
    possibilities that we will increase our revenues;
    
    plans to make strategic investments and acquisitions and the effect of such investments and acquisitions;
    
    estimates and expectations of future operating results, the adequacy of our
cash reserves, and the number of anticipated installed lines;
    
    plans to increase sales of value-added services, like VoIP;
    
    anticipated capital expenditures;
    
    plans to enter into business arrangements with broadband-related service providers;
    
    regulatory changes;
    
    feasibility of alternative access solutions, like wireless;
    
    effects of litigation currently pending; and
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
    
    other statements contained in this Report on Form 10-Q regarding matters that are not historical facts.
  
    
    expand and improve our VoIP services;
    
    adapt our business plan in response to further developments resulting from the
FCCs recent decisions and related litigation;
    
    collect receivables from customers;
    
    retain and recruit employees;
    
    successfully market our services to customers and generate customer demand for our services;
    
    successfully defend our company against litigation;
    
    successfully manage our operating costs and overhead while continuing to provide good customer service;
    
    successfully continue to increase the number of business-grade lines and VoIP stations;
    
    achieve favorable pricing for our services;
    
    respond to increasing competition;
    
    manage growth of our operations, particularly the expansion of our Direct business;
    
    maintain suitable interconnection agreements with the ILECs in the areas where
we provide service, all in a timely manner, at reasonable costs and on satisfactory terms
that provide us with access to ILECs network elements and facilities that we use to provide
our services; and
    
    retain end-users that are served by customers facing financial difficulties.
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 (All dollar amounts are presented in thousands)
  55




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Carrying value
    
    Interest rateCash and cash equivalents
    
    $
    115,091
    
    
    
    2.85
    %Short-term investments in debt securities
    
    
    8,191
    
    
    
    0.20
    %Restricted cash and cash equivalents
    
    
    7,695
    
    
    
    0.13
    %$
    130,977
    
    
    
    3.18
    %
 
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures.
  Changes in Internal Controls.
  56




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PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
      57




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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  Proposal 1
 Name
    
    For
    
    WithheldCharles E. Hoffman
    
    
    223,846,993
    
    
    
    10,054,540Charles McMinn
    
    
    224,804,456
    
    
    
    9,097,077
 Proposal 2
 58




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##### Table of Contents



Item 5. Other Information
  
 Item 6. Exhibits
 Exhibit
    
    
    
    
    
    Incorporated by Reference
    
    ExhibitNumber
    
    Exhibit Description
    
    Form
    
    File No.
    
    Date of First Filing
    
    Number
    
    Filed Herewith31.1
    
    Certification Pursuant
to Rule 13a-14(a)
    
    
    
    
    
    
    
    
    
 X31.2
    
    Certification Pursuant
to Rule 13a-14(a)
Certification Pursuant
to 18
    
    
    
    
    
    
    
    
    
    X32.1*
    
    U.S.C. Section 1350, as
Adopted Pursuant to
Section 906 of the
Sarbanes-Oxley Act of
2002
    
    
    
    
    
    
    
    
    
    X32.2*
    
    Certification Pursuant
to 18 U.S.C. Section
1350, as Adopted
Pursuant to Section 906
of the Sarbanes-Oxley
Act of 2002
    
    
    
    
    
    
    
    
    
    X
 
 *
    
    These certifications accompany the Registrants Quarterly Report on Form 10-Q and are not
deemed filed with the SEC. 59




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##### Table of Contents



SIGNATURES
  COVAD COMMUNICATIONS GROUP, INC.By:
    
    /s/ CHARLES E. HOFFMANCharles E. HoffmanPresident, Chief ExecutiveOfficer and DirectorDate: August 5, 2005By:
    
    /s/ JOHN E. TREWINJohn E. TrewinSenior Vice President andDate: August 5, 2005
    
    
    
    Chief Financial Officer
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##### Table of Contents



Exhibit
    
    
    
    
    
    Incorporated by Reference
    
    ExhibitNumber
    
    Exhibit Description
    
    Form
    
    File No.
    
    Date of First Filing
    
    Number
    
    Filed Herewith31.1
    
    Certification Pursuant
to Rule 13a-14(a)
    
    
    
    
    
    
    
    
    
    X31.2
    
    Certification Pursuant
to Rule 13a-14(a)
Certification Pursuant
to 18
    
    
    
    
    
    
    
    
    
    X32.1*
    
    U.S.C. Section 1350, as
Adopted Pursuant to
Section 906 of the
Sarbanes-Oxley Act of
2002
    
    
    
    
    
    
    
    
    
    X32.2*
    
    Certification Pursuant
to 18 U.S.C. Section
1350, as Adopted
Pursuant to Section 906
of the Sarbanes-Oxley
Act of 2002
    
    
    
    
    
    
    
    
    
    X
 
 *
    
    These certifications accompany the Registrants Quarterly Report on Form 10-Q and are not
deemed filed with the SEC. 61