**UNITED
            STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**





[X]
      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
      EXCHANGE ACT OF 1934





**For
      the Quarterly Period Ended September 30, 2005**





OR





[
      ]
      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
      EXCHANGE ACT OF 1934





Commission
      File Number: 000-27743







**PAC-WEST
        TELECOMM, INC.**
 (Exact
        name of registrant as specified in its charter)


**California**
              **68-0383568**(State
                  or other jurisdiction of
              (I.R.S.
                  Employer Identification No.)incorporation
                  or organization)**1776 W. March
                Lane,
                Suite 250****Stockton,
                  California**********
              **95207**(Address of principal
                executive
                offices)
              (Zip
                  Code)
 **(209)
          926-3300**
 (Registrant's
          telephone number, including area code)
 
 Indicate
          by check mark whether the registrant (1) has filed all reports required
          to be
          filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
          the
          preceding 12 months (or for such shorter period that the registrant was
          required
          to file such reports), and (2) has been subject to such filing requirements
          for
          the past 90 days. Yes [X] No [ ]
 
 Indicate
          by check mark whether the registrant is a shell company (as defined in
          Rule
          12b-2 of the Exchange Act). Yes [ ] No [X]
 
 Indicate
          by check mark whether the registrant is an accelerated filer (as defined
          in Rule
          12b-2 of the Exchange Act). Yes [ ] No [X]
 
  As
          of
          October 31, 2005, the Company had an aggregate of 37,142,236 shares of
          common
          stock issued and outstanding.
  
 **PAC-WEST
            TELECOMM, INC.**
 **Report
            on Form 10-Q for the Quarterly Period Ended September 30,
            2005**
 Table
            of
            Contents
 **Part
                      I.**
                  **FINANCIAL
                      INFORMATION**
                  **Page**Item 1.
                  Financial
                      Statements (Unaudited)Condensed
                      Consolidated Balance SheetsSeptember
                      30,
                      2005 and December 31, 2004
                  3Condensed
                      Consolidated Statements of Operations and Comprehensive
                      Income/Loss
                      -
                      Three and nine months ended September 30, 2005 and 2004
                  4Condensed
                      Consolidated Statements of Cash Flows - Ninemonths
                      ended September 30, 2005 and 2004
                  5Notes
                      to Unaudited Condensed Consolidated Financial Statements
                  6Item 2.
                  Management's
                      Discussion and Analysis of Financial Conditionand
                      Results of Operations
                  13Item 3.
                  Quantitative
                      and Qualitative Disclosures About Market Risk
                  24Item 4.
                  Controls
                      and Procedures
                  24**Part
                      II.**
                  **OTHER
                      INFORMATION**Item 1.
                  Legal
                      Proceedings
                  25Item 6.
                  Exhibits
                  25Signatures
                  
                  26
   2


**PART
                    I****ITEM
                    1. FINANCIAL STATEMENTS****PAC-WEST
                    TELECOMM, INC.****Condensed
                    Consolidated Balance Sheets****(Dollars
                    in thousands except share and per share data)**
 **September
                      30,**
                  
                  **December
                      31,****2005**
                  
                  **2004****(Unaudited)****ASSETS**Current
                      Assets:Cash
                      and cash equivalents
                  $
                      16,952
                  
                  $
                      32,265Short-term
                      investments
                  7,005
                  
                  10,501Trade
                      accounts receivable, net of allowances of$166 and $366 at September 30, 2005 andDecember 31, 2004, respectively
                  8,519
                  
                  12,277Receivable
                      from transition service agreement
                  2,181
                  
                  -Prepaid
                      expenses and other current assets
                  4,874
                  
                  5,813Total
                      current assets
                  39,531
                  
                  60,856Property
                      and equipment, net
                  36,769
                  
                  43,413Other
                      assets, net
                  1,145
                  
                  2,783Total
                      assets
                  $
                      77,445
                  
                  $
                      107,052**LIABILITIES
                      AND STOCKHOLDERS' EQUITY**Current
                      Liabilities:Accounts
                      payable
                  $
                      6,401
                  
                  $
                      5,684Current
                      obligations under notes payable and capital leases
                  3,468
                  
                  2,889Accrued
                      interest
                  812
                  
                  2,208Other
                      accrued liabilities
                  7,819
                  
                  13,291Total current liabilities
                  18,500
                  
                  24,072Senior
                      Notes
                  36,102
                  
                  36,102Notes
                      payable and capital leases, less current portion
                  3,271
                  
                  28,936Other
                      liabilities, net
                  155
                  
                  353Total liabilities
                  58,028
                  
                  89,463Commitments
                      and Contingencies (Note 8)Stockholders'
                      Equity:Preferred
                      stock, no par value, 600,000 shares authorized; noneissued and outstanding
                  -
                  
                  -Common
                      stock, $.001 par value; 100,000,000 sharesauthorized, 37,141,986 and 36,792,426 shares issuedand outstanding at September 30, 2005 and December 31,2004, respectively
                  37
                  
                  37Additional
                      paid-in capital
                  191,275
                  
                  204,540Accumulated
                      deficit
                  (171,411)
                  
                  (186,309)Accumulated
                      other comprehensive loss
                  (63)
                  
                  (114)Deferred
                      stock compensation
                  (421)
                  
                  (565)Total stockholders' equity
                  19,417
                  
                  17,589Total liabilities and stockholders' equity
                  $
                      77,445
                  
                  $
                      107,052
  See
            notes
            to unaudited condensed consolidated financial
            statements
 3




**PAC-WEST
                  TELECOMM, INC.****Condensed
                  Consolidated Statements of Operations****and
                  Comprehensive Income (Loss)****(Unaudited,
                  in thousands except per share
                  data)**


**Three
                  Months Ended**
              
              **Nine
                  Months Ended****September
                  30,**
              
              **September
                  30,****2005**
              
              **2004**
              
              **2005**
              
              **2004**Revenues
              $
                  22,383
              
              $
                  31,652
              
              $
                  72,383
              
              $
                  88,912Costs
                  and Expenses:Network expenses (exclusive of depreciation shown separately
                  below)
              9,628
              
              8,535
              
              29,901
              
              30,175Selling, general and administrative
              13,006
              
              14,454
              
              40,127
              
              42,984Reimbursed transition expenses
              (4,470)
              
              -
              
              (7,318)
              
              -Depreciation and amortization
              3,365
              
              7,760
              
              10,349
              
              24,975Restructuring charges
              24
              
              124
              
              630
              
              503Total operating expenses
              21,553
              
              30,873
              
              73,689
              
              98,637Income (loss) from operations
              830
              
              779
              
              (1,306)
              
              (9,725)Interest expense, net
              1,091
              
              3,073
              
              5,198
              
              8,852Other expense, net
              216
              
              833
              
              154
              
              817Gain on sale of enterprise customer base
              (267)
              
              -
              
              (24,132)
              
              -Loss on extinguishment of debt
              -
              
              -
              
              2,138
              
              -(Loss) income before income taxes
              (210)
              
              (3,127)
              
              15,336
              
              (19,394)Income
                  tax (benefit) expense
              (84)
              
              -
              
              438
              
              3Net (loss) income
              $
                  (126)
              
              $
                  (3,127)
              
              $
                  14,898
              
              $
                  (19,397)Basic
                  income (loss) per share
              $
                  (0.00)
              
              $
                  (0.09)
              
              $
                  0.40
              
              $
                  (0.53)Diluted
                  income (loss) per share
              $
                  (0.00)
              
              $
                  (0.09)
              
              $
                  0.38
              
              $
                  (0.53)Weighted
                  Average Shares Outstanding:Basic
              37,132
              
              36,618
              
              36,958
              
              36,686Diluted
              37,132
              
              36,618
              
              38,718
              
              36,686Comprehensive
                  (Loss) Income:Net (loss) income
              $
                  (126)
              
              $
                  (3,127)
              
              $
                  14,898
              
              $
                  (19,397)Unrealized gains (losses) on investments
              31
              
              40
              
              51
              
              (80)Comprehensive (loss) income
              $
                  (95)
              
              $
                  (3,087)
              
              $
                  14,949
              
              $
                  (19,477)




See
      notes to unaudited condensed consolidated
      financial statements






4


**PAC-WEST
                  TELECOMM, INC.****Condensed
                  Consolidated Statements of Cash Flows****(Unaudited,
                  in thousands)**
 **Nine
                      Months Ended****September
                      30,****2005**
                  
                  **2004**Operating
                      activities:Net
                      income (loss)
                  
                  
                  
                  
                  
                  
                  
                  $
                      14,898
                  
                  $
                      (19,397)Adjustments
                      to reconcile net income (loss) to net cashprovided by operating activities:Depreciation and amortization
                  
                  
                  
                  
                  
                  
                  10,349
                  
                  24,975Amortization of deferred financing costs
                  
                  
                  
                  
                  
                  255
                  
                  521Amortization of discount on notes payable
                  
                  
                  
                  
                  
                  1,262
                  
                  3,990Amortization of deferred stock compensation
                  
                  
                  
                  
                  144
                  
                  149Loss on extinguishment of debt
                  
                  
                  
                  
                  
                  
                  2,138
                  
                  -Gain on sale of enterprise customer base
                  
                  
                  
                  
                  
                  (24,132)
                  
                  -Provision for doubtful accounts
                  
                  
                  
                  
                  
                  
                  172
                  
                  39Net loss on disposal of property
                  
                  
                  
                  
                  
                  
                  187
                  
                  817Changes
                      in operating assets and liabilities:Decrease (increase) in accounts receivable
                  
                  
                  
                  
                  
                  964
                  
                  (1,024)Increase in receivable from transition service agreement
                  
                  
                  
                  
                  (2,181)
                  
                  -Decrease in prepaid expenses and other current assets
                  
                  
                  
                  
                  2,507
                  
                  843Decrease in other assets
                  
                  
                  
                  
                  
                  
                  307
                  
                  345Increase (decrease) in accounts payable
                  
                  
                  
                  
                  
                  
                  417
                  
                  (1,134)Decrease in accrued interest
                  
                  
                  
                  
                  
                  
                  (1,116)
                  
                  (763)Decrease in income tax payable
                  
                  
                  
                  
                  
                  
                  (6)
                  
                  -Decrease in other current liabilities and other
                      liabilities
                  
                  
                  
                  
                  (1,197)
                  
                  (3,565)Net cash provided by operating activities
                  
                  
                  
                  
                  
                  4,968
                  
                  5,796Investing
                      activities:Purchase
                      of property and equipment
                  
                  
                  
                  
                  
                  (6,434)
                  
                  (5,935)Proceeds
                      from disposal of property and equipment
                  
                  
                  
                  
                  99
                  
                  147Redemptions
                      (purchase) of short-term investments, net
                  
                  
                  
                  
                  3,547
                  
                  (13,057)Business
                      acquisitions
                  
                  
                  
                  
                  
                  
                  
                  -
                  
                  (587)Proceeds
                      from sale of enterprise customer base
                  
                  
                  
                  
                  
                  26,953
                  
                  -Returned
                      deposits/other associated with the enterprise customer base
                      sale
                  
                  
                  (3,536)
                  
                  -Other
                  
                  
                  
                  
                  
                  
                  
                  
                  200
                  
                  -Net cash provided by (used) in investing activities
                  
                  
                  
                  
                  20,829
                  
                  (19,432)Financing
                      activities:Repayments
                      of notes payable
                  
                  
                  
                  
                  
                  
                  (42,766)
                  
                  (642)Proceeds
                      from the issuance of common stock
                  
                  
                  
                  
                  
                  225
                  
                  64Principal
                      payments on capital leases
                  
                  
                  
                  
                  
                  (518)
                  
                  (2,467)Net
                      proceeds from borrowing under notes payable
                  
                  
                  
                  
                  1,949
                  
                  3,322Payments
                      for deferred financing costs
                  
                  
                  
                  
                  
                  -
                  
                  (246)Net cash provided by (used) in financing activities
                  
                  
                  
                  
                  (41,110)
                  
                  31Net decrease in cash and cash equivalents
                  
                  
                  
                  
                  
                  (15,313)
                  
                  (13,605)Cash
                      and cash equivalents:Beginning
                      of period
                  
                  
                  
                  
                  
                  
                  
                  32,265
                  
                  34,657End
                      of period
                  
                  
                  
                  
                  
                  
                  
                  $
                      16,952
                  
                  $
                      21,052Supplemental
                      Disclosure of Cash Flow Information:Cash
                      paid during the year for:Interest
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                      5,572
                  
                  $
                      5,378Income
                      taxes
                  
                  
                  
                  
                  
                  
                  
                  $   
                      495
                  
                  $       
                      -




See
        notes
        to unaudited condensed consolidated financial statements
 5




**PAC-WEST
        TELECOMM, INC.**
 **NOTES
        TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **AS
        OF AND FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30,
        2005**


The
        terms
        "the Company," "Pac-West," "we," "our," "us," and similar terms used in this
        Form 10-Q, refer to Pac-West Telecomm, Inc.


**1.
        Organization and Basis of Presentation:**
 
 The
        Company is an independent provider of integrated communication solutions
        that
        enable communication providers to use the Pac-West network and its services
        as
        an alternative to building and maintaining their own network to meet their
        end-users needs. The Company’s customers currently include Internet service
        providers (ISP), enhanced communication service providers (ESPs) and other
        direct providers of communication services to business or residential end-users,
        collectively referred to as service providers (SPs). On March 11, 2005, the
        Company sold substantially all of its enterprise customer base to U.S.
        TelePacific Corp. (TelePacific) while retaining the Company’s associated network
        assets.
 
 These
        accompanying unaudited condensed consolidated financial statements have been
        prepared in accordance with accounting principles generally accepted for
        interim
        financial information in the United States of America pursuant to the rules
        and
        regulations of the Securities and Exchange Commission (SEC). Accordingly,
        they
        do not include all of the information and notes required by accounting
        principles generally accepted in the United States of America (US GAAP) for
        complete financial statements. In the opinion of management, all adjustments,
        consisting only of normal recurring adjustments, considered necessary for
        a fair
        presentation for the periods indicated, have been included. Operating results
        for the nine months ended September 30, 2005 are not necessarily indicative
        of
        the results that may be expected for the year ending December 31, 2005. The
        condensed consolidated balance sheet at December 31, 2004 has been derived
        from
        the audited consolidated balance sheet at that date, but does not include
        all of
        the information and notes required by US GAAP for complete financial statements.
        These unaudited condensed consolidated financial statements should be read
        in
        conjunction with the audited consolidated financial statements and the notes
        thereto of the Company as of and for the year ended December 31, 2004, included
        in the Company's Annual Report on Form 10-K filed with the SEC on March 30,
        2005.
 
 Based
        on
        criteria established by Statement of Financial Accounting Standards No. 131
        (SFAS 131), “Disclosures about Segments of an Enterprise and Related
        Information,” the Company has determined that it has one reportable operating
        segment. While the Company monitors the revenue streams of our various services,
        the revenue streams share almost all of the various operating expenses. As
        a
        result the Company has determined that it has one reportable operating segment.   These
          unaudited condensed consolidated financial statements include the results
          of
          operations of the Company and its subsidiaries. All intercompany accounts
          and
          transactions have been eliminated. Certain prior period amounts have been
          reclassified to conform to current period presentations.
 
 **2.
          Sale of Substantially All of the Enterprise Customer Base:**
 
 On
          March
          11, 2005, the Company sold substantially all of its enterprise customer
          base to
          TelePacific while retaining the Company’s associated network assets, impacting
          approximately 150 employees. Under the terms of this transaction, TelePacific
          acquired certain assets, such as property and equipment with a net book
          value of
          approximately $3.0 million and other assets of approximately $0.6 million,
          and
          assumed certain liabilities of approximately $0.7 million, in exchange
          for $26.9
          million in cash. As a result, the Company recorded a gain of $24.0 million
          from
          this sale during the first quarter of 2005. Subsequent to the first quarter
          of
          2005, the Company recorded a net gain of $0.1 million for adjustments associated
          with this sale and an amendment to the Asset Purchase Agreement (APA) as
          discussed below.
 In
            addition on March 11, 2005, the Company entered into a Transition Service
            Agreement (TSA) with TelePacific that, among
            other things, obligates it to provide certain transition services to TelePacific at
            its
            estimated cost for a one-year period subject to extension for two additional
            three-month periods. The estimated costs to be reimbursed to the Company
            include
            network related and administrative support services which are provided
            exclusively to TelePacific. According to the TSA, TelePacific received
            a $2.0
            million credit against the total amount to be billed that occurred during
            the
            second quarter of 2005. During the third quarter
            of 2005, the Company and TelePacific entered into an amendment to resolve
            certain disputed matters arising out of the APA and to amend and modify
            the TSA.
            The TSA amendment included, among other things, a credit to TelePacific
            of up to
            $0.5 million during the fourth quarter of 2005 against future estimated
            costs to
            be reimbursed to the Company, and the elimination of a cap of $10.5 million
            for
            certain types of network related services for which TelePacific is obligated
            to
            reimburse the Company during the initial 12 month transition
            period.
 For
              the
              three and nine months ended September 30, 2005, the Company recorded
              reimbursed
              transition expenses of $4.5 million and $7.3 million, respectively,
              in
              accordance with the TSA. The amounts are recorded as a reduction to
              costs and
              expenses on a separate line item in the condensed consolidated statements
              of
              operations. Costs billed under the TSA are based upon estimated costs
              to the
              Company, and the Company anticipates that no profit will be recognized
              on the
              services performed under the TSA. The enterprise services are provided
              by the
              same network assets and maintained and operated by the same employee
              base as
              other services provided by the Company until TelePacific can transition
              the
              enterprise customer base onto its own network. As such, the Company’s common
              network services or expenses cannot be segregated based upon the services
              provided and therefore the estimated costs have primarily been billed
              based upon
              a fixed fee per type of service or transaction. Due to the inseparability
              of the
              Company’s network, the absence of identifiable shared costs, and as no network
              assets were sold to TelePacific, the Company determined the assets
              sold did not
              constitute discontinued operations.
 
 As
              of
              September 30, 2005, the Company had receivables of approximately $2.2
              million
              related to the TSA and approximately $1.4 million related to the sale
              of
              substantially all of the enterprise customers to TelePacific. The receivable
              from TelePacific related to the enterprise customers is included in
              prepaid
              expenses and other current assets in the condensed consolidated balance
              sheet.
  6
 **3.**  **Stock
                Based Compensation:**
  The
                Company follows Accounting Principles Board Opinion No. 25, "Accounting
                for
                Stock Issued to Employees" for its stock based compensation plans.
                The Company
                has adopted the disclosure-only provisions of Statement of Financial
                Accounting
                Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation,"
                to disclose
                pro forma information regarding options granted to its employees
                based on
                specified valuation techniques that produce estimated compensation
                charges. If
                compensation expense for our stock-based compensation plans had been
                determined
                in accordance with the fair value as prescribed in SFAS No. 123,
                the Company's
                net (loss) income per share would have been as follows:
 **Three
                            Months Ended**
                        
                        **Nine
                            Months Ended****September
                            30,**
                        
                        **September
                            30,****2005**
                        
                        **2004**
                        
                        **2005**
                        
                        **2004**(Dollars
                            in thousands except per share amounts)Net
                            (loss) income as reported
                        
                        $
                            (126)
                        
                        $
                            (3,127)
                        
                        $
                            14,898
                        
                        $
                            (19,397)Total
                            stock-based employee compensation included inreported net (loss) income, net of tax
                        
                        48
                        
                        54
                        
                        140
                        
                        149Total
                            stock-based employee compensation determinedunder the fair value based method, net of tax
                        
                        (168)
                        
                        (176)
                        
                        (442)
                        
                        (1,310)Pro
                            forma
                        
                        $
                            (246)
                        
                        $
                            (3,249)
                        
                        $
                            14,596
                        
                        $
                            (20,558)Basic
                            net income (loss) per common share:As reported
                        
                        $
                            (0.00)
                        
                        $
                            (0.09)
                        
                        $
                            0.40
                        
                        $
                            (0.53)Pro forma
                        
                        $
                            (0.01)
                        
                        $
                            (0.09)
                        
                        $
                            0.39
                        
                        $
                            (0.56)Diluted
                            net income (loss) per common share:As reported
                        
                        $
                            (0.00)
                        
                        $
                            (0.09)
                        
                        $
                            0.38
                        
                        $
                            (0.53)Pro forma
                        
                        $
                            (0.01)
                        
                        $
                            (0.09)
                        
                        $
                            0.38
                        
                        $
                            (0.56)
  For
                      the
                      quarter ended September 30, 2005, potential common stock was
                      antidilutive, as it
                      decreased the net loss per share. Accordingly, 1,181,326 shares
                      were excluded
                      from the diluted net loss per share calculation for the quarter
                      ended September
                      30, 2005. For the three and nine month periods ended September
                      30, 2004,
                      potential common stock was antidilutive, as it decreased the
                      net loss per share.
                      Accordingly, 972,853 and 1,600,640 shares were excluded from
                      the diluted net
                      loss per share calculation for the three and nine months ended
                      September 30,
                      2004, respectively.
 The
                    Company uses the Black-Scholes option-pricing model to derive
                    the theoretical
                    fair value of employee stock option grants. The fair value of
                    each option was
                    estimated on the date of grant using the Black-Scholes option-pricing
                    model with
                    the following assumptions in the periods ended September 30,
                    2005 and 2004,
                    respectively:
  **Three
                              Months Ended**
                          
                          **Nine
                              Months Ended****September
                              30,**
                          
                          **September
                              30,****2005**
                          
                          **2004**
                          
                          **2005**
                          
                          **2004**Risk-free
                              interest rate
                          
                          3.93%
                          
                          3.26%
                          
                          3.84%
                          
                          3.06%Expected
                              volatility
                          
                          106%
                          
                          110%
                          
                          106%
                          
                          112%Expected
                              dividend yield
                          
                          -
                          
                          -
                          
                          -
                          
                          -Expected
                              life
                          
                          4
                              years
                          
                          4
                              years
                          
                          4
                              years
                          
                          4
                              yearsFair
                              value of options granted
                          
                          $
                              0.64
                          
                          $
                              0.65
                          
                          $
                              0.90
                          
                          $
                              1.10
   7
 **4.
                      Concentration of Customers and Suppliers:**
  For
                      the
                      three and nine months ended September 30, 2005 and 2004, the
                      Company had the
                      following concentrations of revenues and operation costs.
 **Three
                                    Months Ended**
                                
                                **Nine
                                    Months Ended****September
                                    30,**
                                
                                **September
                                    30,****2005**
                                
                                **2004**
                                
                                **2005**
                                
                                **2004**Largest
                                    customers: Percentage of totalrevenuesCustomer
                                    1
                                
                                25.2%
                                
                                32.8%
                                
                                23.8%
                                
                                23.3%Customer
                                    2
                                
                                14.3%
                                
                                14.8%
                                
                                17.4%
                                
                                17.3%Largest
                                    supplier: Percentage of network expenses
                                60.2%
                                
                                50.3%
                                
                                45.9%
                                
                                40.1%
 During
                            each of the comparison periods, no other customer accounted
                            for more than 10% of
                            total revenues. Customer 1 represented 19% of trade accounts
                            receivable as of
                            September 30, 2005 and 12% of trade accounts receivable
                            at December 31, 2004. No
                            other customer represented more than 10% of trade accounts
                            receivable. The
                            Company’s largest source of operating costs was from one incumbent
                            local
                            exchange carrier (ILEC) for each of the comparison periods.
  **5.
                            Restructuring
                            Charges:**


***2001
        and 2002 Restructuring Plans***
  A
        summary
        of the activity for the nine months ended September 30, 2005 pertaining to
        the
        Company's 2001 and 2002 restructuring plans, which is included in other accrued
        liabilities in the accompanying condensed consolidated balance sheets as
        of
        September 30, 2005 and December 31, 2004, consist of the following:
 **Restructuring**
                
                **Additional**
                
                
                
                **Restructuring****Liability**
                
                **Restructuring**
                
                
                
                **Liability****as
                    of**
                
                **Expense**
                
                **Cash**
                
                **as
                    of****Dec.
                    31, 2004**
                
                **Incurred**
                
                **Payments**
                
                **September
                    30, 2005**(Dollars
                    in thousands)Rent
                    expense for vacated premises
                $
                    2,464
                
                $
                    46
                
                $
                    (476)
                
                $
                    2,034
 The
            amount of the reserve for vacated premises is equal to the monthly lease
            payment
            of the unoccupied space, less any estimated sublease income, multiplied
            by the
            remaining months on the lease. In regards to the Colorado facility, no
            sublease
            income was estimated due to the specialized nature of the facility . During
            the nine months ended September 30, 2005, the Company recorded additional
            restructuring charges of approximately $46,000 due to increased common
            area
            operating expenses at the Colorado facility. The final cash payment to
            be
            recorded against the restructuring reserve is currently expected to occur
            in
            March 2010.
 ***2005
            Restructuring Plan***
 
 The
            Company has recorded restructuring charges in connection with the completion
            of
            the sale of substantially all of its enterprise customer base to TelePacific
            on
            March 11, 2005, primarily consisting of employee separation costs. Of
            the
            approximately 150 employees affected by the sale to TelePacific, an estimated
            80
            employees have been or will be involuntarily terminated. As of September
            30,
            2005, approximately 70 employees had been involuntarily terminated. The
            final
            cash payment to be recorded against the 2005 restructuring reserve is
            expected
            to occur in March 2006. However, should TelePacific exercise its option
            to
            extend the term of the TSA, the Company may incur additional employee
            termination benefit costs and the timing of the Company’s final cash payments
            under the 2005 restructuring plan would also be extended.
 
 The
            costs
            incurred in connection with the restructuring plan are comprised of benefits
            to
            employees who were or will be involuntarily terminated and costs related
            to rent
            expense for vacated premises. These costs are included in restructuring
            charges
            in the accompanying condensed consolidated statements of operations and
            comprehensive income (loss). During the nine months ended September 30,
            2005,
            costs incurred for employee termination benefits for approximately 85
            employees
            amounted to $540,000 and costs incurred for vacated premises totaled
            $44,000.
            During the third quarter of 2005, the Company recorded additional costs
            incurred
            for employee termination benefits of $13,000 and additional costs incurred
            for
            vacated premises of approximately $11,000.
 
 The
            Company anticipates total cash payments for employee termination benefits,
            which
            is contingent upon the actual termination date of the remaining employees,
            and
            rent expense for vacated premises, which ended in October 2005, to be
            approximately $549,000 and $52,000, respectively. However, should TelePacific
            exercise its option to extend the term of the TSA, the Company may incur
            additional employee termination benefit costs.
  8
 A
              summary
              of the restructuring expenses and the associated liability pertaining
              to the
              Company's 2005 restructuring plan, which is included in other accrued
              liabilities in the accompanying condensed consolidated balance sheet
              as of
              September 30, 2005, consist of the following:
 **Restructuring**
                      
                      **Additional**
                      
                      
                      
                      **Restructuring****Liability**
                      
                      **Restructuring**
                      
                      
                      
                      **Liability****as
                          of**
                      
                      **Expense**
                      
                      **Cash**
                      
                      **as
                          of****Dec.
                          31, 2004**
                      
                      **Incurred**
                      
                      **Payments**
                      
                      **September
                          30, 2005**(Dollars
                          in thousands)One-time
                          employee termination benefits
                      $
                          -
                      
                      $
                          540
                      
                      $
                          (475)
                      
                      $
                          65Rent
                          expense for vacated premises
                      -
                      
                      44
                      
                      (44)
                      
                      -$
                          -
                      
                      $
                          584
                      
                      $
                          (519)
                      
                      $
                          65
 **6.
                  Income Taxes:**
 
 The
                  Company's effective income tax rate for the quarters ended September
                  30, 2005
                  and 2004 was 40.0% and 0.0%, respectively, and was 2.9% and 0.0%,
                  for the nine
                  months ended September 30, 2005 and 2004, respectively. The Company
                  anticipates
                  using its available tax net operating losses to offset the majority
                  of any
                  income tax owed on the gain from the sale of substantially all
                  of its enterprise
                  customer base to TelePacific. As of September 30, 2005, income
                  taxes payable was
                  $0.0 million.  **7.
                    Other Comprehensive Income (Loss):**
 
 For
                    the
                    quarters ended September 30, 2005 and 2004, there was $31,000
                    and $40,000,
                    respectively, of other comprehensive income pertaining to net
                    unrealized
                    investment gains (losses) on available-for-sale marketable securities.
                    For the
                    nine months ended September 30, 2005 and 2004, there was $51,000
                    and  $(80,000),
                    respectively, of other comprehensive income (loss) pertaining
                    to net unrealized
                    investment gains (losses) on available-for-sale marketable securities.
 **8.
                        Commitments and Contingencies:**
 
 From
                        time
                        to time, the Company is subject to audits with various tax
                        authorities that
                        arise during the normal course of business. During the third
                        quarter of 2005,
                        the Company received two tax assessments arising from audits.
                        Subsequent to the
                        third quarter of 2005, the Company filed appeals against
                        both assessments. The
                        Company believes resolutions to various tax audits that the
                        Company may be
                        involved with in the normal course of business will not materially
                        harm its
                        business, financial condition or results of operations.
 There
                      have been no material developments in the litigation previously
                      reported in the
                      Company’s Annual Report on Form 10-K for the period ended December
                      31, 2004 as
                      filed with the SEC on March 30, 2005. From time to time, the
                      Company is a party
                      to litigation that arises in the ordinary course of business.
                      The Company
                      believes that the resolution of this litigation, and any other
                      litigation the
                      Company may be involved with in the ordinary course of business,
                      will not
                      materially harm its business, financial condition or results
                      of
                      operations.
  **9.
                      Related Party Transactions:**
 
 A
                      significant stockholder of the Company, Bay Alarm, together
                      with its subsidiary
                      InReach Internet, LLC, is a customer of the Company. As of
                      March 11, 2005, Bay
                      Alarm was included in the sale of substantially all of the
                      enterprise customer
                      base to TelePacific, however InReach Internet, LLC, remains
                      a customer of the
                      Company. Bay Alarm continues to provide the Company with security
                      monitoring
                      services at its normal commercial rates. The Company also leases
                      a facility in
                      Oakland, California from Bay Alarm. Certain information concerning
                      these
                      arrangements with Bay Alarm are as
                      follows:
 **Three
                        Months Ended**
                    
                    **Nine
                        Months Ended****September
                        30,**
                    
                    **September
                        30,****2005**
                    
                    **2004**
                    
                    **2005**
                    
                    **2004**(Dollars
                        in thousands)Revenues
                    
                    
                    
                    $
                        218
                    
                    $
                        419
                    
                    $
                        751
                    
                    $
                        1,176Revenues
                        as a percentage of total revenues
                    1.0%
                    
                    1.3%
                    
                    1.0%
                    
                    1.3%Security
                        monitoring costs
                    
                    $
                        7
                    
                    $
                        8
                    
                    $
                        26
                    
                    $
                        26Oakland
                        property rent payments
                    
                    $
                        88
                    
                    $
                        87
                    
                    $
                        265
                    
                    $
                        273
 
 At
              September 30, 2005 and December 31, 2004 the Company had no amounts
              receivable
              from Bay Alarm. All expenses paid to Bay Alarm are included in selling,
              general
              and administrative expenses in the accompanying condensed consolidated
              statements of operations.
  9
 **10.
              Debt and interest expense, net:**
 
 At
              September 30, 2005 and December 31, 2004, long-term debt and capital
              lease
              obligations consist of the following:
 
 **September
                          30,**
                      
                      **December
                          31,****2005**
                      
                      **2004**(unaudited)(Dollars
                          in thousands)Senior
                          Notes
                      $
                          36,102
                      
                      $
                          36,102Senior
                          Secured Note, net of discount of $16,134
                      -
                      
                      24,500Capital
                          lease obligations
                      765
                      
                      1,285Notes
                          payable
                      5,974
                      
                      6,040Less
                          current portion of notes payable and capital leases
                      (3,468)
                      
                      (2,889)$
                          39,373
                      
                      $
                          65,038
  The
                Senior Notes of which there is $36.1 million  in
                principal amount outstanding at September 30, 2005, mature on February
                1, 2009
                and bear interest at 13.5% per annum payable in semiannual installments,
                with
                all principal due in full on February 1, 2009.
 
 The
                Senior Secured Note, which was initially issued in the principal
                amount of $40.0
                million, accrued interest at a rate of LIBOR plus 0.5%, and was to
                mature
                December 2006. On March 11, 2005, pursuant to the terms of a Payoff
                Letter, by
                and between the Company and Deutsche Bank AG — London (Deutsche Bank), the
                Company utilized $26.9 million of proceeds from the sale of substantially
                all of
                its enterprise customer base to TelePacific, as well as $13.8 million
                from cash
                on hand, to prepay in full the Senior Secured Note (including all
                outstanding
                principal and accrued and unpaid interest). In addition, pursuant
                to the terms
                of the Payoff Letter, the Company retired the related warrants to
                acquire up to
                26,666,667 shares of the Company’s common stock in connection with the Senior
                Secured Note, which decreased additional paid in capital by approximately
                $13.5
                million. The prepayment of the Senior Secured Note and the retirement
                of the
                related warrants resulted in a $2.1 million loss on the extinguishment
                of debt.
 
 During
                the second quarter of 2004, the Company entered into a secured financing
                arrangement with Merrill Lynch Capital, a division of Merrill Lynch
                Business
                Financial Services, Inc., pursuant to which the Company may borrow
                up to an
                aggregate amount of $10.0 million, subject to certain conditions.
                This financing
                arrangement was structured in a manner that provides for multiple
                credit
                facilities up to an aggregate of $10.0 million with each facility
                having
                separate closing dates and repayment schedules. Additional borrowing
                under this
                secured financing arrangement expired on December 31, 2004. The principal
                and
                accrued interest of each facility shall be payable in 36 equal monthly
                installments. The Company has the option to prepay the outstanding
                facility
                after 18 months subject to a maximum premium of 3% of the outstanding
                facility.
                Interest on each facility was fixed at 5% plus the 3-year swap rate,
                as
                published by Bloomberg Professional Services, determined two business
                days prior
                to the closing date of each facility. During the second and third
                quarters of
                2004, the Company had borrowed a total of approximately $5.4 million
                under the
                Merrill Lynch Capital financing arrangement under two credit facilities
                both
                with interest rates of 8.6%. The Company used the proceeds of this
                financing
                arrangement to acquire new telecommunication switch and related equipment,
                which
                secure borrowings under this financing arrangement. As of September
                30, 2005,
                the principal balance was $3.3 million and is included under Notes
                payable in
                the above table.  In
                  May
                  2005, the Company entered into a secured borrowing arrangement
                  with Merrill
                  Lynch Capital pursuant to which the Company borrowed $1.9 million
                  at a fixed
                  rate of 8.6%. The principal and accrued interest shall be payable
                  in 36
                  consecutive monthly installments commencing July 1, 2005. The Company
                  has the
                  option to prepay the outstanding balance after 18 months but prior
                  to 24 months
                  subject to a premium of 3%, and if paid thereafter, accompanied
                  by a premium of
                  1%. The borrowing arrangement is secured by telecommunications
                  switching and
                  computer equipment. As of September 30, 2005, the principal balance
                  of $1.8
                  million is included under Notes payable in the above table.
 
 In
                  May
                  2004, the Company completed financing agreements for various network
                  equipment
                  with Cisco Systems, Inc. These financing agreements were comprised
                  of $1.4
                  million of equipment capital leases and a $1.6 million note payable
                  exchanged
                  for a 36-month maintenance services agreement. As of September
                  30, 2005, the
                  principal of the capital lease was $0.8 million and is included
                  under Capital
                  lease obligations in the above table. As of September 30, 2005,
                  the balance of
                  the note payable was $0.9 million and is included under Notes payable
                  in the
                  above table.
  10
 Interest
                  expense, net for the three and nine months ended September 30,
                  2005 and 2004 was
                  as follows:
  **Three
                            Months Ended**
                        
                        **Nine
                            Months Ended****September
                            30,**
                        
                        **September
                            30,****2005**
                        
                        **2004**
                        
                        **2005**
                        
                        **2004**(unaudited)
                        
                        (unaudited)
                        
                        (unaudited)
                        
                        (unaudited)(Dollars
                            in thousands)
                        
                        (Dollars
                            in thousands)Interest
                            on Senior Notes
                        $
                            1,218
                        
                        $
                            1,218
                        
                        $
                            3,655
                        
                        $
                            3,668Accreted
                            discount on Senior Secured Note
                        -
                        
                        1,412
                        
                        1,262
                        
                        3,990Amortization
                            of deferred financing costs
                        50
                        
                        182
                        
                        255
                        
                        521Other
                            interest expense
                        5
                        
                        379
                        
                        524
                        
                        926Less
                            interest income
                        (182)
                        
                        (118)
                        
                        (498)
                        
                        (253)Interest expense, net
                        $
                            1,091
                        
                        $
                            3,073
                        
                        $
                            5,198
                        
                        $
                            8,852
 
 **11.
                  Recent Accounting Pronouncements:**
 
 In
                  December 2004, the Financial Accounting Standards Board (FASB)
                  issued SFAS No.
                  123R, “Share-Based Payment.” Among other items, the standard requires the
                  Company to recognize compensation cost for all share-based payments,
                  in the
                  Company’s consolidated statements of operations. Depending on the model
                  used to
                  calculate stock-based compensation expense in the future and other
                  requirements
                  of SFAS No. 123R, the pro forma disclosure in Note 3 may not be
                  indicative of
                  the stock-based compensation expense that will be recognized in
                  the Company’s
                  future financial statements. On April 14, 2005, the Securities
                  and Exchange
                  Commission (SEC) amended Regulation S-X to allow SEC registrants
                  to delay the
                  implementation date of SFAS No. 123R to the beginning of the first
                  fiscal year
                  after June 15, 2005. The Company plans to implement SFAS No. 123R
                  beginning with
                  its first quarterly report after January 1, 2006. The Company is
                  currently
                  evaluating the new standard and models, which may be used to calculate
                  future
                  stock-based compensation expense.
 
 In
                  March
                  2005, the SEC issued Staff Accounting Bulletin (SAB) No. 107, "Share-Based
                  Payment," which provides the staff's views regarding the valuation
                  of
                  share-based payment arrangements for public companies.
 
 In
                  May
                  2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.”
                  Among other changes, SFAS No. 154 requires that a voluntary change
                  in accounting
                  principle be applied retrospectively with all prior period financial
                  statements
                  presented on the new accounting principle, unless it is impracticable
                  to do so.
                  SFAS No. 154 also provides that (1) a change in method of depreciating
                  or
                  amortizing a long-lived non-financial asset be accounted for as
                  a change in
                  estimate (prospectively) that was effected by a change in accounting
                  principle,
                  and (2) correction of errors in previously issued financial statements
                  should be
                  termed a "restatement." This statement shall be effective for accounting
                  changes
                  and corrections of errors made in fiscal years beginning after
                  December 15,
                  2005. The Company does not expect the adoption of SFAS No. 154
                  to have a
                  material impact on its financial position, results of operations,
                  or cash
                  flows.
 **12.
                    Preferred Stock Purchase Rights**
 
 On
                  August
                  30, 2005, the Company created a series
                  of
                  600,000 shares of preferred stock, without par value, designated
                  as Series A
                  Junior Participating Preferred Stock (the
                  “Preferred Stock”) and adopted a rights agreement (the “Rights Agreement”) with
                  Wachovia Bank ,
                  National Association, as rights agent .
                  Under
                  the Rights Agreement, each common shareholder receives one right
                  to purchase one
                  one-hundredth of a share of the Preferred Stock for each share
                  of common stock
                  owned by the shareholder. Holders of the Rights are entitled to
                  purchase for
                  $8.00 one one-hundredth of one share of the Company’s Preferred Stock in certain
                  limited circumstances involving acquisitions of, or offers for,
                  15 percent or
                  more of the Company’s common stock. After any such acquisition is completed,
                  each Right entitles its holder to purchase for $8.00 an amount
                  of common stock
                  of the Company, or in certain circumstances securities of the acquirer,
                  having a
                  then current market value of two times the exercise price of the
                  Right. In
                  connection with the Rights Agreement, each one-hundredth of one
                  share of the
                  Preferred Stock will generally be afforded economic rights similar
                  to one share
                  of the Company’s common stock. Prior to the acquisition by a person or group of
                  a 15% or more beneficial interest in the common stock, the Rights
                  are redeemable
                  for $0.0001 per Right, subject to adjustment. The Rights will expire
                  on August
                  30, 2015 unless they are earlier redeemed, exercised or exchanged
                  by the
                  Company.
  **13.
                    Subsequent Event**
 
 On
                    November 9, 2005, the Company entered into a Loan and Security
                    Agreement (Loan
                    Agreement) with Comerica Bank (Bank), which provides for up to
                    $5,000,000 of
                    revolving advances and up to $15,000,000 of term loans.
   11
 
 The
                    Loan
                    Agreement provides for the Bank to make revolving advances to
                    the Company not to
                    exceed the lesser of $5,000,000 or 80% of its eligible accounts
                    receivable until
                    November 9, 2007, at which time all revolving loans are immediately
                    due and
                    payable. The Loan Agreement also provides for the Bank to make
                    one or more term
                    loans to the Company in two tranches, Tranche A and Tranche B,
                    which shall be
                    used to finance capital expenditures and acquisitions and/or
                    to refinance the
                    Senior Notes due in 2009. The term loans made pursuant to the
                    Loan Agreement
                    shall not exceed $15,000,000 in the aggregate, and shall also
                    not exceed the
                    following limitations: (1) 100% of the invoice amount of capital
                    expenditures on
                    equipment approved by the Bank from time to time to be purchased
                    by the Company,
                    excluding software, taxes, shipping, warranty charges, freight
                    discounts and
                    installation expense (collectively, “Soft Costs”); (2) $4,500,000 toward the
                    invoice amount of aggregate Soft Costs (in the case of (1) and
                    (2), which the
                    Company shall, in any case, have purchased or expended since
                    June 1, 2005); (3)
                    $5,000,000 toward the purchase of the Senior Notes; and (4) $5,000,000
                    in the
                    aggregate at any time for strategic acquisitions. Any such term
                    loans made
                    through June 9, 2006 may be made as Tranche A term loans. After
                    June 9, 2006, no
                    further Tranche A term loans shall be made, and any such terms
                    loans outstanding
                    under Tranche A on June 9, 2006 shall be payable in thirty-one
                    (31) equal
                    monthly installments of principal, plus all accrued interest,
                    beginning on July
                    1, 2006 until paid in full. Term loans made from June 9, 2006
                    to January 9, 2007
                    shall be made as Tranche B term loans. After January 9, 2007,
                    no further Tranche
                    B term loans shall be made, and any such term loans outstanding
                    under Tranche B
                    on January 9, 2007 shall be payable in twenty-four (24) equal
                    monthly
                    installments of principal, plus all accrued interest, beginning
                    on February 1,
                    2007 until December 31, 2008, at which time all term loans shall
                    be immediately
                    due and payable.
 
 Rates
                    for
                    borrowing under the Loan Agreement are based, at the Company’s election, on an
                    interest rate tied to a Eurodollar rate or the Bank’s prime rate. With respect
                    to Eurodollar loans, the rate is 2.75% above Eurodollar for revolving
                    advances
                    and 3.25% above Eurodollar for term loans. With respect to prime
                    rate loans, the
                    rate is equal to the Bank’s prime rate for revolving advances and 0.5% above the
                    Bank’s prime rate for term loans.
 
 The
                    Loan
                    Agreement is secured by substantially all of the Company’s personal property.
                    The Loan Agreement contains usual and customary events of default
                    for facilities
                    of this nature and provides that upon the occurrence of an event
                    of default, the
                    Bank may, among other things, accelerate the payment of all amounts
                    payable
                    under the Loan Agreement and cease to advance money or extend
                    credit. Under the
                    terms of the Loan Agreement, the Company is also required to
                    maintain certain
                    financial and restrictive covenants which limit, among other
                    things, its ability
                    to incur additional indebtedness, create liens, acquire, sell
                    or dispose of
                    certain assets, engage in certain mergers and acquisitions, pay
                    dividends and
                    make certain capital expenditures. Borrowing under the Loan Agreement
                    is subject
                    to receipt of specified regulatory approvals and the satisfaction
                    of other
                    customary conditions.
 12


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







***Except
      for the historical information contained herein, this report contains
      forward-looking statements, subject to uncertainties and risks. In this
      Quarterly Report on Form 10-Q, our use of the words "outlook," "expect,"
      "anticipate," "estimate," "forecast," "project," "likely," "objective," "plan,"
      "designed," "goal," "target," and similar expressions is intended to identify
      forward-looking statements. While these statements represent our current
      judgment on what the future may hold, and we believe these judgments are
      reasonable, actual results may differ materially due to numerous important
      risk
      factors that are described in our Annual Report on Form 10-K for the period
      ended December 31, 2004, as filed with the SEC on March 30, 2005, which may
      be
      revised or supplemented in subsequent reports filed by us with the SEC. Such
      risk factors include, but are not limited to our level of indebtedness; an
      inability to generate sufficient cash to service our indebtedness; regulatory
      and legal uncertainty with respect to intercarrier compensation payments
      received by us; the migration to broadband Internet access affecting dial-up
      Internet access; the loss of key executive officers could negatively impact
      our
      business prospects; an increase in our network expenses; migration of our
      enterprise customer base to U.S. TelePacific Corp. occurring sooner or later
      than contemplated; and our principal competitors for local services and
      potential additional competitors have advantages that may adversely affect
      our
      ability to compete with them.***








**Introduction**




We
      are an
      independent provider of integrated communication solutions that enable
      communication providers to use our network and services as an alternative to
      building and maintaining their own network to meet their end-users needs. Our
      customers currently include Internet service providers (ISP), enhanced
      communication service providers (ESPs) and other direct providers of
      communication services to business or residential end-users, collectively
      referred to as service providers (SPs).





We
      announced in October 2005 the first phase of a planned national expansion
      beginning in early 2006, to offer our full suite of voice over Internet protocol
      (VoIP) and Internet access enabling services in 36 major metropolitan markets,
      covering more than 50% of the U.S. population. We are positioning ourselves
      as a
      key player in the SP space with a focus on expansion through enabling others
      to
      become voice service providers. This planned expansion will provide a
      nationwide, single source platform that seamlessly bridges the public switched
      telephone network (PSTN) and the Internet targeted at VoIP providers, wireless
      broadband providers, ISPs, carriers and other Next Generation service providers.
      We are in the business of enabling any company to become a custom phone company.
      In addition, this planned expansion is anticipated to increase our market share
      of dial-up Internet services. While we expect that the majority of dial-up
      Internet service will migrate to broadband over time, it is a large target
      market and we remain focused on serving the needs of our customers.





We
      built
      and are expanding our facilities-based network to capitalize on the significant
      growth in Internet usage and in the related demand for local telephone service
      by SPs. We believe the statewide footprint of our current network, which
      encompasses all of the major metropolitan areas of California, and the recent
      planned national expansion, provides us with a competitive advantage over
      incumbent local exchange carriers (ILECs) and competitive local exchange
      carriers (CLECs). Our ubiquitous network in California and our current networks
      and growth in Arizona, Nevada, Oregon, Utah and Washington enable SPs to provide
      their end-users with access to Internet, paging and other data and voice
      services, such as VoIP through a local call. We believe the breadth of our
      product offerings, such as the expansion of our VoiceSource product during
      2005,
      and the structure of our network enables us to generate high network
      utilization.





In
      response to our evolving business model, which as described above, is focused
      on
      providing communication solutions to other communication providers, on March
      11,
      2005, we sold substantially all of our enterprise customer base to U.S.
      TelePacific Corp. (TelePacific) while retaining our associated network assets,
      impacting approximately 150 employees. Under the terms of this transaction,
      TelePacific acquired certain assets, such as property and equipment with a
      net
      book value of approximately $3.0 million and other assets of approximately
      $0.6
      million, and assumed certain liabilities of approximately $0.7 million, in
      exchange for $26.9 million in cash. As a result, we recorded a gain of $24.0
      million from this sale during the first quarter of 2005. Subsequent to the
      first
      quarter of 2005, we recorded a net gain of $0.1 million for adjustments
      associated with this sale and an amendment to the Asset Purchase Agreement
      (APA)
      as discussed below.





In
      addition on March 11, 2005, we entered into a Transition Service Agreement
      (TSA)
      with TelePacific that, among other things, obligates us to provide certain
      transition services to TelePacific at our estimated cost for a one-year period
      subject to extension for two additional three-month periods. The estimated
      costs
      to be reimbursed to us include network related and administrative support
      services which are provided exclusively to TelePacific. According to the TSA,
      TelePacific received a $2.0 million credit against the total amount to be billed
      that occurred during the second quarter of 2005. During the third quarter of
      2005, we entered into an amendment with TelePacific to resolve certain disputed
      matters arising out of the APA and to amend and modify the TSA. The TSA
      amendment included, among other things, a credit to TelePacific of up to $0.5
      million during the fourth quarter of 2005 against future estimated costs to
      be
      reimbursed to us, and the elimination of a cap of $10.5 million for certain
      types of network related services for which TelePacific is obligated to
      reimburse us during the initial 12 month transition period.





For
      the
      three and nine months ended September 30, 2005, the Company recorded reimbursed
      transition expenses of $4.5 million and $7.3 million, respectively, in
      accordance with the TSA. These amounts are recorded as a reduction to costs
      and
      expenses on a separate line item in the condensed consolidated statements of
      operations and comprehensive income (loss). Costs billed under the TSA are
      based
      upon estimated costs to us, and we anticipate that no profit will be recognized
      on the services performed under the TSA. The enterprise services are provided
      by
      the same network assets and maintained and operated by the same employee base
      as
      other services provided by us until TelePacific can transition the enterprise
      customer base onto its own network. As such, our common network services or
      expenses cannot be segregated based upon the services provided and therefore
      the
      estimated costs have primarily been billed based upon a fixed fee per type
      of
      service or transaction. Due to the inseparability of our network, the absence
      of
      identifiable shared costs, and as no network assets were sold to TelePacific,
      we
      determined the assets sold did not constitute discontinued
      operations.


13





In
      connection with the completion of the sale of substantially all of our
      enterprise customer base to TelePacific on March 11, 2005, we recorded
      restructuring charges of approximately $384,000 during the quarter ended March
      31, 2005. These charges primarily consist of employee separation costs for
      approximately 80 employees previously associated with the enterprise customer
      base who have been or will be involuntarily terminated, as well as rent expense
      for vacated premises. As of September 30, 2005, approximately 70 employees
      had
      been involuntarily terminated. Subsequent to the first quarter of 2005,
      additional costs of approximately $200,000 were incurred for employee
      termination benefits and costs incurred for vacated premises. We anticipate
      that
      future cash requirements associated with the separation plan will be
      approximately $0.1 million, the timing of which is contingent upon the actual
      termination date of the remaining employees. The final cash payment to be
      recorded against this reserve is expected to occur in March 2006. However,
      should TelePacific exercise its option to extend the term of the TSA, we may
      incur additional employee termination benefit costs and the timing of our final
      cash payments under the restructuring plan would be extended.





The
      following table shows our financial performance for the three and nine months
      ended September 30, 2005 and 2004:





**Three
                  Months Ended**
              
              **Nine
                  Months Ended****September
                  30,**
              
              **September
                  30,****2005**
              
              **2004**
              
              **2005**
              
              **2004**(unaudited)
              
              (unaudited)
              
              (unaudited)
              
              (unaudited)(Dollars
                  in thousands)
              
              (Dollars
                  in thousands)Total
                  revenue
              $
                  22,383
              
              $ 
                  31,652
              
              $
                  72,383
              
              $   
                  88,912Net
                  (loss) income
              $ 
                   (126)
              
              $
                  (3,127)
              
              $
                  14,898
              
              $
                  (19,397)(Loss)
                  income per share diluted
              $ 
                  (0.00)
              
              $ 
                   (0.09)
              
              $   
                   0.38
              
              $   
                   (0.53)
  We
        derive
        our revenues from monthly recurring charges, usage charges and amortization
        of
        initial non-recurring charges. Since the sale of substantially all of the
        enterprise customer base on March 11, 2005, we provide services primarily
        to SP
        customers. Monthly recurring charges include the fees paid by customers for
        lines in service and additional features on those lines, as well as equipment
        collocation services. Usage charges consist of fees paid by end users for
        each
        call made, fees paid by our customers as intercarrier compensation for
        completion of their customers' calls through our network, and access charges
        paid by carriers for long distance traffic terminated on our network. Initial
        non-recurring charges consist of fees paid by end users for the installation
        of
        our service. These payments and related costs are recognized as revenue and
        expense ratably over the term of the service contracts, which is generally
        24 to
        36 months. We recognize revenue when there is persuasive evidence of an
        arrangement, delivery of the product or performance of the service has occurred,
        the selling price is fixed or determinable and collectability is reasonably
        assured.
 
 We
        have
        carrier customers who pay us to terminate their originating call traffic
        on our
        network. These payments consist of meet point access charges, third party
        transit traffic and intercarrier compensation payments, collectively referred
        to
        as intercarrier compensation. Intercarrier compensation payments are a function
        of the number of calls we terminate, the minutes of use associated with such
        calls and the rates at which we are compensated by the carriers originating
        the
        calls. Intercarrier compensation payments have historically been a significant
        portion of our revenues but the intercarrier payments are not currently a
        targeted customer. Intercarrier compensation payments accounted for
        approximately 39.6% and 28.8% of our total revenues for the nine months ended
        September 30, 2005 and 2004, respectively. Although the rate at which we
        believe
        we will be compensated by the carriers in 2005 is expected to be consistent
        with
        2004, the sale of our enterprise customer base to TelePacific may affect
        the
        percentage of total revenues represented by intercarrier compensation in
        2005.
        The failure, for any reason, of one or more carriers from which we ordinarily
        receive intercarrier compensation payments to make all or a significant portion
        of such payments would adversely affect our financial results.
  Our
        right
        to receive intercarrier compensation payments from other carriers, as well
        as
        the right of CLECs and other competitors to receive such payments is the
        subject
        of numerous regulatory and legal challenges. For example, in 2003, Verizon
        and
        SBC adopted the Federal Communications Commission’s, or FCC’s, Intercarrier ISP
        Compensation Order. The FCC ISP order introduced a series of declining
        intercarrier compensation pricing tiers for minutes of use, at rates starting
        below the rates previously negotiated in our interconnection agreements (ICAs)
        with both carriers. The lowest pricing tier specified by the FCC ISP order
        was
        reached on June 15, 2003 and will remain in effect until such time that a
        replacement FCC ISP order may become effective. Additionally, the FCC ISP
        order
        introduced artificial annual growth limits on compensable minutes of use
        subject
        to intercarrier compensation based on the composition and balance of traffic
        between carriers. The FCC ceased enforcing the growth cap in October 2004.
 
 On
        October 20, 2004, we filed a formal complaint with the California Public
        Utilities Commission ("CPUC") against AT&T.  In the
        complaint **** proceeding,
        we alleged that AT&T owed us over $7.0 million for traffic terminated by us
        on behalf of AT&T, plus late payment fees.  On September 19, 2005, the
        presiding hearing officer released a decision granting our complaint in all
        regards, except for our claim for late payment fees.  On October 19,
        2005,
        AT&T filed an appeal with the CPUC, claiming the decision was in
        error.  We filed a simultaneous appeal with the CPUC, asking for approval
        of late payment fees.  The CPUC has not established a schedule for
        resolving the appeals, affecting the timing, and potentially the collectability
        of these amounts.
  As
        technology continues to evolve with the corresponding development of new
        products and services, there is no guarantee we will retain our customers
        with
        our existing product and service offerings or with any new products or services
        we may develop in the future. Traditional dial-up access to the Internet,
        although a mature technology, remains a large target market for us. Major
        segments of this market may experience migration to broadband access
        technologies where available and competitively priced. While we remain focused
        on serving the needs of our customers who provide dial-up access to their
        end-users, with the evolution of new technologies many new Internet protocol
        (IP) applications are now available, such as VoIP, which have presented us
        with
        new product development and sales opportunities. We are developing and
        overlaying new products and services that take advantage of these new
        technologies to further increase the utilization of our network and expect
        our
        planned national expansion will present additional sales
        opportunities.
  14
 Competition
        in the communication services market has resulted in the consolidation of
        companies in our industry, a trend we expect to continue. In order to grow
        our
        business and better serve our customers, we continue to consider new business
        strategies, such as our planned national expansion, and including, but not
        limited to, potential acquisitions, partnerships, or new business services.
        We
        believe that the statewide footprint of our network, which encompasses all
        of
        the major metropolitan areas of California, and our planned expansion, provides
        us with a significant competitive advantage that will enable us to successfully
        compete in the future, but we cannot guarantee that we will be able to sustain
        continued growth.





**Application
      of Critical Accounting Policies**





*Critical
      Accounting Policies.* The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that effect the reported amounts of assets and
      liabilities, disclosure of contingent assets and liabilities, and reported
      amounts of revenues and expenses for the reporting period. We consider the
      following accounting policies to be critical policies due to the estimation
      processes involved in each:





•  revenue
      recognition;





•  provision
      for doubtful accounts receivable;





•  estimated
      settlement of disputed billings;





•  impairment
      of long-lived assets; and





•  warrant
      valuation.





By
      their
      nature, these judgments are subject to an inherent degree of uncertainty. Thus,
      actual results could differ from estimates made and these differences could
      be
      material.





*Revenue
      Recognition.* We
      recognize revenue when:





•  there
      is
      pervasive evidence of an arrangement;





•  delivery
      of the product or performance of the service has occurred;





•  the
      selling price is fixed and determined; and





•  collectibility
      is reasonably assured.





Non-refundable
      up-front payments received for installation services and related costs are
      recognized as revenue and expense ratably over the term of the service
      contracts, generally 24 to 36 months.





Revenues
      from service access agreements are recognized as the service is provided, except
      for intercarrier compensation fees paid by our intercarrier customers for
      completion of their customers’ calls through our network, and access charges
      paid by carriers for long distance traffic terminated on our network. Our right
      to receive this type of compensation is the subject of numerous regulatory
      and
      legal challenges. Until all issues affecting a given item of revenue are
      resolved, we will continue to recognize intercarrier compensation as revenue
      when the price becomes fixed and determinable and collectibility is reasonably
      assured.





Some
      ILECs with which we have interconnection agreements have withheld payments
      from
      amounts billed by us under their agreements. The process of collection of
      intercarrier compensation can be complex and subject to interpretation of
      regulations and laws. This can lead to the requirement for negotiated
      settlements between us and the ILEC where we agree to accept a portion of what
      we believe is owed to us. These settlements generally reflect the mutual
      agreements of both parties that exist at the date of the settlement.




15


*Provision
        for doubtful accounts receivable.* Provisions for allowances for doubtful accounts receivable are estimated
        based
        upon:
 
 •  historical
        collection experience;
 
 •  customer
        delinquencies and bankruptcies;
 
 •  information
        provided by our customers;
 
 •  observance
        of trends in the industry; and
 
 •  other
        current economic conditions.




*Accruals
        for disputed billings.* During
        the ordinary course of business, we may be billed for carrier traffic for
        which
        management believes we are not responsible. In such instances, we may dispute
        with the appropriate vendor and withhold payment until the matter is resolved.
        Our current disputes are primarily related to incorrect facility rates or
        incorrect billing elements we believe we are being charged. Management regularly
        reviews and monitors all disputed items and, based on industry experience,
        records an accrual that represents what we estimate that we owe on the disputed
        billings. Although we continue to actively try to expedite resolutions, often
        times the state Public Utilities Commission must become involved to arbitrate
        such agreements. This process is often not timely and resolutions are often
        subject to appeal.


*Long-lived
      assets.* In 2002,
      we adopted Statement of Financial Accounting Standards (SFAS) No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets.” We evaluate
      our long-lived assets when events or changes in circumstances indicate that
      the
      carrying amount of such assets may not be fully recoverable. Recoverability
      of
      assets to be held and used is measured by a comparison of the carrying amount
      of
      an asset to the future undiscounted cash flows expected to be generated by
      the
      asset. When we consider an asset to be impaired, it is written down to its
      estimated fair market value. This is assessed based on factors specific to
      the
      type of asset. In assessing the recoverability of these assets, we make
      assumptions regarding, among other things, estimated future cash flows to
      determine the fair value of the respective assets. If these estimates and the
      related assumptions change in the future, we may be required to record
      additional impairment charges for these assets.





*Warrant
      Valuation* .
      During
      the quarter ended March 31, 2005, we performed an internal evaluation of the
      warrants related to the Senior Secured Note. We used the Black Scholes model
      to
      value the warrants at March 11, 2005. This valuation was used to record the
      value of the warrants related to the prepayment of the Senior Secured
      Note.





**Results
      of Operations**





*Quarter
      Ended September 30, 2005 Compared to the Quarter Ended September 30,
      2004*




Our
      significant revenue components and operational metrics for the quarters ended
      September 30, 2005 and 2004 are as follows:





**Three
                Months Ended****September
                30,****2005**
            
            **2004**
            
            **%
                Change**(unaudited)
            (unaudited)(Dollars
                in millions)**Revenues:**Intercarrier
                compensation
            
            $
                10.8
            
            $
                10.8
            
            0.0
            %Direct
                billings to SP customers
            
            8.3
            
            10.6
            
            (21.7)
            %Direct
                billings to enterprise customers
            
            -
            
            4.9
            
            (100.0)
            %Other
            
            3.3
            
            5.4
            
            (38.9)
            %Total
                revenues
            
            $
                22.4
            
            $
                31.7
            
            (29.3)
            %**Operational
                metrics:**Minutes
                of use (in billions)
            
            12.2
            
            11.3
            
            8.0
            %





Consolidated
      revenues decreased 29.3% to $22.4 million in the quarter ended September 30,
      2005 from $31.7 million during the same period in 2004. The decrease in revenue
      was primarily the result of a decrease of  $4.9
      million in direct billings to enterprise customers due to the sale of the
      enterprise customer base during the first quarter of 2005, in addition to lower
      direct billings to SP customers and other revenues.




16


Intercarrier
        compensation remained constant at $10.8 million for both the quarter ended
        September 30, 2005 and the same period in 2004. Although total intercarrier
        revenues remained constant, 2004 revenues were reduced due to payments that
        were
        withheld resulting from an interpretation of a FCC ISP order that introduced
        artificial annual growth limits on compensable minutes of use subject to
        intercarrier compensation based on the composition and balance of traffic
        between carriers. This was primarily offset by more revenues resulting from
        settlements received in 2004 than in 2005.




Direct
        billings to SP customers decreased  21.7%
        to
        $8.3 million in the quarter ended September 30, 2005 from $10.6 million during
        the same period in 2004 primarily due to disconnections of lines.
 
 Direct
        billings to enterprise customers decreased $4.9 million to $0 in the quarter
        ended September 30, 2005 compared to the same period in 2004 due to the sale
        of
        substantially all of our enterprise customer base during the first quarter
        of
        2005.
 
 Other
        revenues decreased 38.9% to $3.3 million in the quarter ended September 30,
        2005
        from $5.4 million during the same period in 2004. The decline is principally
        due
        to a  decrease
        in outbound local and long distance revenues primarily due to a decrease
        in
        minutes of use resulting from the sale of substantially all of our enterprise
        customer base. As a result of this sale we expect these revenues to continue
        to
        decrease in future periods.
 
 Minutes
        of use increased 8.0% to 12.2 billion in the quarter ended September 30,
        2005
        compared to 11.3 billion during the same period in 2004 primarily due to
        an
        increase in minutes of use from intercarriers.
 
 The
        significant costs and expenses for the quarters ended September 30, 2005
        and
        2004 are as follows:
 
 **Three
                    Months Ended****September
                    30,****2005**
                
                **2004**
                
                **%
                    Change**(unaudited)
                
                (unaudited)(Dollars
                    in millions)**Costs
                    and expenses:**Network
                    expenses (exclusive of depreciation shown separately
                    below)
                $
                    9.6
                
                $
                    8.5
                
                12.9
                %Selling,
                    general and administrative
                13.0
                
                14.5
                
                (10.3)
                %Reimbursed
                    transition expenses
                (4.5)
                
                -
                
                -Depreciation
                    and amortization
                3.4
                
                7.8
                
                (56.4)
                %Restructuring
                    charges
                -
                
                0.1
                
                (100.0)
                %Total
                    costs and expenses
                $
                    21.5
                
                $
                    30.9
                
                (30.4)
                %
  Consolidated
          network expenses increased 12.9% to $9.6 million in the quarter ended September
          30, 2005 compared to $8.5 million during the same period in 2004 primarily
          due
          to more negotiated supplier credits in 2004 than in 2005.
 
 Consolidated
          selling, general and administrative expenses decreased  10.3%
          to
          $13.0 million in the quarter ended September 30, 2005 from $14.5 million
          during
          the same period in 2004. The decrease was primarily due to the decrease
          in
          employees ,
          primarily sales employees, as
          a
          result of the sale of the enterprise customer base during the first quarter
          of
          2005.
  Reimbursed
          transition expenses were $4.5 million in the quarter ended September 30,
          2005
          and no such reimbursed expenses were recorded during the same period in
          2004.
          The reimbursed transition expenses relate to network and administrative
          services
          provided to TelePacific in accordance with the TSA. Costs billed under
          the TSA
          are based upon estimated costs to us, and we anticipate that no profit
          will be
          recognized on the services performed under the TSA. The enterprise services
          are
          provided by the same network assets and maintained and operated by the
          same
          employee base as other services provided by us until TelePacific can transition
          the enterprise customer base onto its own network. As such, our common
          network
          services or expenses cannot be segregated based upon the services provided
          and
          therefore the estimated costs have primarily been billed based upon a fixed
          fee
          per type of service or transaction. Due to the inseparability of our network,
          the absence of identifiable shared costs, and as no network assets were
          sold to
          TelePacific, we determined the assets sold did not constitute discontinued
          operations.
 
 Estimates
          and assumptions are used in setting depreciable lives. Assumptions are
          based on
          internal studies of use, industry data on average asset lives, recognition
          of
          technological advancements and understanding of business strategy. Consolidated
          depreciation and amortization expense decreased 56.4% to $3.4 million in
          the
          quarter ended September 30, 2005 from $7.8 million during the same period
          in
          2004. The decrease in depreciation and amortization expense was primarily
          due to
          recording a non-cash asset impairment charge of $54.6 million for our tangible
          assets during the fourth quarter of 2004. The impairment resulted in a
          new cost
          basis for these assets resulting in a reduction of gross property and equipment.
          As a result, future depreciation expense is expected to be less for the
          affected
          assets than in prior years. In addition, as part of the sale of substantially
          all of our enterprise customer base during the first quarter, we sold property
          and equipment with a net book value of approximately $3.0 million.
  17
 
 There
          was
          $24,000 of restructuring charges recorded in the quarter ended September
          30,  2005
          as
          compared to $0.1 million during the same period in 2004. Restructuring
          charges
          for the quarter ended September 30, 2005 related primarily to the completion
          of
          the sale of substantially all of our enterprise customer base primarily
          for
          employee termination benefits and rent expense for vacated premises. We
          anticipate that future cash requirements associated with the separation
          plan
          will be approximately $0.1 million, the timing of which is contingent upon
          the
          actual termination date of the remaining employees.  The final cash
          payment
          to be recorded against this reserve is expected to occur in March 2006.
          However,
          should TelePacific exercise its option to extend the term of the TSA, we
          may
          incur additional employee termination benefit costs and the timing of our
          final
          cash payments under the restructuring plan would be extended. Restructuring
          charges were $0.1 million for the quarter ended September 30, 2004.  These
          charges related to adjustments to estimated costs of previously announced
          restructuring plans, and did not represent new restructuring activities.
  Consolidated
          income from operations remained constant at $0.8 million for both the quarter
          ended September 30, 2005 and the same period in 2004 primarily due to the
          factors discussed in the preceding paragraphs.
 
 Consolidated
          interest expense, net decreased 64.5% to $1.1 million in the quarter ended
          September 30, 2005 from $3.1 million during the same period in 2004 primarily
          due to the termination of the discount accretion on the extinguishment
          of the
          senior secured note. Interest expense, net is expected to decrease during
          the
          remainder of 2005 due to this extinguishment. Our interest expense, net
          was as
          follows:
 
 **Three
                      Months Ended****September
                      30,****2005**
                  
                  **2004**(unaudited)
                  
                  (unaudited)(Dollars
                      in thousands)Interest
                      on Senior Notes
                  $
                      1,218
                  
                  $
                      1,218Accreted
                      discount on Senior Secured Note
                  -
                  
                  1,412Amortization
                      of deferred financing costs
                  50
                  
                  182Other
                      interest expense
                  5
                  
                  379Less
                      interest income
                  (182)
                  
                  (118)Interest
                      expense, net
                  $
                      1,091
                  
                  $
                      3,073
  For
            the
            quarters ended September 30, 2005 and 2004, our effective income tax
            rates were
            40.0% and 0.0%, respectively.
 
 Consolidated
            net loss was $0.1 million in the quarter ended September 30, 2005 compared
            to a
            net loss of $3.1 million during the same period in 2004 primarily due
            to the
            factors discussed in the preceding paragraphs.
  *Nine
            Months Ended September 30, 2005 Compared to the Nine Months Ended September
            30,
            2004*
  Our
            significant revenue components and operational metrics for the nine months
            ended
            September 30, 2005 and 2004 are as follows:
 
 **Nine
                        Months Ended****September
                        30,****2005**
                    
                    **2004**
                    
                    **%
                        Change**(unaudited)
                    (unaudited)(Dollars
                        in millions)**Revenues:**Intercarrier
                        compensation
                    $
                        28.7
                    
                    $
                        25.6
                    
                    12.1
                    %Direct
                        billings to SP customers
                    28.1
                    
                    32.1
                    
                    (12.5)
                    %Direct
                        billings to enterprise customers
                    4.8
                    
                    14.5
                    
                    (66.9)
                    %Other
                    10.8
                    
                    16.7
                    
                    (35.3)
                    %Total
                        revenues
                    $
                        72.4
                    
                    $
                        88.9
                    
                    (18.6)
                    %**Operational
                        metrics:**Minutes
                        of use (in billions)
                    36.6
                    
                    32.8
                    
                    11.6
                    %
  Consolidated
              revenues decreased 18.6% to $72.4 million in the nine months ended
              September 30,
              2005 from $88.9 million during the same period in 2004. The decrease
              in revenue
              was primarily the result of a decrease of $9.7 million in direct billings
              to
              enterprise customers  in
              addition to lower direct billings to SP customers and other
              revenues.
  18
 Intercarrier
                compensation increased 12.1% to $28.7 million in the nine months
                ended September
                30, 2005 from $25.6 million during the same period in 2004. This
                increase was
                primarily related to increased minutes of use in 2005, and revenues
                in 2004 were
                reduced due to payments that were withheld resulting from an interpretation
                of a
                FCC ISP order that introduced artificial annual growth limits on
                compensable
                minutes of use subject to intercarrier compensation based on the
                composition and
                balance of traffic between carriers. This increase was partially
                offset by more
                revenues resulting from settlements received in 2004 than in
                2005.
  Direct
              billings to SP customers decreased 12.5% to $28.1 million in the nine
              months
              ended September 30, 2005 from $32.1 million during the same period
              in 2004
              primarily due to disconnections of lines.
 
 Direct
              billings to enterprise customers decreased 66.9% to $4.8 million in
              the nine
              months ended September 30, 2005 from $14.5 million during the same
              period in
              2004 due to the sale of substantially all of our enterprise customer
              base during
              the first quarter of 2005.
 
 Other
              revenues decreased 35.3% to $10.8 million in the nine months ended
              September 30,
              2005 from $16.7 million during the same period in 2004.  The
              decline is principally due to a decrease in outbound local and long
              distance
              revenues primarily due to a decrease in minutes of use resulting from
              the sale
              of substantially all of our enterprise customer base in the first quarter
              of
              2005. As a result of this sale we expect these revenues to continue
              to decrease
              in future periods.
 
 Minutes
              of use increased 11.6% to 36.6 billion in the nine months ended September
              30,
              2005 compared to 32.8 billion during the same period in 2004 primarily
              due to an
              increase in minutes of use from intercarriers.
  he
              significant costs and expenses for the nine months ended September
              30, 2005 and
              2004 are as follows:
 
 **Nine
                          Months Ended****September
                          30,****2005**
                      
                      **2004**
                      
                      **%
                          Change**(unaudited)
                      (unaudited)(Dollars
                          in millions)**Costs
                          and expenses:**Network
                          expenses (exclusive of depreciation shown separately
                          below)
                      $
                          29.9
                      
                      $
                          30.2
                      
                      (1.0)
                      %Selling,
                          general and administrative
                      40.1
                      
                      43.0
                      
                      (6.7)
                      %Reimbursed
                          transition expenses
                      (7.3)
                      
                      -
                      
                      -Depreciation
                          and amortization
                      10.3
                      
                      24.9
                      
                      (58.6)
                      %Restructuring
                          charges
                      0.6
                      
                      0.5
                      
                      20.0
                      %Total
                          costs and expenses
                      $
                          73.6
                      
                      $
                          98.6
                      
                      (25.4)
                      %
  Consolidated
                network expenses decreased 1.0% to $29.9 million in the nine months
                ended
                September 30, 2005 from $30.2 million during the same period in 2004
                primarily
                due to network efficiencies, partially offset by more negotiated
                supplier
                credits in 2004 than in 2005
 
 Consolidated
                selling, general and administrative expenses decreased 6.7% to $40.1
                million in
                the nine months ended September 30, 2005 from $43.0 million during
                the same
                period in 2004. The decrease was primarily due to the decrease in
                employees,
                primarily sales employees, as a result of the sale of the enterprise
                customer
                base during the first quarter of 2005.
  Reimbursed
                transition expenses were $7.3 million in the nine months ended September
                30,
                2005 and no such reimbursed expenses were recorded during the same
                period in
                2004. The reimbursed transition expenses relate to network and administrative
                services provided to TelePacific in accordance with the TSA. Costs
                billed under
                the TSA are based upon estimated costs to us, and we anticipate that
                no profit
                will be recognized on the services performed under the TSA. The enterprise
                services are provided by the same network assets and maintained and
                operated by
                the same employee base as other services provided by us until TelePacific
                can
                transition the enterprise customer base onto its own network. As
                such, our
                common network services or expenses cannot be segregated based upon
                the services
                provided and therefore the estimated costs have primarily been billed
                based upon
                a fixed fee per type of service or transaction. Due to the inseparability
                of our
                network, the absence of identifiable shared costs, and as no network
                assets were
                sold to TelePacific, we determined the assets sold did not constitute
                discontinued operations.
 
 Estimates
                and assumptions are used in setting depreciable lives. Assumptions
                are based on
                internal studies of use, industry data on average asset lives, recognition
                of
                technological advancements and understanding of business strategy.
                Consolidated
                depreciation and amortization expense decreased 58.6% to $10.3 million
                in the
                nine months ended September 30, 2005 from $24.9 million during the
                same period
                in 2004. The decrease in depreciation and amortization expense was
                primarily due
                to recording a non-cash asset impairment charge of $54.6 million
                for our
                tangible assets during the fourth quarter of 2004. The impairment
                resulted in a
                new cost basis for these assets resulting in a reduction of gross
                property and
                equipment. As a result, future depreciation expense is expected to
                be less for
                the affected assets than in prior years. In addition, as part of
                the sale of
                substantially all of our enterprise customer base during the first
                quarter, we
                sold property and equipment with a net book value of approximately
                $3.0 million.
 
 19
 Restructuring
                charges were $0.6 million in the nine months ended September 30,
                2005 as
                compared to $0.5 million during the same period in 2004. Restructuring
                charges
                for the nine months ended September 30, 2005, related primarily to
                the
                completion of the sale of substantially all of our enterprise customer
                base
                primarily for employee termination benefits and rent expense for
                vacated
                premises. We anticipate that future cash requirements associated
                with the
                separation plan will be approximately $0.1 million, the timing of
                which is
                contingent upon the actual termination date of the remaining employees. 
                The final cash payment to be recorded against this reserve is expected
                to occur
                in March 2006. However, should TelePacific exercise
                its option to extend the term of the TSA, we may incur additional
                employee
                termination benefit costs and the timing of our final cash payments
                under the
                restructuring plan would be extended. Restructuring charges were
                $0.5 million
                for the nine months ended September 30, 2004. These charges related
                to
                adjustments to estimated costs of previously announced restructuring
                plans, and
                did not represent new restructuring activities.
 
 Consolidated
                loss from operations improved to $1.3 million in the nine months
                ended September
                30, 2005 from $9.7 million during the same period in 2004 primarily
                due to the
                factors discussed in the preceding paragraphs.
  Consolidated
                interest expense, net decreased 41.3% to $5.2 million in the nine
                months ended
                September 30, 2005 from $8.9 million during the same period in 2004
                due to the
                termination of the discount accretion on the extinguishment of the
                Senior
                Secured Note. Interest expense, net is expected to decrease during
                the remainder
                of 2005 due to this extinguishment. Our interest expense, net was
                as
                follows:
 
 **Nine
                            Months Ended****September
                            30,****2005**
                        
                        **2004**(unaudited)
                        
                        (unaudited)(Dollars
                            in thousands)Interest
                            on Senior Notes
                        $
                            3,655
                        
                        $
                            3,668Accreted
                            discount on Senior Secured Note
                        1,262
                        
                        3,990Amortization
                            of deferred financing costs
                        255
                        
                        521Other
                            interest expense
                        524
                        
                        926Less
                            interest income
                        (498)
                        
                        (253)Interest
                            expense, net
                        $
                            5,198
                        
                        $
                            8,852
  During
                  the nine months ended September 30, 2005, we recorded a gain of
                  $24.1 million
                  from the sale of substantially all of our enterprise customer base
                  that occurred
                  during the first quarter of 2005.
 
 On
                  March
                  11, 2005, pursuant to the terms of a Payoff Letter, by and between
                  us and
                  Deutsche Bank, we utilized $26.9 million of the proceeds from the
                  sale of
                  substantially all of our enterprise customer base to TelePacific,
                  as well as
                  $13.8 million cash on hand, to prepay in full the Senior Secured
                  Note (including
                  all outstanding principal and accrued and unpaid interest). In
                  addition,
                  pursuant to the terms of the Payoff Letter, we retired the related
                  warrants to
                  acquire up to 26,666,667 shares of our common stock in connection
                  with the
                  Senior Secured Note, which decreased additional paid in capital
                  by approximately
                  $13.5 million. The prepayment of the Senior Secured Note and the
                  retirement of
                  the related warrants resulted in a $2.1 million loss on the extinguishment
                  of
                  debt.
 
 For
                  the
                  nine months ended September 30, 2005 and 2004, our effective income
                  tax rate was
                  2.9% and 0%, respectively.
 
 Consolidated
                  net income was $14.9 million in the nine months ended September
                  30, 2005
                  compared to a net loss of $19.4 million during the same period
                  in 2004 primarily
                  due to a $24.1 million gain related to the sale of the enterprise
                  customer base
                  in addition to the items noted in the preceding paragraphs.  20
 **Quarterly
                    Operating and Statistical Data:**
 
 The
                    following tables summarize the unaudited results of operations
                    as a percentage
                    of revenues for the three and nine months ended September 30,
                    2005 and 2004. The
                    following data should be read in conjunction with the unaudited
                    condensed
                    consolidated financial statements and notes thereto included
                    elsewhere in this
                    report:
 
 **Three
                              Months Ended**
                          
                          **Nine
                              Months Ended****September
                              30,**
                          
                          **September
                              30,****2005**
                          
                          **2004**
                          
                          **2005**
                          
                          **2004**(unaudited)
                          
                          (unaudited)
                          
                          (unaudited)
                          
                          (unaudited)**Consolidated
                              Statements of Operations****Data:**Revenue
                          
                          
                          100.0
                          %
                          
                          100.0
                          %
                          
                          100.0
                          %
                          
                          100.0
                          %Network
                              expenses (exclusive of depreciation shown separately
                              below)
                          43.0
                          %
                          
                          27.0
                          %
                          
                          41.3
                          %
                          
                          33.9
                          %Selling,
                              general and administrative expenses
                          
                          58.1
                          %
                          
                          45.7
                          %
                          
                          55.4
                          %
                          
                          48.3
                          %Reimbursed
                              transition expenses
                          
                          (20.0)
                          %
                          
                          -
                          %
                          
                          (10.1)
                          %
                          
                          -
                          %Depreciation
                              and amortization expenses
                          
                          15.0
                          %
                          
                          24.5
                          %
                          
                          14.3
                          %
                          
                          28.1
                          %Income
                              (loss) from operations
                          
                          3.7
                          %
                          
                          2.5
                          %
                          
                          (1.8)
                          %
                          
                          (10.9)
                          %Net
                              income (loss)
                          
                          (0.6)
                          %
                          
                          (9.9)
                          %
                          
                          20.6
                          %
                          
                          (21.8)
                          %
 
 The
                    following table sets forth unaudited statistical data for each
                    of the specified
                    quarters of 2005 and 2004. The operating and statistical data
                    for any quarter
                    are not necessarily indicative of results for any future period.
 
 **Three
                                Months Ended****2005**
                            
                            **2004****Sept.
                                30,**
                            **June
                                30,**
                            
                            **March
                                31,**
                            
                            **Dec.
                                31,**
                            
                            **Sept.
                                30,**(unaudited)
                            (unaudited)
                            
                            (unaudited)
                            
                            (unaudited)
                            
                            (unaudited)Ports
                                equipped
                            1,054,848
                            1,052,400
                            
                            1,052,400
                            
                            1,052,400
                            
                            998,400Quarterly
                                minutes of useswitched
                                (in billions)
                            12.2
                            12.2
                            
                            12.2
                            
                            11.9
                            
                            11.3Capital
                                additions(in
                                thousands)
                            $
                                3,259
                            $
                                1,575
                            
                            $
                                1,600
                            
                            $
                                1,205
                            
                            $
                                1,758Employees
                            273
                            248
                            
                            250
                            
                            373
                            
                            392
  **Liquidity
                      and Capital Resources:**
  *Sources
                      and use of cash.* At
                      September 30, 2005 cash and short term investments decreased
                      $18.8 million to
                      $24.0 million from $42.8 million at December 31, 2004. The
                      decrease was
                      primarily due to the prepayment of the $40.0 million Senior
                      Secured Note
                      (including all outstanding principal and accrued and unpaid
                      interest) with cash
                      on hand and proceeds of $26.9 million from the sale of substantially
                      all of the
                      enterprise customer base to TelePacific.
 
 Net
                      cash
                      provided by operating activities was $5.0 million for the nine
                      months ended
                      September 30, 2005 compared to $5.8 million in the same period
                      in 2004. The
                      decrease was primarily due to decreased revenues in 2005 as
                      compared to 2004
                      related to the sale of our enterprise customer base during
                      the first quarter of
                      2005. Lower network and selling and general administrative
                      expenses for the
                      period ended September 30, 2005 compared to the same period
                      in 2004 offset a
                      portion of this revenue decrease.
 
 Net
                      cash
                      provided by investing activities was $20.8 million for the
                      nine months ended
                      September 30, 2005 compared to net cash used in investing activities
                      of $19.4
                      million during the same period in 2004. The net cash provided
                      by investing
                      activities during 2005 was primarily due to proceeds of $26.9
                      million from the
                      sale of substantially all of our enterprise customer base to
                      TelePacific during
                      the first quarter of 2005. The net cash used in investing activities
                      during 2004
                      was primarily due to purchases of short-term investments.
 
 Net
                      cash
                      used in financing activities was $41.1 million in the nine
                      months ended
                      September 30, 2005 compared to net cash provided by of $31,000
                      for the same
                      period in 2004. The net cash used in financing activities during
                      2005 was
                      primarily due to the prepayment of the Senior Secured Note
                      with proceeds from
                      the sale
                      of
                      the enterprise customer base of $26.9 million and cash on hand
                      of $13.8 million
                      during the first quarter of 2005.  21
 *Cash
                        requirements.* The
                        telecommunications service business is capital intensive.
                        Our operations have
                        required the expenditure of substantial amounts of cash for
                        the design,
                        acquisition, construction and implementation of our network.
                        We continue to seek
                        further ways to enhance our infrastructure in 2005 and beyond.
                        As a result of
                        various capital projects and our business plan, as currently
                        contemplated, we
                        currently anticipate making capital expenditures, excluding
                        acquisitions, of
                        approximately $25 million for the next 12 months. However
                        the actual cost of
                        capital expenditures will depend on a variety of factors.
                        Accordingly, our
                        actual capital requirements may exceed, or fall below, the
                        amount described
                        above.  We
                          anticipate that future cash requirements associated with
                          the separation plan due
                          to the sale of substantially all of our enterprise customers
                          will be
                          approximately $0.1 million, the timing of which is contingent
                          upon the actual
                          termination date of the remaining employees.  The
                          final cash payment to be
                          recorded against this reserve is expected to occur in March
                          2006. However,
                          should TelePacific exercise its option to extend the term
                          of the TSA, we may
                          incur additional employee termination benefit costs and
                          the timing of our final
                          cash payments under the restructuring plan would be extended.
 
 During
                          the normal course of business, we may enter into agreements
                          with some suppliers,
                          which allow these suppliers to have equipment or inventory
                          available for
                          purchase based upon criteria as defined by us. As of September
                          30, 2005, we did
                          not have any material future purchase commitments to purchase
                          equipment from any
                          of our vendors.
 *Debt
                outstanding.* At
                September 30, 2005 and December 31, 2004 long-term debt and capital
                lease
                obligations consist of the following:
  **September
                            30,**
                        
                        **December
                            31,****2005**
                        
                        **2004**(unaudited)(Dollars
                            in thousands)Senior
                            Notes
                        $
                            36,102
                        
                        $
                            36,102Senior
                            Secured Note, net of discount of $16,134
                        -
                        
                        24,500Capital
                            lease obligations
                        765
                        
                        1,285Notes
                            payable
                        5,974
                        
                        6,040Less
                            current portion of notes payable and capital leases
                        (3,468)
                        
                        (2,889)$
                            39,373
                        
                        $
                            65,038
  The
                  Senior Notes, of which there is $36.1 million in principal amount
                  outstanding at
                  September 30, 2005, bear interest at 13.5% per annum payable in
                  semiannual
                  installments, with all principal due in full on February 1, 2009.
 
 The
                  Senior Secured Note, which was initially issued in the principal
                  amount of $40.0
                  million, accrued interest at a rate of LIBOR plus 0.5%, and was
                  to mature
                  December 2006. On March 11, 2005, pursuant to the terms of the
                  Payoff Letter by
                  and between us and Deutsche Bank, we utilized $26.9 million of
                  the proceeds from
                  the sale of substantially all of our enterprise customer base to
                  TelePacific as
                  well as $13.8 million cash on hand, to prepay in full the Senior
                  Secured Note
                  (including all outstanding principal and accrued and unpaid interest).
                  In
                  addition, pursuant to the terms of the Payoff Letter, we retired
                  the related
                  warrants to acquire up to 26,666,667 shares of our common stock
                  in connection
                  with the Senior Secured Note, which decreased additional paid in
                  capital by
                  approximately $13.5 million. The prepayment of the Senior Secured
                  Note and the
                  retirement of the related warrants resulted in a $2.1 million loss
                  on the
                  extinguishment of debt.
 
 In
                  May
                  2005, we entered into a secured borrowing arrangement with Merrill
                  Lynch Capital
                  pursuant to which we borrowed $1.9 million at a fixed rate of 8.6%.
                  The
                  principal and accrued interest are payable in 36 consecutive monthly
                  installments which commenced July 1, 2005. We have the option to
                  prepay the
                  outstanding balance after 18 months but prior to 24 months subject
                  to a premium
                  of 3%, and if paid thereafter, accompanied by a premium of 1%.
                  The borrowing
                  arrangement is secured by telecommunications switching and
                  computer equipment. As of September 30, 2005, the principal balance
                  of $1.8
                  million is included under Notes payable in the above table.
 *Recent
                  borrowing arrangement.* On
                  November 9, 2005, we entered into a Loan and Security Agreement
                  (Loan Agreement)
                  with Comerica Bank (Bank), which provides for up to $5,000,000
                  of revolving
                  advances and up to $15,000,000 of term loans.
 
 The
                  Loan
                  Agreement provides for the Bank to make revolving advances to us
                  not to exceed
                  the lesser of $5,000,000 or 80% of our eligible accounts receivable
                  until
                  November 9, 2007, at which time all revolving loans are immediately
                  due and
                  payable. The Loan Agreement also provides for the Bank to make
                  one or more term
                  loans to us in two tranches, Tranche A and Tranche B, which shall
                  be used to
                  finance capital expenditures and acquisitions and/or to refinance
                  our Senior
                  Notes due in 2009. The term loans made pursuant to the Loan Agreement
                  shall not
                  exceed $15,000,000 in the aggregate, and shall also not exceed
                  the following
                  limitations: (1) 100% of the invoice amount of capital expenditures
                  on equipment
                  approved by the Bank from time to time to be purchased by us, excluding
                  software, taxes, shipping, warranty charges, freight discounts
                  and installation
                  expense (collectively, “Soft Costs”); (2) $4,500,000 toward the invoice amount
                  of aggregate Soft Costs (in the case of (1) and (2), which we shall,
                  in any
                  case, have purchased or expended since June 1, 2005); (3) $5,000,000
                  toward the
                  purchase of the Senior Notes; and (4) $5,000,000 in the aggregate
                  at any time
                  for strategic acquisitions. Any such term loans made through June
                  9, 2006 may be
                  made as Tranche A term loans. After June 9, 2006, no further Tranche
                  A term
                  loans shall be made, and any such terms loans outstanding under
                  Tranche A on
                  June 9, 2006 shall be payable in thirty-one (31) equal monthly
                  installments of
                  principal, plus all accrued interest, beginning on July 1, 2006
                  until paid in
                  full. Term loans made from June 9, 2006 to January 9, 2007 shall
                  be made as
                  Tranche B term loans. After January 9, 2007, no further Tranche
                  B term loans
                  shall be made, and any such term loans outstanding under Tranche
                  B on January 9,
                  2007 shall be payable in twenty-four (24) equal monthly installments
                  of
                  principal, plus all accrued interest, beginning on February 1,
                  2007 until
                  December 31, 2008, at which time all term loans shall be immediately
                  due and
                  payable.
 
 22
 Rates
                  for
                  borrowing under the Loan Agreement are based, at our election,
                  on an interest
                  rate tied to a Eurodollar rate or the Bank’s prime rate. With respect to
                  Eurodollar loans, the rate is 2.75% above Eurodollar for revolving
                  advances and
                  3.25% above Eurodollar for term loans. With respect to prime rate
                  loans, the
                  rate is equal to the Bank’s prime rate for revolving advances and 0.5% above the
                  Bank’s prime rate for term loans.
 
 The
                  Loan
                  Agreement is secured by substantially all of our personal property.
                  The Loan
                  Agreement contains usual and customary events of default for facilities
                  of this
                  nature and provides that upon the occurrence of an event of default,
                  the Bank
                  may, among other things, accelerate the payment of all amounts
                  payable under the
                  Loan Agreement and cease to advance money or extend credit. Under
                  the terms of
                  the Loan Agreement, we are also required to maintain certain financial
                  and
                  restrictive covenants which limit, among other things, our ability
                  to incur
                  additional indebtedness, create liens, acquire, sell or dispose
                  of certain
                  assets, engage in certain mergers and acquisitions, pay dividends
                  and make
                  certain capital expenditures. Borrowing under the Loan Agreement
                  is subject to
                  receipt of specified regulatory approvals and the satisfaction
                  of other
                  customary conditions.
  *Future
                  uses and sources of cash.* Our
                  principal sources of funds for the remainder of 2005 are anticipated
                  to be
                  current cash and short-term investment balances and cash flows
                  from operating
                  activities. We believe that these funds and the recent Loan Agreement
                  will
                  provide us with sufficient liquidity and capital resources to fund
                  our business
                  plan for the next 12 months. No assurance can be given, however,
                  that this will
                  be the case. We may also seek to obtain leases or additional lines
                  of credit to
                  provide necessary funds. There can be no assurance that additional
                  lines of
                  credit or leases will be made available to us on terms that we
                  find acceptable.
                  As currently contemplated, we expect to fund, among other
                  things:
 •  interest
                payments of approximately $5 million on Senior Notes and other
                notes;
 
 •  anticipated
                capital expenditures of approximately $25.0 million; and
 
 •  other
                note payable and capital lease interest payments of approximately
                $0.5
                million.
 
 The
                foregoing statements do not take into account (i) acquisitions, which,
                if made,
                are expected to be funded through a combination of cash and equity
                (ii) the
                repurchase of any of our remaining outstanding Senior Notes or (iii)
                any
                potential payments made in respect of adjustments which may arise
                from our
                ongoing tax audits. Depending upon our rate of growth and profitability,
                among
                other things, we may require additional equity or debt financing
                to meet our
                working capital requirements or capital needs. There can be no assurance
                that
                additional financing will be available when required, or, if available,
                will be
                on terms satisfactory to us. Key factors which could affect our liquidity
                include:
 
 •  future
                demand of our services;
 
 •  financial
                stability of our customers;
 
 •  outcomes
                of regulatory proceedings involving intercarrier compensation;
 
 •  capital
                expenditures;
 
 •  debt
                payments;
 
 •  capital
                lease repayments;
 
 •  loss
                of
                enterprise revenues due to the sale of our enterprise customer
                base;
 
 •  interest
                expense on debt; and
 
 •  development
                and market rollout of new service offerings.
 23
 **ITEM
                3.**  **QUANTITATIVE
                AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS**
  The
                SEC's
                rule related to market risk disclosure requires that we describe
                and quantify
                our potential losses from market risk sensitive instruments attributable
                to
                reasonably possible market changes. Market risk sensitive instruments
                include
                all financial or commodity instruments and other financial instruments
                that are
                sensitive to future changes in interest rates, currency exchange
                rates,
                commodity prices or other market factors. We are not exposed to market
                risks
                from changes in foreign currency exchange rates or commodity prices.
                We do not
                hold derivative financial instruments nor do we hold securities for
                trading or
                speculative purposes. Since the payoff of our Senior Secured Note
                on March 11,
                2005, our remaining debt carries fixed interest rates. Therefore,
                we are not
                exposed to changes in interest rates associated with our debt as
                of September
                30, 2005.
 
 We
                are
                exposed to changes in interest rates on our investments in cash equivalents
                and
                short-term investments. Approximately one-third of our investments
                are in cash
                equivalents with original maturities of less than three months and
                the other
                two-thirds are in short-term investments with maturities of less
                than 12 months.
                A hypothetical 1% decrease in short-term interest rates would reduce
                the
                annualized pretax interest income on our $24.0 million cash, cash
                equivalents
                and short-term investments at September 30, 2005 by approximately
                $0.2
                million.
 
 **ITEM
                4.**  **CONTROLS
                AND PROCEDURES**
 
 As
                of the
                end of the period covered by this Report, the Company carried out
                an evaluation,
                under the supervision and with the participation of the Company's
                management,
                including the Chief Executive Officer and Chief Financial Officer,
                of the
                effectiveness of the Company's “disclosure controls and procedures” (as defined
                in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended
                (the
“Exchange Act”), in accordance with Rule 13a-15 of the Exchange Act. Based on
                that evaluation, the Chief Executive Officer and Chief Financial
                Officer,
                together with the other members of management participating in the
                evaluation,
                concluded that the Company's disclosure controls and procedures are
                effective at
                the reasonable assurance level.
 
 There
                have been no changes in the Company's internal control over financial
                reporting
                that occurred during the quarter ended September 30, 2005 that have
                materially
                affected, or are reasonably likely to materially affect, the Company’s internal
                control over financial reporting. It should be recognized that the
                design of any
                system of controls is based upon certain assumptions about the scope
                of the
                tasks to be performed and the environment in which the tasks are
                to be
                performed. As such, the Company's internal controls provide the Company
                with a
                reasonable assurance of achieving their intended effect.
 24
 
 
 **PART
                II**
 **OTHER
                INFORMATION**
 
 **ITEM
                1.** **Legal
                Proceedings**
  See
                Note
                8 to the Unaudited Condensed Consolidated Financial Statements included
                elsewhere in this Form 10-Q and “Management's Discussion and Analysis of
                Financial Condition and Results of Operations- Introduction” for a description
                of certain legal proceedings involving the Company.
 
 **ITEM
                6.** **Exhibits**
 
 Exhibits
  10.80       Agreement
                and amendment dated October 6, 2005 to (i) Asset Purchase Agreement,
                made as of
                December 17, 2004, as amended and (ii) Transition Services Agreement,
                made
                December 17, 2004 (certain confidential portions have been omitted
                and filed
                separately with the Securities and Exchange Commission pursuant to
                a request for
                confidential treatment).
  31.1         Certification
                by Henry R. Carabelli, Chief Executive Officer pursuant to Section
                302 of the
                Sarbanes-Oxley Act of 2002.
  31.2Certification
                by H. Ravi Brar, Chief Financial Officer and Vice President of Human
                Resources
                pursuant to Section 302 of theSarbanes-Oxley
                Act of  2002.
  32.1          Certification
                by Henry R. Carabelli, Chief Executive Officer pursuant to Section
                906 of the
                Sarbanes-Oxley Act of 2002.
  32.2          Certification
                by H. Ravi Brar, Chief Financial Officer**and Vice President of
                Human Resources pursuant to Section 906 of the Sarbanes-Oxley Act
                of
                2002.
 
 **Note:
                ITEMS 2, 3, 4 and 5 are not applicable and have been
                omitted.**
 
  25
  
 **SIGNATURES**
 
 
 Pursuant
                to the requirements of the Securities Exchange Act of 1934, the registrant
                has
                duly caused this report to be signed on its behalf by the undersigned,
                thereunto
                duly authorized on November 14, 2005.
 
 
 
 
 PAC-WEST
                TELECOMM, INC.
 
 /s/
                Henry
                R. Carabelli
 _____________________________
 Henry
                R.
                Carabelli
 President
                and Chief Executive Officer
 
 
 
 
 
 
 
 
 /s/
                H.
                Ravi Brar
 ______________________________
 H.
                Ravi
                Brar
 Chief
                Financial Officer and Vice President of Human Resources
 26