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UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, DC 20549


Form 10-K


|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|þ |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
| 
|  |  | For the Fiscal Year Ended December 31, 2004                                             

Commission file number 000-25271


Covad Communications Group, Inc.


|                         |  |                                               
|------------------------ |  | ----------------------------------------------
|Incorporated in Delaware |  | I.R.S. Employer Identification No.: 77-0461529

110 Rio Robles, San Jose, California 95134


(408) 952-6400


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


None


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


Common Stock, par value $0.001 per share


Stock Purchase Rights Pursuant To Rights Agreement


þ o


o


þ o




þ o












---










COVAD COMMUNICATIONS GROUP, INC.


For the Fiscal Year Ended December 31, 2004


TABLE OF CONTENTS


|             |  |                                                                                                                      |     |      |     | 
|------------ |  | -------------------------------------------------------------------------------------------------------------------- | --- | ---- | --- | 
|             |  |                                                                                                                      |     | Page |    
|             |  |                                                                                                                      |     |      |    
|PART I      
|ITEM 1.      |  | Business                                                                                                             |     |      | 2   | 
|ITEM 2.      |  | Properties                                                                                                           |     |      | 26  | 
|ITEM 3.      |  | Legal Proceedings                                                                                                    |     |      | 26  | 
|ITEM 4.      |  | Submission of Matters to a Vote of Security
    Holders                                                              |     |      | 29  | 
|            
|PART II     
|ITEM 5.      |  | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities |     |      | 29  | 
|ITEM 6.      |  | Selected Financial Data                                                                                              |     |      | 30  | 
|ITEM 7.      |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operation                             |     |      | 31  | 
|ITEM 7A.     |  | Quantitative and Qualitative Disclosures
    About Market Risk                                                       |     |      | 52  | 
|ITEM 8.      |  | Financial Statements and Supplementary
    Data                                                                      |     |      | 53  | 
|ITEM 9.      |  | Changes in and Disagreements With
    Accountants on Accounting and Financial Disclosure                             |     |      | 98  | 
|ITEM 9A.     |  | Controls and Procedures                                                                                              |     |      | 98  | 
|ITEM 9B.     |  | Other Information                                                                                                    |     |      | 99  | 
|            
|PART III    
|ITEM 10.     |  | Directors and Executive Officers of the
    Registrant                                                               |     |      | 99  | 
|ITEM 11.     |  | Executive Compensation                                                                                               |     |      | 104 | 
|ITEM 12.     |  | Security Ownership of Certain Beneficial
    Owners and Management                                                   |     |      | 107 | 
|ITEM 13.     |  | Certain Relationships and Related
    Transactions                                                                   |     |      | 110 | 
|ITEM 14.     |  | Principal Accounting Fees and Services                                                                               |     |      | 111 | 
|            
|PART IV     
|ITEM 15.     |  | Exhibits, Financial Statement Schedules                                                                              |     |      | 112 | 
|SIGNATURES   |  |                                                                                                                      | 117 |     
|EXHIBTI 21.1
|EXHIBIT 23.1
|EXHIBIT 23.2
|EXHIBIT 31.1
|EXHIBIT 31.2
|EXHIBIT 32.1
|EXHIBIT 32.2



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PART I







|        |         
|------- | --------
|ITEM 1. | Business

The following discussion contains forward-looking statements,
including statements regarding our growth rates, cash needs, the
adequacy of our cash reserves, relationships with customers and
vendors, market opportunities, legislative and regulatory
proceedings, operating and capital expenditures, expense
reductions and operating results. Each of these statements
involve risks and uncertainties. As a result, actual results
could differ materially from those anticipated in the
forward-looking statements as a result of certain factors
including, but not limited to, those discussed in
Part I. Item 1. Business  Risk
Factors and elsewhere in this Report.


We disclaim any obligation to update information contained in
any forward-looking statement. See Part II.
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations 
Forward-Looking Statements.


(All dollar and share amounts are presented in thousands,
except per share amounts)


Overview










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Industry Background






Our Service Offerings








| |          
| | ---------
| | TeleSpeed



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| |         
| | --------
| | TeleSoho







| |          
| | ---------
| | TeleXtend





| |           
| | ----------
| | TeleSurfer







| |                             
| | ----------------------------
| | Voice over Internet Protocol





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| |                                                         
| | --------------------------------------------------------
| | Asynchronous Transfer Mode, or ATM, Network
    Services





| |                                  
| | ---------------------------------
| | Broadband Internet Access Service





| |                     
| | --------------------
| | Value-Added Services



TeleDefend:


Email and Web Hosting:




| |                          
| | -------------------------
| | Wireless Broadband Access



Sales and Marketing




| |          
| | ---------
| | Wholesale





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| |       
| | ------
| | Direct









Service Deployment and Operations




Network Architecture and Technology




Consistent and Scalable Performance.


6



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Intelligent End-to-End Network Management.


Flexibility.


Network Operations Centers.


Nationwide Broadband Access and Internet Connectivity.


Private Metropolitan Network.


Central Office Spaces.


Telephone Lines.


DSL Modems and On-Site Connection.


Competition




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RBOCs


Cable Modem Service Providers.


Competitive Telecommunications Companies.


National Interexchange Carriers.


VoIP Service Providers.


Telephone Equipment Providers.


Internet Service Providers.


On-Line Service Providers.


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Wireless and Satellite Data Service Providers.




Interconnection Agreements with the Regional Bell Operating
Companies








| |   |                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | prices we pay to lease access, both for stand-alone and
    line-shared lines;                                                                              
|
| |  | special conditioning on certain of these lines to enable the
    transmission of digital signals;                                                           
|
| |  | prices and terms of central office space for our equipment;                                                                                                 
|
| |  | prices we pay and access we have to data transport facilities
    connecting our facilities in different central offices and
    network points of presence;
|
| |  | interfaces that we can use to place orders, report network
    problems and monitor responses to our requests;                                              
|
| |  | dispute resolution process we use to resolve disagreements; and                                                                                             
|
| |  | terms of the interconnection agreement, its transferability to
    successors, its liability limits and other general aspects of
    the relationship       





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Government Regulation


Overview.


Recent Developments.




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | If certain criteria are met, ILECs can stop providing new
    transport services between the telephone companies central
    offices at regulated rates, which are usually lower than
    commercially available rates. These criteria are based on the
    number of users served by the connected central offices and the
    number of alternative providers collocated in the central
    offices. For existing transport services where the criteria are
    met, ILECs would be required to continue to provide the service
    for either twelve or eighteen months after the order goes into
    effect, but during this period the price would increase by 15%.
    We currently purchase this interoffice transport from the ILECs
    in order to carry traffic over our network. We expect that this
    change will increase our data transport costs, but at this time
    we cannot reliably quantify the aggregate amount of these
    increases.
|
| |  | In addition, ILECs are no longer required to provide new
    high-capacity unbundled DS-1 and DS-3 loops at regulated rates
    in locations where certain criteria are met. These criteria are
    based on the number of users served by the central office and
    the number of alternative providers collocated in the central
    office. For existing high- capacity DS-1 and DS-3 loops where
    the criteria are met, ILECs would be required to continue to
    provide the loop for twelve months after the order goes into
    effect, but during this period the price would increase by 15%.
    We use DS-1 loops to provide business-grade services to our
    end-users. We expect this change will increase our cost to
    purchase DS-1 and DS-3 loops in affected central offices, but at
    this time we cannot reliably quantify the aggregate amount of
    these increases.                                                            
|
| |  | ILECs are no longer required to provide new dark fiber loops at
    regulated rates. For existing dark fiber loops, ILECs would be
    required to continue to provide the dark fiber loops for twelve
    months after the order goes into effect, but during this period
    the price would increase by 15%. In certain areas, we purchase
    dark fiber to transport data traffic within our network.
    Currently we purchase our dark fiber from non-ILEC providers.
    However, if we are unable to purchase dark fiber from non-ILEC
    providers in the future, we expect this change will increase our
    cost to purchase dark fiber loops; at this time we cannot
    reliably quantify the aggregate amount of these increases, if
    any.                                                                                                                                                                                                     
|
| |  | Competitive telecommunications carriers, including our
    resellers, will no longer be permitted to order voice services
    from the ILECs under an arrangement known as the Unbundled
    Network Element Platform, or UNE-P, for new customers at
    regulated rates, and, after a twelve month transition period,
    will no longer be able to provide service to existing customers
    using UNE-P. The existence of UNE-P had allowed us to bundle our
    data services with the voice services of competitive
    telecommunications                                                                                                                                                                                                                                                                                                                                                                                                                  

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| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | providers through line-splitting arrangements. We will only be
    able to continue bundling services in this manner with
    competitive telecommunications providers that reach agreements
    with the ILECs to allow them continued access to UNE-P or
    similar resold services. If these competitive telecommunications
    providers cannot reach agreements with the ILECs for continued
    access to UNE-P, we expect that our ability to continue to
    provide bundled services with these providers will cease,
    however, at this time we cannot reliably quantify such impact.
    We are also exploring alternative methods of delivering
    residential voice services with which we and our resellers can
    package our data services. For example, we plan to test
    line-powered voice access service that would enable our
    resellers to offer local and long distance voice services to
    their customers in competition with the local telephone
    companies.







| |   |                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our line-shared customers as of October 2, 2003 were
    grandfathered indefinitely at current rates, terms and
    conditions. These line-shared customers provided approximately
    $89,857 and $137,149, or 20.9% and 35.3%, of our revenues for
    the years ended December 31, 2004 and 2003, respectively.                                                                                               
|
| |  | For line-shared customers acquired from October 3, 2003 to
    October 2, 2004, the FCC-mandated maximum price for the
    high-frequency portion of the telephone line is 25% of the cost
    of a separate telephone line during the first year, 50% during
    the second year and 75% during the third year. After the third
    year, we are required to transition these customers to new
    arrangements.
|
| |  | As of October 3, 2004, we cannot acquire new line-shared
    customers at regulated rates under Section 251 of the
    Telecommunications Act of 1996.                                                                                                                                                                                                                                                           





11



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Federal and State VoIP Regulation.






Other Federal Regulation.






12



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Other State Regulation.




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Local Government Regulation.






Significant Customers




Intellectual Property






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Employees




Available Information


www.covad.com www.sec.gov.


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.





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| |                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.







| |                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------
| | Our business will be adversely affected if our
    interconnection agreements are not renewed or if they are
    modified on unfavorable terms.







16



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| |                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------
| | We depend on a limited number of customers for the
    preponderance of our revenues, and we are highly dependent on
    sales through our resellers.









| |                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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;                                   

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| |   |                                                                                  
| | - | ---------------------------------------------------------------------------------
| |  | undertake more extensive marketing campaigns;                                    
|
| |  | adopt more aggressive pricing policies; and                                      
|
| |  | devote substantially more resources to developing high-speed
    digital services









| |                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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;                                     

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| |   |                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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                                                                                     







| |                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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



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| |                                                                                                      
| | -----------------------------------------------------------------------------------------------------
| | 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.





| |                                                                                                 
| | ------------------------------------------------------------------------------------------------
| | Our internal controls may not prevent or detect all
    misstatements, and may become inadequate





| |                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------
| | Some of our resellers are facing financial difficulties,
    which makes it more difficult to predict our revenues.



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| |                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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    





| |                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------
| | 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.



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| |                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------
| | 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.







| |                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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;                                                        

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| |   |                                                     
| | - | ----------------------------------------------------
| |  | 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                                                             





| |                                                                                              
| | ---------------------------------------------------------------------------------------------
| | 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.



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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.



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| |                                                                                              
| | ---------------------------------------------------------------------------------------------
| | Our intellectual property protection may be inadequate to
    protect our proprietary rights.









| |                                                                           
| | --------------------------------------------------------------------------
| | 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                                                                                                                                                                                    

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| |                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Substantial leverage and debt service obligations may
    adversely affect our cash flow. (Refer to
    Item 7  Managements Discussion and
    Analysis of Financial Condition and Results of
    Operation  Liquidity, Capital Resources and
    Contractual Cash Obligations for additional
    information)







| |   |                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | increasing our vulnerability to general adverse economic and
    industry conditions;                                                                                                                                                       
|
| |  | limiting our ability to obtain additional financing;                                                                                                                                                                                        
|
| |  | 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                                                                               






|        |           
|------- | ----------
|ITEM 2. | Properties

(All dollar amounts are presented in thousands)











|        |                  
|------- | -----------------
|ITEM 3. | Legal Proceedings

(All dollar amounts are presented in thousands)




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






PART II







|        |                                                                                                                     
|------- | --------------------------------------------------------------------------------------------------------------------
|ITEM 5. | Market for Registrants Common Equity, Related
    Stockholder Matters and Issuer Purchases of Equity
    Securities

Market Price Information and Dividend Policy for Our Common
Stock




|                                     |  |      |      |  |     |   |      | 
|------------------------------------ |  | ---- | ---- |  | --- | - | ---- | 
|                                     |  | High |      |  | Low |  
|                                     |  |      |      |  |     |  
|Fiscal Year Ending December 31, 2003 |  |      |      |  |     |   |      | 
|First Quarter                        |  | $    | 1.40 |  |     | $ | 0.57 | 
|Second Quarter                       |  | $    | 1.27 |  |     | $ | 0.55 | 
|Third Quarter                        |  | $    | 6.89 |  |     | $ | 0.87 | 
|Fourth Quarter                       |  | $    | 6.17 |  |     | $ | 2.84 | 
|Fiscal Year Ending December 31, 2004 |  |      |      |  |     |   |      | 
|First Quarter                        |  | $    | 4.16 |  |     | $ | 1.84 | 
|Second Quarter                       |  | $    | 2.58 |  |     | $ | 1.62 | 
|Third Quarter                        |  | $    | 2.36 |  |     | $ | 1.27 | 
|Fourth Quarter                       |  | $    | 2.34 |  |     | $ | 1.45 | 





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|        |                        
|------- | -----------------------
|ITEM 6. | Selected Financial Data

(All dollar and share amounts are presented in thousands,
except per share amounts)


|                                                                                         |  |                                 |         |   |      |   |          |      |  |   |          |   |  |      |           |   |  |   |            |  
|---------------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | -------- | ---- |  | - | -------- | - |  | ---- | --------- | - |  | - | ---------- | -
|                                                                                         |  | For the Year Ended December 31, |        
|                                                                                         |  |                                 |        
|                                                                                         |  | 2004                            |         |   | 2003 |   |          | 2002 |  |   | 2001     |   |  | 2000 |          
|                                                                                         |  |                                 |         |   |      |   |          |      |  |   |          |   |  |      |          
|Consolidated Statement of Operations Data:                                               |  |                                 |         |   |      |   |          |      |  |   |          |   |  |      |           |   |  |   |            |  
|Revenues, net                                                                            |  | $                               | 429,197 |   |      | $ | 388,851  |      |  | $ | 383,496  |   |  | $    | 332,596   |   |  | $ | 158,736    |  
|Cost of sales (exclusive of depreciation and amortization)                               |  |                                 | 266,172 |   |      |   | 288,122  |      |  |   | 298,336  |   |  |      | 461,875   |   |  |   | 432,153    |  
|Selling, general and administrative expenses                                             |  |                                 | 146,241 |   |      |   | 140,081  |      |  |   | 150,373  |   |  |      | 199,908   |   |  |   | 292,991    |  
|Depreciation and amortization                                                            |  |                                 | 77,410  |   |      |   | 73,884   |      |  |   | 127,088  |   |  |      | 150,839   |   |  |   | 178,425    |  
|Provision for restructuring expenses                                                     |  |                                 | 1,409   |   |      |   | 1,235    |      |  |   |         |   |  |      | 14,364    |   |  |   | 4,988      |  
|Provision for long-lived asset impairment                                                |  |                                 |        |   |      |   |         |      |  |   |         |   |  |      | 11,988    |   |  |   | 589,388    |  
|Loss from operations                                                                     |  |                                 | (60,000 | ) |      |   | (114,570 | )    |  |   | (180,992 | ) |  |      | (536,880  | ) |  |   | (1,354,192 | )
|Interest expense                                                                         |  |                                 | (4,927  | ) |      |   | (5,526   | )    |  |   | (5,581   | ) |  |      | (92,782   | ) |  |   | (109,863   | )
|Reorganization expenses, net                                                             |  |                                 |        |   |      |   |         |      |  |   |         |   |  |      | (62,620   | ) |  |   |           |  
|Gain on extinguishment of debt                                                           |  |                                 |        |   |      |   |         |      |  |   |         |   |  |      | 1,033,727 |   |  |   |           |  
|Income (loss) before cumulative effect of change in accounting
    principle             |  |                                 | (60,761 | ) |      |   | (112,302 | )    |  |   | (184,828 | ) |  |      | 344,758   |   |  |   | (1,433,887 | )
|Cumulative effect of change in accounting principle                                      |  |                                 |        |   |      |   |         |      |  |   |         |   |  |      |          |   |  |   | (9,249     | )
|                                                                                         |  |                                 |         |   |      |   |          |      |  |   |          |   |  |      |          
|Net income (loss)                                                                        |  | $                               | (60,761 | ) |      | $ | (112,302 | )    |  | $ | (184,828 | ) |  | $    | 344,758   |   |  | $ | (1,443,136 | )
|Basic and diluted per share amounts:                                                     |  |                                 |         |   |      |   |          |      |  |   |          |   |  |      |           |   |  |   |            |  
|Net income (loss) before cumulative effect of change in
    accounting principle         |  | $                               | (0.24   | ) |      | $ | (0.50    | )    |  | $ | (0.84    | ) |  | $    | 1.94      |   |  | $ | (9.41      | )
|Cumulative effect of accounting change                                                   |  |                                 |        |   |      |   |         |      |  |   |         |   |  |      |          |   |  |   | (0.06      | )
|                                                                                         |  |                                 |         |   |      |   |          |      |  |   |          |   |  |      |          
|Net income (loss)                                                                        |  | $                               | (0.24   | ) |      | $ | (0.50    | )    |  | $ | (0.84    | ) |  | $    | 1.94      |   |  | $ | (9.47      | )
|Weighted-average common shares used in computing basic and
    diluted per share amounts |  |                                 | 249,187 |   |      |   | 224,950  |      |  |   | 219,744  |   |  |      | 177,347   |   |  |   | 152,359    |  
|Pro forma amounts assuming the accounting change is applied
    retroactively:           |  |                                 |         |   |      |   |          |      |  |   |          |   |  |      |           |   |  |   |            |  
|Net loss                                                                                 |  |                                 |         |   |      |   |          |      |  |   |          |   |  |      |           |   |  | $ | (1,433,887 | )
|Net loss attributable to common stockholders                                             |  |                                 |         |   |      |   |          |      |  |   |          |   |  |      |           |   |  | $ | (1,433,887 | )
|Basic and diluted net loss per common share                                              |  |                                 |         |   |      |   |          |      |  |   |          |   |  |      |           |   |  | $ | (9.41      | )

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|                                                  |  |                    |         |   |      |   |         |      |  |   |         |  |  |      |         |  |  |   |           |  
|------------------------------------------------- |  | ------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- |  |  | ---- | ------- |  |  | - | --------- | -
|                                                  |  | As of December 31, |        
|                                                  |  |                    |        
|                                                  |  | 2004               |         |   | 2003 |   |         | 2002 |  |   | 2001    |  |  | 2000 |        
|                                                  |  |                    |         |   |      |   |         |      |  |   |         |  |  |      |        
|Consolidated Balance Sheet Data:                  |  |                    |         |   |      |   |         |      |  |   |         |  |  |      |         |  |  |   |           |  
|Cash, cash equivalents and short-term investments |  | $                  | 150,996 |   |      | $ | 114,345 |      |  | $ | 202,492 |  |  | $    | 283,863 |  |  | $ | 869,834   |  
|Property and equipment, net                       |  | $                  | 78,707  |   |      | $ | 94,279  |      |  | $ | 108,737 |  |  | $    | 215,804 |  |  | $ | 338,409   |  
|Total assets                                      |  | $                  | 385,225 |   |      | $ | 334,711 |      |  | $ | 442,161 |  |  | $    | 675,168 |  |  | $ | 1,511,485 |  
|Long-term obligations, including capital leases   |  | $                  | 125,734 |   |      | $ | 50,000  |      |  | $ | 50,165  |  |  | $    | 50,011  |  |  | $ | 1,374,673 |  
|Total stockholders equity (deficit)              |  | $                  | (8,635  | ) |      | $ | (5,553  | )    |  | $ | 82,299  |  |  | $    | 259,829 |  |  | $ | (182,663  | )

|                                                                                        |  |                                           |            |  |      |   |            |      |  |   |            |  |  |      |            |  |  |   |            | 
|--------------------------------------------------------------------------------------- |  | ----------------------------------------- | ---------- |  | ---- | - | ---------- | ---- |  | - | ---------- |  |  | ---- | ---------- |  |  | - | ---------- | 
|                                                                                        |  | As of and for the Year Ended December 31, |           
|                                                                                        |  |                                           |           
|                                                                                        |  | 2004                                      |            |  | 2003 |   |            | 2002 |  |   | 2001       |  |  | 2000 |           
|                                                                                        |  |                                           |            |  |      |   |            |      |  |   |            |  |  |      |           
|Other Operating and Financial Data:                                                     |  |                                           |            |  |      |   |            |      |  |   |            |  |  |      |            |  |  |   |            | 
|Collocation facilities                                                                  |  |                                           | 2,052      |  |      |   | 1,819      |      |  |   | 1,802      |  |  |      | 1,718      |  |  |   | 1,859      | 
|Homes and businesses passed (approximately)                                             |  |                                           | 50,000,000 |  |      |   | 46,000,000 |      |  |   | 46,000,000 |  |  |      | 40,000,000 |  |  |   | 40,000,000 | 
|Lines in service                                                                        |  |                                           | 533,200    |  |      |   | 517,000    |      |  |   | 381,000    |  |  |      | 351,000    |  |  |   | 274,000    | 
|Capital expenditures for property and equipment                                         |  | $                                         | 38,743     |  |      | $ | 44,142     |      |  | $ | 22,782     |  |  | $    | 15,732     |  |  | $ | 319,234    | 
|Capital expenditures for collocation fees and purchases of other
    intangibles assets |  | $                                         | 7,900      |  |      | $ | 14,889     |      |  | $ | 3,782      |  |  | $    | 7,940      |  |  | $ | 25,038     | 






|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|ITEM 7. | Managements Discussion and Analysis of Financial
    Condition and Results of Operation

(All dollar and share amounts are presented in thousands,
except per share amounts)


The following discussion of our financial condition and
results of operations should be read in conjunction with the
consolidated financial statements and the related notes thereto
included elsewhere in this 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 in Part I. Item 1. Business-Risk
Factors and elsewhere in this Annual Report on
Form 10-K. We disclaim any obligation to update information
contained in any forward-looking statement. See 
Forward-Looking Statements.


Overview




| |             
| | ------------
| | Our Business



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| |                       
| | ----------------------
| | Regulatory Environment





| |                                 
| | --------------------------------
| | Our Opportunities and Challenges





Efficient use of cash


Manage through a transition in the delivery of broadband
Internet access services to consumers


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Obtain acceptable line-sharing terms from the
ILECs


Expand and diversify our sources of revenue


New market opportunities




| |                    
| | -------------------
| | Recent Developments







| |                                           
| | ------------------------------------------
| | Critical Accounting Policies and Estimates



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 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 (i) how we manage
    our operations, (ii) if a component of an operating unit
    constitutes a business for which discrete financial information
    is available and our management regularly review such financial
    information, and (iii) 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., as described in Note 6 to our consolidated
    financial statements, Acquisition of GoBeam,
    Inc. We integrated and

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | 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 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 consolidated financial position
    and results of operations.                                                                                                                                                                                                                                                                                                                                                      
|
| |  | 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 consolidated financial position and results of
    operations. In addition, we continue to analyze the probable
    applicability of employment-related taxes for certain
    stock-based compensation provided to employees in prior periods.
    We believe that the analysis of the probable applicability of
    these taxes will be concluded without a material adverse effect
    to our consolidated financial position and results of
    operations. However, 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 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 consolidated statement 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.

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| |                                 
| | --------------------------------
| | Recent Accounting Pronouncements









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Results of Operations for the years ended December 31,
2004, 2003 and 2002




| |                             
| | ----------------------------
| | Business Segment Information







37



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| |            
| | -----------
| | Adjustments





Revenues, net




38



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| |                                           
| | ------------------------------------------
| | Segment Revenues and Significant Customers



|                             |  |                         |         |   |      |   |         |      |  |   |         |  
|---------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                             |  | Year Ended December 31, |        
|                             |  |                         |        
|                             |  | 2004                    |         |   | 2003 |   |         | 2002 | 
|                             |  |                         |         |   |      |   |         |      | 
|Wholesale                    |  | $                       | 309,899 |   |      | $ | 298,221 |      |  | $ | 326,659 |  
|As a percent of net revenues |  |                         | 72.2    | % |      |   | 76.7    | %    |  |   | 85.2    | %
|Direct                       |  | $                       | 119,298 |   |      | $ | 90,630  |      |  | $ | 56,837  |  
|As a percent of net revenues |  |                         | 27.8    | % |      |   | 23.3    | %    |  |   | 14.8    | %



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| |                                  
| | ---------------------------------
| | Wholesaler Financial Difficulties





| |                   
| | ------------------
| | Operating Expenses





|                             |  |                         |         |   |      |   |         |      |  |   |         |  
|---------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                             |  | Year Ended December 31, |        
|                             |  |                         |        
|                             |  | 2004                    |         |   | 2003 |   |         | 2002 | 
|                             |  |                         |         |   |      |   |         |      | 
|Amount                       |  | $                       | 489,197 |   |      | $ | 503,421 |      |  | $ | 564,488 |  
|As a percent of net revenues |  |                         | 114.0   | % |      |   | 129.5   | %    |  |   | 147.2   | %

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| |                                                           
| | ----------------------------------------------------------
| | Cost of sales (exclusive of depreciation and amortization)





|                             |  |                         |         |   |      |   |         |      |  |   |         |  
|---------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                             |  | Year Ended December 31, |        
|                             |  |                         |        
|                             |  | 2004                    |         |   | 2003 |   |         | 2002 | 
|                             |  |                         |         |   |      |   |         |      | 
|Amount                       |  | $                       | 266,172 |   |      | $ | 288,122 |      |  | $ | 298,336 |  
|As a percent of net revenues |  |                         | 62.0    | % |      |   | 74.1    | %    |  |   | 77.8    | %





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|                     |       |                         |         |         |      |   |         |         |  |   |         |         | 
|-------------------- | ----- | ----------------------- | ------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                     |       | Year Ended December 31, |        
|                     |       |                         |        
|                     |       | 2004                    |         |         | 2003 |   |         | 2002    | 
|                     |       |                         |         |         |      |   |         |         | 
|Wholesale Segment    |       | $                       | 175,687 |         |      | $ | 209,334 |         |  | $ | 206,586 |        
|Direct Segment       |       |                         | 54,016  |         |      |   | 46,124  |         |  |   | 31,301  |        
|Corporate Operations |       |                         | 36,469  |         |      |   | 32,664  |         |  |   | 60,449  |        
|                     |       |                         |         |         |      |   |         |         | 
|                     | Total |                         | $       | 266,172 |      |   | $       | 288,122 |  |   | $       | 298,336 | 
|                     |       |                         |         |         |      |   |         |         | 





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Selling, General and
Administrative Expenses






|                             |  |                         |         |   |      |   |         |      |  |   |         |  
|---------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                             |  | Year Ended December 31, |        
|                             |  |                         |        
|                             |  | 2004                    |         |   | 2003 |   |         | 2002 | 
|                             |  |                         |         |   |      |   |         |      | 
|Amount                       |  | $                       | 146,241 |   |      | $ | 140,081 |      |  | $ | 150,373 |  
|As a percent of net revenues |  |                         | 34.1    | % |      |   | 36.0    | %    |  |   | 39.2    | %









|                     |       |                         |        |         |      |   |         |         |  |   |        |         | 
|-------------------- | ----- | ----------------------- | ------ | ------- | ---- | - | ------- | ------- |  | - | ------ | ------- | 
|                     |       | Year Ended December 31, |       
|                     |       |                         |       
|                     |       | 2004                    |        |         | 2003 |   |         | 2002    | 
|                     |       |                         |        |         |      |   |         |         | 
|Wholesale Segment    |       | $                       | 10,476 |         |      | $ | 13,069  |         |  | $ | 14,244 |        
|Direct Segment       |       |                         | 39,984 |         |      |   | 20,346  |         |  |   | 44,513 |        
|Corporate Operations |       |                         | 95,781 |         |      |   | 106,666 |         |  |   | 91,616 |        
|                     |       |                         |        |         |      |   |         |         | 
|                     | Total |                         | $      | 146,241 |      |   | $       | 140,081 |  |   | $      | 150,373 | 
|                     |       |                         |        |         |      |   |         |         | 



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| |                                              
| | ---------------------------------------------
| | Provision for Bad Debts (Bad Debt Recoveries)





| |                              
| | -----------------------------
| | Depreciation and Amortization





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| |                                     
| | ------------------------------------
| | Provision for Restructuring Expenses





| |                            
| | ---------------------------
| | Litigation-related Expenses





| |                       
| | ----------------------
| | Other Income (Expense)



| |                     
| | --------------------
| | Net Interest Expense





| |                  
| | -----------------
| | Investment Losses





| |                                    
| | -----------------------------------
| | Miscellaneous Income (Expense), net



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| |             
| | ------------
| | Income Taxes







Selected Quarterly Financial Information (Unaudited)




|                                                          |  |                     |         |   |         |   |         |              |  |   |             |   |  |   |         |  
|--------------------------------------------------------- |  | ------------------- | ------- | - | ------- | - | ------- | ------------ |  | - | ----------- | - |  | - | ------- | -
|                                                          |  | Three Months Eended |        
|                                                          |  |                     |        
|                                                          |  | March 31            |         |   | June 30 |   |         | September 30 |  |   | December 31 |  
|                                                          |  |                     |         |   |         |   |         |              |  |   |             |  
|2004:                                                     |  |                     |         |   |         |   |         |              |  |   |             |   |  |   |         |  
|Revenues, net                                             |  | $                   | 108,477 |   |         | $ | 107,326 |              |  | $ | 105,687     |   |  | $ | 107,707 |  
|Gross profit (exclusive of depreciation and amortization) |  | $                   | 40,183  |   |         | $ | 44,578  |              |  | $ | 39,748      |   |  | $ | 38,516  |  
|Depreciation and amortization                             |  | $                   | 19,246  |   |         | $ | 19,204  |              |  | $ | 19,406      |   |  | $ | 19,554  |  
|Net loss                                                  |  | $                   | (13,531 | ) |         | $ | (7,406  | )            |  | $ | (13,804     | ) |  | $ | (26,020 | )
|Basic and diluted net loss per share                      |  | $                   | (0.06   | ) |         | $ | (0.03   | )            |  | $ | (0.05       | ) |  | $ | (0.10   | )
|2003:                                                     |  |                     |         |   |         |   |         |              |  |   |             |   |  |   |         |  
|Revenues, net                                             |  | $                   | 90,860  |   |         | $ | 92,445  |              |  | $ | 100,507     |   |  | $ | 105,039 |  
|Gross profit (exclusive of depreciation and amortization) |  | $                   | 21,983  |   |         | $ | 23,813  |              |  | $ | 23,292      |   |  | $ | 31,641  |  
|Depreciation and amortization                             |  | $                   | 18,589  |   |         | $ | 17,776  |              |  | $ | 17,829      |   |  | $ | 19,690  |  
|Net loss                                                  |  | $                   | (34,722 | ) |         | $ | (27,287 | )            |  | $ | (33,431     | ) |  | $ | (16,862 | )
|Basic and diluted net loss per share                      |  | $                   | (0.16   | ) |         | $ | (0.12   | )            |  | $ | (0.15       | ) |  | $ | (0.07   | )



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|                                                                                                                                 |  |                    |         |   |            |   |         |               |  |   |              |   |  |              |         |   |  |   |          |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ---------- | - | ------- | ------------- |  | - | ------------ | - |  | ------------ | ------- | - |  | - | -------- | -
|                                                                                                                                 |  | Three Months Ended |         |   |           
|                                                                                                                                 |  |                    |         |   | Year Ended |  
|                                                                                                                                 |  | March 31,          |         |   | June 30,   |   |         | September 30, |  |   | December 31, |   |  | December 31, |        
|                                                                                                                                 |  | 2003               |         |   | 2003       |   |         | 2003          |  |   | 2003         |   |  | 2003         |        
|                                                                                                                                 |  |                    |         |   |            |   |         |               |  |   |              |   |  |              |        
|Net loss, as reported                                                                                                            |  | $                  | (34,722 | ) |            | $ | (27,287 | )             |  | $ | (33,431      | ) |  | $            | (16,862 | ) |  | $ | (112,302 | )
|Effect of prospectively correcting certain differences relating
    to prior periods, which is included in net loss, as reported |  |                    |        |   |            |   | 1,236   |               |  |   |             |   |  |              |        |   |  |   | 1,236    |  
|                                                                                                                                 |  |                    |         |   |            |   |         |               |  |   |              |   |  |              |        
|Net loss, net of effect of prospectively correcting certain
    differences relating to prior periods                            |  | $                  | (34,722 | ) |            | $ | (26,051 | )             |  | $ | (33,431      | ) |  | $            | (16,862 | ) |  | $ | (111,066 | )
|                                                                                                                                 |  |                    |         |   |            |   |         |               |  |   |              |   |  |              |        
|Net loss, as reported                                                                                                            |  | $                  | (0.16   | ) |            | $ | (0.12   | )             |  | $ | (0.15        | ) |  | $            | (0.07   | ) |  | $ | (0.50    | )
|Effect of prospectively correcting certain differences relating
    to prior periods, which is included in net loss, as reported |  |                    |        |   |            |   | 0.01    |               |  |   |             |   |  |              |        |   |  |   | 0.01     |  
|                                                                                                                                 |  |                    |         |   |            |   |         |               |  |   |              |   |  |              |        
|Net loss, net of effect of prospectively correcting certain
    differences relating to prior periods                            |  | $                  | (0.16   | ) |            | $ | (0.11   | )             |  | $ | (0.15        | ) |  | $            | (0.07   | ) |  | $ | (0.49    | )
|                                                                                                                                 |  |                    |         |   |            |   |         |               |  |   |              |   |  |              |        

Related Party Transactions






Liquidity, Capital Resources and Contractual Cash
Obligations




47



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|                                |                      |                         |   |         |      |  |   |         |   |  |   |          |  
|------------------------------- | -------------------- | ----------------------- | - | ------- | ---- |  | - | ------- | - |  | - | -------- | -
|                                |                      | Year Ended December 31, |  
|                                |                      |                         |  
|                                |                      | 2004                    |   |         | 2003 |  |   | 2002    |  
|                                |                      |                         |   |         |      |  |   |         |  
|Net cash provided by (used in): |                      |                         |   |         |      |  |   |         |   |  |   |         
|                                | Operating activities |                         | $ | 3,676   |      |  | $ | (45,553 | ) |  | $ | (76,042  | )
|                                | Investing activities |                         |   | (29,780 | )    |  |   | 8,508   |   |  |   | (40,113  | )
|                                | Financing activities |                         |   | 78,234  |      |  |   | 8,005   |   |  |   | 2,761    |  
|                                |                      |                         |   |         |      |  |   |         |  
|                                | Total                |                         | $ | 52,130  |      |  | $ | (29,040 | ) |  | $ | (113,394 | )
|                                |                      |                         |   |         |      |  |   |         |  



| |                     
| | --------------------
| | Operating Activities





| |                     
| | --------------------
| | Investing Activities





| |                     
| | --------------------
| | Financing Activities



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| |          
| | ---------
| | Liquidity









| |   |                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | further development of our VoIP capabilities, systems and
    software to expand our VoIP services;                                                                      
|
| |  | our continuing ability to reach agreements with the ILECs to
    access line-shared telephone lines, remote terminals 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, development and
    intellectual property with respect to existing and future
    technology;                                   
|
| |  | operational costs that we incur to install, maintain and repair
    end-user lines and our network as a whole;                                                           

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| |   |                                                                           
| | - | --------------------------------------------------------------------------
| |  | 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 |  | Total |  
|                           |  |      |        |  |           |   |        |           |  |   |            |  |       |  
|Note payable to debentures |  | $    |       |  |           | $ |       |           |  | $ | 125,000    |  |       | $ |  |  |  | $ | 125,000 | 
|Interest on note payable   |  |      | 3,750  |  |           |   | 7,500  |           |  |   | 4,531      |  |       |   |  |  |  |   | 15,781  | 
|Capital leases             |  |      | 665    |  |           |   | 56     |           |  |   | 13         |  |       |   |  |  |  |   | 734     | 
|Office leases              |  |      | 4,262  |  |           |   | 5,997  |           |  |   | 2,918      |  |       |   |  |  |  |   | 13,177  | 
|Other operating leases     |  |      | 123    |  |           |   | 98     |           |  |   |           |  |       |   |  |  |  |   | 221     | 
|Purchase obligations       |  |      | 4,475  |  |           |   | 281    |           |  |   |           |  |       |   |  |  |  |   | 4,756   | 
|                           |  |      |        |  |           |   |        |           |  |   |            |  |       |   |  
|                           |  | $    | 13,275 |  |           | $ | 13,932 |           |  | $ | 132,462    |  |       | $ |  |  |  | $ | 159,669 | 
|                           |  |      |        |  |           |   |        |           |  |   |            |  |       |   |  







Forward-Looking Statements




50



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| |   |                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 Voice over
    Internet Protocol;                                                                                                    
|
| |  | 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                                                                                                                                               
|
| |  | other statements contained in this Report on Form 10-K
    regarding matters that are not historical facts                                                                                 





| |   |                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------
| |  | 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;                                              

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| |   |                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 7A. | Quantitative and Qualitative Disclosures About Market
    Risk

(All dollar amounts are presented in thousands)






|                                     |  |                |         |  |               |  |       | 
|------------------------------------ |  | -------------- | ------- |  | ------------- |  | ----- | 
|                                     |  | Carrying Value |         |  | Interest Rate | 
|                                     |  |                |         |  |               | 
|Cash and cash equivalents            |  | $              | 117,506 |  |               |  | 2.13% | 
|Short-term investments               |  |                | 33,490  |  |               |  | 1.93% | 
|Restricted cash and cash equivalents |  |                | 2,533   |  |               |  | 1.26% | 
|                                     |  |                |         |  |               | 
|                                     |  | $              | 153,529 |  |               |  | 2.07% | 
|                                     |  |                |         |  |               | 

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|        |                                            
|------- | -------------------------------------------
|ITEM 8. | Financial Statements and Supplementary Data

FINANCIAL STATEMENTS


INDEX




| |     |                                                             
| | --- | ------------------------------------------------------------
| | (a) | The following documents are filed as part of this Form 10-K:



| |                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) Financial Statements. The following Financial
    Statements of Covad Communications Group, Inc. and Report of
    Independent Registered Public Accounting Firms are filed as part
    of this report.

|                                                                               |  |      |    | 
|------------------------------------------------------------------------------ |  | ---- | -- | 
|                                                                               |  | Page |   
|                                                                               |  |      |   
|Report of Independent Registered Public Accounting Firm                        |  |      | 54 | 
|Report of Ernst & Young LLP, Independent Registered
    Public Accounting Firm |  |      | 56 | 
|Consolidated Balance Sheets                                                    |  |      | 57 | 
|Consolidated Statements of Operations                                          |  |      | 58 | 
|Consolidated Statements of Stockholders Equity (Deficit)                      |  |      | 59 | 
|Consolidated Statements of Cash Flows                                          |  |      | 60 | 
|Notes to Consolidated Financial Statements                                     |  |      | 61 | 

53



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Report of Independent Registered Public Accounting Firm







Consolidated financial statements




Internal control over financial reporting


Internal Control  Integrated
Framework Internal Control  Integrated
Framework




54



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PricewaterhouseCoopers
LLP






55



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Report of Ernst and Young LLP, Independent Registered Public
Accounting Firm














| |                          
| | -------------------------
| | /s/ Ernst & Young
    LLP













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COVAD COMMUNICATIONS GROUP, INC.





CONSOLIDATED BALANCE SHEETS


|                                                                                                                                                                                               |                                             |                              |            |         |      |   |            |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------- | ---------------------------- | ---------- | ------- | ---- | - | ---------- | ------- | -
|                                                                                                                                                                                               |                                             | December 31,                 |           
|                                                                                                                                                                                               |                                             |                              |           
|                                                                                                                                                                                               |                                             | 2004                         |            |         | 2003 |  
|                                                                                                                                                                                               |                                             |                              |            |         |      |  
|                                                                                                                                                                                               |                                             | (All dollar and share        |           
|                                                                                                                                                                                               |                                             | amounts are presented in     |           
|                                                                                                                                                                                               |                                             | thousands, except par value) |           
|ASSETS                                                                                                                                                                                        
|Current assets:                                                                                                                                                                                |                                             |                              |            |         |      |   |            |        
|Cash and cash equivalents                                                                                                                                                                      |                                             | $                            | 117,506    |         |      | $ | 65,376     |        
|Short-term investments                                                                                                                                                                         |                                             |                              | 33,490     |         |      |   | 48,969     |        
|Restricted cash and cash equivalents                                                                                                                                                           |                                             |                              | 2,533      |         |      |   | 2,892      |        
|Accounts receivable, net                                                                                                                                                                       |                                             |                              | 30,041     |         |      |   | 28,528     |        
|Unbilled revenues                                                                                                                                                                              |                                             |                              | 3,825      |         |      |   | 5,127      |        
|Other receivables                                                                                                                                                                              |                                             |                              | 1,204      |         |      |   | 637        |        
|Inventories                                                                                                                                                                                    |                                             |                              | 4,629      |         |      |   | 5,335      |        
|Prepaid expenses and other current assets                                                                                                                                                      |                                             |                              | 2,553      |         |      |   | 3,761      |        
|                                                                                                                                                                                               |                                             |                              |            |         |      |  
|                                                                                                                                                                                               | Total current assets                        |                              |            | 195,781 |      |   |            | 160,625 |  
|Property and equipment, net                                                                                                                                                                    |                                             |                              | 78,707     |         |      |   | 94,279     |        
|Collocation fees and other intangible assets, net                                                                                                                                              |                                             |                              | 34,561     |         |      |   | 40,848     |        
|Goodwill                                                                                                                                                                                       |                                             |                              | 36,626     |         |      |   |           |        
|Deferred costs of service activation                                                                                                                                                           |                                             |                              | 30,152     |         |      |   | 31,486     |        
|Deferred customer incentives, net                                                                                                                                                              |                                             |                              | 2,683      |         |      |   | 4,431      |        
|Deferred debt issuance cost                                                                                                                                                                    |                                             |                              | 4,231      |         |      |   |           |        
|Other long-term assets                                                                                                                                                                         |                                             |                              | 2,484      |         |      |   | 3,042      |        
|                                                                                                                                                                                               |                                             |                              |            |         |      |  
|                                                                                                                                                                                               | Total assets                                |                              | $          | 385,225 |      |   | $          | 334,711 |  
|                                                                                                                                                                                               |                                             |                              |            |         |      |  
|                                                                                                                                                                                              
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                                                                                                         
|Current liabilities:                                                                                                                                                                           |                                             |                              |            |         |      |   |            |        
|Accounts payable                                                                                                                                                                               |                                             | $                            | 20,755     |         |      | $ | 12,982     |        
|Accrued compensation                                                                                                                                                                           |                                             |                              | 15,619     |         |      |   | 21,661     |        
|Accrued collocation and network service fees                                                                                                                                                   |                                             |                              | 24,160     |         |      |   | 18,714     |        
|Accrued transaction-based taxes                                                                                                                                                                |                                             |                              | 33,730     |         |      |   | 35,268     |        
|Accrued interest                                                                                                                                                                               |                                             |                              | 1,121      |         |      |   | 5,683      |        
|Accrued market development funds and customer incentives                                                                                                                                       |                                             |                              | 3,182      |         |      |   | 7,024      |        
|Unresolved claims related to bankruptcy proceedings                                                                                                                                            |                                             |                              | 71         |         |      |   | 7,378      |        
|Collateralized customer deposit                                                                                                                                                                |                                             |                              | 7,906      |         |      |   |           |        
|Unearned revenues                                                                                                                                                                              |                                             |                              | 4,420      |         |      |   |           |        
|Other accrued liabilities                                                                                                                                                                      |                                             |                              | 5,753      |         |      |   | 5,607      |        
|                                                                                                                                                                                               |                                             |                              |            |         |      |  
|                                                                                                                                                                                               | Total current liabilities                   |                              |            | 116,717 |      |   |            | 114,317 |  
|Long-term debt                                                                                                                                                                                 |                                             |                              | 125,000    |         |      |   | 50,000     |        
|Collateralized customer deposit                                                                                                                                                                |                                             |                              | 44,444     |         |      |   | 60,258     |        
|Deferred gain resulting from deconsolidation of subsidiary                                                                                                                                     |                                             |                              | 53,963     |         |      |   | 53,963     |        
|Unearned revenues                                                                                                                                                                              |                                             |                              | 51,518     |         |      |   | 61,726     |        
|Other long-term liabilities                                                                                                                                                                    |                                             |                              | 2,218      |         |      |   |           |        
|                                                                                                                                                                                               |                                             |                              |            |         |      |  
|                                                                                                                                                                                               | Total liabilities                           |                              |            | 393,860 |      |   |            | 340,264 |  
|Commitments and contingencies (Notes 9 and 10)                                                                                                                                                 |                                             |                              |            |         |      |   |            |        
|Stockholders deficit:                                                                                                                                                                         |                                             |                              |            |         |      |   |            |        
|Preferred stock, $0.001 par value; 5,000 shares
    authorized; no shares issued and outstanding at
    December 31, 2004 and 2003                                                             |                                             |                              |           |         |      |   |           |        
|Common stock, $0.001 par value; 590,000 shares
    authorized; 263,681 shares issued and outstanding at
    December 31, 2004 (230,163 shares issued and
    outstanding at December 31, 2003) |                                             |                              | 264        |         |      |   | 230        |        
|Common stock  Class B, $0.001 par value;
    10,000 shares authorized; no shares issued and outstanding
    at December 31, 2004 and 2003                                                     |                                             |                              |           |         |      |   |           |        
|Additional paid-in capital                                                                                                                                                                     |                                             |                              | 1,695,424  |         |      |   | 1,651,267  |        
|Deferred stock-based compensation                                                                                                                                                              |                                             |                              | (939       | )       |      |   | (14,459    | )      
|Accumulated other comprehensive loss                                                                                                                                                           |                                             |                              | (985       | )       |      |   | (953       | )      
|Accumulated deficit                                                                                                                                                                            |                                             |                              | (1,702,399 | )       |      |   | (1,641,638 | )      
|                                                                                                                                                                                               |                                             |                              |            |         |      |  
|                                                                                                                                                                                               | Total stockholders deficit                 |                              |            | (8,635  | )    |   |            | (5,553  | )
|                                                                                                                                                                                               |                                             |                              |            |         |      |  
|                                                                                                                                                                                               | Total liabilities and stockholders deficit |                              | $          | 385,225 |      |   | $          | 334,711 |  
|                                                                                                                                                                                               |                                             |                              |            |         |      |  



57



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COVAD COMMUNICATIONS GROUP, INC.





CONSOLIDATED STATEMENTS OF OPERATIONS


|                                                                                         |                                                                          |                                             |         |         |         |   |          |         |         |   |          |         |         | 
|---------------------------------------------------------------------------------------- | ------------------------------------------------------------------------ | ------------------------------------------- | ------- | ------- | ------- | - | -------- | ------- | ------- | - | -------- | ------- | ------- | 
|                                                                                         |                                                                          | Year Ended December 31,                     |        
|                                                                                         |                                                                          |                                             |        
|                                                                                         |                                                                          | 2004                                        |         |         | 2003    |   |          | 2002    |        
|                                                                                         |                                                                          |                                             |         |         |         |   |          |         |        
|                                                                                         |                                                                          | (All dollar and share amounts are presented |        
|                                                                                         |                                                                          | in thousands, except per share amounts)     |        
|Revenues, net                                                                            |                                                                          | $                                           | 429,197 |         |         | $ | 388,851  |         |         | $ | 383,496  |        
|Operating expenses:                                                                      |                                                                          |                                             |         |         |         |   |          |         |         |   |          |        
|                                                                                         | Cost of sales (exclusive of depreciation and amortization)               |                                             |         | 266,172 |         |   |          | 288,122 |         |   |          | 298,336 |        
|                                                                                         | Selling, general and administrative                                      |                                             |         | 146,241 |         |   |          | 140,081 |         |   |          | 150,373 |        
|                                                                                         | Provision for bad debts (bad debt recoveries)                            |                                             |         | (2,035  | )       |   |          | 99      |         |   |          | 319     |        
|                                                                                         | Depreciation and amortization of property and equipment                  |                                             |         | 56,825  |         |   |          | 56,559  |         |   |          | 112,438 |        
|                                                                                         | Amortization of collocation fees and other intangible assets             |                                             |         | 20,585  |         |   |          | 17,325  |         |   |          | 14,650  |        
|                                                                                         | Provision for restructuring expenses                                     |                                             |         | 1,409   |         |   |          | 1,235   |         |   |          |        |        
|                                                                                         | Litigation-related expenses                                              |                                             |         |        |         |   |          |        |         |   |          | (11,628 | )      
|                                                                                         |                                                                          |                                             |         |         |         |   |          |         |        
|                                                                                         |                                                                          | Total operating expenses                    |         |         | 489,197 |   |          |         | 503,421 |   |          |         | 564,488 | 
|                                                                                         |                                                                          |                                             |         |         |         |   |          |         |        
|Loss from operations                                                                     |                                                                          |                                             | (60,000 | )       |         |   | (114,570 | )       |         |   | (180,992 | )      
|Other income (expense):                                                                  |                                                                          |                                             |         |         |         |   |          |         |         |   |          |        
|                                                                                         | Interest income                                                          |                                             |         | 2,668   |         |   |          | 2,105   |         |   |          | 5,122   |        
|                                                                                         | Realized loss on short-term investments                                  |                                             |         |        |         |   |          |        |         |   |          | (17     | )      
|                                                                                         | Provision for impairment of investments in unconsolidated
    affiliates |                                             |         |        |         |   |          | (747    | )       |   |          | (388    | )      
|                                                                                         | Equity in losses of unconsolidated affiliates                            |                                             |         |        |         |   |          | (279    | )       |   |          | (806    | )      
|                                                                                         | Loss on disposal of investments in unconsolidated affiliate              |                                             |         |        |         |   |          |        |         |   |          | (636    | )      
|                                                                                         | Interest expense                                                         |                                             |         | (4,927  | )       |   |          | (5,526  | )       |   |          | (5,581  | )      
|                                                                                         | Miscellaneous income (expense), net                                      |                                             |         | 1,498   |         |   |          | 6,715   |         |   |          | (1,530  | )      
|                                                                                         |                                                                          |                                             |         |         |         |   |          |         |        
|                                                                                         | Other income (expense), net                                              |                                             |         | (761    | )       |   |          | 2,268   |         |   |          | (3,836  | )      
|                                                                                         |                                                                          |                                             |         |         |         |   |          |         |        
|Net loss                                                                                 |                                                                          | $                                           | (60,761 | )       |         | $ | (112,302 | )       |         | $ | (184,828 | )      
|                                                                                         |                                                                          |                                             |         |         |         |   |          |         |        
|Basic and diluted net loss per share                                                     |                                                                          | $                                           | (0.24   | )       |         | $ | (0.50    | )       |         | $ | (0.84    | )      
|                                                                                         |                                                                          |                                             |         |         |         |   |          |         |        
|Weighted-average common shares used in computing basic and
    diluted per share amounts |                                                                          |                                             | 249,187 |         |         |   | 224,950  |         |         |   | 219,744  |        
|                                                                                         |                                                                          |                                             |         |         |         |   |          |         |        



58



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##### Table of Contents



COVAD COMMUNICATIONS GROUP, INC.





CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(DEFICIT)


|                                                                        |  |                                                           |   |              |        |   |            |  |  |             |         |  |               |             |       |              |  |               |           |   |  |         |         |   |           |   |        |   |  |   |            |   |  |   |          |  
|----------------------------------------------------------------------- |  | --------------------------------------------------------- | - | ------------ | ------ | - | ---------- |  |  | ----------- | ------- |  | ------------- | ----------- | ----- | ------------ |  | ------------- | --------- | - |  | ------- | ------- | - | --------- | - | ------ | - |  | - | ---------- | - |  | - | -------- | -
|                                                                        |  |                                                           |   |              |        |   |            |  |  |             |         |  |               | Accumulated |       |              |  |               |          
|                                                                        |  |                                                           |   |              |        |   |            |  |  | Other       |         |  |               |             | Total |             
|                                                                        |  | Preferred Stock                                           |   | Common Stock |        |   | Additional |  |  | Deferred    |         |  | Comprehensive |             |       |              |  | Stockholders |          
|                                                                        |  |                                                           |   |              |        |   | Paid-In    |  |  | Stock-Based |         |  | Income        |             |       | Accumulated  |  |               | Equity    |  
|                                                                        |  | Shares                                                    |   |              | Amount |   | Shares     |  |  | Amount      |         |  | Capital       |             |       | Compensation |  |               | (Loss)    |   |  | Deficit |         |   | (Deficit) |  
|                                                                        |  |                                                           |   |              |        |   |            |  |  |             |         |  |               |             |       |              |  |               |           |   |  |         |         |   |           |  
|                                                                        |  | (All dollar and share amounts are presented in thousands) |  
|Balances at December 31, 2001                                           |  |                                                           |  |              |        | $ |           |  |  |             | 216,542 |  |               | $           | 216   |              |  | $             | 1,606,737 |   |  | $       | (257    | ) |           | $ | (2,359 | ) |  | $ | (1,344,508 | ) |  | $ | 259,829  |  
|Issuance of common stock                                                |  |                                                           |  |              |        |   |           |  |  |             | 5,418   |  |               |             | 6     |              |  |               | 4,303     |   |  |         |        |   |           |   |       |   |  |   |           |   |  |   | 4,309    |  
|Issuance of common stock upon exercise of options                       |  |                                                           |  |              |        |   |           |  |  |             | 1,006   |  |               |             | 1     |              |  |               | 398       |   |  |         |        |   |           |   |       |   |  |   |           |   |  |   | 399      |  
|Issuance of common stock upon emergence from Chapter 11
    bankruptcy  |  |                                                           |  |              |        |   |           |  |  |             | 217     |  |               |             |      |              |  |               | 261       |   |  |         |        |   |           |   |       |   |  |   |           |   |  |   | 261      |  
|Issuance of warrants                                                    |  |                                                           |  |              |        |   |           |  |  |             |        |  |               |             |      |              |  |               | 3,790     |   |  |         |        |   |           |   |       |   |  |   |           |   |  |   | 3,790    |  
|Stock-based compensation                                                |  |                                                           |  |              |        |   |           |  |  |             |        |  |               |             |      |              |  |               | 285       |   |  |         |        |   |           |   |       |   |  |   |           |   |  |   | 285      |  
|Deferred stock-based compensation                                       |  |                                                           |  |              |        |   |           |  |  |             |        |  |               |             |      |              |  |               | 290       |   |  |         | (290    | ) |           |   |       |   |  |   |           |   |  |   |         |  
|Amortization (reversal) of deferred stock-based compensation            |  |                                                           |  |              |        |   |           |  |  |             |        |  |               |             |      |              |  |               | (3,745    | ) |  |         | 387     |   |           |   |       |   |  |   |           |   |  |   | (3,358   | )
|Unrealized losses on available-for-sale securities                      |  |                                                           |  |              |        |   |           |  |  |             |        |  |               |             |      |              |  |               |          |   |  |         |        |   |           |   | 270    |   |  |   |           |   |  |   | 270      |  
|Foreign currency translation                                            |  |                                                           |  |              |        |   |           |  |  |             |        |  |               |             |      |              |  |               |          |   |  |         |        |   |           |   | 1,342  |   |  |   |           |   |  |   | 1,342    |  
|Net loss                                                                |  |                                                           |  |              |        |   |           |  |  |             |        |  |               |             |      |              |  |               |          |   |  |         |        |   |           |   |       |   |  |   | (184,828   | ) |  |   | (184,828 | )
|                                                                        |  |                                                           |   |              |        |   |            |  |  |             |         |  |               |             |       |              |  |               |           |   |  |         |         |   |           |   |       
|Balances at December 31, 2002                                           |  |                                                           |  |              |        |   |           |  |  |             | 223,183 |  |               |             | 223   |              |  |               | 1,612,319 |   |  |         | (160    | ) |           |   | (747   | ) |  |   | (1,529,336 | ) |  |   | 82,299   |  
|Issuance of common stock                                                |  |                                                           |  |              |        |   |           |  |  |             | 1,996   |  |               |             | 2     |              |  |               | 1,721     |   |  |         |        |   |           |   |       |   |  |   |           |   |  |   | 1,723    |  
|Issuance of common stock upon exercise of options                       |  |                                                           |  |              |        |   |           |  |  |             | 4,984   |  |               |             | 5     |              |  |               | 6,453     |   |  |         |        |   |           |   |       |   |  |   |           |   |  |   | 6,458    |  
|Issuance of warrants                                                    |  |                                                           |  |              |        |   |           |  |  |             |        |  |               |             |      |              |  |               | 2,640     |   |  |         |        |   |           |   |       |   |  |   |           |   |  |   | 2,640    |  
|Stock-based compensation                                                |  |                                                           |  |              |        |   |           |  |  |             |        |  |               |             |      |              |  |               | 1,356     |   |  |         |        |   |           |   |       |   |  |   |           |   |  |   | 1,356    |  
|Deferred stock-based compensation                                       |  |                                                           |  |              |        |   |           |  |  |             |        |  |               |             |      |              |  |               | 26,778    |   |  |         | (26,778 | ) |           |   |       |   |  |   |           |   |  |   |         |  
|Amortization (reversal) of deferred stock-based compensation            |  |                                                           |  |              |        |   |           |  |  |             |        |  |               |             |      |              |  |               |          |   |  |         | 12,479  |   |           |   |       |   |  |   |           |   |  |   | 12,479   |  
|Unrealized losses on available-for-sale securities                      |  |                                                           |  |              |        |   |           |  |  |             |        |  |               |             |      |              |  |               |          |   |  |         |        |   |           |   | (206   | ) |  |   |           |   |  |   | (206     | )
|Net loss                                                                |  |                                                           |  |              |        |   |           |  |  |             |        |  |               |             |      |              |  |               |          |   |  |         |        |   |           |   |       |   |  |   | (112,302   | ) |  |   | (112,302 | )
|                                                                        |  |                                                           |   |              |        |   |            |  |  |             |         |  |               |             |       |              |  |               |           |   |  |         |         |   |           |   |       
|Balances at December 31, 2003                                           |  |                                                           |  |              |        |   |           |  |  |             | 230,163 |  |               |             | 230   |              |  |               | 1,651,267 |   |  |         | (14,459 | ) |           |   | (953   | ) |  |   | (1,641,638 | ) |  |   | (5,553   | )
|Issuance of common stock                                                |  |                                                           |  |              |        |   |           |  |  |             | 5,316   |  |               |             | 5     |              |  |               | 4,722     |   |  |         |        |   |           |   |       |   |  |   |           |   |  |   | 4,727    |  
|Issuance of common stock upon exercise of options                       |  |                                                           |  |              |        |   |           |  |  |             | 1,951   |  |               |             | 2     |              |  |               | 2,149     |   |  |         |        |   |           |   |       |   |  |   |           |   |  |   | 2,151    |  
|Issuance of common stock for bankruptcy filing related
    transactions |  |                                                           |  |              |        |   |           |  |  |             | 6,496   |  |               |             | 7     |              |  |               | 6,944     |   |  |         |        |   |           |   |       |   |  |   |           |   |  |   | 6,951    |  
|Issuance of common stock for business acquisition expenses              |  |                                                           |   |              |        |   |            |  |  |             | 834     |  |               |             | 1     |              |  |               | 1,780     |   |  |         |        |   |           |   |       |   |  |   |           |   |  |   | 1,781    |  
|Issuance of common stock to vendors                                     |  |                                                           |  |              |        |   |           |  |  |             | 8       |  |               |             |      |              |  |               | 13        |   |  |         |        |   |           |   |       |   |  |   |           |   |  |   | 13       |  
|Issuance of common stock for business acquisition                       |  |                                                           |  |              |        |   |           |  |  |             | 18,724  |  |               |             | 19    |              |  |               | 39,345    |   |  |         |        |   |           |   |       |   |  |   |           |   |  |   | 39,364   |  
|Issuance of restricted stock                                            |  |                                                           |  |              |        |   |           |  |  |             | 189     |  |               |             |      |              |  |               | 660       |   |  |         | (660    | ) |           |   |       |   |  |   |           |   |  |   |         |  
|Amortization (reversal) of stock- based compensation                    |  |                                                           |  |              |        |   |           |  |  |             |        |  |               |             |      |              |  |               | (11,456   | ) |  |         | 14,180  |   |           |   |       |   |  |   |           |   |  |   | 2,724    |  
|Unrealized losses on available-for-sale securities                      |  |                                                           |  |              |        |   |           |  |  |             |        |  |               |             |      |              |  |               |          |   |  |         |        |   |           |   | (32    | ) |  |   |           |   |  |   | (32      | )
|Net loss                                                                |  |                                                           |  |              |        |   |           |  |  |             |        |  |               |             |      |              |  |               |          |   |  |         |        |   |           |   |       |   |  |   | (60,761    | ) |  |   | (60,761  | )
|                                                                        |  |                                                           |   |              |        |   |            |  |  |             |         |  |               |             |       |              |  |               |           |   |  |         |         |   |           |   |       
|Balances at December 31, 2004                                           |  |                                                           |  |              |        | $ |           |  |  |             | 263,681 |  |               | $           | 264   |              |  | $             | 1,695,424 |   |  | $       | (939    | ) |           | $ | (985   | ) |  | $ | (1,702,399 | ) |  | $ | (8,635   | )
|                                                                        |  |                                                           |   |              |        |   |            |  |  |             |         |  |               |             |       |              |  |               |           |   |  |         |         |   |           |   |       



59



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##### Table of Contents



COVAD COMMUNICATIONS GROUP, INC.





CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                                                                                             |                                                                          |                                                     |          |         |       |   |          |         |         |   |          |         |         |  
|---------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------ | --------------------------------------------------- | -------- | ------- | ----- | - | -------- | ------- | ------- | - | -------- | ------- | ------- | -
|                                                                                                                             |                                                                          | Year Ended December 31,                             |         
|                                                                                                                             |                                                                          |                                                     |         
|                                                                                                                             |                                                                          | 2004                                                |          |         | 2003  |   |          | 2002    |        
|                                                                                                                             |                                                                          |                                                     |          |         |       |   |          |         |        
|                                                                                                                             |                                                                          | (All dollar amounts are presented in                |         
|                                                                                                                             |                                                                          | thousands)                                          |         
|Operating Activities:                                                                                                        |                                                                          |                                                     |          |         |       |   |          |         |         |   |          |        
|Net loss                                                                                                                     |                                                                          | $                                                   | (60,761  | )       |       | $ | (112,302 | )       |         | $ | (184,828 | )      
|Adjustments to reconcile net loss to net cash provided by (used
    in) operating activities:                                |                                                                          |                                                     |          |         |       |   |          |         |         |   |          |        
|                                                                                                                             | Provision for bad debts (bad debt recoveries), net                       |                                                     |          | (2,035  | )     |   |          | 99      |         |   |          | 319     |        
|                                                                                                                             | Depreciation and amortization                                            |                                                     |          | 77,410  |       |   |          | 73,884  |         |   |          | 127,088 |        
|                                                                                                                             | Loss on disposition of property and equipment                            |                                                     |          | 669     |       |   |          | 112     |         |   |          | 1,712   |        
|                                                                                                                             | Non-cash litigation-related expenses                                     |                                                     |          |        |       |   |          |        |         |   |          | (11,628 | )      
|                                                                                                                             | Amortization (reversal) of deferred stock-based
    compensation, net    |                                                     |          | 2,724   |       |   |          | 12,479  |         |   |          | (3,358  | )      
|                                                                                                                             | Amortization of deferred customer incentives                             |                                                     |          | 1,749   |       |   |          |        |         |   |          |        |        
|                                                                                                                             | Other stock-based compensation                                           |                                                     |          | 13      |       |   |          | 1,367   |         |   |          | 305     |        
|                                                                                                                             | Other non-cash charges                                                   |                                                     |          | 809     |       |   |          | 1,749   |         |   |          | 803     |        
|                                                                                                                             | Accretion of interest on investments, net                                |                                                     |          | (716    | )     |   |          | (1,090  | )       |   |          | (209    | )      
|                                                                                                                             | Provision for impairment of investments in unconsolidated
    affiliates |                                                     |          |        |       |   |          | 747     |         |   |          | 388     |        
|                                                                                                                             | Equity in losses of unconsolidated affiliates                            |                                                     |          |        |       |   |          | 279     |         |   |          | 806     |        
|                                                                                                                             | Miscellaneous income from internal-use software license royalties        |                                                     |          |        |       |   |          | (5,606  | )       |   |          |        |        
|                                                                                                                             | Loss on disposal of investment in unconsolidated affiliates              |                                                     |          |        |       |   |          |        |         |   |          | 636     |        
|Net changes in operating assets and liabilities, net of assets
    acquired and liabilities assumed in purchase acquisition: |                                                                          |                                                     |          |         |       |   |          |         |         |   |          |        
|                                                                                                                             | Restricted cash and cash equivalents                                     |                                                     |          |        |       |   |          | (316    | )       |   |          | 6,627   |        
|                                                                                                                             | Accounts receivable                                                      |                                                     |          | 1,055   |       |   |          | (6,881  | )       |   |          | 1,180   |        
|                                                                                                                             | Unbilled revenues                                                        |                                                     |          | 1,302   |       |   |          | (1,206  | )       |   |          | 1,043   |        
|                                                                                                                             | Inventories                                                              |                                                     |          | 730     |       |   |          | (239    | )       |   |          | 2,153   |        
|                                                                                                                             | Prepaid expenses and other assets                                        |                                                     |          | 741     |       |   |          | 1,995   |         |   |          | 4,159   |        
|                                                                                                                             | Deferred costs of service activation                                     |                                                     |          | 1,334   |       |   |          | 8,800   |         |   |          | 17,676  |        
|                                                                                                                             | Accounts payable                                                         |                                                     |          | 4,407   |       |   |          | 2,067   |         |   |          | (4,927  | )      
|                                                                                                                             | Unresolved claims related to bankruptcy proceedings                      |                                                     |          | (356    | )     |   |          | (3      | )       |   |          | (2,930  | )      
|                                                                                                                             | Collateralized customer deposit                                          |                                                     |          | (7,908  | )     |   |          | (7,933  | )       |   |          | (6,809  | )      
|                                                                                                                             | Other current liabilities                                                |                                                     |          | (11,703 | )     |   |          | (1,466  | )       |   |          | (1,366  | )      
|                                                                                                                             | Unearned revenues                                                        |                                                     |          | (5,788  | )     |   |          | (12,089 | )       |   |          | (24,882 | )      
|                                                                                                                             |                                                                          |                                                     |          |         |       |   |          |         |        
|                                                                                                                             |                                                                          | Net cash provided by (used in) operating activities |          |         | 3,676 |   |          |         | (45,553 | ) |          |         | (76,042 | )
|Investing Activities:                                                                                                        |                                                                          |                                                     |          |         |       |   |          |         |         |   |          |        
|Restricted cash and cash equivalents                                                                                         |                                                                          |                                                     | 359      |         |       |   |         |         |         |   |         |        
|Purchase of short-term investments                                                                                           |                                                                          |                                                     | (144,105 | )       |       |   | (131,903 | )       |         |   | (237,088 | )      
|Maturities of short-term investments                                                                                         |                                                                          |                                                     | 160,268  |         |       |   | 191,894  |         |         |   | 165,526  |        
|Proceeds from the sale of short-term investments                                                                             |                                                                          |                                                     |         |         |       |   |         |         |         |   | 40,017   |        
|Purchase of property and equipment                                                                                           |                                                                          |                                                     | (38,743  | )       |       |   | (44,142  | )       |         |   | (22,782  | )      
|Proceeds from sale of property and equipment                                                                                 |                                                                          |                                                     | 115      |         |       |   | 181      |         |         |   | 13,451   |        
|Recovery of internal-use software costs                                                                                      |                                                                          |                                                     |         |         |       |   | 7,345    |         |         |   | 814      |        
|Payment of collocation fees and purchase of other intangible
    assets                                                      |                                                                          |                                                     | (7,900   | )       |       |   | (14,889  | )       |         |   | (3,782   | )      
|Proceeds from sale of investments in unconsolidated affiliates                                                               |                                                                          |                                                     |         |         |       |   |         |         |         |   | 3,360    |        
|Cash acquired through acquisition                                                                                            |                                                                          |                                                     | 107      |         |       |   |         |         |         |   |         |        
|Acquisition costs                                                                                                            |                                                                          |                                                     | (473     | )       |       |   |         |         |         |   |         |        
|Decrease in other long-term assets                                                                                           |                                                                          |                                                     | 592      |         |       |   | 22       |         |         |   | 371      |        
|                                                                                                                             |                                                                          |                                                     |          |         |       |   |          |         |        
|                                                                                                                             | Net cash provided by (used in) investing activities                      |                                                     |          | (29,780 | )     |   |          | 8,508   |         |   |          | (40,113 | )      
|Financing Activities:                                                                                                        |                                                                          |                                                     |          |         |       |   |          |         |         |   |          |        
|Proceeds from the issuance of senior unsecured convertible
    debentures, net                                               |                                                                          |                                                     | 119,961  |         |       |   |         |         |         |   |         |        
|Principal payments of long-term debt                                                                                         |                                                                          |                                                     | (50,000  | )       |       |   |         |         |         |   |         |        
|Principal payments under capital lease obligations                                                                           |                                                                          |                                                     | (386     | )       |       |   | (165     | )       |         |   | (328     | )      
|Proceeds from the issuance of common stock                                                                                   |                                                                          |                                                     | 6,878    |         |       |   | 8,170    |         |         |   | 3,089    |        
|Proceeds from the issuance of common stock related to an
    acquisition                                                     |                                                                          |                                                     | 1,781    |         |       |   |         |         |         |   |         |        
|                                                                                                                             |                                                                          |                                                     |          |         |       |   |          |         |        
|                                                                                                                             | Net cash provided by financing activities                                |                                                     |          | 78,234  |       |   |          | 8,005   |         |   |          | 2,761   |        
|                                                                                                                             |                                                                          |                                                     |          |         |       |   |          |         |        
|Net increase (decrease) in cash and cash equivalents                                                                         |                                                                          |                                                     | 52,130   |         |       |   | (29,040  | )       |         |   | (113,394 | )      
|Cash and cash equivalents at beginning of year                                                                               |                                                                          |                                                     | 65,376   |         |       |   | 94,416   |         |         |   | 207,810  |        
|                                                                                                                             |                                                                          |                                                     |          |         |       |   |          |         |        
|                                                                                                                             | Cash and cash equivalents at end of year                                 |                                                     | $        | 117,506 |       |   | $        | 65,376  |         |   | $        | 94,416  |        
|                                                                                                                             |                                                                          |                                                     |          |         |       |   |          |         |        
|Supplemental Disclosures of Cash Flow Information:                                                                           |                                                                          |                                                     |          |         |       |   |          |         |         |   |          |        
|Cash paid during the year for interest                                                                                       |                                                                          | $                                                   | 8,535    |         |       | $ | 5,510    |         |         | $ | 80       |        
|                                                                                                                             |                                                                          |                                                     |          |         |       |   |          |         |        
|Supplemental Schedule of Non-Cash Investing and Financing
    Activities:                                                    |                                                                          |                                                     |          |         |       |   |          |         |         |   |          |        
|Equipment purchased through capital leases                                                                                   |                                                                          | $                                                   | 959      |         |       | $ |         |         |         | $ | 482      |        
|                                                                                                                             |                                                                          |                                                     |          |         |       |   |          |         |        
|Common stock issued in settlement of claims related to bankruptcy                                                            |                                                                          | $                                                   | 6,951    |         |       | $ |         |         |         | $ |         |        
|                                                                                                                             |                                                                          |                                                     |          |         |       |   |          |         |        
|Common stock, options, and warrants issued for acquisition of
    business                                                   |                                                                          | $                                                   | 39,364   |         |       | $ |         |         |         | $ |         |        
|                                                                                                                             |                                                                          |                                                     |          |         |       |   |          |         |        



60



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COVAD COMMUNICATIONS GROUP, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Years Ended December 31, 2004, 2003 and 2002


(All dollar and share amounts are presented in thousands,
except per share amounts)




|   |                                                                        
|-- | -----------------------------------------------------------------------
|1. | Nature of Operations and Summary of Significant Accounting
    Policies



| |                                                 
| | ------------------------------------------------
| | Organization, Business and Basis of Presentation



| |                          
| | -------------------------
| | Organization and Business







61



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##### Table of Contents



COVAD COMMUNICATIONS GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                      
| | ---------------------
| | Basis of Presentation





| |            
| | -----------
| | Adjustments





62



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##### Table of Contents



COVAD COMMUNICATIONS GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                                           
| | ------------------------------------------
| | Summary of Significant Accounting Policies



| |                 
| | ----------------
| | Use of Estimates





| |                                            
| | -------------------------------------------
| | Cash Equivalents and Short-Term Investments





|                                  |                                     |                   |        |        |            |       |            |   |  |            |     |     |   |   |        |        | 
|--------------------------------- | ----------------------------------- | ----------------- | ------ | ------ | ---------- | ----- | ---------- | - |  | ---------- | --- | --- | - | - | ------ | ------ | 
|                                  |                                     | December 31, 2004 |       
|                                  |                                     |                   |       
|                                  |                                     |                   |        | Gross  |            | Gross |            |   | 
|                                  |                                     | Amortized         |        |        | Unrealized |       | Unrealized |   |  |           
|                                  |                                     | Cost              |        |        | Gains      |       | Losses     |   |  | Fair Value |    
|                                  |                                     |                   |        |        |            |       |            |   |  |            |    
|U.S. Government agency securities |                                     | $                 | 21,952 |        |            | $     |           |   |  | $          | (22 | )   |   | $ | 21,930 |       
|Commercial paper                  |                                     |                   | 11,564 |        |            |       |           |   |  |            | (4  | )   |   |   | 11,560 |       
|                                  |                                     |                   |        |        |            |       |            |   |  |            |     |    
|                                  | Total available-for-sale securities |                   | $      | 33,516 |            |       | $          |  |  |            | $   | (26 | ) |   | $      | 33,490 | 
|                                  |                                     |                   |        |        |            |       |            |   |  |            |     |    

|                                  |                                     |                   |        |        |            |   |       |            |  |            |   |   |  |   |        |        | 
|--------------------------------- | ----------------------------------- | ----------------- | ------ | ------ | ---------- | - | ----- | ---------- |  | ---------- | - | - |  | - | ------ | ------ | 
|                                  |                                     | December 31, 2003 |       
|                                  |                                     |                   |       
|                                  |                                     |                   |        | Gross  |            |   | Gross |            | 
|                                  |                                     | Amortized         |        |        | Unrealized |   |       | Unrealized |  |           
|                                  |                                     | Cost              |        |        | Gains      |   |       | Losses     |  | Fair Value |  
|                                  |                                     |                   |        |        |            |   |       |            |  |            |  
|U.S. Government agency securities |                                     | $                 | 38,961 |        |            | $ | 7     |            |  | $          |  |   |  | $ | 38,968 |       
|Certificates of deposit           |                                     |                   | 10,000 |        |            |   | 1     |            |  |            |  |   |  |   | 10,001 |       
|                                  |                                     |                   |        |        |            |   |       |            |  |            |   |  
|                                  | Total available-for-sale securities |                   | $      | 48,961 |            |   | $     | 8          |  |            | $ |  |  |   | $      | 48,969 | 
|                                  |                                     |                   |        |        |            |   |       |            |  |            |   |  



63



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COVAD COMMUNICATIONS GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|       |       |              |   |      |  |   |      |   |  |       |      
|------ | ----- | ------------ | - | ---- |  | - | ---- | - |  | ----- | -----
|       |       | Year Ended  
|       |       | December 31,
|       |       |             
|       |       | 2004         |   | 2003 |  |   | 2002
|       |       |              |   |      |  |   |     
|Losses |       | $            |  |      |  | $ |     |   |  | $(17)
|       |       |              |   |      |  |   |      |  
|       | Total |              | $ |     |  |   | $    |  |  |       | $(17)
|       |       |              |   |      |  |   |      |  



| |                                     
| | ------------------------------------
| | Restricted Cash and Cash Equivalents





| |                  
| | -----------------
| | Other Investments







| |                                                                           
| | --------------------------------------------------------------------------
| | Concentrations of Credit Risk, Significant Customer and, Key
    Suppliers







64



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##### Table of Contents



COVAD COMMUNICATIONS GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                
| | ---------------
| | Related Parties









| |            
| | -----------
| | Inventories





| |                       
| | ----------------------
| | Property and Equipment



|                                     |  |                                                    
|------------------------------------ |  | ---------------------------------------------------
|Leasehold improvements               |  | 5 years or the term of the lease, whichever is less
|Computer equipment                   |  | 2 to 5 years                                       
|Computer software                    |  | 3 to 5 years                                       
|Furniture and fixtures               |  | 2 to 5 years                                       
|Networks and communication equipment |  | 2 to 5 years                                       



65



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##### Table of Contents



COVAD COMMUNICATIONS GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                                             
| | --------------------------------------------
| | Collocation Fees and Other Intangible Assets







|     |  |   |        | 
|---- |  | - | ------ | 
|2005 |  | $ | 16,750 | 
|2006 |  | $ | 7,636  | 
|2007 |  | $ | 5,610  | 
|2008 |  | $ | 3,753  | 
|2009 |  | $ | 812    | 



| |                              
| | -----------------------------
| | Change in Accounting Estimate



66



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##### Table of Contents



COVAD COMMUNICATIONS GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








| |                                
| | -------------------------------
| | Impairment of Long-lived Assets







| |                         
| | ------------------------
| | Stock-Based Compensation





|                                                                                                                                                                         |             |      |         |       |      |   |          |       |   |   |          |       |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------- | ---- | ------- | ----- | ---- | - | -------- | ----- | - | - | -------- | ----- | -
|                                                                                                                                                                         |             | 2004 |         |       | 2003 |   |          | 2002  |  
|                                                                                                                                                                         |             |      |         |       |      |   |          |       |  
|Net loss, as reported                                                                                                                                                    |             | $    | (60,761 | )     |      | $ | (112,302 | )     |   | $ | (184,828 | )    
|Stock-based employee compensation expense (reversal) included in
    the determination of net loss, as reported                                                          |             |      | 2,724   |       |      |   | 13,715   |       |   |   | (3,112   | )    
|Stock-based employee compensation expense that would have been
    included in the determination of net loss if the fair value
    method had been applied to all awards |             |      | (21,593 | )     |      |   | (20,507  | )     |   |   | (28,471  | )    
|                                                                                                                                                                         |             |      |         |       |      |   |          |       |  
|Pro forma net loss                                                                                                                                                       |             | $    | (79,630 | )     |      | $ | (119,094 | )     |   | $ | (216,411 | )    
|                                                                                                                                                                         |             |      |         |       |      |   |          |       |  
|Basic and diluted net loss per common share:                                                                                                                             |             |      |         |       |      |   |          |       |   |   |          |      
|                                                                                                                                                                         | As reported |      | $       | (0.24 | )    |   | $        | (0.50 | ) |   | $        | (0.84 | )
|                                                                                                                                                                         |             |      |         |       |      |   |          |       |  
|                                                                                                                                                                         | Pro forma   |      | $       | (0.32 | )    |   | $        | (0.53 | ) |   | $        | (0.98 | )
|                                                                                                                                                                         |             |      |         |       |      |   |          |       |  



67



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##### Table of Contents



COVAD COMMUNICATIONS GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                  
| | -----------------
| | Advertising Costs







| |            
| | -----------
| | Legal Costs





| |             
| | ------------
| | Income Taxes





| |                                     
| | ------------------------------------
| | Fair Values of Financial Instruments



Cash, Cash Equivalents, Short Term Investments and Restricted
Cash and Cash Equivalents.


Borrowings.




| |                 
| | ----------------
| | Foreign Currency



68



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##### Table of Contents



COVAD COMMUNICATIONS GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                                     
| | ------------------------------------
| | Basic and Diluted Net Loss per Share







|                                                                             |  |                         |         |  |      |  |         |      |  |  |         | 
|---------------------------------------------------------------------------- |  | ----------------------- | ------- |  | ---- |  | ------- | ---- |  |  | ------- | 
|                                                                             |  | Year Ended December 31, |        
|                                                                             |  |                         |        
|                                                                             |  | 2004                    |         |  | 2003 |  |         | 2002 | 
|                                                                             |  |                         |         |  |      |  |         |      | 
|Weighted-average shares of common stock outstanding                          |  |                         | 249,295 |  |      |  | 224,950 |      |  |  | 219,750 | 
|Less weighted-average shares of common stock subject to
    repurchase       |  |                         | 108     |  |      |  |        |      |  |  | 6       | 
|                                                                             |  |                         |         |  |      |  |         |      | 
|Weighted-average common shares used in computing basic per share
    amounts |  |                         | 249,187 |  |      |  | 224,950 |      |  |  | 219,744 | 
|                                                                             |  |                         |         |  |      |  |         |      | 







| |                   
| | ------------------
| | Comprehensive Loss



|                                                           |  |            |            |                         |      |   |         |      |  |   |          |   |  |   |          |  
|---------------------------------------------------------- |  | ---------- | ---------- | ----------------------- | ---- | - | ------- | ---- |  | - | -------- | - |  | - | -------- | -
|                                                           |  |            |            | Year Ended December 31, |     
|                                                           |  | Cumulative |            |                         |      |  
|                                                           |  | Amounts    |            |                         | 2004 |   |         | 2003 |  |   | 2002     |  
|                                                           |  |            |            |                         |      |   |         |      |  |   |          |  
|Net loss                                                   |  | $          | (1,702,399 | )                       |      | $ | (60,761 | )    |  | $ | (112,302 | ) |  | $ | (184,828 | )
|Unrealized gains (losses) on available-for-sale securities |  |            | (23        | )                       |      |   | (32     | )    |  |   | (206     | ) |  |   | 270      |  
|Foreign currency translation adjustment                    |  |            | (962       | )                       |      |   |        |      |  |   |         |   |  |   | 1,342    |  
|                                                           |  |            |            |                         |      |   |         |      |  |   |          |  
|Comprehensive loss                                         |  | $          | (1,703,384 | )                       |      | $ | (60,793 | )    |  | $ | (112,508 | ) |  | $ | (183,216 | )
|                                                           |  |            |            |                         |      |   |         |      |  |   |          |  

69



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##### Table of Contents



COVAD COMMUNICATIONS GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |         
| | --------
| | Goodwill





Acquisition of GoBeam, Inc.




| |                                
| | -------------------------------
| | Collateralized Customer Deposit

Revenue Recognition




| |                                 
| | --------------------------------
| | Recent Accounting Pronouncements



70



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##### Table of Contents



COVAD COMMUNICATIONS GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










71



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##### Table of Contents



COVAD COMMUNICATIONS GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








| |                        
| | -----------------------
| | Risks and Uncertainties





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | changes in government policy, regulation and enforcement or
    adverse judicial or administrative interpretations and rulings
    or legislative action relating to regulations, enforcement and
    pricing, including, but not limited to, changes that affect the
    continued availability of the unbundled network elements of the
    local exchange carriers network and the costs associated
    therewith;
|
| |  | dependence on the availability and functionality of the networks
    of the incumbent local exchange carriers;                                                                                                                                                                                                                                                                                                       
|
| |  | increased price competition in local and long distance services,
    including bundled services, and overall competition within the
    telecommunications industry; and                                                                                                                                                                                                                                             
|
| |  | adverse determinations in certain litigation matters                                                                                                                                                                                                                                                                                                                                                                 





|   |                    
|-- | -------------------
|2. | Revenue Recognition



72



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##### Table of Contents



COVAD COMMUNICATIONS GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)












|                              |                          |              |        |        |      |   |        |        | 
|----------------------------- | ------------------------ | ------------ | ------ | ------ | ---- | - | ------ | ------ | 
|                              |                          | December 31, |       
|                              |                          |              |       
|                              |                          | 2004         |        |        | 2003 |  
|                              |                          |              |        |        |      |  
|Gross accounts receivable     |                          | $            | 31,607 |        |      | $ | 33,402 |       
|Allowance for service credits |                          |              | (1,405 | )      |      |   | (2,124 | )     
|Allowance for bad debts       |                          |              | (161   | )      |      |   | (2,750 | )     
|                              |                          |              |        |        |      |  
|                              | Accounts receivable, net |              | $      | 30,041 |      |   | $      | 28,528 | 
|                              |                          |              |        |        |      |  



|                               |  |              |        |   |      |   |        |      |  |   |        |  
|------------------------------ |  | ------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                               |  | December 31, |       
|                               |  |              |       
|                               |  | 2004         |        |   | 2003 |   |        | 2002 | 
|                               |  |              |        |   |      |   |        |      | 
|Allowance for service credits: |  |              |        |   |      |   |        |      |  |   |        |  
|Balance at beginning of period |  | $            | 2,124  |   |      | $ | 2,077  |      |  | $ | 5,648  |  
|Provision                      |  |              | 4,914  |   |      |   | 2,886  |      |  |   | 2,322  |  
|Write-offs                     |  |              | (5,136 | ) |      |   | (1,557 | )    |  |   | (3,748 | )
|Recoveries                     |  |              | (497   | ) |      |   | (1,282 | )    |  |   | (2,145 | )
|                               |  |              |        |   |      |   |        |      | 
|Balance at end of period       |  | $            | 1,405  |   |      | $ | 2,124  |      |  | $ | 2,077  |  
|                               |  |              |        |   |      |   |        |      | 

73



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##### Table of Contents



COVAD COMMUNICATIONS GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                               |  |              |        |   |      |   |       |      |  |   |        |  
|------------------------------ |  | ------------ | ------ | - | ---- | - | ----- | ---- |  | - | ------ | -
|                               |  | December 31, |       
|                               |  |              |       
|                               |  | 2004         |        |   | 2003 |   |       | 2002 | 
|                               |  |              |        |   |      |   |       |      | 
|Allowance for bad debts:       |  |              |        |   |      |   |       |      |  |   |        |  
|Balance at beginning of period |  | $            | 2,750  |   |      | $ | 3,311 |      |  | $ | 2,835  |  
|Provision                      |  |              | 487    |   |      |   | 275   |      |  |   | 3,812  |  
|Write-offs                     |  |              | (1,051 | ) |      |   | (462  | )    |  |   | (2,652 | )
|Recoveries                     |  |              | (2,025 | ) |      |   | (374  | )    |  |   | (684   | )
|                               |  |              |        |   |      |   |       |      | 
|Balance at end of period       |  | $            | 161    |   |      | $ | 2,750 |      |  | $ | 3,311  |  
|                               |  |              |        |   |      |   |       |      | 



| |                      
| | ---------------------
| | Significant Customers







| |                                  
| | ---------------------------------
| | Wholesaler Financial Difficulties





74



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##### Table of Contents



COVAD COMMUNICATIONS GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|   |              
|-- | -------------
|3. | Restructuring



| |                   
| | ------------------
| | Reduction in Force





| |                               
| | ------------------------------
| | Other Restructuring Activities





75



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COVAD COMMUNICATIONS GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|   |                       
|-- | ----------------------
|4. | Property and Equipment



|                                               |                             |              |         |        |      |   |         |        | 
|---------------------------------------------- | --------------------------- | ------------ | ------- | ------ | ---- | - | ------- | ------ | 
|                                               |                             | December 31, |        
|                                               |                             |              |        
|                                               |                             | 2004         |         |        | 2003 |  
|                                               |                             |              |         |        |      |  
|Leasehold improvements                         |                             | $            | 10,239  |        |      | $ | 10,339  |       
|Computer equipment                             |                             |              | 53,045  |        |      |   | 48,801  |       
|Computer software                              |                             |              | 47,291  |        |      |   | 33,912  |       
|Furniture and fixtures                         |                             |              | 17,303  |        |      |   | 17,515  |       
|Network and communication equipment            |                             |              | 380,559 |        |      |   | 362,910 |       
|                                               |                             |              |         |        |      |  
|                                               |                             |              | 508,437 |        |      |   | 473,477 |       
|Less accumulated depreciation and amortization |                             |              | 429,730 |        |      |   | 379,198 |       
|                                               |                             |              |         |        |      |  
|                                               | Property and equipment, net |              | $       | 78,707 |      |   | $       | 94,279 | 
|                                               |                             |              |         |        |      |  





|   |                                       
|-- | --------------------------------------
|5. | Collocation Fees and Other Intangibles



|                                     |                                             |              |         |        |      |   |        |        | 
|------------------------------------ | ------------------------------------------- | ------------ | ------- | ------ | ---- | - | ------ | ------ | 
|                                     |                                             | December 31, |        
|                                     |                                             |              |        
|                                     |                                             | 2004         |         |        | 2003 |  
|                                     |                                             |              |         |        |      |  
|Collocation fees                     |                                             | $            | 93,665  |        |      | $ | 86,796 |       
|Customer lists and other intangibles |                                             |              | 10,470  |        |      |   | 3,750  |       
|                                     |                                             |              |         |        |      |  
|                                     |                                             |              | 104,135 |        |      |   | 90,546 |       
|Less accumulated amortization        |                                             |              | 69,574  |        |      |   | 49,698 |       
|                                     |                                             |              |         |        |      |  
|                                     | Collocation fees and other intangibles, net |              | $       | 34,561 |      |   | $      | 40,848 | 
|                                     |                                             |              |         |        |      |  

6.                Business
Acquisition, Asset Acquisitions and Equity Investments




| |                                      
| | -------------------------------------
| | Acquisition of InternetConnect Assets



76



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##### Table of Contents



COVAD COMMUNICATIONS GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|                           |                      |   |       |       | 
|-------------------------- | -------------------- | - | ----- | ----- | 
|Accounts receivable        |                      | $ | 1,386 |      
|Refundable deposits        |                      |   | 349   |      
|Property and equipment     |                      |   | 61    |      
|Customer acquisition costs |                      |   | 3,674 |      
|                           |                      |   |      
|                           | Total purchase price |   | $     | 5,470 | 
|                           |                      |   |      





| |                                   
| | ----------------------------------
| | Acquisition of Qwest Customer List







| |                            
| | ---------------------------
| | Acquisition of GoBeam, Inc.



77



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##### Table of Contents



COVAD COMMUNICATIONS GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










|                           |                                              |                        |                              |        |        |        | 
|-------------------------- | -------------------------------------------- | ---------------------- | ---------------------------- | ------ | ------ | ------ | 
|Total purchase cost:       |                                              |                        |                              |       
|                           | Value of common shares issued                |                        | $                            | 38,910 |       
|                           | Value of assumed GoBeam options and warrants |                        |                              | 454    |       
|                           |                                              |                        |                             
|                           |                                              |                        | 39,364                       |       
|Acquisition costs          |                                              |                        | 473                          |       
|                           |                                              |                        |                             
|                           |                                              | Total purchase cost    |                              | $      | 39,837 |       
|                           |                                              |                        |                             
|Purchase price allocation: |                                              |                        |                              |       
|                           | Tangible net liabilities acquired            |                        | $                            | (4,479 | )     
|                           | Intangible assets acquired:                  |                        |                              |        |       
|                           |                                              | Customer relationships |                              |        | 6,600  |       
|                           |                                              | Internal use software  |                              |        | 1,090  |       
|                           |                                              | Goodwill               |                              |        | 36,626 |       
|                           |                                              |                        |                             
|                           |                                              |                        | Total purchase consideration |        | $      | 39,837 | 
|                           |                                              |                        |                             





78



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##### Table of Contents



COVAD COMMUNICATIONS GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|                                     |  |                         |         |   |      |   |          |  
|------------------------------------ |  | ----------------------- | ------- | - | ---- | - | -------- | -
|                                     |  | Year Ended December 31, |        
|                                     |  |                         |        
|                                     |  | 2004                    |         |   | 2003 |  
|                                     |  |                         |         |   |      |  
|Revenue                              |  | $                       | 432,148 |   |      | $ | 393,257  |  
|Net loss                             |  | $                       | (68,331 | ) |      | $ | (124,538 | )
|Basic and diluted net loss per share |  | $                       | (0.27   | ) |      | $ | (0.51    | )







| |                                         
| | ----------------------------------------
| | Unconsolidated Investments in Affiliates



|                        |  |                         |  |            |     |  |           |            |          |            |  |  |        |  |  |      |   |  |  |  |   | 
|----------------------- |  | ----------------------- |  | ---------- | --- |  | --------- | ---------- | -------- | ---------- |  |  | ------ |  |  | ---- | - |  |  |  | - | 
|                        |  |                         |  |            |     |  |           | Investment |         
|                        |  |                         |  | Ownership  |     |  |           |            | Carrying |           
|                        |  |                         |  | Percentage |     |  |           |            | Value    |           
|                        |  |                         |  |            |     |  | Method of |            |          |            | 
|Entity Name             |  | Date of Investment(s)   |  | 2004       |     |  | 2003      |            |          | Accounting |  |  | 2004   |  |  | 2003 |  
|                        |  |                         |  |            |     |  |           |            |          |            |  |  |        |  |  |      |  
|ACCA Networks Co., Ltd. |  | August 2000             |  |            | 10% |  |           |            | 10%      |            |  |  | Equity |  |  |      |  |  |  |  |  | 
|Certive Corporation     |  | November 1999; May 2000 |  |            | 2%  |  |           |            | 5%       |            |  |  | Equity |  |  |      |  |  |  |  |  | 



| |                        
| | -----------------------
| | ACCA Networks Co., Ltd.



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COVAD COMMUNICATIONS GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








| |                    
| | -------------------
| | Certive Corporation





|   |                    
|-- | -------------------
|7. | Credit Arrangements





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COVAD COMMUNICATIONS GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)














|   |               
|-- | --------------
|8. | Capital Leases





|   |                                          
|-- | -----------------------------------------
|9. | Operating Leases and Purchase Obligations



| |                 
| | ----------------
| | Operating Leases



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COVAD COMMUNICATIONS GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                         |            |             |   |       |               |  |   |           |    |  |   |       |        | 
|------------------------ | ---------- | ----------- | - | ----- | ------------- |  | - | --------- | -- |  | - | ----- | ------ | 
|                         |            | Gross Lease |   |       | Less Sublease |  |   | Net Lease |   
|                         |            | Payments    |   |       | Payments      |  |   | Payments  |   
|                         |            |             |   |       |               |  |   |           |   
|Year ending December 31, |            |             |   |       |               |  |   |           |    |  |   |      
|                         | 2005       |             | $ | 4,385 |               |  | $ | 47        |    |  | $ | 4,338 |       
|                         | 2006       |             |   | 3,460 |               |  |   | 31        |    |  |   | 3,429 |       
|                         | 2007       |             |   | 2,635 |               |  |   | 13        |    |  |   | 2,622 |       
|                         | 2008       |             |   | 2,182 |               |  |   |          |    |  |   | 2,182 |       
|                         | 2009       |             |   | 736   |               |  |   |          |    |  |   | 736   |       
|                         | Thereafter |             |   |      |               |  |   |          |    |  |   |      |       
|                         |            |             |   |       |               |  |   |           |   
|                         |            | Total       |   | $     | 13,398        |  |   | $         | 91 |  |   | $     | 13,307 | 
|                         |            |             |   |       |               |  |   |           |   





| |                     
| | --------------------
| | Purchase Obligations





|                         |      |       |   |       |       | 
|------------------------ | ---- | ----- | - | ----- | ----- | 
|Year ending December 31, |      |       |   |      
|                         | 2005 |       | $ | 4,475 |      
|                         | 2006 |       |   | 281   |      
|                         |      |       |  
|                         |      | Total |   | $     | 4,756 | 
|                         |      |       |  





|    |              
|--- | -------------
|10. | Contingencies



| |           
| | ----------
| | Litigation



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COVAD COMMUNICATIONS GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |   |                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the class action lawsuits filed in the United States District
    Court for the Northern District of California. This settlement
    is described in more detail below;                            
|
| |  | the lawsuits filed in the Superior Court of the State of
    California for the County of Santa Clara by six purchasers
    of the convertible notes that the Company issued in September
    2000;
|
| |  | disputed claims made by former shareholders of Laser Link.net,
    Inc.; and                                                                                                                       
|
| |  | disputed claims made by GE Capital and its subsidiary, Heller
    Financial Group                                                                                                                  







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COVAD COMMUNICATIONS GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)














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COVAD COMMUNICATIONS GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)












85



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COVAD COMMUNICATIONS GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                    
| | -------------------
| | Other Contingencies







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COVAD COMMUNICATIONS GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                           
| | --------------------------
| | Indemnification Agreements









|    |                     
|--- | --------------------
|11. | Stockholders Equity



| |                    
| | -------------------
| | Strategic Investors





| |             
| | ------------
| | Common Stock





|                             |       |  |        |        | 
|---------------------------- | ----- |  | ------ | ------ | 
|Bankruptcy claims            |       |  | 583    |       
|Outstanding options          |       |  | 22,997 |       
|Options available for grant  |       |  | 11,683 |       
|Employee stock purchase plan |       |  | 7,568  |       
|Convertible debentures       |       |  | 39,380 |       
|Outstanding warrants         |       |  | 6,514  |       
|                             |       |  |       
|                             | Total |  |        | 88,725 | 
|                             |       |  |       

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COVAD COMMUNICATIONS GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                                   
| | ----------------------------------
| | Stockholder Protection Rights Plan





| |         
| | --------
| | Warrants







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COVAD COMMUNICATIONS GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |             
|--- | ------------
|12. | Income Taxes





|                                              |                              |                         |         |   |      |   |         |      |  |   |         |   | 
|--------------------------------------------- | ---------------------------- | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - | 
|                                              |                              | Year Ended December 31, |        
|                                              |                              |                         |        
|                                              |                              | 2004                    |         |   | 2003 |   |         | 2002 | 
|                                              |                              |                         |         |   |      |   |         |      | 
|Federal benefit at statutory rate             |                              | $                       | (21,266 | ) |      | $ | (39,306 | )    |  | $ | (64,690 | )
|State benefit, net of federal benefit         |                              |                         | (3,038  | ) |      |   | (4,829  | )    |  |   | (9,386  | )
|Net operating losses with no current benefits |                              |                         | 22,290  |   |      |   | 38,636  |      |  |   | 75,090  |  
|Deferred variable stock-based compensation    |                              |                         | 1,099   |   |      |   | 4,330   |      |  |   |        |  
|Other                                         |                              |                         | 915     |   |      |   | 1,169   |      |  |   | (1,014  | )
|                                              |                              |                         |         |   |      |   |         |      | 
|                                              | Income tax expense (benefit) |                         | $       |  |      |   | $       |     |  |   | $       |  | 
|                                              |                              |                         |         |   |      |   |         |      | 



|                                         |                           |              |          |         |      |   |          |         | 
|---------------------------------------- | ------------------------- | ------------ | -------- | ------- | ---- | - | -------- | ------- | 
|                                         |                           | December 31, |         
|                                         |                           |              |         
|                                         |                           | 2004         |          |         | 2003 |  
|                                         |                           |              |          |         |      |  
|Deferred tax assets:                     |                           |              |          |         |      |   |          |        
|Net operating loss carryforwards         |                           | $            | 370,489  |         |      | $ | 327,574  |        
|Capital loss carryforwards               |                           |              | 10,810   |         |      |   | 16,919   |        
|Deferred and unearned revenue            |                           |              | 32,259   |         |      |   | 37,921   |        
|Deconsolidation of subsidiary            |                           |              | 21,585   |         |      |   | 21,585   |        
|Unconsolidated investments in affiliates |                           |              | 6,725    |         |      |   | 6,725    |        
|Depreciation and amortization            |                           |              | 43,241   |         |      |   | 38,158   |        
|Other                                    |                           |              | 12,891   |         |      |   | 12,231   |        
|                                         |                           |              |          |         |      |  
|                                         | Total deferred tax assets |              |          | 498,000 |      |   |          | 461,113 | 
|Deferred tax liabilities                 |                           |              | (2,628   | )       |      |   |         |        
|                                         |                           |              |          |         |      |  
|                                         | Net deferred tax assets   |              |          | 495,372 |      |   |          | 461,113 | 
|Valuation allowance                      |                           |              | (495,372 | )       |      |   | (461,113 | )      
|                                         |                           |              |          |         |      |  
|                                         | Net deferred taxes        |              | $        |        |      |   | $        |        | 
|                                         |                           |              |          |         |      |  





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COVAD COMMUNICATIONS GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










|    |                       
|--- | ----------------------
|13. | Employee Benefit Plans



| |                          
| | -------------------------
| | Defined Contribution Plan







| |                                  
| | ---------------------------------
| | 1998 Employee Stock Purchase Plan





| |                                  
| | ---------------------------------
| | 2003 Employee Stock Purchase Plan



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COVAD COMMUNICATIONS GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








| |                   
| | ------------------
| | Stock Option Plans









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COVAD COMMUNICATIONS GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                |                     |                     |        |                  |   |  |                  |                  | 
|------------------------------- | ------------------- | ------------------- | ------ | ---------------- | - |  | ---------------- | ---------------- | 
|                                |                     | Number of Shares of |        | Option Price Per
|                                |                     | Common Stock        |        | Share           
|                                |                     |                     |        |                 
|Balance as of December 31, 2001 |                     |                     | 31,600 |                  |   |  | $0.001  $149.79 |                 
|                                | Granted             |                     |        | 2,231            |   |  |                  | $0.940  $  2.30 | 
|                                | Exercised           |                     |        | (1,006           | ) |  |                  | $0.001  $  2.56 | 
|                                | Cancelled           |                     |        | (7,150           | ) |  |                  | $0.001  $149.79 | 
|                                |                     |                     |        |                  |   |  |                  |                 
|Balance as of December 31, 2002 |                     |                     | 25,675 |                  |   |  | $0.001  $149.79 |                 
|                                | Granted             |                     |        | 7,196            |   |  |                  | $0.570  $  5.53 | 
|                                | Exercised           |                     |        | (4,984           | ) |  |                  | $0.001  $  5.44 | 
|                                | Cancelled           |                     |        | (6,210           | ) |  |                  | $0.296  $149.79 | 
|                                |                     |                     |        |                  |   |  |                  |                 
|Balance as of December 31, 2003 |                     |                     | 21,677 |                  |   |  | $0.001  $149.79 |                 
|                                | Granted and assumed |                     |        | 6,867            |   |  |                  | $1.460  $  3.51 | 
|                                | Exercised           |                     |        | (1,951           | ) |  |                  | $0.001  $  3.72 | 
|                                | Cancelled           |                     |        | (3,596           | ) |  |                  | $0.001  $149.79 | 
|                                |                     |                     |        |                  |   |  |                  |                 
|Balance as of December 31, 2004 |                     |                     | 22,997 |                  |   |  | $0.001  $149.79 |                 
|                                |                     |                     |        |                  |   |  |                  |                 



|                     |  |                     |        |                     |  |                  |      |           |  |                  |       |  |  |  |        |  |  |   |       | 
|-------------------- |  | ------------------- | ------ | ------------------- |  | ---------------- | ---- | --------- |  | ---------------- | ----- |  |  |  | ------ |  |  | - | ----- | 
|                     |  | Options Outstanding |        | Options Exercisable
|                     |  |                     |        |                    
|                     |  | Number of           |        | Weighted-Average    |  | Weighted-Average |      | Number of |  | Weighted-Average
|Exercise Price Range |  | Shares              |        | Life Remaining      |  | Exercise Price   |      | Shares    |  | Exercise Price  
|                     |  |                     |        |                     |  |                  |      |           |  |                 
|$0.001  $0.67       |  |                     | 2,466  |                     |  |                  | 4.56 |           |  | $                | 0.54  |  |  |  | 1,816  |  |  | $ | 0.53  | 
|$0.68  $0.84        |  |                     | 2,525  |                     |  |                  | 4.51 |           |  |                  | 0.83  |  |  |  | 2,161  |  |  |   | 0.83  | 
|$0.86  $1.17        |  |                     | 848    |                     |  |                  | 5.52 |           |  |                  | 1.05  |  |  |  | 503    |  |  |   | 1.06  | 
|$1.18  $1.28        |  |                     | 3,876  |                     |  |                  | 6.24 |           |  |                  | 1.28  |  |  |  | 2,070  |  |  |   | 1.28  | 
|$1.29  $2.25        |  |                     | 2,537  |                     |  |                  | 6.18 |           |  |                  | 1.73  |  |  |  | 1,238  |  |  |   | 1.72  | 
|$2.28  $2.56        |  |                     | 2,753  |                     |  |                  | 4.74 |           |  |                  | 2.53  |  |  |  | 2,152  |  |  |   | 2.56  | 
|$2.59  $3.31        |  |                     | 284    |                     |  |                  | 5.11 |           |  |                  | 3.07  |  |  |  | 183    |  |  |   | 3.00  | 
|$3.34  $3.34        |  |                     | 4,011  |                     |  |                  | 7.16 |           |  |                  | 3.34  |  |  |  | 933    |  |  |   | 3.34  | 
|$3.51  $30.04       |  |                     | 2,324  |                     |  |                  | 3.71 |           |  |                  | 16.23 |  |  |  | 2,015  |  |  |   | 18.02 | 
|$30.67  $149.79     |  |                     | 1,373  |                     |  |                  | 2.91 |           |  |                  | 49.26 |  |  |  | 1,373  |  |  |   | 49.26 | 
|                     |  |                     |        |                     |  |                  |      |           |  |                  |       |  |  |  |        |  |  |   |       | 
|$0.001  $149.79     |  |                     | 22,997 |                     |  |                  | 5.35 |           |  | $                | 6.10  |  |  |  | 14,444 |  |  | $ | 8.39  | 
|                     |  |                     |        |                     |  |                  |      |           |  |                  |       |  |  |  |        |  |  |   |       | 



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COVAD COMMUNICATIONS GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










| |                                               
| | ----------------------------------------------
| | Pro forma Stock-Based Compensation Information









|                                  |  |               |        |   |                              |  |        |      |  |  |        |   |  |      |        |   |      |  |        |   |  |  |        |  
|--------------------------------- |  | ------------- | ------ | - | ---------------------------- |  | ------ | ---- |  |  | ------ | - |  | ---- | ------ | - | ---- |  | ------ | - |  |  | ------ | -
|                                  |  | Stock Options |        |   | Employee Stock Purchase Plan | 
|                                  |  |               |        |   |                              | 
|                                  |  | 2004          |        |   | 2003                         |  |        | 2002 |  |  | 2004   |   |  | 2003 |        |   | 2002 | 
|                                  |  |               |        |   |                              |  |        |      |  |  |        |   |  |      |        |   |      | 
|Expected life of options in years |  |               | 4.0    |   |                              |  | 4.0    |      |  |  | 4.0    |   |  |      | 1.0    |   |      |  | 0.5    |   |  |  | 0.5    |  
|Volatility                        |  |               | 123.70 | % |                              |  | 131.70 | %    |  |  | 152.10 | % |  |      | 123.70 | % |      |  | 131.70 | % |  |  | 152.10 | %
|Risk-free interest rate           |  |               | 3.27   | % |                              |  | 2.10   | %    |  |  | 3.10   | % |  |      | 2.61   | % |      |  | 1.08   | % |  |  | 1.72   | %
|Expected dividend yield           |  |               | 0.00   | % |                              |  | 0.00   | %    |  |  | 0.00   | % |  |      | 0.00   | % |      |  | 0.00   | % |  |  | 0.00   | %

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COVAD COMMUNICATIONS GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                  
|--- | -----------------
|14. | Business Segments







94



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COVAD COMMUNICATIONS GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                                        |                                   |           |         |         |        |       |         |          |           |   |            |              |  |       |          |          |   |   |         |         |  
|----------------------------------------------------------------------- | --------------------------------- | --------- | ------- | ------- | ------ | ----- | ------- | -------- | --------- | - | ---------- | ------------ |  | ----- | -------- | -------- | - | - | ------- | ------- | -
|                                                                        |                                   |           |         |         |        | Total |         |          | Corporate |   |            | Consolidated | 
|                                                                        |                                   | Wholesale |         |         | Direct |       |         | Segments |           |   | Operations |              |  | Total |         
|                                                                        |                                   |           |         |         |        |       |         |          |           |   |            |              |  |       |         
|As of and for the year ended December 31, 2004:                         |                                   |           |         |         |        |       |         |          |           |   |            |              |  |       |          |          |   |   |         |        
|Revenue, net                                                            |                                   | $         | 309,899 |         |        | $     | 119,298 |          |           | $ | 429,197    |              |  | $     |         |          |   | $ | 429,197 |        
|Intersegment revenues                                                   |                                   |           |        |         |        |       |        |          |           |   |           |              |  |       |         |          |   |   |        |        
|                                                                        |                                   |           |         |         |        |       |         |          |           |   |            |              |  |       |         
|                                                                        | Total revenues, net               |           |         | 309,899 |        |       |         | 119,298  |           |   |            | 429,197      |  |       |          |         |   |   |         | 429,197 |  
|Cost of sales (exclusive of depreciation and amortization)              |                                   |           | 175,687 |         |        |       | 54,016  |          |           |   | 229,703    |              |  |       | 36,469   |          |   |   | 266,172 |        
|Selling, general and administrative                                     |                                   |           | 10,476  |         |        |       | 39,984  |          |           |   | 50,460     |              |  |       | 95,781   |          |   |   | 146,241 |        
|Provision for bad debts (recoveries)                                    |                                   |           |        |         |        |       |        |          |           |   |           |              |  |       | (2,035   | )        |   |   | (2,035  | )      
|Depreciation and amortization                                           |                                   |           |        |         |        |       |        |          |           |   |           |              |  |       | 56,825   |          |   |   | 56,825  |        
|Amortization of intangible assets                                       |                                   |           |        |         |        |       |        |          |           |   |           |              |  |       | 20,585   |          |   |   | 20,585  |        
|Provision for restructuring expenses                                    |                                   |           | 374     |         |        |       | 281     |          |           |   | 655        |              |  |       | 754      |          |   |   | 1,409   |        
|                                                                        |                                   |           |         |         |        |       |         |          |           |   |            |              |  |       |         
|                                                                        | Total operating expenses          |           |         | 186,537 |        |       |         | 94,281   |           |   |            | 280,818      |  |       |          | 208,379  |   |   |         | 489,197 |  
|                                                                        |                                   |           |         |         |        |       |         |          |           |   |            |              |  |       |         
|Income (loss) from operations                                           |                                   |           | 123,362 |         |        |       | 25,017  |          |           |   | 148,379    |              |  |       | (208,379 | )        |   |   | (60,000 | )      
|                                                                        |                                   |           |         |         |        |       |         |          |           |   |            |              |  |       |         
|Interest income                                                         |                                   |           |        |         |        |       |        |          |           |   |           |              |  |       | 2,668    |          |   |   | 2,668   |        
|Equity in losses of unconsolidated affiliates                           |                                   |           |        |         |        |       |        |          |           |   |           |              |  |       |         |          |   |   |        |        
|Interest expense                                                        |                                   |           |        |         |        |       |        |          |           |   |           |              |  |       | (4,927   | )        |   |   | (4,927  | )      
|Other income, net                                                       |                                   |           |        |         |        |       |        |          |           |   |           |              |  |       | 1,498    |          |   |   | 1,498   |        
|                                                                        |                                   |           |         |         |        |       |         |          |           |   |            |              |  |       |         
|                                                                        | Total other income (expense), net |           |         |        |        |       |         |         |           |   |            |             |  |       |          | (761     | ) |   |         | (761    | )
|                                                                        |                                   |           |         |         |        |       |         |          |           |   |            |              |  |       |         
|                                                                        | Net income (loss)                 |           | $       | 123,362 |        |       | $       | 25,017   |           |   | $          | 148,379      |  |       | $        | (209,140 | ) |   | $       | (60,761 | )
|                                                                        |                                   |           |         |         |        |       |         |          |           |   |            |              |  |       |         
|Assets                                                                  |                                   | $         | 47,994  |         |        | $     | 18,707  |          |           | $ | 66,701     |              |  | $     | 318,524  |          |   | $ | 385,225 |        
|Capital expenditures for property and equipment                         |                                   | $         |        |         |        | $     |        |          |           | $ |           |              |  | $     | 38,743   |          |   | $ | 38,743  |        
|Payment of collocation fees and purchase of other intangible
    assets |                                   | $         |        |         |        | $     |        |          |           | $ |           |              |  | $     | 7,900    |          |   | $ | 7,900   |        

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COVAD COMMUNICATIONS GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                                                                        |                                   |           |         |         |        |       |        |          |           |   |            |              |  |       |          |          |   |   |          |          |  
|----------------------------------------------------------------------- | --------------------------------- | --------- | ------- | ------- | ------ | ----- | ------ | -------- | --------- | - | ---------- | ------------ |  | ----- | -------- | -------- | - | - | -------- | -------- | -
|                                                                        |                                   |           |         |         |        | Total |        |          | Corporate |   |            | Consolidated | 
|                                                                        |                                   | Wholesale |         |         | Direct |       |        | Segments |           |   | Operations |              |  | Total |         
|                                                                        |                                   |           |         |         |        |       |        |          |           |   |            |              |  |       |         
|As of and for the year ended December 31, 2003:                         |                                   |           |         |         |        |       |        |          |           |   |            |              |  |       |          |          |   |   |          |         
|Revenue, net                                                            |                                   | $         | 298,221 |         |        | $     | 90,630 |          |           | $ | 388,851    |              |  | $     |         |          |   | $ | 388,851  |         
|Intersegment revenues                                                   |                                   |           |        |         |        |       |       |          |           |   |           |              |  |       |         |          |   |   |         |         
|                                                                        |                                   |           |         |         |        |       |        |          |           |   |            |              |  |       |         
|                                                                        | Total revenues, net               |           |         | 298,221 |        |       |        | 90,630   |           |   |            | 388,851      |  |       |          |         |   |   |          | 388,851  |  
|Cost of sales (exclusive of depreciation and amortization)              |                                   |           | 209,334 |         |        |       | 46,124 |          |           |   | 255,458    |              |  |       | 32,664   |          |   |   | 288,122  |         
|Selling, general and administrative                                     |                                   |           | 13,069  |         |        |       | 20,346 |          |           |   | 33,415     |              |  |       | 106,666  |          |   |   | 140,081  |         
|Provision for bad debts                                                 |                                   |           |        |         |        |       |       |          |           |   |           |              |  |       | 99       |          |   |   | 99       |         
|Depreciation and amortization                                           |                                   |           |        |         |        |       |       |          |           |   |           |              |  |       | 56,559   |          |   |   | 56,559   |         
|Amortization of intangible assets                                       |                                   |           |        |         |        |       |       |          |           |   |           |              |  |       | 17,325   |          |   |   | 17,325   |         
|Provision for restructuring expenses                                    |                                   |           | 103     |         |        |       | 349    |          |           |   | 452        |              |  |       | 783      |          |   |   | 1,235    |         
|                                                                        |                                   |           |         |         |        |       |        |          |           |   |            |              |  |       |         
|                                                                        | Total operating expenses          |           |         | 222,506 |        |       |        | 66,819   |           |   |            | 289,325      |  |       |          | 214,096  |   |   |          | 503,421  |  
|                                                                        |                                   |           |         |         |        |       |        |          |           |   |            |              |  |       |         
|Income (loss) from operations                                           |                                   |           | 75,715  |         |        |       | 23,811 |          |           |   | 99,526     |              |  |       | (214,096 | )        |   |   | (114,570 | )       
|                                                                        |                                   |           |         |         |        |       |        |          |           |   |            |              |  |       |         
|Interest income                                                         |                                   |           |        |         |        |       |       |          |           |   |           |              |  |       | 2,105    |          |   |   | 2,105    |         
|Provision for impairment of investment in unconsolidated
    affiliates |                                   |           |        |         |        |       |       |          |           |   |           |              |  |       | (747     | )        |   |   | (747     | )       
|Equity in losses of unconsolidated affiliates                           |                                   |           |        |         |        |       |       |          |           |   |           |              |  |       | (279     | )        |   |   | (279     | )       
|Interest expense                                                        |                                   |           |        |         |        |       |       |          |           |   |           |              |  |       | (5,526   | )        |   |   | (5,526   | )       
|Other income, net                                                       |                                   |           |        |         |        |       |       |          |           |   |           |              |  |       | 6,715    |          |   |   | 6,715    |         
|                                                                        |                                   |           |         |         |        |       |        |          |           |   |            |              |  |       |         
|                                                                        | Total other income (expense), net |           |         |        |        |       |        |         |           |   |            |             |  |       |          | 2,268    |   |   |          | 2,268    |  
|                                                                        |                                   |           |         |         |        |       |        |          |           |   |            |              |  |       |         
|                                                                        | Net income (loss)                 |           | $       | 75,715  |        |       | $      | 23,811   |           |   | $          | 99,526       |  |       | $        | (211,828 | ) |   | $        | (112,302 | )
|                                                                        |                                   |           |         |         |        |       |        |          |           |   |            |              |  |       |         
|Assets                                                                  |                                   | $         | 52,210  |         |        | $     | 17,362 |          |           | $ | 69,572     |              |  | $     | 265,139  |          |   | $ | 334,711  |         
|Capital expenditures for property and equipment                         |                                   | $         |        |         |        | $     |       |          |           | $ |           |              |  | $     | 44,142   |          |   | $ | 44,142   |         
|Payment of collocation fees and purchase of other intangible
    assets |                                   | $         |        |         |        | $     |       |          |           | $ |           |              |  | $     | 14,889   |          |   | $ | 14,889   |         

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COVAD COMMUNICATIONS GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                                                                        |                                   |           |         |         |        |       |         |          |           |   |            |              |  |       |          |          |   |   |          |          |  
|----------------------------------------------------------------------- | --------------------------------- | --------- | ------- | ------- | ------ | ----- | ------- | -------- | --------- | - | ---------- | ------------ |  | ----- | -------- | -------- | - | - | -------- | -------- | -
|                                                                        |                                   |           |         |         |        | Total |         |          | Corporate |   |            | Consolidated | 
|                                                                        |                                   | Wholesale |         |         | Direct |       |         | Segments |           |   | Operations |              |  | Total |         
|                                                                        |                                   |           |         |         |        |       |         |          |           |   |            |              |  |       |         
|As of and for the year ended December 31, 2002:                         |                                   |           |         |         |        |       |         |          |           |   |            |              |  |       |          |          |   |   |          |         
|Revenues, net                                                           |                                   | $         | 326,659 |         |        | $     | 56,837  |          |           | $ | 383,496    |              |  | $     |         |          |   | $ | 383,496  |         
|Intersegment revenues                                                   |                                   |           |        |         |        |       |        |          |           |   |           |              |  |       |         |          |   |   |         |         
|                                                                        |                                   |           |         |         |        |       |         |          |           |   |            |              |  |       |         
|                                                                        | Total revenues, net               |           |         | 326,659 |        |       |         | 56,837   |           |   |            | 383,496      |  |       |          |         |   |   |          | 383,496  |  
|Cost of sales (exclusive of depreciation and amortization)              |                                   |           | 206,586 |         |        |       | 31,301  |          |           |   | 237,887    |              |  |       | 60,449   |          |   |   | 298,336  |         
|Selling, general and administrative                                     |                                   |           | 14,244  |         |        |       | 44,513  |          |           |   | 58,757     |              |  |       | 91,616   |          |   |   | 150,373  |         
|Provision for bad debts                                                 |                                   |           |        |         |        |       |        |          |           |   |           |              |  |       | 319      |          |   |   | 319      |         
|Depreciation and amortization                                           |                                   |           |        |         |        |       |        |          |           |   |           |              |  |       | 112,438  |          |   |   | 112,438  |         
|Amortization of intangible assets                                       |                                   |           |        |         |        |       |        |          |           |   |           |              |  |       | 14,650   |          |   |   | 14,650   |         
|Non-cash litigation-related expenses                                    |                                   |           |        |         |        |       |        |          |           |   |           |              |  |       | (11,628  | )        |   |   | (11,628  | )       
|                                                                        |                                   |           |         |         |        |       |         |          |           |   |            |              |  |       |         
|                                                                        | Total operating expenses          |           | $       | 220,830 |        |       | $       | 75,814   |           |   | $          | 296,644      |  |       | $        | 267,844  |   |   | $        | 564,488  |  
|                                                                        |                                   |           |         |         |        |       |         |          |           |   |            |              |  |       |         
|Income (loss) from operations                                           |                                   |           | 105,829 |         |        |       | (18,977 | )        |           |   | 86,852     |              |  |       | (267,844 | )        |   |   | (180,992 | )       
|Interest income                                                         |                                   |           |        |         |        |       |        |          |           |   |           |              |  |       | 5,122    |          |   |   | 5,122    |         
|Realized loss on short-term investments                                 |                                   |           |        |         |        |       |        |          |           |   |           |              |  |       | (17      | )        |   |   | (17      | )       
|Provision for impairment of investment in unconsolidated
    affiliates |                                   |           |        |         |        |       |        |          |           |   |           |              |  |       | (388     | )        |   |   | (388     | )       
|Equity in losses of unconsolidated affiliates                           |                                   |           |        |         |        |       |        |          |           |   |           |              |  |       | (806     | )        |   |   | (806     | )       
|Loss on disposal of investment in unconsolidated affiliates             |                                   |           |        |         |        |       |        |          |           |   |           |              |  |       | (636     | )        |   |   | (636     | )       
|Interest expense                                                        |                                   |           |        |         |        |       |        |          |           |   |           |              |  |       | (5,581   | )        |   |   | (5,581   | )       
|Other expense, net                                                      |                                   |           |        |         |        |       |        |          |           |   |           |              |  |       | (1,530   | )        |   |   | (1,530   | )       
|                                                                        |                                   |           |         |         |        |       |         |          |           |   |            |              |  |       |         
|                                                                        | Total other income (expense), net |           |         |        |        |       |         |         |           |   |            |             |  |       |          | (3,836   | ) |   |          | (3,836   | )
|                                                                        |                                   |           |         |         |        |       |         |          |           |   |            |              |  |       |         
|                                                                        | Net income (loss)                 |           | $       | 105,829 |        |       | $       | (18,977  | )         |   | $          | 86,852       |  |       | $        | (271,680 | ) |   | $        | (184,828 | )
|                                                                        |                                   |           |         |         |        |       |         |          |           |   |            |              |  |       |         
|Assets                                                                  |                                   | $         | 58,158  |         |        | $     | 11,335  |          |           | $ | 69,493     |              |  | $     | 372,668  |          |   | $ | 442,161  |         
|Investments in unconsolidated affiliates:                               |                                   |           |         |         |        |       |         |          |           |   |            |              |  |       |          |          |   |   |          |         
|                                                                        | Domestic                          |           | $       |        |        |       | $       |         |           |   | $          |             |  |       | $        | 1,026    |   |   | $        | 1,026    |  
|Capital expenditures for property and equipment                         |                                   | $         |        |         |        | $     |        |          |           | $ |           |              |  | $     | 22,782   |          |   | $ | 22,782   |         
|Payment of collocation fees                                             |                                   | $         |        |         |        | $     |        |          |           | $ |           |              |  | $     | 3,782    |          |   | $ | 3,782    |         



|    |                  
|--- | -----------------
|15. | Subsequent events



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|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|ITEM 9. | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure










|         |                        
|-------- | -----------------------
|ITEM 9A. | Controls and Procedures



| |                                                  
| | -------------------------------------------------
| | Evaluation of Disclosure Controls and Procedures:







| |                                                                      
| | ---------------------------------------------------------------------
| | Managements Report on Internal Control over
    Financial Reporting:



Internal
Control  Integrated Framework.


Internal Control  Integrated Framework






| |                                                          
| | ---------------------------------------------------------
| | Changes in Internal Control over Financial
    Reporting:



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|         |                  
|-------- | -----------------
|ITEM 9B. | Other Information






PART III







|         |                                                   
|-------- | --------------------------------------------------
|ITEM 10. | Directors and Executive Officers of the Registrant



|                   |  |     |    |  |          |                                                         
|------------------ |  | --- | -- |  | -------- | --------------------------------------------------------
|Name               |  | Age |    |  | Position
|                   |  |     |    |  |         
|Charles E. Hoffman |  |     | 55 |  |          | President and Chief Executive Officer                   
|Patrick J. Bennett |  |     | 57 |  |          | Executive Vice President                                
|Andrew S. Lockwood |  |     | 48 |  |          | Executive Vice President, Market Development            
|P. Michael Hanley  |  |     | 47 |  |          | Executive Vice President, Customer Experience           
|James Kirkland     |  |     | 45 |  |          | General Counsel and Senior Vice President               
|David McMorrow     |  |     | 37 |  |          | Executive Vice President, Sales                         
|Susan Crawford     |  |     | 46 |  |          | Senior Vice President and Acting Chief Financial Officer
|Charles McMinn     |  |     | 53 |  |          | Chairman, Board of Directors                            
|Hellene S. Runtagh |  |     | 56 |  |          | Director                                                
|Daniel C. Lynch    |  |     | 63 |  |          | Director                                                
|Larry Irving       |  |     | 49 |  |          | Director                                                
|Robert C. Hawk     |  |     | 65 |  |          | Director                                                
|L. Dale Crandall   |  |     | 63 |  |          | Director                                                
|Richard A. Jalkut  |  |     | 60 |  |          | Director                                                

Charles E. Hoffman


Patrick J. Bennett


Andrew S. Lockwood


99



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P. Michael Hanley


James Kirkland


David McMorrow


Susan Crawford


John Trewin


Charles McMinn


L. Dale Crandall


100



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##### Table of Contents



Richard A. Jalkut


Robert C. Hawk


Larry Irving


Daniel C. Lynch


Hellene S. Runtagh




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Classified Board




|          |  |                                                          |  |                                                                                                                   
|--------- |  | -------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------
|Class     |  | Directors                                                |  | Term of Office                                                                                                    
|          |  |                                                          |  |                                                                                                                   
|Class I   |  | Daniel C. Lynch
    Richard A. Jalkut
    Larry Irving   |  |  expires at the annual meeting of stockholders in
    2006 and at each third succeeding annual meeting thereafter
|Class II  |  | L. Dale Crandall
    Hellene S. Runtagh                  |  |  expires at the annual meeting of stockholders in
    2007 and at each third succeeding annual meeting thereafter
|Class III |  | Charles McMinn
    Robert C. Hawk
    Charles E. Hoffman |  |  expires at the annual meeting of stockholders in
    2005 and at each third succeeding annual meeting thereafter



Board Committees












| |   |                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------
| |  | reviewing and determining the compensation policy for our
    executives and other employees as directed by the Board of
    Directors;
|
| |  | reviewing and determining all forms of compensation to be
    provided to our executive officers; and                                  
|
| |  | unless otherwise directed by the Board, administering our
    equity-based compensation plans.                                         





| |   |                                                
| | - | -----------------------------------------------
| |  | proposing nominees for election as directors;  
|
| |  | board appraisals and performance standards; and
|
| |  | oversight of corporate governance matters.     



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Code of Conduct





Director Compensation






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an annual retainer of $18,000 is paid to each director in two
    equal cash payments every six months. For the years ended, in
    lieu of receiving the cash payments, a director could elect to
    receive a grant of an option to purchase 5,000 shares,
    vesting in equal monthly installments over one year. For 2005
    forward, Covad will no longer offer its directors the ability to
    receive an option to purchase shares in lieu of the cash
    payments;
|
| |  | for each Board meeting that a director attends, we pay a $1,000
    fee;                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | for each Committee meeting that a director attends on a
    different day from a Board meeting, we pay a fee of $1,000;                                                                                                                                                                                                                                                                                                                                                        
|
| |  | each new director receives an initial stock option grant to
    purchase 60,000 shares of our common stock, and each
    ongoing director receives annual grants of options to
    purchase 15,000 shares of our common stock;                                                                                                                                                                                                                                                 
|
| |  | the above-referenced annual grants of options to
    purchase 15,000 shares vest in equal monthly
    installments over one year rather than equal monthly
    installments over four years;                                                                                                                                                                                                                                                                                   
|
| |  | each member of our Audit Committee, other than the Chairperson,
    receives an initial stock option grant to
    purchase 10,000 shares of our common stock when he or
    she is first appointed to the Audit Committee; thereafter, each
    such member receives an annual grant of an option to
    purchase 5,000 shares of our common stock;                                                                                                                            
|
| |  | the Chairperson of our Audit Committee receives an initial
    option to purchase 10,000 shares of our common stock
    when appointed to the Audit Committee; therefore, the
    Chairperson receives an annual grant of an option to
    purchase 10,000 shares of our common stock for
    continued service; and                                                                                                                                                           
|
| |  | the above referenced annual grants of options to Audit Committee
    members and the Chairperson of the Audit Committee vest in equal
    monthly installments over one year                                                                                                                                                                                                                                                                                                   









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Section 16(a)
Beneficial Ownership Reporting Compliance









|         |                       
|-------- | ----------------------
|ITEM 11. | Executive Compensation



SUMMARY COMPENSATION TABLE


|                            |                           |        |      |                     |        |            |         |                        |            |            |              |         |  |           |   |   |                 |  |         |         |  |   |         |        |     
|--------------------------- | ------------------------- | ------ | ---- | ------------------- | ------ | ---------- | ------- | ---------------------- | ---------- | ---------- | ------------ | ------- |  | --------- | - | - | --------------- |  | ------- | ------- |  | - | ------- | ------ | ----
|                            |                           |        |      |                     |        |            |         | Long-Term Compensation |            |            |             
|                            |                           |        |      |                     |        |            |         |                        |            |            |             
|                            |                           |        |      |                     |        | Restricted |         |                        | Securities |            |              |        
|                            |                           |        |      | Annual Compensation |        |            | Stock   |                        |            | Underlying |              |         | 
|                            |                           | Fiscal |      |                     |        |            |         | Awards                 |            |            | Options/SARs |         |  | All Other |  
|Name and Principal Position |                           | Year   |      |                     | Salary |            |         | Bonus                  |            |            | ($)          |         |  | (#)       |   |   | Compensation(1) | 
|                            |                           |        |      |                     |        |            |         |                        |            |            |              |         |  |           |   |   |                 | 
|Charles E. Hoffman(2)       |                           |        | 2004 |                     |        | $          | 542,308 |                        |            | $          | 444,370      |         |  |           |  |   |                 |  | 625,000 |         |  | $ | 774     |       
|                            | President and Chief       |        |      | 2003                |        |            | $       | 500,004                |            |            | $            | 733,593 |  |           |   |  |                 |  |         | 625,000 |  |   | $       | 428    |     
|                            | Executive Officer         |        |      | 2002                |        |            | $       | 500,004                |            |            | $            | 542,483 |  |           |   |  |                 |  |         |        |  |   | $       | 414    |     
|Patrick J. Bennett(3)       |                           |        | 2004 |                     |        | $          | 285,000 |                        |            | $          | 111,490      |         |  |           |  |   |                 |  | 100,000 |         |  | $ | 774     |       
|                            | Executive Vice President  |        |      | 2003                |        |            | $       | 285,000                |            |            | $            | 194,216 |  |           |   |  |                 |  |         | 98,000  |  |   | $       | 774    |     
|                            |                           |        |      | 2002                |        |            | $       | 285,000                |            |            | $            | 126,343 |  |           |   |  |                 |  |         |        |  |   | $       | 774    |     
|Mark A. Richman(4)          |                           |        | 2004 |                     |        | $          | 276,845 |                        |            | $          | 70,226       |         |  |           |  |   |                 |  | 100,000 |         |  | $ | 137,966 | (8)   
|                            | Executive Vice President, |        |      | 2003                |        |            | $       | 239,231                |            |            | $            | 164,310 |  |           |   |  |                 |  |         | 98,000  |  |   | $       | 180    |     
|                            | Chief Financial Officer   |        |      | 2002                |        |            | $       | 228,077                |            |            | $            | 100,723 |  |           |   |  |                 |  |         |        |  |   | $       | 180    |     
|P. Michael Hanley(5)        |                           |        | 2004 |                     |        | $          | 271,154 |                        |            | $          | 105,477      |         |  |           |  |   |                 |  | 150,000 |         |  | $ | 270     |       
|                            | Executive Vice President, |        |      | 2003                |        |            | $       | 229,231                |            |            | $            | 163,176 |  |           |   |  |                 |  |         | 98,000  |  |   | $       | 270    |     
|                            | Customer Experience       |        |      | 2002                |        |            | $       | 192,923                |            |            | $            | 76,738  |  |           |   |  |                 |  |         |        |  |   | $       | 229    |     
|Andrew S. Lockwood(6)       |                           |        | 2004 |                     |        | $          | 254,808 |                        |            | $          | 89,142       |         |  |           |  |   |                 |  | 100,000 |         |  | $ | 260     |       
|                            | Executive Vice President, |        |      | 2003                |        |            | $       | 265,000                |            |            | $            | 150,418 |  |           |   |  |                 |  |         | 98,000  |  |   | $       | 270    |     
|                            | Market Development        |        |      | 2002                |        |            | $       | 106,000                |            |            | $            | 23,342  |  |           |   |  |                 |  |         | 200,000 |  |   | $       | 114    |     
|James Kirkland(7)           |                           |        | 2004 |                     |        | $          | 230,000 |                        |            | $          | 89,974       |         |  |           |  |   |                 |  | 150,000 |         |  | $ | 43,358  | (9)   
|                            | Senior Vice President,    |        |      | 2003                |        |            | $       | 35,385                 |            |            | $            | 32,589  |  |           |   |  |                 |  |         | 125,000 |  |   | $       | 24,858 | (10)
|                            | General Counsel and       |        |      |                     |        |            |         |                        |            |            |              |         |  |           |   |   |                 |  |         |         |  |   |         |        |     
|                            | Secretary                 |        |      |                     |        |            |         |                        |            |            |              |         |  |           |   |   |                 |  |         |         |  |   |         |        |     






| |     |                                                                                                              
| | --- | -------------------------------------------------------------------------------------------------------------
| | (1) | The dollar amount represents premium payments the Company made
    for these executives term life insurance.
|
| | (2) | Mr. Hoffman joined Covad in June 2001.                                                                       
|
| | (3) | Mr. Bennett joined Covad in October 2001.                                                                    
|
| | (4) | Mr. Richman resigned from Covad in November 2004.                                                            
|
| | (5) | Mr. Hanley joined Covad in February 2002.                                                                    

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| |     |                                                                                                                                                                               
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (6) | Mr. Lockwood joined Covad in August 2002.                                                                                                                                     
|
| | (7) | Mr. Kirkland joined Covad in October 2003.                                                                                                                                    
|
| | (8) | Amount includes $166 for term life insurance and $137,800 for
    payment per agreement between Covad and Mr. Richman for
    consultation services and release of all claims.
|
| | (9) | Amount includes $37,625 for moving expenses, $5,463 for life
    insurance, as well as $270 for term life insurance.                                                          



|     |                                                                                         
|---- | ----------------------------------------------------------------------------------------
|(10) | Amount includes $24,830 for moving expenses, as well as $28 for
    term life insurance.

Option/ SAR Grants in Last Fiscal Year




|                   |  |             |         |                   |  |          |      |                 |  |                             |      |     |  |  |          |  |  |   |         |  |  |   |           | 
|------------------ |  | ----------- | ------- | ----------------- |  | -------- | ---- | --------------- |  | --------------------------- | ---- | --- |  |  | -------- |  |  | - | ------- |  |  | - | --------- | 
|                   |  |             |         | Individual Grants |  |          |      |                 |  |                            
|                   |  |             |         |                   |  |          |      |                
|                   |  |             |         | Percent of Total  |  |          |      |                 |  | Potential Realizable Value 
|                   |  | Number of   |         | Options           |  |          |      |                 |  | at Assumed Annual Rates    
|                   |  | Securities  |         | Granted to        |  | Exercise |      |                 |  | of Stock Price Appreciation
|                   |  | Underlying  |         | Employees in      |  | Price    |      |                 |  | for Option Term ($)(3)     
|                   |  | Options     |         | Fiscal 2003       |  | per      |      |                 |  |                            
|Name               |  | Granted (#) |         | (%)(2)            |  | Share    |      | Expiration Date |  | 5%                          |      | 10%
|                   |  |             |         |                   |  |          |      |                 |  |                             |      |    
|Charles E. Hoffman |  |             | 625,000 | (1)               |  |          | 9.47 | %               |  | $                           | 3.34 |     |  |  | 02/26/12 |  |  | $ | 996,688 |  |  | $ | 2,387,242 | 
|Patrick J. Bennett |  |             | 100,000 | (1)               |  |          | 1.51 | %               |  |                             | 3.34 |     |  |  | 02/26/12 |  |  |   | 159,470 |  |  |   | 381,959   | 
|P. Michael Hanley  |  |             | 150,000 | (1)               |  |          | 2.27 | %               |  |                             | 3.34 |     |  |  | 02/26/12 |  |  |   | 239,205 |  |  |   | 572,938   | 
|James Kirkland     |  |             | 150,000 | (1)               |  |          | 2.27 | %               |  |                             | 3.34 |     |  |  | 02/26/12 |  |  |   | 239,205 |  |  |   | 572,938   | 
|Mark A. Richman    |  |             | 100,000 | (1)               |  |          | 1.51 | %               |  |                             | 3.34 |     |  |  | 02/26/12 |  |  |   | 159,470 |  |  |   | 381,959   | 
|Andrew S. Lockwood |  |             | 100,000 | (1)               |  |          | 1.51 | %               |  | $                           | 3.34 |     |  |  | 02/26/12 |  |  | $ | 159,470 |  |  | $ | 381,959   | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The material terms of the option grants are as follows:
    (i) the options consist of qualified and nonqualified stock
    options; (ii) all have an exercise price equal to the fair
    market value on the date of grant; (iii) grants have an
    8-year term and become exercisable over a four-year period (for
    example, grants of initial stock options to new employees
    typically vest at a rate of 25% of the option shares on the
    twelve-month anniversary of the grant date with the remainder
    vesting in 36 equal monthly installments); (iv) the options
    are not transferable and (v) all options are otherwise
    subject to the terms and provisions of our 1997 Stock Plan.
|   
|(2) | Based on options covering an aggregate of 6,600,710 shares
    we granted during 2004 pursuant to our 1997 Stock Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(3) | These amounts represent hypothetical gains that could be
    achieved for the options if exercised at the end of the option
    term. The potential realizable values are calculated by assuming
    our common stock appreciates at the annual rate shown,
    compounded annually, from the date of grant until expiration of
    the granted options. The assumed 5% and 10% rates of stock price
    appreciation are mandated by the rules of the Securities and
    Exchange Commission and do not represent our estimate or
    projection of future stock price growth.                                                                                                                                  

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Aggregated Option/ SAR Exercises in Last Fiscal Year and
Year-End Option/ SAR Values




|                   |  |              |         |  |          |                        |         |                   |                         |  |                          |  |  |             |           |  |               |   |           |  |  |   |         | 
|------------------ |  | ------------ | ------- |  | -------- | ---------------------- | ------- | ----------------- | ----------------------- |  | ------------------------ |  |  | ----------- | --------- |  | ------------- | - | --------- |  |  | - | ------- | 
|                   |  |              |         |  |          | Number of Securities   |         |                   |                        
|                   |  |              |         |  |          | Underlying Unexercised |         |                   | Value of Unexercised    | 
|                   |  |              |         |  |          | Options at             |         |                   | In-The-Money Options at | 
|                   |  | Shares       |         |  | Value    |                        |         | December 31, 2004 |                         |  | December 31, 2004 ($)(2) | 
|                   |  | Acquired on  |         |  | Realized |                        |         |                   |                         |  |                          | 
|Name               |  | Exercise (#) |         |  | ($)(1)   |                        |         | Exercisable       |                         |  | Unexercisable            |  |  | Exercisable |           |  | Unexercisable |  
|                   |  |              |         |  |          |                        |         |                   |                         |  |                          |  |  |             |           |  |               |  
|Charles E. Hoffman |  |              |        |  |          | $                      |        |                   |                         |  | 2,454,166                |  |  |             | 1,145,834 |  |               | $ | 2,918,343 |  |  | $ | 703,907 | 
|Patrick J. Bennett |  |              |        |  |          |                        |        |                   |                         |  | 239,249                  |  |  |             | 158,751   |  |               |   | 316,688   |  |  |   | 102,572 | 
|P. Michael Hanley  |  |              |        |  |          |                        |        |                   |                         |  | 249,665                  |  |  |             | 198,335   |  |               |   | 286,605   |  |  |   | 94,655  | 
|James Kirkland     |  |              |        |  |          |                        |        |                   |                         |  | 67,709                   |  |  |             | 207,291   |  |               |   |          |  |  |   |        | 
|Andrew S. Lockwood |  |              |        |  |          |                        |        |                   |                         |  | 197,582                  |  |  |             | 200,418   |  |               |   | 166,605   |  |  |   | 114,655 | 
|Mark A. Richman    |  |              | 256,541 |  |          | $                      | 287,531 |                   |                         |  |                         |  |  |             |          |  |               | $ |          |  |  | $ |        | 






|    |                                                                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Value represents the fair market value at exercise minus the
    exercise price.                                                                                                                                                                                        
|   
|(2) | Value represents the difference between the exercise price and
    the market value (i.e., closing price) of our common stock of
    $2.15 on December 31, 2004. An option is
    in-the-money if the market value of the common stock
    exceeds the exercise price.

Employment Agreements and Change in Control Arrangements










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Compensation Committee Interlocks and Insider
Participation




Limitation on Liability and Indemnification Matters









|         |                                                                   
|-------- | ------------------------------------------------------------------
|ITEM 12. | Security Ownership of Certain Beneficial Owners and
    Management





| |   |                                                                                  
| | - | ---------------------------------------------------------------------------------
| |  | each Named Executive Officer;                                                    
|
| |  | each of our directors;                                                           
|
| |  | all of our executive officers and directors as a group; and                      
|
| |  | all persons known to Covad to beneficially own 5% or more of our
    common stock



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|                                                                         |  |                           |            |  |            |  |      |  
|------------------------------------------------------------------------ |  | ------------------------- | ---------- |  | ---------- |  | ---- | -
|                                                                         |  | Shares Beneficially Owned |           
|                                                                         |  |                           |           
|Beneficial Owner                                                         |  | Number                    |            |  | Percentage | 
|                                                                         |  |                           |            |  |            | 
|FMR Corp.(1)                                                             |  |                           | 26,227,635 |  |            |  | 9.88 | %
|Charles McMinn(2)                                                        |  |                           | 3,688,997  |  |            |  | 1.40 | %
|Charles E. Hoffman(3)                                                    |  |                           | 2,887,658  |  |            |  | 1.09 | %
|Robert Hawk(4)                                                           |  |                           | 765,160    |  |            |  | *    |  
|P. Michael Hanley(5)                                                     |  |                           | 301,914    |  |            |  | *    |  
|Patrick J. Bennett(6)                                                    |  |                           | 279,021    |  |            |  | *    |  
|Andrew S. Lockwood(7)                                                    |  |                           | 235,706    |  |            |  | *    |  
|Hellene S. Runtagh(8)                                                    |  |                           | 233,416    |  |            |  | *    |  
|Daniel Lynch(9)                                                          |  |                           | 185,273    |  |            |  | *    |  
|Larry Irving(10)                                                         |  |                           | 184,812    |  |            |  | *    |  
|L. Dale Crandall(11)                                                     |  |                           | 142,500    |  |            |  | *    |  
|David McMorrow(12)                                                       |  |                           | 138,236    |  |            |  | *    |  
|Richard A. Jalkut(13)                                                    |  |                           | 111,250    |  |            |  | *    |  
|Susan Crawford(14)                                                       |  |                           | 90,629     |  |            |  | *    |  
|James Kirkland(15)                                                       |  |                           | 87,799     |  |            |  | *    |  
|All current executive officers and directors as a group
    (14 persons) |  |                           | 9,332,371  |  |            |  | 3.53 | %






| |   |                                                                              
| | - | -----------------------------------------------------------------------------
| | * | Represents beneficial ownership of less than 1% of our
    outstanding stock.



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | This includes: (1) 24,647,361 shares beneficially
    owned by Fidelity Management & Research Company as a
    result of it acting as investment adviser to various investment
    companies registered under Section 8 of the Investment
    Company Act of 1940, which includes 1,575,200 shares owned
    by these investment companies resulting from the assumed
    conversion of $5,000,000 principal amount of our convertible
    Debentures; and (2) 1,580,274 shares held by Fidelity
    Management Trust Company, a wholly-owned subsidiary of FMR
    Corp. Edward C. Johnson 3d, FMR Corp., through its control of
    Fidelity Management & Research Company, and the funds
    each has the sole power to dispose of the 24,647,361 shares
    owned by the Fidelity Funds. The voting power with respect to
    the shares held by Fidelity Management & Research
    Company rests solely with the Boards of Trustees of each of the
    investment companies to which it acts as investment adviser.
    Edward C. Johnson 3d and FMR Corp., through its control of
    Fidelity Management Trust Company, each has the sole power
    to dispose of the 1,580,274 shares owned by Fidelity
    Management Trust Company and the sole power to vote or to
    direct the voting of 1,554,411 of these shares and no power to
    vote or direct the voting of 25,863 of the shares. The
    information provided with respect to these shareholders is based
    solely upon a Schedule 13G dated February 14, 2005,
    filed by such shareholders with the Securities and Exchange
    Commission. The Company has not done any independent
    investigation with respect to the beneficial ownership of these
    shareholders. The address for FMR Corp. is 82 Devonshire Street,
    Boston, MA 02109.
|
| | (2) | Includes 4,375 shares of common stock subject to options
    exercisable within 60 days of February 1, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | (3) | Includes 156,250 shares of common stock subject to options
    exercisable within 60 days of February 1, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | (4) | Includes 5,000 shares of common stock subject to options
    exercisable within 60 days of February 1, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | (5) | Includes 17,500 shares of common stock subject to options
    exercisable within 60 days of February 1, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

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| |     |                                                                                                              
| | --- | -------------------------------------------------------------------------------------------------------------
| | (6) | Includes 15,416 shares of common stock subject to options
    exercisable within 60 days of February 1, 2005.
|
| | (7) | Includes 15,417 shares of common stock subject to options
    exercisable within 60 days of February 1, 2005.
|
| | (8) | Includes 5,000 shares of common stock subject to options
    exercisable within 60 days of February 1, 2005. 
|
| | (9) | Includes 5,208 shares of common stock subject to options
    exercisable within 60 days of February 1, 2005. 



|     |                                                                                                              
|---- | -------------------------------------------------------------------------------------------------------------
|(10) | Includes 4,375 shares of common stock subject to options
    exercisable within 60 days of February 1, 2005. 
|    
|(11) | Includes 8,127 shares of common stock subject to options
    exercisable within 60 days of February 1, 2005. 
|    
|(12) | Includes 13,334 shares of common stock subject to options
    exercisable within 60 days of February 1, 2005.
|    
|(13) | Includes 6,667 shares of common stock subject to options
    exercisable within 60 days of February 1, 2005. 
|    
|(14) | Includes 7,916 shares of common stock subject to options
    exercisable within 60 days of February 1, 2005. 
|    
|(15) | Includes 11,459 shares of common stock subject to options
    exercisable within 60 days of February 1, 2005.

Securities Authorized for Issuance under Equity Compensation
Plans




|                                                              |  |                   |            |  |                  |            |      |                      |  |  |            | 
|------------------------------------------------------------- |  | ----------------- | ---------- |  | ---------------- | ---------- | ---- | -------------------- |  |  | ---------- | 
|                                                              |  |                   |            |  |                  | Number of  |     
|                                                              |  |                   |            |  |                  | securities |     
|                                                              |  | Number of         |            |  | Weighted-        |            |      | remaining available  | 
|                                                              |  | securities to be  |            |  | average exercise |            |      | for future issuance  | 
|                                                              |  | issued upon       |            |  | price of         |            |      | under equity         | 
|                                                              |  | exercise of       |            |  | outstanding      |            |      | compensation         | 
|                                                              |  | outstanding       |            |  | options,         |            |      | plans (excluding     | 
|                                                              |  | options, warrants |            |  | warrants and     |            |      | securities reflected | 
|                                                              |  | and rights        |            |  | rights           |            |      | in column (a))       | 
|Plan Category                                                 |  | (a)               |            |  | (b)              |            |      | (c)                  | 
|                                                              |  |                   |            |  |                  |            |      |                      | 
|Equity compensation plans approved by security holders(1)     |  |                   | 22,836,340 |  |                  |            | 6.08 |                      |  |  | 19,250,902 | 
|Equity compensation plans not approved by security holders(2) |  |                   | 160,870    |  |                  |            | 6.44 |                      |  |  | 266,225    | 
|                                                              |  |                   |            |  |                  |            |      |                      | 
|Total                                                         |  |                   | 22,997,210 |  |                  |            | 6.10 |                      |  |  | 19,517,127 | 
|                                                              |  |                   |            |  |                  |            |      |                      | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | These plans consist of the 1997 Stock Plan and the 2003 Employee
    Stock Purchase Plan. The 1997 Stock Plan provides for the grant
    of stock purchase rights and options to purchase shares of
    common stock to employees and consultants from time to time as
    determined by Covads board of directors. The number of
    shares that may be issued under the 1997 Stock Option Plan is
    subject to an annual increase to be added on the first day of
    Covads fiscal year equal to the lesser of (a) 3% of
    the outstanding shares of Covads stock on such date or
    (b) an amount determined by the board. The 2003 Employee
    Stock Purchase Plan allows employees to purchase shares of
    Covads common stock at a discount from the market prices
    during set purchase periods. The number of shares that may be
    issued under the 2003 Employee Stock Purchase Plan is subject to
    an annual increase to be added on January 1 of each year equal
    to the lesser of either (a) 2% of the outstanding shares of
    Covads stock on such date, (b) 7 million shares
    or (c) an amount determined by a committee of the board.
    Securities available for future issuance under Covads

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | 2003 Employee Stock Purchase Plan are included in column
    (c) but are not included in columns (a) and
    (b) because amount and price of securities purchased in an
    offering period are determined at the end of such offering
    period. Covads next offering period ends in June 2004.                                                                                                                                                                 
|   
|(2) | These plans consist of the LaserLink.Net, Inc. 1997 Stock Plan,
    the BlueStar Communications Group, Inc. 2000 Stock Incentive
    Plan and the Infraswitch Corporation 2000 Employee and
    Consultant Equity Incentive Plan, all of which were assumed by
    Covad in connection with the acquisitions of each company and
    are described in Note 13 of the Financial Statements. Covad
    does not intend to grant additional options under these plans.






|         |                                               
|-------- | ----------------------------------------------
|ITEM 13. | Certain Relationships and Related Transactions

(All dollar and share amounts are presented in thousands,
except per share amounts)


Strategic Investments and Relationships






Transactions with Management and Others








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|         |                                       
|-------- | --------------------------------------
|ITEM 14. | Principal Accounting Fees and Services

(All dollar amounts are presented in thousands)




|                   |       |      |       |       |      |   |     |     |  |   |       |       | 
|------------------ | ----- | ---- | ----- | ----- | ---- | - | --- | --- |  | - | ----- | ----- | 
|                   |       | 2004 |       |       |     
|                   |       |      |       |       | 2003 |  
|                   |       | PwC  |       |       | E&Y  |   |     | E&Y | 
|                   |       |      |       |       |      |   |     |     | 
|Audit fees         |       | $    | 3,996 |       |      | $ | 524 |     |  | $ | 1,952 |      
|Audit-related fees |       |      |      |       |      |   |    |     |  |   | 3     |      
|Tax fees           |       |      |      |       |      |   |    |     |  |   | 258   |      
|All other fees     |       |      | 2     |       |      |   |    |     |  |   |      |      
|                   |       |      |       |       |      |   |     |     | 
|                   | TOTAL |      | $     | 3,998 |      |   | $   | 524 |  |   | $     | 2,213 | 
|                   |       |      |       |       |      |   |     |     | 





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PART IV







|         |                                        
|-------- | ---------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules





| |     |                                                                                                                                                                                                        
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Financial Statements. The following Financial Statements
    of Covad Communications Group, Inc. and Report of Independent
    Registered Public Accounting Firms are filed as part of this
    report.

















| |     |                                                                                                                                                                                                                                                                                        
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) | Financial Statement Schedules. Financial statement
    schedules not filed herein are omitted because of the absence of
    conditions under which they are required or because the
    information called for is shown in the consolidated financial
    statements and notes thereto.
|
| | (3) | Exhibits. The Exhibits listed below and on the
    accompanying Index to Exhibits immediately following the
    signature page hereto are filed as part of, or incorporated by
    reference into, this Report on Form 10-K.                                                           

EXHIBIT INDEX


|        |    |             |  |                                                                                                                                                                                                         
|------- | -- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 2  | .1(1)       |  | Plan: First Amended Plan of Reorganization, as Modified, of
    Covad Communications Group, Inc. dated November 26, 2001.                                                                               
|        | 2  | .2(2)       |  | Order Pursuant to Section 1129 of the Bankruptcy Code
    Confirming the Debtors First Amended Chapter 11 Plan
    of Reorganization, as Modified (Docket No. 214).                                    
|        | 2  | .3(3)       |  | Agreement and Plan of Merger, dated as of March 2, 2004,
    among Covad Communications Group, Inc., Covad Communications
    Investment Corp., GoBeam, Inc. and Eduardo Briceno, as
    Representative.
|        | 3  | .1(4)       |  | Amended and Restated Certificate of Incorporation.                                                                                                                                                      
|        | 3  | .2(5)       |  | Certificate of Amendment of Certificate of Incorporation of the
    Registrant filed on July 14, 2000.                                                                                                  
|        | 3  | .3(6)       |  | Certificate of Amendment of Certificate of Incorporation of the
    Registrant filed on December 20, 2001.                                                                                              
|        | 3  | .4(7)       |  | Bylaws, as currently in effect.                                                                                                                                                                         
|        | 4  | .1(8)       |  | Indenture, dated as of March 10, 2004 between the
    Registrant and The Bank of New York, as Trustee.                                                                                                  
|        | 4  | .2(8)       |  | Resale Registration Rights Agreement, dated as of March 10,
    2004 among the Registrant and Banc of America Securities LLC.                                                                           
|        | 4  | .3(8)       |  | Form of Debenture for the Registrants 3% Convertible
    Senior Debentures due 2024.                                                                                                                   
|        | 4  | .4(9)       |  | Stockholder Protection Rights Agreement dated February 15,
    2000.                                                                                                                                    
|        | 4  | .5(10)      |  | Amended and Restated Stockholder Protection Rights Agreement,
    dated as of November 1, 2001.                                                                                                         
|        | 10 | .1(11)      |  | Form of Indemnification Agreement entered into between the
    Registrant and each of the Registrants executive officers
    and directors.                                                            
|        | 10 | .2(12)      |  | 1998 Employee Stock Purchase Plan and related agreements.                                                                                                                                               

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|        |    |             |  |                                                                                                                                                                                                                                                                                
|------- | -- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .3(13)      |  | 1997 Stock Plan and related option agreement, as currently in
    effect.                                                                                                                                                                                                      
|        | 10 | .22(14)     |  | Stock Purchase Agreement between SBC Communications Inc. and
    Covad Communications Group, Inc., dated September 10, 2000.                                                                                                                                                   
|        | 10 | .23(15)     |  | Resale and Marketing Agreement between SBC Communications Inc.
    and Covad Communications Group, Inc., dated September 10,
    2000.                                                                                                                                         
|        | 10 | .24(16)     |  | Credit Agreement dated as of November 12, 2001 by and
    between Covad Communications Group, Inc. and SBC Communications
    Inc.                                                                                                                                             
|        | 10 | .25(17)     |  | Resale Agreement dated as of November 12, 2001 by and among
    SBC Communications Inc., Covad Communications Group, Inc., Covad
    Communications Company, DIECA Communications Company and Laser
    Link.net, Inc.                                                         
|        | 10 | .26(18)     |  | Term Loan Note dated December 20, 2001 made by Covad
    Communications Group, Inc. in favor of SBC Communications Inc.                                                                                                                                                        
|        | 10 | .27(19)     |  | Deed of Trust, Assignment of Leases and Rents, Security
    Agreement and Financing Statement dated effective as of
    December 20, 2001 made by DIECA Communications, Inc. in
    favor of Title Associates of Virginia, Inc., for the
    benefit of SBC Communications Inc.
|        | 10 | .28(20)     |  | Pledge Agreement dated as of December 20, 2001 made by
    Covad Communications Group, Inc. to SBC Communications Inc.                                                                                                                                                         
|        | 10 | .30(21)     |  | Security Agreement dated as of December 20, 2001 made by
    Covad Communications Company in favor of SBC Communications Inc.                                                                                                                                                  
|        | 10 | .31(22)     |  | Intellectual Property Security Agreement dated as of
    December 20, 2001 made by Covad Communications Company in
    favor of SBC Communications Inc.                                                                                                                        
|        | 10 | .32(23)     |  | Subsidiary Guaranty dated as of December 20, 2001 made by
    Covad Communications Company in favor of and for the benefit of
    SBC Communications Inc.                                                                                                                      
|        | 10 | .33(24)     |  | Capital Markets Debt Subordination Provisions.                                                                                                                                                                                                                                 
|        | 10 | .34(25)     |  | General Unsecured Debt Subordination Agreement.                                                                                                                                                                                                                                
|        | 10 | .35(26)     |  | Form of Warrant to Purchase Common Stock Issued by the
    Registrant on September 3, 2002 to America Online, Inc.                                                                                                                                                             
|        | 10 | .36(27)     |  | Form of Warrant to Purchase Common Stock Issued by the
    Registrant on January 1, 2003 to AT&T Corp.                                                                                                                                                                         
|        | 10 | .37(28)     |  | Covad Communications Group, Inc., 2003 Employee Stock Purchase
    Plan.                                                                                                                                                                                                       
|        | 10 | .38(29)     |  | Covad Communications Group, Inc. Executive Severance Plan and
    Summary Plan Description.                                                                                                                                                                                    
|        | 10 | .39(30)     |  | General Release of All Claims executed by Anjali Joshi.                                                                                                                                                                                                                        
|        | 10 | .40(31)     |  | Letter Agreement between Covad Communications and Charles
    Hoffman dated May 29, 2001.                                                                                                                                                                                      
|        | 10 | .41(32)     |  | Lease Agreement for 110 Rio Robles, San Jose, California,
    between Covad Communications and CarrAmerica Realty Corporation
    dated August 6, 2003.                                                                                                                        
|        | 10 | .43(33)     |  | Change in Control Agreement between Covad Communications Group,
    Inc. and Charles E. Hoffman                                                                                                                                                                                
|        | 10 | .44(34)     |  | Change in Control Agreement between Covad Communications Group,
    Inc. and Patrick J. Bennett                                                                                                                                                                                
|        | 10 | .45(35)     |  | Change in Control Agreement between Covad Communications Group,
    Inc. and P. Michael Hanley                                                                                                                                                                                 
|        | 10 | .46(36)     |  | Change in Control Agreement between Covad Communications Group,
    Inc. and James A. Kirkland                                                                                                                                                                                 
|        | 10 | .47(37)     |  | Change in Control Agreement between Covad Communications Group,
    Inc. and Andrew Lockwood                                                                                                                                                                                   
|        | 10 | .48(38)     |  | Change in Control Agreement between Covad Communications Group,
    Inc. and David McMorrow                                                                                                                                                                                    

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|        |    |             |  |                                                                                                                                
|------- | -- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .49(39)     |  | Change in Control Agreement between Covad Communications Group,
    Inc. and Mark A. Richman                                   
|        | 10 | .50(40)     |  | Change in Control Agreement between Covad Communications Group,
    Inc. and Susan Crawford                                    
|        | 10 | .51(41)     |  | Indemnification Agreement between Covad Communications Group,
    Inc. and Susan Crawford                                      
|        | 10 | .52(42)     |  | General Release of All Claims by and between Covad
    Communications Group, Inc. and Mark Richman                             
|        | 21 | .1          |  | Subsidiaries of the Registrant.                                                                                                
|        | 23 | .1          |  | Consent of PricewaterhouseCoopers LLP, Independent Registered
    Public Accounting Firm.                                      
|        | 23 | .2          |  | Consent of Ernst & Young LLP, Independent Registered
    Public Accounting Firm.                                               
|        | 24 | .1          |  | Power of Attorney (incorporated in the signature page herein).                                                                 
|        | 31 | .1          |  | Certification Pursuant to Rule 13a-14(a).                                                                                      
|        | 31 | .2          |  | Certification Pursuant to Rule 13a-14(a).                                                                                      
|        | 32 | .1*         |  | Certification Pursuant to 18 U.S.C. Section 1350, as
    Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002.
|        | 32 | .2*         |  | Certification Pursuant to 18 U.S.C. Section 1350, as
    Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002.






| |   |                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------
| | * | These certifications accompany the Registrants Annual
    Report on Form 10-K and are not deemed filed with the SEC.



| |     |                                                                                                                                                                                                                      
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Incorporated by reference to the exhibit of corresponding number
    filed with our current report on Form 8-K as originally
    filed on December 28, 2001.                                                         
|
| | (2) | Incorporated by reference to Exhibit 99.12 filed with our
    current report on Form 8-K as originally filed on
    December 28, 2001.                                                                               
|
| | (3) | Incorporated by reference to Exhibit 2.1 filed with our
    quarterly report on Form 10-Q as originally filed on
    May 17, 2004.                                                                                   
|
| | (4) | Incorporated by reference to Exhibit 3.2 filed with our
    registration statement on Form S-1/ A (No. 333-38688)
    as originally filed on July 17, 2000 and as subsequently
    amended.                          
|
| | (5) | Incorporated by reference to Exhibit 3.5 filed with our
    registration statement on Form S-1/ A (No. 333-38688)
    as originally filed on July 17, 2000 and as subsequently
    amended.                          
|
| | (6) | Incorporated by reference to Exhibit 3.3 filed with our
    Annual Report on Form 10-K as filed on March 29, 2002.                                                                                                   
|
| | (7) | Incorporated by reference to the exhibit of corresponding number
    filed with our registration statement on Form S-1
    (No. 333-63899) as originally filed on September 21,
    1998 and as subsequently amended.
|
| | (8) | Incorporated by reference to the exhibit of corresponding number
    filed with our quarterly report on Form 10-Q as originally
    filed on May 17, 2004.                                                           
|
| | (9) | Incorporated by reference to Exhibit 4.1 filed with our
    current report on Form 8-A as originally filed on
    February 22, 2000 and as subsequently amended.                                                     



|     |                                                                                                                                                                                               
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference to Exhibit 4.1 filed with our
    current report on Form 8-K as originally filed on
    December 14, 2001.                                                          
|    
|(11) | Incorporated by reference to Exhibit 10.1 filed with our
    registration statement on Form S-1 (No. 333-63899) as
    originally filed on September 21, 1998 and as subsequently
    amended.
|    
|(12) | Incorporated by reference to Exhibit 10.2 filed with our
    Annual Report on Form 10-K as filed on March 29, 2002.                                                                           
|    
|(13) | Incorporated by reference to Exhibit 10.3 filed with our
    Annual Report on Form 10-K as filed on March 29, 2002.                                                                           

114



---



##### Table of Contents





|     |                                                                                                                                                                  
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|(14) | Incorporated by reference to Exhibit 4.1 filed with our
    current report on Form 8-K as originally filed on
    September 12, 2000 and as subsequently amended.
|    
|(15) | Incorporated by reference to Exhibit 4.2 filed with our
    current report on Form 8-K as originally filed on
    September 12, 2000 and as subsequently amended.
|    
|(16) | Incorporated by reference to Exhibit 10.2 filed with our
    quarterly report on Form 10-Q as originally filed on
    November 14, 2001.                         
|    
|(17) | Incorporated by reference to Exhibit 10.1 filed with our
    quarterly report on Form 10-Q as originally filed on
    November 14, 2001.                         
|    
|(18) | Incorporated by reference to Exhibit 99.4 filed with our
    current report on Form 8-K as originally filed on
    December 28, 2001.                            
|    
|(19) | Incorporated by reference to Exhibit 99.5 filed with our
    current report on Form 8-K as originally filed on
    December 28, 2001.                            
|    
|(20) | Incorporated by reference to Exhibit 99.6 filed with our
    current report on Form 8-K as originally filed on
    December 28, 2001.                            
|    
|(21) | Incorporated by reference to Exhibit 99.7 filed with our
    current report on Form 8-K as originally filed on
    December 28, 2001.                            
|    
|(22) | Incorporated by reference to Exhibit 99.8 filed with our
    current report on Form 8-K as originally filed on
    December 28, 2001.                            
|    
|(23) | Incorporated by reference to Exhibit 99.9 filed with our
    current report on Form 8-K as originally filed on
    December 28, 2001.                            
|    
|(24) | Incorporated by reference to Exhibit 99.10 filed with our
    current report on Form 8-K as originally filed on
    December 28, 2001.                           
|    
|(25) | Incorporated by reference to Exhibit 99.11 filed with our
    current report on Form 8-K as originally filed on
    December 28, 2001.                           
|    
|(26) | Incorporated by reference to Exhibit 99.1 filed with our
    current report on Form 8-K as originally filed
    September 5, 2002.                               
|    
|(27) | Incorporated by reference to Exhibit 99.1 filed with our
    current report on Form 8-K as originally filed
    January 7, 2003.                                 
|    
|(28) | Incorporated by reference to Exhibit 10.38 filed with our
    quarterly report on Form 10-Q as filed on July 31,
    2003.                                       
|    
|(29) | Incorporated by reference to Exhibit 10.1 filed with our
    current report on Form 8-K as originally filed
    October 6, 2004.                                 
|    
|(30) | Incorporated by reference to Exhibit 10.40 filed with our
    quarterly report on Form 10-Q as filed on October 24,
    2003.                                    
|    
|(31) | Incorporated by reference to Exhibit 10.41 to our annual
    report on Form 10-K as originally filed on
    February 27, 2004.                                   
|    
|(32) | Incorporated by reference to Exhibit 10.42 to our annual
    report on Form 10-K as originally filed on
    February 27, 2004.                                   
|    
|(33) | Incorporated by reference to Exhibit 10.2 to our current
    report on Form 8-K as originally filed on October 6,
    2004.                                      
|    
|(34) | Incorporated by reference to Exhibit 10.3 to our current
    report on Form 8-K as originally filed on October 6,
    2004.                                      
|    
|(35) | Incorporated by reference to Exhibit 10.4 to our current
    report on Form 8-K as originally filed on October 6,
    2004.                                      
|    
|(36) | Incorporated by reference to Exhibit 10.5 to our current
    report on Form 8-K as originally filed on October 6,
    2004.                                      

115



---



##### Table of Contents





|     |                                                                                                                              
|---- | -----------------------------------------------------------------------------------------------------------------------------
|(37) | Incorporated by reference to Exhibit 10.6 to our current
    report on Form 8-K as originally filed on October 6,
    2004.  
|    
|(38) | Incorporated by reference to Exhibit 10.7 to our current
    report on Form 8-K as originally filed on October 6,
    2004.  
|    
|(39) | Incorporated by reference to Exhibit 10.8 to our current
    report on Form 8-K as originally filed on October 6,
    2004.  
|    
|(40) | Incorporated by reference to Exhibit 10.2 to our current
    report on Form 8-K as originally filed on November 24,
    2004.
|    
|(41) | Incorporated by reference to Exhibit 10.1 to our current
    report on Form 8-K as originally filed on December 6,
    2004. 
|    
|(42) | Incorporated by reference to Exhibit 10.1 to our current
    report on Form 8-K as originally filed on November 24,
    2004.

116



---



##### Table of Contents






SIGNATURES






| |                                 
| | --------------------------------
| | COVAD COMMUNICATIONS GROUP, INC.



| |     |                   
| | --- | ------------------
| | By: | /s/ Susan Crawford

| |                               
| | ------------------------------
| |                               
| | Susan Crawford                
| | Senior Vice President and     
| | Acting Chief Financial Officer



|                                                |  |                                                                                                           |  | 
|----------------------------------------------- |  | --------------------------------------------------------------------------------------------------------- |  | 
|Signature                                       |  | Title                                                                                                    
|                                                |  |                                                                                                          
|                                               
|/s/ Charles E. Hoffman
    (Charles E. Hoffman) |  | Chief Executive Officer and Director
    (Principal Executive Officer)                                   
|                                               
|/s/ Susan Crawford
    (Susan Crawford)         |  | Senior Vice President and Acting Chief Financial Officer
    (Principal Financial and Accounting Officer)
|                                               
|/s/ Charles McMinn
    (Charles McMinn)         |  | Chairman of the Board of Directors                                                                       
|                                               
|/s/ L. Dale Crandall
    (L. Dale Crandall)     |  | Director                                                                                                 
|                                               
|/s/ Robert Hawk
    (Robert Hawk)               |  | Director                                                                                                 
|                                               
|/s/ Hellene S. Runtagh
    (Hellene Runtagh)    |  | Director                                                                                                 
|                                               
|/s/ Larry Irving
    (Larry Irving)             |  | Director                                                                                                 
|                                               
|/s/ Daniel Lynch
    (Daniel Lynch)             |  | Director                                                                                                 
|                                               
|/s/ Richard A. Jalkut
    (Richard Jalkut)      |  | Director                                                                                                 

117



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##### Table of Contents



EXHIBIT INDEX


|        |    |             |  |                                                                                                                                                                                                                                                                                
|------- | -- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 2  | .1(1)       |  | Plan: First Amended Plan of Reorganization, as Modified, of
    Covad Communications Group, Inc. dated November 26, 2001.                                                                                                                                                      
|        | 2  | .2(2)       |  | Order Pursuant to Section 1129 of the Bankruptcy Code
    Confirming the Debtors First Amended Chapter 11 Plan
    of Reorganization, as Modified (Docket No. 214).                                                                                                           
|        | 2  | .3(3)       |  | Agreement and Plan of Merger, dated as of March 2, 2004,
    among Covad Communications Group, Inc., Covad Communications
    Investment Corp., GoBeam, Inc. and Eduardo Briceno, as
    Representative.                                                                       
|        | 3  | .1(4)       |  | Amended and Restated Certificate of Incorporation.                                                                                                                                                                                                                             
|        | 3  | .2(5)       |  | Certificate of Amendment of Certificate of Incorporation of the
    Registrant filed on July 14, 2000.                                                                                                                                                                         
|        | 3  | .3(6)       |  | Certificate of Amendment of Certificate of Incorporation of the
    Registrant filed on December 20, 2001.                                                                                                                                                                     
|        | 3  | .4(7)       |  | Bylaws, as currently in effect.                                                                                                                                                                                                                                                
|        | 4  | .1(8)       |  | Indenture, dated as of March 10, 2004 between the
    Registrant and The Bank of New York, as Trustee.                                                                                                                                                                         
|        | 4  | .2(8)       |  | Resale Registration Rights Agreement, dated as of March 10,
    2004 among the Registrant and Banc of America Securities LLC.                                                                                                                                                  
|        | 4  | .3(8)       |  | Form of Debenture for the Registrants 3% Convertible
    Senior Debentures due 2024.                                                                                                                                                                                          
|        | 4  | .4(9)       |  | Stockholder Protection Rights Agreement dated February 15,
    2000.                                                                                                                                                                                                           
|        | 4  | .5(10)      |  | Amended and Restated Stockholder Protection Rights Agreement,
    dated as of November 1, 2001.                                                                                                                                                                                
|        | 10 | .1(11)      |  | Form of Indemnification Agreement entered into between the
    Registrant and each of the Registrants executive officers
    and directors.                                                                                                                                   
|        | 10 | .2(12)      |  | 1998 Employee Stock Purchase Plan and related agreements.                                                                                                                                                                                                                      
|        | 10 | .3(13)      |  | 1997 Stock Plan and related option agreement, as currently in
    effect.                                                                                                                                                                                                      
|        | 10 | .22(14)     |  | Stock Purchase Agreement between SBC Communications Inc. and
    Covad Communications Group, Inc., dated September 10, 2000.                                                                                                                                                   
|        | 10 | .23(15)     |  | Resale and Marketing Agreement between SBC Communications Inc.
    and Covad Communications Group, Inc., dated September 10,
    2000.                                                                                                                                         
|        | 10 | .24(16)     |  | Credit Agreement dated as of November 12, 2001 by and
    between Covad Communications Group, Inc. and SBC Communications
    Inc.                                                                                                                                             
|        | 10 | .25(17)     |  | Resale Agreement dated as of November 12, 2001 by and among
    SBC Communications Inc., Covad Communications Group, Inc., Covad
    Communications Company, DIECA Communications Company and Laser
    Link.net, Inc.                                                         
|        | 10 | .26(18)     |  | Term Loan Note dated December 20, 2001 made by Covad
    Communications Group, Inc. in favor of SBC Communications Inc.                                                                                                                                                        
|        | 10 | .27(19)     |  | Deed of Trust, Assignment of Leases and Rents, Security
    Agreement and Financing Statement dated effective as of
    December 20, 2001 made by DIECA Communications, Inc. in
    favor of Title Associates of Virginia, Inc., for the
    benefit of SBC Communications Inc.
|        | 10 | .28(20)     |  | Pledge Agreement dated as of December 20, 2001 made by
    Covad Communications Group, Inc. to SBC Communications Inc.                                                                                                                                                         
|        | 10 | .30(21)     |  | Security Agreement dated as of December 20, 2001 made by
    Covad Communications Company in favor of SBC Communications Inc.                                                                                                                                                  
|        | 10 | .31(22)     |  | Intellectual Property Security Agreement dated as of
    December 20, 2001 made by Covad Communications Company in
    favor of SBC Communications Inc.                                                                                                                        
|        | 10 | .32(23)     |  | Subsidiary Guaranty dated as of December 20, 2001 made by
    Covad Communications Company in favor of and for the benefit of
    SBC Communications Inc.                                                                                                                      
|        | 10 | .33(24)     |  | Capital Markets Debt Subordination Provisions.                                                                                                                                                                                                                                 

118



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##### Table of Contents



|        |    |             |  |                                                                                                                                                        
|------- | -- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .34(25)     |  | General Unsecured Debt Subordination Agreement.                                                                                                        
|        | 10 | .35(26)     |  | Form of Warrant to Purchase Common Stock Issued by the
    Registrant on September 3, 2002 to America Online, Inc.                                     
|        | 10 | .36(27)     |  | Form of Warrant to Purchase Common Stock Issued by the
    Registrant on January 1, 2003 to AT&T Corp.                                                 
|        | 10 | .37(28)     |  | Covad Communications Group, Inc., 2003 Employee Stock Purchase
    Plan.                                                                               
|        | 10 | .38(29)     |  | Covad Communications Group, Inc. Executive Severance Plan and
    Summary Plan Description.                                                            
|        | 10 | .39(30)     |  | General Release of All Claims executed by Anjali Joshi.                                                                                                
|        | 10 | .40(31)     |  | Letter Agreement between Covad Communications and Charles
    Hoffman dated May 29, 2001.                                                              
|        | 10 | .41(32)     |  | Lease Agreement for 110 Rio Robles, San Jose, California,
    between Covad Communications and CarrAmerica Realty Corporation
    dated August 6, 2003.
|        | 10 | .43(33)     |  | Change in Control Agreement between Covad Communications Group,
    Inc. and Charles E. Hoffman                                                        
|        | 10 | .44(34)     |  | Change in Control Agreement between Covad Communications Group,
    Inc. and Patrick J. Bennett                                                        
|        | 10 | .45(35)     |  | Change in Control Agreement between Covad Communications Group,
    Inc. and P. Michael Hanley                                                         
|        | 10 | .46(36)     |  | Change in Control Agreement between Covad Communications Group,
    Inc. and James A. Kirkland                                                         
|        | 10 | .47(37)     |  | Change in Control Agreement between Covad Communications Group,
    Inc. and Andrew Lockwood                                                           
|        | 10 | .48(38)     |  | Change in Control Agreement between Covad Communications Group,
    Inc. and David McMorrow                                                            
|        | 10 | .49(39)     |  | Change in Control Agreement between Covad Communications Group,
    Inc. and Mark A. Richman                                                           
|        | 10 | .50(40)     |  | Change in Control Agreement between Covad Communications Group,
    Inc. and Susan Crawford                                                            
|        | 10 | .51(41)     |  | Indemnification Agreement between Covad Communications Group,
    Inc. and Susan Crawford                                                              
|        | 10 | .52(42)     |  | General Release of All Claims by and between Covad
    Communications Group, Inc. and Mark Richman                                                     
|        | 21 | .1          |  | Subsidiaries of the Registrant.                                                                                                                        
|        | 23 | .1          |  | Consent of PricewaterhouseCoopers LLP, Independent Registered
    Public Accounting Firm.                                                              
|        | 23 | .2          |  | Consent of Ernst & Young LLP, Independent Registered
    Public Accounting Firm.                                                                       
|        | 24 | .1          |  | Power of Attorney (incorporated in the signature page herein).                                                                                         
|        | 31 | .1          |  | Certification Pursuant to Rule 13a-14(a).                                                                                                              
|        | 31 | .2          |  | Certification Pursuant to Rule 13a-14(a).                                                                                                              
|        | 32 | .1*         |  | Certification Pursuant to 18 U.S.C. Section 1350, as
    Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002.                        
|        | 32 | .2*         |  | Certification Pursuant to 18 U.S.C. Section 1350, as
    Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002.                        






| |   |                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------
| | * | These certifications accompany the Registrants Annual
    Report on Form 10-K and are not deemed filed with the SEC.

119



---



##### Table of Contents





| |     |                                                                                                                                                                                                                      
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Incorporated by reference to the exhibit of corresponding number
    filed with our current report on Form 8-K as originally
    filed on December 28, 2001.                                                         
|
| | (2) | Incorporated by reference to Exhibit 99.12 filed with our
    current report on Form 8-K as originally filed on
    December 28, 2001.                                                                               
|
| | (3) | Incorporated by reference to Exhibit 2.1 filed with our
    quarterly report on Form 10-Q as originally filed on
    May 17, 2004.                                                                                   
|
| | (4) | Incorporated by reference to Exhibit 3.2 filed with our
    registration statement on Form S-1/ A (No. 333-38688)
    as originally filed on July 17, 2000 and as subsequently
    amended.                          
|
| | (5) | Incorporated by reference to Exhibit 3.5 filed with our
    registration statement on Form S-1/ A (No. 333-38688)
    as originally filed on July 17, 2000 and as subsequently
    amended.                          
|
| | (6) | Incorporated by reference to Exhibit 3.3 filed with our
    Annual Report on Form 10-K as filed on March 29, 2002.                                                                                                   
|
| | (7) | Incorporated by reference to the exhibit of corresponding number
    filed with our registration statement on Form S-1
    (No. 333-63899) as originally filed on September 21,
    1998 and as subsequently amended.
|
| | (8) | Incorporated by reference to the exhibit of corresponding number
    filed with our quarterly report on Form 10-Q as originally
    filed on May 17, 2004.                                                           
|
| | (9) | Incorporated by reference to Exhibit 4.1 filed with our
    current report on Form 8-A as originally filed on
    February 22, 2000 and as subsequently amended.                                                     



|     |                                                                                                                                                                                               
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference to Exhibit 4.1 filed with our
    current report on Form 8-K as originally filed on
    December 14, 2001.                                                          
|    
|(11) | Incorporated by reference to Exhibit 10.1 filed with our
    registration statement on Form S-1 (No. 333-63899) as
    originally filed on September 21, 1998 and as subsequently
    amended.
|    
|(12) | Incorporated by reference to Exhibit 10.2 filed with our
    Annual Report on Form 10-K as filed on March 29, 2002.                                                                           
|    
|(13) | Incorporated by reference to Exhibit 10.3 filed with our
    Annual Report on Form 10-K as filed on March 29, 2002.                                                                           
|    
|(14) | Incorporated by reference to Exhibit 4.1 filed with our
    current report on Form 8-K as originally filed on
    September 12, 2000 and as subsequently amended.                             
|    
|(15) | Incorporated by reference to Exhibit 4.2 filed with our
    current report on Form 8-K as originally filed on
    September 12, 2000 and as subsequently amended.                             
|    
|(16) | Incorporated by reference to Exhibit 10.2 filed with our
    quarterly report on Form 10-Q as originally filed on
    November 14, 2001.                                                      
|    
|(17) | Incorporated by reference to Exhibit 10.1 filed with our
    quarterly report on Form 10-Q as originally filed on
    November 14, 2001.                                                      
|    
|(18) | Incorporated by reference to Exhibit 99.4 filed with our
    current report on Form 8-K as originally filed on
    December 28, 2001.                                                         
|    
|(19) | Incorporated by reference to Exhibit 99.5 filed with our
    current report on Form 8-K as originally filed on
    December 28, 2001.                                                         
|    
|(20) | Incorporated by reference to Exhibit 99.6 filed with our
    current report on Form 8-K as originally filed on
    December 28, 2001.                                                         
|    
|(21) | Incorporated by reference to Exhibit 99.7 filed with our
    current report on Form 8-K as originally filed on
    December 28, 2001.                                                         
|    
|(22) | Incorporated by reference to Exhibit 99.8 filed with our
    current report on Form 8-K as originally filed on
    December 28, 2001.                                                         
|    
|(23) | Incorporated by reference to Exhibit 99.9 filed with our
    current report on Form 8-K as originally filed on
    December 28, 2001.                                                         

120



---



##### Table of Contents





|     |                                                                                                                                       
|---- | --------------------------------------------------------------------------------------------------------------------------------------
|(24) | Incorporated by reference to Exhibit 99.10 filed with our
    current report on Form 8-K as originally filed on
    December 28, 2001.
|    
|(25) | Incorporated by reference to Exhibit 99.11 filed with our
    current report on Form 8-K as originally filed on
    December 28, 2001.
|    
|(26) | Incorporated by reference to Exhibit 99.1 filed with our
    current report on Form 8-K as originally filed
    September 5, 2002.    
|    
|(27) | Incorporated by reference to Exhibit 99.1 filed with our
    current report on Form 8-K as originally filed
    January 7, 2003.      
|    
|(28) | Incorporated by reference to Exhibit 10.38 filed with our
    quarterly report on Form 10-Q as filed on July 31,
    2003.            
|    
|(29) | Incorporated by reference to Exhibit 10.1 filed with our
    current report on Form 8-K as originally filed
    October 6, 2004.      
|    
|(30) | Incorporated by reference to Exhibit 10.40 filed with our
    quarterly report on Form 10-Q as filed on October 24,
    2003.         
|    
|(31) | Incorporated by reference to Exhibit 10.41 to our annual
    report on Form 10-K as originally filed on
    February 27, 2004.        
|    
|(32) | Incorporated by reference to Exhibit 10.42 to our annual
    report on Form 10-K as originally filed on
    February 27, 2004.        
|    
|(33) | Incorporated by reference to Exhibit 10.2 to our current
    report on Form 8-K as originally filed on October 6,
    2004.           
|    
|(34) | Incorporated by reference to Exhibit 10.3 to our current
    report on Form 8-K as originally filed on October 6,
    2004.           
|    
|(35) | Incorporated by reference to Exhibit 10.4 to our current
    report on Form 8-K as originally filed on October 6,
    2004.           
|    
|(36) | Incorporated by reference to Exhibit 10.5 to our current
    report on Form 8-K as originally filed on October 6,
    2004.           
|    
|(37) | Incorporated by reference to Exhibit 10.6 to our current
    report on Form 8-K as originally filed on October 6,
    2004.           
|    
|(38) | Incorporated by reference to Exhibit 10.7 to our current
    report on Form 8-K as originally filed on October 6,
    2004.           
|    
|(39) | Incorporated by reference to Exhibit 10.8 to our current
    report on Form 8-K as originally filed on October 6,
    2004.           
|    
|(40) | Incorporated by reference to Exhibit 10.2 to our current
    report on Form 8-K as originally filed on November 24,
    2004.         
|    
|(41) | Incorporated by reference to Exhibit 10.1 to our current
    report on Form 8-K as originally filed on December 6,
    2004.          
|    
|(42) | Incorporated by reference to Exhibit 10.1 to our current
    report on Form 8-K as originally filed on November 24,
    2004.         

121