COVAD COMMUNICATIONS GROUP INC, S-1/A, 2000-07-17

COVAD COMMUNICATIONS GROUP INC
S-1/A, 2000-07-17
TELEPHONE & TELEGRAPH APPARATUS

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 17, 2000
REGISTRATION NO. 333-38688

====================================================================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

--------------

FORM S-1/A

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

--------------
COVAD COMMUNICATIONS GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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DELAWARE 4813 77-0461529
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)

4250 BURTON DRIVE
SANTA CLARA, CALIFORNIA 95054
(408) 987-1000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

--------------

ROBERT E. KNOWLING, JR.
CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
COVAD COMMUNICATIONS GROUP, INC.
4250 BURTON DRIVE
SANTA CLARA, CALIFORNIA 95054
(408) 987-1000

(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)

COPIES TO:
Meredith S. Jackson, Esq.
Ashok W. Mukhey, Esq.
Geoffrey M. Trachtenberg, Esq.
Irell & Manella LLP
1800 Avenue of the Stars
Los Angeles, California 90067
(310) 277-1010

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415
under the Securities Act of 1933, check the following box. /X/
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act registration statement number of the earlier effective registration
statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / /

CALCULATION OF REGISTRATION FEE

====================================================================================================================================
PROPOSED
TITLE OF MAXIMUM OFFERING PRICE PROPOSED MAXIMUM
EACH CLASS OF SECURITIES AMOUNT TO BE PER SHARE (2) AGGREGATE AMOUNT OF

TO BE REGISTERED (1) REGISTERED OFFERING PRICE (2) REGISTRATION FEE (3)
====================================================================================================================================
Common Stock, $0.001 par value (2)....... 5,013,466 shares $20.75 $104,029,419.50 $27,463.76
====================================================================================================================================
(1) Includes associated preferred stock purchase rights which, prior to the occurrence of certain events, will not be exercisable
or evidenced separately from the common stock.
(2) Estimated solely for the purpose of computing the amount of the registration fee, based on the average high and low trading
price of the common stock reported on the Nasdaq National Market on July 13, 2000 in accordance with Rule 457(c) under the
Securities Act of 1933.
(3) $42,882.31 previously paid in connection with filing on June 6, 2000 is being applied to this filing.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date
until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter
become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Securities Exchange Commission, acting pursuant to said Section 8(a), may determine.
====================================================================================================================================
</TABLE>

<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell the securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
********************************************************************************

SUBJECT TO COMPLETION, DATED JULY 17, 2000

PRELIMINARY PROSPECTUS

5,013,466 SHARES

[COVAD LOGO]

COMMON STOCK

($0.001 PAR VALUE)

--------------

This prospectus relates to the public offering of up to 5,536,231 shares of
our common stock, par value $0.001, which are held by some of our current
shareholders and may be offered and sold from time to time by the selling
shareholders. The prices at which such shareholders may sell the shares will be
determined by the prevailing market price for the shares or in negotiated
transactions. We will not receive any of the proceeds from the sale of the
shares, however, we are paying for the costs of registering the shares covered
by this prospectus.

The selling shareholders will receive all of the amounts received upon any
sale by them of the common stock, less any brokerage commissions or other
expenses incurred by them. While this offering is not being underwritten, the
selling shareholders and the brokers or other third parties through whom the
selling shareholders sell the common stock may be deemed "underwriters" as that
term is defined in the Securities Act of 1933, as amended, for purposes of the
resale of the shares of common stock offered in this prospectus.

Our common stock is traded on the Nasdaq National Market under the symbol
"COVD." On July 13, 2000, the last reported sale price for our common stock on
the Nasdaq National Market was $21 15/16 per share.

SEE "RISK FACTORS" BEGINNING ON PAGE 9 TO READ ABOUT CERTAIN RISKS THAT YOU
SHOULD CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.

--------------

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS
APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

--------------

You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. The selling shareholders are offering to sell, and
seeking offers to buy, shares of our common stock only in jurisdictions where
offers and sales are permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of our common stock. In this
prospectus, "Covad," "we," "us," and "our" refer to Covad Communications Group,
Inc., its predecessors and its consolidated subsidiaries.

--------------

The date of this prospectus is July , 2000.

<PAGE>

PROSPECTUS SUMMARY

COVAD COMMUNICATIONS GROUP, INC.

OUR COMPANY

We are a leading provider of broadband communications services to
Internet service provider, enterprise, telecommunications carrier and other
customers. These services include a range of high-speed, high capacity Internet
and network access services using digital subscriber line ("DSL") technology,
and related value-added services. Internet service providers purchase our
services in order to provide high-speed Internet access to their business and
consumer end-users. Enterprise customers purchase our services directly or
indirectly from us to provide employees with high-speed remote access to the
enterprise's local area network ("RLAN access"), which improves employee
productivity and reduces network connection cost. Telecommunications carrier
customers purchase our services for resale to their Internet service provider
affiliates, Internet users and enterprise customers.

As of March 31, 2000, we believe we have the nation's largest DSL network
with 1,350 operational central offices passing over at least 35 million homes
and businesses. As of March 31, 2000, we had installed 93,000 DSL based
high-speed access lines and received orders for our services from more than 295
Internet service provider, enterprise, and telecommunications carrier customers,
including AT&T Corporation ("AT&T"), Concentric Network Corporation, Flashcom,
Inc., EarthLink, Inc., Oracle Corporation, Prodigy Communications
Corporation, PSINet, Inc., Qwest Communications International Inc., Stanford
University, Sun Microsystems, Inc., UUNET Technologies (an MCI WorldCom company)
and Verio, Inc.

By March 31, 2000, we had deployed our network in a total of 62
metropolitan statistical areas. When our 165 metropolitan statistical area
build-out is completed, which we expect to be by the end of 2000, our network
will pass more than 45% of homes and 50% of businesses in the United States.

We plan to continue to pursue rapid network expansion and installation of
high-speed access lines. We also plan to develop a variety of services that are
enhanced or enabled by our expanding network by entering into business
arrangements with broadband-related service providers in order to bring a
variety of value-added service offerings to our customers and their end-users.

OUR MARKET OPPORTUNITY

We believe that we have a substantial business opportunity for the
following reasons:

o There is a growing market demand for broadband communications services.

o Broadband communications services are enabling new applications for
businesses and consumers.

o DSL is a cost-effective technology for broadband communications.

o The current regulatory environment facilitates the provision of
competitive broadband communications service offerings.

OUR COMPETITIVE STRENGTHS

WE OFFER AN ATTRACTIVE VALUE PROPOSITION COMPARED TO ALTERNATIVE
TECHNOLOGIES. For business Internet users, our high-end services offer bandwidth
comparable to that offered by T1 and frame relay circuits (which are up to 25
times the speed of most analog modems) at a substantially lower cost than
traditional T1 service. For the RLAN market, our mid-range services are three to
six times the speed of ISDN lines and up to ten times the speed of most analog
modems at monthly rates similar to or lower than those for heavily-used ISDN
lines. For consumer Internet users, our consumer services are comparably priced
to other services, such as cable modem services, but offer significant
advantages in security, network performance and speed.

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<PAGE>

installations. We believe we have the nation's largest DSL network with more
than 1,350 operational central offices passing over more than 35 million homes
and businesses. As of March 31, 2000, we had installed a total of 93,000 lines
nationwide.

OUR SERVICES ARE WIDELY AVAILABLE, CONTINUOUSLY CONNECTED AND SECURE. Our
strategy of providing blanket coverage in each region we serve is designed to
ensure that our services are available to the vast majority of our customers'
end-users. Our networks provide a 24-hour continuous connection, unlike ISDN
lines and analog modems which require customers to dial-up each time for
Internet or RLAN access. Also, because we use dedicated connections from each
end-user to the Internet service provider or enterprise network, our customers
can reduce the risk of unauthorized access. These factors are important to our
customers because any Internet service they market to their end-users must
actually be available for them to purchase and be secure enough to not risk
their own reputation or business with any security lapses.

OUR MANAGEMENT TEAM HAS EXTENSIVE INDUSTRY EXPERIENCE. Our management
team includes individuals with extensive experience in the data communications,
telecommunications and personal computer industries, including Robert Knowling,
Jr., Chairman of the Board, President and Chief Executive Officer (former
Executive Vice President of Operations and Technology at U S WEST
Communications, Inc.), Catherine Hemmer, Executive Vice President and Chief
Operations Officer (former Vice President, Network Reliability and Operations at
U S WEST Communications, Inc., former General Manager, Network Provisioning at
Ameritech Corporation and former Vice President, Network Services at MFS
Communications Company, Inc.), Timothy Laehy, Executive Vice President and Chief
Financial Officer (former Vice President of Corporate Finance and Treasurer of
Leasing Solutions, Inc.), Robert Davenport, III, Executive Vice President,
Business Development (former Senior Vice President and Chief Operating Officer
of Tele-Communication, Inc.'s Internet Services subsidiary TCI.NET), Joseph
Devich, Executive Vice President, Corporate Services (former Vice President,
Operations and Technologies Staff of U S WEST Communications, Inc.), Dhruv
Khanna, Executive Vice President, General Counsel and Secretary, Jane Marvin,
Executive Vice President of Human Resources (former Vice President of Human
Resources for the General Business Services unit of Ameritech Corporation),
Terry Moya, Executive Vice President, External Affairs (former Vice President
and Chief Financial Officer, Capital Management, Network Operations and
Technologies at U S WEST Communications, Inc), Michael Lach, Executive Vice
President, Business Integration (former Vice President, Customer Provisioning
and Maintenance of Ameritech Corporation), John McDevitt, Executive Vice
President, Sales and Marketing (former Vice President of Sales and Marketing at
Danly IEM and former Business Director at Praxair, Inc; and Jimmy LaValley,
Executive Vice President, Community Relations (former Vice President, Human
Resources at US WEST).

OUR BUSINESS STRATEGY

Our objective is to become the leading nationwide provider of broadband
services and a critical element in the proliferation of e-commerce and other
applications that are enabled or enhanced by broadband communications. The key
elements of our strategy to achieve this objective are as follows:

EXPAND OUR NETWORK AND ROLL OUT SERVICE RAPIDLY IN OUR TARGETED
METROPOLITAN STATISTICAL AREAS. As of March 31, 2000, we introduced our services
in 62 of the top metropolitan statistical areas nationwide. We have announced
our plan to expand our services to a total of 165 metropolitan statistical areas
by the end of 2000. In the aggregate, these 165 metropolitan statistical areas
cover more than 45% of homes and 50% of businesses in the United States. In
addition, we have recently begun to assess the regulatory and competitive
environments in other countries.

PROVIDE PERVASIVE COVERAGE IN EACH METROPOLITAN STATISTICAL AREA. We are
pursuing a blanket coverage strategy of providing service in a substantial
majority of the central offices in each region that we enter since our Internet
service provider customers desire to market their Internet access services on a
region-wide basis. Blanket coverage is also important to our enterprise
customers since most of them desire to offer RLAN access to all employees
regardless of where they reside. In addition, we believe our presence in 165
metropolitan statistical areas will allow us to better serve our Internet
service provider, enterprise, telecommunications carrier and other customers.
These customers are increasingly seeking a single supplier in multiple
metropolitan areas.

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for Internet access using our services. We primarily provide connections to
Internet service providers, which in turn offer high-speed Internet access using
our network. In other cases, we provide wholesale DSL and Internet access
services for resale by our customers such as Prodigy Communications Corporation
and Juno Online Services. In this way, we:

o carry the traffic of multiple Internet service providers,
telecommunications carriers and other customers in any region,
increasing our volume and reducing our costs;

o leverage our selling efforts through the sales and support staff of
these Internet service providers, telecommunications carriers and
other customers;

o offer Internet service providers, telecommunications carriers and
other customers an alternative, since the traditional telephone
company typically provides its own retail Internet access services in
competition with our customers; and

o provide Internet service providers, telecommunications carriers and
other customers a high-speed service offering to compete with
cable-based Internet access.

DEVELOP A NATIONAL BRAND. We believe that we can enhance our competitive
position and increase demand for our services by actively developing a positive
brand and image for our Company and our services through a combination of
television, print and radio advertisements on both a national and local basis.
In October 1999, we commenced a significant national advertising campaign in
pursuit of this strategy. This branding strategy has created the opportunity for
us to provide end-user leads to our existing customers.

DEVELOP AND COMMERCIALIZE VALUE-ADDED SERVICES. We intend to introduce
value-added services to our customers and leverage the value of the network
access we offer today. Offering services such as voice over DSL, DSL plus
International Protocol (DSL + IP), and our Virtual Broadband Service Provider
(VBSP) offering will allow us to bundle service offerings to our customers and
improve the quality of content delivery to their end-users as well as reduce
costs. We believe this is an important part of our strategy and will allow us to
build upon our success to date in adding and retaining subscribers.

ACQUIRE AND ENTER INTO BUSINESS ARRANGEMENTS WITH NETWORK AND
BROADBAND-RELATED SERVICE PROVIDERS. We believe that the pace of deployment of
our network can be increased by acquiring and entering into business
arrangements with other network service providers, some of which may be located
outside of the United States. We also believe our network deployment will enable
the delivery of a variety of broadband-related services and content that are
desired by our customers. We expect to make these services available to our
customers through acquiring and entering into business arrangements with leading
providers of broadband-related services or content. For example, we recently
acquired Laser Link.Net, Inc. This acquisition will allow us to better provide
DSL and IP services on a wholesale basis and better enable us to serve customers
who do not wish to maintain any network facilities. Our agreement to acquire
BlueStar Communications Group will expand our selling capabilities in smaller
cities and rural areas, increase our distribution methods, and will enhance our
ability to deliver enhanced broadband solutions to small businesses.

TAKE ADVANTAGE OF NEW REGULATORY DEVELOPMENTS. In late 1999, the FCC
required the major local phone companies to provide us, and other competitive
local carriers, with "line sharing." This would allow us to provide our services
over the same telephone wire used by the traditional telephone companies to
provide analog voice services. In addition, some of the Ameritech/SBC merger
conditions adopted by the FCC in October 1999 also contain provisions on line
sharing and provide for reductions in costs for telephone wires in certain
circumstances. In many cases, line sharing would allow us to provision our
asymmetric DSL services on the same telephone wire as the existing local phone
companies' voice service. Currently, we provide our DSL services over a separate
additional telephone wire. Asymmetric DSL and standard telephone service can
exist on a single line and most, if not all, of the traditional telephone
companies provision their own asymmetric services on the same line as existing
voice services.

We see line sharing as an extremely important opportunity for us for
three primary reasons. First, line sharing should significantly reduce the
monthly recurring charges we incur for telephone wires. Second, line sharing
should reduce the time it takes traditional telephone companies to deliver
telephone wires because the telephone wire will already exist. Third, line
sharing should resolve lack of telephone wire problems that we have encountered
when ordering telephone wires in some areas of the country. We have entered into
line sharing agreements with U S West Communications, Inc., BellSouth
Corporation and Bell Atlantic Corporation. We have also entered into line
sharing

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agreements with SBC in California and we are negotiating agreements for the
remaining states in SBC's territory. We have entered into a line sharing
agreement with GTE for all of its major markets other than Texas. We recently
received a decision from the Texas Public Utilities Commission implementing line
sharing in Texas. We have started implementing line sharing in several states.
We expect the traditional local phone companies to implement line sharing on a
wide scale later this year.

RECENT DEVELOPMENTS

On March 20, 2000 we completed the acquisition of Laser Link.Net, Inc., a
leading provider of branded internet access, based in Media, Pennsylvania in a
transaction accounted for as a purchase. Under the acquisition agreement, we
issued 6.45 million split-adjusted shares of common stock for all Laser Link.Net
outstanding shares, plus assumption of all outstanding debt. We anticipate that
this acquisition will allow us to provide a turnkey broadband access solution to
companies and affinity groups who want to offer broadband Internet services to
their customers, members, or affiliates. Laser Link.Net currently provides a
similar service using dial-up access. The total consideration related to the
acquisition was valued at approximately $411.1 million based on the trading
price of our common stock at the time of the signing of the agreement.

On May 16, 2000, we announced that the American Arbitration Association
issued its Intended Award of Damages to us in our arbitration hearings against
Pacific Bell for violations of the Telecommunications Act of 1996. The
arbitrators awarded us $27.2 million plus attorneys' fees and costs which is in
addition to the panel's January 1999 interim decision to award us $257,166 in
damages and $474,995 in attorneys' fees and costs. In November 1998, the
arbitrators determined that Pacific Bell had violated the 1996
Telecommunications Act as well as its contract with us by failing to timely
deliver collocation space and operable loops.

On June 16, 2000, we announced our agreement to acquire BlueStar
Communications Group Inc., a provider of broadband and Internet services
for small- and medium-sized businesses throughout the Southeastern
United States. Under the acquisition agreement, we will issue 8 million shares
of our common stock for all of BlueStar's outstanding shares, plus assumption of
$55 million in debt and operating leases, in a transaction currently scheduled
to close in the third quarter of 2000. Up to five million additional shares of
our common stock may be issued to the BlueStar shareholders if certain
performance targets are met by BlueStar over the 2001 fiscal year. We
anticipate that our acquisition of BlueStar will provide the following benefits:

o Speed to market in implementing our direct sales strategy in Tier 3
markets;

o Increased ability to provide enhanced broadband solutions to small
businesses;

o A large, experienced direct sales force; and

o BlueStar's customer base.

In addition, our acquisition of BlueStar will provide us with 135 new
central offices that were built out by BlueStar and had not been built out by
us. We believe that we acquired these new central offices at a cost savings in
comparison with what it would have cost us to build, operate and support those
central offices and the underlying business associated with the markets they
serve.

In connection with our announcement of the BlueStar acquisition, we
announced a reduction in the number of end-user lines that we expected to be in
service on June 30, 2000. At the same time, we reduced end-user line growth
expectations for 2000 to 330%, primarily because of the channel conflict with
our resellers that may result from our acquisition of BlueStar, which sells
directly to end-users.

On June 27, 2000, we announced the appointment of John McDevitt as our
Executive Vice President of Sales and Marketing. Mr. McDevitt assumed this role
July 5, 2000 and replaced Robert Grant, who was serving in this position on an
interim basis.

We are currently aware of a Staff Accounting Bulletin entitled SAB 101
"Revenue Recognition in Financial Statements" ("SAB 101"), which was issued in
December 1999 by the Securities and Exchange Commission. SAB 101 provides that,
in certain circumstances, revenues which are received in the first month of a
contract might have to be recognized over an extended period of time, instead of
in the first month of the contract. Due to the complex nature of the widespread
implementation of SAB 101, the SEC has deferred the implementation date of SAB
101 until the quarter ended December 31, 2000. The SEC intends to issue further
definitive guidance on the implementation of SAB 101. When and if that guidance
is received, we will fully evaluate this guidance and respond and comply
accordingly. If SAB 101 is implemented and its implementation is contrary to
our current practice, it may have an adverse effect on our financial
statements.

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THE OFFERING

The shares to be offered for resale in this offering are shares of our
common stock issued to the former shareholders of LaserLink.Net, which we
acquired in March 2000.

Securities offered by the selling
shareholders................................... 5,013,466 shares of common stock

Common stock outstanding as of
July 1, 2000................................... 154,433,087 shares(1)

Use of Proceeds................................ We will not receive any proceeds from the sale
of the common stock by the selling shareholders. SEE
"Use of Proceeds."
Risk Factors................................... The shares of common stock offered under this
prospectus involve a high degree of risk. SEE "Risk
Factors."
Nasdaq National Market Symbol.................. COVD
</TABLE>
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(1) This number excludes approximately 28,003,758 shares reserved for
issuance in connection with the Company's stock-based compensation
plans or for conversion and exchange of the Company's convertible and
exchangeable securities.

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The address of our principal executive office is 4250 Burton Drive, Santa
Clara, California 95054, and our telephone number is (408) 987-1000.

"Covad(TM)," "TeleSpeed(R)," "TeleSurfer(SM)," "The Speed to Work(SM),"
"The Internet As It Should Be(SM)" and the Covad logos, names and marks are some
of our trademarks and servicemarks. This prospectus contains other product
names, trade names and trademarks of ours and of other organizations.

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SUMMARY CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
-------------------------------------- ----------------------------
1997 1998 1999 1999 2000
---------- ------------ ------------- ------------ --------------
(DOLLARS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues.................................. $ 26 $ 5,326 $ 66,488 $ 5,596 $ 41,807
Operating expenses:
Network and product costs.............. 54 4,562 55,347 4,960 31,349
Sales, marketing, general and
administrative....................... 2,374 31,043 140,372 18,113 89,171
Amortization of deferred compensation.. 295 3,997 4,768 1,653 1,186
Depreciation and amortization.......... 70 3,406 37,602 4,647 20,782
---------- ------------ ------------- ------------ --------------
Total operating expenses............. 2,793 43,008 238,089 29,373 142,488
---------- ------------ ------------- ------------ --------------
Loss from operations...................... (2,767) (37,682) (171,601) (23,777) (100,681)
Net interest expense................... 155 (10,439) (23,796) (5,127) (7,543)
Other income........................... -- -- -- -- 999
---------- ------------ ------------- ------------ --------------
Net loss.................................. (2,612) (48,121) (195,397) (28,904) (107,225)
Preferred dividends....................... -- -- (1,146) (1,146) --
---------- ------------ ------------- ------------ --------------
Net loss attributable to Common $ (2,612) $(48,121) $ (196,543) $ (30,050) $ (107,225)
Stockholders..............................
========== ============ ============= ============ ==============
Net loss per share--basic and diluted...... $ (.35) $ (3.75) $ (1.83) $(0.37) $(0.73)
========== ============ ============= ============ ==============
Weighted average shares used in computing
net loss per share
--basic and diluted..................... 7,360,978 12,844,203 107,647,812 80,432,965 146,967,581
========== ============ ============= ============ ==============
OTHER FINANCIAL DATA:
EBITDA(1)................................. $ (2,402) $ (30,154) $ (129,486) (17,477) (74,987)
Capital expenditures...................... $ 2,253 $ 59,503 $ 208,186 42,802 110,652
</TABLE>

<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
----------------------------------- ----------------
1997 1998 1999 2000
--------- ----------- ------------ ----------------
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents and short-term investments...... $ 4,378 $ 64,450 $ 767,357 1,062,789
Net property and equipment................................ 3,014 59,145 237,542 329,159
Total assets.............................................. 8,074 139,419 1,147,606 1,947,453
Long-term obligations, including current portion.......... 783 142,879 375,049 805,864
Total stockholders' equity (net capital deficiency)....... 6,498 (24,706) 690,291 984,825
</TABLE>

<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
----------------------------------- ----------------
1997 1998 1999 2000
--------- ----------- ------------ ----------------
<S> <C> <C> <C>
OTHER OPERATING DATA:
Homes and businesses passed............................... 278,000 6,023,217 29,000,000 35,000,000
Lines installed........................................... 26 3,922 57,000 93,000
</TABLE>

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(1) EBITDA consists of net loss excluding net interest, taxes, depreciation
and amortization, non-cash stock-based compensation expense and other
non-operating income or expenses. We have provided EBITDA because it is a
measure of financial performance commonly used in the telecommunications
industry as well as to enhance an understanding of our operating results.
EBITDA should not be construed as either:

o an alternative to operating income (as determined in accordance with
generally accepted accounting principles) as an indicator of our
operating performance, or

o an alternative to cash flows from operating activities (as determined
in accordance with generally accepted accounting principles) as a
measure of liquidity.

EBITDA as calculated by us may be calculated differently than EBITDA for
other companies. See our consolidated financial statements and the
related notes thereto contained elsewhere in this prospectus.

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RISK FACTORS

AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. IN
ADDITION TO REVIEWING OTHER INFORMATION IN THIS PROSPECTUS, YOU SHOULD CAREFULLY
CONSIDER THE FOLLOWING FACTORS BEFORE DECIDING TO PURCHASE SHARES OF OUR COMMON
STOCK. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. WE USE WORDS SUCH AS "ANTICIPATES," "BELIEVES," "PLANS,"
"EXPECTS," "FUTURE," "INTENDS" AND SIMILAR EXPRESSIONS TO IDENTIFY
FORWARD-LOOKING STATEMENTS. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS, INCLUDING THE RISKS DESCRIBED BELOW AND ELSEWHERE IN THIS PROSPECTUS.
WE DISCLAIM ANY OBLIGATION TO UPDATE INFORMATION CONTAINED IN ANY
FORWARD-LOOKING STATEMENT.

REJECTIONS OF OUR APPLICATIONS FOR CENTRAL OFFICE AND REMOTE TERMINAL SPACE BY
TRADITIONAL TELEPHONE COMPANIES ARE LIKELY TO DELAY THE EXPANSION OF OUR NETWORK
AND THE ROLL OUT OF OUR SERVICES

We must secure physical space from traditional telephone companies for
our equipment in their central offices in order to provide our services in our
targeted metropolitan statistical areas. In the past, we have experienced
rejections of our applications to secure this space in many central offices, and
we continue to receive rejections in some central offices. In addition, to
provide a full range of DSL services, we must access remote terminals, which are
used by traditional telephone companies to serve end-users through a combination
of fiber optic technology and copper wires. Traditional telephone companies are
increasing their deployment of fiber-fed remote terminal architectures (for
example, SBC and "Project Pronto"). For Covad to provide copper based DSL
services to these end users, Covad needs to access the copper telephone wires
that terminate at these remote terminals.

We expect that, as we proceed with our deployment, we will face
additional rejections of our applications for central office space in our other
targeted metropolitan statistical areas. These rejections have in the past
resulted, and could in the future result, in delays and increased expenses in
the rollout of our services in our targeted metropolitan statistical areas,
including delays and expenses associated with engaging in legal proceedings with
the traditional telephone companies. This has harmed our business and is likely
to continue to harm our business in the future periods.

We face other challenges in dealing with the traditional telephone
companies:

o there may be real limitations on the availability of central office
space in certain central offices and remote terminals;

o they frequently claim lack of available facilities when asked by us
to provide connections between central offices, remote terminals, and
telephone wires to end-users;

o they frequently fail to promise delivery of, and actually deliver,
properly connected telephone wires to our end-users on time;

o they frequently do not cooperate in providing us with relevant
telephone wire information such as the length of the wire;

o they frequently do not deploy and provide us with integrated software
systems that allow us to seamlessly place large volumes of orders for
telephone lines; and

o they frequently do not cooperate in maintaining and resolving
problems relating to delivery of telephone lines.

o they frequently do not cooperate in providing relevant information
about the presence and types of remote terminals that may be serving
end users.

We are engaged in a variety of negotiations, regulatory disputes and
legal actions to resolve these situations. We may be unable to resolve these
matters successfully.

The Federal Communications Commission ("FCC") has been reviewing the
policies and practices of the traditional telephone companies with the goal of
facilitating the efforts of competitive telecommunications companies to obtain
central office space and telephone wires more easily and on more favorable
terms. On March 31, 1999, the FCC adopted rules to make it easier and less
expensive for competitive telecommunications companies to obtain central office
space and to require traditional telephone companies to make new alternative

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arrangements for obtaining central office space. However, the FCC's new rules
have not been uniformly implemented in a timely manner, may not ultimately
enhance our ability to obtain central office space, and have been subject to
litigation.

Moreover, in March 2000, a federal appeals court struck portions of the
FCC's new rules, and has required the FCC to reconsider and review those rules.
In particular, the appeals court has required the FCC to revise its rules
concerning the types of equipment that we may collocate on the traditional
telephone company premises and the steps that traditional telephone companies
may take to separate their equipment from our equipment. The traditional
telephone companies may implement the court's ruling and any subsequent FCC
rules in a manner that impairs our ability to obtain collocation space and
collocate the equipment of our choice on their premises. Such actions by the
traditional telephone companies could adversely affect our business and disrupt
our existing network design, configuration and services.

On November 5, 1999, the FCC adopted rules that require traditional
telephone companies to provide access to remote terminal locations and to
require them to provide access to copper wires that terminate at these
terminals. These rules went into effect in May 2000. These rules are currently
being appealed. In addition, SBC is seeking a waiver from the FCC of one of the
merger conditions it agreed to in its merger with Ameritech; this waiver would
facilitate SBC deploying a remote terminal architecture (called "Project
Pronto"). Covad has been very active in these and other regulatory proceedings
in order to ensure that it receives the full nondiscriminatory access to these
remote terminals and copper wires.

CHARGES FOR UNBUNDLED NETWORK ELEMENTS ARE OUTSIDE OF OUR CONTROL BECAUSE THEY
ARE PROPOSED BY THE TRADITIONAL TELEPHONE COMPANIES AND ARE SUBJECT TO COSTLY
REGULATORY APPROVAL PROCESSES

Traditional telephone companies provide the unbundled DSL-capable lines
or telephone wires that connect each end-user to our equipment located in the
central offices. The 1996 Telecommunications Act generally requires that charges
for these unbundled network elements be cost-based and nondiscriminatory. The
nonrecurring and recurring monthly charges for DSL-capable lines (telephone
wires) that we require vary greatly. These rates are subject to the approval of
the state regulatory commissions. The rate approval processes for DSL-capable
lines and other unbundled network elements typically involve a lengthy review of
the rates proposed by the traditional telephone companies in each state. The
ultimate rates approved typically depend on the traditional telephone company's
initial rate proposals and the policies of the state public utility commission.
These rate approval proceedings are time-consuming and expensive. Consequently,
we are subject to the risk that the non-recurring and recurring charges for
DSL-capable lines and other unbundled network elements will increase based on
rates proposed by the traditional telephone companies and approved by state
regulatory commissions from time to time, which would harm our operating
results.

THE FAILURE OF TRADITIONAL TELEPHONE COMPANIES TO ADEQUATELY PROVIDE
TRANSMISSION FACILITIES AND PROVISION TELEPHONE WIRES IS LIKELY TO IMPAIR OUR
ABILITY TO INSTALL LINES AND ADVERSELY AFFECT OUR GROWTH RATE

We interconnect with and use traditional telephone companies' networks to
service our customers. This presents a number of challenges because we depend on
traditional telephone companies:

o to use their technology and capabilities to meet certain
telecommunications needs of our customers and to maintain our
service standards;

o to cooperate with us for the provision and maintenance of
transmission facilities; and

o to provide the services and network components that we order, for
which they depend significantly on unionized labor. Labor issues have
in the past, and may in the future, hurt the telephone companies'
performance.

Our dependence on the traditional telephone companies has caused and
could continue to cause us to encounter delays in establishing our network and
providing higher speed DSL services. We rely on the traditional telephone
companies to provision telephone wires to our customers and end-users. We must
establish efficient procedures for ordering, provisioning, maintaining and
repairing large volumes of DSL capable lines from the traditional telephone
companies. We must also establish satisfactory electronic billing and payment
arrangements with the traditional telephone companies. We may not be able to do
these things in a manner that will allow us to retain and grow our customer and
end-user base.

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It has been and continues to be our experience that, at any given time,
one or more of the traditional telephone companies will fail to deliver the
central office space, transmission facilities, telephone wires or other
elements, features and functions that our business requires. For example, the
traditional telephone companies currently are significantly impairing our
ability to efficiently install our services, and this has adversely affected the
growth in the volume of orders we receive. The failure of the traditional
telephone companies to consistently and adequately deliver operable telephone
wires to us on time has significantly contributed to an increase in the backlog
of uninstalled orders. The continued inadequate performance of the traditional
telephone companies could slow the growth in our revenues and reduce the growth
in orders placed by our customers, which could materially harm our business.

On November 18, 1999, the FCC decided that the traditional local
telephone companies must provide us and other competitive local exchange
carriers with access to line sharing. This would allow us to provide our
services over the same telephone wire used by the traditional telephone
companies to provide analog voice services. The FCC has directed the traditional
local telephone companies to enter into agreements with competitors, such as
ourselves, and take the necessary steps to provide such access by mid-2000.
However, it is unclear whether the traditional telephone companies will provide
us with such access in a meaningful way this year.

Although we have entered into interim line sharing agreements with the
major local telephone carriers the permanent rates, terms and conditions of line
sharing access have not yet been mutually agreed to between the traditional
local phone companies and us. State commissions have not yet arbitrated disputes
or set line sharing rates in connection with failed negotiations between
traditional local phone companies and us. The efforts of traditional local
telephone companies to provide us with line sharing may inadvertently or
purposefully cause disruption and dislocation to our existing processes for
obtaining full telephone lines and our ability to provide our services.

WE DEPEND ON THE TRADITIONAL TELEPHONE COMPANIES FOR THE QUALITY AND
AVAILABILITY OF THE TELEPHONE WIRES THAT WE USE

We depend significantly on the quality and availability of the
traditional telephone companies' telephone wires, shared lines and the
traditional telephone companies' maintenance of such wires. We may not be able
to obtain the telephone wires and the services we require from the traditional
telephone companies at satisfactory quality levels, rates, terms and conditions.
Our inability to do so could delay the expansion of our network and degrade the
quality of our services to our customers.

OUR BUSINESS WILL SUFFER IF OUR INTERCONNECTION AGREEMENTS ARE NOT RENEWED OR IF
THEY ARE MODIFIED ON UNFAVORABLE TERMS

We are required to enter into and implement interconnection agreements in
each of our targeted metropolitan statistical areas with the appropriate
traditional telephone companies in order to provide service in those regions. We
have not yet entered into all of the interconnection agreements we require to
complete our 165 metropolitan statistical area build-out. We may be unable to
timely enter into these agreements, which is prerequisite for us to provide
service in those areas. Many of our existing interconnection agreements have a
maximum term of three years. Therefore, we will have to renegotiate these
agreements with the traditional telephone companies when they expire. We may not
succeed in extending or renegotiating them on favorable terms or at all.

As the FCC modifies, changes and implements rules related to unbinding
and collocation, Covad generally has to renegotiate its interconnection
agreements with the traditional telephone companies in order to implement those
new or modified rules. We may be unable to timely renegotiate these agreements,
or we may be forced to arbitrate and litigate with the traditional telephone
company agreement terms that fully comply with FCC rules. As a result, although
the FCC may implement rules or policies designed to speed or improve Covad's
ability to provide its services, Covad may not be able to timely implement those
rules or policies.

Additionally, disputes have arisen and will continue to arise in the
future as a result of differences in interpretations of the interconnection
agreements. For example, we are in litigation proceedings with certain of the
traditional telephone companies. These disputes have delayed the deployment of
our network, and resolution of the litigated matters will cause us ongoing
expenditure of money and management time. They may have also negatively affected
our service to our customers and our ability to enter into additional
interconnection agreements with the traditional telephone companies in other
states. In addition, the interconnection agreements are subject to state
commission, FCC and judicial oversight. These government authorities may modify
the terms of the interconnection agreements in a way that harms our business.

OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE WE HAVE A LIMITED OPERATING
HISTORY

We were incorporated in October 1996 and introduced our services
commercially in the San Francisco Bay Area in December 1997. Because of our
limited operating history, you have limited operating and financial data upon
which to evaluate our business. You should consider that we have the risks of an
early stage company in a new and rapidly evolving market. To overcome these
risks, we must:

o rapidly expand the geographic coverage of our services;

o attract and retain customers within our existing and in new
metropolitan statistical areas;

o increase awareness of our services;

o respond to competitive developments;

o continue to attract, retain and motivate qualified persons;

o continue to upgrade our technologies in response to competition and
market factors;

o manage our traditional telephone company suppliers;

o rapidly install high-speed access lines;

o effectively manage the growth of our operations; and

o deliver additional value-added services to our customers without
causing existing customers to cease reselling our services or
reducing the volume or rate of growth of sales of our services.

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WE HAVE A HISTORY OF LOSSES AND EXPECT INCREASING LOSSES IN THE FUTURE

We have incurred substantial losses and experienced negative cash flow
each fiscal quarter since our inception. As of March 31, 2000, we had an
accumulated deficit of approximately $353.4 million. We intend to increase our
capital expenditures and operating expenses in order to expand our business. As
a result, we expect to incur substantial additional net losses and substantial
negative cash flow for the next several years due to continued development,
commercial deployment and expansion of our network. We may also make investments
in and acquisitions of businesses that are complementary to ours to support the
growth of our business. Our future cash requirements for developing, deploying
and enhancing our network and operating our business, as well as our revenues,
will depend on a number of factors including:

o the number of regions entered, the timing of entry and services
offered;

o network deployment schedules and associated costs;

o the rate at which customers and end-users purchase our services and
the pricing of such services;

o the level of marketing required to acquire and retain customers and
to attain a competitive position in the market place;

o the rate at which we invest in engineering and development and
intellectual property with respect to existing and future technology;
and

o unanticipated opportunities.

In addition, we expect our net losses to increase in the future due to
interest and amortization charges related to our 13 1/2% senior discount notes
(the "1998 notes") due 2008, our 12 1/2% senior notes (the "1999 notes") due
2009, our 12% senior notes due 2010 (the "2000 notes") and the amortization
charges related to our issuance of preferred stock to AT&T Ventures and two
affiliated funds ("AT&T Ventures"), NEXTLINK Communications, Inc. ("NEXTLINK")
and Qwest Communications International Inc. ("Qwest") in January 1999. For
example:

o Interest and amortization charges relating to the 1998 notes were
approximately $22.3 million during the year ending December 31, 1999.
These charges will increase each year until the year ending December
31, 2004, during which period the interest and amortization charges
will be approximately $36.9 million. This increase is due to the
accretion of the 1998 notes to $260 million through March 2003.

o Interest and amortization charges relating to the 1999 notes were
approximately $24.8 million during the year ending December 31, 1999
and will increase slightly each year to approximately $29.3 million
during the year ending December 31, 2008.

o Interest and amortization charges relating to the 2000 notes will be
approximately $48.2 million during the year ending December 31, 2000
and will be $52.2 million each following year through the maturity of
the notes in February 2010.

o We recorded intangible assets of $28.7 million associated with the
issuance of our preferred stock to AT&T Ventures, NEXTLINK and Qwest.
Amortization charges relating to our preferred stock issuance were
approximately $8.2 million during the year ending December 31, 1999.
These amounts will result in an annual amortization charge of
approximately $8.4 million in each of the years in the two-year
period ending December 31, 2001.

OUR BUSINESS WILL SUFFER IF OUR INTERNET SERVICE PROVIDERS, TELECOMMUNICATIONS
CARRIERS AND OTHER THIRD PARTIES ARE NOT SUCCESSFUL IN MARKETING AND SELLING OUR
SERVICES

We primarily market our Internet access services through Internet service
providers, telecommunications carriers and other customers for resale to their
business and consumer end-users. To date, a limited number of Internet service
providers have accounted for the significant majority of our revenues. As a
result, a significant reduction in the number of end-users or revenues provided
by one or more of our key Internet service providers could materially harm our
operating results in any given period. We expect that our Internet service
provider customers and telecommunications carriers will account for the majority
of our future market penetration and revenue growth. Our agreements with our
customers are generally non-exclusive. Many of our customers also resell
services offered by our competitors. In addition, a number of our customers have
committed to provide large

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numbers of end-users in exchange for price discounts. If our customers do not
meet their volume commitments or otherwise do not sell our services to as many
end-users as we expect, our business will suffer. In addition, these and future
relationships we may establish with other third parties may not result in
significant line orders or revenues.

OUR OPERATING RESULTS ARE LIKELY TO FLUCTUATE IN FUTURE PERIODS AND, MAY FAIL TO
MEET THE EXPECTATIONS OF SECURITIES ANALYSTS AND INVESTORS

Our annual and quarterly operating results are likely to fluctuate
significantly in the future as a result of numerous factors, many of which are
outside of our control. These factors include:

o the timing and willingness of traditional telephone companies to
provide us with central office space and the prices, terms and
conditions on which they make available the space to us;

o the amount and timing of capital expenditures and other costs
relating to the expansion of our network and the marketing of our
services;

o delays in the commencement of operations in new regions and the
generation of revenue because certain network elements have lead
times that are controlled by traditional telephone companies and
other third parties;

o the ability to develop and commercialize new services by us or our
competitors;

o the ability to order or deploy our services on a timely basis to
adequately satisfy end-user demand;

o our ability to successfully operate our network;

o the rate at which customers subscribe to our services;

o decreases in the prices for our services due to competition,
volume-based pricing and other factors;

o our ability to retain Internet service provider, enterprise and
telecommunications carrier customers and limit end-user churn rates;

o the mix of line orders between consumer end-users and business
end-users (which typically have higher margins);

o the success of our relationship with AT&T and other potential third
parties in generating significant end-user demand;

o the development and operation of our billing and collection systems
and other operational systems and processes;

o the rendering of accurate and verifiable bills by our traditional
telephone company suppliers and resolution of billing disputes;

o the incorporation of enhancements, upgrades and new software and
hardware products into our network and operational processes that may
cause unanticipated disruptions; and

o the interpretation and enforcement of regulatory developments and
court rulings concerning the 1996 Telecommunications Act,
interconnection agreements and the anti-trust laws.

o The availability of equipment and services from key vendors.

As a result, it is likely that in some future quarters our operating
results will be below the expectations of securities analysts and investors. If
this happens, the trading price of our common stock would likely decline.

WE CANNOT PREDICT WHETHER WE WILL BE SUCCESSFUL BECAUSE OUR BUSINESS STRATEGY IS
LARGELY UNPROVEN

We believe that we were the first competitive telecommunications company
to widely provide high-speed Internet and network access using DSL technology.
To date, our business strategy remains significantly unproven. To be successful,
we must develop and market services that achieve broad commercial acceptance by
Internet service provider, enterprise and telecommunications carrier customers
in our targeted metropolitan statistical areas. Because our business and the
demand for high-speed digital communications services are in the early stages of
development, we are uncertain whether our services will achieve broad commercial
acceptance.

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<PAGE>

It is uncertain whether our strategy of selling and providing our service
through Internet service providers, telecommunication carriers and others will
be successful. This strategy creates marketing, operational and other challenges
and complexities that are less likely to appear in the case of a single entity
providing integrated DSL and ISP services. For example, cable modem service
providers, such as Excite@Home Corporation and Time Warner, Inc., market, sell
and provide high-speed services, Internet access and content services on an
integrated basis. Also, our new DSL + IP and VBSP services may adversely affect
our relationship with our current ISP customers, since we will be providing some
of the services that they provide. We do not anticipate that this will have a
substantial adverse effect on our relationship with our ISP customers because we
will be able to provide our ISP customers with these additional services at a
lower cost then they would pay if they developed these additional services
internally.

Three recently-announced mergers and acquisitions--between America
Online, Inc. and Time Warner, Inc., between NTT and Verio, and between NEXTLINK
and Concentric Network Corporation--highlight a growing trend among service
providers and telecommunications carriers to combine the marketing, selling and
provision of high-speed data transmission services, Internet access and content
services. While we do not believe that such combined entities providing
integrated services will adversely affect our business, no assurance can be
given that such combinations will not ultimately have such an adverse effect.
Further, no assurance can be given that additional acquisitions of Internet
service providers by traditional and local competitive telecommunications
carriers, and other strategic alliances between such entities, will not harm our
business.

In light of our acquisition of Laser Link.Net, Inc. and other changes we
have made in our business to provide Internet access services on a wholesale
basis to Internet service providers, such as Prodigy Communications Corporation
and Juno On-Line, some of our existing Internet service provider customers may
perceive us as a potential or actual competitor instead of as a supplier.
Similarly, our agreement to acquire BlueStar, which sells its services directly
to end-users, may cause our existing Internet service provider customers to view
us a a competitor. Such Internet service providers may therefor reduce the
volume or the rate of growth of the sales of our services, or may cease to
resell our services. No assurance can be given that our provision of additional
services will not alienate some or all of our existing customers and thus harm
our business.

WE MAY EXPERIENCE DECREASING PRICES FOR OUR SERVICES, WHICH MAY IMPAIR OUR
ABILITY TO ACHIEVE PROFITABILITY OR POSITIVE CASH FLOW

We may experience decreasing prices for our services due to competition,
volume-based pricing, an increase in the proportion of our revenues generated by
our consumer services and other factors. Currently, we charge higher prices for
some of our services than some of our competitors do for their similar services.
As a result, we cannot assure you that our customers and their end-user
customers will select our services over those of our competitors. In addition,
prices for digital communications services in general have fallen historically,
and we expect this trend to continue. We have provided and expect in the future
to provide price discounts to customers that commit to sell our services to a
large number of their end-user customers. Our consumer-grade services have lower
prices than our business-grade services. As a result, expected increases in the
percentage of our revenues which we derive from our consumer services will
likely reduce our overall profit margins. We also expect to reduce prices
periodically in the future to respond to competition and to generate increased
sales volume. As a result, we cannot predict whether demand for our services
will exist at prices that enable us to achieve profitability or positive cash
flow.

OUR FAILURE TO MANAGE OUR GROWTH EFFECTIVELY MAY DELAY OUR NETWORK EXPANSION AND
SERVICE ROLLOUT

Our strategy is to significantly expand our network within our existing
metropolitan statistical areas and to deploy our network in substantially all of
our 165 targeted metropolitan statistical areas by the end of 2000. The
execution of this strategy involves:

o obtaining the required government authorizations;

o identifying, accessing and initiating service in key central offices
within existing and target regions;

o designing, maintaining and upgrading adequate operational support,
billing and collection systems;

o obtaining central office space and maintaining connections between
central offices;

o obtaining phone lines and electronic ordering facilities from our
traditional telephone company suppliers on a timely basis; and

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o entering into and renewing interconnection agreements with the
appropriate traditional telephone companies on satisfactory terms and
conditions.

To accomplish this strategy, we must, among other things:

o market to and acquire a substantial number of customers and
end-users;

o continue to implement and improve our operational, financial and
management information systems, including our client ordering,
provisioning, dispatch, trouble ticketing and other operational
systems as well as our billing, accounts receivable and payable
tracking, collection, fixed assets and other financial management
systems;

o hire and train additional qualified management and technical
personnel;

o manage and resolve any disputes which may arise with our traditional
telephone company suppliers;

o establish and maintain relationships with third parties to market and
sell our services, install network equipment and provide field
service; and

o continue to expand and upgrade our network infrastructure.

We may be unable to do these things successfully. As a result, we may be
unable to deploy our network as scheduled, deploy our services in a timely
manner or achieve the operational growth necessary to achieve our business
strategy.

Our growth has placed, and is expected to continue to place, significant
demands on our management and operational resources. We expect to continue to
significantly increase our employee base to support the deployment of our
network. We also expect to implement system upgrades, new software systems and
other enhancements, which could cause disruption and dislocation in our
business. If we are successful in implementing our marketing strategy, we may
have difficulty responding to demand for our services and technical support in a
timely manner and in accordance with our customers' expectations. We expect
these demands to require the addition of new management personnel and the
increased outsourcing of Company functions to third parties. We may be unable to
do this successfully, in which case we could experience a reduction in the
growth of our line orders and therefore our revenues.

In February to March 2000, we deployed new software systems that caused
some disruption to our business while enhancing the productivity and efficiency
of certain operational practices. Future changes in our processes that we
introduce or we are required to introduce as a result of our arrangements with
the traditional telephone companies could cause similar or more serious
disruption to our ability to provide our services and to our overall business.

Thus far we have electronically linked our own ordering software systems to the
software systems of five of the traditional telephone companies. Such electronic
linkage is essential for us to successfully place a large volume of orders for
access to telephone wires. There is no assurance that we will be successful in
electronically linking our software system to those of all of the traditional
telephone companies who we rely on for the supply of access to their telephone
wires. Even if we have such electronic links, we cannot assure you that we will
be able to process all of our orders through such electronic links, which would
require additional human intervention. Our failure to electronically link our
systems with those of all major traditional telephone companies would severely
harm our ability to provide our services in large volume to our customers.

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THE MARKETS WE FACE ARE HIGHLY COMPETITIVE AND WE MAY NOT BE ABLE TO COMPETE
EFFECTIVELY, ESPECIALLY AGAINST ESTABLISHED INDUSTRY COMPETITORS WITH
SIGNIFICANTLY GREATER FINANCIAL RESOURCES

The markets we face for business and consumer Internet access and RLAN
access services are intensely competitive. We expect that these markets will
become increasingly competitive in the future. In addition, the traditional
telephone companies dominate the current market and have a monopoly on telephone
wires. We pose a competitive risk to the traditional telephone companies and, as
both our competitors and our suppliers, they have the ability and the motivation
to harm our business. We also face competition from cable modem service
providers, competitive telecommunications companies traditional and new national
long distance carriers, Internet service providers, on-line service providers
and wireless and satellite service providers. Many of these competitors have
longer operating histories, greater name recognition, better strategic
relationships and significantly greater financial, technical or marketing
resources than we do. As a result, these competitors:

o may be able to develop and adopt new or emerging technologies and
respond to changes in customer requirements or devote greater
resources to the development, promotion and sale of their products
and services more effectively than we can;

o may form new alliances and rapidly acquire significant market share;
and

o may be able to undertake more extensive marketing campaigns, adopt
more aggressive pricing policies and devote substantially more
resources to developing high-speed digital services.

The intense competition from our competitors, including the traditional
telephone companies, the cable modem service providers and the competitive
telecommunications companies could harm our business.

The traditional telephone companies represent the dominant competition in
all of our target service areas, and we expect this competition to intensify.
For example, they have an established brand name and reputation for high quality
in their service areas, possess sufficient capital to deploy DSL equipment
rapidly, have their own telephone wires and can bundle digital data services
with their existing analog voice services to achieve economies of scale in
serving customers. Certain of the traditional telephone companies have
aggressively priced their consumer DSL services as low as $19-$29 per month,
placing pricing pressure on our TeleSurfer services. While we may be allowed to
provide our data services over the same telephone wires that they provide analog
voice services, we may be unable to obtain this ability. Even if we do obtain
this ability, there is no assurance that we will be permitted to provide our
services in this manner without running into operational or technical obstacles;
including those created by the traditional telephone companies. Further, they
can offer service to end-users from certain central offices where we are unable
to secure central office space and offer service. Accordingly, we may be unable
to compete successfully against the traditional telephone companies.

Cable modem service providers, such as Excite@Home Corporation and
MediaOne, the broadband services arm of MediaOne Group (formerly U S West Media
Group), and their respective cable partners, are deploying high-speed Internet
access services over coaxial cable networks. Where deployed, these networks
provide similar, and in some cases, higher-speed Internet access and RLAN access
than we provide. They also offer these services at lower price points than our
TeleSurfer services. As a result, competition with the cable modem service
providers
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may have a significant negative effect on our ability to secure customers and
may create downward pressure on the prices we can charge for our services.

Many competitive telecommunications companies offer high-speed data
services using a business strategy similar to ours. Some of these competitors
have begun offering DSL-based access services and others are likely to do so in
the future. In addition, some competitive telecommunications companies have
extensive fiber networks in many metropolitan areas primarily providing
high-speed digital and voice circuits to large corporations, and have
interconnection agreements with traditional telephone companies pursuant to
which they have acquired central office space in many of our existing and target
markets. Further, certain of our customers have made investments in our
competitors. As a result of these factors, we may be unsuccessful in generating
a significant number of new customers or retaining existing customers.

OUR LEVERAGE IS SUBSTANTIAL AND WILL INCREASE, MAKING IT MORE DIFFICULT TO
RESPOND TO CHANGING BUSINESS CONDITIONS

As of March 31, 2000 we had approximately $823.8 million of long-term
obligations (including current portion), which consists primarily of the 1998
notes, the 1999 notes and the 2000 notes. Because the 1998 notes accrete to $260
million through March 2003, we will become increasingly leveraged until then,
whether or not we incur new indebtedness in the future. We may also incur
additional indebtedness in the future, subject to certain restrictions contained
in the indentures governing the 1998 notes, the 1999 notes and the 2000 notes,
to finance the continued development, commercial deployment and expansion of our
network and for funding operating losses or to take advantage of unanticipated
opportunities. The degree to which we are leveraged could have important
consequences. For example, it could:

o materially limit or impair our ability to obtain additional financing
or refinancing in the future for working capital, capital
expenditures, acquisitions, general corporate purposes or other
purposes;

o require us to dedicate a substantial portion of our cash flow to the
payment of principal and interest on our indebtedness, which reduces
the availability of cash flow to fund working capital, capital
expenditures, acquisitions, general corporate purposes or other
purposes;

o limit our ability to redeem the 1998 notes, the 1999 notes and the
2000 notes in the event of a change of control; and

o increase our vulnerability to economic downturns, limit our ability
to withstand competitive pressures and reduce our flexibility in
responding to changing business and economic conditions.

WE WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH TO SERVICE OUR INDEBTEDNESS; OUR
ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS BEYOND OUR CONTROL

We expect to continue to generate substantial net losses and negative
cash flow for at least the next several years. We may be unable to maintain a
level of cash flow from operations sufficient to permit us to pay the principal
and interest on our current indebtedness, and any additional indebtedness we may
incur. The 1998 notes accrete to $260 million through March 2003 and we must
begin paying cash interest on those notes in September 2003. We have provided
for the first six payments on the 1999 notes by setting aside approximately
$74.1 million in government securities to fund such payments. We began paying
cash interest on the 1999 notes in August 1999 and will begin paying cash
interest on the 2000 notes in August 2000.

Our ability to make scheduled payments with respect to indebtedness will
depend upon, among other things:

o our ability to achieve significant and sustained growth in cash flow;

o the rate and success of the commercial deployment of our network;

o successful operation of our network;

o the market acceptance, customer demand, rate of utilization and
pricing for our services;

o our ability to successfully complete development, upgrades and
enhancements of our network;

o and our ability to complete additional financings, as necessary.

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Each of these factors is affected by economic, financial, competitive and
other factors, many of which are beyond our control. If we are unable to
generate sufficient cash flow to service our indebtedness, we may have to reduce
or delay network deployments, restructure or refinance our indebtedness or seek
additional equity capital, strategies that may not enable us to service and
repay our indebtedness. Any failure to satisfy our obligations with respect to
the 1998 notes, the 1999 notes or the 2000 notes at or before maturity would be
a default under the related indentures and could cause a default under
agreements governing our other indebtedness. If such defaults occur, the holders
of the indebtedness would have enforcement rights, including the right to
accelerate payment of the entire amount of the debt and the right to commence an
involuntary bankruptcy proceeding against us.

OUR INTELLECTUAL PROPERTY PROTECTION MAY BE INADEQUATE TO PROTECT OUR
PROPRIETARY RIGHTS, AND WE MAY BE SUBJECT TO INFRINGEMENT CLAIMS

We regard certain aspects of our products, services and technology as
proprietary. We attempt to protect them with patents, copyrights, trademarks,
trade secret laws, restrictions on disclosure and other methods. These methods
may not be sufficient to protect our technology. We also generally enter into
confidentiality or license agreements with our employees and consultants, and
generally control access to and distribution of our documentation and other
proprietary information. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use our products, services or
technology without authorization, or to develop similar technology
independently.

Currently, we have been issued one patent and we have a number of
additional patent applications pending. We intend to prepare additional
applications and to seek patent protection for our systems and services. These
patents may not be issued to us. If issued, they may not protect our
intellectual property from competition. Competitors could seek to design around
or invalidate these patents.

Effective patent, copyright, trademark and trade secret protection may be
unavailable or limited in certain foreign countries. The global nature of the
Internet makes it virtually impossible to control the ultimate destination of
our proprietary information. The steps that we have taken may not prevent
misappropriation or infringement of our technology. Litigation may be necessary
in the future to enforce our intellectual property rights, to protect our trade
secrets or to determine the validity and scope of the proprietary rights of
others. Such litigation could result in substantial costs and diversion of
resources and could harm our business.

In addition, others may sue us with respect to infringement of their
intellectual property rights. Last year we were sued by Bell Atlantic for an
alleged infringement of a patent issued to them September 1998 entitled
"Variable Rate and Variable Mode Transmission System." Although the court
recently held that we do not infringe Bell Atlantic's patent, this ruling is
still subject to appeal. As litigation is inherently unpredictable, there is no
guarantee that we will prevail on an appeal of this ruling. An unfavorable
outcome on appeal of this ruling, or in any other lawsuit that may be brought
against us, could limit our ability to provide all our services and require us
to pay damages, which could significantly harm our business.

WE WILL NEED ADDITIONAL FUNDS IN THE FUTURE IN ORDER TO CONTINUE TO GROW OUR
BUSINESS

We believe our current capital resources will be sufficient for our
funding and working capital requirements for the deployment and operation of our
network into the second quarter of 2001. Thereafter, we will be required to
raise additional capital through the issuance of debt or equity financings. We
may choose to raise additional capital sooner, depending on market conditions.
The actual amount and timing of our future capital requirements will depend upon
a number of factors, including:

o the number of geographic areas targeted and entered and the timing of
entry and services offered;

o network deployment schedules and associated costs;

o the rate at which customers and end-users purchase our services and
the pricing of such services;

o the level of marketing required to acquire and retain customers and
to attain a competitive position in each region we enter;

o the rate at which we invest in engineering and development and
intellectual property with respect to existing and future technology;
and

o investment opportunities in complementary businesses, acquisitions
or other opportunities.

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We also may be unsuccessful in raising sufficient capital at all or on
terms that we consider acceptable. If this happens, our ability to continue to
expand our business or respond to competitive developments would be impaired.

In addition, indentures governing our existing indebtedness contain
covenants that may restrict our business activities and our ability to raise
additional funds. As a result, we may not be able to undertake certain
activities which management believes are in our best interest to develop our
business. We also may be unable to raise as much additional funding through the
issuance of debt securities as we may need in the future. This could require us
to raise funding through the issuance of equity securities or amend our
indentures, which we may be unable to do on acceptable terms.

THE SCALABILITY AND SPEED OF OUR NETWORK REMAIN LARGELY UNPROVEN

As of March 31, 2000, we had deployed our network in a total of 62
metropolitan statistical areas, many of which have been deployed only in the
last several months. As a result, the ability of our DSL networks and
operational support systems to connect and manage a substantial number of online
end-users at high speeds is still unknown. Consequently, there remains a risk
that we may not be able to scale our network and operational support systems up
to our expected end-user numbers while achieving superior performance. Peak
digital data transmission speeds currently offered across our DSL networks are
1.5 megabits per second downstream. However, the actual data transmission speeds
over our network could be significantly slower and will depend on a variety of
factors, including:

o the type of DSL technology deployed;

o the distance an end-user is located from a central office;

o the configuration of the telecommunications line being used;

o quality of the telephone wires provisioned by traditional telephone
companies; and

o our operational support systems which manage our network.

As a result, our network may be unable to achieve and maintain the
highest possible digital transmission speed. Our failure to achieve or maintain
high-speed digital transmissions would significantly reduce customer and
end-user demand for our services.

INTERFERENCE IN THE TRADITIONAL TELEPHONE COMPANIES' COPPER PLANT COULD DEGRADE
THE PERFORMANCE OF OUR SERVICES

Certain tests indicate that some types of DSL technology may cause
interference with, and be interfered with by other signals present in a
traditional telephone company's copper plant, usually with lines in close
proximity. In addition, as we continue to implement line sharing with the
traditional local telephone companies, our deployment of our ADSL data services
could interfere with the voice services of the traditional local telephone
companies carried over the same line or adjacent lines. If it occurs, such
interference could cause degradation of performance of our services or the
services of the traditional local telephone companies and render us unable to
offer our services on selected lines. The amount and extent of such interference
will depend on the condition of the traditional telephone company's copper plant
and the number and distribution of DSL and other signals in such plant and
cannot now be ascertained.

When interference occurs, it is difficult to detect. The procedures to
resolve interference issues between competitive telecommunications companies and
traditional telephone companies are still being developed and may not be
effective. In the past we have agreed to interference resolution procedures with
certain traditional telephone companies. However, we may be unable to
successfully negotiate similar procedures with other traditional telephone
companies in future interconnection agreements or in renewals of existing
interconnection agreements. In addition, the failure of the traditional
telephone companies to take timely action to resolve interference issues could
harm the provision of our services. If our TeleSpeed and TeleSurfer services
cause widespread network degradation or are perceived to cause that type of
interference, actions by the traditional telephone companies or state or federal
regulators could harm our reputation, brand image, service quality, customer
satisfaction and retention, and overall business. Moreover, ostensible
interference concerns have in the past been, continue to currently and may in
the future be used by the traditional telephone companies as a pretext to delay
the deployment of our services and otherwise harm our business.

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A SYSTEM FAILURE COULD DELAY OR INTERRUPT SERVICE TO OUR CUSTOMERS

Our operations depend upon our ability to support our highly complex
network infrastructure and avoid damage from fires, earthquakes, floods, power
losses, excessive sustained or peak user demand, telecommunications failures,
network software flaws, transmission cable cuts and similar events. The
occurrence of a natural disaster or other unanticipated problem at our network
operations center or any our regional data centers could cause interruptions in
our services. Additionally, failure of a traditional telephone company or other
service provider, such as competitive telecommunications companies, to provide
communications capacity that we require, as a result of a natural disaster,
operational disruption any other reason, could cause interruptions in our
services. Any damage or failure that causes interruptions in our operations
could harm our business.

A BREACH OF NETWORK SECURITY COULD DELAY OR INTERRUPT SERVICE TO OUR CUSTOMERS

Our network may be vulnerable to unauthorized access, computer viruses
and other disruptive problems. Internet service provider, telecommunications
carrier and corporate networks have in the past experienced, and may in the
future experience, interruptions in service as a result of accidental or
intentional actions of Internet users, current and former employees and others.
Unauthorized access could also potentially jeopardize the security of
confidential information stored in the computer systems of our customers and the
customers' end-users. This might result in liability to our customers and also
might deter potential customers. We intend to implement security measures that
are standard within the telecommunications industry and newly developed security
measures. We have not done so yet and may not implement such measures in a
timely manner. Moreover, if and when implemented, such measures may be
circumvented, and eliminating computer viruses and alleviating other security
problems may require interruptions, delays or cessation of service to our
customers and such customers' end-users, which could harm our business.

WE DEPEND ON A LIMITED NUMBER OF THIRD PARTIES FOR EQUIPMENT SUPPLY SERVICE,
AND INSTALLATION

We rely on outside parties to manufacture our network equipment and
provide certain network services. These services and equipment include:

o digital subscriber line access multiplexers;

o customer premise equipment modems;

o network routing and switching hardware;

o network management software;

o systems management software;

o database management software;

o collocation space; and

o Internet connectivity and Internet protocol services.

As we sign additional service contracts, we will need to increase
significantly the amount of manufacturing and other services supplied by third
parties in order to meet our contractual commitments. For example, we have a
service arrangement with Lucent Technologies Inc. to increase our ability to
install our central office facilities and associated equipment.

We have in the past experienced supply problems with certain of our
vendors. These vendors may not be able to meet our needs in a satisfactory and
timely manner in the future. In addition, we may not be able to obtain
additional vendors when needed. We have identified alternative suppliers for
technologies that we consider critical. However, it could take us a significant
period of time to establish relationships with alternative suppliers for
critical technologies and substitute their technologies into our network.

Our reliance on third-party vendors involves additional risks, including:

o the absence of guaranteed capacity; and

o reduced control over delivery schedules, quality assurance, production
yields and costs.

The loss of any of our relationships with these suppliers could harm our
business.

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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 the performance of our executive officers and key employees.
In particular, our senior management has significant experience in the data
communications, telecommunications and personal computer industries, and the
loss of any of them, such as the losses of Robert Roblin and Robert Grant, could
negatively affect our ability to execute our business strategy. Additionally, we
do not have "key person" life insurance policies on any of our employees.

Our future success also depends on our continuing ability to identify,
hire, train and retain other highly qualified technical, sales, marketing, legal
and managerial personnel in connection with our expansion within our existing
regions and the deployment, legal and marketing of our network into targeted
regions. Competition for such qualified personnel is intense. This is
particularly the case in software development, network engineering and product
management. We also may be unable to attract, assimilate or retain other highly
qualified technical, operations, sales, marketing and managerial personnel. Our
business will be harmed if we cannot attract the necessary technical, sales,
marketing and managerial personnel. In addition, in the event that our employees
unionize, we could incur higher ongoing labor costs and disruptions in our
operations in the event of a strike or other work stoppage.

WE HAVE AND MAY MAKE ACQUISITIONS OF COMPLEMENTARY TECHNOLOGIES OR BUSINESSES IN
THE FUTURE, WHICH MAY DISRUPT OUR BUSINESS AND BE DILUTIVE TO OUR EXISTING
STOCKHOLDERS

In addition to our acquisition of Laser Link.Net, Inc. and our agreement
to acquire BlueStar Communications Group, we intend to consider acquisitions of
businesses and technologies in the future on an opportunistic basis.
Acquisitions of businesses and technologies involve numerous risks, including
the diversion of management attention, difficulties in assimilating the acquired
operations, loss of key employees from the acquired company, and difficulties in
transitioning key customer relationships. In addition, these acquisitions may
result in dilutive issuances of equity securities, the incurrence of additional
debt, large one-time expenses and the creation of goodwill or other intangible
assets that result in significant amortization expense. Any of these factors
could materially harm our business or our operating results in a given period.

AN ECONOMIC DOWNTURN COULD ADVERSELY IMPACT DEMAND FOR OUR SERVICES

In the last few years the general health of the economy, particularly the
California economy, has been relatively strong and growing, a consequence of
which has been increasing capital spending by individuals and growing companies
to keep pace with rapid technological advances. To the extent the general
economic health of the United States or of California declines from recent
historically high levels, or to the extent individuals or companies fear such a
decline is imminent, such individuals and companies may reduce, in the near
term, expenditures such as those for our services. Any such decline or concern
about an imminent decline could delay decisions among certain of our customers
to roll out our services or could delay decisions by prospective customers to
make initial evaluations of our services. Such delays would have a material
adverse effect on our business, prospects, operating results and financial
condition.

OUR STOCK PRICE HAS BEEN AND IS LIKELY TO CONTINUE TO BE VOLATILE

The trading price of our common stock has been and is likely to continue
to be highly volatile. Our stock price could fluctuate widely in response to
factors such as the following:

o actual or anticipated variations in quarterly operating results,
including the pace of the expansion of our business;

o announcements of new products or services by us or our competitors or
new competing technologies;

o the addition or loss of ISP or enterprise customers or subscribers;

o changes in financial estimates or recommendations by securities
analysts;

o 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;

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o conditions or trends in the telecommunications industry, including
regulatory developments;

o growth of the Internet and online commerce industries;

o announcements by us of significant acquisitions, strategic
partnerships, joint ventures or capital commitments;

o additions or departures of key personnel;

o future equity or debt offerings or our announcements of such
offerings;

o general market and general economic conditions; and

o other events or factors, many of which are beyond our control.

FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE

Sales of a substantial number of shares of our common stock in the public
market, or the appearance that such shares available for sale, could adversely
affect the market price for our common stock. As of July 1, 2000, we had
154,433,087 shares of common stock outstanding. We have a significant number of
these shares of which are not currently publicly traded but are available for
immediate resale to the public, subject to certain volume limitations and under
the securities laws and lock-up arrangements. We also have 32,383,377 shares of
our common stock remaining that are reserved for issuance pursuant to options
under our 1997 Stock Plan, and of which 26,553,754 shares were subject to
outstanding options at July 1, 2000. We have reserved 975,656 shares of our
common stock for issuance pursuant to options we assumed in connection with our
acquisition of Laser Link.Net. We have also reserved 1,732,716 shares of common
stock for issuance under our 1998 Employee Stock Purchase Plan as of July 1,
2000. Shares underlying vested options are generally eligible for immediate
resale in the public market. In addition, a significant portion of our
stockholders have certain registration rights with respect to their shares

ANTITAKEOVER EFFECTS OF CERTAIN CHARTER AND BYLAW PROVISIONS, DELAWARE LAW, OUR
INDENTURES AND STOCKHOLDER PROTECTION RIGHTS PLAN

Our Board of Directors has the authority to issue up to 5,000,000 shares
of preferred stock and to determine the price, rights, preferences, privileges
and restrictions, including voting rights, of those shares without any further
vote or action by the stockholders. The issuance of preferred stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire a majority of our outstanding voting stock. Our charter
and bylaws provide for a classified board of directors, limitations on the
ability of stockholders to call special meetings and act by written consent, the
lack of cumulative voting for directors and procedures for advance notification
of stockholder nominations and proposals. These provisions, as well as Section
203 under the Delaware General Corporation Law to which we are subject, could
discourage potential acquisition proposals and could delay or prevent a change
of control.

The indentures relating to the 1998 notes, 1999 notes and 2000 notes
provide that, in the event of certain changes in control, each holder of the
notes will have the right to require us to repurchase such holder's notes at a
premium over the aggregate principal amount or the accreted value, as the case
may be, of such debt. In addition, our Stockholder Protection Rights Plan
contains provisions that make a hostile takeover prohibitively expensive and, in
effect, requires interested suitors to cooperate with the Board of Directors
prior to acquiring more than 15% of the Company. There is no guarantee that the
Stockholder Protection Rights Plan will not discourage takeover attempts which
would otherwise result in a premium to our stockholders.

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The provisions in the charter, bylaws, indentures and Stockholder
Protection Rights Plan could have the effect of discouraging others from making
tender offers for our shares and, as a consequence, they also may inhibit
increases in the market price of our shares that could result from actual or
rumored takeover attempts. Such provisions also may have the effect of
preventing changes in our management.

OUR FAILURE AND THE FAILURE OF THIRD PARTIES TO BE YEAR 2000 COMPLIANT COULD
NEGATIVELY IMPACT OUR BUSINESS

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

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

To date, we have not experienced any problems in complying with Year 2000
requirements, nor have we experienced any operational difficulties related to
Year 2000 issues.

THE BROADBAND COMMUNICATIONS INDUSTRY IS UNDERGOING RAPID TECHNOLOGICAL CHANGES,
AND NEW TECHNOLOGIES MAY BE SUPERIOR TO THE TECHNOLOGY WE USE

The broadband communications industry is subject to rapid and significant
technological change, including continuing developments in DSL technology, which
does not presently have widely accepted standards, and alternative technologies
for providing broadband communications, such as cable modem technology. As a
consequence:

o we will rely on third parties, including some of our competitors and
potential competitors, to develop and provide us with access to
communications and networking technology;

o our success will depend on our ability to anticipate or adapt to new
technology on a timely basis; and

o we expect that new products and technologies will emerge that may be
superior to, or may not be compatible with, our products and
technologies.

If we fail to adapt successfully to technological changes or fail to
obtain access to important technologies, our business will suffer.

OUR STRATEGY DEPENDS ON GROWTH IN DEMAND FOR DSL-BASED SERVICES

The demand for high-speed Internet and RLAN access is in the early stages
of development. As a result, we cannot predict the rate at which this demand
will grow, if at all, or whether new or increased competition will result in
satisfying all demand. Various providers of high-speed digital communications
services are testing products from various suppliers for various applications.
We do not know whether DSL will offer the same or more attractive
price-performance characteristics. Critical issues concerning commercial use of
DSL for Internet and RLAN access, including security, reliability ease and cost
of access and quality of service remain unresolved and may impact the growth of
such services. If the demand for our services grows more slowly than we
anticipate or is satisfied by competitors, our ability to achieve revenue growth
and positive cash flow will be harmed.

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WE MUST COMPLY WITH FEDERAL AND STATE TAX AND OTHER SURCHARGES ON OUR SERVICE
THE LEVELS OF WHICH ARE UNCERTAIN

Telecommunications providers pay a variety of surcharges and fees on
their gross revenues from interstate services and intrastate services.
Interstate surcharges include Federal Universal Service Fees, Common Carrier
Regulatory Fees and TRS Fund fees. In addition, state regulators impose similar
surcharges and fees on intrastate services. The division of our services between
interstate services and intrastate services is a matter of interpretation and
may in the future be contested by the FCC or relevant state commission
authorities. The FCC is currently considering the jurisdictional nature of
ISP-bound traffic, as a result of a March 24, 2000 decision by the United States
Court of Appeals for the D.C. Circuit related to the jurisdictional nature of
analog, dial-up traffic to the Internet. A change in the characterization of
their jurisdictions could cause our payment obligations, pursuant to the
relevant surcharges, to increase. In addition, pursuant to periodic revisions by
state and federal regulators of the applicable surcharges, we may be subject to
increases in the surcharges and fees currently paid. Also, a determination of
the jurisdictional nature of our DSL services may require us to commit
additional resources to regulatory compliance, such as tariff filings.

OUR SERVICES ARE SUBJECT TO GOVERNMENT REGULATION, AND CHANGES IN CURRENT OR
FUTURE LAWS OR REGULATIONS COULD ADVERSELY AFFECT OUR BUSINESS

Our services are subject to federal, state and local government
regulations. The 1996 Telecommunications Act, which became effective in February
1996, introduced widespread changes in the regulation of the telecommunications
industry, including the digital access services segment in which we operate. The
1996 Telecommunications Act eliminates many of the pre-existing legal barriers
to competition in the telecommunications services business and sets basic
criteria for relationships between telecommunications providers.

Among other things, the 1996 Telecommunications act removes barriers to
entry in the local telecommunications markets by preempting state and local laws
that restrict competition by providing competitors interconnection, access to
unbundled network elements, collocation, and retail services at wholesale rates.
The FCC's primary rules interpreting the 1996 Telecommunications Act were issued
on August 8, 1996. These rules have been reviewed by the U.S. Court of Appeals
for the Eighth Circuit, the U.S. Court of Appeals for the District of Columbia,
and the U.S. Supreme Court. The U.S. Supreme Court overruled the Eighth Circuit
in January 1999 and upheld most of the FCC rules. On November 5, 1999, the FCC
implemented unbundling rules that responded to the Supreme Court's January 1999
decision. Currently pending before the Eighth Circuit are the legality of the
FCC's decision to require traditional telephone companies to sell unbundled
network elements to companies like Covad at total element, long-run incremental
cost. An adverse decision in that proceeding could increase the amount we must
pay these for copper wires, transport links, and collocation.

Since August 1996, the FCC has proposed and adopted further rules related
to our ability to obtain access to unbundled network elements and other
services.

In August 1998, the FCC stated that its rules required traditional local
telephone companies to provide us access to copper wires in order to provide
"advanced services", such as our DSL services. In that same proceeding, the FCC
proposed new rules that would allow traditional telephone companies to provide
their own DSL services free from traditional telephone company regulation
through a separate affiliate. The provision of DSL services by an affiliate of a
traditional telephone company not subject to such regulation could harm our
business. The FCC has not implemented such separate affiliate rules as of this
date. However, the FCC, in approving the merger of SBC and Ameritech in October
1999, required SBC/Ameritech to create such an affiliate throughout the
SBC/Ameritech service territory. In June 2000, Bell Atlantic and GTE were
ordered by the FCC to create such an affiliate, in the context of their merger.
The FCC requires SBC/Ameritech and Bell Atlantic/GTE to provide all of their
in-region DSL services through this "separate affiliate".

In March 1999, the FCC revised its collocation and unbundled network
element rules, in order to facilitate the deployment of advanced services by
companies like Covad. In March 2000, the U.S. Circuit Court for the District of
Columbia struck portions of the FCC's new collocation rules and has required the
FCC to reconsider and review those rules. In particular, the D.C. Circuit
required the FCC to revise its rules concerning the types of equipment that we
may collocate on the traditional telephone company premises, the method in which
we may be permitted to connect that equipment to other new entrants, and the
steps that traditional telephone companies may take to separate their

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equipment from our equipment. The traditional telephone companies may implement
the court's ruling and any subsequent FCC rules in a manner that impairs our
ability to obtain collocation space and collocate the equipment of our choice on
their premises. Such actions by the traditional telephone companies could
adversely affect our business and disrupt our existing network design,
configuration and services.

In November 1999, the FCC ruled that traditional local telephone
companies must provide access to "line-sharing" on an unbundled basis.
Line-sharing permits us to provide a DSL service on the same telephone wire in
which an end-user has analog, local telephone service. Only certain DSL
technologies, such as ADSL, are designed to work on the same line as analog
telephone service. Most traditional telephone companies provide ADSL service
excusively over line-sharing. Without access to line-sharing, we have to have
the traditional telephone company install an additional telephone line to an
end-user's premises. Without line-sharing, we may not be able to provide a
product that is competitive with the traditional telephone company's offering. A
group of traditional telephone companies has appealed this decision, and an
adverse result in that court proceeding could harm our business.

We have not entered into interconnection agreements that take full
advantage of these new federal rules. We anticipate that traditional telephone
companies will challenge these new rules in regulatory proceedings and court
challenges. In addition, we anticipate that traditional telephone companies will
resist full implementation of these federal and state rules. Any unfavorable
decisions by the courts, the FCC, or state telecommunications regulatory
commissions could harm our business. In addition, a failure to enforce these
rules by the appropriate court, FCC, or state authority in a timely basis could
slow down our deployment of services or could otherwise harm our business.

Changes to current regulations, the adoption of new regulations by the
FCC or state regulatory authorities, court decisions, or legislation, such as
changes to the 1996 Telecommunications Act, could harm our business. In
particular, several bills pending before the 106th Congress, including H.R.
2420, H.R. 1686, and S. 877, would directly harm our business by taking away
some of the legal rights we have to unbundled network elements and collocation,
or by diminishing the incentive the Regional Bell Operating Companies have to
provide us the elements, collocation and services we need to provide our
services. Passage of any of these bills or similar legislation would adversely
and significantly harm our business, and may cause us to eliminate or even
disconnect certain services to particular end-users. In addition, passage of any
of these bills may cause us to disrupt and change our existing network design
and configuration.

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USE OF PROCEEDS

The proceeds from the sale of the common stock offered pursuant to this
prospectus are solely for the account of the shareholders who may be selling
pursuant to this prospectus. Accordingly, we will not receive any proceeds from
the sale of the shares by the selling shareholders.

DETERMINATION OF OFFERING PRICE

Because this prospectus relates only to the resale of previously issued
shares of the common stock, we did not determine an offering price. The selling
shareholders will individually determine the offering price of the common stock.
The selling shareholders may use this prospectus from time to time to sell their
common stock. The price at which the common stock is sold may be based on market
prices prevailing at the time of sale, at prices relating to such prevailing
market prices, or at negotiated prices.

DIVIDEND POLICY

We have not paid any cash dividends since our inception. We currently
anticipate that we will retain all of our future earnings for use in the
expansion and operation of our business. Thus, we do not anticipate paying any
cash dividends on our capital stock in the foreseeable future. In addition, the
terms of the indentures relating to the 1998 notes, the 1999 notes and the 2000
notes restrict our ability to pay cash dividends on our capital stock.

PRICE RANGE OF OUR COMMON STOCK

Our common stock has been traded on the NASDAQ National Market under the
symbol "COVD" since January 22, 1999, the date of our initial public offering.
Prior to that time, there was no public market for our common stock. The
following table sets forth, for the period indicated, the high and low closing
sales prices for our common stock as reported by the NASDAQ National Market.
THESE PRICES HAVE BEEN SPLIT-ADJUSTED TO ACCOUNT FOR THE STOCK SPLITS IN MAY,
1999 AND MARCH, 2000.

FISCAL YEAR ENDED DECEMBER 31, 1999 HIGH LOW
--------------------------------- -------- -------
First Quarter...................................... 47.50 12.00
Second Quarter...................................... 72.38 39.56
Third Quarter....................................... 67.50 37.31
Fourth Quarter...................................... 65.38 38.78

FISCAL YEAR ENDED DECEMBER 31, 2000
----------------------------------
First Quarter....................................... 66.25 38.63
Second Quarter...................................... 45.75 15.44
Third Quarter (Through July 12)..................... 19.50 17.38

On July 12, 2000 the last reported sale price for our common stock on the
NASDAQ National Market was $19.50 per share. As of July 1, 2000, there were 594
holders of record of our common stock, and there were no holders of record of
our class B common stock.

26
<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data for the years ended
December 31, 1997, 1998 and 1999 have been derived from our audited Consolidated
Financial Statements and the related Notes, which are included elsewhere in this
prospectus. You should read the following selected consolidated financial data
together with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our Consolidated Financial Statements and the related
Notes included elsewhere in this prospectus.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
-------------------------------------- ----------------------------
1997 1998 1999 1999 2000
---------- ------------ ------------- ------------ --------------
(DOLLARS IN THOUSANDS) (UNAUDITED)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Revenues.................................. $ 26 $ 5,326 $ 66,488 $ 5,596 $ 41,807
Operating expenses:
Network and product costs.............. 54 4,562 55,347 4,960 31,349
Sales, marketing, general and
administrative....................... 2,374 31,043 140,372 18,113 89,171
Amortization of deferred compensation.. 295 3,997 4,768 1,653 1,186
Depreciation and amortization.......... 70 3,406 37,602 4,647 20,782
--------- ----------- ------------ ----------- -------------
Total operating expenses............. 2,793 43,008 238,089 29,373 142,488
--------- ----------- ------------ ----------- -------------
Loss from operations...................... (2,767) (37,682) (171,601) (23,777) (100,681)
Net interest expense................... 155 (10,439) (23,796) (5,127) (7,543)
Other income........................... -- -- -- -- 999
Net loss.................................. (2,612) (48,121) (195,397) (28,904) (107,225)
Preferred dividends....................... -- -- (1,146) (1,146) --
--------- ----------- ------------ ----------- -------------
Net loss attributable to Common $ (2,612) $(48,121) $ (196,543) $ (30,050) $ (107,225)
Stockholders..............................
========= =========== ============ =========== =============
Net loss per share--basic and diluted...... $ (.35) $ (3.75) $ (1.83) $(0.37) $(0.73)
========= =========== ============ =========== =============
Weighted average shares used in computing
net loss per share
--basic and diluted..................... 7,360,978 12,844,203 107,647,812 80,432,965 146,967,581
========= =========== ============ =========== =============

OTHER FINANCIAL DATA:
EBITDA(1)................................. $ (2,402) $ (30,154) $ (129,486) (17,477) (74,987)
Capital expenditures...................... $ 2,253 $ 59,503 $ 208,186 42,802 110,652
</TABLE>

<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
----------------------------------- ----------------
1997 1998 1999 2000
--------- ----------- ------------ ----------------
CONSOLIDATED BALANCE SHEET DATA:
<S> <C> <C> <C> <C>
Cash and cash equivalents and short-term investments...... $ 4,378 $ 64,450 $ 767,357 1,062,789
Net property and equipment................................ 3,014 59,145 237,542 329,159
Total assets.............................................. 8,074 139,419 1,147,606 1,947,453
Long-term obligations, including current portion.......... 783 142,879 375,049 805,864
Total stockholders' equity (net capital deficiency)....... 6,498 (24,706) 690,291 984,825

<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
----------------------------------- ----------------
1997 1998 1999 2000
--------- ----------- ------------ ----------------
OTHER OPERATING DATA:
Homes and businesses passed............................... 278,000 6,023,217 29,000,000 35,000,000
Lines installed........................................... 26 3,922 57,000 93,000
</TABLE>
--------------
(1) EBITDA consists of net loss excluding net interest, taxes, depreciation
and amortization, non-cash stock-based compensation expense and other
non-operating income or expenses. We have provided EBITDA because it is a
measure of financial performance commonly used in the telecommunications
industry as well as to enhance an understanding of our operating results.
EBITDA should not be construed as either:

o an alternative to operating income (as determined in accordance with
generally accepted accounting principles) as an indicator of our
operating performance, or

27
<PAGE>

o an alternative to cash flows from operating activities (as determined
in accordance with generally accepted accounting principles) as a
measure of liquidity.

28
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL
STATEMENTS AND THE RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS.
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 "RISK FACTORS" AND ELSEWHERE
IN THIS PROSPECTUS. WE DISCLAIM ANY OBLIGATION TO UPDATE INFORMATION CONTAINED
IN ANY FORWARD-LOOKING STATEMENT. SEE "--FORWARD LOOKING STATEMENTS."

OVERVIEW

We are a leading provider of broadband communications services to Internet
service provider, enterprise and telecommunications carrier, and other
customers. Since March 1998, we have raised $1,580.4 million of gross proceeds
from debt and equity financings to fund the deployment and expansion of our
network. By March 31, 2000, we had deployed our services in 62 metropolitan
statistical areas. We plan to build our network and offer our services in a
total of 165 metropolitan statistical areas nationwide. As of March 31, 2000,
our network passed 35 million homes and businesses, and we had installed 93,000
end-user lines.

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

We derive revenue from:

o monthly recurring service charges for connections from the end-user to
our facilities and for backhaul services from our facilities to the
Internet service provider or enterprise customer;

o service order set-up and other non-recurring charges; and

o the sale of customer premise equipment that we provide to our
customers due to the general unavailability of customer premise
equipment through retail channels.

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

The following factors comprise our network and service costs:

o MONTHLY NON-RECURRING AND RECURRING CIRCUIT FEES. We pay traditional
telephone companies and other competitive telecommunications companies
non-recurring and recurring fees for services including installation,
activation, monthly line costs, maintenance and repair circuits
between and among our digital subscriber line access multiplexers and
our regional data centers, customer backhaul, and end-user lines. As
our end-user base grows, we expect that the largest element of network
and product cost will be the traditional telephone companies' charges
for our leased telephone wires; and

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

The development and expansion of our business will require significant
expenditures. The principal capital expenditures incurred during the buildup
phase of any metropolitan statistical area involve the procurement, design and
construction of our central office cages, end-user DSL line cards, and
expenditures for other elements of our network design. Currently, the average
capital cost to deploy our facilities in a central office, excluding end-user
line cards, is approximately $85,000 per central office facility. This cost may
vary in the future due to the quantity and type of equipment we initially deploy
in a central office facility as well as regulatory limitations imposed on the
traditional phone companies relative to pricing of central office space,
including cageless physical collocation. Following the build-out of our central
office space, the major portion of our capital expenditures is the purchase of

29
<PAGE>

DSL line cards to support incremental end-users. We expect that the average cost
of such line cards will decline over the next several years. Network
expenditures will continue to increase with the number of end-users. However,
once an operating region is fully built out, a substantial majority of the
regional capital expenditures will be tied to incremental customer and end-user
growth. In addition to developing our network, we will use our capital for
marketing our services, acquiring Internet service provider, enterprise, and
telecommunication carrier customers, and funding our customer care and field
service operations.

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

RECENT DEVELOPMENTS

On June 16, 2000, we announced the signing of an agreement to acquire
BlueStar Communications Group Inc., a provider of broadband and Internet
services for small- and medium-sized businesses throughout the Southeastern
United States. Under the acquisition agreement, we will issue 8 million shares
of our common stock for all of BlueStar's outstanding shares, plus assumption of
$55 million in debt and operating leases. Up to five million additional shares
of our common stock may be issued to the BlueStar shareholders if certain
performance targets are met by BlueStar over the 2001 fiscal year. We anticipate
that this acquisition will accelerate the national expansion of our network. We
anticipate that our acquisition of BlueStar will provide the following benefits:

o Speed to market in implementing our direct sales strategy in Tier 3
markets.

o A large, experienced direct sales force.

o BlueStar's customer base.

o Increased ability to provide enhanced broadband solutions to small
businesses.

In connection with our announcement of the BlueStar acquisition, we
announced a reduction in the number of end-user lines that we expected to be in
service on June 30, 2000. At the same time, we reduced line growth expectations
for 2000 to 330%, primarily because of the channel conflict with our customers
that may result from our acquisition of BlueStar, which sells directly to
end-users.

30
<PAGE>

RESULTS OF OPERATIONS

Results of operations are as follows:

Three Months Ended March 31, 2000 Compared to Three Months Ended March 31,
1999

REVENUES

We recorded revenues of $41.8 million for the three months ended March 31,
2000 compared to $5.6 million for the three months ended March 31, 1999. This
increase is attributable to growth in the number of customers and end-users
resulting from our increased sales and marketing efforts and the expansion of
our national network. We expect revenues to increase in future periods as we
expand our network within our existing regions, deploy networks in new regions
and increase our sales and marketing efforts in all of our regions.

NETWORK AND PRODUCT COSTS

We recorded network and product costs of $31.3 million for the three months
ended March 31, 2000 and $5.0 million for the three months ended March 31, 1999.
This increase is attributable to the expansion of our networks and increased
orders resulting from our sales and marketing efforts. We expect network and
product costs to increase significantly in future periods due to increased sales
activity and expected revenue growth.

SALES, MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES

Sales, marketing, general and administrative expenses consist primarily of
salaries, expenses for the development of our business, the development of
corporate identification, promotional and advertising materials, expenses for
the establishment of our management team, and sales commissions. Sales,
marketing, general and administrative expenses were $89.2 million for the three
months ended March 31, 2000 and $18.1 million for the three months ended March
31, 1999. This increase is attributable to growth in headcount in all areas of
our company, continued expansion of our sales and marketing efforts, deployment
of our networks and building of our operating infrastructure. Sales, marketing,
general and administrative expenses are expected to increase significantly as we
continue to expand our business.

DEFERRED COMPENSATION

Through March 31, 2000, we recorded a total of approximately $17.7
million of deferred compensation, with an unamortized balance of approximately
$7.4 million on our March 31, 2000 consolidated balance sheet. Deferred
compensation is a result of us granting stock options to our employees, certain
of our directors, and certain contractors with exercise prices per share below
the fair values per share for accounting purposes of our common stock at the
dates of grant. We are amortizing the deferred compensation over the vesting
period of the applicable option using a graded vesting method. Amortization of
deferred compensation was $1.2 million for the three months ended March 31, 2000
and $1.7 million for the three months ended March 31, 1999.

31
<PAGE>

DEPRECIATION AND AMORTIZATION

Depreciation and amortization includes:

o depreciation of network costs and related equipment;

o depreciation of information systems, furniture and fixtures;

o amortization of improvements to central offices, regional data centers
and network operations center facilities and corporate facilities;

o amortization of capitalized software costs; and

o amortization of intangible assets.

In January 1999, we recorded intangible assets of $28.7 million from the
issuance of preferred stock to AT&T Ventures, NEXTLINK and Qwest. Amortization
of these assets was $2.1 and $1.9 million during the three months ended March
31, 2000, and 1999, respectively and is included in depreciation and
amortization on the accompanying consolidated statement of operations. Annual
amortization of these assets will be approximately $8.4 million in each of the
years in the three year period ending December 31, 2001, decreasing to
approximately $1.2 million per year for each subsequent year through the year
ending December 31, 2004. Depreciation and amortization was approximately $20.8
million for the three months ended March 31, 2000 and $4.6 for the three months
ended March 31, 1999. This increase was due to the increase in equipment and
facilities placed in service throughout the period as well as amortization of
intangible assets. We expect depreciation and amortization to increase
significantly as we increase our capital expenditures to expand our networks.

NET INTEREST INCOME AND EXPENSE

Net interest income and expense consists primarily of interest income on
our cash balance and interest expense associated with our debt. Net interest
expense for the three months ended March 31, 2000, was $7.5 million. Net
interest expense during this period consisted primarily of interest expense on
the 1998 notes and the 1999 notes and capital lease obligations partially offset
by interest income earned primarily from the investment of the proceeds raised
from the issuance of the 1998 notes and the 1999 notes as well as our initial
public offering and our issuance of preferred stock to AT&T Ventures, NEXTLINK
and Qwest. Net interest expense for the three months ended March 31, 1999, was
$5.1 million. Net interest expense during these periods consisted primarily of
interest expense on the 1998 notes and capital lease obligations, partially
offset by interest income earned primarily from the investment of the proceeds
raised from the issuance of the 1998 notes. We expect interest expense to
increase significantly over time, primarily because the 1998 notes accrete to
$260 million by March 15, 2003.

INCOME TAXES

We made no provision for taxes because we operated at a loss for the years
ended December 31, 1997, 1998 and 1999 and the three months ended March 31,
2000.

Three Years Ended December 31, 1999

REVENUES

We recorded revenues of $66.5 million for the year ended December 31, 1999,
$5.3 million for the year ended December 31, 1998 and $26,000 for the year ended
December 31, 1997. The increase in revenues in all periods is attributable to
growth in the number of customers and end-users resulting from our increased
sales and marketing efforts and the expansion of our national network. We expect
revenues to increase in future periods as we expand our network within our
existing regions, deploy networks in new regions and increase our sales and
marketing efforts in all of our regions.

NETWORK AND PRODUCT COSTS

We recorded network and product costs of $55.3 million for the year ended
December 31, 1999, $4.6 million for the year ended December 31, 1998 and $54,000
for the year ended December 31, 1997. The increase in network costs in all
periods is attributable to the expansion of our network and increased orders
resulting from our sales and

32
<PAGE>

marketing efforts. We expect network and product costs to increase significantly
in future periods due to increased sales activity and expected revenue growth.

SALES, MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES

Sales, marketing, general and administrative expenses were $140.4 million
for the year ended December 31, 1999, $31.0 million for the year ended December
31, 1998 and $2.4 million for the year ended December 31, 1997. Sales, marketing
and general and administrative expenses consist primarily of salaries, expenses
for the development of our business, the development of corporate
identification, promotional and advertising materials, expenses for the
establishment of our management team, and sales commissions. The increase in
sales, marketing, general and administrative expense for all years is
attributable to growth in headcount in all areas of our Company, continued
expansion of our sales and marketing efforts, deployment of our network,
expansion of our facilities and building of our operating infrastructure. In
addition, in 1999, sales, marketing, general and administrative increased over
1998 due to our advertising campaign initiated in 1999. Sales, marketing,
general and administrative expenses are expected to increase significantly as we
continue to expand our business.

DEFERRED COMPENSATION

Through December 31, 1999, we recorded a total of approximately $15.6
million of deferred compensation, with an unamortized balance of approximately
$6.5 million remaining on our December 31, 1999 consolidated balance sheet.
Deferred compensation is a result of us granting stock options to our employees,
certain of our directors, and certain contractors with exercise prices per share
below the fair values per share for accounting purposes of our common stock at
the dates of grant. We are amortizing the deferred compensation over the vesting
period of the applicable option using a graded vesting method. Amortization of
deferred compensation was $4.8 million for the year ended December 31, 1999,
$4.0 million for the year ended December 31, 1998, and $295,000 for the year
ended December 31, 1997.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization includes:

o depreciation of network costs and related equipment;

o depreciation of information systems, furniture and fixtures;

o amortization of improvements to central offices, regional data centers
and network operations center facilities and corporate facilities;

o amortization of capitalized software costs; and

o amortization of intangible assets.

In January 1999, we recorded intangible assets of $28.7 million from the
issuance of preferred stock to AT&T Ventures, NEXTLINK and Qwest. Amortization
of these assets was $8.2 million during the year ended December 31, 1999, and is
included in depreciation and amortization on the accompanying consolidated
statement of operations. Annual amortization of these assets will be
approximately $8.4 million in each of the years in the two-year period ending
December 31, 2001, decreasing to approximately $1.2 million per year for each
subsequent year through the year ending December 31, 2004.

Depreciation and amortization was approximately $37.6 million for the year
ended December 31, 1999, $3.4 million for the year ended December 31, 1998, and
$70,000 for the year ended December 31, 1997. The increase for both years was
due to the addition of equipment and facilities placed in service throughout the
year as well as amortization of intangible assets recorded in 1999. We expect
depreciation and amortization to increase significantly as we increase our
capital expenditures to expand our network.

NET INTEREST INCOME AND EXPENSE

Net interest income and expense consists primarily of interest income on
our cash balance, cash equivalents, and short term investments, offset by
interest expense associated with our debt. Net interest expense for the years
ended December 31, 1999, 1998, and 1997 was $23.8 million, $10.4 million and
($155,000), respectively. Net

33
<PAGE>

interest expense during these periods consisted primarily of interest expense on
our 13 1/2% Senior Discount Notes due 2008 issued in March 1998 (the "1998
notes") and our 12 1/2% senior notes due 2009 issued in February 1999 (the "1999
notes") and capital lease obligations. Net interest expense was partially offset
by interest income earned primarily from the investment of the proceeds raised
from the issuance of the 1998 notes and the 1999 notes as well as our initial
public offering and our issuance of preferred stock to AT&T Ventures, NEXTLINK
and Qwest. We expect interest expense to increase significantly over time,
primarily because the 1998 notes and 1999 notes mature in 2008 and 2009,
respectively, and because we issued $425.0 million of new long-term debt in
January 2000.

INCOME TAXES

We made no provision for taxes because we operated at a loss for the years
ended December 31, 1999, 1998 and 1997.

QUARTERLY FINANCIAL INFORMATION

The following table presents certain unaudited consolidated statements of
operations data for our most recent eight quarters. This information has been
derived from our unaudited consolidated financial statements. In our opinion,
this unaudited information has been prepared on the same basis as the annual
consolidated financial statements and includes all adjustments (consisting only
of normal recurring adjustments) necessary for a fair presentation of the
information for the quarters presented. This information should be read in
conjunction with the consolidated financial statements and related notes
included elsewhere in this prospectus. The operating results for any quarter are
not necessarily indicative of results for any future period.

<TABLE>
<CAPTION>
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31,
1998 1998 1998 1999 1999 1999 1999 2000
--------- --------- -------- -------- --------- --------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.............. $ 809 $ 1,565 $ 2,766 $ 5,596 $ 10,833 $ 19,141 $30,918 41,807
Operating Expenses:
Network and products
costs.............. 758 1,355 2,246 4,960 10,565 16,694 23,128 31,349
Sales, marketing,
general and
administrative..... 4,606 10,681 13,812 18,113 24,976 37,697 59,586 89,171
Amortization of
deferred
compensation....... 631 1,837 1,302 1,653 1,234 1,008 873 1,186
Depreciation and
amortization....... 446 738 2,058 4,647 8,671 10,593 13,691 20,782
--------- --------- -------- -------- --------- --------- -------- ----------
Total operating 6,441 14,611 19,418 29,373 45,446 65,992 97,278 142,488
expenses..............
--------- --------- -------- -------- --------- --------- -------- ----------
Loss from operations.. (5,632) (13,046) (16,652) (23,777) (34,613) (46,851) (66,360) (100,681)
Net interest income
(expense).......... (3,291) (3,511) (3,208) (5,127) (7,239) (7,254) (4,176) (7,543)
Other income....... -- -- -- -- -- -- -- 999
--------- --------- -------- -------- --------- --------- -------- ----------
Net loss.............. $ (8,923) $(16,557) $(19,86) $(28,904 $(41,852) $(54,105) $(70,53) (107,225)
========= ========= ======== ======== ========= ========= ======== ==========
Net loss per share.... $ (1.11) $ (1.84) $ (1.83) $ (0.56 $ (0.61) $ (0.70) $ (0.80) (0.73)
========= ========= ======== ======== ========= ========= ======== ==========
</TABLE>

We have generated increasing revenues in each of the last eight quarters,
reflecting increases in the number of customers and end-users. Our network and
product costs have increased in every quarter, reflecting costs associated with
customer and end-user growth and the deployment of our network in existing and
new regions. Our selling, marketing, general and administrative expenses have
increased in every quarter and reflect sales and marketing costs associated with
the acquisition of customers and end-users, including sales commissions, and the
development of regional and corporate infrastructure. Depreciation and
amortization has increased in each quarter, primarily reflecting the purchase of
equipment associated with the deployment of our networks. We have experienced
increasing net losses on a quarterly basis as we increased operating expenses
and increased depreciation as a result of increased capital expenditures, and we
expect to sustain increasing quarterly losses for at least the next several
years. See "Risk Factors--We have a history of losses and expect increasing
losses in the future." Our annual and quarterly operating results may fluctuate
significantly in the future as a result of numerous factors. Factors that may
affect our operating results include:

o the willingness, timing and ability of traditional telephone companies
to provide us with central office space;

o the rate at which traditional telephone companies can provide us
telephone wires over which we sell our service;

34
<PAGE>

o the rate at which customers subscribe to our services;

o decreases in the prices for our services due to competition,
volume-based pricing and other factors;

o our ability to retain Internet service provider, enterprise and
telecommunications carrier customers and limit end-user churn rates;

o the success of our relationships with strategic partners, and other
potential third parties in generating significant subscriber demand;

o the ability to order or deploy our services on a timely basis to
adequately satisfy end-user demand;

o delays in the commencement of operations in new regions and the
generation of revenue because certain network elements have lead times
that are controlled by traditional telephone companies and other third
parties;

o the mix of line orders between consumer end-users and business
end-users (which typically have higher margins);

o the amount and timing of capital expenditures and other costs relating
to the expansion of our network;

o the ability to develop and commercialize new services by us or our
competitors;

o the impact of regulatory developments, including interpretations of
the 1996 Telecommunications Act; and

o our ability to successfully operate our network.

Many of these factors are outside of our control. In addition, we plan to
increase operating expenses to fund operations, sales, marketing, general and
administrative activities and infrastructure, including increased expenses
associated with our relationships with strategic partners. If these expenses are
not accompanied by an increase in revenues, we could experience a material
adverse effect on our business, prospects, operating results and financial
condition and our ability to service and repay our indebtedness. See "Risk
Factors--Our operating results are likely to fluctuate in future periods and,
therefore, are difficult to predict."

LIQUIDITY AND CAPITAL RESOURCES

Our operations have required substantial capital investment for the
procurement, design and construction of our central office cages, the purchase
of telecommunications equipment and the design and development of our networks.
Capital expenditures were approximately $110.7 million for the three months
ended March 31, 2000. We expect that our capital expenditures will be higher in
future periods in connection with the purchase of infrastructure equipment
necessary for the development and expansion of our networks and the development
of new regions.

From our inception through March 31, 2000, we financed our operations
primarily through private placements of $10.6 million of equity securities,
$129.3 million in net proceeds raised from the issuance of the 1998 notes,
$150.2 million in net proceeds raised from our initial public offering, $60.0
million in net proceeds raised from strategic investors, $205.0 million in net
proceeds raised from the issuance of the 1999 notes, $568.8 million in net
proceeds raised from our public offering on November 3, 1999 and $413.3 million
in net proceeds from the issuance of the 2000 notes. As of March 31, 2000, we
had an accumulated deficit of $353.4 million, and cash, cash equivalents, and
short-term investments of $1,062.8 million.

Net cash used in our operating activities was $17.0 million for the three
months ended March 31, 2000. The net cash used for operating activities during
this period was primarily due to net losses and increases in current assets,
offset by non-cash expenses and increases in accounts payable and accrued
liabilities. Net cash used in our investing activities was $30.3 million for the
three months ended March 31, 2000. The net cash used for investing activities
during this period was primarily due to purchases of property and equipment, the
acquisition of Laser Link, and a $23 million equity investment was made with a
strategic partner.

Net cash provided by financing activities for the three months ended March
31, 2000 was $420.4 million, which primarily related to the net proceeds of
$413.3 million from the issuance of the 2000 notes with an aggregate principal
amount of $425.0 million.

35
<PAGE>

We believe that our current cash, cash equivalents and short-term
investments, including the proceeds received from our recently completed
issuance of 12% senior notes (2000 notes), will be sufficient to meet our
anticipated cash needs for working capital and capital expenditures into the
second quarter of 2001.

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

o the number of regions entered, the timing of entry and services
offered;

o network development schedules and associated costs;

o the rate at which customers and end-users purchase our services and
the pricing of such services;

o the level of marketing required to acquire and retain customers and to
attain a competitive position in the marketplace;

o the rate at which we invest in engineering and development and
intellectual property with respect to existing and future technology;

o existing and future technology; and

o unanticipated opportunities

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

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

YEAR 2000 ISSUES

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

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

To date, we have not experienced any problems in complying with Year 2000
requirements, nor have we experienced any operational difficulties related to
Year 2000 issues.

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<PAGE>

FORWARD-LOOKING STATEMENTS

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

o our plans to expand our existing networks or to commence service in
new metropolitan statistical areas;

o estimates regarding the timing of launching our service in new
metropolitan statistical areas;

o expectations regarding the time frames, rates, terms and conditions
for implementing "line sharing;"

o expectations regarding the extent to which enterprise customers roll
out our service;

o expectations regarding our relationships with our strategic partners
and other potential third parties;

o expectations as to pricing for our services in the future;

o expectations as to the impact of our TeleSurfer service offerings on
our margins;

o the possibility that we may obtain significantly increased sales
volumes;

o the impact of our national advertising campaign on brand recognition
and operating results;

o plans to make strategic investments and acquisitions and the affect of
such investments and acquisitions;

o estimates of future operating results;

o plans to develop and commercialize value-added services;

o our anticipated capital expenditures;

o plans to enter into business arrangements with broadband-related
service providers;

o expectations regarding the commencement of our voice service;

o the effect of regulatory reform and regulatory litigation; and

o other statements contained in this prospectus regarding matters that
are not historical facts.

These statements are only estimates or predictions and cannot be relied
upon. We can give you no assurance that future results will be achieved. Actual
events or results may differ materially as a result of risks facing us or actual
results differing from the assumptions underlying such statements. Such risks
and assumptions that could cause actual results to vary materially from the
future results indicated, expressed or implied in such forward-looking
statements include our ability to:

o successfully market our services to current and new customers;

o generate customer demand for our services in the particular regions
where we plan to market services;

o achieve favorable pricing for our services;

o respond to increasing competition;

o manage growth of our operations; and

o access regions and negotiate suitable interconnection agreements with
the traditional telephone companies, all in a timely manner, at
reasonable costs and on satisfactory terms and conditions consistent
with regulatory, legislative and judicial developments.

All written and oral forward-looking statements made in connection with
this prospectus which are attributable to us or persons acting on our behalf are
expressly qualified in their entirety by the "Risk Factors" and other cautionary
statements included in this prospectus. We disclaim any obligation to update
information contained in any forward-looking statement.

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to financial market risk, including changes in interest rates
and marketable equity security prices, relates primarily to our investment
portfolio and outstanding debt obligations. We typically do not attempt to
reduce or eliminate our market exposure on our investment securities because a
substantial majority of our investments are in fixed-rate, short-term
securities. We do not have any derivative instruments. The fair value of our
investments portfolio or related income would not be significantly impacted by
either a 100 basis point increase or decrease in interest rates due mainly to
the fixed-rate, short-term nature of the substantial majority of our investment
portfolio. In addition, substantially all of our outstanding indebtedness at
March 31, 2000 including our 1998 notes, our 1999 notes, and our 2000 notes, is
fixed-rate debt.

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BUSINESS

THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. 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 "RISK FACTORS" AND ELSEWHERE
IN THIS PROSPECTUS. WE DISCLAIM ANY OBLIGATION TO UPDATE INFORMATION CONTAINED
IN ANY FORWARD-LOOKING STATEMENT. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--FORWARD LOOKING STATEMENTS."

OVERVIEW

We are a leading provider of broadband communications services to Internet
service provider, enterprise telecommunications carrier and other customers.
These services include a range of high-speed, high capacity Internet and network
access services using digital subscriber line (DSL) technology, and related
value-added services. Internet service providers purchase our services in order
to provide high-speed Internet access to their business and consumer end-users.
Enterprise customers purchase our services directly or indirectly from us to
provide employees with high-speed remote access to the enterprise's local area
network (RLAN access), which improves employee productivity and reduces network
connection cost. Telecommunications carrier customers purchase our services for
resale to their Internet service provider affiliates, Internet users and
enterprise customers.

As of March 31, 2000, we believe we have the nation's largest DSL network
with 1,350 operational central offices passing over at least 35 million homes
and businesses. As of March 31, 2000, we had installed 93,000 DSL based
high-speed access lines and received orders for our services from more than 295
Internet service provider, enterprise, and telecommunications carrier customers,
including AT&T, Concentric Network, Flashcom, MindSpring Enterprises Inc. (now
Earthlink, Inc.), Oracle Corporation, Prodigy Communications Corporation,
PSINet, Qwest Communications International Inc., Stanford University, Sun
Microsystems, UUNET Technologies (an MCI WorldCom Company) and Verio.

By March 31, 2000, we had deployed our network in a total of 62
metropolitan statistical areas. When our 165 metropolitan statistical area
(MSA's) build-out is completed, which we expect to be by the end of 2000, our
network will pass more than 45% of homes and 50% of businesses in the United
States.

We plan to continue to pursue rapid network expansion and installation of
high-speed access lines, and to develop a variety of services that are enhanced
or enabled by our expanding network, by entering into business arrangements with
broadband-related service providers in order to bring a variety of value-added
service offerings to our customers and their end-users.

INDUSTRY BACKGROUND

GROWING MARKET DEMAND FOR BROADBAND COMMUNICATIONS BANDWIDTH SERVICES

High-speed connectivity has become important to small- and medium-sized
businesses and consumers due to the dramatic increase in Internet usage.
According to International Data Corporation, the number of Internet users
worldwide reached approximately 196 million in 1999 and is forecasted to grow to
approximately 502 million by 2003. The popularity of the Internet with consumers
has driven the rapid proliferation of the Internet as a commercial medium.
Businesses are increasingly establishing Web sites and corporate intranets and
extranets to expand their customer reach and improve their communications
efficiency. Consumers are increasingly using the Internet to carry out
commercial transactions. International Data estimates that the value of goods
and services sold world wide via the Internet will increase from $111 billion in
1999 to over $1.3 trillion in 2003. Accordingly, to remain competitive, small-
and medium-sized businesses increasingly need high-speed Internet connections to
maintain complex Web sites, access critical business information and communicate
more effectively with employees, customers and business partners. Broadband
connections are also becoming increasingly important to businesses and consumers
as rich Internet content--such as multi-media advertising, news and
entertainment--and on-line consumer transactions and e-commerce become more
widely available and widely used.

The demand for broadband communications services for RLAN access is also
growing rapidly. Over the past ten years, high-speed local area networks have
become increasingly important to enterprises to enable employees to share
information, send e-mail, search databases and conduct business. We believe that
a large majority of personal computers used in enterprises are connected to
local area networks. Enterprises are now seeking to extend this same

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high-speed connectivity to employees accessing the local area networks from home
to improve employee productivity and reduce operating costs. The number of home
office households on the Internet grew from 12.0 million at the end of 1997 to
an estimated 27 million by the end of 1999 and is expected to grow to 30.2
million households by 2002. Only 3.7% of these users currently access the
Internet through a broadband connection of any type.

As use of the Internet, intranets and extranets increases, we expect the
market size for both small- and medium-sized business and consumer Internet and
RLAN access to continue to grow rapidly causing the demand for broadband
communications services to also grow rapidly. However, the full potential of
Internet and local area network applications cannot be realized without removing
the performance bottlenecks of the existing public switched telephone network.
Increases in telecommunications bandwidth have significantly lagged improvements
in microprocessor performance over the last ten years. Since 1988,
microprocessor performance has improved nearly 80-fold, while the fastest
consumer modem connection has improved from 9.6 kilobits per second to 56.6
kilobits per second, a factor of six. According to industry analysts, there are
nearly 40 million personal computers in U.S. homes today, and most of them can
only connect to the Internet or their corporate local area network by low-speed
analog lines. Higher speed connections are available, including:

o INTEGRATED SERVICES DIGITAL NETWORKS--An ISDN line provides standard
interfaces for digital communication networks and is capable of
carrying data, voice, and video over digital circuits. ISDN protocols
are used worldwide for connections to public ISDN networks or to
attach ISDN devices to compatible PBX systems.

o T1 LINE AND FRACTIONAL T1--These are telephone industry terms for a
digital transmission link with a capacity of 1.544 megabits per second
or portions thereof.

o FRAME-RELAY--A high-speed packet-switched data communications
protocol.

o CABLE MODEM--Internet access over hybrid fiber coaxial cable.

While these services have recently experienced dramatic growth in the U.S.,
they are frequently expensive, complex to order, install and maintain, and in
some cases are not as widely available as DSL technology.

EMERGENCE OF DSL TECHNOLOGY

DSL technology first emerged in the 1990s and is commercially available
today to address performance bottlenecks of the public switched telephone
network. DSL equipment, when deployed at each end of standard copper telephone
lines, increases the data carrying capacity of copper telephone lines from
analog modem speeds of 56.6 kilobits per second, for the fastest consumer
modems, and ISDN speeds of 128 kilobits per second to DSL speeds of up to 6
megabits per second depending on the length and condition of the copper line.
Recent advances in semiconductor technology and digital signal processing
algorithms and falling equipment prices have made the widespread deployment of
DSL technology more economical over time. We anticipate that equipment prices
will continue to fall as a result of continued advances in semiconductor
technologies and increases in equipment production volumes.

Because DSL technology reuses the existing copper plant, it is
significantly less expensive to deploy on a broad scale than alternative
technologies, such as cable modems, wireless data and satellite data. As a
result, a significant portion of the investment in a DSL network is
success-based, requiring a comparatively lower initial fixed investment.
Subsequent variable investments in DSL technology are directly related to the
number of paying customers.

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IMPACT OF REGULATORY DEVELOPMENTS

The passage of the 1996 Telecommunications Act created a legal framework
for competitive telecommunications companies to provide local analog and digital
communications services in competition with the traditional telephone companies.
The 1996 Telecommunications Act eliminated a substantial barrier to entry for
competitive telecommunications companies by enabling them to leverage the
existing infrastructure built by the traditional telephone companies, which
required a $200 billion investment by these telephone companies and their
ratepayers, rather than constructing a competing infrastructure at significant
cost. The 1996 Telecommunications Act requires traditional telephone companies,
among other things:

o to allow competitive telecommunications companies to lease telephone
wires on a line by line basis;

o to provide central office space for the competitive telecommunications
companies' DSL and other equipment required to connect to the leased
telephone wires;

o to lease access on their inter-central office fiber backbone to link
the competitive telecommunications companies' equipment; and

o to allow competitive telecommunications companies to electronically
connect into their operational support systems to place orders and
access their databases.

The 1996 Telecommunications Act, as interpreted by the Federal
Communications Commissions (FCC), in particular emphasized the need for
competition-driven innovations in the deployment of advanced telecommunications
services, such as DSL services.

OUR COMPETITIVE STRENGTHS

We were formed to capitalize on the substantial business opportunity
created by the growing demand for broadband Internet and network access, the
commercial availability of low-cost DSL technology and the passage of the 1996
Telecommunications Act. Key aspects of our solution to provide broadband
communications services include:

o an attractive value proposition that provides high-speed connections
at similar or lower prices than alternative high-speed technologies
currently available to customers;

o a rapid network deployment and service rollout with significant
increases in line installations to date;

o a widely available, continuously connected, secure network that
facilitates deployment of Internet and intranet applications; and

o a management team experienced in the data communications,
telecommunications and personal computer industries.

ATTRACTIVE VALUE PROPOSITION. We offer higher bandwidth digital connections
than alternative services at similar or lower prices that do not vary with
usage. For business Internet users, our high-end services offer bandwidth
comparable to that offered by T1 and frame-relay circuits at approximately 25%
of the cost. For the RLAN market, our mid-range services are three to six times
the speed of ISDN lines and up to ten times the speed of analog modems at
monthly rates similar to or lower than those for heavily used ISDN lines. We
believe that many of our enterprise customers can justify deploying lines to
their employees if their productivity improves by only a few hours per month
based on increases in the number of hours worked and decreases in commute time
and time spent waiting for information. For consumer Internet users, our
consumer services are comparably priced to current cable modem services. Unlike
cable modems, the speed of our service does not decrease when more users are
added.

WE HAVE LEVERAGED OUR FIRST-MOVER ADVANTAGE TO RAPIDLY EXPAND OUR NETWORK
AND GROW OUR NUMBER OF LINES INSTALLED. We were the first to widely roll out DSL
services on a commercial basis, making DSL service available for purchase in the
San Francisco Bay Area in December 1997. We believe that we have leveraged our
first-mover advantage to rapidly expand our network into our targeted
metropolitan regions and grow our number of line installations. We believe we
have the nation's largest DSL network with more than 1,350 operational central
offices passing over more than 35 million homes and businesses. As of March 31,
2000, we had installed a total of 93,000 lines nationwide.

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WIDELY AVAILABLE, ALWAYS-CONNECTED SECURE NETWORK. Our strategy of
providing blanket coverage in each region we serve is designed to ensure that
our services are available to the vast majority of our customers' end-users. Our
network provides 24-hour, always-on connectivity, unlike ISDN lines and analog
modems which require customers to dial-up each time for Internet or RLAN access.
Also, because we use dedicated connections from each end-user to the Internet
service provider or enterprise network, our customers can reduce the risk of
unauthorized access. These factors are important to our customers because any
Internet service they market to their end-users must actually be available for
them to purchase and be secure enough to not risk their own reputation or
business with any security lapses.

EXPERIENCED MANAGEMENT TEAM. Our management team includes individuals with
extensive experience in the data communications, telecommunications and personal
computer industries, including Robert Knowling, Jr., Chairman of the Board,
President and Chief Executive Officer (former Executive Vice President of
Operations and Technology at U S WEST Communications), Catherine Hemmer,
Executive Vice President and Chief Operations Officer (former Vice President,
Network Reliability and Operations at U S WEST Communications, Inc., former
General Manager, Network Provisioning at Ameritech Corporation and former Vice
President, Network Services at MFS), John McDevitt, Executive Vice President,
Sales and Marketing (former Vice President of Sales and Marketing at Danly IEM
and former Business Director at Praxair, Inc.), Timothy Laehy, Executive Vice
President and Chief Financial Officer (former Vice President of Corporate
Finance and Treasurer of Leasing Solutions, Inc.), Robert Davenport, III,
Executive Vice President, Business Development (former Senior Vice President and
Chief Operating Officer of Tele-Communication, Inc.'s Internet Services
subsidiary TCI.NET), Joseph Devich, Executive Vice President, Corporate Services
(former Vice President, Operations and Technologies Staff of U S WEST
Communications), Dhruv Khanna, Executive Vice President, General Counsel and
Secretary, Jane Marvin, Executive Vice President of Human Resources (former Vice
President of Human Resources for the General Business Services unit of Ameritech
Corporation), Terry Moya, Executive Vice President, External Affairs (former
Vice President & Chief Financial Officer, Capital Management, Network Operations
and Technologies at U S WEST Communications, Inc), Michael Lach, Executive
Vice President, Business Integration (former Vice President, Customer
Provisioning and Maintenance of Ameritech Corporation); and Jimmy La Valley,
Executive Vice President, Community Relations (former Vice President, Human
Resources at US WEST).

BUSINESS STRATEGY

EXPAND OUR NETWORK AND ROLL OUT SERVICE RAPIDLY IN OUR TARGETED
METROPOLITAN STATISTICAL AREAS. As of March 31, 2000, we introduced our services
in 62 of the top metropolitan statistical areas nationwide. We plan to expand
our services to a total of 165 metropolitan statistical areas by the end of
2000. In the aggregate, these 165 metropolitan statistical areas cover more than
45% of homes and 50% of businesses in the United States. In addition, we have
recently begun to assess the regulatory and competitive environments in other
countries.

PROVIDE PERVASIVE COVERAGE IN EACH METROPOLITAN STATISTICAL AREA. We are
pursuing a blanket coverage strategy of providing service in a substantial
majority of the central offices in each region that we enter since our Internet
service provider customers desire to market their Internet access services on
region-wide basis. Blanket coverage is also important to our enterprise
customers since most of them desire to offer RLAN access to all employees
regardless of where they reside. In addition, we believe our presence in 165
metropolitan statistical areas will allow us to better serve our Internet
service provider, enterprise, telecommunications carrier and other customers.
These customers are increasingly seeking a single supplier in multiple
metropolitan areas.

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ESTABLISH AND MAINTAIN SALES AND MARKETING RELATIONSHIPS WITH LEADING
INTERNET SERVICE PROVIDERS, TELECOMMUNICATIONS CARRIERS AND OTHER DSL RESELLERS.
We principally target Internet service providers, telecommunications carriers
and other DSL resellers that can offer their end-users cost and performance
advantages for Internet access using our services. We primarily provide
connections to Internet service providers, which in turn offer high-speed
Internet access using our network. In other cases, we provide wholesale DSL and
Internet access services for resale by our customers such as Prodigy
Communications Corporation and Juno Online Services. In this way, we:

o carry the traffic of multiple Internet service providers,
telecommunications carriers and other customers in any region,
increasing our volume and reducing our costs;

o leverage our selling efforts through the sales and support staff of
these Internet service providers, telecommunications carriers and
other customers;

o provide Internet service providers, telecommunications carriers and
other customers a high-speed service offering to compete with
cable-based Internet access.

DEVELOP A NATIONAL BRAND. We believe that we can enhance our competitive
position and increase demand for our services by actively developing a positive
brand and image for our Company and our services through a combination of
television, print and radio advertisements on both a national and local basis.
In October 1999, we commenced a significant national advertising campaign in
pursuit of this strategy. This branding strategy has created the opportunity
fours to provide end-user leads to our existing customers.

ACQUIRE AND ENTER INTO BUSINESS ARRANGEMENTS WITH NETWORK AND
BROADBAND-RELATED SERVICE PROVIDERS. We believe that the pace of deployment of
our network can be increased by acquiring and entering into business
arrangements with other network service providers, some of which may be located
outside of the United States. We also believe our network deployment will enable
the delivery of a variety of broadband-related services and content that are
desired by our customers. We expect to make these services available to our
customers through acquiring and entering into business arrangements with leading
providers of broadband-related services or content. For example, we recently
acquired Laser Link. Net, Inc. This acquisition will allow us to better provide
DSL and IP services on a wholesale basis and better enable us to serve customers
who do not wish to maintain any network facilities. Our agreement to acquire
BlueStar Communications Group will expand our selling capabilities in smaller
cities and rural areas, increase our distribution methods, and will enhance our
ability to deliver enhanced broadband solutions to small businesses.

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already exist. Third, line sharing should resolve lack of telephone wire
problems that we have encountered when ordering telephone wires in some areas of
the country. We have signed interim line-sharing agreements with Bell South,
Bell Atlantic and U S West. We have also entered into interim line sharing
agreements with SBC in California and we are negotiating agreements for the
remaining states in SBC's territory. We have entered into an interim line
sharing agreement with GTE for all of its major markets other than Texas. We
recently received a decision from the Texas Public Utilities Commission
implementing line sharing in Texas. We have also implemented line sharing on a
trial basis in one state. We expect all of the major traditional local phone
companies to implement line sharing on a wide scale later this year.

OUR SERVICE OFFERINGS

We offer six business-grade services under the TeleSpeed brand to connect
our customers' end-users to our regional data centers and two consumer-grade
service offerings called TeleSurfer and TeleSurfer Pro. In March 2000, we
introduced two new services--DSL+IP and VBSP. We also offer business consumers
Virtual Private Network (VPN) technology over DSL. In addition, Internet service
provider and enterprise customers may purchase backhaul services from us to
connect their facilities to our regional data centers.

TELESPEED SERVICES

Our TeleSpeed services connect individual end-users on conventional
telephone wires to our DSL equipment in their serving central office and from
there to our network serving that metropolitan statistical area. A traditional
telephone company's infrastructure consists of numerous central offices which
are connected by a fiber optic backbone to a regional office that routes local
and long distance traffic. Each central office collects the individual telephone
wires from end-users' premises in the neighborhood.

The particular TeleSpeed service available to an end-user depends in large
part on the user's distance to the central office. We believe that substantially
all, if not all, of our potential end-users in our target markets generally can
be served with one of our services. We estimate that approximately 70% of
end-users are within 18,000 feet of a central office and can be served by at
least our TeleSpeed 384 service. However, the specific number of potential
end-users for the higher speeds will vary by central office and by region and
will be affected by line quality. The chart below compares the performance and
markets for each of our intraregional end-user services as of July 1, 2000:

<TABLE>
<CAPTION>
MAXIMUM MAXIMUM RANGE*
INTRAREGIONAL SPEED TO SPEED FROM (FEET)
SERVICES END-USER END-USER MARKET USAGE
-------------------- ------------ -------------- ---------- -----------------------------
<S> <C> <C> <C> <C>
TeleSpeed 144........................ 144 Kbps 144 Kbps 35,000 ISDN replacement
TeleSpeed 192........................ 192 Kbps 192 Kbps 18,000 Business Internet, RLAN
TeleSpeed 384........................ 384 Kbps 384 Kbps 18,000 Business Internet, RLAN
TeleSpeed 768........................ 768 Kbps 768 Kbps 13,500 Business Internet
TeleSpeed 1.1........................ 1.1 Mbps 1.1 Mbps 12,000 Business Internet
TeleSpeed 1.5S....................... 1.5 Mbps 1.5 Kbps 15,000 High-speed Web access
</TABLE>
--------------
* Estimated maximum distance from the end-user to the central office.

Prices for our end-user services may vary depending upon the performance
level of the service. For example, our TeleSpeed 144 and 192 services are our
lowest priced end-user services and our TeleSpeed 1.1 and 1.5 services are our
highest priced end-user services. Our prices also vary across regions and for
high volume customers that are eligible for volume discounts. See "Risk
Factors--We may experience decreasing prices for our services, which may impair
our ability to achieve profitability or positive cash flow" for a discussion of
the risks associated with our ability to sustain current price levels in the
future.

TELESPEED 144. Our TeleSpeed 144 service operates at up to 144 kilobits per
second in each direction, which is similar to the performance of an ISDN line.
This service, which can use existing ISDN equipment at the end-user site, is
targeted at the ISDN replacement market where its per month flat rate can
compare favorably to ISDN services from the traditional telephone company when
per-minute usage charges apply. It is also the service that we offer on
telephone wires that are either too long to carry our higher speed services or
are served by digital loop carrier systems or similar equipment where a
continuous copper connection is not available from the end-user site to a
central office.

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TELESPEED 192. This service provides one and a half to three times the
performance of ISDN lines at similar or lower price points to heavily-used ISDN
lines.

TELESPEED 384. This service provides three to six times the performance of
ISDN lines at similar price points to heavily-used ISDN lines.

TELESPEED 768. This service provides one-half the bandwidth of a T1 data
circuit at substantially less than one-half of the monthly price that we
estimate is typical for T1 service. The target market for the TeleSpeed 768
service is small businesses needing moderate speed access to the Internet but
who have previously been unable to afford the price of such service. The service
also competes favorably from a price/performance standpoint with traditional
fractional T1 and frame-relay services for these same customers.

TELESPEED 1.1. This service provides over two-thirds the bandwidth of a
T1data circuit at less than one-half of the monthly price that we estimate is
typical for T1 service. The target market for the TeleSpeed 1.1 service is small
businesses needing T1-level access to the Internet which have previously been
unable to afford the price of such service. The service also competes favorably
from a price/performance standpoint with traditional fractional T1 and
frame-relay services for these same customers.

TELESPEED 1.5S. This service provides bandwidth comparable to a T1 data
circuit of less than one-half of the monthly price that we estimate is typical
for T1 service. The service also provides the highest performance of any
TeleSpeed service to stream video or other multimedia content to end-user
locations.

TELESPEED REMOTE. TeleSpeed Remote provides high-speed network access for
end-users located in remote regions to their corporate networks. This service is
targeted at businesses that want high-speed remote office connections at a lower
cost than ISDN or frame-relay services. For example, this service can provide a
corporation's employees located in Boston high-speed access to their corporate
network located in San Francisco.

TELESURFER SERVICES

<TABLE>
<CAPTION>
MAXIMUM MAXIMUM
INTRAREGIONAL SPEED TO SPEED FROM RANGE*
SERVICES END-USER END-USER (FEET) MARKET/USAGE
--------------------- ------------- --------------- ---------- ------------------
<S> <C> <C> <C> <C>
Telesurfer ADSL............................... 608 Kbps 128 Kbps 12,000 Consumer
TeleSurfer Pro ADSL........................... 1.5 Mbps 384 Kbps 12,000 Consumer
</TABLE>
--------------
* Estimated maximum distance from the end-user to the central office.

TELESURFER ADSL. This consumer-grade service is an asymmetric service,
offering up to 608 kilobits per second downstream and up to 128 kilobits per
second upstream. This service is the base consumer service. The target market
for this service is consumers using either dial-up analog or ISDN connections
for web browsers.

TELESURFER PRO ADSL. This is a premium consumer-grade asymmetric service,
offering up to 1.5 megabits per second downstream and up to 384 kilobits per
second upstream. The target market for this service is consumers using analog or
ISDN connections for web browsers.

DSL + IP

This service currently bundles Internet protocol services with our existing
TeleSurfer services. We also plan to offer it with our TeleSpeed services. The
additional Internet protocol services include end-user authentication,
authorization and accounting, Internet protocol address assignment and
management, domain name service and Internet protocol routing and connectivity.

VBSP

We plan to offer this additional service which provides a complete solution
for organizations and businesses that want to offer broadband Internet services
to their customers without having to develop their own Internet capabilities. We
will provide Internet services to end-users under the brand name of our
customer. Our Internet services will be a turnkey solution that includes
registration, connection and Internet software, web sites, network
authentication, electronic mail, billing and reporting, news and personal
web-space for end-users and end-user service and technical support.

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VPN OVER DSL

In August 1999 we introduced our VPN over DSL service. This service uses
the public Internet backbone or a private data network, combined with DSL
connections, as a channel for sharing information and applications within a
closed circle of users in different locations. We offer two levels of VPN over
DSL service.

COVAD BRANCH OFFICE. This service is available for remote or branch offices
that require high-speed inter-office connectivity across multiple locations.

COVAD TELEWORKER. This service is available for telecommuters and other
remote users who secure access to their corporate network and the Internet from
home.

OTHER SERVICES

We also provide a DS3 backhaul service from our regional network to an
Internet service provider or enterprise customer site. This service aggregates
all individual end-users in a metropolitan statistical area and transmits the
packet information to the customer on a single high-speed line. The service
utilizes an asynchronous transfer mode (ATM) protocol that efficiently handles
the high data rates involved and operates at up to 45 megabits per second. In
addition to monthly service charges, we impose non-recurring order set-up
charges for Internet service provider and RLAN end-users for our DS3 backhaul
service. Customers must also purchase a DSL modem from us or a third party for
each end-user of our services.

CUSTOMERS

We offer our services to Internet service providers, enterprises,
telecommunications carriers and other DSL resellers. As of March 31, 2000, we
had installed 93,000 DSL lines and received orders for our services from more
than 295 Internet service provider, enterprise and telecommunications carrier
customers. The following is a list of selected Internet service provider,
enterprise, telecommunications carrier and other customers:

<TABLE>
<CAPTION>
SELECTED INTERNET SERVICE PROVIDER CUSTOMERS SELECTED ENTERPRISE CUSTOMERS SELECTED TELECOMMUNICATIONS CARRIERS
<S> <C> <C>
Concentric Network Corporation Apple Computer AT&T
Flashcom Inktomi e.spire
Juno Intel IGC
Earthlink Oracle Corporation Qwest
PSINet Stanford University RCN Corporation
Prodigy Sun Microsystems
UUNET WebTV
Verio
</TABLE>

Our agreements with Internet service providers and other DSL resellers
generally have terms of one year and are nonexclusive. We do not require
Internet service providers to generate a minimum number of end-users and
generally grant volume discounts based on order volume. We serve Internet
service providers who provide their own Internet access service and have started
serving Internet service providers who choose to obtain access to the Internet
through us. In both cases, the Internet service providers purchase our service
son a wholesale basis and sell such services under their own brand.

Our practice with respect to our enterprise customers has been to enter
into an arrangement or a negotiated price to install the service initially to a
small number of end-users. An enterprise customer decides whether to implement
abroad rollout of our services after evaluating the results of this initial
phase of deployment. To date, a typical enterprise customer's initial phase of
deployment and its decision to roll out our service to additional end-users has
taken at least six months, and has generally taken longer than we originally
expected. As of March 31, 2000, a substantial majority of our enterprise
customers had not yet rolled out our services broadly to their employees.

We will not receive significant revenue from an enterprise customer until
and unless these rollouts occur. During the lengthy sales cycle for an
enterprise customer, we incur significant expenses in advance of the receipt of
revenues. We also enter into customer agreements with telecommunications
carriers, including competitive telecommunications companies and interexchange
carriers. Under these agreements our telecommunication carrier customers
typically resell our services to their new and existing customers. These
carriers currently market our

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Internet and RLAN services primarily to small, medium and enterprise businesses
that purchase voice services from them.

SALES AND MARKETING

BUSINESS AND CONSUMER INTERNET. For the business and consumer Internet
access markets, we sell our service to Internet service providers,
telecommunications carriers and others. These customers can either combine our
lines with their Internet access services, or purchase wholesale Internet access
services from us, and resell the combination to their existing and new
end-users. We address these markets through sales and marketing personnel
dedicated to the Internet service provider sales channel. We supplement our
sales efforts to Internet service providers through training programs and
marketing programs that include promotions and sales incentives designed to
encourage the Internet service providers to sell our services instead of those
of our competitors. As of March 31, 2000, we had more than 295 Internet service
provider and telecommunications carrier customers with their own sales personnel
marketing Internet services.

REMOTE LOCAL AREA NETWORK. We market our RLAN services to businesses
through a direct sales force, augmented by marketing programs with value-added
resellers and interexchange carriers. The sales force is directed to deal
directly with the chief information officer and the telecommunications manager
responsible for remote access within an enterprise. We augment our sales efforts
to RLAN customers through partnerships with value-added resellers, including
systems integrators that can offer our TeleSpeed service as part of a complete
work-at-home solution to businesses.

THIRD-PARTY RELATIONSHIPS. A key element of our strategy is to enter into
relationships with leading telecommunications companies, including competitive
telecommunications carriers and interexchange carriers, pursuant to which those
companies resell our TeleSpeed and TeleSurfer services to their customers. For
example, we have entered into commercial agreement with AT&T providing for the
purchase and resale of our services, primarily to their small business and
enterprise customers. We believe that these indirect sales channels will enable
us to penetrate our target markets more rapidly and eventually will generate the
majority of sales of our services.

BRANDING AND MARKETING PROGRAMS. In October 1999 we commenced a branding
and advertising effort to educate the market about our broadband service
offerings and increase recognition of our brand. This program, which uses
television, print and radio advertising on both a national and regional basis,
is intended to inform the market about the availability of our service,
differentiate the products and services offered by our Company and simplify the
process through which these products and services are ordered.

We are also pursuing several types of joint marketing arrangements with our
Internet service provider, telecommunications carrier customers and other DSL
resellers. In addition, certain of our equipment suppliers have promoted our
services through seminars to corporate information technology managers in the
San Francisco Bay Area. We also support our sales efforts with marketing efforts
that include advertising programs through radio and other popular media,
attendance at trade shows and presentations at industry conferences. See "Risk
Factors--Our business will suffer if our Internet service providers,
telecommunications carriers and other third parties are not successful in the
marketing and sale of our services."

SERVICE DEPLOYMENT AND OPERATIONS

Internet service providers, telecommunications carriers and corporate
information technology managers typically have had to assemble their digital
communications connections using multiple service and equipment suppliers,
leading to additional work, cost and coordination problems. With our services,
we emphasize a one-stop service solution for our customers. This service
solution includes:

o extending our network to customers and end-users with various needs
and configuration requirements;

o end-user premise wiring and DSL modem configuration;

o ongoing network monitoring and customer reporting;

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o customer service and technical support; and

o operational support system.

EXTENDING OUR NETWORK TO CUSTOMERS AND END-USERS. We work with our Internet
service provider, enterprise, telecommunications carrier and other customers to
extend our network to each customer premise and each end-user premise bordering
circuits from the traditional telephone company or a competitive
telecommunications company, interconnecting the customers and end-users to our
network, testing the circuits, configuring customer routers or switches and
end-user routers and monitoring the circuits from the network operations center.

END-USER PREMISES WIRING AND DSL MODEM CONFIGURATION. We use our own and
subcontracted field service crews and trucks to perform any required inside
wiring and to configure DSL modems at each end-user site.

NETWORK MONITORING. We monitor our network from our network operations
center, which helps us to identify and correct network problems. We have also
developed network capability to provide Internet service provider, enterprise
and telecommunications carrier customers direct monitoring access of their
end-users for more efficient monitoring of their own network performance.

CUSTOMER REPORTING. We communicate regularly with our customers about the
status of their end-users. We also operate a toll-free customer care help line.
Additionally, we provide Web-based tools to allow individual Internet service
providers and enterprise information technology managers and telecommunications
carriers to monitor their end-users directly, to place orders for new end-users,
to enter trouble tickets on end-user lines and to communicate with us on an
ongoing basis.

CUSTOMER SERVICE AND TECHNICAL SUPPORT. We provide 24x7 on-line support to
our Internet service provider customers and enterprise information technology
managers. The Internet service provider and information technology manager and
telecommunications carriers serve as the initial contact for service and
technical support, and we provide the second level of support. For customers
using our VBSP offering, we will provide the first level of support for their
end users.

OPERATIONAL SUPPORT SYSTEM. We have developed what we believe to be the
industry-leading operational support system for DSL networks. Our operational
support system is based on web interfaces and is highly automated. These
features are intended to and should allow us to scale our businesses rapidly
because they eliminate many manual processes such as line testing, network path
configuration, equipment configuration, order taking and verification, billing
and telephone wire supplier management.

NETWORK ARCHITECTURE AND TECHNOLOGY

The key design principles of our network attempt to provide the following
attributes which we believe are important requirements of our existing and
potential customers:

ROBUST NETWORK SECURITY. Modem access to enterprise networks presents
significant security risks, since any telephone can be used to attempt to access
such a network simply by dialing the telephone number. As a result, enterprises
expend significant effort and resources to prevent unauthorized access.
Enterprises also typically limit remote access users to reading e-mail or other
non-sensitive applications. Our network is designed to ensure secure
availability of all internal applications and information for remote locations.
Our permanent virtual circuit network architecture connects individual end-users
at fixed locations to a single enterprise, which reduces the possibility of
unauthorized access and allows our customers to safely transmit sensitive
information and applications over our TeleSpeed lines.

CONSISTENT AND SCALABLE PERFORMANCE. We believe that eventually public
packet networks will evolve to replace the over 40 million modems currently
connected to circuit switched networks that have been deployed in the U.S. As
such, we designed our network for scalability and consistent performance to all
users as the networks grow. We have designed a "star topology" network similar
to the most popular local area network architecture currently used in
high-performance enterprise networks. In this model, new capacity is added
automatically as each new user receives a new line. We also use asynchronous
transfer mode equipment in our network that implements packet switching directly
in silicon circuits rather than slower router-based designs that implement
switching in router software.

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<PAGE>

INTELLIGENT END-TO-END NETWORK MANAGEMENT. Because the customers' and end
users' lines are continuously connected, they can also always be monitored. We
have visibility from the Internet service provider or enterprise site across the
network and into the end-user's home or business. Because our network is
centrally managed, we can identify and dynamically enhance network quality,
service and performance and address network problems promptly.

FLEXIBILITY. We have designed our network to be flexible in handling
various types of network traffic, starting with data, but able to accommodate
voice and video. This flexibility will allow us to directly offer, or enter into
arrangements with other entities to offer, not only value-added services such as
voice over DSL, but also control the prioritization of content delivery within
our national network.

The primary components of our network is the network operations center, our
high-speed private metropolitan networks, central office spaces, including
digital subscriber line access multiplexers (DSLAMs), copper telephone lines and
DSL modems.

NETWORK OPERATIONS CENTER. Our entire network is managed from the network
operations center. We provide end-to-end network management using advanced
network management tools on a 24x7 basis, which enhances our ability to address
performance or connectivity issues before they affect the end-user experience.
From the network operations center, we can monitor the equipment and circuits in
each metropolitan network (including the asynchronous transfer mode equipment),
each central office (including DSLAMs) and potentially individual end-user lines
(including the DSL modems). Presently, our network operations center is located
in the San Francisco Bay Area. We are currently in the process of building a
second network operations center on the East Coast.

PRIVATE METROPOLITAN NETWORK. We operate our own private metropolitan
network in each region that we enter. The network consists of high-speed
asynchronous transfer mode communications circuits that we lease to connect our
asynchronous transfer mode hubs, our equipment in individual central offices and
our Internet service provider, enterprise and telecommunications carrier
customers. This network operates at a speed of 45 to 155 megabits per second.

CENTRAL OFFICE SPACES. Through our interconnection agreements with the
traditional telephone companies, we seek to secure space in every central office
where we intend to offer service. These central office spaces are designed to
offer the same high reliability and availability standards as the traditional
telephone company's other central office space. We require access to these
spaces for our equipment and for persons employed by, or under contract with,
us. We place DSLAMs in our central office spaces to provide the high-speed DSL
signals on each copper line to our end-users. As of March 31, 2000, we had 1,350
central office spaces operational. In addition, we have a significant number of
additional spaces under construction as well as other spaces on order from
various traditional telephone companies. In December 1998, we entered into a
professional service arrangement with Lucent Technologies to augment and
accelerate our ability to deploy our central office facilities.

TELEPHONE WIRES. We lease the telephone wires running to end-users from the
traditional telephone companies under terms specified in our interconnection
agreements. We lease lines that, in numerous cases, must be specially
conditioned by the traditional telephone companies to carry digital signals,
usually at an additional charge relative to that for voice grade telephone
wires. The price we are obligated to pay for these lines currently varies from
$4 to $70 per month per line with additional one-time charges in some cases for
installation, modification or removal of lines.

DSL MODEMS AND ON-SITE CONNECTION. We buy our DSL modems from our suppliers
for resale to our Internet service provider or enterprise customers for use by
their end-users. We configure and install these modems along with any required
on-site wiring needed to connect the modem to the copper line leased from the
traditional telephone company. For the most part, the DSL modem and DSLAM
equipment used have come from the same vendor for all services, since there
aren't yet interoperability standards for the equipment used in our higher-speed
services. We are also pursuing a program of ongoing network development. Our
service development and engineering efforts focus on the design and development
of new technologies and services to increase the speed, efficiency, reliability
and security of our network and to facilitate the development of network
applications by third parties that will increase the use of our network. See
"Risk Factors--The scalability and speed of our network remain largely
unproven."

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COMPETITION

The markets for business and consumer Internet access and network access
services are intensely competitive. We expect that these markets will become
increasingly competitive in the future. The principal bases of competition in
our markets include:

o price/performance;

o breadth of service availability;

o reliability of service;

o network security;

o ease of access and use;

o content bundling;

o customer support;

o brand recognition;

o operating experience;

o relationships with Internet service providers and other third parties;
and

o capital resources.

We face competition from traditional telephone companies, cable modem
service providers, competitive telecommunications companies, traditional and new
national long distance carriers, Internet service providers, on-line service
providers and wireless and satellite service providers.

TRADITIONAL TELEPHONE COMPANIES. All of the largest traditional telephone
companies in our target markets have begun offering DSL services. As a result,
the traditional telephone companies represent strong competition in all of our
target service areas, and we expect this competition to intensify. The
traditional telephone companies have an established brand name and reputation
for high quality in their service areas, possess sufficient capital to deploy
DSL equipment rapidly, own the telephone wires themselves and can bundle digital
data services with their existing voice services to achieve economies of scale
in serving their customers. Certain of the traditional telephone companies have
aggressively priced their consumer DSL services as low as $19-$29 per month,
placing pricing pressure on our TeleSurfer services. The traditional telephone
companies are also in a position to offer service from central offices where we
are unable to secure space and offer service because of asserted or actual space
restrictions.

CABLE MODEM SERVICE PROVIDERS. Cable modem service providers such as AT&T,
Excite@Home, Cox, Time Warner, Road Runner and MediaOne (and their respective
cable partners) are deploying high-speed Internet access services over hybrid
fiber coaxial cable networks. Hybrid fiber coaxial cable is a combination of
fiber optic and coaxial cable, and has become the primary architecture utilized
by cable operators in recent and ongoing upgrades of their systems. Where
deployed, these networks provide similar and in some cases higher-speed Internet
access than we provide. They also offer these services at lower price points
than our TeleSurfer services. We believe the cable modem service providers face
a number of challenges that providers of DSL services do not face. For example,
different regions within a metropolitan statistical area may be served by
different cable modem service providers, making it more difficult to offer the
blanket coverage required by potential business customers. Also, much of the
current cable infrastructure in the U.S. must be upgraded to support cable
modems, a process which we believe is significantly more expensive and
time-consuming than the deployment of DSL-based networks.

COMPETITIVE TELECOMMUNICATIONS COMPANIES. Many competitive
telecommunications companies such as NorthPoint Communications, Rhythms
NetConnections and Network Access Solutions offer high-speed digital services
using a business strategy similar to ours. Some of these competitors have begun
offering DSL-based access services and others are likely to do so in the future.
Companies such as NEXTLINK Communications have extensive fiber networks in
many metropolitan areas, primarily providing high-speed digital and voice
circuits to large corporations. They also have interconnection agreements

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with the traditional telephone companies pursuant to which they have acquired
central office space in many markets targeted by us. Further, certain of our
customers have made investments in our competitors.

NATIONAL INTEREXCHANGE CARRIERS. Interexchange carriers, such as AT&T,
Sprint, WorldCom, Qwest, Level 3 and Global Crossing have deployed large-scale
Internet access networks and ATM networks, sell connectivity to businesses and
residential customers, and have high brand recognition. They also have
interconnection agreements with many of the traditional telephone companies and
a number of spaces in central offices from which they are currently offering or
could begin to offer competitive DSL services.

INTERNET SERVICE PROVIDERS. Internet service providers such as Genuity,
UUNET Technologies (acquired by MCI WorldCom), EarthLink Network, Concentric
Network Corporation (acquired by NEXTLINK), and PSINet provide Internet access
to residential and business customers, generally using the existing public
switched telephone network at integrated services digital network speeds or
below. Some Internet service providers such as UCNET Technologies in California
and New York, HarvardNet Inc. and InterAccess have begun offering DSL-based
services. To the extent we are not able to recruit Internet service providers as
customers for our service, Internet service providers could become competitive
DSL service providers.

ON-LINE SERVICE PROVIDERS. On-line service providers include companies such
as AOL, Yahoo!, CompuServe (acquired by AOL), MSN (a subsidiary of Microsoft
Corp.) and Web TV (a subsidiary of Microsoft Corp.) that provide, over the
Internet and on proprietary online services, content and applications ranging
from news and sports to consumer video conferencing. These services are designed
for broad consumer access over telecommunications-based transmission media,
which enable the provision of digital services to the significant number of
consumers who have personal computers with modems. In addition, they provide
Internet connectivity, ease-of-use and consistency of environment. Many of these
on-line service providers have developed their own access networks for modem
connections. If these on-line service providers were to extend their access
networks to DSL or other high-speed service technologies, they would become
competitors of ours.

WIRELESS AND SATELLITE DATA SERVICE PROVIDERS. Wireless and satellite data
service providers are developing wireless and satellite-based Internet
connectivity. We may face competition from terrestrial wireless services
including future third-generation wireless networks, two Gigahertz (Ghz) and 28
Ghz wireless cable systems (Multi-channel Microwave Distribution System (MMDS)
and Local Multi-channel Distribution System (LMDS)), and 18 Ghz and 39 Ghz
point-to-point microwave systems. For example, the FCC is currently considering
new rules to permit MMDS licensees to use their systems to offer two-way
services, including high-speed data, rather than solely to provide one-way video
services. The FCC also recently auctioned spectrum for LMDS services in all
markets. This spectrum is expected to be used for wireless cable and telephony
services, including high-speed digital services. In addition, companies such as
Teligent Inc., Advanced Radio Telecom Corp. and WinStar Communications, Inc.,
hold point-to-point microwave licenses to provide fixed wireless services such
as voice, data and videoconferencing.

We also may face competition from satellite-based systems. Motorola
Satellite Systems, Inc., Hughes Communications (a subsidiary of General Motors
Corporation), Globalstar, Lockheed, Teledesic and others have filed applications
with the FCC for global satellite networks which can be used to provide
broadband voice and data services, and the FCC has authorized several of these
applicants to operate their proposed networks.

INTERCONNECTION AGREEMENTS WITH TRADITIONAL TELEPHONE COMPANIES

A critical aspect of our business is our interconnection agreements with
the traditional telephone companies. These agreements cover a number of aspects
including:

o the price we pay to lease access to the traditional telephone
company's telephone wires;

o the special conditioning the traditional telephone company provides on
certain of these lines to enable the transmission of digital signals;

o the price and terms of central office space for our equipment in the
traditional telephone company's central offices and remote terminals;

o the price we pay and access we have to the traditional telephone
company's transport facilities;

o the operational support systems and interfaces that we can use to
place orders, report network problems and monitor the traditional
telephone company's response to our requests;

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o the dispute resolution process that we use to resolve disagreements on
the terms of the interconnection contract; and

o the term of the interconnection agreement, its transferability to
successors, its liability limits and other general aspects of the
traditional telephone company relationship.

As of March 31, 2000, we have entered into interconnection agreements with
or otherwise obtained interconnection rights from the different major
traditional telephone companies in all the states covering our metropolitan
statistical areas. Traditional telephone companies do not in many cases agree to
our requested provisions in interconnection agreements and we have not
consistently prevailed in obtaining all of our desired provisions in such
agreements either voluntarily or through the interconnection arbitration
process. We cannot be sure that we will be able to continue to sign
interconnection agreements with existing or other traditional telephone
companies. We are currently negotiating agreements with several traditional
telephone companies in order to expand our services into 165 targeted
metropolitan statistical areas. The traditional telephone companies are also
permitting competitive telecommunications companies to adopt previously signed
interconnection agreements. In certain instances, we have adopted the
interconnection agreement of another competitive telecommunications company.
Other competitive telecommunications companies have also adopted the same or
modified versions of our interconnection agreements, and may continue to do so
in the future.

Many of our interconnection agreements have a term of three years. We will
have to renegotiate these agreements when they expire. Although we expect to
renew the interconnection agreements that require renewal and believe the 1996
Telecommunications Act and the agreements themselves limit the ability of
traditional telephone companies not to renew such agreements, we may not succeed
in extending or renegotiating our interconnection agreements on favorable terms.
Additionally, disputes have arisen and will likely arise in the future as a
result of differences in interpretations of the interconnection agreements. For
example, we are in litigation proceedings with certain of the traditional
telephone companies. These disputes have delayed our deployment of our network.
They have also adversely affected our service to our customers and our ability
to enter into additional interconnection agreements with the traditional
telephone companies in other states. Finally, the interconnection agreements are
subject to state commission, FCC and judicial oversight. These government
authorities may modify the terms of the interconnection agreements in a way that
hurts our business.

GOVERNMENT REGULATION

OVERVIEW. Our services are subject to a variety of federal regulations.
With respect to certain activities and for certain purposes, we have submitted
our operations to the jurisdiction of state and local authorities who may also
assert more extensive jurisdiction over our facilities and services. The FCC has
jurisdiction over all of our services and facilities to the extent that we
provide interstate and international services. To the extent we provide
identifiable intrastate services, our services and facilities are subject to
state regulations. Rates for the services and network elements we purchase from
the traditional local telephone companies are generally determined by the States
consistent with federal law. In addition, local municipal government authorities
also assert jurisdiction over our facilities and operations. The jurisdictional
reach of the various federal, state and local authorities is subject to ongoing
controversy and judicial review, and we cannot predict the outcome of such
review.

FEDERAL REGULATION. We must comply with the requirements of the
Communications Act of 1934, as amended by the 1996 Telecommunications Act, as
well as the FCC's regulations under the statute. The 1996 Telecommunications Act
eliminates many of the pre-existing legal barriers to competition in the
telecommunications and video programming communications businesses, preempts
many of the state barriers to local telecommunications service competition that
previously existed in state and local laws and regulations, and sets basic
standards for relationships between telecommunications providers. The law
delegates to the FCC and the states broad regulatory and administrative
authority to implement the 1996 Telecommunications Act.

Among other things, the 1996 Telecommunications Act removes barriers to
entry in the local telecommunications market. It does this by preempting certain
state and local laws that are barriers to competition and by requiring
traditional telephone companies to provide nondiscriminatory access and
interconnection to potential competitors, such as cable operators, wireless
telecommunications providers, interexchange carriers and competitive
telecommunications companies such as us.

Regulations promulgated by the FCC under the 1996 Telecommunications Act
specify in greater detail the requirements of the 1996 Telecommunications Act
imposed on the traditional telephone companies to open their

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networks to competition by providing competitors interconnection, central office
and remote terminal space, access to unbundled network elements, retail services
at wholesale rates and nondiscriminatory access to telephone poles, ducts,
conduits, and rights-of-way. The requirements enable companies such as us to
interconnect with the traditional telephone companies in order to provide local
telephone exchange services and to use portions of the traditional telephone
companies' existing networks to offer new and innovative services such as our
TeleSpeed and TeleSurfer services. In January 1999, the U.S. Supreme Court ruled
on challenges to the FCC regulations. Although the U.S. Supreme Court upheld
most of the FCC's authority and its regulations, it required the FCC to
reexamine and redefine which unbundled network elements the traditional
telephone companies must offer. The FCC issued its revised list of unbundled
network elements in September 1999. The 1996 Telecommunications Act also allows
the Regional Bell Operating Companies (RBOCs), which are the traditional
telephone companies created by AT&T's divestiture of its local exchange
business, to enter the long distance market within their own local service
regions upon meeting certain requirements. The remaining RBOCs include
BellSouth, Verizon (formerly, Bell Atlantic Corporation), Ameritech Corporation,
U S WEST Communications, Inc. (recently acquired by Qwest) and SBC
Communications, Inc. The timing of the various RBOCs' entry into their
respective in-region long distance service businesses is extremely uncertain. In
December 1999, Atlantic's (now Verizon) application to provide in-region long
distance services in New York state was granted by the FCC. The FCC recently
granted Southwestern Bell Telephone Company's application to provide in-region
long distance service in Texas. Given the FCC's grant of the New York and Texas
applications, the FCC is likely to thereafter grant similar applications by
Verizon and the other RBOCs in other states. The timing of the various RBOCs'
in-region long distance entry will likely affect the level of cooperation we
receive from each of the RBOCs. The approval of such entry will likely adversely
affect the level of cooperation.

In addition, the 1996 Telecommunications Act provides relief from the
earnings restrictions and price controls that have governed the local telephone
business for many years. Traditional telephone company tariff filings at the FCC
have been subjected to increasingly less regulatory review. However, precisely
when and to what extent the traditional telephone companies will secure pricing
flexibility or other regulatory freedom for their services is uncertain. For
example, under the 1996 Telecommunications Act, the FCC is considering
eliminating certain regulations that apply to the traditional telephone
companies' provision of services that are competitive with ours. The timing and
the extent of regulatory freedom and pricing flexibility and regulatory freedom
granted to the traditional telephone companies will affect the competition we
face from the traditional telephone companies' competitive services. Pursuant to
recent merger conditions, SBL and Verizon have established in-region separate
affiliates to provide DSL services. Those affiliates will be subject to less
regulation than if the services were provided on an integrated basis.

Further, the 1996 Telecommunications Act provides the FCC with the
authority to forbear from regulating entities such as us who are classified as
"non-dominant" carriers. The FCC has exercised its forbearance authority. As a
result, we are not obligated to obtain prior certificate approval from the FCC
for our interstate services or file tariffs for such services. We have
determined not to file tariffs for our interstate services. We provide our
interstate services to our customers on the basis of contracts rather than
tariffs. We believe that it is unlikely that the FCC will require us to file
tariffs for our interstate services in the future.

On March 18, 1999, the FCC adopted rules to make it easier and less
expensive for competitive telecommunications companies to obtain central office
space and to require traditional telephone companies to make new alternative
arrangements for obtaining central office space. However, in March 2000, the
U.S. Court of Appeal for the District of Columbia issued a decision casting
doubt on whether new entrants will be able to locate certain kinds of equipment
in the traditional local telephone companies central offices. The FCC's rules on
location of new entrant's equipment in central offices remain somewhat
uncertain, and have not been uniformly implemented. In the March 1999
announcement, the FCC also provided notice of proposed rule-making to determine
whether carriers should be able to provide asymmetric DSL over the same line
over which traditional telephone companies provide voice service. On November
18, 1999, the FCC required the traditional local phone companies to provide us
and other competitive local carriers with line sharing access. If implemented by
the traditional local phone companies these rules could materially lower the
price we pay to lease access to the traditional telephone company's telephone
wires. While we believe that these rules are advantageous to us, the traditional
telephone companies may balk at, delay, or thwart the implementation of such
rules.

In its March 2000 ruling, the federal appeals court struck portions of the
FCC's new rules concerning the location of new entrants' equipment in
traditional local telephone companies' central offices, and has required the FCC
to reconsider and review those rules. In particular, the appeals court has
required the FCC to revise its rules concerning the types of equipment that we
may collocate on the traditional telephone company premises and the steps that
traditional telephone companies may take to separate their equipment from our
equipment. The traditional

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telephone companies may implement the court's ruling and any subsequent FCC
rules in a manner that impairs our ability to obtain collocation space and
collocate the equipment of our choice on their premises. Such actions by the
traditional telephone companies could adversely affect our business and disrupt
our existing network design, configuration and services.

Any changes in applicable federal law and regulations, in particular,
changes in its interconnection agreements with traditional telephone companies,
the prospective entry of the RBOCs into the in-region long distance business and
grant of regulatory freedom and pricing flexibility to the traditional telephone
companies, could harm our business.

STATE REGULATION. To the extent we provide identifiable intrastate services
or have otherwise submitted ourselves to the jurisdiction of the relevant state
telecommunications regulatory commissions, we are subject to such jurisdiction.
In addition, certain states have required prior state certification as a
prerequisite for processing and deciding an arbitration petition for
interconnection under the 1996 Telecommunications Act. As of December 31,
1999,we were authorized under state law to operate as a competitive local
exchange carrier in 34 states, and intend to obtain authorization in the other
states necessary to cover our 165 targeted metropolitan statistical areas. We
have pending arbitration proceedings in different states for interconnection
arrangements with the relevant traditional telephone companies. We have
concluded arbitration proceedings in a number of states by entering into
interconnection agreements with the relevant traditional telephone companies. We
have filed tariffs in certain states for intrastate services as required by
state law or regulation. We are also subject to periodic financial and other
reporting requirements of these states with respect to our intrastate services.

The different state commissions have various proceedings to determine the
rates, charges and terms and conditions for unbundled network elements
(unbundled network elements are the various portions of a traditional telephone
company's network that a competitive telecommunications company can lease for
purposes of building a facilities-based competitive network, including telephone
wires, central office collocation space, inter-office transport, operational
support systems, local switching and rights of way), as well as the discount for
wholesale services that we purchase from the relevant traditional telephone
company. The rates set forth in many of our interconnection agreements are
interim rates and will be prospectively, and, in some cases, retroactively,
affected by the permanent rates set by the various state commissions for such
unbundled network elements as unbundled loops and interoffice transport. We have
participated in unbundled network element rate proceedings in several states in
an effort to reduce these rates. If any state commission decides to increase
unbundled network element rates our operating results could suffer. The
applicability of the various state regulations on our business and compliance
requirements will be further affected by the extent to which our services are
determined to be intrastate services. Jurisdictional determinations of our
services as intrastate services could harm our business.

LOCAL GOVERNMENT REGULATION. We may be required to obtain various permits
and authorizations from municipalities in which we operate our own facilities.
The issue of whether actions of local governments over the activities of
telecommunications carriers, including requiring payment of franchise fees or
other surcharges, pose barriers to entry for competitive telecommunications
companies which may be preempted by the FCC is the subject of litigation.
Although we rely primarily on the unbundled network elements of the traditional
telephone companies, in certain instances we deploy our own facilities,
including fiber optic cables, and therefore may need to obtain certain municipal
permits or other authorizations. The actions of municipal governments in
imposing conditions on the grant of permits or other authorizations or their
failure to act in granting such permits or other authorizations could harm our
business.

The foregoing does not purport to describe all present and proposed
federal, state and local regulations and legislation affecting the
telecommunications industry. Other existing federal regulations are currently
the subject of judicial proceedings, legislative hearings and administrative
proposals, which could change, in varying degrees, the manner in which
communications companies operate in the U.S. In particular, several bills
pending in the 106th Congress would significantly alter or repeal
pro-competitive FCC rules and portions of the 1996 Telecommunications Act.
Passage of any of these bills could adversely affect our business. The ultimate
outcome of these proceedings and the ultimate impact of the 1996
Telecommunications Act or any final regulations adopted pursuant to the 1996
Telecommunications Act or our business cannot be determined at this time but may
well be adverse to our interests. We cannot predict the impact, if any, that
future regulation or regulatory changes may have on our business and we can give
you no assurance that such future regulation or regulatory changes will not harm
our business. See "Risk Factors--Rejections of our applications for central
office space by traditional telephone companies are likely to delay the
expansion of our network and the rollout of our services" and "Our services are
subject to government regulation, and changes in current or future laws or
regulations could adversely affect our business."

<PAGE>

INTELLECTUAL PROPERTY

We regard certain aspects of our products, services and technology as
proprietary and attempt to protect them with patents, copyrights, trademarks,
trade secret laws, restrictions on disclosure and other methods. These methods
may not be sufficient to protect our technology. We also generally enter into
confidentiality or license agreements with our employees and consultants, and
generally control access to and distribution of our documentation and other
proprietary information. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use our products, services or
technology without authorization, or to develop similar technology
independently.

Currently we have one patent and a number of patent applications pending,
and intend to prepare additional applications and to seek additional patent
protection for our systems and services to the extent possible. The pending and
any future patents may not be issued to us, and if issued, they may not protect
our intellectual property from competition which could seek to design around or
invalidate these patents.

Further, effective patent, copyright, trademark and trade secret protection
may be unavailable or limited in certain foreign countries. The global nature of
the Internet makes it virtually impossible to control the ultimate destination
of our proprietary information. Steps taken by us may not prevent
misappropriation or infringement of our intellectual property rights, and
litigation may be necessary in the future to enforce our intellectual property
rights to protect our trade secrets or to determine the validity and scope of
the proprietary rights of others. Such litigation could result in substantial
costs and diversion of resources.

In addition, others may sue us with respect to infringement of their
intellectual property rights. We were recently sued by Bell Atlantic for an
alleged infringement of a patent issued to them in September 1998 entitled
"Variable Rate and Variable Mode Transmission System." On February 18, 2000, we
were granted a summary judgement ruling in the Bell Atlantic lawsuit. The court
ruled that we had not infringed on Bell Atlantic's patent. We anticipate that
Bell Atlantic may appeal this decision and, while we expect that we would
prevail on appeal, the outcome of such an appeal is inherently uncertain. Such
lawsuits, including an appeal in the Bell Atlantic lawsuit, could significantly
harm our business.

EMPLOYEES

As of March 31, 2000, we had approximately 1160 employees, excluding
temporary personnel and consultants. None of our employees are represented by a
labor union, and we consider our relations with our employees to be good. Our
ability to achieve our financial and operational objectives depends in large
part upon the continued service of our senior management and key technical,
sales, marketing, legal and managerial personnel, and our continuing ability to
attract and retain highly qualified technical, sales, marketing, legal and
managerial personnel. Competition for such qualified personnel is intense,
particularly in software development, network engineering and product
management. In addition, in the event that our employees unionize, we could
incur higher ongoing labor costs and disruptions in our operations in the event
of a strike or other work stoppage.

PROPERTIES

We are headquartered in Santa Clara, California in facilities pursuant to
leases that will expire beginning on or before July 14, 2002. We also lease
office space in many of the metropolitan statistical areas in which we conduct
operations.

We have recently expanded our headquarters space in Santa Clara by leasing
additional office space, and have expanded our operational space with a new
facility lease in Denver, Colorado. Through a subsidiary, we have also acquired
land and are currently building a 100,000 square foot network operations center
in Prince Williams County, Virginia.

We also lease central office space from the traditional telephone company
in each region that we operate or plan to operate under the terms of our
interconnection agreements and obligations imposed by state public utilities
commissions and the FCC. While the terms of these leases are perpetual, the
productive use of our central office space is subject to the terms of our
interconnection agreements which expire on or before March 2001. We will
increase our central office space as we expand our network geographically.

55
<PAGE>

LEGAL PROCEEDINGS

We are engaged in a variety of negotiations, arbitrations and regulatory
and court proceedings with multiple traditional telephone companies. These
negotiations, arbitrations and proceedings concern the traditional telephone
companies' denial of physical central office space to us in certain central
offices, the cost and delivery of central office spaces, the delivery of
transmission facilities and telephone lines, billing issues and other
operational issues. We have also filed a lawsuit against Pacific Bell and
certain of its affiliates, including SBC Communications, in federal court. We
are pursuing a variety of contract, tort, and antitrust and other claims, such
as violations of the Telecommunications Act, in these proceedings. In November
1998, we prevailed in our commercial arbitration proceeding against Pacific
Bell. The arbitration panel found that Pacific Bell breached its interconnection
agreement with us and failed to act in good faith on multiple counts. The
arbitration panel ruled in favor of awarding us direct damages, as well as
attorneys' fees and costs of the arbitration. Pacific Bell is currently
attempting to have the decision vacated. On May 15, 2000, the arbitration panel
issued an award of partial damages to us in the amount of $27.5 million,
including $257,166 previously awarded to us by the panel. The panel also ruled
that Pacific Bell must pay Covad's reasonable attorneys' fees and costs.

We have also filed a lawsuit against Bell Atlantic and its affiliates in
federal court. We are pursuing antitrust and other claims in this lawsuit. In
addition, Bell Atlantic has separately filed suit against us asserting
infringement of a patent issued to them in September 1998 entitled "Variable
Rate and Variable Mode Transmission System." However, on February 18, 2000 the
court issued a summary judgment ruling holding that we had not infringed Bell
Atlantic's patent. Bell Atlantic has filed a notice of appeal and, while we
expect that we will prevail on an appeal, the outcome of such an appeal is
inherently uncertain.

One of our former employees has filed a complaint against us in California
Superior Court, alleging that he was terminated wrongfully and is entitled to
commissions and other amounts arising from his employment with us. We contend
that this employee resigned and that we do not owe him any money, but litigation
is unpredictable and there is no guarantee we will prevail. Another group of our
former employees have filed a complaint against us in California Superior Court,
alleging that they were terminated wrongfully and are entitled to various
amounts arising from their employment with us. We believe that we do not owe
these employees any money, but litigation is unpredictable and we cannot
guarantee that we will prevail in this matter. Failure to resolve these various
legal disputes and controversies without excessive delay and cost and in a
manner that is favorable to us could significantly harm our business.

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

56
<PAGE>

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

Our directors and executive officers, and their respective ages as of March
15, 2000, are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Robert Knowling, Jr.............. 44 Chairman of the Board, President and Chief Executive Officer
Timothy Laehy.................... 43 Executive Vice President and Chief Financial Officer
Robert Davenport, III............ 40 Executive Vice President, Business Development
Catherine Hemmer................. 41 Executive Vice President and Chief Operating Officer
John McDevitt.................... 48 Executive Vice President, Sales and Marketing
Joseph Devich.................... 42 Executive Vice President, Corporate Services
Dhruv Khanna..................... 40 Executive Vice President, General Counsel and Secretary
Jane Marvin...................... 40 Executive Vice President, Human Resources
Terry Moya....................... 41 Executive Vice President, External Affairs
Michael Lach..................... 38 Executive Vice President, Business Integration
Jimmy LaValley................... 46 Executive Vice President, Community Relations
Robert Hawk...................... 60 Director
Hellene Runtagh.................. 51 Director
Daniel Lynch..................... 58 Director
Frank Marshall................... 53 Director
Rich Shapero..................... 51 Director
Larry Irving..................... 43 Director
Debra Dunn....................... 44 Director
</TABLE>

ROBERT KNOWLING, JR. has been our President, Chief Executive Officer and a
member of our board of directors since July 1998. As of September 1999, he also
became Chairman of the Board of Directors. From October 1997 through July 1998,
Mr. Knowling served as the Executive Vice President of Operations and
Technologies at U S WEST Communications, Inc., a regional telecommunications
service provider. In this capacity, Mr. Knowling was responsible for planning,
delivering and maintaining high-quality telecommunications services for more
than 25 million customers in 14 western and midwestern states. From March 1996
through September 1997, he served as Vice President of Network Operations at U S
WEST Communications, Inc. From November 1994 through March 1996, he served as
Vice President of Network Operations for Ameritech Corporation. Mr. Knowling
began his career in 1977 at Indiana Bell where he progressed through a variety
of assignments in operations, engineering and marketing. When Indiana Bell
became a part of Ameritech Corporation, Mr. Knowling assumed positions of
increasing responsibility in marketing, product development, large business
marketing and network operations, including service on Ameritech Corporation's
re-engineering breakthrough development team. As lead architect of the Ameritech
Corporation transformation, Mr. Knowling reported directly to the Chairman. In
July 2000, Mr. Knowling was appointed to the board of directors for Ariba, Inc.
a business-to-business eCommerce platform provider.

TIMOTHY LAEHY joined us in August 1997. He served as our Chief Financial
Officer, Treasurer and Vice President, Finance until February 1999 and currently
serves as our Executive Vice president and Chief Financial Officer. Prior to
joining us, Mr. Laehy served as Vice President, Corporate Finance and Treasurer
of Leasing Solutions, Inc., a computer equipment leasing company, from February
1991 to August 1997. From 1990 to 1991, Mr. Laehy served as a senior associate
with Recovery Equity Partners, a private venture capital investment fund. From
1985 to 1990, he served in various capacities at Guarantee Acceptance Capital
Corporation, an investment bank, Liberty Mutual Insurance Company and Union
Carbide Corporation.

ROBERT DAVENPORT, III joined us in January 1999. He served as our Vice
President, Business Development until February 1999 and has served as our
Executive Vice President, Business Development since that date. Prior to joining
us, Mr. Davenport was Senior Vice President and Chief Operating Officer at
Tele-Communications, Inc.'s Internet Services subsidiary, TCI.NET from 1997 to
1999. Between 1995 and 1997, Mr. Davenport was with Tele-Communications, Inc.,
as Vice President, Finance and Development for the Telephony Services
subsidiary. From 1992 to 1995, he was Managing Partner of RD Partners, LLC, a
private investment firm focused on leveraged equity investments.

57
<PAGE>

CATHERINE HEMMER joined us in August 1998. She served as our Vice
President, Operations until February 1999 and served as our President, Network
Services from February 1999 to September 1999, and currently serves as our
Executive Vice President and Chief Operating Officer. From 1996 to August 1998,
she was Vice President, Network Reliability and Operations at U S WEST
Communications, Inc. From 1995 to 1996, she served as General Manager, Network
provisioning at Ameritech Services, Inc., a telecommunications company. From
1987 to 1995, she served in various capacities, including Vice President,
Network Services, at MFS Telecom, Inc. From 1981 to 1987, she served in various
management roles at MCI Communications Inc. (now MCI Worldcom, Inc.), providing
management information systems support for the network operations organization.

JOHN MCDEVITT has served as our Executive Vice President, Sales and
Marketing since July 2000. Prior to joining us, he was Vice President of Sales
and Marketing for Danly IEM from 1998 to June 2000. From 1996 to 1998, Mr.
McDevitt served as Business Director with Praxair, Inc. Between 1978 and 1996,
Mr. McDevitt was with Liquid Carbonic Corporation, where he served as Vice
President of Sales and Marketing, General Manager and as a National and Regional
Manager.

JOSEPH DEVICH joined us in August 1998. He served as Vice President and
General Manager of our Western Region until February 1999 and served as
President and General Manager of the Western Region from February 1999 to
September 1999. Since September 1999, he has served as Executive Vice President,
Corporate Services. Prior to joining us, from November 1996 to August 1998, Mr.
Devich was Vice President, Operations and Technologies Staff of U S WEST
Communications, Inc., where he served on the strategic leadership council and
was responsible for leading staff support functions, methodical and procedural
process support, results reporting and analysis, systems planning and
integration, customer value analysis, disaster recovery/business continuity
planning, network security, supplier management and operations strategy
planning. From August 1986 to November 1996, Mr. Devich worked in several
capacities at Ameritech Corporation, including Manager of Product
Management--Technical Support, and Director in the areas of customer support in
the large business market, service reliability within custom business services,
process improvement of network operations and network provisioning.

DHRUV KHANNA is one of our founders. He served as our Vice President,
General Counsel and Secretary from October 1996 until February 1999 and has
served as our Executive Vice President, General Counsel and Secretary since that
date. He was an in-house counsel for Intel Corporation's communications products
division and its Senior Telecommunications Attorney between 1993 and 1996.
Between 1987 and 1993, Mr. Khanna was an associate at Morrison & Foerster, LLP,
where his clients included Teleport Communications Group (now AT&T Corp.), McCaw
Cellular Communications, Inc. (now AT&T Wireless), and Southern Pacific Telecom
(now Qwest Communications International, Inc.). Mr. Khanna has extensive
experience with regulatory matters, litigation and business transactions
involving the RBOCs and other telecommunications companies. While at Intel, he
helped shape the computer industry's positions on the Telecommunications Act of
1996 and the FCC's rules implementing the 1996 Act.

JANE MARVIN joined us in April 1999 as our Senior Vice President, Human
Resources. Prior to joining us, from August 1995 to April 1999, Ms. Marvin was
Vice President, Human Resources for the General Business, Small Business and
Enhanced Business Services units and Director, Leadership and Executive
Development of Ameritech Corporation. In these capacities, she re-engineered and
streamlined multiple HR processes and drove corporate-wide change initiatives.
From 1991 to 1995, Ms. Marvin was Human Resources Director with the Pepsi Cola
Company, a division of Pepsico Inc., where she improved business processes in
the areas of recruitment, selection, training, and compensation. From 1984 to
1991, Ms. Marvin worked in progressively broader HR leadership roles at
DataGeneral Corporation, a provider of enterprise hardware and software
solutions.

TERRY MOYA joined us in July 1999 as our Senior Vice President, External
Affairs. Prior to joining us, from January 1999 to July 1999, Terry served as
Vice President & Chief Financial Officer, Capital Management, Network/Operations
and Technologies at U S WEST Communications, Inc. From August 1998 to January
1999, Terry served as Vice President, Operations for U S WEST Communications,
Inc., where he managed over $2 billion in capital expenditures and over $320
million in engineering and construction transaction costs. From February 1997 to
August 1998, Terry served as Vice President, Construction, Operations and
Technologies and led the outside plant construction contracting organization for
U S WEST Communications, Inc. From August 1992 to February 1997, Terry spent
time in over a half dozen foreign countries establishing and improving several
different lines of business for U S WEST Communications, Inc. These countries
include Poland, Russia, the Czech Republic, Hungary, Brazil and the United
Kingdom. Prior to August 1992, Terry was at KPMG Peat Marwick, LLP in New
Orleans.

58
<PAGE>

MICHAEL LACH joined us in January 2000 as our Executive Vice President,
Business Integration. Prior to joining us, from May 1997 to December 1999, Mr.
Lach was Vice President, Customer Provisioning and Maintenance of Ameritech
Corporation, where he was responsible for the installation and repair of
residential phone lines across a five-state region. From October 1995 to May
1997, Mr. Lach was General Manager, Network Operations West of Ameritech
Corporation, where he was responsible for provisioning and maintaining central
offices and the transport network in a three state region. From September 1994
to October 1995, Mr. Lach was Division Manager, Technical Support of Ameritech
Corporation, where he supported the development and implementation of new
product for residential and business customers. From March 1993 to August 1994,
Mr. Lach was Director, Business Development for Siemens Stromberg-Carlson, Inc.
From January 1984 to February 1993, Mr. Lach served in various management roles
with Ameritech Corporation relating to its network.

JIMMY LAVALLEY joined us in April 2000 as Executive Vice President of
Community Relations. Prior to joining the Company, from June 1979 to April 2000,
Mr. LaValley was with U S WEST Communications, Inc. Most recently, from February
1999 to April 2000, Mr. LaValley was Vice President, Human Resources,
responsible for Strategic Staffing Services and Management Development for U S
WEST's 58,000 employees. From October 1997 to February 1999, Mr. LaValley was
Vice President Human Resources supporting Network Services, the largest U S WEST
Business Unit. In this role, all aspects of Human Resources support were
provided to 28,000 employees. Prior to these assignments, Mr. LaValley held
leadership positions in all aspects of the Human Resources disciplines at U S
WEST. A former police officer in Tahlequah Oklahoma, Mr. LaValley holds a
bachelor's degree in criminal justice/pre-law from Northeastern Oklahoma State
University.

ROBERT HAWK has served as a member of our board of directors since April
1998. Mr. Hawk is President of Hawk Communications and recently retired as
President and Chief Executive Officer of U S WEST Multimedia Communications, a
regional telecommunications service provider, where he headed the cable, data
and telephony communications business from May 1996 to April 1997. He was
president of the Carrier Division of U S West Communications, Inc., from
September 1990 to May 1996. Prior to that time, Mr. Hawk was Vice President of
Marketing and Strategic Planning for CXC Corporation. Prior to joining CXC
Corporation, Mr. Hawk was director of Advanced Systems Development for
AT&T/American Bell. He currently serves on the boards of PairGain Technologies,
Inc., COM21, Inc., Concord Communications, Inc., Radcom, Ltd., Efficient
Networks, Inc. and several privately held companies.

DANIEL LYNCH has served as a member of our board of directors since April
1997. Mr. Lynch is also a founder of CyberCash, Inc. and has served on its board
of directors since August 1994. From December 1990 to December 1995, he served
as chairman of the board of directors of Softbank Forums, a provider of
education and conference services for the information technology industry. Mr.
Lynch founded Interop Company in 1986, which is now a division of ZD Comdex and
Forums. Mr. Lynch is a member of the Association for Computing Machinery and the
Internet Society. He is also a member of the Board of Trustees of the Santa Fe
Institute, the Bionomics Institute and CommerceNet. He previously served as
Director of the Information Processing Division for the Information Sciences
Institute in Marina del Rey, where he led the Arpanet team that made the
transition from the original NCP protocols to the current TCP/IP based
protocols. He has served as a member of the board of directors of Exodus
Communications since January 1998. Mr. Lynch previously served as a member of
the board of directors at UUNET Technologies, Inc., from April 1994 until August
1996.

FRANK MARSHALL has served as a member of our board of directors since
October 1997. Mr. Marshall currently serves on the board of directors of
PMC-Sierra, Inc. and several private companies. Mr. Marshall also serves on the
technical advisory board of several high technology private companies. He is a
member of the InterWest Partners Advisory Committee and a Venture Partner at
Sequoia Capital. From 1992 to 1997, Mr. Marshall served as Vice President of
Engineering and Vice President and General Manager, Core Business Unit of Cisco
Systems, Inc. From 1982 to 1992, he served as Senior Vice President, Engineering
at Convex Computer Corporation.

RICH SHAPERO has served as a member of our board of directors since July
1997. Mr. Shapero has been a general partner of Crosspoint Venture Partners,
L.P., a venture capital investment firm, since April 1993. From January 1991 to
June 1992, he served as Chief Operating Officer of Shiva Corporation, a computer
network company. Previously, he was a Vice President of Sun Microsystems, Inc.,
Senior Director of Marketing at AST Research, Inc., and held marketing and sales
positions at Informatics General Corporation and UNIVAC's Communications
Division. Mr. Shapero serves as a member of the board of directors of Sagent
Technology, Inc., a provider of real-time eBusiness intelligence, and several
privately held companies.

59
<PAGE>

HELLENE RUNTAGH has served as a member of our board of directors since
November 3, 1999. Ms. Runtagh has served as Executive Vice President of
Universal Studios since January 1999. In this capacity, she is responsible for
overseeing the activities of the Universal Studios Operations Group, Universal
Studios Consumer Products Group, Universal Studios Corporate Marketing and
Sponsorships, and the Spencer Gift retail operations, Universal Studios'
worldwide information technology, and Seagram's global sourcing and real estate
operations. From February 1997 to January 1999, she held the position of senior
vice president of reengineering effort at Universal. Previously, Ms. Runtagh
spent 25 years at General Electric, where she served as President and Chief
Executive Officer of GE Information Services from 1989 to 1996 and held general
management roles with GE's capital and software businesses.

LARRY IRVING has served as a member of our Board of Directors since April
2000. Mr. Irving is the President and CEO of UrbanMagic.com, an Internet portal
for the African American community scheduled to be launched later this year.
Prior to joining UrbanMagic.com, Mr. Irving served for almost seven years as
Assistant Secretary of Commerce for Communications and Information, where he was
a principal advisor to the President, Vice President and Secretary of Commerce
on domestic and international communications and information policy issues,
including the development of policies related to the Internet and Electronic
Commerce. He was a point person in the Administration's successful efforts to
reform the United States' telecommunications law, which resulted in the passage
of the Telecommunications Act of 1996. Mr. Irving is widely credited with
popularizing the term "Digital Divide" and was the principal author of the
landmark Federal survey, FALLING THROUGH THE NET, which tracked access to
telecommunications and information technologies, including computers and the
Internet, across racial, economic, and geographic lines. In recognition of his
work to promote policies and develop programs to ensure equitable access to
advanced telecommunication and information technologies, Irving was named one of
the fifty most influential persons in the "Year of the Internet" by Newsweek
Magazine. Prior to joining the Clinton-Gore Administration, Mr. Irving served
ten years on Capitol Hill, most recently as Senior Counsel to the U.S. House of
Representatives Subcommittee on Telecommunications and Finance. He also served
as Legislative Director, Counsel and Chief of Staff (acting) to the late
Congressman Mickey Leland (D-Texas). During the previous three years, Mr. Irving
was associated with the Washington, D.C. law firm of Hogan & Hartson,
specializing in communications law, antitrust law and commercial litigation.

DEBRA DUNN has served as a member of our Board of Directors since April
2000. Since late 1999, Ms. Dunn has been the vice president of Strategy and
Corporate Operations for Hewlett-Packard Company and has global responsibility
for driving the broad range of efforts required to reposition Hewlett-Packard.
She is responsible for corporate-wide functions including corporate strategy,
development, communications, philanthropy and government affairs. Ms. Dunn
joined Hewlett-Packard in 1983 as an executive development manager in
Hewlett-Packard's Corporate Training division in Palo Alto. She held a wide
range of development and marketing management positions from 1986 to 1992, and
was promoted to manufacturing manager for Hewlett-Packard's Video Communication
division in 1992, marketing manager in 1993 and was named general manager of the
division in 1996. Ms. Dunn was promoted to general manager of Hewlett-Packard's
executive committee in 1998 and led the Hewlett-Packard/Agilent split process
and Hewlett-Packard's new business creation function.

CLASSIFIED BOARD

The board of directors is divided into three classes. The term of office
and directors consisting of each class is as follows:

<TABLE>
<CAPTION>
CLASS DIRECTORS TERM OF OFFICE

<S> <C> <C>
Class I Daniel Lynch o expires at the annual meeting of
Rich Shapero stockholders in 2003 and at each third
Larry Irving succeeding annual meeting thereafter

Class II Frank Marshall o expires at the annual meeting of
Hellene Runtagh stockholders in 2001 and at each third
succeeding annual meeting thereafter

Class III Robert Hawk o expires at the annual meeting of
Robert Knowling, Jr. stockholders in 2002 and at each third
Debra Dunn succeeding annual meeting thereafter
</TABLE>

60
<PAGE>

The classification of directors has the effect of making it more difficult
to change the composition of the board of directors.

BOARD COMMITTEES

In April 1998, our board of directors established an audit committee and a
compensation committee. The audit committee consists of three of our outside
directors, Mr. Lynch, Mr. Hawk and Ms. Runtagh. The audit committee's primary
responsibilities include:

o conducting a post-audit review of the financial statements and audit
findings;

o reviewing our independent auditors proposed audit scope and approach;
and

o reviewing on a continuous basis the adequacy of our system of internal
accounting controls.

The compensation committee also consists of three of our outside directors,
Ms. Runtagh, Ms. Dunn and Mr. Shapero. Mr. Marshall, also an outside director,
serves as an alternate on the committee. The primary responsibilities of the
compensation committee include:

o reviewing and determining the compensation policy for our executive
officers and directors, and other employees as directed by the board
of directors;

o reviewing and determining all forms of compensation to be provided to
our executive officers; and

o reviewing and making recommendations to our board of directors
regarding general compensation goals and guidelines for our employees
and the criteria by which bonuses to our employees are determined.

We also have a pricing committee and management compensation committee. The
pricing committee currently consists of three outside directors, Messrs.
Shapero, Irving and Marshall, and one inside director, Mr. Knowling. The
function of the pricing committee is to set the price for the sale of our common
stock to third-parties. The function of the management compensation committee,
which consists solely of one inside director, Mr. Knowling, is to review and
determine the compensation policy for employees other than our executive
officers and directors and to review and determine all forms of compensation for
such employees.

DIRECTOR COMPENSATION

Except for grants of stock options subject to vesting and restricted stock
subject to repurchase, directors generally do not receive compensation for
services provided as a director or committee member. New directors will receive
a stock option grant to purchase 60,000 shares of common stock which will vest
over four years. We do not pay additional amounts for committee participation or
special assignments of the Board of Directors, except for reimbursement of
expenses in attending Board and committee meetings.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

No interlocking relationship exists between the Board of Directors or the
Compensation Committee and the Board of Directors or compensation committee of
any other company, nor has any such interlocking relationship existed in the
past. Mr. Shapero is affiliated with Crosspoint Venture Partners L.P., which was
a party along with the Company, to a Series C Preferred Stock and Warrant
Subscription Agreement dated February 23, 1998. See "--Certain Relationships and
Related Transactions."

EXECUTIVE COMPENSATION

The following table sets forth certain information with respect to
compensation awarded to, earned by or paid to each person who served as our
Chief Executive Officer or was one of our four other most highly compensated
executive officers (collectively, the "Named Executive Officers") during the
fiscal year ended December 31, 1999. All share numbers have been adjusted in
light of the 3-for-2 stock split, effected in the form of a stock dividend,
effective March 31, 2000.

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<PAGE>

SUMMARY COMPENSATION TABLE

<TABLE>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------ ---------------------------
NAME AND PRINCIPAL RESTRICTED SECURITIES
POSITION FISCAL STOCK UNDERLYING ALL OTHER
YEAR SALARY BONUS AWARDS($) OPTIONS/SARS(#) COMPENSATION
-------------------------- ------ ---------- ---------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Robert Knowling, Jr............. 1999 $ 399,996 $ 500,000 -- -- $ 750,420(8)
Chairman, Board of 1998 $ 180,768(2) $ 250,000 -- 4,725,000 $750,343(9)
Directors, President and 1997 -- -- -- -- --
Chief Executive Office7 (1)

Robert Roblin................... 1999 $ 232,692 $ 140,250 $882,500(7) -- $ 405(10)
Executive Vice President, 1998 $ 21,154(3) $ 9,493 -- 562,500 $ 74(10)
Sales and Marketing(13) 1997 -- -- -- -- --

Catherine Hemmer................ 1999 $ 180,769 $ 109,500 $882,500(7) -- $ 240(10)
Chief Operating Officer 1998 $ 58,359(4) $ 56,000 -- 437,713 $ 84,363(11)
1997 -- -- -- -- --

Joseph Devich................... 1999 $ 167,308 $ 101,250 $882,500(7) -- $ 210(10)
Executive Vice President, 1998 $ 52,981(5) $ 20,137 -- 380,622 $ 76,961(12)
Corporate Services 1997 -- -- -- -- --

Robert Davenport, III........... 1999 $ 183,077(6) $ 91,667 -- 450,001 $ 171(10)
Executive Vice President, 1998 -- -- -- -- --
Business Development 1997 -- -- -- -- --
</TABLE>
--------------

(1) In September 1999, Mr. Knowling became Chairman of our Board of
Directors.
(2) Pro rated based on an annual salary of $400,000 from hiring date of
July 8, 1998.
(3) Pro rated based on an annual salary of $220,000 from hiring date of
November 16, 1998.
(4) Pro rated based on an annual salary of $150,000 from hiring date of
August 10, 1998.
(5) Pro rated based on an annual salary of $150,000 from hiring date of
August 13, 1998.
(6) Pro rated based on an annual salary of $200,000 from hiring date of
January 20, 1999.
(7) This value is based upon the split-adjusted closing price of $29.416
for 30,000 post-split shares granted on November 3, 1999 to Mr.
Roblin, Ms. Hemmer and Mr. Devich. As of December 31, 1999, all of
these shares were unvested and valued at $1,118,750 based on a
split-adjusted closing price of $37.29. Twenty-five percent of these
shares will vest on the four consecutive anniversaries of the grant
date.
(8) Includes $750,000 for the final installment of Mr. Knowling's sign-on
bonus as well as $420 for term life insurance premium.
(9) Includes $750,000 for the first installment of Mr. Knowling's sign-on
bonus as well as $343 for term life insurance premium.
(10) The dollar amount in this column represents premium payments the
Company made for executive's term life insurance policies.
(11) Includes a payment of $84,275 as a sign-on bonus as well as $88 for
term life insurance premium.
(12) Includes a payment of $76,883 as a sign-on bonus as well as $78 for
term life insurance premium.
(13) On May 12, 2000, we announced the resignation of Robert Roblin. John
McDevitt has been appointed to replace Mr. Roblin.

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<PAGE>

OPTION / SAR GRANTS IN LAST FISCAL YEAR

The following table sets forth information regarding stock options granted
to Named Executive Officers during the fiscal year ended December 31, 1999.
During the last fiscal year, Mr. Davenport was the only Named Executive Officer
to receive any option grant and none of the Named Executive Officers received
stock appreciation rights during the year ended December 31, 1999. All share
numbers have been adjusted in light of the 3-for-2 stock split, effected in the
form of a stock dividend, effective March 31, 2000.
<TABLE>
<CAPTION>

INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------------------------------------------- ---------------------------
PERCENT OF
NUMBER OF TOTAL OPTIONS
SECURITIES GRANTED TO VALUE AT ASSUMED ANNUAL
UNDERLYING EMPLOYEES IN EXERCISE RATES OF STOCK PRICE
OPTIONS FISCAL PRICE PER EXPIRATION APPRECIATION FOR OPTION
NAME GRANTED(#)(1) 1999(%)(2) SHARE DATE TERM($)(3)
------- -------------- ------------- ---------- ------------ ---------------------------
5% 10%
<S> <C> <C> <C> <C> <C> <C>
Robert Davenport, III......... 450,001 5.14% $ 7.53 1/20/2007 $ 1,623,354 $ 3,888,215
</TABLE>
--------------
(1) The material terms of the option grant to Mr. Davenport during 1999 is 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) all have an 8-year term and become
exercisable over a four-year period, with 12.5% of the option shares
vesting on the six-month anniversary of the grant date and the remainder
vesting in 42 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. See "--1997 Stock Plan."
(2) Based on options covering an aggregate of 8,750,826 shares
(split-adjusted) we granted during 1999 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 that 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.

AGGREGATED OPTION / SAR EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION
/SAR VALUES

The following table sets forth information with respect to the exercise
of stock options during the year ended December 31, 1999 and the number and
year-end value of shares of our common stock underlying the unexercised options
held by the Named Executive Officers. None of the Named Executive Officers
exercised or held stock appreciation rights during the year ended December 31,
1999. All share numbers have been adjusted in light of the 3-for-2 stock split,
effected in the form of a stock dividend, effective March 31, 2000.

NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS EXERCISED DURING OPTIONS AT DECEMBER IN-THE-MONEY OPTIONS AT
1999 31, 1999 DECEMBER 31, 1999($)(1)
--------------------------- ------------------------ ------------------------------
NAME SHARE
ACQUIRED ON VALUE
EXERCISE(#) REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------- ----------- -------------- ----------- ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Robert Knowling, Jr...... 491,250 $14,324,166.56 1,088,437 3,145,312 $40,105,898.20 $115,896,027.95
Robert Roblin (3)........ 22,500 $ 582,575.00 129,843 410,152 $ 4,384,437.41 $13,849,862.47
Catherine Hemmer......... 54,000 $ 1,588,502.00 91,902 291,811 $ 3,192,316.10 $10,136,396.75
Joseph Devich............ 54,129 $ 2,146,621.00 39,800 177,862 $ 2,073,745.85 $ 9,267,351.35
Robert Davenport, III.... -- -- 68,750 231,251 $ 3,066,536.48 $10,314,758.22
</TABLE>

--------------
(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., split-adjusted closing price) of common stock of $37.29 on
December 31, 1999. An option is "in-the-money" if the market value of the
common stock exceeds the exercise price.
(3) On May 12, 2000, we announced the resignation of Mr. Roblin. John
McDevitt has been appointed to replace Mr. Roblin.

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<PAGE>

EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS

In 1998, we entered into a written employment agreement with Robert
Knowling, Jr., the Chairman of the Board of Directors, President and Chief
Executive Officer. The agreement provides that Mr. Knowling will receive
compensation in the form of a $400,000 annual base salary and a $250,000 minimum
annual bonus. Mr. Knowling received (i) a signing bonus of $1,500,000, one half
of which was paid when he began working for us, and the remaining half of which
was paid once he worked for us for one full year (July 1999), and (ii) stock
options to purchase 4,725,000 post-split shares of our common stock at a
split-adjusted exercise price of $.45 per share. If we terminate Mr. Knowling's
employment relationship without cause (as that term is defined in the
agreement), or if Mr. Knowling resigns for good reason (as that term is defined
in the agreement), we must continue to pay Mr. Knowling's annual salary and
targeted bonus for a period of two years after the date of termination so long
as Mr. Knowling does not become employed by one of our direct competitors. Mr.
Knowling has agreed to be bound by customary confidentiality provisions. As
provided in the agreement, in August 1998 we loaned Mr. Knowling $500,000
pursuant to a Note Secured by Deed of Trust that bears no interest during his
employment. The loan has provisions for forgiveness based on continued
employment and matures in four years, subject to acceleration in certain events.
See "Certain Relationships and Related Transactions--Employee Loans."

With respect to all options granted under our 1997 Stock Plan, in the
event that we merge with or into another corporation resulting in a change of
control involving a shift in 50% or more of the voting power of our capital
stock, or the sale of all or substantially all of our assets, the options will
fully vest and become exercisable one year after the change of control or
earlier in the event the individual is constructively terminated or terminated
without cause or in the event the successor corporation refuses to assume the
options.
See "--1997 Stock Plan."

We have also entered into restricted stock purchase agreements with
certain of our officers and directors. The shares of our common stock issued
pursuant to these restricted stock purchase agreements are subject to our right
of repurchase which lapses in accordance with the vesting schedule of the
agreements. The agreements also include similar provisions to the stock options,
providing for accelerated vesting in the event of a change of control. See
"Certain Relationships and Related Transactions--Issuance of Common Stock."

1997 STOCK PLAN

STRUCTURE

The 1997 Plan consists of three types of equity incentive programs: (i)
qualifying stock options ("Incentive Stock Options") intended to qualify within
the meaning of Section 422 of the Code; (ii) non-qualifying stock options (or
"Non-Statutory Stock Options") not intended to qualify within the meaning of
Section 422 of the Code; and (iii) stock purchase rights ("SPRs") for shares of
common stock.

ADMINISTRATION

The Plan is administered by our Board of Directors or a committee
appointed by the Board of Directors and consisting of non-employee directors
within the meaning of Section 16(b) of the Exchange Act and outside directors
within the meaning of Section 162(m) of the Code (referred to as the
"Administrator"). Subject to the provisions of the Plan, the Administrator has
the authority, in its discretion: (i) to determine the fair market value of our
common stock; (ii) to select the employees, directors or consultants to whom
options and SPRs may be granted under the Plan; (iii) to determine the number of
shares of common stock to be covered by each option and SPR granted under the
Plan; (iv) to approve forms of agreement for use under the Plan; (v) to
determine the terms and conditions of any option or SPR granted under the Plan
such as the exercise price, the time or times when options or SPRs may be
exercised (which may be based on performance criteria), any vesting acceleration
or waiver of forfeiture restrictions; (vi) to reduce the exercise price of any
option or SPR to the then current fair market value; (vii) to institute an
option exchange program; (viii) to construe and interpret the terms of the Plan
and awards granted pursuant to the Plan; (ix) to prescribe, amend and rescind
rules and regulations relating to the Plan; (x) to modify or amend each option
or SPR; (xi) to allow optionees to satisfy withholding tax obligations by
electing to have us withhold from the shares to be issued upon exercise of an
option or SPR that number of shares having a fair market value equal to the
amount required to be withheld; (xii) to authorize any person to execute on
behalf of us any instrument required to effect the grant of an option or SPR
previously granted by the Administrator; and (xiii) to make all other
determinations deemed necessary or advisable for administering the Plan.

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<PAGE>

ELIGIBILITY

All employees, directors and consultants are eligible to participate in
the 1997 Plan. Incentive Stock Options may be granted only to employees
(including officers and directors). Non-Statutory Stock Options and SPRs may be
granted to employees, directors and consultants. To the extent that the
aggregate fair market value of the shares with respect to which Incentive Stock
Options are exercisable for the first time by an optionee during any calendar
year (under all plans of the Company and any parent or subsidiary) exceed
$100,000, such options are treated as Non-Statutory Stock Options. No optionee
may be granted, in any fiscal year, options to purchase more than 2,000,000
shares; provided that, in connection with his or her initial service, an
optionee may be granted options to purchase up to an additional 2,000,000 shares
that shall not count against such limit.

SECURITIES SUBJECT TO THE PLAN

The number of shares of our common stock which are reserved for issuance
under the Plan is 35,092,635 post-split shares, plus an annual increase on the
first day of each fiscal year equal to the lesser of (i) 3% of the outstanding
shares on such date or (ii) an amount determined by our Board of Directors, with
the total increase being capped at 20,000,000 shares and an additional 5,000,000
and 10,000,000 post-split shares for the Year 2000 and Year 2001, respectively.
As of January 1, 2000, there were 12,425,857 post-split shares available for
issuance under the Plan, which includes the 3% annual increase of 4,400,533
post-split shares and 5,000,000 additional post-split shares.

These shares may be authorized, but unissued, or reacquired common stock.
If an option or SPR expires or becomes unexercisable without having been
exercised in full, or is surrendered pursuant to an option exchange program, the
unpurchased shares that were subject thereto may become available for future
grant or sale under the Plan.

TERMS AND CONDITIONS OF OPTIONS

Each option granted pursuant to the Plan is evidenced by a written stock
option agreement (an "Option Agreement") between the optionee and us and is
subject to the following terms and conditions:

TERM OF OPTIONS. The term of each option is stated in each Option
Agreement. In the case of an Incentive Stock Option, the term is ten years from
the date of grant or such shorter terms as may be provided in the Option
Agreement. In the case of an Incentive Stock Option granted to an optionee who,
at the time the Incentive Stock Option is granted, owns stock representing more
than ten percent of the total combined voting power of all classes of stock of
us or any parent or subsidiary, the term of the Incentive Stock Option is five
years from the date of grant or such shorter term as may be provided in the
Option Agreement.

EXERCISE PRICE. The per share exercise price for the shares to be issued
pursuant to the exercise of an option is determined by the Administrator,
subject to the following: (i) in the case of an Incentive Stock Option (A)
granted to an employee who, at the time the Incentive Stock Option is granted,
owns stock representing more than ten percent of the voting power of all classes
of stock of us or any parent or subsidiary, the per share exercise price may be
no less than 110% of the fair market value per share on the date of grant and
(B) granted to any employee other than an employee described in (A) immediately
preceding, the per share exercise price may be no less than 100% of the fair
market value per share on the date of grant; (ii) in the case of a Non-Statutory
Stock Option, the per share exercise price maybe determined by the
Administrator; and (iii) in the case of a Non-Statutory Stock Option intended to
qualify as "performance-based compensation" within the meaning of Section 162(m)
of the Code, the per share exercise price may be no less than 100% of the fair
market value per share on the date of grant. Notwithstanding the foregoing,
options may be granted with a per share exercise price of less than 100% of the
fair market value per share on the date of grant pursuant to a merger or other
corporate transaction.

WAITING PERIOD AND EXERCISE DATES. At the time an option is granted, the
Administrator fixes the period within which the option may be exercised (i.e.,
vests) and determines any conditions that must be satisfied before the option
may be exercised. Options generally vest at a rate of 12.5% of the shares
subject to the option on the date six months following the grant date and 1/48th
of the shares subject to the option at the end of each one-month period
thereafter and generally expire eight years from the date of grant. Unless the
Administrator provides otherwise, vesting of options granted under the 1997 Plan
are tolled during any unpaid leave of absence.

65
<PAGE>

FORM OF CONSIDERATION. The Administrator determines the acceptable form
of consideration for exercising an option, including the method of payment. In
the case of an Incentive Stock Option, the Administrator determines the
acceptable form of consideration at the time of grant. Such consideration may
consist entirely of (a) cash; (b) check; (c) promissory note; (d) other shares
that (i) in the case of shares acquired upon exercise of an option, have been
owned by the optionee for more than six months on the date of surrender, and
(ii) have a fair market value on the date of surrender equal to the aggregate
exercise price of the shares as to which such option is exercised, consideration
received by us under a cashless exercise program implemented by us in connection
with the Plan, a reduction in the amount of any liability to the optionee,
including any liability attributable to the optionee's participation in any
company-sponsored deferred compensation program or arrangement, any combination
of the foregoing methods of payment; or (e) any other consideration and method
of payment for the issuance of shares to the extent permitted by applicable
laws.

EXERCISE OF OPTION. Any option granted under the Plan is exercisable
according to the terms of the Plan and at such times and under such conditions
as determined by the Administrator and set forth in the Option Agreement.
Exercise of an option in any manner shall result in a decrease in the number of
shares thereafter available, both for purposes of the Plan and for sale under
the option, by the number of shares as to which the option is exercised.

TERMINATION OF RELATIONSHIP. If an optionee ceases to be an employee,
director or consultant, other than upon the optionee's death or disability, the
optionee may exercise his or her option within such period of time as is
specified in the Option Agreement to the extent that the option is vested on the
date of termination (but in no event later than the expiration of the term of
such option as set forth in the Option Agreement). In the absence of a different
specified time in the Option Agreement, the option remains exercisable for three
months following the optionee's termination. If, on the date of termination, the
optionee is not vested as to his or her entire option, the shares covered by the
unvested portion of the option revert to the Plan. If, after termination, the
optionee does not exercise his or her option within the time specified by the
Administrator, the option terminates, and the shares covered by such option
revert to the Plan.

DISABILITY OF OPTIONEE. If an optionee ceases to be an employee, director
or consultant as a result of the optionee's disability, the optionee may
exercise his or her option within such period of time as is specified in the
Option Agreement to the extent the option is vested on the date of termination
(but in no event later than the expiration of the term of such option as set
forth in the Option Agreement). In the absence of a different specified time in
the Option Agreement, the option will remain exercisable for twelve months
following the optionee's termination. If, on the date of termination, the
optionee is not vested as to his or her entire option, the shares covered by the
unvested portion of the option revert to the Plan. If, after termination, the
optionee does not exercise his or her option within the time specified, the
option will terminate, and the shares covered by such option revert to the Plan.

DEATH OF OPTIONEE. If an Optionee dies while an employee, director or
consultant, the option may be exercised within such period of time as is
specified in the Option Agreement (but in no event later than the expiration of
the term of such option as set forth in the Option Agreement), by the optionee's
estate or by a person who acquires the right to exercise the option by bequest
or inheritance, but only to the extent that the option is vested on the date of
death. In the absence of a specified time in the Option Agreement, the option
will remain exercisable for twelve months following the optionee's termination.
If, at the time of death, the optionee is not vested as to his or her entire
option, the shares covered by the unvested portion of the option will revert to
the Plan. The option may be exercised by the executor or Administrator of the
optionee's estate or, if none, by the person(s) entitled to exercise the option
under the optionee's will or the laws of descent or distribution. If the option
is not so exercised within the time specified, the option terminates, and the
shares covered by such option revert to the Plan.

BUYOUT PROVISIONS. The Administrator may at any time offer to buy out for
a payment in cash, shares or otherwise an option previously granted based on
such terms and conditions as the Administrator establishes and communicates to
the optionee at the time that such offer is made.

STOCK PURCHASE RIGHTS

RIGHTS TO PURCHASE. Stock purchase rights may be issued either alone, in
addition to, or in tandem with other awards granted under the Plan and/or cash
awards made outside of the Plan. After the Administrator determines that it will
offer SPRs under the Plan, it will advise the offeree in writing or
electronically, by means of a Notice of Grant, of the terms, conditions and
restrictions related at the offer, including the number of shares that the
offeree

66
<PAGE>

will be entitled to purchase, the price to be paid, and the time within which
the offeree must accept such offer. The offer will be accepted by execution of a
restricted stock purchase agreement in the form determined by the Administrator.

REPURCHASE OPTION. Unless the Administrator determines otherwise, the
restricted stock purchase agreement will grant us a repurchase option
exercisable upon the voluntary or involuntary termination of the purchaser's
service with us for any reason (including death or disability). The purchase
price for shares repurchased pursuant to the restricted stock purchase agreement
will be the original price paid by the purchaser and may be paid by cancellation
of any indebtedness of the purchaser to us. The repurchase option will lapse at
a rate determined by the Administrator.

OTHER PROVISIONS. The restricted stock purchase agreement will contain
such other terms, provisions and conditions not inconsistent with the Plan as
may be determined by the Administrator in its sole discretion.

RIGHTS AS A STOCKHOLDER. Once the SPR is exercised, the purchaser will
have the rights equivalent to those of a stockholder, and will be a stockholder
when his or her purchase is entered upon the records of the duly authorized
transfer agent.

NON-TRANSFERABILITY OF OPTIONS AND STOCK PURCHASE RIGHTS

Unless determined otherwise by the Administrator, an option or SPR may
not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any
manner other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the optionee, only by the optionee.

ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, MERGER OR ASSET
SALE

CHANGES IN CAPITALIZATION. Subject to any required action by
stockholders, the number of shares of common stock covered by each outstanding
option and SPR, and the number of shares of common stock that have been
authorized for issuance under the Plan but as to which no options or SPRs have
yet been granted or that have been returned to the Plan upon cancellation or
expiration of an option or SPR, as well as the price per share of common stock
covered by each such outstanding option or SPR, will be proportionately adjusted
for any increase or decrease in the number of issued shares of common stock
resulting from a stock split, reverse stock split, stock dividend, combination
or reclassification of the common stock, or any other increase or decrease in
the number of issued shares of common stock effected without receipt of
consideration by us.

DISSOLUTION OR LIQUIDATION. In the event of the proposed dissolution or
liquidation, the Administrator will notify each optionee as soon as practicable
prior to the effective date of such proposed transaction. The Administrator in
its discretion may provide for an optionee to have the right to exercise his or
her option until ten days prior to such transaction as to all of the optioned
stock covered thereby, including shares as to which the option would not
otherwise be exercisable. In addition, the Administrator may provide that any
repurchase option applicable to any shares purchased upon exercise of an option
or SPR will lapse as to all such shares, provided the proposed dissolution or
liquidation take place at the time and in the manner contemplated. To the extent
it has not been previously exercised, an option or SPR will terminate
immediately prior to the consummation of such proposed action.

MERGER OR ASSET SALE. In the event of a merger of us with or into another
corporation, or the sale of substantially all of our assets, each outstanding
option and SPR will be assumed or an equivalent option or right substituted by
the successor corporation or a parent or subsidiary of the successor
corporation. In the event that the successor corporation refuses to assume or
substitute for the option or SPR, the optionee will fully vest in and have the
right to exercise the option or SPR as to all of the optioned stock, including
shares as to which it would not otherwise be vested or exercisable. If an option
or stock repurchase right becomes fully vested and exercisable in lieu of
assumption or substitution in the event of a merger or sale of assets, the
Administrator will notify the Optionee in writing or electronically that the
option or SPR shall be fully vested and exercisable for a period of fifteen days
from the date of such notice, and the option or SPR shall terminate upon the
expiration of such period.

ACCELERATION IN CONNECTION WITH CHANGE OF CONTROL. All stock options and
SPRs to officers, employees, directors and consultants provide that in the event
the Company merges with or into another corporation resulting in a change of
control involving a shift in 50% or more of the voting power of our capital
stock, or the sale of all or substantially all of our assets, the options will
fully vest and become exercisable one year after the change of control.

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<PAGE>

In the event the individual is constructively terminated or terminated without
cause or in the event that the successor corporation refuses to assume or
substitute the options, the options or SPRs will fully vest and become
exercisable at that time.

AMENDMENT AND TERMINATION OF THE PLAN

The Board may at any time amend, alter, suspend or terminate the Plan;
provided that we are required to obtain stockholder approval of any Plan
amendment to the extent necessary and desirable to comply with applicable laws.

FEDERAL INCOME TAX CONSEQUENCES

The following discussion of federal income tax consequences does not
purport to be a complete analysis of all of the potential tax effects of the
Plan. It is based upon laws, regulations, rulings and decisions now in effect,
all of which are subject to change. No information is provided with respect to
persons who are not citizens or residents of the United States, or foreign,
state or local tax laws, or estate, gift and excise tax considerations. In
addition, the tax consequences to a particular participant may be affected by
matters not discussed herein.

NON-STATUTORY STOCK OPTIONS

Under current federal income tax law, the grant of a Non-Statutory Stock
Option has no tax effect on us or the optionee to whom it is granted. If the
shares of common stock received on the exercise of a Non-Statutory Stock Option
are not subject to restrictions on transfer or risk of forfeiture, the exercise
of the Non-Statutory Stock Option will result in ordinary income to the optionee
equal to the excess of the fair market value of the shares at the time of
exercise over the option price. The optionee's tax basis in the shares will be
equal to the aggregate exercise price paid by the optionee plus the amount of
taxable income recognized upon the exercise of the option. Upon any subsequent
disposition of the shares, any gain or loss recognized by the optionee will be
treated as capital gain or loss and will be long-term capital gain or loss if
the shares are held for more than one year after exercise. At the time of
recognition of ordinary income by the optionee upon exercise, we will normally
be allowed to take a deduction for federal income tax purposes in an amount
equal to such recognized income.

INCENTIVE STOCK OPTIONS

The federal income tax consequences associated with Incentive Stock
Options are generally more favorable to the optionee and less favorable to us
than those associated with Non-Statutory Stock Options. Under current federal
income tax law, the grant of an Incentive Stock Option does not result in income
to the optionee or in a deduction for us at the time of the grant. Generally,
the exercise of an Incentive Stock Option will not result in income for the
optionee if the optionee does not dispose of the shares within two years after
the date of grant nor within one year after the date of exercise. If these
requirements are met, the basis of the shares of common stock upon a later
disposition will be the option price, any gain on the later disposition will be
taxed to the optionee as long-term capital gain, and we will not be entitled to
a deduction. The excess of the market value on the exercise date over the option
price is an adjustment to regular taxable income in determining alternative
minimum taxable income, which could cause the optionee to be subject to the
alternative minimum tax. If the optionee disposes of the shares before the
expiration of either of the holding periods described above (a "Disqualifying
Disposition"), the optionee will have compensation taxable as ordinary income,
and the Company will normally be entitled to a deduction, equal to the lesser of
(a) the fair market value of the shares on the exercise date minus the option
price, or (b) the amount realized on the disposition minus the option price. If
the price realized in any such Disqualifying Disposition of the shares exceeds
the fair market value of the shares on the exercise date, the excess will be
treated as long-term or short-term capital gain, depending on the optionee's
holding period for the shares.

STOCK PURCHASE RIGHTS

Under current federal income tax law, the grant of an SPR has no tax effect on
us or the individual to whom it is granted. The income tax consequences
resulting from a purchase of restricted stock pursuant to the exercise of a
stock purchase right will vary depending on whether the purchaser makes an
election under Section 83(b) of the Code. Such election maybe made within 30
days of the date the restricted stock is purchased with respect to some or all
of the shares of restricted stock purchased. If no election is made, the
participant will not recognize any income as a result of the purchase of shares
subject to the transfer restrictions and forfeiture provisions (i.e., our
repurchase

68
<PAGE>

right) described above. The participant will recognize compensation income when
the transfer restrictions or forfeiture provisions lapse or are otherwise
removed in an amount equal to the difference between the purchase price paid for
such shares and the fair market value of such shares when such restrictions
lapse or are otherwise removed. In addition, any dividends paid on any shares
while such shares are subject to transfer restrictions and forfeiture provisions
will be considered compensation income and not dividend income.

If the participant makes an election under Section 83(b) of the Code, the
participant recognizes compensation income when he or she purchases the shares
in an amount equal to the difference between the fair market value of such
shares at the time of purchase (determined without regard to the transfer
restrictions) and the purchase price paid for such shares. The participant
recognizes no additional income upon the subsequent lapse or removal of the
transfer restrictions or forfeiture provisions with respect to such shares, and
any dividends paid on the shares while such shares are subject to the transfer
restrictions and forfeiture provisions will be taxed as dividend (rather than
compensation) income.

In general, we are entitled to a deduction in the amount of the
compensation income recognized by the participant at the time the participant
recognizes such income, provided certain reporting requirements are timely met.

If and to the extent any shares are forfeited (i.e., repurchased by us),
the participant will be allowed to deduct--as an ordinary deduction if no
Section 83(b) election was made or as a capital loss if such an election was
made--an amount equal to the difference, if any, between the purchase price paid
for the shares and the amount received as a result of the forfeiture. The
participant will recognize a capital gain or loss upon the subsequent sale or
other taxable disposition of such shares (other than a sale to us as a result of
the forfeiture provisions), in an amount equal to the difference between the
proceeds realized from the sale or other disposition and the sum of (a) the
purchase price paid for such shares plus (b) in the case of a gain taxable to a
participant who made a Section 83(b) election, the amount of gross income
taxable as compensation to such participant as a result of the purchase of the
shares.

We are not entitled to any deduction corresponding to any capital gains
realized by a participant.

$1,000,000 LIMIT ON DEDUCTIBLE COMPENSATION

Section 162(m) of the Code provides that any publicly-traded corporation
will be denied a deduction for compensation paid to certain executive officers
to the extent that the compensation exceeds $1,000,000 per officer per year.
However, the deduction limit does not apply to "performance-based compensation,"
as defined in Section 162(m). Compensation is performance-based compensation if
(i) the compensation is payable on account of the attainment of one or more
performance goals; (ii) the performance goals are established by a compensation
committee of the board of directors consisting of "outside directors"; (iii) the
material terms of the compensation and the performance goals are disclosed to
and approved by the stockholders in a separate vote; and (iv) the compensation
committee certifies that the performance goals have been satisfied. We believe
that the stock options granted under the plan (unless granted for purchase
prices below the fair market value of the stock subject to the options) will
satisfy the requirements to be treated as performance-based compensation, and
accordingly will not be subject to the deduction limit of Section 162(m) of the
Code. We believe, however, that it is unlikely that SPRs granted under the Plan,
or the purchase of restricted stock there under, will qualify as
performance-based compensation. Our ability to deduct compensation attributable
to the purchase of restricted stock under stock purchase rights will therefore
probably be subject to the limit of Section 162(m) of the Code.

EXCESS PARACHUTE PAYMENTS

Under Section 4999 of the Code, certain officers, stockholders, or
highly-compensated individuals ("Disqualified Individuals") will be subject to
an excise tax (in addition to federal income taxes) of 20% of the amount of
certain "excess parachute payments" which they receive as a result of a change
in control of us. Furthermore, Section 280G of the Code prevents us from taking
a deduction for any "excess parachute payments." The cash out or acceleration of
the vesting of stock options or restricted stock upon a change in control may
cause the holders of such stock options and restricted stock who are
Disqualified Individuals to recognize certain amounts as "excess parachute
payments" on which they must pay the 20% excise tax, and for which we will be
denied a tax deduction.

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SPECIAL RULES; WITHHOLDING OF TAXES

Special tax rules may apply to a participant who is subject to Section 16
of the Exchange Act. Other special tax rules will apply if a participant
exercises a stock option by delivering shares of common stock which he or she
already owns, or through a "cashless exercise."

PARTICIPATION IN THE PLAN

As of July 1, 2000, 26,553,754 split-adjusted shares of common stock were
subject to outstanding options and SPRs under the Plan, 40,058,247
split-adjusted options had been issued under the Plan (net of cancelled
options), and 5,934,921 split-adjusted shares of common stock remained available
for future issuance.

The actual benefits, if any, to the holders of stock options issued under
the Plan are not determinable as all grants to be made under the Plan are
discretionary and, prior to exercise, the value, if any, of such stock options
to their holders is represented by the difference between the market price of a
share of our common stock on the date of exercise and the exercise price of a
holder's stock option. During the fiscal year ended December 31, 1999: (i)
options to purchase 8,750,826 split-adjusted shares of common stock were issued
pursuant to the Plan; (ii) options to purchase 163,500 split-adjusted shares of
common stock were issued pursuant to the Plan to the current directors who are
not executive officers, as a group (5 persons); (iii) options to purchase
1,060,500 split-adjusted shares of common stock were issued to current executive
officers, as a group (9 persons); and (iv) options to purchase 7,526,826
split-adjusted shares of common stock were issued pursuant to the Plan to all
other employees and consultants, including current officers who are not
executive officers, as a group (approximately 800 persons). The split-adjusted
closing price of the common stock on December 31, 1999 was $37.29 per share.

The Plan is not a qualified deferred compensation plan under Section
401(a) of the Code, and is not subject to the provisions of the Employee
Retirement Income Security Act of 1974, as amended.

1998 EMPLOYEE STOCK PURCHASE PLAN

The 1998 Employee Stock Purchase Plan was adopted by our Board of
Directors in December 1998, and approved by the stockholders in January 1999. A
total of 2,250,000 post-split shares of our common stock have been reserved for
issuance under this plan, plus annual increases equal to the lesser of (i) 2% of
the outstanding shares on such date or (ii) an amount determined by the Board of
Directors. To date, 334,776 post-split shares have been issued under the 1998
Employee Stock Purchase Plan.

The 1998 Employee Stock Purchase Plan, which is intended to qualify under
Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"),
contains consecutive, overlapping, twenty-four month offering periods. Each
offering period includes four six-month purchase periods. The offering periods
generally start on the first trading day on or after May 1 and November 1 of
each year, except for the first offering period which commenced on the first
trading day after the Company's initial public offering (January 22, 1999) and
ends on the last trading day on or before October 31, 2000.

Employees are eligible to participate if they are customarily employed by
us or any of our participating subsidiaries for at least 30 hours per week and
more than five months in any calendar year. However, no employee may be granted
a right to purchase stock under the 1998 Employee Stock Purchase Plan (i) to the
extent that, immediately after the grant of the right to purchase stock, the
employee would own stock possessing 5% or more of the total combined voting
power or value of all classes of our capital stock, or (ii) to the extent that
his or her rights to purchase stock under all our employee stock purchase plans
accrues at a rate which exceeds $25,000 worth of stock for each calendar year.
The 1998 Employee Stock Purchase Plan permits participants to purchase our
common stock through payroll deductions of up to 12% of the participant's
"compensation." Compensation is defined as the participant's base straight time
gross earnings and commissions but excludes payments for overtime, shift
premium, incentive compensation, incentive payments, bonuses and other
compensation. The maximum number of shares a participant may purchase during a
single purchase period is 5,000 shares.

Amounts deducted and accumulated by the participant are used to purchase
shares of our common stock at the end of each purchase period. The price of
stock purchased under the 1998 Employee Stock Purchase Plan is generally 85% of
the lower of the fair market value of our common stock (i) at the beginning of
the offering period or (ii) at the end of the purchase period. In the event the
fair market value at the end of a purchase period is less than the fair market
value at the beginning of the offering period, the participants will be
withdrawn from the current

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offering period following exercise and automatically re-enrolled in a new
offering period. The new offering period will use the lower fair market value as
of the first date of the new offering period to determine the purchase price for
future purchase periods. Participants may end their participation at any time
during an offering period, and they will be paid their payroll deductions to
date. Participation ends automatically upon termination of employment.

Rights to purchase stock granted under the 1998 Employee Stock Purchase
Plan are not transferable by a participant other than by will, the laws of
descent and distribution, or as otherwise provided under the plan. The 1998
Employee Stock Purchase Plan provides that, in the event we merge with or into
another corporation or sell substantially all of our assets, each outstanding
right to purchase stock may be assumed or substituted for by the successor
corporation. If the successor corporation refuses to assume or substitute for
the outstanding rights to purchase stock, the offering period then in progress
will be shortened and a new exercise date will be set.

Our Board of Directors has the authority to amend or terminate the 1998
Employee Stock Purchase Plan, except that no such action may adversely affect
any outstanding rights to purchase stock under the Employee Stock plan. Our
Board of Directors may terminate an offering period on any exercise date if it
determines that the termination of the plan is in our best interests and the
best interest of our stockholders. The Board of Directors may in its sole
discretion amend the plan to the extent necessary and desirable to avoid
unfavorable financial accounting consequences by altering the purchase price for
any offering period, shortening any offering period or allocating remaining
shares among the participants. Unless sooner terminated by our Board of
Directors, the plan will automatically terminate ten years from the effective
date of our initial public offering.

LASER LINK.NET, INC. 1997 STOCK PLAN

On March 20, 2000, pursuant to the Agreement and Plan of Merger dated as
of March 8, 2000, Laser Link.Net, Inc. was acquired in a merger of Lightsaber
Acquisition Co. ("Lightsaber"), our wholly-owned subsidiary, with Laser Link in
which Lightsaber was the surviving entity (the "Merger"). As part of the Merger,
we agreed to assume the Laser Link.Net, Inc. 1997 Stock Option Plan (the "Laser
Link Plan") and each outstanding option under the Laser Link Plan. As a result,
we will issue shares of our common stock, subject to adjustment in the number of
shares and exercise price of the original options, upon exercise of outstanding
stock options previously issued under the Laser Link Plan. In the Merger, each
share of Laser Link common stock was converted into .173535 share of our common
stock (the "Exchange Ratio").

PURPOSE OF THE LASER LINK PLAN

The purpose of the Laser Link Plan is to provide additional incentive to
officers, key employees, directors and consultants and to align their interests
with those of the shareholders. The Laser Link Plan is not subject to the
Employee Retirement Income Act of 1974.

STRUCTURE

The Laser Link Plan consists of two types of equity incentive programs:
(i) qualifying stock options ("Incentive Stock Options") intended to qualify
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code") and (ii) non-qualifying stock options (or "Non-Statutory
Stock Options") not intended to qualify within the meaning of Section 422 of the
Code.

ADMINISTRATION

The Laser Link Plan is administered by either our Board of Directors or
an Option Committee consisting of outside directors appointed by the Board of
Directors (the "Administrator"). Subject to the provisions of the Laser Link
Plan, the Administrator has the authority, in its discretion: (i) to select the
employees, directors or consultants to whom options may be granted under the
Laser Link Plan; (ii) to determine the number of shares of common stock to be
covered by each option granted under the Laser Link Plan; (iii) to determine the
time or times at which options may be granted and whether those options are
Incentive Stock Options or Non-Statutory Stock Options; (iv) to determine the
price at which options are exercisable, the rate of exercisability and the
duration of each option; and (v) to prescribe, amend and rescind rules and
regulations relating to the Laser Link Plan.

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ELIGIBILITY

All key employees, directors and important consultants are eligible to
participate in the Laser Link Plan. However, in view of the Merger, it is
anticipated that no further options will be granted under the Laser Link Plan.

Under the Laser Link Plan Incentive Stock Options may be granted only to
employees (including officers and directors who are employees). Non-Statutory
Stock Options may be granted to our employees, directors and consultants. No
optionholder may be granted options to purchase more than 90% of the shares
authorized for issuance under the Laser Link Plan.

SECURITIES SUBJECT TO THE LASER LINK PLAN

As of the date of the Merger, 10,000,000 shares of Laser Link's common
stock, par value $0.01, were reserved for issuance under the Laser Link Plan.
After the Merger, based on the Exchange Ratio, a maximum of 1,735,350 shares of
our common stock will be available for issuance under the Laser Link Plan.

TERMS AND CONDITIONS OF OPTIONS

Each option granted pursuant to the Laser Link Plan is evidenced by a
written stock option agreement (an "Option Agreement") between the optionholder
and Laser Link and is subject to the following terms and conditions:

EXERCISE OF OPTIONS AND FORM OF CONSIDERATION. Options shall vest upon
the exercisability dates, as set forth in the Option Agreement for each option
grant. Options not subject to Deferral Agreements (as described below) became
fully vested and exercisable on the closing of the Merger.

Many optionholders have entered into written agreements deferring the
acceleration of the exercisability of their options ("Deferral Agreements"). The
Deferral Agreements postpone the acceleration of vesting that would have
occurred on the closing of the Merger under the terms of the Option Agreements.
Options subject to the Deferral Agreements will become fully vested upon the
first anniversary of the Merger, unless the optionholder has (a) been terminated
"for cause," as defined in the Deferral Agreements; (b) resigned, other than (i)
death or disability; (ii) a change in location of the optionholder's employment
beyond the 50 mile radius of the current location of Laser Link.Net, Inc. or
(iii) a material diminution in the optionholder's duties. Pending the first
anniversary of the closing of the Merger, the options will continue to vest as
set forth in the Option Agreements.

Exercise of an option in any manner shall result in a decrease in the
number of shares thereafter available under the option by the number of shares
as to which the option is exercised. An optionholder may exercise an option by
giving written notice to our Secretary accompanied by payment of the
option price for the total number of options exercised. Payment may consist of
cash, check, cash from a brokerage firm in a cashless exercise or-unless
prohibited by the Administrator-our shares or a combination thereof.

Pursuant to the terms of the Merger, and irrespective of Deferral
Agreements, during the escrow period as provided by the Merger agreement, 10% of
the shares issued upon the exercise of an option will be deposited into an
escrow fund. The escrow fund is intended to serve as security for the
indemnification of us, among others, from and against damages, as defined by
the Merger agreement, arising out of any breach of or default in any
representation, warranty, covenant or agreement given or made by Laser Link.Net,
Inc. in connection with the Merger. Accordingly, the escrow fund will be
available to compensate us for such damages, and, in such event, an
optionholder may not receive all of the option shares he would otherwise
receive. The escrow period expires on the first anniversary of the effective
time of the merger, when all shares not applied in satisfaction of the
indemnification obligations will be distributed, subject to the terms of the
Merger, in accordance with each shareholder's percentage of the escrow fund as
determined by the terms of the Merger.

TERM OF OPTIONS. In general, the term of each option is ten years from
the date of grant or such shorter terms as may be provided in the Option
Agreement. This term is not extended by the Deferral Agreements.

EXERCISE PRICE. The per share exercise price for the shares issued
pursuant to the Laser Link Plan is at least equal to the fair market value of
the Laser Link's common stock on the date of the grant. Pursuant to the terms of
the Merger, the exercise price listed in option agreements has been adjusted
by accounting for any post-grant Laser Link stock splits, if applicable,
dividing the exercise price by the Exchange Ratio and rounding the quotient up
to the nearest whole cent.

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WAITING PERIOD AND EXERCISE DATES. At the time options were granted, the
Administrator fixed the period within which the option vests and determined any
conditions that must be satisfied before the option may be exercised. Most
options will vest at a rate of 25% of the shares subject to the option grant on
each anniversary of the grant.

All Option Agreements provided that any unvested options were accelerated
upon a "change of control," including a transaction such as the closing of the
Merger. However, with respect to optionholders who executed Deferral Agreements,
this acceleration will not occur until March 20, 2001, the one-year anniversary
of the closing of the Merger, and is subject to the terms of the Laser Link
Plan, the Option Agreements and the Deferral Agreements.

TERMINATION OF RELATIONSHIP. If an optionholder ceases to be an employee,
director or consultant, other than upon the optionholder's death or disability,
the optionholder may exercise his or her option within three months of such
termination (but in no event later than the termination date of such option as
set forth in the Option Agreement). If, on the date of termination, the
optionholder is not vested as to his or her entire option, the shares covered by
the unvested portion of the option revert to the Laser Link Plan. If, after
termination, the optionholder does not exercise his or her option within three
months, the option terminates.

DISABILITY OF OPTIONHOLDER. If an optionholder ceases to be an employee,
director or consultant as a result of the optionholder's disability, the
optionholder may generally exercise his or her option within twelve months
following the optionholder's termination (but in no event later than the
termination date of such option as set forth in the Option Agreement). If, on
the date of termination, the optionholder is not vested as to his or her entire
option, the shares covered by the unvested portion of the option revert to the
Laser Link Plan. If, after termination, the optionholder does not exercise his
or her option within twelve months, the option will terminate.

DEATH OF OPTIONHOLDER. If an optionholder dies while an employee,
director or consultant, the option may generally be exercised within twelve
months following the optionholder's death (but in no event later than the
termination date of such option as set forth in the Option Agreement), by the
optionholder's heirs, executor or administrator, but only to the extent that the
option is vested on the date of death. If, at the time of death, the
optionholder is not vested as to his or her entire option, the shares covered by
the unvested portion of the option will revert to the Laser Link Plan. If the
option is not so exercised within the time specified, the option terminates.

NON-TRANSFERABILITY OF OPTIONS

Options granted under the Laser Link Plan are not transferable otherwise
than by will or the laws of descent and distribution, and are exercisable during
the lifetime of the optionholder only by the optionholder including, for this
purpose, the optionholder's legal guardian or custodian in the event of
disability. Until the option price has been paid in full pursuant to due
exercise of the option and the purchased shares are delivered, an optionholder
does not have any rights as a shareholder. We reserve the right not to
deliver the shares purchased by virtue of the exercise of an option during any
period of time in which we deem, in our sole discretion, that such delivery
would violate a federal, state, local or securities exchange rule, regulation or
law.

ADJUSTMENTS UPON CHANGES IN CAPITALIZATION AND CONTROL

CHANGES IN CAPITALIZATION. In the event of any change in the outstanding
shares of our common stock by reason of a stock dividend, stock split,
combination of shares, recapitalization, merger, consolidation, transfer of
assets, reorganization, conversion or what the Administrator deems in its sole
discretion to be similar circumstances, the number and kind of shares subject to
an option and the option price of such shares shall be appropriately adjusted in
a manner to be determined in the sole discretion of the Administrator.

ACCELERATION IN CONNECTION WITH A CHANGE OF CONTROL. All Option
Agreements provide that the vesting of options accelerate upon a "change of
control," including a transaction such as the closing of the Merger. Thus,
options not subject to the Deferral Agreements became fully vested upon the
closing of the Merger on March 20, 2000.

With respect to options subject to Deferral Agreements, while all options
vested at the closing of the Merger are not subject to deferral and unvested
options continue to vest at the rate set forth in the Option Agreements,
unvested options will become fully vested upon the first anniversary of the
Merger, March 20, 2001, unless the optionholder has (a) been terminated "for
cause," as defined in the Deferral Agreements; (b) resigned, other than (i)

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death or disability; (ii) a change in location of the optionholder's employment
beyond the 50 mile radius of the current location of Laser Link.Net, Inc. or
(iii) a material diminution in the optionholder's duties. Pending the first
anniversary of the closing of the Merger, the options will continue to vest as
set forth in the Option Agreements.

AMENDMENT AND TERMINATION OF THE LASER LINK PLAN.

The Board may at any time amend, alter, suspend or terminate the Laser
Link Plan; provided that it is required to obtain stockholder approval of any
Plan amendment to the extent necessary and desirable to comply with applicable
laws and that no such action shall affect options granted under the Laser Link
Plan prior to the actual date on which such action occurred.

ARBITRATION

Any disputes or disagreements between optionholders and the Company
shall be settled by arbitration in accordance with the Commercial Arbitration
Rules of the American Arbitration Association or its successor, as amended from
time to time. However, prior to submission to arbitration, optionholders must
attempt to resolve such disputes or disagreements with the Company amicably and
informally, in good faith, for a period not to exceed two weeks. Thereafter, the
dispute or disagreement will be submitted to arbitration.

Optionholders and the Company shall equally share the costs charged by
the American Arbitration Association or its successor, but optionholders and the
Company shall otherwise be solely responsible for their own respective counsel
fees and expenses. The decision of the arbitrator(s) shall be made in writing,
setting forth the award, the reasons for the decision and award and shall be
binding and conclusive on optionholders and the Company. Further, neither
optionholders nor the Company shall appeal any such award. Judgment of a court
of competent jurisdiction may be entered upon the award and may be enforced as
such in accordance with the provisions of the award.

FEDERAL INCOME TAX MATTERS

The Laser Link Plan is not subject to any of the provisions of the
Employee Retirement Income Security Act of 1974 ERISA and is not qualified under
Section 401(a) of the Code.

NON-STATUTORY STOCK OPTIONS.

Under current federal income tax law, the grant of a Non-Statutory Stock
Option has no tax effect on the Company or the optionholder to whom it is
granted. If the shares of common stock received on the exercise of a
Non-Statutory Stock Option are not subject to restrictions on transfer or risk
of forfeiture, the exercise of the Non-Statutory Stock Option will result in
ordinary income to the optionholder equal to the excess of the fair market value
of the shares at the time of exercise over the option price. The optionholder's
tax basis in the shares will be equal to the aggregate exercise price paid by
the optionholder plus the amount of taxable income recognized upon the exercise
of the option. Upon any subsequent disposition of the shares, any gain or loss
recognized by the optionholder will be treated as capital gain or loss and will
be long-term capital gain or loss if the shares are held for more than one year
after exercise. At the time of recognition of ordinary income by the
optionholder upon exercise, the Company will normally be allowed to take a
deduction for federal income tax purposes in an amount equal to such recognized
income.

INCENTIVE STOCK OPTIONS.

The federal income tax consequences associated with Incentive Stock
Options are generally more favorable to the optionholder and less favorable to
us than those associated with Non-Statutory Stock Options. Under current
federal income tax law, the grant of an Incentive Stock Option does not result
in income to the optionholder or in a deduction for us at the time of the
grant. Generally, the exercise of an Incentive Stock Option will not result in
income for the optionholder if the optionholder does not dispose of the shares
within two years after the date of grant nor within one year after the date of
exercise. If these requirements are met, the basis of the shares of common stock
upon a later disposition will be the option price, any gain on the later
disposition will be taxed to the optionholder as long-term capital gain, and we
will not be entitled to a deduction. The excess of the market value on the
exercise date over the option price is an adjustment to regular taxable income
in determining alternative minimum taxable income, which could cause the
optionholder to be subject to the alternative minimum tax. If the optionholder
disposes of the shares before the expiration of either of the holding periods
described above (a "Disqualifying Disposition"), the optionholder will have
compensation taxable as ordinary income, and we will

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normally be entitled to a deduction, equal to the lesser of (a) the fair market
value of the shares on the exercise date minus the option price, or (b) the
amount realized on the disposition minus the option price. If the price realized
in any such Disqualifying Disposition of the shares exceeds the fair market
value of the shares on the exercise date, the excess will be treated as
long-term or short-term capital gain, depending on the optionholder's holding
period for the shares.

SPECIAL RULES; WITHHOLDING OF TAXES.

We may take whatever steps it deems appropriate to comply with any
applicable withholding tax obligation, including requiring any participant to
pay the amount of any applicable withholding tax to us in cash. We may, in our
discretion, authorize "cashless withholding."

LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS

Our Amended and Restated Certificate of Incorporation limits the
liability of our directors to the maximum extent permitted by Delaware law, and
our Bylaws provide that we will indemnify our directors and officers and may
indemnify our other employees and agents to the fullest extent permitted by law.
We also entered into agreements to indemnify our directors and executive
officers, in addition to the indemnification provided for in our Bylaws. Our
Board of Directors believes that these provisions and agreements are necessary
to attract and retain qualified directors and executive officers. At present,
there is no pending litigation or proceeding involving any of our directors,
officers, employees or agents in which indemnification will be required or
permitted. We are not aware of any threatened litigation or proceeding that
might result in a claim for such indemnification.

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

SERIES C PREFERRED STOCK AND WARRANT SUBSCRIPTION AGREEMENT

On February 20, 1998, we entered into a Series C Preferred Stock and
Warrant Subscription Agreement (the "Subscription Agreement") with Warburg,
Pincus Ventures, L.P. ("Warburg") & Crosspoint Venture Partners 1996
("Crosspoint") and Intel Corporation ("Intel"). Under this agreement, Warburg
and Crosspoint unconditionally agreed to purchase an aggregate of 8,646,214
shares of our Series C Preferred Stock and warrants to purchase an aggregate of
7,094,250 shares of our Series C Preferred Stock for an aggregate purchase price
of $16.0 million at a date that we were to determine but, in any event, not
later than March 11, 1999. We agreed to either call this commitment or complete
an alternate equity financing of at least $16.0 million by March 11, 1999. A
proposed alternate equity financing providing for a price per share greater than
or equal to $1.8511and including securities that were equal in right with, or
more favorable to us than, our Series C Preferred Stock as set forth in our
Amended and Restated Certificate of Incorporation required unanimous approval by
a majority of our disinterested directors. In consideration of this commitment,
we issued to Warburg and Crosspoint warrants to purchase an aggregate of
2,541,222 post-split shares of our common stock at a split-adjusted purchase
price of $0.0022 per share. The parties agreed that the stock purchases by AT&T
Ventures and NEXTLINK Communications Inc. constituted an alternate equity
financing (see below). As a result, we did not issue and sell our Series C
Preferred Stock to Warburg and Crosspoint. Messrs. Henry Kressel and Joseph
Landy, two of our former directors, are affiliated with Warburg, and Mr.
Shapero, one of our current directors, is affiliated with Crosspoint.

On April 24, 1998, the Subscription Agreement was amended pursuant to an
Assignment and Assumption Agreement to which we were a party along with Warburg,
Crosspoint and Mr. Hawk. By the terms of this agreement, Warburg and Crosspoint
assigned to Mr. Hawk their obligation to purchase 54,022 shares of our Series C
Preferred Stock and 44,338 warrants to purchase Series C Preferred Stock for an
aggregate purchase price of $100,001.65. On the same date, Mr. Hawk purchased
54,022 shares of our Series C Preferred Stock at a price per share of $1.8511.
As a result of this amendment, the aggregate obligation of Warburg and
Crosspoint to purchase our Series C Preferred Stock and warrants to purchase
Series C Preferred Stock was reduced from 8,646,214 shares to 8,592,192 shares
and from 7,094,250 shares to 7,049,911 shares, respectively, for an aggregate
purchase price of $15.9 million (reduced from $16.0 million). On the same date,
the Amended and Restated Stockholder Rights Agreement dated March 11, 1998 (the
"Stockholder Rights Agreement") was amended to add Mr. Hawk as a party.

The warrants to purchase our common stock issued upon the signing of the
Subscription Agreement had five-year terms (but had to be exercised prior to the
closing of our initial public offering), had split-adjusted purchase prices of
$0.0015 per share, were immediately exercisable and contained net exercise
provisions. Prior to our initial public offering, Warburg and Crosspoint
exercised their warrants to purchase Series C Preferred Stock for 3,048,907 and
762,364 post-split shares of our common stock.

On March 11, 1998, we amended the Stockholder Rights Agreement, to extend
the rights held by Warburg, Crosspoint, and Intel to our warrants to purchase
common stock, Series C Preferred Stock and warrants to purchase Series C
Preferred Stock issued or issuable to Warburg, Crosspoint and Intel pursuant to
the Subscription Agreement (see below).

THE INTEL STOCK PURCHASE

As provided in the Subscription Agreement, Intel purchased 540,216 shares
of our Series C Preferred Stock and warrants to purchase 443,250 shares of our
Series C Preferred Stock for an aggregate purchase price of $1.0 million
concurrently with the issuance of our 1998 notes in March 1998. We did not have
any obligation to issue the warrants to purchase Series C Preferred Stock to
Intel until such time as Warburg and Crosspoint funded their respective
commitments under the Subscription Agreement. The parties agreed that our
initial public offering constituted an alternate equity financing and,
therefore, we did not issue the warrants to purchase Series C Preferred Stock to
Intel. In connection with its agreement to purchase such Series C Preferred
Stock and warrants to purchase Series C Preferred Stock, we issued to Intel
warrants to purchase an aggregate of 238,167 post-split shares of our common
stock at a split-adjusted purchase price of $0.0015 per share. Prior to our
initial public offering, Intel exercised its warrants for 238,167 post-split
shares of our common stock.

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<PAGE>

TRANSACTIONS IN CONNECTION WITH THE FORMATION OF THE DELAWARE HOLDING COMPANY

We were originally incorporated in California as Covad Communications
Company ("Covad California") in October 1996. In July 1997, we were incorporated
in Delaware as part of our strategy to operate through a holding company
structure and to conduct substantially all of our operations through
subsidiaries. To effect the holding company structure, in July 1997 we entered
into an Exchange Agreement with the existing holders of the common stock and
Series A Preferred Stock of Covad California to acquire all of such stock in
exchange for a like number of shares of our common and preferred stock, so that
after giving effect to the exchange Covad California became our wholly-owned
subsidiary. In addition, we entered into an Assumption Agreement pursuant to
which we assumed certain outstanding obligations of Covad California, including
a $500,000 demand note issued to Warburg and certain commitments to issue stock
options to two of our consultants.

In connection with the Exchange Agreement, two of our former officers,
Messrs. Charles McMinn and Charles Haas, and one of our current officers, Mr.
Khanna, each exchanged 6,750,000 shares of common stock of Covad California,
originally purchased for $.0019 per share, for a like number of our pre-split
shares of common stock pursuant to restricted stock purchase agreements. In
addition, Mr. Lynch, one of our directors, exchanged 324,000 shares of common
stock of Covad California, originally purchased for $0.148 per share, for a like
number of our pre-split shares of common stock pursuant to a restricted stock
purchase agreement. The common stock issued to Messrs. McMinn, Khanna, Haas and
Lynch are generally subject to vesting over a period of four years. This vesting
is subject to acceleration upon a change of control involving a merger, sale of
all or substantially all our assets or a shift in 50% or more of the voting
power of our capital stock. Our repurchase rights lapse one year after the
change of control or earlier in the event the individual is constructively
terminated or terminated without cause, or in the event the successor
corporation refuses to assume the agreements.

ISSUANCE OF COMMON STOCK

On July 15, 1997, we issued 2,531,250 post-split shares of our common stock
to Mr. Rex Cardinale, one of our former officers, for a split-adjusted purchase
price of $0.148 per share. On August 30,1997, we issued 776,250 post-split
shares of our common stock to Mr. Laehy, one of our officers, for a
split-adjusted purchase price of $0.0222 per share. On October 14, 1997, we
issued 324,000 post-split shares of our common stock to Mr. Marshall, one of our
directors, for a split-adjusted purchase price of $0.0222 per share. On April
24, 1998, we issued 216,000 post-split shares of our common stock to Mr. Hawk,
one of our directors, for a split-adjusted purchase price of $0.296 per share.
On August 28, 1998, we issued 90,000 post-split shares of our common stock to
Mr. Hawk for a split-adjusted purchase price of $2.555 per share. The shares of
our common stock issued to Messrs. Cardinale, Laehy, Marshall, and Hawk were
issued pursuant to restricted stock purchase agreements which contain vesting
and change of control provisions similar to those contained in the
above-described restricted stock purchase agreements of Messrs. McMinn, Khanna,
Haas and Lynch.

ISSUANCE OF SERIES A PREFERRED STOCK

On June 30, 1997 Covad California issued 225,000 shares of Series A
Preferred Stock to each of Messrs. McMinn, Khanna and Haas and 450,000 shares of
Series A Preferred Stock to Mr. Lynch for a purchase price of $0.222 per share.
In July 1997, these shares were exchanged for a like number of our shares of
Series A Preferred Stock pursuant to the Exchange Agreement.

ISSUANCE OF SERIES B PREFERRED STOCK

In July 1997, we sold an aggregate of 25,500,001 shares of our Series B
Preferred Stock, of which 18,000,000 shares were sold to Warburg, 4,500,000
shares were sold to Crosspoint and 3,000,001 shares were sold to Intel. The
purchase price of our Series B Preferred Stock was $0.333 per share. A portion
of the purchase price of the Series B Preferred Stock was paid by cancellation
of a $500,000 demand note issued to Warburg in June 1997. Messrs. Kressel and
Landy, each of whom formerly served as members of our Board of Directors, are
affiliated with Warburg. Mr. Shapero, who currently serves on our Board of
Directors, is affiliated with Crosspoint. On February 12, 1998, we sold an
additional 150,003 shares of Series B Preferred Stock at a purchase price of
$0.666 per share to Mr. Marshall, one of our directors.

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<PAGE>

THE STRATEGIC INVESTMENTS AND RELATIONSHIPS

In January 1999, we received equity investments from AT&T Ventures,
NEXTLINK Communications Inc. and Qwest Communications International, Inc. AT&T
Ventures purchased an aggregate of 2,250,874 shares of our Series C-1 Preferred
Stock at $1.8511 per share and an aggregate of 1,736,112 shares of our Series
D-1 Preferred Stock at $12.00 per share. These purchases represent an aggregate
investment of $25 million, of which $11 million was invested by AT&T Venture
Fund II, LP and $14 million was invested by two affiliated funds. NEXTLINK
Communications Inc. purchased 1,800,699 shares of our Series C-1 Preferred Stock
at $1.8511 per share and 925,926 shares of our Series D-1 Preferred Stock at
$12.00 per share, representing an investment of $20 million. Qwest
Communications International, Inc. purchased 1,350,523 shares of our Series C-1
Preferred Stock at $1.8511 per share and 1,041,667 shares of our Series D-1
Preferred Stock at $12.00 per share, representing an aggregate investment of $15
million. At the completion of our initial public offering, our Series C-1
Preferred Stock converted into our class B common stock on a one-for-one basis.
The Series D-1 Preferred Stock also converted into our class B common stock at
that time on a one-for-one basis. These strategic investors have agreed not to
transfer any of our Series C-1 Preferred Stock, Series D-1 Preferred Stock or
class B common stock to any non-affiliated third party until January 2000. They
have also each agreed not to acquire more than 10% of our voting stock without
our consent until January 2002. In addition, until January 2002, they have
agreed to vote any voting securities they hold as recommended by our Board of
Directors. Since this time, all of our class B common stock has been converted
into our common stock.

Concurrently with these strategic equity investments, we entered into
commercial agreements with AT&T Corp., NEXTLINK Communications Inc. and Qwest
Communications International, Inc. These agreements provide for the purchase,
marketing and resale of our services at volume discounts, our purchase of fiber
optic transport bandwidth at volume discounts, collocation of network equipment
and development of new DSL services. These agreements have terms ranging from
six months to several years subject to earlier termination in certain
circumstances. We cannot predict the number of line orders that AT&T Corp.,
NEXTLINK Communications Inc. or Qwest Communications International, Inc. will
generate, if any, whether line orders will be below our expectations or the
expectations of, AT&T Corp., NEXTLINK Communications Inc. or Qwest
Communications International, Inc. or whether AT&T Corp., NEXTLINK
Communications Inc. or Qwest Communications International, Inc. will discontinue
selling our services entirely.

EQUIPMENT LEASE FINANCING

Through December 31, 1999, we incurred a total of $865,000 of equipment
lease financing obligations (including principal and interest) through a sale
lease-back transaction with Charter Financial, Inc. ("Charter Financial").
Through December 31, 1999, we made total payments of approximately $525,000 to
Charter Financial on these obligations. Warburg, a principal stockholder of us
at the time this transaction was entered into, owns a majority of the capital
stock of Charter Financial. We believe that the terms of the lease financing
with Charter Financial were completed at rates similar to those available from
alternative providers. Our belief that the terms of the sale lease-back
arrangement are similar to those available from alternative providers is based
on the advice of its our officers who reviewed at least two alternative
proposals and who reviewed and negotiated the terms of the arrangement with
Charter Financial.

VENDOR RELATIONSHIP

Crosspoint, who was one of our principal stockholders, previously owned
approximately 12% of the capital stock of Diamond Lane, one of our vendors.
Payments to Diamond Lane in 1999 totaled approximately $51,539,000. We believe
that the terms of our transactions with Diamond Lane were completed at rates
similar to those available from alternative vendors. This belief is based on our
management team's experience in obtaining vendors and the fact that we sought
competitive bidders before entering into the relationship with Diamond Lane.

REGISTRATION RIGHTS

Certain holders of our common stock are entitled to registration rights.
Pursuant to the Stockholder Rights Agreement holders of 30,112,927 post-split
shares of common stock and holders of 6,379,177 shares of class B common stock
(collectively, the "Rights Holders") are entitled to certain rights with respect
to the registration under the Securities Act of the shares of common stock held
by them or issuable upon conversion of the class B common

78
<PAGE>

stock. Commencing January 2000, the class B common stock became convertible
into common stock at the election of the holder. As of April 2000, all class B
common stock had been so converted.

The Rights Holders are entitled to demand, "piggy-back" and S-3
registration rights, subject to certain limitations and conditions. The number
of securities requested to be included in a registration involving the exercise
of demand and "piggy-back" rights are subject to a pro rata reduction based on
the number of shares of common stock held by each Rights Holder and any other
security holders exercising their respective registration rights to the extent
that the managing underwriter advises that the total number of securities
requested to be included in the underwriting is such as to materially and
adversely affect the success of the offering. The registration rights terminate
as to any Rights Holder at the later of (i) three years after our initial public
offering or (ii) such time as such Rights Holder may sell under Rule 144 in a
three month period all registrable securities then held by such Rights Holder.

Pursuant to the Warrant Registration Rights Agreement dated March 11, 1999,
between us and Bear, Stearns & Co. Inc. and BT Alex. Brown Incorporated, holders
of the warrants that were issued in connection with our 1998 note offering in
March 1998 are entitled to certain registration rights with respect to the
shares of common stock issuable upon exercise of such warrants. The warrant
holders are entitled to demand and "piggy-back" registration rights, subject to
certain limitations and conditions. Like the Rights Holders, the number of
securities that a warrant holder may request to be included in a registration
involving an exercise of its demand or "piggy-back" rights is subject to a pro
rata reduction. Such a reduction will be based upon the number of shares held by
each warrant holder and any other security holders exercising their respective
registration rights to the extent that the managing underwriter advises us that
the total number of securities requested to be included in the underwriting is
such as to materially and adversely affect the success of the offering.

EMPLOYMENT AGREEMENTS

In 1998, we entered into a written employment agreement with Robert
Knowling, Jr., the Chairman of the Board of Directors, President and Chief
Executive Officer. The agreement provides that Mr. Knowling will receive
compensation in the form of a $400,000 annual base salary and a $250,000 minimum
annual bonus. Mr. Knowling received (i) a signing bonus of $1,500,000, one half
of which was paid when he began working for us, and the remaining half of which
was paid once he worked for us for one full year in July 1999, and (ii) stock
options to purchase 4,725,000 post-split shares of our common stock at a
split-adjusted exercise price of $.45 per share. If we terminate Mr. Knowling's
employment relationship without cause (as that term is defined in the
agreement), or if Mr. Knowling resigns for good reason (as that term is defined
in the agreement), we must continue to pay Mr. Knowling's annual salary and
targeted bonus for a period of two years after the date of termination so long
as Mr. Knowling does not become employed by one of our direct competitors. Mr.
Knowling has agreed to be bound by customary confidentiality provisions. As
provided in the agreement, in August 1998 we loaned Mr. Knowling $500,000
pursuant to a Note Secured by Deed of Trust that bears no interest during his
employment. The loan has provisions for forgiveness based on continued
employment and matures in four years, subject to acceleration in certain events.
See "Certain Relationships and Related Transactions--Employee Loans."

With respect to all options granted under our 1997 Stock Plan, in the event
that we merge with or into another corporation resulting in a change of control
involving a shift in 50% or more of the voting power of our capital stock, or
the sale of all or substantially all of our assets, the options will fully vest
and become exercisable one year after the change of control or earlier in the
event the individual is constructively terminated or terminated without cause or
in the event the successor corporation refuses to assume the options. See
"--1997 Stock Plan."

We have also entered into restricted stock purchase agreements with certain
of the Company's officers and directors. The shares of our common stock issued
pursuant to these restricted stock purchase agreements are subject to the
Company's right of repurchase which lapses in accordance with the vesting
schedule of the agreements. The agreements also include similar provisions to
the stock options, providing for accelerated vesting in the event of a change of
control. See "Certain Relationships and Related Transactions--Issuance of Common
Stock."

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<PAGE>

EMPLOYEE LOANS

In August 1998, we loaned Robert Knowling, Jr., our Chairman of the Board,
President and Chief Executive Officer, pursuant to his employment agreement, the
principal amount of $500,000 pursuant to a Note Secured by Deed of Trust, which
was secured by certain real property of Mr. Knowling. The entire principal
balance of this note becomes due and payable in one lump sum on August 14, 2002.
No interest is charged on the note. This note has provisions for forgiveness
based on continued employment and is subject to acceleration in certain events.

In August 1998, we loaned Joseph Devich, one of our officers, the principal
amount of $200,000 pursuant to a Note Secured by Deed of Trust, which was
secured by certain real property of Mr. Devich. The outstanding principal
balance of this note becomes due and payable in four equal installments
commencing August 13, 1999, with the last installment due on August 13, 2002. No
interest is charged on the note. This note has provisions for forgiveness based
on continued employment and is subject to acceleration in certain events.

In October 1998, we loaned Catherine Hemmer, our Executive Vice President
and Chief Operating Officer, and her husband, one of the Company's employees,
the principal amount of $600,000 pursuant to a Note Secured By Deed of Trust,
which was secured by certain real property of the Hemmers. The outstanding
principal balance of this note becomes due in four equal annual installments
commencing August 10, 1999, with the last installment due on August 10, 2002. No
interest is charged on the note. This note has provisions for forgiveness based
upon continued employment of each of the Hemmers and is subject to acceleration
in certain events.

In April 2000, we loaned Jane Marvin, one of our officers, the principal
amount of $500,000 for the purchase of a principal residence. The loan is
secured by such principal residence. The principal balance of the loan is due
and payable in four equal annual installments beginning at the first year
anniversary of the commencement of Ms. Marvin's employment, and no interest will
be charged for the loan. Furthermore, the loan will be forgiven based upon her
continued employment and is subject to acceleration in certain events. In
addition, in December 1999, we loaned Ms. Marvin $80,705.46 pursuant to a note
secured by a pledge of shares of our common stock. The entire principal balance
of this note becomes due and payable in one lump sum on the earlier to occur of
October 2000 or the sale of the pledged shares. Interest is payable on the note
at a rate of 5.89% per annum, compounded semiannually.

In May 1999, we loaned Robert Davenport, one of our officers, the principal
amount of $600,000 for the purchase of a principal residence. The loan is
secured by such principal residence. The outstanding principal balance of this
note becomes due in four equal installments commencing January 20, 2000, with
the last installment due on January 20, 2003. No interest is charged on the
note. The note has provisions for forgiveness based upon continued employment
and is subject to acceleration in certain events.

In January 2000, we committed to extend a loan to Michael Lach, one of our
officers, in the principal amount of $200,000, for the purchase of a principal
residence. The loan will be secured by such principal residence. The loan will
provide that the principal balance will be due and payable in four equal annual
installments, beginning at the first year anniversary of the commencement of Mr.
Lach's employment. No interest will be charged on this loan. The loan will have
provisions for forgiveness based on continued employment and is subject to
acceleration in certain events.

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<PAGE>

PRINCIPAL AND SELLING SHAREHOLDERS

The following table sets forth certain information regarding ownership of
our common stock as of July 1, 2000 by:

(i) each Named Executive Officer,

(ii) each of our directors,

(iii) all of our executive officers and directors as a group,

(iv) all persons who directly own 5% or more of our common stock, and

(v) our selling shareholders. The selling shareholders are former
shareholders of LaserLink.Net who received our common stock when
we acquired LaserLink.Net.

Share ownership in each case includes shares issuable upon exercise of
outstanding options and warrants that are exercisable within 60 days of July 1,
2000 as described in the footnotes below. Percentage ownership is calculated
pursuant to SEC Rule 13d-3(d)(1). Except as otherwise indicated, the address of
each of the persons in this table, other than the selling stockholders, is as
follows: c/o Covad Communications Group, Inc., 4250 Burton Drive, Santa Clara,
California 95054.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY
PRIOR TO THE OFFERING SHARES OWNED AFTER THE OFFERING
------------------------- ELIGIBLE TO ------------------------
BENEFICIAL OWNER NUMBER PERCENTAGE BE SOLD NUMBER PERCENTAGE
---------------- ------------- ---------- ------------ ----------- -----------
DIRECTORS, EXECUTIVE OFFICERS AND FIVE PERCENT
STOCKHOLDERS:
<S> <C> <C> <C> <C> <C>
Putnam Investments, Inc. (1)................... 11,728,230 7.59% 0 11,728,230 7.59%
Fidelity Management & Research Company (2)..... 12,310,722 7.97% 0 12,310,722 7.97%
Robert Knowling Jr. (3)........................ 1,833,946 1.2% 0 1,833,946 1.2%
Robert Roblin (4).............................. 183,132 * 0 183,132 *
Catherine Hemmer (5)........................... 174,953 * 0 174,953 *
Joseph Devich (6).............................. 217,189 * 0 217,189 *
Robert Davenport, III (7)...................... 136,123 * 0 136,123 *
Robert Hawk (8)................................ 258,982 * 0 258,982 *
Daniel Lynch (9)............................... 518,995 * 0 518,995 *
Frank Marshall (10)............................ 604,356 * 0 604,356 *
Rich Shapero (11).............................. 14,373 * 0 14,373 *
Hellene Runtagh (12)........................... 17,873 * 0 17,873 *
Larry Irving (27).............................. 4,999 * 0 4,999 *
Debra Dunn (28)................................ 4,999 * 0 4,999 *
All current executive officers and directors
as a group (15 persons)..................... 9,951,221 6.49% 0 9,951,221 6.49%

SELLING SHAREHOLDERS:
George McGovern (13)........................... 1,510,127 1.04 1,492,774 17,353 *
Ed Sullivan (14)............................... 1,459,731 1.01 1,451,055 8,676 *
Liberty Partners............................... 1,047,542 * 1,047,542 0 *
G. Michael Stakias (22)........................ 156,178 * 104,118 52,060 *
Eugene J. Malaady.............................. 8,676 * 8,676 0 *
Darryl Copeland (23)........................... 159,649 * 107,589 52,060 *
David Dulaney (24)............................. 163,120 * 111,060 52,060 *
William Fromholzer (25)........................ 128,373 * 76,353 52,060 *
James Lynch (26)............................... 124,942 * 72,882 52,060 *
Dennis M. & Audrey B. Durkin................... 3,469 * 3,469 0 *
Thomas Feeney.................................. 20,823 * 20,823 0 *
Stanley & Carolyn Ellis........................ 17,352 * 17,352 0 *
</TABLE>

81
<PAGE>

<TABLE>
<S> <C> <C> <C> <C> <C>
Donald Guinan.................................. 38,176 * 38,176 0 *
Andrew Guinan (21)............................. 67,677 * 12,147 55,530 *
Guinan Family Ltd. Partnership................. 10,411 * 10,411 0 *
William Napier Macartney III................... 38,176 * 38,176 0 *
Darryl Copeland, Jr............................ 39,215 * 39,215 0 *
Thaddeus Newell III............................ 4,338 * 4,338 0 *
W. Sherwood Robertson.......................... 17,352 * 17,352 0 *
H. L. Yoh...................................... 17,352 * 17,352 0 *
Larry & Randi Yogel............................ 8,676 * 8,676 0 *
W. Dale Haas................................... 17,352 * 17,352 0 *
Huntoon, Paige & Co., Inc...................... 17,352 * 17,352 0 *
Gregory P. Evans............................... 10,411 * 10,411 0 *
Mark Fiato (15)................................ 43,036 * 43,036 0 *
Michael Azeez.................................. 3,469 * 3,469 0 *
James Dengler.................................. 6,940 * 6,940 0 *
David Farrugut................................. 6,940 * 6,940 0 *
Frank Gilday................................... 3,469 * 3,469 0 *
Steve Griffith................................. 2,275 * 2,275 0 *
Judiane Griffith............................... 9,217 * 9,217 0 *
Christopher Lange.............................. 1,734 * 1,734 0 *
Seth Lehr...................................... 3,469 * 3,469 0 *
Joan H. Lewis.................................. 3,469 * 3,469 0 *
Patrick McCloskey.............................. 3,469 * 3,469 0 *
Colleen McGovern............................... 19,629 * 19,629 0 *
Daniel McGovern................................ 24,835 * 24,835 0 *
Mary McGovern.................................. 2,275 * 2,275 0 *
Guy Messick.................................... 1,734 * 1,734 0 *
Jill Neyer..................................... 9,217 * 9,217 0 *
Steven Neyer................................... 2,275 * 2,275 0 *
Arthur Jackson................................. 3,469 * 3,469 0 *
Darcy Falbey................................... 3,469 * 3,469 0 *
Leslie Kogan................................... 17,352 * 17,352 0 *
Richard McMahon................................ 6,940 * 6,940 0 *
Thomas Sheridan................................ 3,469 * 3,469 0 *
Kevin Seeger................................... 1,734 * 1,734 0 *
Judy Welde..................................... 1,734 * 1,734 0 *
Carey Wilkinson................................ 5,746 * 5,746 0 *
Kristin Wilkinson.............................. 5,746 * 5,746 0 *
Lynn Wilkinson................................. 19,629 * 19,629 0 *
Michael & Christine Breslin.................... 2,275 * 2,275 0 *
Thomas & Debra Breslin......................... 2,275 * 2,275 0 *
John & Patricia Golato......................... 2,275 * 2,275 0 *
Edward & Patricia Sullivan..................... 2,275 * 2,275 0 *
Sullivan Family Ltd. Partnership............... 6,829 * 6,829 0 *
Shane McGovern (16)............................ 43,489 * 19,629 23,860 *
Daniel Malcolm (17)............................ 76,528 * 2,775 73,753 *
Malcolm Family Ltd. Partnership................ 11,106 * 11,106 0 *
Mike Breslin (18).............................. 5,311 * 2,276 3,036 *
Sherwood W. Newell............................. 4,338 * 4,338 0 *
Dana B. Newell................................. 4,338 * 4,338 0 *
Gordon D. Newell............................... 4,338 * 4,338 0 *
Herbert J. Nevyas.............................. 3,469 * 3,469 0 *
Brad Copeland (19)............................. 34,531 * 12,840 21,691 *
Paul Hondros................................... 3,469 * 3,469 0 *
Robert Sullivan (20)........................... 26,135 * 2,275 23,860 *
Total Selling Stockholders................ 5,013,466 522,766 *
</TABLE>

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<PAGE>

--------------

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

(1) Based on a Form 13G filed March 10, 2000 with the Securities and Exchange
Commission by Marsh & McLennan Companies, Inc. and its direct and
indirect wholly-owned subsidiaries, Putnam Investments, Inc., Putnam
Investment Management, Inc. and The Putnam Advisory Company, Inc.
(2) Based on a Form 13G filed June 9, 2000 with the Securities and Exchange
Commission by Fidelity International Limited and FMR Corp. and its
wholly-owned subsidiaries, Fidelity Management & Research Company,
Fidelity Management Trust Company and Strategic Advisers, Inc.
(3) Includes 1,694,572 shares of common stock subject to options exercisable
within 60 days of July 1, 2000.
(4) Includes 181,122 shares of common stock subject to options exercisable
within 60 days of April 1, 2000.
(5) Includes 174,230 shares of common stock subject to options exercisable
within 60 days of July 1, 2000.
(6) Includes 28,050 shares of common stock subject to options exercisable
within 60 days of July 1, 2000.
(7) Includes 132,186 shares of common stock subject to options exercisable
within 60 days of July 1, 2000.
(8) Includes 53,748 shares of common stock subject to options exercisable
within 60 days of July 1, 2000.
(9) Includes 54,873 shares of common stock subject to options exercisable
within 60 days of July 1, 2000.
(10) Includes 54,873 shares of common stock subject to options exercisable
within 60 days of July 1, 2000.
(11) Includes 14,373 shares of common stock subject to options exercisable
within 60 days of July 1, 2000.
(12) Includes 19,873 shares of common stock subject to options exercisable
within 60 days of July 1, 2000.
(13) Includes of 17,353 shares of common stock subject to options exercisable
within 60 days of July 1, 2000.
Mr. McGovern is employed by us as Executive Vice President, LaserLink
Operations.
(14) Includes of 8,676 shares of common stock subject to options exercisable
within 60 days of July 1, 2000. Mr. Sullivan is employed by us as our
Senior Vice President, Technical Marketing.
(15) Includes of 34,707 shares of common stock which will be issued upon
exercise of options issued to Mr. Fiato by LaserLink.Net for consulting
services.
(16) Includes of 23,860 shares of common stock subject to options exercisable
within 60 days of July 1, 2000. Mr. McGovern is employed by us as a
Regional Sales Manager.
(17) Includes of 73,753 shares of common stock subject to options exercisable
within 60 days of July 1, 2000. Mr. Malcolm is employed by us Senior Vice
President, Sales Development.
(18) Includes of 3,036 shares of common stock subject to options exercisable
within 60 days of July 1, 2000. Mr. Breslin is employed by us as an
Account Manager.
(19) Includes 34,531 shares of common stock subject to options exercisable
within 60 days of July 1, 2000. Mr. Copeland is employed by us as a
Director of Project Management.
(20) Consists of 23,860 shares of common stock subject to options exercisable
within 60 days of July 1, 2000. Mr. Sullivan is employed by us as a
Database Administrator.
(21) Includes 55,530 shares of common stock subject to options exercisable
within 60 days of July 1, 2000. Mr. Guinan is employed by us as our Vice
President, Business Integration.
(22) Includes 52,060 shares of common stock subject to options exercisable
within 60 days of July 1, 2000. Mr. Stakias was formerly a director of
LaserLink.Net.
(23) Includes 52,060 shares of common stock subject to options exercisable
within 60 days of July 1, 2000. Mr. Copeland was formerly a director of
LaserLink.Net.
(24) Includes 52,060 shares of common stock subject to options exercisable
within 60 days of July 1, 2000. Mr. Dulaney was formerly a director of
LaserLink.Net.
(25) Includes 52,060 shares of common stock subject to options exercisable
within 60 days of July 1, 2000. Mr. Fromholzer was formerly a director of
LaserLink.Net.
(26) Includes 52,060 shares of common stock subject to options exercisable
within 60 days of July 1, 2000. Mr. Lynch was formerly a director of
LaserLink.Net.
(27) Includes 4,999 shares of common stock subject to options exercisable
within 60 days of July 1, 2000.
(28) Includes 4,999 shares of common stock subject to options exercisable
within 60 days of July 1, 2000.

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<PAGE>

DESCRIPTION OF CAPITAL STOCK

The following summary describes the material terms of our capital stock.
However, it does not purport to be complete and is qualified in its entirety by
the actual terms of our capital stock contained in our Amended and Restated
Certificate of Incorporation and other agreements referenced below.

As of July 1, 2000 our authorized capital stock currently consists of
600,000,000 shares of common stock, 10,000,000 shares of class B common stock
and 5,000,000 shares of preferred stock. As of July 1, 2000, there were 594
holders of record of common stock and no holders of class B common stock. The
common stock and preferred stock each have a par value of $0.001 per share. As
of July 1, 2000, there were 154,433,087 shares of common stock, outstanding. As
of July 1, 2000, options to purchase 27,542,825 shares of common stock at a
weighted average exercise price of $20.9891 per share were outstanding.

COMMON STOCK

The holders of our common stock are entitled to one vote per share on all
matters submitted to a vote of the stockholders. Subject to preferential rights
of any outstanding series of preferred stock, the holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the board of directors out of funds legally available for that
purpose. In the event of our liquidation, dissolution or winding up, the holders
of common stock are entitled to share ratably in all our remaining assets after
payment of liabilities and satisfaction of preferential rights of any
outstanding series of preferred stock. The common stock has no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the common stock. All outstanding shares
of common stock are fully paid and non- assessable.

CLASS B COMMON STOCK

Although there are 10,000,000 shares of Class B common stock authorized,
there is, currently, no class B common stock outstanding.

PREFERRED STOCK

The board of directors has the authority to issue up to 5,000,000 shares
of preferred stock in one or more series without any further action or vote by
the stockholders. In addition, the board of directors is authorized, without
stockholder approval, to fix the rights, preferences, privileges, and
restrictions granted to or imposed upon such preferred stock, including:

o dividend rights,

o conversion rights,

o terms of redemption,

o liquidation preferences,

o voting rights,

o sinking fund terms, and

o the number of shares constituting any series or the designation of
such series.

As a result, the board of directors could issue additional preferred
stock with voting and conversion rights which could adversely affect the voting
power of the holders of common stock. Issuing preferred stock could also have
the effect of delaying, deferring or preventing a change in control or the
removal of our management. We have no present plan to issue any shares of
preferred stock.

WARRANTS

In connection with the issuance of our senior discount notes in March
1998, we issued warrants to purchase an aggregate of 11,370,969 split-adjusted
shares of our common stock with exercise prices of $0.0015 per share. We also
issued to a consultant a five-year warrant to purchase 303,750 split-adjusted
shares with an exercise price of $0.4445 per share. This warrant is immediately
exercisable. In April 1999, we issued a warrant to purchase 450,000
split-adjusted shares of

84
<PAGE>

common stock to a customer. This warrant vested with respect to 225,000 shares
on April 1, 2000 and will vest with respect to the remaining 225,000 shares on
April 1, 2001, subject to the customer achieving certain performance goals. The
exercise price for 225,000 of the shares is $48.4375. The exercise price for the
remaining 225,000 shares will be the fair market value of the common stock on
the ten trading days preceding the second vesting date.

REGISTRATION RIGHTS

Certain holders of our common stock are entitled to registration rights.
Pursuant to the Stockholder Rights Agreement holders of 29,859,175 shares of
common stock and the former holders of 6,379,177 shares of class B common stock
(collectively, the "Rights Holders") are entitled to certain rights with respect
to the registration under the Securities Act of the shares of common stock held
by them or issuable upon conversion of the class B common stock. The 6,379,177
shares of class B common stock have been converted into 14,353,147 shares of
common stock. The Rights Holders are entitled to demand, "piggy-back" and S-3
registration rights, subject to certain limitations and conditions. The number
of securities requested to be included in a registration involving the exercise
of demand and "piggy-back" rights are subject to a pro rata reduction based on
the number of shares of common stock held by each Rights Holder and any other
security holders exercising their respective registration rights to the extent
that the managing underwriter advises that the total number of securities
requested to be included in the underwriting is such as to materially and
adversely affect the success of the offering. The registration rights terminate
as to any Rights Holder at the later of (i) three years after our initial public
offering or (ii) such time as such Rights Holder may sell under Rule 144 in a
three month period all registrable securities then held by such Rights Holder.

Pursuant to the Warrant Registration Rights Agreement dated March 11,
1998, between us and Bear, Stearns & Co. Inc. and BT Alex. Brown Incorporated,
holders of warrants that remain outstanding after this offering are entitled to
certain registration rights with respect to the shares of common stock issuable
upon exercise of such warrants. Like the Rights Holders, the number of
securities that a warrant holder may request to be included in any registration
is subject to a pro rata reduction. Such a reduction will be based on the number
of shares held by each warrant holder and any other security holders exercising
their respective registration rights to the extent that the managing underwriter
advises us that the total number of securities requested to be included in the
underwriting is such as to materially and adversely affect the success of the
offering.

ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS OF OUR CHARTER, BYLAWS, DELAWARE LAW
AND OUR STOCKHOLDER PROTECTION RIGHTS PLAN.

As noted above, our board of directors, without stockholder approval, has
the authority under our charter to issue preferred stock with rights superior to
the rights of the holders of common stock. As a result, preferred stock could be
issued quickly and easily, could adversely affect the rights of the common stock
holders and could be issued with terms calculated to delay or prevent a change
of control of our company or make removal of management more difficult.

ELECTION AND REMOVAL OF DIRECTORS. Our charter and bylaws provide for the
division of our board of directors into three classes with the directors in
each class serving for a three-year term, and one class being elected each year
by our stockholders. Our directors may be removed only for cause.

This system of electing and removing directors may tend to discourage a
third party from making a tender offer or otherwise attempting to obtain control
of our company and may maintain the incumbency of the board of directors, as it
generally makes it more difficult for stockholders to replace a majority of the
directors. See "Management--Classified Board."

STOCKHOLDER MEETINGS AND WRITTEN CONSENT. Under our bylaws, the
stockholders may not call a special meeting of the stockholders of our company.
Rather, only our board of directors, the chairman of our board of directors and
the President or Chief Executive Officer may call special meetings of our
stockholders. Our charter provides that stockholders may not act by written
consent. As a result, stockholders can only act at a meeting.

REQUIREMENTS FOR ADVANCE NOTIFICATION OF STOCKHOLDER NOMINATIONS AND
PROPOSALS. Our bylaws establish advance notice procedures with respect to
stockholder proposals and the nomination of candidates for election as
directors, other than nominations made by or at the direction of the board of
directors or a committee thereof.

SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW. We are subject to
Section 203 of the Delaware General Corporation Law. Section 203 prohibits a
publicly held Delaware corporation from engaging in a "business

85
<PAGE>

combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless

o prior to such date, the board of directors of the corporation
approves either the business combination or the transaction that
resulted in the stockholder's becoming an interested stockholder,

o upon consummation of the transaction that resulted in the
stockholder's becoming an interested stockholder, the interested
stockholder owns at least 85% of the outstanding voting stock,
excluding shares held by directors, officers and certain employee
stock plans, or

o on or after the consummation date the business combination is
approved by the board of directors and by the affirmative vote at an
annual or special meeting of stockholders of at least 66 2/3 % of the
outstanding voting stock that is not owned by the interested
stockholder.

For purposes of Section 203, a "business combination" includes, among
other things, a merger, asset sale or other transaction resulting in a financial
benefit to the interested stockholder. An "interested stockholder" is generally
a person who, together with affiliates and associates of such person,

o owns 15% or more of the corporation's voting stock or

o is an affiliate or associate of the corporation and was the owner of
15% or more of the outstanding voting stock of the
corporation as any time within the prior three years.

These charter and bylaw provisions and provisions of Delaware law may
have the effect of delaying, deterring or preventing a change of control of our
company.

STOCKHOLDER PROTECTION RIGHTS PLAN. In addition, our Board of Directors
has adopted a Stockholder Protection Rights Plan under which stockholders
received one right for each share of our common stock owned by them. The rights
become exercisable, in most circumstances, upon the accumulation by a person or
group of 15% or more of the our outstanding shares of common stock. Each right
entitles the holder to purchase from us, as provided by the Stockholder
Protection Rights Agreement, one one-thousandth of a share of Participating
Preferred Stock, par value $.001 per share, for $400.00 subject to adjustment.
The Rights Plan is not intended to, and will not, prevent a takeover of Covad at
a full and fair price. However, the rights may cause substantial dilution to a
person or group acquiring 15% of more of our common stock unless the rights are
first redeemed by the board of directors.

86
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Future sales of a substantial number of shares of our common stock in the
public market, or the appearance that such shares are available for sale, could
adversely affect prevailing market prices for our common stock and our ability
to raise capital through an offering of equity securities.

As of July 1, 2000 we had 154,433,087 shares of common stock outstanding
and no class B common stock outstanding. Of these shares, the 5,013,466 shares
of common stock sold in this offering will be freely tradeable in the public
market without restriction under the Securities Act, unless such shares are
purchased by our "affiliates" as that term is defined in Rule 144 under the
Securities Act. In addition, 89,432,727 shares of our common stock (the
"Restricted Shares") were issued and sold by us in reliance on exemptions from
the registration requirements of the Securities Act. These shares may be sold or
may have been sold in the public market only if they are registered or if they
qualify for an exemption from registration, such as Rule 144 or 701 under the
Securities Act, which are summarized below.

Stock Plans. In addition, we have 32,383,377 shares of our common stock
reserved for issuance pursuant to options under our 1997 Stock Plan, of which
26,553,754 shares were subject to outstanding options as of March 31, 2000, and
we have 1,732,716 shares of our common stock reserved for issuance pursuant to
our 1998 Employee Stock Purchase Plan. We have also reserved 975,656 shares of
our common stock for issuance pursuant to options we assumed in connection with
our acquisition of LaserLink.net. Accordingly, shares underlying vested options
will be eligible for resale in the public market at various times.

Warrants. We also have _____ shares underlying an outstanding warrant. The
shares underlying this warrant will be eligible for resale in the public market
upon expiration of their one-year holding period under Rule 144. However, to the
extent that warrant holder effects a "cashless" exercise of this warrant, the
underlying shares will be eligible for sale in the public markets beginning on
_____.

REGISTRATION RIGHTS

Pursuant to the Warrant Registration Rights Agreement dated March 11, 1998,
between us and Bear, Stearns & Co. Inc. and BT Alex. Brown Incorporated, holders
of warrants that remain outstanding after this offering are entitled to certain
registration rights with respect to the shares of common stock issuable upon
exercise of such warrants. Like the Rights Holders, the number of securities
that a warrant holder may request to be included in any registration is subject
to a pro rata reduction. Such a reduction will be based on the number of shares
held by each warrant holder and any other security holders exercising their
respective registration rights to the extent that the managing underwriter
advises us that the total number of securities requested to be included in the
underwriting is such as to materially and adversely affect the success of the
offering.

Summary of Rule 144. In general, under Rule 144 as currently in effect, a
person (or persons whose shares are aggregated) who has beneficially owned
shares for at least one year (including the holding period of any prior owner,
except an affiliate) is entitled to sell within any three-month period a number
of shares that does not exceed the greater of:

(i) one percent of the number of shares of common stock then
outstanding; or

87
<PAGE>

(ii) the average weekly trading volume of the common stock during the
our calendar weeks preceding the required filing of a Form 144 with respect
to such sale.

Sales under Rule 144 are generally subject to certain manner of sale
provisions and notice requirements and to the availability of current public
information about us. Under Rule 144(k), a person who is not deemed to have been
an affiliate of ours at any time during the 90 days preceding a sale, and who
has beneficially owned the shares proposed to be sold for at least two years, is
entitled to sell such shares without having to comply with the manner of sale,
public information, volume limitation or notice provisions of Rule 144. Under
Rule 701, persons who purchase shares upon exercise of options granted prior to
the effective date of our initial public offering became entitled to sell such
shares 90 days after the effective date of our initial public offering in
reliance on Rule 144, without having to comply with the holding period
requirements of Rule 144 and, in the case of non-affiliates, without having to
comply with the public information, volume limitation or notice provisions of
Rule 144.

88
<PAGE>

PLAN OF DISTRIBUTION

The shares covered by this prospectus may be offered and sold from time to
time by the selling shareholders. The selling shareholders will act
independently of us in making decisions with respect to the timing, manner and
size of each sale. The selling shareholders may sell the shares being offered
hereby on the Nasdaq National Market, or otherwise, at prices and under terms
then prevailing or at prices related to the then current market price or at
negotiated prices. Shares may be sold by one or more of the following means of
distribution:

o block trades in which the broker-dealer so engaged will attempt to
sell such shares as agent, but may position and resell a portion of
the block as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by such
broker-dealer for its own account pursuant to this prospectus;
o over-the-counter distributions in accordance with the rules of the
Nasdaq National Market;
o ordinary brokerage transactions and transactions in which the broker
solicits purchasers; and
o privately negotiated transactions.

To the extent required, this prospectus may be amended and supplemented
from time to time to describe a specific plan of distribution. In connection
with distributions of such shares or otherwise, the selling shareholders may
enter into hedging transactions with broker-dealers or other financial
institutions. In connection with such transactions, broker-dealers or other
financial institutions may engage in short sales of our common stock in the
course of hedging the positions they assume with the selling shareholders. The
selling shareholders may also sell our common stock short and redeliver the
shares to close out such short positions. The selling shareholders may also
enter into option or other transactions with broker-dealers or other financial
institutions which require the delivery to such broker-dealer or other financial
institution of the shares offered hereby, which shares such broker-dealer or
other financial institution may resell pursuant to this prospectus (as
supplemented or amended to reflect such transaction). The selling shareholders
may also pledge such shares to a broker-dealer or other financial institution,
and, upon a default, such broker-dealer or other financial institution, may
effect sales of such pledged shares pursuant to this prospectus (as supplemented
or amended to reflect such transaction). In addition, any such shares that
qualify for sale pursuant to Rule 144 may be sold under Rule 144 rather than
pursuant to this prospectus.

In effecting sales, brokers, dealers or agents engaged by the selling
shareholder may arrange for other brokers or dealers to participate. Brokers,
dealers or agents may receive commissions, discounts or concessions from the
selling shareholders in amounts to be negotiated prior to the sale. Such brokers
or dealers and any other participating brokers or dealers may be deemed to be
"underwriters" within the meaning of the Securities Act of 1933 in connection
with such sales, and any such commissions, discounts or concessions may be
deemed to be underwriting discounts or commissions under the Securities Act of
1933. We will pay all reasonable expenses incident to the registration of the
shares being offered hereby other than any commissions and discounts of
underwriters, dealers or agents.

In order to comply with the securities laws of certain states, if
applicable, the shares being offered hereby must be sold in such jurisdictions
only through registered or licensed brokers or dealers. In addition, in certain
states such shares may not be sold unless they have been registered or qualified
for sale in the applicable state or an exemption from the registration or
qualification requirement is available and there has been compliance thereof.

We have advised the selling shareholders that the anti-manipulation rules
of Regulation M under the Securities Exchange Act of 1934 may apply to sales of
shares in the market and to the activities of the selling shareholders and their
affiliates. In addition, we will make copies of this prospectus available to the
selling shareholder and have informed them of the need for delivery of copies of
this prospectus to purchasers at or prior to the time of any sale of the shares
offered hereby. The selling shareholders may indemnify any broker-dealer that
participates in transactions involving the sale of the shares against certain
liabilities, including liabilities arising under the Securities Act of 1933. We
have agreed to indemnify the selling shareholders against certain liabilities.

Subject to certain limitations, we will keep the registration statement, of
which this prospectus constitutes a part, effective for a period of _______ days
or, if earlier, with respect to the selling shareholders, until the selling
shareholders are able to sell all shares offered pursuant to this registration
statement.

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<PAGE>

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the Securities and Exchange Commission a registration
statement on Form S-1, of which this prospectus is a part, under the Securities
Act with respect to the shares of common stock offered hereby. This prospectus
does not contain all of the information included in the registration statement.
Statements contained in this prospectus concerning the provisions of any
document are not necessarily complete. You should refer to the copy of these
documents filed as an exhibit to the registration statement or otherwise filed
by us with the Securities and Exchange Commission ("SEC") for a more complete
understanding of the matter involved. Each statement concerning these documents
is qualified in its entirety by such reference.

We are also subject to the informational requirements of the Securities
Exchange Act of 1934. In accordance with the Exchange Act, we file reports,
proxy statements and other information with the SEC. The registration statement,
including the attached exhibits and schedules, may be inspected and copied at
the public reference facilities maintained by the SEC, Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional
offices of the Commission located at Seven World Trade Center, New York, New
York 10048, and 500 West Madison Street, Chicago, Illinois 60661. Please call
the SEC at 1-800-SEC-0330 for further information about the public reference
rooms. The SEC maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC. Copies of the registration statement and the reports, proxy and
information statements and other information that we file with the SEC may be
obtained from the SEC's Internet address at http://www.sec.gov.

LEGAL MATTERS

The validity of the common stock offered hereby will be passed upon for
us by Irell & Manella LLP, Los Angeles, California.

EXPERTS

The consolidated financial statements of the Company as of December 31,
1998 and 1999 and for each of the three years in the period ended December 31,
1999, appearing in this Prospectus and Registration Statement, have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
on the authority of such firm as experts in accounting and auditing.

90
<PAGE>

COVAD COMMUNICATIONS GROUP, INC.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
Annual Financial Statements
Report of Ernst & Young LLP, Independent Auditors...................................................... F-2
Consolidated Balance Sheets at December 31, 1998 and 1999.............................................. F-3
Consolidated Statements of Operations for the years ended December 31, 1997, 1998 and 1999............. F-4
Consolidated Statements of Stockholders' Equity (Net Capital Deficiency) for the years ended
December 31, 1997, 1998 and 1999..................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999............. F-6
Notes to Consolidated Financial Statements............................................................. F-7
Interim Financial Statements (Unaudited)..................................................................
Consolidated Balance Sheet at March 31, 2000........................................................... F-19
Consolidated Statements of Operations for the three months ended March 31, 1999 and 2000............... F-20
Consolidated Statements of Cash Flows for the three months ended March 31, 1999 and 2000............... F-21
Notes to Consolidated Financial Statements............................................................. F-22
</TABLE>

F-1
<PAGE>

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders of
Covad Communications Group, Inc.

We have audited the accompanying consolidated balance sheets of Covad
Communications Group, Inc. as of December 31, 1998 and 1999, and the related
consolidated statements of operations, stockholders' equity (net capital
deficiency), and cash flows for each of the three years in the period ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to herein
present fairly, in all material respects, the consolidated financial position of
Covad Communications Group, Inc. as of December 31, 1998 and 1999, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States.

/s/ ERNST & YOUNG LLP

Walnut Creek, California
January 21, 2000, except for Note 9,
as to which the date is April 3, 2000

F-2
<PAGE>

COVAD COMMUNICATIONS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN 000'S, EXCEPT SHARE AND PER SHARE AMOUNTS)

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1998 1999
--------------- -----------------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents...................................................................... $ 64,450 $ 216,038
Accounts receivable, net of allowances for uncollectibles of $220 and $2,857 at December 31,
1998 and 1999............................................................................... 1,933 15,393
Short-term investments......................................................................... -- 551,319
Unbilled revenue............................................................................... 663 5,419
Inventories.................................................................................... 946 8,547
Prepaid expenses............................................................................... 1,183 6,048
Other current assets........................................................................... 514 1,219
--------------- -----------------
Total current assets........................................................................ 69,689 803,983
PROPERTY AND EQUIPMENT:
Networks and communication equipment........................................................... 55,189 233,260
Computer equipment............................................................................. 4,426 24,057
Furniture and fixtures......................................................................... 1,119 4,383
Leasehold improvements......................................................................... 1,887 6,884
Land........................................................................................... -- 1,120
--------------- -----------------
62,621 269,704
Less accumulated depreciation and amortization................................................. (3,476) (32,162)
--------------- -----------------
Net property and equipment.................................................................. 59,145 237,542
OTHER ASSETS:
Restricted cash................................................................................ 225 63,308
Deposits....................................................................................... 337 1,131
Deferred debt issuance costs, net.............................................................. 8,112 12,369
Deferred charge, net........................................................................... -- 20,529
Other long term assets......................................................................... 1,911 8,744
--------------- -----------------
Total other assets.......................................................................... 10,585 106,081
--------------- -----------------
Total assets................................................................................ $ 139,419 $ 1,147,606
=============== =================
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)

CURRENT LIABILITIES:
Accounts payable............................................................................... $ 14,975 $ 41,126
Unearned revenue............................................................................... 551 5,238
Accrued network costs.......................................................................... 1,866 8,798
Other accrued liabilities...................................................................... 3,854 27,104
Current portion of capital lease obligations................................................... 263 268
--------------- -----------------
Total current liabilities................................................................... 21,509 82,534
Long-term debt, net of discount................................................................ 142,300 374,737
Long-term capital lease obligations............................................................ 316 44
--------------- -----------------
Total liabilities........................................................................... 164,125 457,315

Commitments and contingencies (see notes 4 and 8)

STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY):
Preferred stock ($0.001 par value):
Authorized shares--5,000,000 at December 1998 and 1999...................................... -- --
Issued and outstanding shares--27,369,243 at December 31, 1998 and 0 at December 31, 1999... 18 --
Common Stock ($0.001 par value):
Authorized shares--65,000,000 at December 31, 1998 and 190,000,000 at December 31, 1999..... -- --
Issued and outstanding shares--26,491,494 at December 31, 1998 and 132,331,316 at
December 31, 1999........................................................................ 12 82
Common Stock--Class B ($0.001 par value)
Authorized shares--0 at December 31, 1998 and 10,000,000 at December 31, 1999............... -- --
Issued and outstanding shares--0 at December 31, 1998 and 6,379,177 at December 31, 1999.... -- 6
Additional paid-in capital..................................................................... 30,685 851,589
Deferred compensation.......................................................................... (4,688) (6,513)
Accumulated other comprehensive income, net of tax effect...................................... -- 91,257
Accumulated (deficit).......................................................................... (50,733) (246,130)
--------------- -----------------
Total stockholders' equity (net capital deficiency)......................................... (24,706) 690,291
--------------- -----------------
Total liabilities and stockholders' equity (net capital deficiency)......................... $ 139,419 $ 1,147,606
=============== =================
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

F-3
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.

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

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1997 1998 1999
------------ -------------- --------------
<S> <C> <C> <C>
Revenues................................................................. $ 26 $ 5,326 $ 66,488
Operating expenses:
Network and product costs............................................ 54 4,562 55,347
Sales, marketing, general and administrative......................... 2,374 31,043 140,372
Amortization of deferred compensation................................ 295 3,997 4,768
Depreciation and amortization........................................ 70 3,406 37,602
------------ -------------- --------------
Total operating expenses.......................................... 2,793 43,008 238,089
------------ -------------- --------------
Loss from operations..................................................... (2,767) (37,682) (171,601)
Interest income (expense):
Interest income...................................................... 167 4,778 20,676
Interest expense..................................................... (12) (15,217) (44,472)
------------ -------------- --------------
Net interest income (expense)........................................ 155 (10,439) (23,796)
------------ -------------- --------------
Net loss................................................................. (2,612) (48,121) (195,397)
Preferred dividends...................................................... -- -- (1,146)
------------ -------------- --------------
Net loss attributable to Common Stockholders............................. $ (2,612) $ (48,121) $ (196,543)
============ ============== ==============
Net loss per share--basic and diluted.................................... $ (0.35) $ (3.75) $ (1.83)
============ ============== ==============
Weighted average shares used in computing net loss per share--
basic and diluted................................................... 7,360,978 12,844,203 107,647,812
============ ============== ==============
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

F-4
<PAGE>

COVAD COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
(AMOUNTS IN 000'S, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
---------------------------------- ----------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Initial issuance of Common Stock........... -- $ -- 27,000,000 $ 12
Repurchase of Common Stock................. -- -- (5,423,166) (3)
Issuance of Common Stock................... -- -- 3,985,875 2
Issuance of Series A Preferred Stock....... 1,125,000 1 -- --
Issuance of Series B Preferred Stock
(net of $43 of financing costs)........ 25,500,002 17 -- --
Deferred compensation...................... -- -- -- --
Amortization of deferred................... -- -- -- --
Net loss................................... -- -- -- --
---------------- --------------- --------------- ----------------
Balances at December 31, 1997.............. 26,625,002 18 25,562,709 11
Issuance of Common Stock................... -- -- 928,785 1
Issuance of Series B Preferred Stock....... 150,003 -- -- --
Issuance of Series C Preferred Stock....... 594,238 -- -- --
Issuance of Common Stock warrants
as part of debt offering issuance
costs.................................. -- -- -- --
Issuance of Common Stock warrants
Pursuant to debt offering.............. -- -- -- --
Deferred compensation...................... -- -- -- --
Amortization of deferred
compensation........................... -- -- -- --
Net loss................................... -- -- -- --
---------------- --------------- --------------- ----------------
Balances at December 31, 1998.............. (27,369,243) 18 26,491,494 12
Issuance of Common Stock................... -- -- 48,999,989 33
Issuance of Common Stock upon
exercise of warrants................... -- -- 15,652,382 10
Issuance of Series C and D Preferred
Stock.................................. 9,568,766 6 -- --
Deferred charge related to issuance of
Series C and D Preferred Stock......... -- -- -- --
Conversion of Series A, Series B and
Series C Preferred Stock to
Common Stock........................... (27,369,243) (18) 41,053,864 27
Conversion of Series C1 and D1
Preferred stock........................ (9,568,766) (6) 6,379,177 6
Preferred dividends........................ -- -- 133,587 --
Conversion of convertible Preferred
Stock.................................. -- -- -- --
Deferred compensation...................... -- -- -- --
Amortization of deferred
compensation........................... -- -- -- --
Unrealized gains (losses) on
investments............................ -- -- -- --
Net loss................................... -- -- -- --
---------------- --------------- --------------- ----------------
Balances at December 31, 1999.............. -- -- 138,710,493 $ 88
================ =============== =============== ================

ADDITIONAL ACCUMULATED OTHER
PAID-IN DEFERRED COMPREHENSIVE
CAPITAL COMPENSATION INCOME
--------------------- ------------------------- --------------------------
<S> <C> <C> <C>
Initial issuance of Common Stock........... $ 38 $ -- $ --
Repurchase of Common Stock................. (7) -- --
Issuance of Common Stock................... 66 -- --
Issuance of Series A Preferred Stock....... 249 -- --
Issuance of Series B Preferred Stock
(net of $43 of financing costs)........ 8,440 -- --
Deferred compensation...................... 906 (906) --
Amortization of deferred................... -- 295 --
Net loss................................... -- -- --
--------------------- ------------------------- --------------------------
Balances at December 31, 1997.............. 9,692 (611) --
Issuance of Common Stock................... 570 -- --
Issuance of Series B Preferred Stock....... 100 -- --
Issuance of Series C Preferred Stock....... 1,100 -- --
Issuance of Common Stock warrants
as part of debt offering issuance
costs.................................. 2,928 -- --
Issuance of Common Stock warrants
Pursuant to debt offering.............. 8,221 -- --
Deferred compensation...................... 8,074 (8,074) --
Amortization of deferred
compensation........................... -- 3,997 --
Net loss................................... -- -- --
--------------------- ------------------------- --------------------------
Balances at December 31, 1998.............. 30,685 (4,688) --
Issuance of Common Stock................... 725,708 -- --
Issuance of Common Stock upon
exercise of warrants................... (5) -- --
Issuance of Series C and D Preferred
Stock.................................. 59,994 -- --
Deferred charge related to issuance of
Series C and D Preferred Stock......... 28,700 -- --
Conversion of Series A, Series B and
Series C Preferred Stock to
Common Stock........................... (9) -- --
Conversion of Series C1 and D1
Preferred stock........................ -- -- --
Preferred dividends........................ (77) -- --
Conversion of convertible Preferred
Stock.................................. -- -- --
Deferred compensation...................... 6,593 (6,593) --
Amortization of deferred
compensation........................... -- 4,768 --
Unrealized gains (losses) on
investments............................ -- -- 91,257
Net loss................................... -- -- --
--------------------- ------------------------- --------------------------
Balances at December 31, 1999.............. $ 851,589 $ (6,513) $ 91,257
===================== ========================= ==========================
<CAPTION>

TOTAL STOCKHOLDERS'
ACCUMULATED EQUITY (NET CAPITAL
DEFICIT DEFICIENCY)
------------------------ --------------------------
<S> <C> <C>
Initial issuance of Common Stock........... $ -- $ 50
Repurchase of Common Stock................. -- (10)
Issuance of Common Stock................... -- 68
Issuance of Series A Preferred Stock....... -- 250
Issuance of Series B Preferred Stock
(net of $43 of financing costs)........ -- 8,457
Deferred compensation...................... -- --
Amortization of deferred................... -- 295
Net loss................................... (2,612) (2,612)
------------------------ --------------------------
Balances at December 31, 1997.............. (2,612) 6,498
Issuance of Common Stock................... -- 571
Issuance of Series B Preferred Stock....... -- 100
Issuance of Series C Preferred Stock....... -- 1,100
Issuance of Common Stock warrants
as part of debt offering issuance
costs.................................. -- 2,928
Issuance of Common Stock warrants
Pursuant to debt offering.............. -- 8,221
Deferred compensation...................... -- --
Amortization of deferred
compensation........................... -- 3,997
Net loss................................... (48,121) (48,121)
------------------------ --------------------------
Balances at December 31, 1998.............. (50,733) (24,706)
Issuance of Common Stock................... -- 725,741
Issuance of Common Stock upon
exercise of warrants................... -- 5
Issuance of Series C and D Preferred
Stock.................................. -- 60,000
Deferred charge related to issuance of
Series C and D Preferred Stock......... -- 28,700
Conversion of Series A, Series B and
Series C Preferred Stock to
Common Stock........................... -- --
Conversion of Series C1 and D1
Preferred stock........................ -- --
Preferred dividends........................ -- (77)
Conversion of convertible Preferred
Stock.................................. -- --
Deferred compensation...................... -- --
Amortization of deferred
compensation........................... -- 4,768
Unrealized gains (losses) on
investments............................ -- 91,257
Net loss................................... (195,397) (195,397)
------------------------ --------------------------
Balances at December 31, 1999.............. $ (246,130) $ 690,291
======================== ==========================
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

F-5
<PAGE>

COVAD COMMUNICATIONS GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN 000'S)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1998 1999
--------- ---------- -----------
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net loss.................................................................... $ (2,612) $ (48,121) $ (195,397)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization............................................ 70 3,406 37,602
Loss on disposition of equipment......................................... -- -- 358
Amortization of deferred compensation.................................... 295 3,997 4,768
Accreted interest and amortization of debt discount and deferred debt
issuance costs......................................................... -- 16,009 20,269
Net changes in operating assets and liabilities:
Accounts receivable.................................................... (25) (1,908) (13,460)
Unbilled revenue....................................................... (4) (659) (4,756)
Inventories............................................................ (43) (903) (7,601)
Prepaid expenses and other current assets.............................. (369) (1,328) (5,570)
Accounts payable....................................................... 651 14,324 26,151
Unearned revenue....................................................... 7 544 4,687
Other current liabilities.............................................. 135 5,585 30,182
-------- --------- ----------
Net cash used in operating activities....................................... (1,895) (9,054) (102,767)

INVESTING ACTIVITIES:
Purchase of restricted investment........................................... (210) (15) (73,435)
Redemption of restricted investments........................................ -- -- 13,214
Purchase of investments..................................................... -- (460,062)
Deposits.................................................................... (31) (306) (794)
Long-term assets............................................................ -- (1,428) (6,833)
Purchase of property and equipment.......................................... (2,253) (59,503) (208,186)
-------- --------- ----------
Net cash used in investing activities....................................... (2,494) (61,252) (736,096)

FINANCING ACTIVITIES:
Net proceeds from issuance of long-term debt and warrants................... -- 129,328 205,049
Principal payments under capital lease obligations.......................... (48) (238) (267)
Proceeds from Common Stock issuance, net of repurchase...................... 108 571 725,746
Proceeds from preferred stock issuance...................................... 8,707 1,200 60,000
Offering costs related to Common Stock offering............................. -- (483) (77)
-------- --------- ----------
Net cash provided by financing activities................................... 8,767 130,378 990,451
-------- --------- ----------
Net increase in cash and cash equivalents................................... 4,378 60,072 151,588
Cash and cash equivalents at beginning of year.............................. -- 4,378 64,450
-------- --------- ----------
Cash and cash equivalents at end of year.................................... $ 4,378 $ 64,450 $ 216,038
======== ========= ==========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest................................... $ 9 $ 99 $ 13,257
========= ========== ==========

SUPPLEMENTAL SCHEDULE ON NON-CASH INVESTING AND FINANCING ACTIVITIES:
Equipment purchased through capital lease................................ $ 831 $ 34 $ --
========= ========== ==========
Warrants issued for equity commitment.................................... $ -- $ 2,928 $ --
========= ========== ==========
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

F-6
<PAGE>

COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND NATURE OF OPERATIONS

Covad Communications Group, Inc. (the "Company") is a high-speed Internet
and network access provider offering digital subscriber line ("DSL") services to
Internet Service Provider ("ISP") and enterprise customers. ISPs purchase the
Company's services in order to provide high-speed Internet access to their
business and consumer end-users. Enterprise customers purchase the Company's
services to provide employees with remote access to their Local Area Networks to
improve employee productivity and reduce operating costs. The Company's services
are provided over standard copper telephone lines at considerably faster speeds
than available through a standard modem.

The Company's operations are subject to significant risks and
uncertainties including competitive, financial, developmental, operational,
growth and expansion, technological, regulatory, and other risks associated with
an emerging business.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The consolidated financial statements of the Company include the accounts
of all of its wholly-owned subsidiaries. There were no intercompany accounts and
transactions which required elimination.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results may differ materially from
those estimates.

INITIAL PUBLIC OFFERING

In January 1999, the Company completed an initial public offering of
20,182,500 shares of Common Stock at a purchase price of $8 per share. Net
proceeds to the Company aggregated approximately $150.2 million. In connection
with the offering, all of the preferred stock outstanding automatically
converted into 41,053,864 shares of Common Stock and 6,379,177 shares of Class B
Common Stock (which are convertible into 14,353,148 shares of Common Stock). The
Company's Board of Directors and stockholders also approved an amendment to the
Company's Articles of Incorporation to increase the total number of shares which
the Company is authorized to issue to 205,000,000 shares, of which 200,000,000
is Common Stock and 5,000,000 is preferred stock.

REVENUE RECOGNITION

Revenue related to installation of service and sale of customer premise
equipment is recognized when equipment is delivered and installation is
completed. Revenue from monthly recurring service is recognized in the month the
service is provided. Revenue recognized for which the customer has not been
billed is recorded as unbilled revenue until the period such billings are made.
Amounts billed in advance of providing services are recorded as unearned revenue
until the period such services are provided. For the year ended December
31,1998, one customer accounted for approximately 17% of the Company's revenue.
For the year ended December 31, 1999, two customers accounted for 15% and 14%
percent of the Company's revenues.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments, with a maturity of
three months or less from the date of original issuance, to be cash equivalents.

F-7
<PAGE>

COVAD COMMUNICATIONS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

RESTRICTED CASH

As of December 31, 1998, the Company had $225,000, in commercial deposits
held in the Company's name but restricted as security for certain of the
Company's capital lease financing arrangements. As of December 31, 1999, the
Company had $63,308,000 (net of an unrealized loss of $918,000) in U.S. Treasury
investments and commercial deposits for the payment of interest on the Company's
1999 notes and as security for certain lease financing arrangements.

CONCENTRATION OF CREDIT RISK AND CREDIT RISK EVALUATIONS

Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents,
restricted cash, short-term investments and accounts receivable. The Company's
cash and investment policies limit cash equivalents, restricted cash and
short-term investments to short-term, investment grade instruments. Cash and
cash equivalents, restricted cash and short-term investments are held with
various domestic financial institutions with high credit standing. The Company
has not experienced any significant losses on its cash and cash equivalents,
restricted cash or short-term investments. The company conducts business with
companies in various industries, primarily in the United States. Concentrations
of credit risk with respect to accounts receivable are limited due to the large
number of customers comprising the Company's customer base. In addition, the
Company typically offers its customers credit terms. The Company performs
ongoing credit evaluations of its customers' financial condition and generally
does not require collateral. Allowances are maintained for potential credit
issues and such losses to date have been within management's expectations.

INVENTORIES

Inventories are stated at the lower of cost or market and consist
primarily of customer premise equipment. Costs are based on the "first-in,
first-out" method.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost and depreciated using the
straight-line method over the following estimated useful lives:

Leasehold improvements......................... 15 years or life of
the lease
Electronic communication equipment............. 2 to 5 years
Furniture and fixtures......................... 3 to 7 years
Computer equipment............................. 3 years
Office equipment............................... 2 to 5 years
Computer software.............................. 2 to 7 years

SOFTWARE DEVELOPMENT COSTS

The Company capitalizes costs associated with the design, deployment and
expansion of the Company's network including internally and externally developed
software in accordance with Financial Accounting Standard Board No. 86 "Software
Development Costs" ("FAS 86") and Statement of Position 98-1 "Accounting for
Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"),
respectively. Costs incurred subsequent to the establishment of technological
feasibility are capitalized and amortized over the estimated lives of the
related products. Technological feasibility is established upon completion of a
working model. Capitalized external software costs include the actual costs to
purchase software from vendors. Capitalized internal software costs generally
include personnel and related costs incurred in the enhancement and
implementation of purchased software packages. Capitalized internal labor costs
for the years ending December 31, 1997, 1998 and 1999 were $139,000, $3,063,000
and $15,733,000, respectively. Capitalized interest cost for the years ending
December 31, 1997, 1998 and 1999 were none, $908,000 and $2,756,000,
respectively.

F-8
<PAGE>

COVAD COMMUNICATIONS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

EQUIPMENT UNDER CAPITAL LEASES

The Company leases certain of its equipment and other fixed assets under
capital lease agreements. The assets and liabilities under capital leases are
recorded at the lesser of the present value of aggregate future minimum lease
payments, including estimated bargain purchase options, or the fair value of the
assets under lease, whichever is less. Assets under capital lease are amortized
over the lease term or useful life of the assets.

ACCOUNTING FOR STOCK-BASED COMPENSATION

The Company accounts for employee stock options using the intrinsic value
method in accordance with Accounting Principles Board Opinion No. 25 ("APB 25")
and makes the pro forma disclosures required by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("FAS123")

ADVERTISING COSTS

The Company expenses the costs of advertising as incurred. Advertising
expense for the years ended December 31, 1997, 1998 and 1999 was $120,000,
$1,500,000 and $25,798,000, respectively.

INCOME TAXES

Due to the Company's overall loss position, there is no provision for
income taxes for 1997, 1998 or 1999.

The reconciliation of income tax computed at the US federal statutory
rate to income tax expense is as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1997 1998 1999
--------------- --------------- --------------
<S> <C> <C> <C>

Federal at 34%, statutory.............................. $(757,000) $(16,363,000) $(66,435,000)
Nondeductible interest................................. -- 911,000 2,050,000
Losses with no current benefits........................ 757,000 15,436,000 64,306,000
Other.................................................. -- 16,000 79,000
-------------- -------------- --------------
Provision.............................................. $-- $-- $--
============== ============== ==============
</TABLE>

Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities for federal and state income taxes
are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1998 1999
----------------- -----------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.............................. $ 16,000,000 45,462,000
Accrued interest.............................................. -- 15,977,000
Other......................................................... 2,500,00 1,846,000
---------------- ----------------
Total Net deferred tax assets................................. 18,500,000 63,285,000
---------------- ----------------
Valuation allowance.............................................. (18,500,000) (26,782,000)
---------------- ----------------
Total tax deferred assets........................................ -- 36,503,000
Unrealized gain on investments................................... -- (36,503,000)
---------------- ----------------
Net deferred tax assets.......................................... $-- --
================ ================
</TABLE>

Realization of the Company's deferred tax assets is dependent upon future
earnings, if any, the timing and amount of which are uncertain. Accordingly, the
net deferred tax assets have been fully offset by a valuation allowance. The
valuation allowance increased by $8,282,000 during 1999.

As of December 31, 1999, the Company had federal net operating loss
carryforwards for federal tax purposes of approximately $219.5 million which
expire in the years 2012 through 2019, if not utilized. The Company also had

F-9
<PAGE>

COVAD COMMUNICATIONS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

net operating losses carryforwards for state income tax purposes of
approximately $122.3 million expiring in year 2004, if not utilized.

The tax benefits associated with employee stock options provide a
deferred tax benefit of $14.5 million for the year-ended December 31, 1999. The
deferred tax benefit has been offset by a valuation allowance and will be
credited to additional paid-in capital when realized.

The utilization of the net operating loss is subject to a substantial
annual limitation due to the "change in ownership" provisions of the Internal
Revenue Code of 1986, as amended, and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair
value for financial instruments:

CASH, CASH EQUIVALENTS AND RESTRICTED CASH. The carrying amount
approximates fair value.

SHORT TERM INVESTMENT. The fair values of short-term investments were
estimated based on quoted market prices.

BORROWINGS. The fair values of borrowings, including long-term debt,
capital lease obligations and other obligations, were estimated based on quoted
market prices, where available, or by discounting the future cash flows using
estimated borrowing rates at which similar types of borrowing arrangements with
the same remaining maturities could be obtained by the Company. For all
borrowings outstanding at December 31, 1998 and 1999, fair value approximates
recorded value.

LOSS PER SHARE

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

Diluted loss per share is determined in the same manner as basic loss per
share except that the number of shares is increased assuming exercise of
dilutive stock options and warrants using the treasury stock method. The diluted
loss per share amount is the same as basic loss per share which has not been
reported because the Company has a net loss and the impact of the assumed
exercise of the stock options and warrants and the assumed is not dilutive.

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

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

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1998 1999
-------------- -------------- --------------
(IN 000'S, EXCEPT SHARE AND PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Net loss........................................................ $ (2,612) $ (48,121) $ (195,397)
Preferred dividends............................................. -- -- (1,146)
------------- ------------- -------------
Net loss attributable to common stockholders.................... $ (2,612) $ (48,121) $ (196,543)
============= ============= =============
Basic and diluted:
Weighted average shares of Common Stock outstanding.......... 24,797,854 25,886,940 115,675,656
Less: Weighted average shares subject to repurchase.......... 17,436,876 13,042,737 8,027,844
------------- ------------- -------------
Weighted average shares used in computing basic and diluted net 7,360,978 12,844,203 107,647,812
loss per share...............................................
============= ============= =============
Basic and diluted net loss per share............................ $ (0.35) $ (3.75) $ (1.83)
============= ============= =============
</TABLE>

F-10
<PAGE>

COVAD COMMUNICATIONS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

If the Company had reported net income, the calculation of historical
diluted earnings per share would have included an additional 8,574,189,
43,282,296 and 26,517,674 common equivalent shares related to the outstanding
stock options and warrants not included above (determined using the treasury
stock method) for the years ended December 31, 1997, 1998 and 1999,
respectively.

KEY SUPPLIERS

The Company is dependent on limited source suppliers for certain
equipment used to provide its services. The Company has generally been able to
obtain an adequate supply of equipment. In addition, the Company believes that
there are alternative suppliers for the equipment used to provide its services.
However, an extended interruption in the supply of equipment currently obtained
from limited source suppliers could adversely affect the Company's business and
results of operations.

ACCOUNTS RECEIVABLE ALLOWANCE

The Company's reserve for uncollectible accounts receivable was $220,000
and $2,857,000 at December 31, 1998 and 1999, respectively. No significant
charges were made against this reserve as of December 31, 1999.

BUSINESS SEGMENTS

For management purposes, the Company is viewed as one entity with a Chief
Executive Officer ("CEO"), who is the Chief Operating Decision Maker. Financial
position and results of operations for the entity are provided to the CEO in a
format similar to the accompanying financial statements. The Company's
management makes financial decisions and allocates resources based on these
financial statements.

SHORT-TERM INVESTMENTS

At December 31, 1999, all of the Company's investments were classified as
available for sale. Investments were also classified as short-term, as their
maturing date was less than one year from the balance sheet date. Management
determines the appropriate classification of investments at the time of purchase
and reevaluates such designation at the end of each period. Unrealized gains and
losses on short-term investments as of December 31, 1999, are included as a
separate component of stockholders' equity, net of any related tax effect. The
amount of realized gains or losses for the years ended December 31, 1997, 1998
and 1999 was not significant.

The following table summarizes the Company's investments:

<TABLE>
<CAPTION>
DECEMBER 31, 1999,
-------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
----------- ----------- ----------- -----------
(AMOUNT IN $000'S)
<S> <C> <C> <C> <C>
Commercial paper....................................... $373,007 $125 -- $373,132
Corporate notes........................................ 53,767 -- (596) 53,171
Equity securities...................................... 32,200 92,816 -- 125,016
----------- ----------- ----------- -----------
Total available for sale securities.................... $458,974 $92,941 $(596) $551,319
=========== =========== =========== ===========
</TABLE>

The company also had a net unrealized loss of $168,000 on cash and cash
equivalents and an unrealized loss of $920,000 on long term U.S. Treasury
investments, classified as Restricted Cash on the Company's balance sheet.

2. DEBT

On March 11, 1998, the Company completed a private placement (the "1998
Private Offering") through the issuance of 260,000 units (the "Units"), each
unit consisting of $1,000 in principal amount at maturity of 13 1/2% Senior
Discount Notes due 2008 (the "1998 notes") and one warrant, initially
exercisable to purchase 43.7346 shares of Common Stock, $0.001 par value, of the
Company (the "Unit Warrants"). Net proceeds from the 1998 Private Offering were
approximately $129.6 million, after transaction costs of approximately $5.5
million.

F-11
<PAGE>

COVAD COMMUNICATIONS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The principal amount of the 1998 notes will accrete from the date of
issuance at the rate of 13 1/2% per annum through March 15, 2003, compounded
semi-annually, and thereafter bear interest at the rate of 13 1/2% per annum,
payable semi-annually, in arrears on March 15 and September 15 of each year,
commencing on September 15, 2003. The 1998 notes are unsecured senior
obligations of the Company that will mature on March 15, 2008. The 1998 notes
will be redeemable at the option of the Company at any time after March 15, 2003
plus accrued and unpaid interest thereon, if any, to the redemption date.

The 1998 notes were originally recorded at approximately $126.9 million,
which represents the $135.1 million in gross proceeds less the approximate $8.2
million value assigned to the Unit Warrants, which is included in additional
paid-in capital. The value assigned to the Unit Warrants, representing debt
discount, is being amortized over the life of the 1998 notes. Debt issuance
costs were incurred through the issuance of additional warrants associated with
the commitment of equity by certain investors. The debt issuance costs are also
being amortized over the life of the 1998 notes. For the years ended December
31, 1998 and 1999, the accretion of the 1998 notes and the amortization of debt
discount and debt issuance costs was $16.0 million and $22.3 million,
respectively, of which $15.1 million and $21.0 million, respectively, is
included in interest expense and $900,000 and $1.3 million, respectively, is
capitalized in property, plant and equipment.

The Unit Warrants have ten year terms, have exercise prices of $0.0022
per share (subject to adjustment in certain events), contain net exercise
provisions and are currently exercisable.

On February 18, 1999, the Company completed the issuance of $215.0
million senior debt notes (the "1999 notes"). Net proceeds from the 1999 notes
were approximately $205.0 million after transaction costs of approximately $9.9
million, which are being amortized over the life of the notes. Amortization
expense related to the transaction cost was $827,000 for year ended December
31,1999. The principal amount of the 1999 notes bears interest at the rate of 12
1/2% per annum through February 15, 2009, compounded semi-annually, and
thereafter bears interest at the rate of 12 1/2% per annum, payable
semi-annually, in arrears on February 15 and August 15 of each year, commencing
on August 15, 1999. The 1999 notes are unsecured senior obligations of the
Company that will mature on February 15, 2009. The notes will be redeemable at
the option of the Company at any time after February 15, 2004 at stated
redemption prices plus accrued and unpaid interest thereon.

The Company purchased approximately $74.1 million of government
securities from the net proceeds, representing sufficient funds to pay the first
six scheduled interest payments on the 1999 notes. These government securities
are pledged as security for repayment of interest on the 1999 notes.

On June 1, 1999, the Company completed an offer to exchange all
outstanding12 1/2% senior notes due February 15, 2009 for 12 1/2% senior notes
due February15, 2009, which have been registered under the Securities Act of
1933.

3. CAPITAL LEASES

The Company has entered into capital lease arrangements to finance the
acquisition of certain operating assets, two of which have bargain purchase
options. The original principal value of these leases totaled $865,000 as of
December 31, 1999, and was equivalent to the fair value of the assets leased.

F-12
<PAGE>

COVAD COMMUNICATIONS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Future minimum lease payments under capital leases are as follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
<S> <C>
2000............................................... $ 294,000
2001............................................... 44,000
2002............................................... 4,000
Thereafter......................................... --
----------
342,000

Less amount representing interest.................. (30,000)
Less current portion............................... (268,000)
----------
Total long-term portion............................ $44,000
==========
</TABLE>

Accumulated amortization for equipment under capital leases is reflected
in accumulated depreciation and amortization for property and equipment.

4. OPERATING LEASES

The Company leases vehicles, equipment, and office space under various
operating leases. Future minimum lease payments by year under operating leases
are as follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
<S> <C>
2000............................................. 5,852,000
2001............................................. 5,713,000
2002............................................. 5,023,000
2003............................................. 3,875,000
2004............................................. 3,292,000
Thereafter....................................... 2,326,000
--------------
Total..................................... $26,081,000
==============
</TABLE>

Rental expense on operating leases totaled $131,000, $1,507,000 and
$4,302,000 for the years ended December 31, 1997, 1998, and 1999, respectively.

5. STOCKHOLDERS' EQUITY

STRATEGIC INVESTMENT

In January 1999, the Company entered into strategic relationships with
AT&T Corp. ("AT&T"), NEXTLINK Communications, Inc. ("NEXTLINK") and Qwest
Communications Corporation ("Qwest"). As part of these strategic relationships,
the Company received equity investments totaling approximately $60 million. The
Company recorded intangible assets of $28.7 million associated with these
transactions which will be amortized over periods of three to six years. For the
year ended December 31, 1999, amortization expense totaled $8.2 million.

INITIAL PUBLIC OFFERING

On January 27, 1999, the Company completed the initial public offering
(IPO) of 20,182,500 shares of the Company's Common Stock at a price of $8.00 per
share. Net proceeds to the Company from the offering were $150.2 million after
deducting underwriting discounts and commissions and offering expenses payable
by the Company. As a result of the offering, 41,053,864 shares of the Common
Stock and 6,379,177 shares of the Class B Common Stock (which are convertible
into 14,353,148 shares of Common Stock) were issued upon the conversion of
Preferred Stock, 133,587 shares of Common Stock were issued for cumulative but
unpaid dividends on Series A and Series B Preferred Stock and 4,049,439 shares
of Common Stock were issued upon the exercise of common warrants.

F-13
<PAGE>

COVAD COMMUNICATIONS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

SECONDARY OFFERING

On June 23, 1999, the Company completed a public offering of 12,937,500
shares of Common Stock sold by certain stockholders of the Company. The Company
did not sell any shares in this offering. Accordingly, there were no net
proceeds to the Company from this offering. The Company incurred offering
expenses of approximately $600,000.

SECOND PUBLIC OFFERING

On November 3, 1999 the Company completed a public offering of 22,425,000
shares of Common Stock sold by the Company and certain stockholders of the
Company. The net proceeds to the Company from this offering were $568.8 million
after deducting underwriting discounts and commissions and offering expenses.

COMMON STOCK

Shares of Common Stock outstanding at December 31, 1998 and December
31,1999 were 26,491,494 and 132,331,316 shares, respectively, of which
10,739,437 and 6,679,313 shares, respectively, remain subject to repurchase
provisions which generally lapse over a four-year period from the date of
issuance. Shares of Class B Common Stock outstanding at December 31, 1998 and
December 31, 1999 were 0 and 6,379,177, respectively, of which no shares remain
subject to repurchase.

Common Stock reserved for future issuance as of December 31, 1999 is as
follows:

Outstanding options...................... 24,522,633
Options available for grant.............. 1,905,080
Employee stock purchase plan............. 2,872,836
Warrants outstanding..................... 1,995,041
--------------
Total............................. 31,295,590
==============

PREFERRED STOCK DIVIDENDS

The holders of Series A, Series B and Series C were entitled to receive
in any fiscal year, dividends at the rate of $0.0111 per share, $0.0267 per
share and $0.1487 per share, respectively, payable in preference and priority to
any payment of dividends on Common Stock. The rights to such dividends were
cumulative and accrue to the holders to the extent they were not declared or
paid and were payable, in cash or Common Stock, only in the event of a
liquidation, dissolution or winding up of the Company, or other liquidity event
(as defined in the Certificate of Incorporation). The cumulative dividends at
December 31, 1998 and December 31,1999 for Preferred Stock were approximately
$1,085,000 and $ 1,146,000, respectively, which were converted into 133,587
shares of Common Stock in connection with the IPO.

6. EMPLOYEE BENEFIT PLANS

DEFINED CONTRIBUTION PLAN

Effective September 1, 1997, the Company adopted a defined contribution
retirement plan under Section 401(k) of the Internal Revenue Code which covers
substantially all employees. Eligible employees may contribute amounts to the
plan, via payroll withholding, subject to certain limitations. The Company does
not match contributions by plan participants.

1998 EMPLOYEE STOCK PURCHASE PLAN

In January 1999, the Company adopted the 1998 Employee Stock Purchase
Plan. The Company has reserved a total of 3,375,000 shares of Common Stock for
issuance under the plan. Eligible employees may purchase Common Stock at 85% of
the lesser of the fair market value of the Company's Common Stock on the first
day of the applicable twenty-four month offering period or the last day of the
applicable six month purchase period.

F-14
<PAGE>

COVAD COMMUNICATIONS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

STOCK OPTION PLANS

In 1997, the Company adopted the Covad Communications Group, Inc. 1997
Stock Plan (the "Plan"). The 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 the Board of Directors. The
options expire from two to eight years after the date of grant. As of December
31, 1999 the Plan has reserved 34,920,770 shares of the Company's Common Stock
for sale and issuance under the Plan at prices to be determined by the Board of
Directors.

The following table summarizes stock option activity for the year ended
December 31, 1997, 1998 and December 31, 1999:

<TABLE>
<CAPTION>
NUMBER OF SHARES OF OPTION PRICE
COMMON STOCK PER SHARE
--------------------- -------------------
<S> <C> <C>
Granted.................................................. 8,648,438 $0.022- $ 0.03
Exercised................................................ (13,500) --- $0.02
Cancelled................................................ (60,750) $0.022- $0.03
-------------------- ------------------
Balance as of December 31, 1997.......................... 8,574,188 $0.022- $0.03
Granted.................................................. 21,077,955 $0.067- $5.44
Exercised................................................ (466,863) $0.022- $0.45
Cancelled................................................ (1,627,730) $0.022- $5.29
-------------------- ------------------
Balance as of December 31, 1998.......................... 27,557,550 $0.022- $5.44
Granted.................................................. 8,774,658 $0.007- $44.67
Exercised................................................ (8,012,683) $0.007- $38.17
Cancelled................................................ (3,796,892) $0.147- $43.42
-------------------- ------------------
Balance as of December 31, 1999.......................... 24,522,633 $0.0007- $44.67
==================== ==================
</TABLE>

The following is a summary of the status of stock options outstanding at
December 31, 1999:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- ----------------------------------
EXERCISE NUMBER OF WEIGHTED-AVERAGE WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE
PRICE RANGE SHARES LIFE REMAINING EXERCISE PRICE SHARES EXERCISE PRICE
------------------- ---------------- --------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
$ .007 - $ 6.33 16,509,627 6.1 $1.14 3,592,692 $1.05
$ 1.33 - $12.67 1,704,315 7.0 $7.55 326,487 $7.55
$12.67 - $19.00 25,614 7.1 $18.61 2,757 $18.61
$19.00 - $25.33 34,500 7.1 $20.96 5,502 $20.91
$25.33 - $31.67 2,944,256 7.4 $28.41 166,840 $28.38
$31.67 - $

38.00 1,754,922 7.5 $34.50 65,499 $36.21
$38.00 - $44.33 1,534,774 7.3 $40.69 151,818 $40.23
$44.33 - $50.67 14,625 5.6 $44.67 2,432 $44.67
--------------- --------------- ---------------- -------------- ----------------
24,522,633 6.5 $9.79 4,314,027 $4.57
=============== =============== ================ ============== ================
</TABLE>

During the year ended December 31, 1997, the Company recorded deferred
compensation of $906,000 as a result of granting stock options and issuing
restricted stock with exercise or issue prices per share below the revised fair
value per share of the Company's Common Stock at the date of grant or issuance.
This amount was recorded as a reduction of stockholders' equity and is being
amortized as a charge to operations over the vesting period of the applicable
options using a graded vesting method. Such amortization was $295,000 for the
year ended December 31, 1997. During the year ended December 31, 1998, the
company recorded additional deferred compensation of approximately $8.1 million.
Amortization of deferred compensation during this same period was approximately
$4.0 million. During the year ended December 31, 1999, the Company recorded
additional deferred compensation of approximately $6.6 million. Amortization of
deferred compensation during this same period was approximately $4.8 million.

F-15
<PAGE>

COVAD COMMUNICATIONS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

STOCK-BASED COMPENSATION

Pro forma information regarding the results of operations and net loss
per share is required by FAS 123, which also requires that the information be
determined as if the Company had accounted for its employee stock options using
the fair value method of FAS 123. The fair value of each option granted is
estimated on the date of grant using the Black Scholes valuation model.

The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FAS 123 requires the use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, when the exercised price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.

The option valuation models were developed for use in estimating the fair
value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected life of the option. Because the
Company's 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 of the estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

For the years ended December 31, 1997, 1998 and 1999, the fair value of
the Company's stock-based awards to employees was estimated using the following
weighted average assumptions:

<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Expected life of options in years..................... 4.0 4.0 4.0
Volatility............................................ 123.5% 123.5% 123.5%
Risk-free interest rate............................... 7.0% 7.0% 7.0%
Expected dividend yield............................... 0.0% 0.00% 0.00%
</TABLE>

The weighted average fair value of stock options granted during the years
ended December 31, 1997, 1998 and 1999 was $0.11, $0.91 and $9.79 per share,
respectively. For pro forma purposes, the estimated fair value of the Company's
stock-based awards to employees is amortized over the options' vesting period
which would result in an increase in net loss of approximately $12,000, $1.7
million and $35.2 million for the years ended December 31, 1997, 1998 and 1999,
respectively. The result of applying FAS 123 to the Company's option grants was
not material to the results of operations or loss per share for the year ended
December 31, 1997 and would have increased the net loss per share by $0.20 per
share and $0.49 per share for the year ended December 31, 1998 and 1999,
respectively.

The pro forma impact of options on the net loss for the years ended
December 31, 1997, 1998, and 1999 is not representative of the effects on net
loss for future years, as future years will include the effects of additional
years of stock option grants.

7. RELATED PARTY TRANSACTIONS

The Company purchases equipment from a supplier which is partially owned
by an investor in the Company. Purchases from this supplier totaled $85,000,
$5,844,000 and $45,695,000 for the years ending December 31, 1997, 1998 and
1999, respectively. During 1999, an unrelated party acquired this supplier, as
such, the Company had no financial interest in them by year end December
31,1999. In addition, the Company acquired an interest in a new supplier.
Purchases from this new supplier totaled $3,401,000 for the year ended December
31, 1999.

8. LEGAL PROCEEDINGS

The Company is engaged in a variety of negotiations, arbitrations and
regulatory and court proceedings with multiple traditional telephone companies.
These negotiations, arbitrations and proceedings concern the traditional
telephone companies' denial of physical central office space to the Company in
certain central offices, the cost and delivery of central office spaces, the
delivery of transmission facilities and telephone lines, billing issues and
other operational issues. For example, the Company is currently involved in
commercial arbitration proceedings with Pacific Bell over these issues. The
Company has also filed a lawsuit against Pacific Bell and certain of its
affiliates,

F-16

<PAGE>
COVAD COMMUNICATIONS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

including SBC Communications, in federal court. The Company is pursuing a
variety of contract, tort, and antitrust and other claims, such as violations of
the Telecommunications Act, in these proceedings. In November 1998, the Company
prevailed in its commercial arbitration proceeding against Pacific Bell. The
arbitration panel found that Pacific Bell breached its interconnection agreement
with the Company and failed to act in good faith on multiple counts. The
arbitration panel ruled in favor of awarding the Company direct damages, as well
as attorneys fees and costs of the arbitration. Pacific Bell is currently
attempting to have the decision vacated. Meanwhile, the arbitration panel is
evaluating the Company's claim for additional damages.

The Company also filed a lawsuit against Bell Atlantic and its affiliates
in federal court and is pursuing antitrust and other claims in this lawsuit. In
addition, Bell Atlantic has separately filed suit against the Company asserting
infringement of a patent issued to them in September 1998 entitled "Variable
Rate and Variable Mode Transmission System." However, on February 18, 2000 the
court issued a summary judgement ruling holding that the Company had not
infringed Bell Atlantic's patent. The Company anticipates that Bell Atlantic may
appeal this decision and, while the Company expects that it would prevail on an
appeal, the outcome of such an appeal is uncertain.

A former employee of the Company has filed a complaint against the
Company in California Superior Court, alleging that he was terminated wrongfully
and is entitled to commissions and other amounts arising from his employment.
The Company believes that this employee resigned and that it does not owe him
any money, but litigation is unpredictable and there is no guarantee the Company
will prevail. Another group of former employees of the Company have filed a
Complaint against the Company in California Superior Court alleging that they
were terminated wrongfully and are entitled to other amounts arising from their
employment. The Company believes it has valid defenses and does not own them any
money, but litigation is unpredictable and there is no guarantee the Company
will prevail. Failure to resolve these various legal disputes and controversies
without excessive delay and cost and in a manner that is favorable, could
significantly harm the business.

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

9. SUBSEQUENT EVENTS

On January 28, 2000, the Company completed a private placement of $425.0
million aggregate principal amount of the Company's 12% senior notes (the "2000
notes") due 2010. The 2000 notes are unsecured senior obligations of the Company
maturing on February 15, 2010 and are redeemable at the option of the Company
any time after February 15, 2005 at stated redemption prices plus accrued and
unpaid interest thereon. Net proceeds from the 2000 notes were approximately
$413.3 million, after discounts, commissions and other transaction costs of
approximately $11.7 million. The discount and debt issuance costs are being
amortized over the life of the 2000 notes. These notes were sold in a private
placement under Rule 144A and Regulation S under the Securities Act of 1933, as
amended.

The Company has filed a registration statement covering an offer to
exchange new registered 12% senior notes due February 15, 2010 for all
outstanding 12% senior notes due February 15, 2010.

On February 15, 2000 the Company's Board of Directors adopted a
Stockholder Protection Rights Plan under which stockholders received one right
for each share of the Company's Common Stock or Class B Common Stock owned by
them. The rights become exercisable, in most circumstances, upon the
accumulation by a person or group of 15% or more of the Company's outstanding
shares of Common Stock. Each right entitles the holder to purchase from the
Company, as provided by the Stockholder protection Rights Agreement, one
one-thousandth of a share of Participating Preferred Stock, par value $.001 per
share, for $400.00, subject to adjustment.

F-17
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

On March 7, 2000, the Company announced a 3-for-2 stock split, which was
effectuated through a stock dividend. The Company's Common Stock began trading
on a split adjusted basis on April 3, 2000. All share and per share numbers in
the accompanying consolidated financial statements have been retroactively
adjusted to reflect this split.

On March 20, 2000 the Company completed the acquisition of Laser
Link.Net, a leading provider of branded internet access, based in Media,
Pennsylvania in a transaction to be accounted for as a purchase. Under the
acquisition agreement, the Company issued 6.45 million shares of Common Stock
for all Laser Link.Net outstanding shares, plus assumption of all outstanding
debt. The Company anticipates that this acquisition will allow the Company to
provide a turnkey broadband access solution to companies and affinity groups who
want to offer broadband internet services to their customers, members, or
affiliates. Laser Link.Net currently provides a similar service using dial-up
access. The total consideration related to the acquisition, was approximately
$411.1 million.

F-18
<PAGE>

COVAD COMMUNICATIONS GROUP, INC.

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

MARCH 31, 2000
-----------------
ASSETS

CURRENT ASSETS:
<S> <C>
Cash and cash equivalents.......................................................................... $589,145
Accounts receivable, net........................................................................... 18,351
Short term investments............................................................................. 473,644
Unbilled revenue................................................................................... 7,774
Inventories........................................................................................ 13,162
Prepaid expenses................................................................................... 12,053
Other current assets............................................................................... 5,317
-----------------
Total current Assets......................................................................... 1,119,446
PROPERTY AND EQUIPMENT:
Networks and communication equipment............................................................... 312,707
Computer equipment................................................................................. 37,107
Furniture and fixtures............................................................................. 7,615
Leasehold improvements............................................................................. 17,524
Land............................................................................................... 1,195
-----------------
376,148
Less accumulated depreciation and amortization..................................................... (46,989)
-----------------
Net property and equipment...................................................................... 329,159
OTHER ASSETS:
Restricted cash.................................................................................... 51,476
Deposits........................................................................................... 1,509
Deferred debt issuance costs (net)................................................................. 23,569
Deferred charge (net).............................................................................. 18,438
Goodwill (net)..................................................................................... 395,248
Other long term assets............................................................................. 8,608
-----------------
Total other assets........................................................................... 498,848
-----------------
Total assets................................................................................. $1,947,453
=================

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:

Accounts payable................................................................................... $77,451
Unearned revenue................................................................................... 8,754
Accrued network costs.............................................................................. 7,492
Other accrued liabilities.......................................................................... 45,167
Current portion of capital lease obligations....................................................... 210
-----------------
Total current liabilities.................................................................... 139,074
Long-term debt (net of discount)................................................................... 805,619
Long-term capital lease obligations................................................................ 35
Other Long-term liabilities........................................................................ 17,900
=================
Total liabilities............................................................................ 962,628
STOCKHOLDERS' EQUITY:
Preferred stock ($0.001 par value):
Authorized shares--5,000,000
Issued and outstanding shares-none.............................................................. --
Common stock ($0.001 par value):
Authorized shares--190,000,000
Issued and outstanding shares--148,028,308 ..................................................... 132
Common stock - Class B ($0.001 par value):
Authorized shares--10,000,000
Issued and outstanding shares--1,594,794........................................................ 6
Additional paid-in capital......................................................................... 1,252,793
Deferred compensation.............................................................................. (7,414)
Accumulated other comprehensive income............................................................. 92,663
Accumulated deficit................................................................................ (353,355)
-----------------
Total stockholders' equity................................................................... 984,825
-----------------
Total liabilities and stockholders' equity................................................... $1,947,453
=================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

F-19
<PAGE>

COVAD COMMUNICATIONS GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN 000'S, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------
1999 2000
----------------- ------------------
<S> <C> <C>
Revenues................................................................................ $ 5,596 $ 41,807
Operating expenses:
Network and product costs......................................................... 4,960 31,349
Sales, marketing, general and administrative ..................................... 18,113 89,171
Amortization of deferred compensation............................................. 1,653 1,186
Depreciation and amortization..................................................... 4,647 20,782
----------------- ------------------
Total operating expenses.................................................... 29,373 142,488
----------------- ------------------
Loss from operations.................................................................... (23,777) (100,681)
Interest income (expense):
Interest income................................................................... 3,509 13,828
Interest expense.................................................................. (8,636) (21,371)
----------------- ------------------
Net interest income (expense)..................................................... (5,127) (7,543)
Other income............................................................................ -- 999
----------------- ------------------
Net loss................................................................................ (28,904) (107,225)
Preferred dividends............................................................... (1,146) --
Net loss attributable to common stockholders............................................ $ (30,050) $ (107,225)
================= ==================
Basic and diluted net loss per common stock share....................................... $ (0.37) $ (0.73)
================= ==================
Weighted average shares used in computing basic and diluted net loss per share.......... 80,432,965 146,967,581
================= ==================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

F-20
<PAGE>

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN 000'S)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------------
1999 2000
-------------- ---------------
<S> <C> <C>
Net Cash Used In Operating Activities............................................ $ (15,254) $ (17,044)

Investing Activities:
Purchase of resticted investments................................................ (74,103) --
Redemption of restriced investments.............................................. -- 13,438
Sale of investments.............................................................. -- 79,081
Deposits......................................................................... (11) (378)
Other long-term assets........................................................... (6,132) (784)
Purchase of property and equipment............................................... (42,802) (110,652)
Cash acquired through acquisitions............................................... -- 3,948
Acquisitions of business, net of cash acquired................................... -- (14,903)
------------- --------------
Net cash used in investing activities............................................ (123,048) (30,250)

Financing Activities:
Net proceeds from issuance of long-term debt..................................... 205,094 413,269
Principal payments under capital lease obligations............................... (65) (67)
Proceeds from common stock issuance, net of offering costs....................... 150,703 7,199
Proceeds from preferred stock issuance........................................... 60,000 --
Preferred Dividends.............................................................. (77) --
------------- --------------
Net cash provided by financing activities........................................ 415,655 420,401
------------- --------------
Net increase in cash and cash equivalents........................................ 277,353 373,107
Cash and cash equivalents at beginning of period................................. 64,450 216,038
------------- --------------
Cash and cash equivalents at end of period....................................... $ 341,803 $ 589,145
Supplemental disclosures of cash flow information:
Cash paid during the period for interest...................................... $ -- $ 13,257
Supplemental schedule of non-cash investing and financing activities:
Common Stock Issued for preferred dividends................................... $ -- $ --
Issuance of Common Stock for acquisition of business.......................... $ -- $ 391,968
</TABLE>

F-21
<PAGE>

COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

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

The consolidated financial statements at March 31, 2000 and for the three
month period ended March 31, 1999 are unaudited, but include all adjustments
(consisting only of normal recurring adjustments) that the Company considers
necessary for a fair presentation of financial position and operating results.
Operating results for the three month periods ended March 31, 2000 and 1999 are
not necessarily indicative of results that may be expected for any future
periods.

The information included in this report should be read in conjunction
with the Company's audited consolidated financial statements and notes thereto
included in the Company's 1999 Annual Report on Form 10-K.

LOSS PER SHARE

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

Diluted loss per share is determined in the same manner as basic earnings
per share except that the number of shares is increased assuming exercise of
dilutive stock options and warrants using the treasury stock method. The diluted
earnings per share amount is the same as basic loss per share, which has not
been reported because the Company has a net loss and the impact of the assumed
exercise of the stock options and warrants is not dilutive.

The consolidated financial statements applicable to the prior periods
have been restated to reflect a three-for-two stock split effective May 1999,
and a three-for-two stock split effective April 2000.

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

THREE MONTHS ENDED MARCH 31,
----------------------------
1999 2000
------------- -------------
Net loss...................................... $ (28,904) $ (107,225)
Preferred dividends........................ (1,146) --
------------- -------------

Net loss available to common stockholders..... $ (30,050) $ (107,225)
Basic and diluted:
Weighted average shares of common stock
outstanding................................... 90,269,528 151,996,934
Less: Weighted average shares subject to
repurchase.................................... 9,836,562 5,029,353
------------- -------------

Weighted average shares used in computing
basic and diluted net loss per share... (80,432,966) 146,967,581

------------- -------------
Basic and diluted net loss per share......... $ (0.37) $ (0.73)
============= =============

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"), which establishes accounting
and reporting standards for derivative instruments and activities. FAS 133
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair

F-22
<PAGE>

COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)

value. The Company will be required to adopt FAS 133 effective January 1, 2001.
Management of the Company does not believe the adoption of this statement will
have a material effect on the Company's consolidated financial position, results
of operations or cash flows.

Staff Accounting Bulletin 101 "Revenue Recognition in Financial
Statements," ("SAB 101") which was issued in December 31, 1999 by the Securities
and Exchange Commission. SAB 101 provides that, in certain circumstances,
revenues which are received in the first month of a contract might have to be
recognized over an extended period of time, instead of in the first month of the
contract. Due to the complex nature of the widespread implementation of SAB
101, the SEC has deferred the implementation date of SAB 101 until the
quarter ended December 31, 2000. The SEC intends to issue further definitive
guidance on the implementation of SAB 101. If SAB 101 is implemented and its
implementation is contrary to the Company's current practice, it may have an
adverse effect on the Company's financial statements.

2. COMPREHENSIVE INCOME

Comprehensive income for the three months ended March 31, 1999 and 2000
was as follows (in thousands):

THREE MONTHS ENDED
MARCH 31,
-----------------
1999 2000
------- -----------
Net loss........................................... $ (28,904) $ (107,225)
Unrealized holding gains, net of tax effect........ -- 92,663
-----------
Comprehensive income............................... $ (28,904) $ (14,562)
========== ===========

3. SHORT-TERM INVESTMENTS

At March 31, 2000, all of the Company's investments were classified as
available for sale. Investments were also classified as short-term, as their
maturing date was less than one year from the balance sheet date. Management
determines the appropriate classification of investments at the time of purchase
and re-evaluates such designation at the end of each period. Unrealized gains
and losses on short-term investments as of March 31, 2000 are included as a
separate component of stockholders' equity, net of any related tax effect. The
amount of realized gains or losses for the three months ended March 31, 2000 and
March 31, 1999 was not significant.

The following table summarizes the Company's investments:
<TABLE>

GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
MARCH 31, 2000 COST GAINS LOSSES FAIR VALUE
---------- ---------- --------- ----------
(AMOUNTS IN $000'S)
<S> <C> <C> <C> <C>
Commercial paper.............................................. $ 133,870 $ -- $ (10) $ 133,860
Corporate notes............................................... 8,340 -- (24) 8,316
U.S. Treasurey & Agency notes................................. 182,142 -- (9) 182,133
Equity securities............................................. 55,113 94,222 -- 149,335
----------- ----------- ---------- -----------
Total available for sale securities........................... $ 379,465 $ 94,222 $ (43) $ 473,644
=========== =========== ========== ===========
</TABLE>

The company had a net unrealized loss of $844,000 on long term U.S.
Treasury investments, at March 31, 2000, classified as restricted cash on the
accompanying consolidated balance sheet. The Company also had unrealized losses
on cash and cash equivalents which were not significant at March 31, 2000.

4. ACQUISITIONS

On March 20, 2000, the Company completed the acquisition of
LaserLink.net, a leading provider of branded Internet access, based in Media,
Pennsylvania in a transaction to be accounted for as a purchase. The Company
anticipates that this acquisition will allow the Company to provide a turnkey
broadband access solution to

F-23
<PAGE>

COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)

companies and affinity groups who want to offer broadband Internet services to
their customers, members, or affiliates. LaserLink.net currently provides a
similar service using dial-up access.

The amounts allocated to purchased research and development were
determined through established valuation techniques in the high technology
Internet industry and were expensed upon acquisition, because technological
feasibility had not been established and no future alternative uses existed. The
values assigned to purchased in-process technology were determined by
identifying the on-going research projects for which technological feasibility
had not been achieved and assessing the state of completion of the research and
development effort. The state of completion was determined by estimating the
costs and time incurred to date relative to those costs and time to be incurred
to develop the purchased in-process technology into commercially viable
products, estimating the resulting net cash flows only from the percentage of
research and development efforts complete at the date of acquisition, and
discounting the net cash flows back to their present value. The discount rate
included a factor that took into account the uncertainty surrounding the
successful development of the purchased in-process technology projects.

To determine the values of purchased technology, the expected future cash
flows of the existing developed technologies were discounted taking into account
the characteristics and applications of the product.

To determine the value of the customer base, the expected future cash
flows from customer payments were discounted back to their present value taking
into account, the length of contracts, payment terms, expected life cycle of a
customer relationship, and the level of internet usage.

To determine the values of the acquired workforce, it was concluded all
employees would require significant cost to replace and train. Then each
employee's partially burdened cost (salary, benefits, facilities), the cost the
train the employee, and the recruiting costs (locating, interviewing, and
hiring) were estimated. These costs were then aggregated and tax-affected to
estimate the value of the assembled workforce.

Amounts allocated to purchased technology, goodwill and other intangible
assets for the business acquisitions that follow are being amortized on a
straight-line basis over a period of five years.

The purchase consideration consisted of approximately 4.3 million shares
of Common Stock with a value of $392.0 million, liabilities assumed of $3.6
million and $15.5 million in acquisitions costs. The purchase consideration of
the acquired assets and assumed liabilities were allocated based on fair values
as follows (in thousands):

Purchased in-process research and development
charged to operations..........................................$ 3,726
Assests acquired............................................... 8,738
Purchased technology........................................... 10,798
Customer base.................................................. 28,552
Acquired workforce............................................. 1,141
Goodwill....................................................... 358,105
-----------
Total purchase consideration...................................$ 411,060
===========

The pro forma results of operations for the three months ended March 31,
2000 and 1999, for Laser Link were not significant.

5. DEBT

On January 28, 2000, the Company completed a private placement of $425.0
million aggregate principal amount of the Company's 12% senior notes (the "2000
notes') due 2010 and are redeemable at the option of the Company any time after
February 15, 2005 at stated redemption prices plus accrued and unpaid interest
thereon.

Net proceeds from the 2000 Notes were approximately $413.3 million, after
discounts, commissions and other transaction costs of approximately $11.7
million. The discount and debt issuance costs are being amortized over the

F-24
<PAGE>

COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)

life of the 2000 Notes. For the three months ended March 31, 2000, the
amortization of debt discount and debt issuance costs was $205,000.

6. STOCKHOLDERS' EQUITY

STRATEGIC INVESTMENT:

INITIAL PUBLIC OFFERING:

On January 27, 1999, the Company completed the IPO of 20,182,500 shares
of the Company's common stock at a price of $8.00 per share. Net proceeds to the
Company from the IPO were $150.2 million after deducting underwriting discounts
and commissions and estimated offering expenses payable by the Company. As a
result of the IPO, 41,053,865 shares of Common Stock and 6,379,177 shares of
Class B Common Stock (which are convertible into 14,353,148 shares of Common
Stock) were issued upon the conversion of Preferred Stock, 133,587 shares of
Common Stock were issued for cumulative but unpaid dividends on series A and
series B Preferred Stock and 4,049,039 shares of Common Stock were issued upon
the exercise of common warrants.

SECONDARY PUBLIC OFFERING:

On June 23, 1999, the Company completed a public offering of 12,937,500
split adjusted shares of Common Stock sold by certain stockholders of the
Company. The Company did not sell any shares in this offering. Accordingly,
there were no net proceeds to the Company from this offering. The Company
incurred offering expenses of approximately $600,000.

SECOND PUBLIC OFFERING:

On November 3, 1999 the Company completed a public offering of 22,425,000
shares of common stock sold by the Company and certain stockholders of the
Company. The net proceeds to the Company from this offering are estimated to be
approximately $568.8 million after deducting underwriting discounts and
commissions and estimated offering expenses.

7. SUBSEQUENT EVENTS

On May 16, 2000, the Company announced that the American Arbitration
Association issued its Intended Award of Damages in arbitration hearings against
Pacific Bell for violations of the Telecommunications Act of 1996. The
arbitrators awarded the Company $27.2 million plus attorneys' fees and costs
which is in addition to the panel's January 1999 interim decision to award the
Company $257,166 in damages and $474,995 in attorneys' fees and costs. In
November 1998, the arbitrators determined that Pacific Bell had violated the
Telecomm Act as well as its contract by failing to timely deliver collocation
space and operable loops.

On June 16, 2000, the Company announced the signing of an agreement to
acquire BlueStar Communications Inc. ("BlueStar"), a provider of broadband and
Internet services for small- and medium-sized businesses throughout the
Southeastern United States. Under the acquisition agreement, the Company will
issue 8 million shares of Common Stock for all of BlueStar's outstanding shares,
plus assumption of $55 million in debt. Up to five million additional shares of
Common Stock may be issued to BlueStar shareholders if certain performance
targets are met by BlueStar over the 2001 fiscal year.

F-25
<PAGE>

APPENDIX I

COVAD COMMUNICATIONS GROUP, INC.
GLOSSARY OF TERMS

ACCESS LINE--A circuit that connects a telephone end-user to the ILEC
Central Office.

ANALOG MODEM -- A telecommunications device that allows the communication
of digital information over analog telephone lines and through the public
switched telephone network by translating such information in a way that
simulates and uses only the bandwidth of normal voice transmissions.

ASYNCHRONOUS TRANSFER MODE (ATM)--A standard packet-switching protocol that
segments digital information into 53-byte cells (each cell has a 5-byte standard
packet-switching header and 48 bytes of data) that are switched very quickly
throughout a network over virtual circuits. ATM is able to accommodate multiple
types of media (voice, video, data).

BANDWIDTH--Refers to the maximum amount of data that can be transferred
through a computer's backplane or communication channel in a given time. It is
usually measured in Hertz for analog communications and bits per second for
digital communication.

CENTRAL OFFICE--ILEC facility where subscriber lines are joined to
switching equipment.

CLEC (COMPETITIVE LOCAL EXCHANGE CARRIER)--Category of telephone service
provider (carrier) that offers services similar to those of the ILEC, as allowed
by recent changes in telecommunications law and regulation. A CLEC may also
provide other types of services such as long distance, Internet access and
entertainment.

COMMUNICATIONS ACT OF 1934--The federal legislation governing broadcast and
non-broadcast communications, including both wireless and wired telephone
service, and which established the FCC.

DSL--Digital Subscriber Line.

FCC (FEDERAL COMMUNICATIONS COMMISSION)--The U.S. government agency charged
with the oversight of communications originating in the U.S. and crossing state
lines.

FRAME-RELAY--A high-speed packet-switched data communications protocol.

HFC (HYBRID FIBER COAX)--A combination of fiber optic and coaxial cable,
which has become the primary architecture utilized by cable operators in recent
and ongoing upgrades of their systems. An HFC architecture generally utilizes
fiber optic wire between the headend and the nodes and coaxial wire from nodes
to individual end-users.

ILEC (INCUMBENT LOCAL EXCHANGE CARRIER)--The local exchange carrier that
was the monopoly carrier in a region, prior to the opening of local exchange
services to competition.

ILEC COLLOCATION--A location serving as the interface point for a CLEC
network's interconnection to that of the ILEC. Collocation can be (i) physical,
in which the CLEC places and directly maintains equipment in the ILEC Central
Office, or (ii) virtual, in which the CLEC leases a facility, similar to that
which it might build, to effect a presence in the ILEC Central Office.

INTERCONNECTION (CO-CARRIER) AGREEMENT--A contract between an ILEC and a
CLEC for the interconnection of the two networks and CLEC access to ILEC UNEs.
These agreements set out the financial and operational aspects of such
interconnection and access.

ISP (INTERNET SERVICE PROVIDER)--A vendor that provides subscribers access
to the Internet.

ISDN (INTEGRATED SERVICES DIGITAL NETWORK)--ISDN provides standard
interfaces for digital communication networks and is capable of carrying data,
voice, and video over digital circuits. ISDN protocols are used worldwide for
connections to public ISDN networks or to attach ISDN devices to ISDN-capable
PBX systems (ISPBXs). Developed by the International Telecommunications Union,
ISDN includes two user-to-network interfaces: basic rate interface (BRI) and
primary rate interface (PRI). An ISDN interface contains one signaling channel
(D-channel)

F-26

<PAGE>

and a number of information channels ("bearer" or B channels). The D-channel is
used for call setup, control, and call clearing on the B-channels. It also
transports feature information while calls are in progress. The B-channels carry
the voice, data, or video information.

IXC (INTEREXCHANGE CARRIER)--Facilities-based long distance/interLATA
carriers (e.g., AT&T, MCI WorldCom and Sprint), who also provide intraLATA toll
service and may operate as CLECs.

KBPS (KILOBITS PER SECOND)--One thousand bits per second.

LATA (LOCAL ACCESS AND TRANSPORT AREA)--A geographic area inside of which a
local telephone company can offer switched telecommunications services,
including long distance (known as toll). There are 196 LATAs in the U.S.

MBPS (MEGABITS PER SECOND)--One million bits per second.

RBOCS (REGIONAL BELL OPERATING COMPANIES)--ILECs created by AT&T's
divestiture of its local exchange business. The remaining RBOCs include
BellSouth, Bell Atlantic Corporation, Ameritech Corporation, U S WEST
Communications, Inc. and SBC Communications, Inc.

T1--This is a Bell system term for a digital transmission link with a
capacity of 1.544 Mbps. UNES (UNBUNDLED NETWORK ELEMENTS)--The various portions
of an ILEC's network that a CLEC can lease for purposes of building a
facilities-based competitive network, including copper lines, Central Office
collocation space, inter-office transport, operational support systems, local
switching and rights of way.

F-27

<PAGE>

<TABLE>
<CAPTION>
<S> <C>
========================================================= =========================================================

5, 013,466 SHARES
[COVAD LOGO]
YOU SHOULD RELY ONLY ON THE INFORMATION COMMON STOCK
CONTAINED OR INCORPORATED BY REFERENCE ----------
IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED
ANYONE TO PROVIDE YOU WITH DIFFERENT P R E L I M I N A R Y P R O S P E C T U S
OR ADDITIONAL INFORMATION. THIS PROSPECTUS ----------
IS NOT AN OFFER TO SELL NOR IS IT
SEEKING AN OFFER TO BUY SHARES OF OUR
COMMON STOCK IN ANY JURISDICTION WHERE
THE OFFER OR SALE IS NOT PERMITTED. THE
INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS IS CORRECT
ONLY AS OF THE DATE OF THIS PROSPECTUS,
REGARDLESS OF THE TIME OF THE DELIVERY OF
THIS PROSPECTUS OR ANY SALE OF OUR COMMON STOCK.

TABLE OF CONTENTS

PAGE
----

Prospectus Summary................................. 3
Risk Factors....................................... 9
Use of Proceeds.................................... 26
Determination of Offering Price.................... 26
Dividend Policy.................................... 26
Price Range of Our Common Stock.................... 26
Selected Consolidated Financial Data............... 27
Management's Discussion and Analysis of Financial
Condition and Results of Operations............. 29
Business........................................... 39
Management......................................... 57
Certain Relationships and Related Transactions..... 76
Principal and Selling Shareholders................. 81
Description of Capital Stock....................... 84
Shares Eligible for Future Sale.................... 87
Plan of Distribution............................... 89
Where You Can Find More Information................ 90
Legal Matters...................................... 90
Experts............................................ 90
Index to Financial Statements...................... F-1
Glossary........................................... I-1

DEALER PROSPECTUS DELIVERY OBLIGATION

DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES,
WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION
TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

JULY _______, 2000
========================================================= =========================================================
</TABLE>

<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the costs and expenses, payable by the
Company in connection with the sale of common stock being registered. All
amounts are estimates except for the SEC Registration Fee and NASD fee.

AMOUNT TO BE
PAID BY THE
COMPANY
----------------

<S> <C>
SEC registration fee.......................................................................... $ 42,882.31
Printing...................................................................................... 35,000
Legal fees and expenses....................................................................... 35,000
Accounting fees and expenses.................................................................. 25,000
Miscellaneous................................................................................. 5,000

----------------
Total.................................................................................... $ 142,882.31
================
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law ("DGCL") provides that
a corporation may indemnify such person who was or is a party or is threatened
to be made a party to any threatened, pending or completed action or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that such person is or was a director, officer, employee or agent of the
corporation or is or was serving at its request in such capacity in another
corporation or business association, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if such
person acted in good faith and in a manner such person reasonably believed to be
in or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful.

Section 102(b)(7) of the DGCL permits a corporation to provide in its
certificate of incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL,
or (iv) for any transaction from which the director derived an improper personal
benefit.

As permitted by Section 102(b)(7) of the DGCL, the Registrant's Amended and
Restated Certificate of Incorporation includes a provision that limits a
director's personal liability to the Registrant or its stockholders for monetary
damages for breaches of his or her fiduciary duty as a director. Article X of
the Registrant's Amended and Restated Certificate of Incorporation provides that
no director of the Registrant shall be personally liable to the Registrant or
its stockholders for monetary damages for breach of fiduciary duty to the
fullest extent permitted by the DGCL.

As permitted by Section 145 of the DGCL, the Registrant's Bylaws provide
that, to the fullest extent permitted by the DGCL, directors, officers and
certain other persons who are made, or are threatened to be made, parties to, or
are involved in, any action, suit or proceeding will be indemnified by the
Registrant with respect thereto. Article VI of the Registrant's Bylaws provides
for the indemnification of officers, directors, employees and agents of the
corporation if such person acted in good faith and in a manner reasonably
believed to be in and not opposed to the best interest of the corporation, and,
with respect to any criminal action or proceeding the indemnified party had no
reason to believe his conduct was unlawful.

The Registrant maintains insurance policies under which its directors and
officers are insured, within the limits and subject to the limitations of the
policies, against expenses in connection with the defense of actions, suits or
proceedings, and certain liabilities that might be imposed as a result of such
actions, suits or proceedings, to

II-1
<PAGE>

which they are parties by reason of being or having been directors or officers
of the Registrant. The Registrant also entered into agreements to indemnify the
Registrant's directors and executive officers, in addition to the
indemnification provided for in the Registrant's Amended and Restated
Certificate of Incorporation and Bylaws.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

Since our incorporation in October 1996, we have issued and sold
unregistered securities as follows:

(1) An aggregate of 18,216,000 shares of common stock was issued in a
private placement in November 1996 to Messrs. McMinn, Khanna, Haas, Davidson and
Lynch pursuant to Restricted Stock Purchase Agreements. The consideration
received for such shares was $50,600. We repurchased 3,615,444 shares of common
stock issued to Mr. Davidson in July 1997. See "Certain Transactions."

(2) An aggregate of 1,687,500 shares of common stock was issued in a
private placement in July 1997 to Mr. Cardinale pursuant to a Restricted Stock
Purchase Agreement. The consideration received for such shares was $37,500.

(3) An aggregate of 750,000 shares of series A preferred stock was issued
in a private placement in June 1997 to Messrs. McMinn, Khanna, Haas and Lynch.
The aggregate consideration received for such shares was $249,975.

(4) An aggregate of 17,000,001 shares of series B preferred stock was
issued in a private placement in July 1997 to Warburg, Crosspoint and Intel. The
aggregate consideration received for such shares was $8,500,000.50, a portion of
which was paid by cancellation of a $500,000 demand note issued to Warburg in
June 1997.

(5) An aggregate of 517,500 shares of common stock was issued in a private
placement in August 1997 to Mr. Laehy pursuant to a Restricted Stock Purchase
Agreement. The consideration received for such shares was $17,250.

(6) An aggregate of 216,000 shares of common stock was issued in a private
placement in October 1997 to Mr. Marshall pursuant to a Restricted Stock
Purchase Agreement. The consideration received for such shares was $7,200.

(7) An aggregate of 1,125 shares of common stock was issued in a private
placement in December 1997 to one investor pursuant to an Assignment, Transfer
and Sale Agreement and a Restricted Stock Purchase Agreement. The consideration
for such shares was receipt of a mark and domain name.

(8) An aggregate of 100,002 shares of series B preferred stock was issued
in a private placement in February 1998 to Mr. Marshall. The consideration
received for such shares was $100,002.

(9) Warrants for the purchase of an aggregate of 2,700,000 shares of common
stock with an exercise price of $0.0022 per share were issued in February 1998
to Warburg, Crosspoint and Intel in connection with a series C preferred stock
and Warrant Subscription Agreement.

(10) An aggregate of 360,144 shares of series C preferred stock was issued
in a private placement in March 1998 to Intel. The consideration received for
such shares was $999,999.84.

(11) In March 1998, we issued 260,000 units consisting of 13 1/2% senior
discount notes due 2008 and warrants to purchase 7,580,646 shares of common
stock with exercise prices of $0.0022 per share to Bear, Stearns & Co. Inc. and
BT Alex. Brown Incorporated, as initial purchasers, for resale to qualified
institutional buyers. Bear, Stearns & Co. Inc. and BT Alex. Brown Incorporated
received commissions of $4,728,542 for acting as initial purchasers in
connection with this transaction.

(12) An aggregate of 36,015 shares of series C preferred stock was issued
in a private placement in April 1998 to Mr. Hawk. The consideration received for
such shares was $100,001.65.

(13) An aggregate of 144,000 shares of common stock was issued in a private
placement pursuant to a Restricted Stock Purchase Agreement in April 1998 to Mr.
Hawk. The consideration received for such shares was $64,000.

(14) A warrant for the purchase of an aggregate of 202,500 shares of common
stock with an exercise price of $.6666 per share was issued in July 1998 to a
consultant in connection with services rendered.

II-2
<PAGE>

(15) An aggregate of 60,000 shares of common stock was issued in a private
placement pursuant to a Restricted Stock Purchase Agreement in August 1998 to
Mr. Hawk. The consideration received for such shares was $230,000.

(16) An aggregate of 13,500 shares of common stock was issued in a private
placement pursuant to a Restricted Stock Purchase Agreement in October 1998 to
one investor. The consideration received for such shares was services rendered.

(17) An aggregate of 13,167 shares of common stock was issued in a private
placement pursuant to a Restricted Stock Purchase Agreement in November 1998 to
two consultants. The consideration received for such shares was services
rendered.

(18) An aggregate of 12,000 shares of common stock was issued in a private
placement pursuant to a Restricted Stock Purchase Agreement in December 1998 to
a consultant. The consideration received for such shares was services rendered.

(19) From July 1997 through December 31, 1998, we granted stock options to
purchase an aggregate of 19,795,090 shares of common stock to employees,
consultants and directors with exercise prices ranging from $0.0222 to $5.44 per
share pursuant to our 1997 Stock Plan. To date, 320,248 shares of common stock
have been issued upon exercise of vested options.

(20) An aggregate of 2,701,049 shares of series C-1 preferred stock and
2,083,334 shares of series D-1 preferred stock were issued in a private
placement in January 1999 to four investors. The consideration received for such
shares was $45 million.

(21) An aggregate of 900,349 shares of series C-1 preferred stock and
694,445 shares of series D-1 preferred stock were issued in a private placement
in January 1999 to an investor. The consideration received for such shares was
$15 million.

(22) In February 1999, we issued $215 million aggregate principal amount of
12 1/2% senior notes due 2009 to Bear, Stearns & Co. Inc., BT Alex. Brown
Incorporated, Donaldson, Lufkin & Jenrette Securities Corporation and Goldman,
Sachs & Co., as initial purchasers for resale to qualified institutional buyers.
The initial purchasers received commissions of $5,106,250 for acting as such in
connection with the transaction.

(23) In April 1999, we issued a warrant to purchase 450,000 split-adjusted
shares of common stock to a customer. This warrant vested with respect to
225,000 shares on April 1, 2000 and will vest with respect to the remaining
225,000 shares on April 1, 2001, subject to the customer achieving certain
performance goals. The exercise price for 225,000 of the shares is $48.4375. The
exercise price for the remaining 225,000 shares will be the fair market value of
the common stock on the ten trading days preceding the second vesting date.

(24) In January 2000, we issued $425 million aggregate principal amount of
12% senior notes due 2010 to Bear, Stearns & Co., Inc. and Morgan Stanley & Co.,
Inc., as initial purchasers for resale to qualified institutional buyers. The
initial purchasers received commissions of $10,306,250 for acting as such in
connection with the transaction.

(25) On March 20, 2000, pursuant to the Agreement and Plan of Merger dated
as of March 8, 2000, Laser Link.Net, Inc. was acquired in a merger of Lightsaber
Acquisition Co., our wholly-owned subsidiary, with Laser Link in which
Lightsaber was the surviving entity. As a result, in a transaction exempt under
Section 4(2) of the Securities Act, we issued shares of our common stock to
shareholders of Laser Link.Net in exchange for their Laser Link.Net Stock.

No underwriters were used in connection with these sales and issuances
except for the issuance of the 1998 notes and related warrants in (11) above,
the issuance of the 1999 notes in (22) above and the issuance of the 2000 notes
in (24) above. The sales and issuances of these securities except for those in
note (11), note (22) and note (24) were exempt from registration under the
Securities Act pursuant to Rule 701 promulgated thereunder on the basis that
these options were offered and sold either pursuant to a written compensatory
benefit plan or pursuant to written contracts relating to consideration, as
provided by Rule 701, or pursuant to Section 4(2) thereof on the basis that the
transactions did not involve a public offering. The sales and issuance in note
(11), note (22) and note (24) were exempt from registration under the Securities
Act pursuant to Section 4(2) and, in connection with the resale by the initial
purchasers of the securities described in note (11), note (22) and note (24),
Rule 144A thereunder.

II-3
<PAGE>

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
2.1(3) Agreement and Plan of Merger Among Covad Communications Group, Inc., LightSaber Acquisition Co. and
Laser Link.Net, Inc., dated as of March 8, 2000.
2.2(8) Agreement and Plan of Merger and Reorganization among Covad Communications Group, Inc., Covad
Acquisition Corp. and BlueStar Communications Group, Inc., dated as of June 15, 2000.
3.2 Amended and Restated Certificate of Incorporation.
3.4(5) Bylaws, as currently in effect.
3.5 Form of Certificate of Amendment of Certificate of Incorporation of the Registrant.
4.1(1) Indenture dated as of March 11, 1998 between the Registrant and The Bank of New York.
4.4(1) Warrant Registration Rights Agreement dated as of March 11, 1998 among the Registrant and Bear,
Stearns & Co., Inc. and BT Alex. Brown Incorporated.
4.5(1) Specimen 13 1/2% Senior Note Due 2008.
4.6(1) Amended and Restated Stockholders Rights Agreement dated January 19, 1999 among the Registrant and
certain of its stockholders.
4.7(2) Indenture dated as of February 18, 1999 among the Registrant and The Bank of New York.
4.8(2) Registration Rights Agreement dated as of February 18, 1999 among the Registrant and the Initial
Purchasers.
4.9(2) Specimen 12 1/2% Senior Note Due 2009.
4.10(7) Indenture dated as of January 28, 2000, between the Registrant and United States Trust Company of
New York.
4.11(7) Registration Rights Agreement dated as of January 28, 2000, between the Registrant and Bear, Stearns
& Co., Inc.
4.12(7) Specimen 12% Senior Note Due 2010.
4.14(4) Stockholder Protection Rights Agreement dated February 15, 2000.
5.1 Opinion of Irell & Manella LLP.
10.1(2) Form of Indemnification Agreement entered into between the
Registrant and each of the Registrant's executive officers and
directors.
10.5(2) Series C Preferred Stock and Warrant Subscription Agreement
dated as of February 20, 1998 among the Registrant, Warburg, Pincus
Ventures, L.P., Crosspoint Venture Partners 1996 and Intel
Corporation, as amended by the Assignment and Assumption Agreement
and First Amendment to the Series C Preferred Stock and Warrant
Subscription Agreement dated as of April 24, 1998 among the
Registrant, Warburg, Crosspoint and Robert Hawk.
10.6(2) Employment Agreement dated June 21, 1999 between the Registrant and Robert E. Knowling, Jr.
10.7(2) Sublease Agreement dated July 6, 1998 between Auspex Systems, Inc. and the Registrant with respect
to Registrant's facilities in Santa Clara, California.
10.8(2) 1998 Employee Stock Purchase Plan and related agreements, as currently in effect.
10.10(2) Form of Warrant to purchase Common Stock issued by the Registrant on February 20, 1998 to Warburg,
Pincus Ventures, L.P., Crosspoint Ventures Partners 1996 and Intel Corporation.
10.11(5) Note Secured by Deed of Trust dated October 7, 1998 issued by Catherine A. Hemmer and John J. Hemmer
in favor of the Registrant.
10.12(5) 1997 Stock Plan and related option agreement, as currently in effect.
10.13(5) Series C-1 Preferred Stock Purchase Agreement dated as of December 30, 1998 among the Registrant,
AT&T Venture Fund II, LP and two affiliated funds.
10.14(5) Series D-1 Preferred Stock Purchase Agreement dated as of December 30, 1998 among the Registrant,
AT&T Venture Fund II, LP and two affiliated funds.
10.15(5) Series C-1 Preferred Stock Purchase Agreement dated as of December 30, 1998 between the Registrant
and NEXTLINK Communications, Inc.
10.16(5) Series D-1 Preferred Stock Purchase Agreement dated as of December 30, 1998 between the Registrant
and NEXTLINK Communications, Inc.
10.17(5) Series C-1 Preferred Stock Purchase Agreement dated as of January 19, 1998 between the Registrant
and U.S. Telesource, Inc.
10.18(5) Series D-1 Preferred Stock Purchase Agreement dated as of January 19, 1998 between the Registrant
and U.S. Telesource, Inc.
11.1(6) Statement of Computation of Per Share Earnings.
12.1(6) Statement of Computation of Ratios.
21.1(6) Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, independent auditors.
23.2 Consent of Irell & Manella LLP (Included in Exhibit 5.1).

II-4
<PAGE>

24.1 Power of Attorney (Included in Part II).
27.1(6) Financial Data Schedules.
--------------
</TABLE>
(1) Incorporated by reference to the exhibit of corresponding number filed
with our registration statement on Form S-4 (No. 333-51097) as originally
filed on April 27, 1998 and as subsequently amended.

(2) Incorporated by reference to the exhibit of corresponding number filed
with our registration statement on Form S-4 (No. 333-75955) as originally
filed on April 4, 1999 and as subsequently amended.

(3) Incorporated by reference to the exhibit of corresponding number filed
with our Registration Statement on Form 8-K as originally filed on March
23, 2000 and as subsequently amended.

(4) Incorporated by reference to Exhibit 4.1 filed with our Registration
Statement on Form 8-A as originally filed on February 22, 2000 and as
subsequently amended.

(5) Incorporated by reference to the exhibit of corresponding number filed
with our Registration Statement on Form S-1 (File No. 333-63899) as
originally filed on September 21, 1998 and as subsequently amended.

(6) Incorporated by reference to the exhibit of corresponding number filed
with our report on Form 10-K as originally filed on March 30, 2000 and as
subsequently amended.

(7) Incorporated by reference to the exhibit of corresponding number filed
with our registration statement on Form S-4 (No. 333-30360) as originally
filed on February 14, 2000 and as subsequently amended.

(8) Incorporated by reference to the exhibit of correspondingb number filed
with our Registration Statement on Form 8-K as originally filed on
July 7, 2000 and as subsequently amended.

(b) FINANCIAL STATEMENTS

None.

ITEM 17. UNDERTAKINGS

1. The undersigned registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:

(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
a 20 percent change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective
registration statement;

(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;"

PROVIDED HOWEVER, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
registration statement is on Form S-3, Form S-8, or Form F-3, and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the registration
statement.

(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial BONA FIDE offering thereof.

(3) To remove from registrant by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.

II-5
<PAGE>

(4) If the registrant is a foreign private issuer, to file a
post-effective amendment to the registration statement to include any
financial statements required by Rule 3-19 of this chapter at the start of
any delayed offering or throughout a continuous offering. Financial
statements and information otherwise required by Section 10(a)(3) of the
Act need not be furnished, PROVIDED, that the registrant includes in the
prospectus, by means of a post-effective amendment, financial statements
required pursuant to this paragraph (a)(4) and other information necessary
to ensure that all other information in the prospectus is at least as
current as the date of those financial statements. Notwithstanding the
foregoing, with respect to registration statements on Form F-3, a
post-effective amendment need not be filed to include financial statements
and information required by Section 10(a)(3) of the Act or Rule 3-19 of
this chapter if such financial statements and information are contained in
periodic reports filed with or furnished to the Commission by the
registrant pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the Form F-3.

2. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.

3. The undersigned Registrant hereby undertakes:

(a) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1), or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective; and

(b) For purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

II-6
<PAGE>

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SANTA
CLARA, STATE OF CALIFORNIA, ON THE 14TH DAY OF JULY 2000.

COVAD COMMUNICATIONS GROUP, INC.

By: /s/ Timothy Laehy
------------------------------------------
Timothy Laehy
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Robert E. Knowling, Jr. and Timothy Laehy
and each of them his attorneys-in-fact, each with the power of substitution, for
him and in his name, place and stead, in any and all capacities, to sign any and
all amendments (including post-effective amendments) to this Registration
Statement, and to sign any registration statement for the same offering covered
by this Registration Statement that is to be effective upon filing pursuant to
Rule 462(b) promulgated under the Securities Act, and all post-effective
amendments thereto, and to file the same, with all exhibits thereto in all
documents in connection therewith, with the SEC, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents or any of them, or his or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on July 14, 2000
in the capacities indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE

<S> <C>
/s/ Robert E. Knowling, Jr. Chairman of the Board, President and Chief
-----------------------------------------------
(Robert E. Knowling, Jr.) Executive Officer (Principal Executive Officer)

/s/ Timothy Laehy Executive Vice President and Chief Financial Officer
-----------------------------------------------
(Timothy Laehy) (Principal Financial and Accounting Officer)

/s/ Robert Hawk Director
-----------------------------------------------
(Robert Hawk)

/s/ Hellene Runtagh Director
-----------------------------------------------
(Hellene Runtagh)

/s/ Larry Irving Director
-----------------------------------------------
(Larry Irving)

/s/ Daniel Lynch Director
-----------------------------------------------
(Daniel Lynch)

/s/ Frank Marshall Director
-----------------------------------------------
(Frank Marshall)

/s/ Debra Dunn Director
-----------------------------------------------
(Debra Dunn)

Director
-----------------------------------------------
(Rich Shapero)
</TABLE>

II-7
<PAGE>

EXHIBIT INDEX

EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
2.1(3) Agreement and Plan of Merger Among Covad Communications Group, Inc., LightSaber Acquisition Co. and Laser Link.Net,
Inc., dated as of March 8, 2000.
2.2(8) Agreement and Plan of Merger and Reorganization among Covad Communications Group, Inc., Covad
Acquisition Corp. and BlueStar Communications Group, Inc., dated as of June 15, 2000.
3.2 Amended and Restated Certificate of Incorporation.
3.4(5) Bylaws, as currently in effect.
3.5 Form of Certificate of Amendment of Certificate of Incorporation of the Registrant.
4.1(1) Indenture dated as of March 11, 1998 between the Registrant and The Bank of New York.
4.4(1) Warrant Registration Rights Agreement dated as of March 11, 1998 among the Registrant and Bear, Stearns & Co., Inc. and
BT Alex. Brown Incorporated.
4.5(1) Specimen 13 1/2% Senior Note Due 2008.
4.6(1) Amended and Restated Stockholders Rights Agreement dated January 19, 1999 among the Registrant and certain of its
stockholders.
4.7(2) Indenture dated as of February 18, 1999 among the Registrant and The Bank of New York.
4.8(2) Registration Rights Agreement dated as of February 18, 1999 among the Registrant and the Initial Purchasers.
4.9(2) Specimen 12 1/2% Senior Note Due 2009.
4.10(7) Indenture dated as of January 28, 2000, between the Registrant and United States Trust Company of New York.
4.11(7) Registration Rights Agreement dated as of January 28, 2000, between the Registrant and Bear, Stearns & Co., Inc.
4.12(7) Specimen 12% Senior Note Due 2010.
4.14(4) Stockholder Protection Rights Agreement dated February 15, 2000.
5.1 Opinion of Irell & Manella LLP.
10.1(2) Form of Indemnification Agreement entered into between the Registrant and each of the Registrant's executive officers
and directors.
10.5(2) Series C Preferred Stock and Warrant Subscription Agreement dated as of February 20, 1998 among the Registrant,
Warburg, Pincus Ventures, L.P., Crosspoint Venture Partners 1996 and Intel Corporation, as amended by the Assignment
and Assumption Agreement and First Amendment to the Series C Preferred Stock and Warrant Subscription Agreement dated
as of April 24, 1998 among the Registrant, Warburg, Crosspoint and Robert Hawk.
10.6(2) Employment Agreement dated June 21, 1999 between the Registrant and Robert E. Knowling, Jr.
10.7(2) Sublease Agreement dated July 6, 1998 between Auspex Systems, Inc. and the Registrant with respect to Registrant's
facilities in Santa Clara, California.
10.8(2) 1998 Employee Stock Purchase Plan and related agreements, as currently in effect.
10.10(2) Form of Warrant to purchase Common Stock issued by the Registrant on February 20, 1998 to Warburg, Pincus Ventures,
L.P., Crosspoint Ventures Partners 1996 and Intel Corporation.
10.11(5) Note Secured by Deed of Trust dated October 7, 1998 issued by Catherine A. Hemmer and John J. Hemmer in favor of the
Registrant.
10.12(5) 1997 Stock Plan and related option agreement, as currently in effect.
10.13(5) Series C-1 Preferred Stock Purchase Agreement dated as of December 30, 1998 among the Registrant, AT&T Venture Fund II,
LP and two affiliated funds.
10.14(5) Series D-1 Preferred Stock Purchase Agreement dated as of December 30, 1998 among the Registrant, AT&T Venture Fund II,
LP and two affiliated funds.
10.15(5) Series C-1 Preferred Stock Purchase Agreement dated as of December 30, 1998 between the Registrant and NEXTLINK
Communications, Inc.
10.16(5) Series D-1 Preferred Stock Purchase Agreement dated as of December 30, 1998 between the Registrant and NEXTLINK
Communications, Inc.
10.17(5) Series C-1 Preferred Stock Purchase Agreement dated as of January 19, 1998 between the Registrant and U.S. Telesource,
Inc.
10.18(5) Series D-1 Preferred Stock Purchase Agreement dated as of January 19, 1998 between the Registrant and U.S. Telesource,
Inc.
11.1(6) Statement of Computation of Per Share Earnings.
12.1(6) Statement of Computation of Ratios.

<PAGE>

21.1(6) Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, independent auditors.
23.2 Consent of Irell & Manella LLP (Included in Exhibit 5.1).
24.1 Power of Attorney (Included in Part II).
27.1(6) Financial Data Schedules.
</TABLE>

--------------
<TABLE>
<S> <C>

(1) Incorporated by reference to the exhibit of corresponding number filed with our registration statement on Form S-4 (No.
333-51097) as originally filed on April 27, 1998 and as subsequently amended.
(2) Incorporated by reference to the exhibit of corresponding number filed with our registration statement on Form S-4 (No.
333-75955) as originally filed on April 4, 1999 and as subsequently amended.
(3) Incorporated by reference to the exhibit of corresponding number filed with our Registration Statement on Form 8-K as
originally filed on March 23, 2000 and as subsequently amended.
(4) Incorporated by reference to Exhibit 4.1 filed with our Registration Statement on Form 8-A as originally filed on February
22, 2000 and as subsequently amended.
(5) Incorporated by reference to the exhibit of corresponding number filed
with our Registration Statement on Form S-1 (File No. 333-63899) as
originally filed on September 21, 1998 and as subsequently amended.
(6) Incorporated by reference to the exhibit of corresponding number filed with our report on Form 10-K as originally filed on
March 30, 2000 and as subsequently amended.
(7) Incorporated by reference to the exhibit of corresponding number filed with our registration statement on Form S-4 (No.
333-30360) as originally filed on February 14, 2000 and as subsequently amended.
(8) Incorporated by reference to the exhibit of correspondingb number filed
with our Registration Statement on Form 8-K as originally filed on
July 7, 2000 and as subsequently amended.

</TABLE>