**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 March 31, 2006**





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 he registrant is a large accelerated filer, an accelerated
      filer, or a non-accelerated filer. See definition of “accelerated filer and
      large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):





Large
      accelerated filer [ ]    Accelerated
      filer [ ]   Non-accelerated
      filer [X]





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes [ ] No [X]





As
      of
      April 30, 2006, the Company had an aggregate of 37,616,030 shares of common
      stock issued and outstanding.










**PAC-WEST
        TELECOMM, INC.**
 **Report
        on Form 10-Q For the Quarterly Period Ended March 31, 2006**
 **Table
        of Contents**


**Part
                  I.**
              **FINANCIAL
                  INFORMATION**
              **Page**Item
                  1.
              Financial
                  Statements (Unaudited)Condensed
                  Consolidated Balance SheetsMarch 31, 2006 and December 31, 2005
              3Condensed
                  Consolidated Statements of Operations and Comprehensive
                  Income(Loss) - Three months ended March 31, 2006 and 2005
              4Condensed
                  Consolidated Statements of Cash Flows - Threemonths ended March 31, 2006 and 2005
              5Notes
                  to Unaudited Condensed Consolidated Financial Statements
              6Item
                  2.
              Management's
                  Discussion and Analysis of Financial Conditionand Results of Operations
              16Item
                  3.
              Quantitative
                  and Qualitative Disclosures About Market Risks
              25Item
                  4.
              Controls
                  and Procedures
              26**Part
                  II.**
              **OTHER
                  INFORMATION**Item
                  1.
              Legal
                  Proceedings
              26Item
                  1A.
              Risk
                  Factors
              26Item
                  5.
              Other
                  Information
              26Item
                  6.
              Exhibits
              26Signatures
              
              27





2


**PART
                I. FINANCIAL INFORMATION****ITEM
                1. FINANCIAL STATEMENTS****PAC-WEST
                TELECOMM, INC.****Condensed
                Consolidated Balance Sheets****(Dollars
                in thousands except share and per share
                data)**


**March
                31,**
            
            **December
                31,****2006**
            
            **2005****(Unaudited)****ASSETS**Current
                Assets:Cash
                and cash equivalents
            
            
            
            
            $
            22,676
            
            $
            26,681Short-term
                investments
            
            
            
            
            
            1,124
            
            
            -Trade
                accounts receivable, net of allowances of$300 and $368 at March 31, 2006 andDecember 31, 2005, respectively
            
            
            
            
            
            7,936
            
            
            7,806Receivable
                from transition service agreement
            
            
            
            
            
            1,152
            
            
            1,170Prepaid
                expenses and other current assets
            
            
            
            
            
            2,953
            
            
            3,129Total current assets
            
            
            
            
            
            35,841
            
            
            38,786Property
                and equipment, net
            
            47,248
            
            
            39,458Other
                assets, net
            
            913
            
            
            1,079Total assets
            
            
            
            
            $
            84,002
            
            $
            79,323**LIABILITIES
                AND STOCKHOLDERS' EQUITY**Current
                Liabilities:Accounts
                payable
            
            
            
            
            $
            9,291
            
            $
            6,578Current
                obligations under notes payable and capital leases
            
            
            
            
            
            8,595
            
            
            5,392Accrued
                interest
            
            
            
            
            
            910
            
            
            2,032Other
                accrued liabilities
            
            
            
            
            
            8,118
            
            
            8,492Total current liabilities
            
            
            
            
            
            26,914
            
            
            22,494Senior
                Notes
            
            36,102
            
            
            36,102Notes
                payable and capital leases, less current portion
            
            11,731
            
            
            7,418Other
                liabilities, net
            
            98
            
            
            72Total liabilities
            
            
            
            
            
            74,845
            
            
            66,086Commitments
                and Contingencies (Note 7)Stockholders'
                Equity:Preferred
                stock, no par value, 600,000 shares authorized; noneissued and outstanding
            
            
            
            
            
            -
            
            
            -Common
                stock, $.001 par value; 100,000,000 sharesauthorized, 37,211,030 and 37,204,093 shares issuedand outstanding at March 31, 2006 and December 31,2005, respectively
            
            
            
            
            
            37
            
            
            37Additional
                paid-in capital
            
            
            
            
            
            191,095
            
            
            191,319Accumulated
                deficit
            
            
            
            
            
            (181,993
            )
            
            (177,721
            )Accumulated
                other comprehensive gain (loss)
            
            
            
            
            
            18
            
            
            (25
            )Deferred
                stock compensation
            
            
            
            
            
            -
            
            
            (373
            )Total stockholders' equity
            
            
            
            
            
            9,157
            
            
            13,237Total liabilities and stockholders' equity
            
            
            
            
            $
            84,002
            
            $
            79,323


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****March
                  31,****2006**
              
              **2005**Revenues
              
              $
              19,628
              
              $
              28,131Costs
                  and Expenses:Network expenses (exclusive of depreciation shown separately
                  below)
              
              
              9,000
              
              
              10,566Selling, general and administrative
              
              
              13,582
              
              
              14,673Reimbursed transition expenses
              
              
              (2,904
              )
              
              -Depreciation and amortization
              
              
              2,832
              
              
              3,750Restructuring charges
              
              
              15
              
              
              384Total operating expenses
              
              
              22,525
              
              
              29,373Loss from operations
              
              
              (2,897
              )
              
              (1,242
              )Interest expense, net
              
              
              1,375
              
              
              2,806Gain on sale of enterprise customer base
              
              
              -
              
              
              (24,034
              )Loss on extinguishment of debt
              
              
              -
              
              
              2,138(Loss) income before income taxes
              
              
              (4,272
              )
              
              17,848Income
                  tax expense
              
              
              -
              
              
              509Net (loss) income
              
              $
              (4,272
              )
              $
              17,339Basic
                  (loss) income per share
              
              $
              (0.11
              )
              $
              0.47Diluted
                  (loss) income per share
              
              $
              (0.11
              )
              $
              0.45Weighted
                  Average Shares Outstanding:Basic
              
              
              37,206
              
              
              36,803Diluted
              
              
              37,206
              
              
              38,889Comprehensive
                  (Loss) Income:Net (loss) income
              
              $
              (4,272
              )
              $
              17,339Unrealized gains (losses) on investments, net of tax
              
              
              51
              
              
              (22
              )Reclassification of realized gains on sale of investments, net
                  of
                  tax
              
              
              (8
              )
              
              -Comprehensive (loss) income
              
              $
              (4,229
              )
              $
              17,317




See
        notes
        to unaudited condensed consolidated financial statements.




4


**PAC-WEST
                  TELECOMM, INC.****Condensed
                  Consolidated Statements of Cash Flows****(Unaudited,
                  in thousands)**
 **Three
                  Months Ended****March
                  31,****2006**
              
              **2005**Operating
                  activities:Net
                  income (loss)
              
              $
              (4,272
              )
              $
              17,339Adjustments
                  to reconcile net (loss) income to net cashprovided by operating activities:Depreciation and amortization
              
              
              2,832
              
              
              3,750Amortization of deferred financing costs
              
              
              57
              
              
              154Amortization of discount on notes payable
              
              
              -
              
              
              1,262Stock-based compensation
              
              
              146
              
              
              48Loss on extinguishment of debt
              
              
              -
              
              
              2,138Gain on sale of enterprise customer base
              
              
              -
              
              
              (24,034
              )Provision for doubtful accounts
              
              
              12
              
              
              77Other
              
              
              61
              
              
              122Changes
                  in operating assets and liabilities:Increase in accounts receivable
              
              
              (142
              )
              
              (84
              )Decrease in receivable from transition service agreement
              
              
              18
              
              
              -Decrease in prepaid expenses and other current assets
              
              
              335
              
              
              493Decrease in accounts payable
              
              
              (1,800
              )
              
              (477
              )Decrease in accrued interest
              
              
              (1,122
              )
              
              (1,008
              )Decrease in other current liabilities and other
                  liabilities
              
              
              (348
              )
              
              (1,039
              )Net cash used in operating activities
              
              
              (4,223
              )
              
              (1,259
              )Investing
                  activities:Purchase
                  of property and equipment
              
              
              (5,801
              )
              
              (1,600
              )Redemptions
                  (purchase) of short-term investments, net
              
              
              (1,081
              )
              
              207Proceeds
                  from sale of enterprise customer base
              
              
              -
              
              
              26,953Returned
                  deposits associated with the enterprise customer base sale
              
              
              -
              
              
              (3,500
              )Other
              
              
              -
              
              
              50Net cash (used in) provided by investing activities
              
              
              (6,882
              )
              
              22,110Financing
                  activities:Repayments
                  of notes payable
              
              
              (759
              )
              
              (41,441
              )Proceeds
                  from the issuance of common stock
              
              
              3
              
              
              21Principal
                  payments on capital leases
              
              
              (116
              )
              
              (100
              )Net
                  proceeds from borrowing under notes payable
              
              
              7,972
              
              
              -Net cash provided by (used in) financing activities
              
              
              7,100
              
              
              (41,520
              )Net decrease in cash and cash equivalents
              
              
              (4,005
              )
              
              (20,669
              )Cash
                  and cash equivalents:Beginning
                  of period
              
              
              26,681
              
              
              32,265End
                  of period
              
              $
              22,676
              
              $
              11,596Supplemental
                  Disclosure of Cash Flow Information:Cash
                  paid during the period for:Interest
              
              $
              2,619
              
              $
              2,832Non-cash
                  Operating and Investing Activities:Acquisitions
                  of property and equipment included in accounts payable
              
              $
              4,513
              
              $
              -Non-cash
                  Operating and Financing Activities:Prepaid
                  maintenance agreement financed by notes payable
              
              $
              165
              
              $
              -Non-cash
                  Investing and Financing Activities:Equipment
                  acquired with capital lease obligations
              
              $
              254
              
              $
              -


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 MONTHS ENDED MARCH 31, 2006**
 
 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. The Company’s
        customers currently include Internet service providers (ISPs), 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 three months ended March 31, 2006 are not necessarily indicative
        of the
        results that may be expected for the year ending December 31, 2006. The
        condensed consolidated balance sheet at December 31, 2005 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, 2005, included
        in the Company's Annual Report on Form 10-K filed with the SEC on March 29,
        2006.
 
 Based
        on
        criteria established by Statement of Financial Accounting Standards (SFAS)
        No.
        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 its 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.
 
 **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. The Company considers
        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
        for long-lived assets; and
  •  stock-based
        compensation.
 
 6
 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.* The
        Company recognizes 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 installation related
        costs, are recognized as revenue and expensed 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 the Company’s intercarrier customers
        for completion of their customers’ calls through the Company’s network, and
        access charges paid by carriers for long distance traffic terminated on the
        Company’s network. The Company’s 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, the Company will continue
        to
        recognize intercarrier compensation as revenue when the price becomes fixed
        and
        determinable and collectibility is reasonably assured.
 
 Some
        ILECs with which the Company has interconnection agreements have withheld
        payments from amounts billed by the Company 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 negotiated settlements
        between the Company and the ILEC where it agrees to accept a portion of what
        it
        believes is owed to it.
 
 *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 the Company’s customers;
 
 •  observance
        of trends in the industry; and
 
 •  other
        current economic conditions.
 
 *Estimated
        settlements for disputed billings.* During
        the ordinary course of business, the Company may be billed for carrier traffic
        for which management believes it is not responsible for. In such instances,
        the
        Company may dispute with the appropriate vendor and withhold payment until
        the
        matter is resolved. The Company’s current disputes are primarily related to
        incorrect facility rates or incorrect billing elements that the Company believes
        are being charged. Management regularly reviews and monitors all disputed
        items
        and, based on industry experience, records an accrual that represents what
        it
        estimates it may pay to settle the dispute. Although the Company continues
        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.
 7
 *Long-lived
        assets.* In 2002,
        the Company adopted SFAS No. 144, “Accounting for the Impairment or Disposal of
        Long-Lived Assets.” The Company evaluates its 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 the Company
        considers 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, the Company makes 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, the Company may be required to record additional
        impairment charges for these assets.
 
 *Stock-based
        compensation.* On
        January 1, 2006, the Company adopted SFAS No. 123R and accounts for stock-based
        compensation in accordance with the fair value recognition provisions of
        SFAS
        No. 123R “Share-Based Payment”. The Company uses the Black-Scholes
        option-pricing model, which requires the input of subjective assumptions.
        These
        assumptions include estimating the length of time employees will retain their
        stock options (expected term), the estimated volatility of its common stock
        price over the expected term and the number of options that will cancel for
        failure to complete their vesting requirements (forfeitures). Changes in
        these
        assumptions could materially affect the estimate of fair value stock-based
        compensation and consequently, the related amount recognized on the consolidated
        statements of operations and comprehensive income (loss).
 
 **2.
        Stock-based Compensation**
 
 The
        Company has stock-based compensation plans that include employee options,
        restricted stock and an employee stock purchase plan. Effective January 1,
        2006,
        the Company adopted the provisions of SFAS No. 123R using the modified
        prospective transition method. SFAS No. 123R requires the Company to recognize
        the cost of employee services received in exchange for awards of equity
        instruments based on the grant-date fair value of those awards, with limited
        exceptions. Cost is recognized over the period during which an employee is
        required to provide services (usually the vesting period). The Company
        previously followed Accounting Principles Board Opinion (APB) No. 25,
        "Accounting for Stock Issued to Employees" for its stock-based compensation
        plans and adopted the disclosure-only provisions of SFAS No. 123, "Accounting
        for Stock-Based Compensation," to disclose pro forma information regarding
        stock-based compensation based on specified valuation techniques that produce
        estimated compensation charges.
 
 The
        Company recorded approximately $97,000 in expense during the quarter ended
        March
        31, 2006 as a result of its adoption of SFAS No. 123R. There was no material
        impact on basic and diluted earnings per share or cash flow from either
        operations or financing activities due to the adoption of SFAS
        123R.
 
 Total
        compensation expense recognized for stock-based awards for the three months
        ended March 31, 2006 and 2005 was $146,000 and $48,000, respectively, and
        is
        included in selling, general and administrative expenses in the condensed
        consolidated statements of operations and comprehensive income (loss). The
        Company recognized approximately $49,000 and $48,000, respectively, for the
        quarters ended March 31, 2006 and 2005 related to performance unit awards.
        Cash
        received for options exercised during the three months ended March 31, 2006
        and
        2005 was $3,000 and $21,000, respectively.
 
 For
        the
        three months ended March 31, 2006, potential common stock was anti-dilutive,
        as
        it decreased the net loss per share. Accordingly, for the three months ended
        March 31, 2006, 814,609 shares were excluded from the diluted net loss per
        share
        calculation.
 
 8
 The
        effect of the change from applying the original provisions of SFAS 123 for
        the
        comparison period is as follows:
  **Three
                  Months Ended****March
                  31,****2005**(Dollars
                  in thousands except per share amounts)Net
                  income (loss) as reported
              
              $
              17,339Total
                  stock-based employee compensation included inreported net income (loss), net of tax
              
              
              48Total
                  stock-based employee compensation determinedunder the fair value based method
              
              
              (155
              )Pro
                  forma
              
              $
              17,232Basic
                  net income (loss) per common share:As reported
              
              $
              0.47Pro forma
              
              $
              0.47Diluted
                  net income (loss) per common share:As reported
              
              $
              0.45Pro forma
              
              $
              0.44




**Stock
        Incentive Plans**
  In
        January 1999, the Company’s Board of Directors approved the terms of the 1999
        Stock Incentive Plan which authorizes the granting of stock options, including
        restricted stock, stock appreciation rights, dividend equivalent rights,
        performance units, performance shares or other similar rights or benefits
        to
        employees, directors, consultants and advisors. In addition, options have
        been
        granted to two senior officers (both of whom are no longer officers) pursuant
        to
        the 1998 Griffin and Bryson Non-Qualified Stock Incentive Plans. In May 2000
        the
        Board of Directors approved the 2000 Napa Valley Non-Qualified Stock Incentive
        Plan. An aggregate of 7,601,750 shares of common stock are currently reserved
        for option grants under these plans (the Plans). Option awards are generally
        granted with an exercise price equal to the closing market price of the
        Company’s stock on the trading day prior to the date of grant; option awards
        generally vest ratably based on 4 years of continuous service and have 10-year
        contractual terms. Stock awards generally vest over 3 to 4 years. Certain
        options and stock awards provide for accelerated vesting if there is a change
        in
        control (as defined by the Plans). Stock options exercised are settled with
        new
        issuances of stock.
 
 As
        of
        March 31, 2006, there was $1.2 million of total unrecognized compensation
        cost
        related to the nonvested stock-based compensation arrangements granted under
        the
        Plans. That cost is expected to be recognized over a weighted-average period
        of
        3 years. The total fair value of shares vested during the quarter ended March
        31, 2006 was approximately $40,000. For the period ended March 31, 2006,
        there
        was no stock-based compensation cost capitalized and no tax benefit
        recognized.
 
 9
 *Stock
        Options*
  The
        fair
        value of each stock option award granted under the Plans is estimated using
        the
        Black-Scholes option-pricing model. The application of this valuation model
        involves certain assumptions in the determination of compensation expense.
        The
        weighted average for key assumptions used in determining the fair value of
        options granted during the periods are presented as follows:


**Three
                  Months Ended****March
                  31,****2006**
              
              **2005**Expected
                  volatility
              
              
              110.8%
              
              
              106.0%Risk-free
                  interest rate
              
              
              4.5%
              
              
              3.8%Expected
                  term
              
              
              6.3
              
              
              4.0Expected
                  dividend yield
              
              
              0.0%
              
              
              0.0%




Historical
      information was the primary basis for the selection of the expected volatility,
      dividend yield and the 2005 expected term. The expected term of the options
      granted during 2006 is calculated using the simplified formula promulgated
      by
      the Securities and Exchange Commission staff in Staff Accounting Bulletin No.
      107 which allows for the expected term to be calculated as the sum of the
      vesting term and the original contractual term divided by 2. The risk-free
      interest rate was selected based upon yields of U.S. Treasury issues with a
      term
      equal to the expected life of the option being valued.




A
      summary of
      the option activity under the Plans as of March 31, 2006, and changes during
      the
      period then ended is presented below:


**Weighted****Weighted**
                    
                    **Average**
                    
                    **Aggregate****Number
                        of**
                    
                    **Average**
                    
                    **Remaining**
                    
                    **Intrinsic****Shares**
                    
                    **Exercise**
                    
                    **Contractual**
                    
                    **Value****(000's)**
                    
                    **Price**
                    
                    **Term**
                    
                    **(000's)**Outstanding
                        at January 1, 2006
                    
                    
                    5,804
                    
                    $
                    1.70Granted
                    
                    
                    147
                    
                    $
                    0.96Exercised
                    
                    
                    (7
                    )
                    $
                    0.48Cancelled
                    
                    
                    (90
                    )
                    $
                    1.46Outstanding
                        at March 31, 2006
                    
                    
                    5,854
                    
                    $
                    1.68
                    
                    
                    6.4
                    
                    $
                    750Vested
                        and exercisable atMarch
                        31, 2006
                    
                    
                    3,913
                    
                    $
                    1.93
                    
                    
                    6.4
                    
                    $
                    673




The
      weighted-average fair value of options granted during the quarters ended March
      31, 2006 and 2005 was $0.85 and $1.09, respectively. The total intrinsic value
      of options exercised during the quarters ended March 31, 2006 and 2005 was
      approximately $7,000 and $48,000, respectively.


*Restricted
        Stock*
  As
        of March
        31, 2006 and December 31, 2005, the Company had 400,000 nonvested shares
        of
        restricted stock outstanding. The restricted stock vests on June 30, 2009.
        However, 200,000 shares of restricted stock vest at such earlier time as
        (a) the
        monthly average fair market value of the Company’s common stock exceeds $3.00
        per share for a period of six consecutive months and (b) all of the shares
        of
        restricted stock shall vest at such earlier time as certain change in control
        transactions occur with respect to the Company. Total compensation expense
        for
        the restricted stock award was determined based upon the closing market price
        on
        the date of the award multiplied by the number of shares awarded. At
        March 31, 2006, there was approximately $364,000 of unrecognized compensation
        expense associated with this award. The Company expects to recognize this
        expense on a straight-line basis through June 30, 2009 or such shorter
        period if vesting is accelerated under the terms of the award.
  10
 **Employee
          Stock Purchase Plan**
  The
          Company
          established the 2000 Employee Stock Purchase Plan (the Purchase Plan) under
          which one million shares of common stock have been reserved for issuance
          and
          489,004 shares remained available for issuance at March 31, 2006. Full-time
          employees may designate up to 10% of their compensation, not to exceed
          1,000
          shares each six-month period, or $25,000 worth of common stock in any one
          calendar year, which is deducted each pay period for the purchase of common
          stock under the Purchase Plan. On the last business day of each six-month
          period, shares of common stock are purchased with the employees’ payroll
          deductions at 85% of the lesser of the market price on the first or last
          day of
          the six-month period. The Purchase Plan will terminate no later than May
          2,
          2020. Compensation expense for the three months ended March 31, 2006 and
          2005
          was computed, for disclosure purposes in 2005 and for recognition in 2006,
          based
          on the fair value of the employee’s purchase rights estimated using the
          Black-Scholes model with the following assumptions:


**Three
                  Months Ended****March
                  31,****2006**
              
              **2005**Expected
                  volatility
              
              
              68.0%
              
              
              84.0%Risk-free
                  interest rate
              
              
              4.4%
              
              
              2.5%Expected
                  term
              
              
              0.5
              
              
              0.5Expected
                  dividend yield
              
              
              0.0%
              
              
              0.0%
  Expected
        volatility is based primarily on historical stock volatility for the most
        recent
        period equal to the expected term (which is equal to the actual purchase
        term).
        No dividends were expected during these terms and the risk-free interest
        rate is
        based on the six-month U.S. Treasury rate in effect at the beginning of the
        period. Since actual purchases occur semi-annually, the Company must, during
        the
        first and third quarters of the year, estimate future purchase levels based
        on
        observation of historical participation levels. Compensation expense recognized
        at March 31, 2006 was approximately $11,000.


**3.
        Concentration of Customers and Suppliers**
 
 For
        the
        three months ended March 31, 2006 and 2005, the Company had the following
        concentrations of revenues and operation costs:




**Three
                  Months Ended****March
                  31,****2006**
              
              **2005**Largest
                  customers: Percentage of totalrevenuesCustomer
                  1
              
              
              23.7
              %
              
              21.1
              %Customer
                  2
              
              
              14.1
              %
              
              16.7
              %Largest
                  supplier: Percentage of networkexpenses
              
              
              34.0
              %
              
              38.3
              %


During
        each of the comparison periods, no other customer accounted for more than
        10% of
        total revenues. There were two customers representing 19.4% and 11.4%,
        respectively, of trade accounts receivable as of March 31, 2006. At December
        31,
        2005, no customer represented more than 10% of trade accounts
        receivable.
 
 11
 **4.
        Restructuring Charges**
 
 ***2001
        and 2002 Restructuring Plans***
  A
        summary of
        the activity for the three months ended March 31, 2006 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
        March 31, 2006 and December 31, 2005, consist of the
        following:




**Restructuring**
              
              **Additional**
              
              
              
              **Restructuring****Liability**
              
              **Restructuring**
              
              
              
              **Liability****as
                  of**
              
              **Expense**
              
              **Cash**
              
              **as
                  of****Dec.
                  31, 2005**
              
              **Incurred**
              
              **Payments**
              
              **Mar.
                  31, 2006**(Dollars
                  in thousands)Rent
                  expense for vacated premises
              
              $
              1,915
              
              $
              14
              
              $
              (114
              )
              $
              1,815




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. During the three months ended March 31, 2006,
      the
      Company recorded additional restructuring charges of approximately $14,000
      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***
  A
        summary of
        the activity for the three months ended March 31, 2006 pertaining to the
        Company's 2005 plan, which is included in other accrued liabilities in the
        accompanying condensed consolidated balance sheets as of March 31, 2006 and
        December 31, 2005, consist of the following:


**Restructuring**
              
              **Additional**
              
              
              
              **Restructuring****Liability**
              
              **Restructuring**
              
              
              
              **Liability****as
                  of**
              
              **Expense**
              
              **Cash**
              
              **as
                  of****Dec.
                  31, 2005**
              
              **Incurred**
              
              **Payments**
              
              **Mar.
                  31, 2006**(Dollars
                  in thousands)One-time
                  employee termination benefits
              
              $
              41
              
              $
              1
              
              $
              (18
              )
              $
              24




The
      amount of
      the reserve is for benefits to employees who were or may be involuntarily
      terminated in connection with the sale of substantially all of the Company’s
      enterprise customer base to TelePacific on March 11, 2005. As of March 31,
      2006,
      approximately 78 employees had been involuntarily terminated out of the
      estimated 80 employees expected to be terminated in connection with such sale.
      During the three months ended March 31, 2006, the Company recorded additional
      restructuring charges of approximately $1,000 for employee termination benefits.




The
      Company
      anticipates the total cash paid for employee termination benefits, which is
      contingent upon the actual termination date of the remaining employees, and
      rent
      expense for vacated premises, which ended October 2005, to be approximately
      $528,000 and $56,000, respectively. In connection with such sale, the Company
      entered into a Transition Service Agreement (TSA) with TelePacific that, among
      other things, obligates the Company to provide certain transition services
      to
      TelePacific. In April 2006, TelePacific exercised the second and last option
      to
      extend the TSA to September 12, 2006. As a result, the final cash payment to
      be
      recorded against the 2005 restructuring reserve is expected to occur in
      September 2006 in conjunction with the termination of the TSA.




****5.
      Income Taxes****




The
      Company's
      effective income tax rate for the quarters ended March 31, 2006 and 2005 was
      0.0% and 2.9%, respectively. As of March 31, 2006, there was a tax receivable
      of
      $0.3 million.


12
 **6.
        Other Comprehensive Income (Loss)**
 
 For
        the
        quarter ended March 31, 2006 there was $51,000 of other comprehensive income
        pertaining to net unrealized investment gains on available-for-sale marketable
        securities and $8,000 in reclassifications of realized gains on sales of
        investments during the period. For the quarter ended March 31, 2005 there
        was
        $22,000 of other comprehensive loss pertaining to net unrealized investment
        losses on available-for-sale marketable securities.
 
 **7.
        Commitments and Contingencies:**
 
 The
        Company has a five-year contract (the Contract) with an incumbent local exchange
        carrier (ILEC) for transport services that expires in November 2006. The
        contract requires that the Company meet certain minimum annual usage levels,
        which if met, trigger monthly credits to the Company. While the Company has
        met
        its minimum usage requirements through March 31, 2006, it has done so primarily
        through providing transition services to TelePacific. If TelePacific fully
        migrates the enterprise customer base to its system during the current TSA
        agreement and should the Company decide to terminate the Contract at such
        time,
        the Company could incur a termination fee. The amount of the termination
        fee, if
        any, is dependent on the remaining life of the Contract. The Company estimates
        the fee, if any, would approximate $1.0 million.
 
 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 a tax assessment arising from a tax audit amounting
        to $4.8
        million. Subsequent to the third quarter of 2005, the Company filed an appeal
        against this assessment. The Company believes the resolution to this tax
        audit
        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, 2005 as
        filed with the SEC on March 29, 2006. 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.
  **8.
        Related Party Transactions**
 
 Bay
        Alarm, a significant stockholder of the Company, together with its subsidiary,
        InReach Internet, LLC (InReach), were customers of the Company. As of March
        11,
        2005, the Bay Alarm customer account was included in the sale of substantially
        all of the enterprise customer base to TelePacific. Additionally, as of November
        2005, InReach was no longer a subsidiary of Bay Alarm and therefore the table
        below does not reflect revenues subsequent to November 2005. Bay Alarm provides
        the Company with security monitoring services. The Company also leases a
        facility in Oakland, California from Bay Alarm. Certain information concerning
        these arrangements is as follows:


**Three
                  Months Ended****March
                  31,****2006**
              
              **2005**(Dollars
                  in thousandsRevenues
              
              $
              -
              
              $
              280Revenues
                  as a percentage of total revenues
              
              
              -
              
              
              1.0
              %Security
                  monitoring costs
              
              $
              8
              
              $
              10Oakland
                  property rent payments
              
              $
              89
              
              $
              88


All
        expenses paid to Bay Alarm are included in selling, general and administrative
        expenses in the accompanying condensed consolidated statements of operations
        and
        comprehensive income (loss).
  13
 **9.
        Debt and interest expense, net**
 
 At
        March
        31, 2006 and December 31, 2005, long-term debt and capital lease obligations
        consist of the following:




**March
                  31,**
              
              **December
                  31,****2006**
              
              **2005**(unaudited)(Dollars
                  in thousands)Senior
                  Notes
              
              $
              36,102
              
              $
              36,102Capital
                  lease obligations
              
              
              789
              
              
              651Notes
                  payable
              
              
              19,537
              
              
              12,159Less
                  current portion of notes payable and capital leases
              
              
              (8,595
              )
              
              (5,392
              )$
              47,833
              
              $
              43,520
  The
          Senior Notes of which there is $36.1 million in principal amount outstanding
          at
          March 31, 2006 and December 31, 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.
 
 During
          2004, the Company entered into a secured financing arrangement with Merrill
          Lynch Capital (Merrill Lynch), a division of Merrill Lynch Business Financial
          Services, Inc., pursuant to which the Company could have borrowed up to
          an
          aggregate amount of $10.0 million, subject to certain conditions. This
          financing
          arrangement was structured in a manner that provided 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 is payable in 36 equal monthly installments.
          The Company has the option to prepay each 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. The Company used the proceeds of this financing arrangement
          to
          acquire a new telecommunication switch and related equipment, which secure
          borrowings under this financing arrangement.
 
 As
          of
          March 31, 2006, the Company had borrowed approximately $5.4 million under
          the
          Merrill Lynch Capital financing arrangement under two credit facilities
          both
          with interest rates of 8.6%. As of March 31, 2006 and December 31, 2005,
          the
          principal balance was $2.6 million and $2.9 million, respectively, and
          is
          included under Notes Payable in the above table.
 
 The
          Company entered into a second secured financing arrangement with Merrill
          Lynch
          during 2005 pursuant to which the Company borrowed $1.9 million in May
          2005 and
          $4.5 million in November 2005 at fixed rates of 8.6% and 9.3%, respectively.
          In
          each case the principal and accrued interest is payable in 36 consecutive
          monthly installments. Principal payments on the May loan commenced July
          1, 2005
          and the November loan commenced January 2006. 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 March 31, 2006 and December 31, 2005 the principal balances
          of
          $5.7 million and $6.0 million, respectively, are included in the above
          table
          under Notes Payable.
 
 In
          May
          2004, the Company completed financing agreements for various network equipment
          with Cisco Systems, Inc. (Cisco). 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 March 31,
          2006
          and December 31, 2005, the principal balance for the capital lease portion
          of
          the arrangement was $0.5 million and $0.7 million, respectively, and is
          included
          in the above table under Capital Lease Obligations. As of March 31, 2006
          and
          December 31, 2005, the principal balance of the note payable was $0.6 million
          and $0.7 million, respectively, and is included in the above table under
          Notes
          Payable.
 
 14
 In
          March
          2006, the Company completed a new financing agreement with Cisco for various
          network equipment and related maintenance. This financing agreement was
          comprised of a $0.3 million of equipment capital lease and a $0.2 million
          note
          payable exchanged for a 36-month maintenance services agreement. As of
          March 31,
          2006 the principal balance for the capital lease portion of the arrangement
          was
          $0.3 million, and is included in the above table under Capital Lease
          Obligations. As of March 31, 2006 the principal balance of the note payable
          was
          $0.2 and is included in the above table under Notes Payable.
 
 In
          November 2005, the Company entered into a Loan and Security Agreement
          (Agreement) with Comerica Bank, which provides for up to $5 million of
          revolving
          advances and up to $15 million of term loans, subject to certain conditions.
          Any
          revolving advances are not to exceed 80% of eligible accounts receivables
          and
          are due and payable in full on November 9, 2007. There were no revolving
          advances as of March 31, 2006.
 
 The
          term
          loan portion of the Agreement, which is to be used within certain limitations
          to
          finance capital equipment expenditures and acquisitions or to refinance
          the
          Company’s Senior Notes, is structured into two tranches; the first includes all
          term loan borrowings through June 9, 2006, at which point it expires, and
          shall
          be payable in thirty equal monthly installments commencing July 1, 2006.
          The
          second tranche starts June 10, 2006 and continues through January 9, 2007
          at
          which point it expires, and shall be payable in twenty-three equal monthly
          installments commencing February 1, 2007.
 
 Rates
          for
          borrowings under the Agreement float and are based, at the Company’s election,
          at 2.75% above a calculated Eurodollar rate for the revolving advances
          and 3.75%
          above a Eurodollar rate for the term loans or Comerica’s prime rate for the
          revolving advances and Comerica’s prime rate plus 0.5% for the term loans. The
          Company selected the bank prime rate base for the current term loan resulting
          in
          an interest rate of 8.25% as of March 31, 2006 and a range of 7.75% to
          8.25%
          during the three months ended March 31, 2006. The Agreement is secured
          by all
          personal property of the Company, prevents the distribution of any dividends
          without the written consent of Comerica and requires the Company to maintain
          certain financial and restrictive covenants including compensating cash
          balances. The Company shall maintain 80% of all cash balances with Comerica
          and
          compensating cash balances of not less than $15.0 million through December
          30,
          2006, $12.5 million December 31, 2006 through June 29, 2007 and $10.0 million,
          thereafter. As of March 31, 2006 and December 31, 2005, the term loan principal
          balance was $10.5 million and $2.5 million, respectively, and is included
          in the
          above table under Notes Payable.
 
 Interest
          expense, net for the quarters ended March 31, 2006 and 2005 was as
          follows:
  **Three
                    Months Ended****March
                    31,****2006**
                
                **2005**(unaudited)
                
                (unaudited)(Dollars
                    in thousands)Interest
                    on Senior Notes
                
                $
                1,218
                
                $
                1,218Accreted
                    discount on Senior Secured Note
                
                
                -
                
                
                1,262Amortization
                    of deferred financing costs
                
                
                57
                
                
                154Other
                    interest expense
                
                
                280
                
                
                362Less
                    interest income
                
                
                (180
                )
                
                (190
                )Interest expense, net
                
                $
                1,375
                
                $
                2,806


The
        weighted average interest rate on short-term borrowings outstanding as of
        March
        31, 2006 and 2005 was 7.55% and 6.03%, respectively.
  **10.
          Subsequent Event**
 
 Subsequent
          to the end of the first quarter of 2006, the Company became aware, and
          notified
          Comerica, that it was not in compliance with the Adjusted Quick Ratio and
          Total
          Liabilities to Effective Tangible Net Worth covenants in the Agreement,
          in each
          case, as of Apri1 30, 2006. On May 11, 2006, the Company received from
          Comerica
          a waiver of the defaults arising as a result of its non-compliance with
          these
          two financial covenants. The waiver covers the period from April 1, 2006
          through
          and including May 31, 2006. The Company expects to negotiate and enter
          into an
          amendment to the Agreement in order to gain compliance with these two financial
          covenants.
 
 15
 **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, 2005, as filed with the SEC on March 29, 2006, 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; other regulatory changes; 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 than contemplated; the possible delisting of our common
        shares
        from the Nasdaq Capital Market; customer acceptance of products, such as
        VoIP;
        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. Our customers include Internet
        service providers (ISPs), 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. Under our
        expansion plan, we intend 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 communication service providers. This planned
        expansion is designed to provide a nationwide, single source platform that
        seamlessly bridges circuit-switching and packet-switching 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 telecommunications 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.
  In
        May 2006
        we announced that we are now serving customers across our expanded network
        in
        Washington, D.C. and Denver, Colorado in addition to announcing the availability
        of our East Coast SuperPOP to support our nationwide expansion plan. We also
        announced in May our increased coverage in Oregon and Washington, as well
        as an
        initial expansion into Idaho, in response to increasing demand for
        infrastructure services.
 
 We
        announced
        in January 2006 an alliance with VeriSign, Inc. (VeriSign) to provide services
        that enable communications providers to offer converged IP, voice and data
        communications. The alliance contemplates that VeriSign will facilitate us
        with
        back office and database services including Calling Party Name, Local Number
        Portability, E911 related database updating, SS7 and provisioning services.
        Further, it is expected that we will contribute voice and data network services
        such as trunking, switching, E911 selective router trunking and IP transport.
        Our strategic alliance with VeriSign is expected to enhance our national
        expansion plans and strategy of being a single source for converged solutions
        offered by VoIP, wireless, broadband and other service providers, allowing
        both
        companies to drive adoption of next-generation applications.
 
 In
        connection
        with our transition to a business model based upon enabling other communication
        service 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. 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
        $27.0
        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).
 
 16
 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 and were capped at $10.5 million.
        In accordance with 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 eliminated the 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. During April
        2006,
        TelePacific exercised their second and final option to extend the transition
        period for an additional three months. This will extend the TSA transition
        period to September 12, 2006.
  For
        the three
        months ended March 31, 2006, we recorded reimbursed transition expenses of
        $2.9
        million in accordance with the TSA. This amount is 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 transaction with TelePacific did not result
        in
        discontinued operations.
 
 The
        following
        table shows our financial performance for the three months ended March 31,
        2006
        and 2005:


**Three
                Months Ended****March
                31,****2006**
            
            **2005**(unaudited)
            
            (unaudited)(Dollars
                in thousands)Total
                revenue
            
            $
            19,628
            
            $
            28,131Loss
                from operations
            
            $
            (2,897
            )
            $
            (1,242
            )Net
                (loss) income
            
            $
            (4,272
            )
            $
            17,339(Loss)
                income per share diluted
            
            $
            (0.11
            )
            $
            0.45




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 intercarrier 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. Most installation revenues and costs associated with installation
      are recognized as revenue and expensed 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
      collectibility is reasonably assured.


17
 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 incumbent local exchange
        carriers (ILECs). Intercarrier compensation payments have historically been
        a
        significant portion of our revenues but the intercarrier carriers are not
        currently a targeted customer. Intercarrier compensation payments accounted
        for
        37.7% and 31.0% of our total revenues for the quarters ended March 31, 2006
        and
        2005, respectively. 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 competitive local exchange carriers (CLECs) and other competitors
        to receive such payments is the subject of numerous regulatory and legal
        challenges.
 
 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 collectibility
        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.
 
 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 alliance with VeriSign,
        Inc., and including, but not limited to, potential acquisitions, partnerships,
        or new business services. We believe that the footprint of our network, which
        encompasses all of the major metropolitan areas of California, in addition
        to
        Washington, D.C., Denver, Colorado, Oregon, Washington, Nevada, Arizona,
        Utah,
        as well as an initial expansion into Idaho, 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 achieve
        future growth.
 
 18
 **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
        for long-lived assets; and
 
 •  stock-based
        compensation.
 
 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 installation related
        costs, are recognized as revenue and expensed 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 negotiated settlements between us
        and the
        ILEC where we agree to accept a portion of what we believe is owed to us.
 
 *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.
 
 19
 *Estimated
        settlements 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.
 
 *Stock-based
        compensation.* On
        January 1, 2006, we adopted SFAS No. 123R and account for stock-based
        compensation in accordance with the fair value recognition provisions of
        SFAS
        No. 123R. We use the Black-Scholes option-pricing model, which requires the
        input of subjective assumptions. These assumptions include estimating the
        length
        of time employees will retain their stock options (expected term), the estimated
        volatility of the our common stock price over the expected term and the number
        of options that will cancel for failure to complete their vesting requirements
        (forfeitures). Changes in these assumptions could materially affect the estimate
        of fair value stock-based compensation and consequently, the related amount
        recognized on the consolidated statements of operations and comprehensive
        income
        (loss).
 
 **Results
        of Operations**
 
 *Quarter
        Ended March 31, 2006 Compared to the Quarter Ended March 31,
        2005*
 
 Our
        significant revenue components and operational metrics for the quarters ended
        March 31, 2006 and 2005 are as follows:


**Three
                  Months Ended****March
                  31,****2006**
              
              **2005**
              
              **%
                  Change**(unaudited)
              
              (unaudited)(Dollars
                  in millions)**Revenues:**Intercarrier
                  compensation
              
              $
              9.3
              
              $
              10.0
              
              (7.0
              )%Mature
                  Products
              
              
              8.6
              
              
              17.3
              
              (50.3
              )%Growth
                  Products
              
              
              1.7
              
              
              0.8
              
              112.5
              %Total
                  revenues
              
              $
              19.6
              
              $
              28.1
              
              (30.2
              )%**Operational
                  metrics:**Minutes
                  of use (in billions)Intercarrier
              
              
              11.04
              
              
              12.1
              
              (8.8
              )%Mature Products
              
              
              0.05
              
              
              0.06
              
              (16.7
              )%Growth Products
              
              
              0.10
              
              
              0.06
              
              66.7
              %Total minutes of use
              
              
              11.19
              
              
              12.22
              
              (8.4
              )%




Total
        revenues, which is composed of intercarrier, mature products and growth
        products, decreased 30.2% to $19.6 million in the quarter ended March 31,
        2006.
        This decrease was primarily attributable to the sale of our enterprise customer
        base to TelePacific in the same period in 2005 as well as the disconnection
        of
        lines no longer used by certain existing customers.
 
 Intercarrier
        compensation decreased 7.0% to $9.3 million in the quarter ended March 31,
        2006
        from $10.0 million during the same period in 2005 primarily due to a 8.8%
        decrease in minutes of use compared to the same period in 2005.
 
 20
 Mature
          products include dial access services, collocation, and all enterprise
          products.
          Revenues from mature products decreased $8.7 million, or 50.3% in the quarter
          ended March 31, 2006 from $17.3 million during the same period in 2005.
          The
          decrease was primarily due to the sale of substantially all of our enterprise
          customer base to TelePacific on March 11, 2005 in addition to customers
          disconnecting lines not in use.
 
 Growth
        products include the VoiceSource suite (PSTN on Ramp, IFEX, PSTN on Ramp
        with
        NDS and Driver’s Seat), exchange advantage and enhanced dial access. Revenues
        from growth products increased $0.9 million, or 112.5% in the quarter ended
        March 31, 2006 from $0.8 million during the same period in 2005. The increase
        was due primarily to volume growth in addition to new products introduced
        subsequent to the quarter ended March 31, 2005.
 
 Total
        minutes of use, which is composed of intercarrier, mature products and growth
        products declined 8.4% to 11.19 billion in the quarter ended March 31, 2006.
        Intercarrier minutes of use are composed of minutes of use resulting from
        both
        mature products and growth products that are initiated on another carrier’s
        network but terminated on our network. Intercarrier minutes of use decreased
        8.8% due to a customer moving the majority of their traffic onto their own
        network. Mature products minutes of use decreased to 0.05 billion for the
        quarter ended March 31, 2006. Growth products minutes of use increased to
        0.10
        billion for the quarter ended March 31, 2006. We believe that the decrease
        in
        the minutes of use for mature products and the increase in the minutes of
        use
        related to growth products reflects the changing focus of our business as
        well
        as the recent introduction of new products.
  The
        significant costs and expenses for the quarters ended March 31, 2006 and
        2005
        are as follows:


**Three
                  Months Ended****March
                  31,****2006**
              
              **2005**
              
              **% 
                  Change**(unaudited)
              
              
              (unaudited)(Dollars
                  in millions)**Costs
                  and expenses:**Network
                  expenses (exclusive of depreciation shown separately
                  below)
              
              $
              9.0
              
              $
              10.6
              
              
              (15.1
              )%Selling,
                  general and administrative
              
              
              13.6
              
              
              14.7
              
              
              (7.5
              )%Reimbursed
                  transition expenses
              
              
              (2.9
              )
              
              -
              
              
              100.0
              %Depreciation
                  and amortization
              
              
              2.8
              
              
              3.7
              
              
              (24.3
              )%Restructuring
                  charges
              
              
              -
              
              
              0.4
              
              
              (100.0
              )%Total
                  costs and expenses
              
              $
              22.5
              
              $
              29.4
              
              
              (23.5
              )%


Consolidated
        network expenses decreased $1.6 million, or 15.1% during the quarter ended
        March
        31, 2006 compared to $10.6 million during the same period in 2005 due primarily
        to negotiated supplier credits received in 2006 in addition to former customers
        transitioning off our network as a result of the sale of substantially all
        of
        our enterprise customer base to TelePacific’s network. During this transition
        period, we are obligated under the TSA, among other things, to provide certain
        transition services to TelePacific at our estimated cost. The estimated costs
        to
        be reimbursed to us include network related services and are included under
        “Reimbursed transition expenses.”
  Consolidated
        selling, general and administrative expenses decreased 7.5% to $13.6 million
        for
        the quarter ended March 31, 2006 from $14.7 million during the same period
        in
        2005. The decrease was due primarily to the reduction in full-time equivalent
        employees, primarily sales employees, as a result of the sale of substantially
        all of our enterprise customer base during the first quarter of 2005, partially
        offset by costs associated with the expansion plan.
  Effective
        January 1, 2006, we adopted SFAS No. 123R, “Share-Based Payment” utilizing the
        modified prospective method. We recorded approximately $97,000 in selling,
        general and administrative expense during the quarter ended March 31, 2006
        as a
        result of this adoption. Total compensation expense recognized for stock-based
        awards for the three months ended March 31, 2006 and 2005 was $146,000 and
        $48,000, respectively. Previously, we followed Accounting Principles Board
        Opinion (APB) No. 25, "Accounting for Stock Issued to Employees" for our
        stock-based compensation plans and the disclosure-only provisions of SFAS
        No.
        123, "Accounting for Stock-Based Compensation." As of March 31, 2006, we
        had
        unrecognized stock-based compensation of $1.2 million outstanding, which
        we
        expect to recognize over a weighted-average period of 3 years.
 
 21
 Reimbursed
        transition expenses were $2.9 million for the quarter ended March 31, 2006
        and
        no such reimbursed expenses were recorded during the same period in 2005.
        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 transaction with TelePacific did not result
        in
        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 24.3% to $2.8 million in
        the
        quarter ended March 31, 2006 from $3.7 million during the same period in
        2005.
        The decrease in depreciation and amortization expense was primarily due to
        some
        assets becoming fully depreciated during the period in addition to the sale
        of
        some assets as part of the sale of substantially all of our enterprise customer
        base. Approximately 54% of the property and equipment purchased during the
        period, primarily for the planned expansion, were not placed in service as
        of
        March 31, 2006, and therefore no depreciation expense was recognized for
        these
        assets.
 
 Restructuring
        charges were approximately $15,000 for the quarter ended March 31, 2006
        primarily due to increased common area operating expenses at the Colorado
        facility. Restructuring charges were $0.4 million for the same period in
        2005.
        These charges related primarily to the completion of the sale of substantially
        all of our enterprise customer base for employee termination benefits and
        rent
        expense for vacated premises.
 
 Consolidated
        loss from operations increased to $2.9 million for the quarter ended March
        31,
        2006 from $1.2 million during the same period in 2005 primarily due to the
        factors discussed in the preceding paragraphs.
  Consolidated
        interest expense, net decreased to $1.4 million for the quarter ended March
        31,
        2006 compared to $2.8 million for the same period in 2005 due primarily from
        the
        extinguishment of the Senior Secured Note during the first quarter of 2005.
        Our
        interest expense, net was as follows:


**Three
                  Months Ended****March
                  31,****2006**
              
              **2005**(unaudited)
              
              
              (unaudited)(Dollars
                  in thousands)Interest
                  on Senior Notes
              
              $
              1,218
              
              $
              1,218Accreted
                  discount on Senior Secured Note
              
              
              -
              
              
              1,262Amortization
                  of deferred financing costs
              
              
              57
              
              
              154Other
                  interest expense
              
              
              280
              
              
              362Less
                  interest income
              
              
              (180
              )
              
              (190
              )Interest expense, net
              
              $
              1,375
              
              $
              2,806


For
        the
        quarters ended March 31, 2006 and 2005, our effective income tax rate was
        0.0%
        and 2.9%, respectively.
 
 Consolidated
        net loss was $4.3 million for the quarter ended March 31, 2006 compared to
        net
        income of $17.3 million during the same period in 2005 primarily due to the
        factors discussed in the preceding paragraphs.
 
 22
 **Quarterly
        Operating and Statistical Data:**
 
 The
        following tables summarize the unaudited results of operations as a percentage
        of revenues for the quarters ended March 31, 2006 and 2005. 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****March
                  31,****2006**
              
              **2005**(unaudited)
              
              (unaudited)**Consolidated
                  Statements of Operations****Data:**Revenue
              
              
              100.0
              %
              
              100.0
              %Network
                  expenses (exclusive of depreciation shown separately
                  below)
              
              
              45.9
              %
              
              37.6
              %Selling,
                  general and administrative expenses
              
              
              69.2
              %
              
              52.2
              %Reimbursed
                  transition expenses
              
              
              (14.8
              )%
              
              -
              %Depreciation
                  and amortization expenses
              
              
              14.4
              %
              
              13.3
              %(Loss)
                  income from operations
              
              
              (14.8
              )%
              
              (4.4
              )%Net
                  (loss) income
              
              
              (21.8
              )%
              
              61.6
              %


The
        following table sets forth unaudited statistical data for each of the specified
        quarters of 2006 and 2005. The operating and statistical data for any quarter
        are not necessarily indicative of results for any future period.




**Three
                  Months Ended****2006**
              
              **2005****March
                  31,**
              
              **Dec.
                  31,**
              
              **Sept.
                  30,**
              
              **June
                  30,**
              
              **March
                  31,**(unaudited)
              
              (unaudited)
              
              (unaudited)
              
              (unaudited)
              
              (unaudited)Ports
                  equipped
              1,151,616
              
              1,151,616
              
              1,054,848
              
              1,052,400
              
              1,052,400Quarterly
                  minutes of useswitched (in billions)
              0.1
              
              12.0
              
              12.2
              
              12.2
              
              12.2Capital
                  additions(in thousands)
              $
                  10,568
              
              $
                  5,797
              
              $
                  3,259
              
              $
                  1,575
              
              $
                  1,600Employees
              305
              
              296
              
              273
              
              248
              
              250




**Liquidity
        and Capital Resources:**
  *Sources
        and uses of cash.* At
        March
        31, 2006, cash and short-term investments decreased $2.9 million to $23.8
        million from $26.7 million at December 31, 2005. The decrease was primarily
        due
        to the semi-annual interest payment on the Senior Notes.
 
 Net
        cash
        used in operating activities was $4.2 million for the quarter ended March
        31,
        2006 as compared $1.3 million for the same period ended in 2005. The increase
        was primarily due to an increase in loss from operations and a decrease in
        accounts payable.
 
 Net
        cash
        used in investing activities was $6.9 million for the quarter ended March
        31,
        2006 due primarily to the purchase of property and equipment. Net cash provided
        by investing activities was $22.1 million during the quarter ended March
        31,
        2005 due to the sale of substantially all of our enterprise customer base
        in
        March 2005.
 
 Net
        cash
        provided by financing activities was $7.1 million for the quarter ended March
        31, 2006 primarily due to proceeds from borrowings under notes payable. Net
        cash
        used in financing activities was $41.5 million during the quarter ended March
        31, 2005 primarily due to the prepayment of the Senior Secured Note with
        proceeds from the sale of the enterprise customer base and cash on hand.
 
 23
 
 *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 2006 and beyond. As a result
          of
          various capital projects and our business plan, as currently contemplated,
          we
          anticipate making capital expenditures, excluding acquisitions, if any,
          of
          approximately $13.2 million for the next twelve 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 this
          amount.
  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 March 31, 2006, we did
        not
        have any material future purchase commitments to purchase equipment from
        any of
        our vendors.
  *Debt
        outstanding.* At March
        31, 2006 and December 31, 2005, long-term debt and capital lease obligations
        consist of the following:


**March
                  31,**
              
              **December
                  31,****2006**
              
              **2005**(unaudited)(Dollars
                  in thousands)Senior
                  Notes
              
              $
              36,102
              
              $
              36,102Capital
                  lease obligations
              
              
              789
              
              
              651Notes
                  payable
              
              
              19,537
              
              
              12,159Less
                  current portion of notes payable and capital leases
              
              
              (8,595
              )
              
              (5,392
              )$
              47,833
              
              $
              43,520
  The
          Senior Notes of which there is $36.1 million in principal amount outstanding
          at
          March 31, 2006 and December 31, 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.
 
 In
          March
          2006, we completed a new financing agreement with Cisco Systems, Inc. for
          various network equipment and related maintenance. This financing agreement
          was
          comprised of a $0.3 million equipment capital lease and a $0.2 million
          note
          payable exchanged for a 36-month maintenance services agreement. As of
          March 31,
          2006 the principal balance for the capital lease portion of the arrangement
          was
          $0.3 million, and is included in the above table under Capital Lease
          Obligations. As of March 31, 2006 the principal balance of the note payable
          was
          $0.2 and is included in the above table under Notes Payable.
 
 In
          November
          2005, we entered into a Loan and Security Agreement (Agreement) with Comerica
          Bank, which provides for up to $5 million of revolving advances and up
          to $15
          million of term loans, subject to certain conditions. Any revolving advances
          are
          not to exceed 80% of eligible accounts receivables and are due and payable
          in
          full on November 9, 2007. There were no revolving advances as of March
          31,
          2006.
 
 The
          term loan
          portion of the Agreement, which is to be used within certain limitations
          to
          finance capital equipment expenditures and acquisitions or to refinance
          our
          Senior Notes, is structured into two tranches; the first includes all term
          loan
          borrowings through June 9, 2006, at which point it expires, and shall be
          payable
          in thirty equal monthly installments commencing July 1, 2006. The second
          tranche
          starts June 10, 2006 and continues through January 9, 2007 at which point
          it
          expires, and shall be payable in twenty-three equal monthly installments
          commencing February 1, 2007.
  Rates
            for
            borrowings under the Agreement float and are based, at our election,
            at 2.75%
            above a calculated Eurodollar rate for the revolving advances and 3.75%
            above a
            Eurodollar rate for the term loans or Comerica’s prime rate for the revolving
            advances and Comerica’s prime rate plus 0.5% for the term loans. The Agreement
            is secured by all of our personal property and requires us to maintain
            certain
            financial and restrictive covenants. As of March 31, 2006 and December
            31, 2005,
            the term loan principal balance was $10.5 million and $2.5 million,
            respectively, and is included in the above table under Notes Payable
            and we were
            in compliance with all required covenants.
  24
 Subsequent
            to the end of the first quarter of 2006, we became aware, and notified
            Comerica,
            that we were not in compliance with the Adjusted Quick Ratio and Total
            Liabilities to Effective Tangible Net Worth covenants in the Agreement,
            in each
            case, as of April 30, 2006. On May 11, 2006, we received from Comerica
            a waiver
            of the defaults arising as a result of our non-compliance with these
            two
            financial covenants. The waiver covers the period from April 1, 2006
            through and
            including May 31, 2006. We expect to negotiate and enter into an amendment
            to
            the Agreement in order to gain compliance with these two financial covenants.
            However, we cannot assure you that we will be able to enter into such
            an
            amendment, or do so on terms favorable to us, or that we will be able
            to gain
            and/or maintain compliance with these financial covenants, whether or
            not
            amended.
  *Future
          uses
          and sources of cash.* Our
          principal sources of funds for the remainder of 2006 are anticipated to
          be
          current cash and short-term investment balances, cash flows from operating
          activities and borrowings under existing and any future financing agreements.
          We
          believe that these funds will provide us with sufficient liquidity and
          capital
          resources for us 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 in 2006. 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 $6.2 million on Senior Notes and other
          notes;
 
 •  anticipated
          capital expenditures of approximately $13.2 million; and
 
 •  capital
          lease payments (including interest) of approximately $0.6 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;
 
 •  our
          debt
          payments;
 
 •  capital
          lease repayments;
 
 •  interest
          expense on debt; and
 
 •  development
          and market rollout of new service offerings.
  We
          are in the
          process of exploring strategic alternatives with a goal of enhancing stockholder
          value. Possible strategic alternatives include raising additional debt
          or equity
          financing, entry into strategic relationships or joint ventures and merger
          and
          acquisitions.
 
 **ITEM
          3.**  **QUANTITATIVE
          AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS**
  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. At March 31, 2006, we had
          an
          outstanding note payable of $10.5 million to Comerica Bank (Comerica).
          This note
          is at Comerica’s prime rate plus 0.5%, which was 8.25 % as of March 31, 2006. A
          hypothetical 1% point increase in short-term interest rates would reduce
          the
          annualized income before tax by approximately $0.1 million as a result
          of higher
          interest expense.
  We
          are
          exposed to changes in interest rates on our investments in cash equivalents
          and
          short-term investments. Approximately $22.7 million of our total cash and
          investments are in cash equivalents with original maturities of less than
          three
          months and the remainder 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 $23.8 million cash, cash
          equivalents and short-term investments at March 31, 2006 by approximately
          $0.2
          million.
  25
 **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 March 31, 2006 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.
 
 **PART
          II**
 **OTHER
          INFORMATION**
 
 **ITEM
          1.** **Legal
          Proceedings**
  See
          Note 7 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
          1A.**  **Risk
          Factors**
  There
          have been no material changes in the previously reported risk factors as
          noted
          in the Company’s Annual Report on Form 10-K for the period ended December 31,
          2005 filed with the SEC on March 29, 2006.
 **ITEM
            5. Other Information**
 
 (a)
            On
            May 11, 2006, we received from Comerica Bank a waiver of certain defaults
            (the
            Waiver) arising as a result of our non-compliance with two financial
            covenants
            set forth in the Loan and Security Agreement, dated as of November 9,
            2005,
            between us and Comerica Bank (as amended, the Agreement). In particular,
            we were
            not in compliance with the Adjusted Quick Ratio and Total Liabilities
            to
            Effective Tangible Net Worth covenants in the Agreement, in each case,
            as of
            April 30, 2006. The Waiver covers the period from April 1, 2006 through
            and
            including May 31, 2006. A copy of the Waiver is filed as exhibit 10.61
            to this
            Report.
 
 **ITEM
          6.** **Exhibits**
 
 Exhibits
 10.60
                  Second
                      Amendmentto
                      Loan and Security Agreement dated as of February 17, 2006,
                      by and between
                      Comerica Bank and the Company.
 
 10.61**
                  Waiver
                        dated May 11, 2006to
                        Loan and Security Agreement between Comerica Bank and the
                        Company dated as of November 9, 2005, as amended by the First
                        Amendment to the Loan and Security Agreement, dated as of
                        November 30,
                        2005, as further amended by the Second Amendment to the Loan
                        and Security
                        Agreement, dated as of February 17, 2006.
 
 31.1
                Certification
                    by Henry R. Carabelli, Chief Executive Officer pursuant to Section
                    302 of
                    the Sarbanes-Oxley Act of 2002.
 
 31.2**
                Certification
                    by H. Ravi Brar, Chief Financial Officer and Vice President of
                    Human
                    Resources pursuant to Section 302 of the Sarbanes-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, and 4 are not applicable and have been
            omitted.**
  26
 
 **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 May 12, 2006.
 
 
 
 
  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
  27