**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 June 30, 2005**





OR





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


SECURITIES
      EXCHANGE ACT OF 1934





Commission
      File Number: 000-27743







**PAC-WEST
      TELECOMM, INC.**


(Exact
      name of registrant as specified in its charter)





**California**
            **68-0383568**(State
                or other jurisdiction of
            (I.R.S.
                Employer Identification No.)incorporation
                or organization)




**1776
                W. March Lane, Suite 250 Stockton, California**
            **95207**Address
                of principal executive offices)
            (Zip
                Code)







**(209)
      926-3300**


(Registrant's
      telephone number, including area code)





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. Yes [X] No [ ]





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





As
      of
      July 31, 2005, the Company had an aggregate of 37,131,486 shares of common
      stock
      issued and outstanding.












**PAC-WEST
        TELECOMM, INC.**
 **Report
        on Form 10-Q For the Quarterly Period Ended June 30, 2005**
 **Table
        of Contents**
  **Part
                  I.**
              **FINANCIAL
                  INFORMATION**
              **Page**Item 1.
              Financial
                  Statements (Unaudited)Condensed
                  Consolidated Balance SheetsJune
                  30, 2005 and December 31, 2004
              3Condensed
                  Consolidated Statements of Operations and Comprehensive
                  Income/Loss
                  - Three and six months ended June 30, 2005 and 2004
              4Condensed
                  Consolidated Statements of Cash Flows - Sixmonths
                  ended June 30, 2005 and 2004
              5Notes
                  to Unaudited Condensed Consolidated Financial Statements
              6Item
                  2.
              Management's
                  Discussion and Analysis of Financial Conditionand
                  Results of Operations
              13Item
                  3.
              Quantitative
                  and Qualitative Disclosures About Market Risks
              25Item
                  4.
              Controls
                  and Procedures
              26**Part
                  II.**
              **OTHER
                  INFORMATION**Item
                  1.
              Legal
                  Proceedings
              26Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              26Item
                  5.
              Other
                  Information
              28Item
                  6.
              Exhibits
              28Signatures
              
              29
 2


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




**June
                30,**
            
            **December
                31,****2005**
            
            **2004****(Unaudited)****ASSETS**Current
                Assets:Cash
                and cash equivalents
            
            
            
            
            $
            15,297
            
            $
            32,265Short-term
                investments
            
            
            
            
            
            10,234
            
            
            10,501Trade
                accounts receivable, net of allowances of$95
                and $366 at June 30, 2005 andDecember
                31, 2004, respectively
            
            
            
            
            
            9,821
            
            
            12,774Receivable
                from transition service agreement
            
            
            
            
            
            1,751
            
            
            -Prepaid
                expenses and other current assets
            
            
            
            
            
            4,576
            
            
            5,316Total
                current assets
            
            
            
            
            
            41,679
            
            
            60,856Property
                and equipment, net
            
            37,020
            
            
            43,413Other
                assets, net
            
            1,398
            
            
            2,783Total
                assets
            
            
            
            
            $
            80,097
            
            $
            107,052**LIABILITIES
                AND STOCKHOLDERS' EQUITY**Current
                Liabilities:Accounts
                payable
            
            
            
            
            $
            6,912
            
            $
            5,684Current
                obligations under notes payable and capital leases
            
            
            
            
            
            3,396
            
            
            2,889Accrued
                interest
            
            
            
            
            
            2,131
            
            
            2,208Other
                accrued liabilities
            
            
            
            
            
            7,770
            
            
            13,291Total
                current liabilities
            
            
            
            
            
            20,209
            
            
            24,072Senior
                Notes
            
            36,102
            
            
            36,102Notes
                payable and capital leases, less current portion
            
            4,171
            
            
            28,936Other
                liabilities, net
            
            163
            
            
            353Total
                liabilities
            
            
            
            
            
            60,645
            
            
            89,463Commitments
                and Contingencies (Note 8)Stockholders'
                Equity:Common
                stock, $.001 par value; 100,000,000 sharesauthorized,
                37,114,236 and 36,792,426 shares issuedand
                outstanding at June 30, 2005 and December 31,2004,
                respectively
            
            
            
            
            
            37
            
            
            37Additional
                paid-in capital
            
            
            
            
            
            191,263
            
            
            204,540Accumulated
                deficit
            
            
            
            
            
            (171,285
            )
            
            (186,309
            )Accumulated
                other comprehensive loss
            
            
            
            
            
            (94
            )
            
            (114
            )Deferred
                stock compensation
            
            
            
            
            
            (469
            )
            
            (565
            )Total
                stockholders' equity
            
            
            
            
            
            19,452
            
            
            17,589Total
                liabilities and stockholders' equity
            
            
            
            
            $
            80,097
            
            $
            107,052


See
      notes
      to unaudited condensed consolidated financial statements.




3


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




**Three
                  Months Ended**
              
              **Six
                  Months Ended****June
                  30,**
              
              **June
                  30,****2005**
              
              **2004**
              
              **2005**
              
              **2004**Revenues
              
              $
              21,869
              
              $
              27,837
              
              $
              50,000
              
              $
              57,260Costs
                  and Expenses:Network
                  expenses (exclusive of depreciation shown separately
                  below)
              
              
              9,707
              
              
              11,148
              
              
              20,273
              
              
              21,640Selling,
                  general and administrative
              
              
              12,448
              
              
              14,299
              
              
              27,121
              
              
              28,530Reimbursed
                  transition expenses
              
              
              (2,848
              )
              
              -
              
              
              (2,848
              )
              
              -Depreciation
                  and amortization
              
              
              3,234
              
              
              8,130
              
              
              6,984
              
              
              17,215Restructuring
                  charges
              
              
              222
              
              
              379
              
              
              606
              
              
              379Total
                  operating expenses
              
              
              22,763
              
              
              33,956
              
              
              52,136
              
              
              67,764Loss
                  from operations
              
              
              (894
              )
              
              (6,119
              )
              
              (2,136
              )
              
              (10,504
              )Interest
                  expense, net
              
              
              1,301
              
              
              2,998
              
              
              4,107
              
              
              5,779Other
                  (income), net
              
              
              (62
              )
              
              (12
              )
              
              (62
              )
              
              (16
              )Loss
                  (gain) on sale of enterprise customer base
              
              
              169
              
              
              -
              
              
              (23,865
              )
              
              -Loss
                  on extinguishment of debt
              
              
              -
              
              
              -
              
              
              2,138
              
              
              -(Loss)
                  income before income taxes
              
              
              (2,302
              )
              
              (9,105
              )
              
              15,546
              
              
              (16,267
              )Income
                  tax expense
              
              
              13
              
              
              -
              
              
              522
              
              
              3Net
                  (loss) income
              
              $
              (2,315
              )
              $
              (9,105
              )
              $
              15,024
              
              $
              (16,270
              )Basic
                  income (loss) per share
              
              $
              (0.06
              )
              $
              (0.25
              )
              $
              0.41
              
              $
              (0.44
              )Diluted
                  income (loss) per share
              
              $
              (0.06
              )
              $
              (0.25
              )
              $
              0.39
              
              $
              (0.44
              )Weighted
                  Average Shares Outstanding:Basic
              
              
              36,896
              
              
              36,632
              
              
              36,870
              
              
              36,620Diluted
              
              
              36,896
              
              
              36,632
              
              
              38,867
              
              
              36,620Comprehensive
                  (Loss) Income:Net
                  (loss) income
              
              $
              (2,315
              )
              $
              (9,105
              )
              $
              15,024
              
              $
              (16,270
              )Unrealized
                  gains (losses) on investments
              
              
              42
              
              
              (120
              )
              
              20
              
              
              (120
              )Comprehensive
                  (loss) income
              
              $
              (2,273
              )
              $
              (9,225
              )
              $
              15,044
              
              $
              (16,390
              )


See
        notes
        to unaudited condensed consolidated financial statements.






4


**PAC-WEST
                    TELECOMM, INC.****Condensed
                    Consolidated Statements of Cash Flows****(Unaudited,
                    in thousands)**
 **Six
                      Months Ended****June
                      30,****2005**
                  
                  **2004**Operating
                      activities:Net
                      income (loss)
                  
                  $
                  15,024
                  
                  $
                  (16,270
                  )Adjustments
                      to reconcile net income (loss) to net cashprovided
                      by operating activities:Depreciation
                      and amortization
                  
                  
                  6,984
                  
                  
                  17,215Amortization
                      of deferred financing costs
                  
                  
                  205
                  
                  
                  339Amortization
                      of discount on notes payable
                  
                  
                  1,262
                  
                  
                  2,578Amortization
                      of deferred stock compensation
                  
                  
                  96
                  
                  
                  95Loss
                      on extinguishment of debt
                  
                  
                  2,138
                  
                  
                  -Gain
                      on sale of enterprise customer base
                  
                  
                  (23,865
                  )
                  
                  -Provision
                      for doubtful accounts
                  
                  
                  (18
                  )
                  
                  64Net
                      gain on disposal of property
                  
                  
                  (29
                  )
                  
                  (16
                  )Changes
                      in operating assets and liabilities:Decrease
                      (increase) in accounts receivable
                  
                  
                  352
                  
                  
                  (1,753
                  )Increase
                      in receivable from transition service agreement
                  
                  
                  (1,751
                  )
                  
                  -Decrease
                      in prepaid expenses and other current assets
                  
                  
                  2,003
                  
                  
                  867Decrease
                      in other assets
                  
                  
                  157
                  
                  
                  53Increase
                      in accounts payable
                  
                  
                  984
                  
                  
                  1,076Increase
                      in accrued interest
                  
                  
                  203
                  
                  
                  404Increase
                      in income tax payable
                  
                  
                  244
                  
                  
                  -Decrease
                      in other current liabilities and other liabilities
                  
                  
                  (1,486
                  )
                  
                  (2,176
                  )Net
                      cash provided by operating activities
                  
                  
                  2,503
                  
                  
                  2,476Investing
                      activities:Purchase
                      of property and equipment
                  
                  
                  (3,175
                  )
                  
                  (4,177
                  )Proceeds
                      from disposal of property and equipment
                  
                  
                  95
                  
                  
                  138Redemptions
                      (purchase) of short-term investments, net
                  
                  
                  287
                  
                  
                  (11,779
                  )Business
                      acquisitions
                  
                  
                  -
                  
                  
                  (587
                  )Proceeds
                      from sale of enterprise customer base
                  
                  
                  26,953
                  
                  
                  -Returned
                      deposits/other associated with the enterprise customer base
                      sale
                  
                  
                  (3,536
                  )
                  
                  -Other
                  
                  
                  200
                  
                  
                  -Net
                      cash provided by (used) in investing activities
                  
                  
                  20,824
                  
                  
                  (16,405
                  )Financing
                      activities:Repayments
                      of notes payable
                  
                  
                  (42,050
                  )
                  
                  (179
                  )Proceeds
                      from the issuance of common stock
                  
                  
                  213
                  
                  
                  21Principal
                      payments on capital leases
                  
                  
                  (407
                  )
                  
                  (2,081
                  )Net
                      proceeds from borrowing under notes payable
                  
                  
                  1,949
                  
                  
                  2,401Payments
                      for deferred financing costs
                  
                  
                  -
                  
                  
                  (242
                  )Net
                      cash used in financing activities
                  
                  
                  (40,295
                  )
                  
                  (80
                  )Net
                      decrease in cash and cash equivalents
                  
                  
                  (16,968
                  )
                  
                  (14,009
                  )Cash
                      and cash equivalents:Beginning
                      of period
                  
                  
                  32,265
                  
                  
                  34,657End
                      of period
                  
                  $
                  15,297
                  
                  $
                  20,648Supplemental
                      Disclosure of Cash Flow Information:Cash
                      paid during the year for:Interest
                  
                  $
                  2,997
                  
                  $
                  2,556Income
                      taxes
                  
                  $
                  335
                  
                  $
                  -


See
        notes
        to unaudited condensed consolidated financial statements.


5




**PAC-WEST
        TELECOMM, INC.**
 **NOTES
        TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **AS
        OF AND FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2005**
 
 The
        terms
        "the Company," "Pac-West," "we," "our," "us," and similar terms used in this
        Form 10-Q, refer to Pac-West Telecomm, Inc.
 
 **1.**
              **Organization
                  and Basis of Presentation:**
 
 The
        Company is an independent provider of integrated communication solutions
        that
        enable communication providers to use the Pac-West network and its services
        as
        an alternative to building and maintaining their own network to meet their
        end-users needs. The Company’s customers currently include Internet service
        providers (ISP), enhanced communication service providers (ESPs) and other
        direct providers of communication services to business or residential end-users,
        collectively referred to as service providers (SPs). On March 11, 2005, the
        Company sold substantially all of its enterprise customer base to U.S.
        TelePacific Corp. (TelePacific) while retaining the Company’s associated network
        assets.
 
 These
        accompanying unaudited condensed consolidated financial statements have been
        prepared in accordance with accounting principles generally accepted for
        interim
        financial information in the United States of America pursuant to the rules
        and
        regulations of the Securities and Exchange Commission (SEC). Accordingly,
        they
        do not include all of the information and notes required by accounting
        principles generally accepted in the United States of America (US GAAP) for
        complete financial statements. In the opinion of management, all adjustments,
        consisting only of normal recurring adjustments, considered necessary for
        a fair
        presentation for the periods indicated, have been included. Operating results
        for the six months ended June 30, 2005 are not necessarily indicative of
        the
        results that may be expected for the year ending December 31, 2005. The
        condensed consolidated balance sheet at December 31, 2004 has been derived
        from
        the audited consolidated balance sheet at that date, but does not include
        all of
        the information and notes required by US GAAP for complete financial statements.
        These unaudited condensed consolidated financial statements should be read
        in
        conjunction with the audited consolidated financial statements and the notes
        thereto of the Company as of and for the year ended December 31, 2004, included
        in the Company's Annual Report on Form 10-K filed with the SEC on March 30,
        2005.
 
 Based
        on
        criteria established by Statement of Financial Accounting Standards No. 131
        (SFAS 131), “Disclosures about Segments of an Enterprise and Related
        Information,” the Company has determined that it has one reportable operating
        segment. While the Company monitors the revenue streams of our various services,
        the revenue streams share almost all of the various operating expenses. As
        a
        result the Company has determined that it has one reportable operating segment.
  These
        unaudited condensed consolidated financial statements include the results
        of
        operations of the Company and its subsidiaries. All intercompany accounts
        and
        transactions have been eliminated. Certain prior period amounts have been
        reclassified to conform to current period presentations.
  **2.**
              **Sale
                  of
                  Substantially All of the Enterprise Customer
                  Base:**
  On
        March
        11, 2005, the Company sold substantially all of its enterprise customer base
        to
        TelePacific while retaining the Company’s associated network assets, impacting
        approximately 150 employees. Under the terms of this transaction, TelePacific
        acquired certain assets, such as property and equipment with a net book value
        of
        approximately $3.0 million and other assets of approximately $0.6 million,
        and
        assumed certain liabilities of approximately $0.7 million, in exchange for
        $26.9
        million in cash. As a result, the Company recorded a gain of $24.0 million
        from
        this sale during the first quarter of 2005. During the second quarter of
        2005
        the Company recorded a loss of $0.2 million for adjustments associated with
        this
        sale. In addition, the Company entered into a Transition Service Agreement
        (TSA)
        with TelePacific that, among other things, obligates it to provide certain
        transition services to TelePacific at its estimated cost. The estimated costs
        to
        be reimbursed to the Company include network related and administrative support
        services which are provided exclusively to TelePacific. TelePacific’s obligation
        to pay the Company for circuit and usage costs during the initial 12 month
        transition period is limited to $10.5 million, and TelePacific received a
        $2.0
        million credit against the total amount to be billed. The Company believes
        that
        the $8.5 million of reimbursed circuit and usage costs is adequate to cover
        the
        estimated network related costs based upon the Company’s understanding of
        TelePacific’s transition plan. However if the number or timing of customers
        transitioned off the Company’s network by TelePacific changes significantly from
        the Company’s understanding, the Company may incur additional expenses that will
        not be reimbursed by TelePacific. The TSA is for a one-year period subject
        to
        extension for two additional three-month periods.
 
 6
 
 
 During
          the second quarter
          of 2005, the Company recorded reimbursed transition expenses of $2.8 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. Costs billed under the TSA are based upon estimated costs to
          the
          Company, and the Company anticipates that no profit will be recognized
          on the
          services performed under the TSA. The enterprise services are provided
          by the
          same network assets and maintained and operated by the same employee base
          as
          other services provided by the Company until TelePacific can transition
          the
          enterprise customer base onto its own network. As such, the Company’s common
          network services or expenses cannot be segregated based upon the services
          provided and therefore the estimated costs have primarily been billed based
          upon
          a fixed fee per type of service or transaction. Due to the inseparability
          of the
          Company’s network, the absence of identifiable shared costs, and as no network
          assets were sold to TelePacific, the Company determined the assets sold
          did not
          constitute discontinued operations.
  As
          of June 30, 2005 the
          Company had receivables of approximately $1.7 million related to the TSA
          and
          approximately $0.8 million related to the sale of substantially all of
          the
          enterprise customers to TelePacific. The receivable from TelePacific related
          to
          the enterprise customers is included in prepaid expenses and other current
          assets in the condensed consolidated balance sheet.
 
 **3.**
                **Stock
                      Based
                      Compensation:**
 
 The
        Company follows
        Accounting Principles Board Opinion No. 25, "Accounting for Stock Issues
        to
        Employees" for its stock based compensation plans. The Company has adopted
        the
        disclosure-only provisions of Statement of Financial Accounting Standards
        (SFAS)
        No. 123, "Accounting for Stock-Based Compensation," to disclose pro forma
        information regarding options granted to its employees based on specified
        valuation techniques that produce estimated compensation charges. If
        compensation expense for our stock-based compensation plans had been determined
        in accordance with the fair value as prescribed in SFAS No. 123, the Company's
        net (loss) income per share would have been as follows:




**Three
                  Months Ended**
              
              **Six
                  Months Ended****June
                  30,**
              
              **June
                  30,****2005**
              
              **2004**
              
              **2005**
              
              **2004**(Dollars
                  in thousands except per share amounts)Net
                  (loss) income as reported
              
              
              
              
              $
              (2,315
              )
              $
              (9,105
              )
              $
              15,024
              
              $
              (16,270
              )Total
                  stock-based employee compensation included inreported
                  net (loss) income, net of tax
              
              
              
              
              
              48
              
              
              49
              
              
              93
              
              
              95Total
                  stock-based employee compensation determinedunder
                  the fair value based method
              
              
              
              
              
              (134
              )
              
              (416
              )
              
              (278
              )
              
              (1,127
              )Pro
                  forma
              
              
              
              
              $
              (2,401
              )
              $
              (9,472
              )
              $
              14,839
              
              $
              (17,302
              )Basic
                  net income (loss) per common share:As
                  reported
              
              
              
              
              $
              (0.06
              )
              $
              (0.25
              )
              $
              0.41
              
              $
              (0.44
              )Pro
                  forma
              
              
              
              
              $
              (0.07
              )
              $
              (0.26
              )
              $
              0.40
              
              $
              (0.47
              )Diluted
                  net income (loss) per common share:As
                  reported
              
              
              
              
              $
              (0.06
              )
              $
              (0.25
              )
              $
              0.39
              
              $
              (0.44
              )Pro
                  forma
              
              
              
              
              $
              (0.07
              )
              $
              (0.26
              )
              $
              0.38
              
              $
              (0.47
              )


For
        the quarter ended
        June 30, 2005, potential common stock was antidilutive, as it decreased the
        net
        loss per share. Accordingly, 1,759,349 shares were excluded from the diluted
        net
        loss per share calculation for the quarter ended June 30, 2005. For the periods
        ended June 30, 2004, potential common stock was antidilutive, as it decreased
        the net loss per share. Accordingly, 1,996,258 and 2,377,245 shares were
        excluded from the diluted net loss per share calculation for the three and
        six
        months ended June 30, 2004, respectively.
  7
 T he
        Company uses the Black-Scholes option-pricing model to derive the theoretical
        fair value of employee stock option grants. The fair value of each option
        was
        estimated on the date of grant using the Black-Scholes option pricing model
        with
        the following assumptions in the periods ended June 30, 2005 and 2004,
        respectively:




**Three
                  Months Ended**
              
              **Six
                  Months Ended****June
                  30,**
              
              **June
                  30,****2005**
              
              **2004**
              
              **2005**
              
              **2004**Risk-free
                  interest rate
              
              
              3.85
              %
              
              3.36
              %
              
              3.79
              %
              
              2.98
              %Expected
                  volatility
              
              
              106
              %
              
              110
              %
              
              106
              %
              
              113
              %Expected
                  dividend yield
              
              
              -
              
              
              -
              
              
              -
              
              
              -Expected
                  life
              
              
              4
                  years
              
              
              4
                  years
              
              
              4
                  years
              
              
              4
                  yearsFair
                  value of options granted
              
              $
              0.98
              
              $
              0.94
              
              $
              1.03
              
              $
              1.34
  **4.**
                **Concentration
                      of Customers and
                      Suppliers:**
  For
          the three and six
          months ended June 30, 2005 and 2004, the Company had the following
          concentrations of revenues and operation costs.
  **Three
                    Months Ended**
                
                **Six
                    Months Ended****June
                    30,**
                
                **June
                    30,****2005**
                
                **2004**
                
                **2005**
                
                **2004**Largest
                    customers: Percentage of totalrevenuesCustomer
                    1
                
                
                25.7
                %
                
                18.2
                %
                
                23.1
                %
                
                18.0
                %Customer
                    2
                
                
                21.5
                %
                
                16.9
                %
                
                18.8
                %
                
                18.7
                %Largest
                    supplier: Percentage of networkexpenses
                
                
                40.2
                %
                
                32.7
                %
                
                39.2
                %
                
                36.1
                %
  During
          each of the
          comparison periods, no other customer accounted for more than 10% of total
          revenues. Customers representing more than 10% of trade accounts receivable
          as
          of June 30, 2005 were from two customers, one of them was Customer 1 above,
          representing 19% and 14% and Customer 1 at December 31, 2004 represented
          12% of
          trade accounts receivable. The Company’s largest source of operating costs was
          from one incumbent local exchange carrier (ILEC) for each of the comparison
          periods.
  **5.**
                  **Restructuring
                        Charges:**
  ***2001
            and 2002 Restructuring Plans***
  A
            summary of the
            associated liability 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 June 30, 2005 and December
            31, 2004,
            consist of the following:
 **Restructuring**
                  
                  **Additional**
                  
                  
                  
                  **Restructuring****Liability**
                  
                  **Restructuring**
                  
                  
                  
                  **Liability****as
                      of**
                  
                  **Expense**
                  
                  **Cash**
                  
                  **as
                      of****Dec.
                      31, 2004**
                  
                  **Incurred**
                  
                  **Payments**
                  
                  **June
                      30, 2005**(Dollars
                      in thousands)Rent
                      expense for vacated premises
                  
                  $
                  2,464
                  
                  $
                  46
                  
                  $
                  (346
                  )
                  $
                  2,164






8


The
      amount of the reserve
      for vacated premises is equal to the monthly lease payment of the unoccupied
      space, less any estimated sublease income, multiplied by the remaining months
      on
      the lease. In regards to the Colorado facility, no sublease income was estimated
      due to the specialized nature of the facility. During the second quarter of
      2005, the Company recorded additional restructuring charges of approximately
      $46,000 due to increased common area operating expenses at the Colorado
      facility. The final cash payment to be recorded against the restructuring
      reserve is currently expected to occur in March 2010.




***2005
        Restructuring Plan***
  On
        March 11, 2005, the Company
        recorded restructuring charges in connection with the completion of the sale
        of
        substantially all of its enterprise customer base to TelePacific, primarily
        consisting of employee separation costs. Of the 150 employees affected by
        the
        sale to TelePacific, approximately 85 employees have been or will be
        involuntarily terminated. It is anticipated that the majority of the employees
        associated with this separation plan will leave their positions by the end
        of
        2005. The final cash payment to be recorded against the 2005 restructuring
        reserve is expected to occur in March 2006. However, should TelePacific exercise
        its option to extend the term of the TSA, the Company may incur additional
        employee termination benefit costs and the timing of the Company’s final cash
        payments under the 2005 restructuring plan would also be extended.
  The
        costs incurred in
        connection with the restructuring plan are comprised of benefits to employees
        who were or will be involuntarily terminated and costs related to rent expense
        for vacated premises. These costs are included in restructuring charges in
        the
        accompanying condensed consolidated statements of operations and comprehensive
        income (loss). During the quarter ended March 31, 2005, costs incurred for
        employee termination benefits for approximately 85 employees amounted to
        $372,000 and costs incurred for vacated premises totaled $12,000. During
        the
        quarter ended June 30, 2005, additional costs incurred for employee termination
        benefits totaled approximately $154,000 and costs incurred for vacated premises
        totaled approximately $22,000. As of June 30, 2005, 70 employees had been
        involuntarily terminated. The Company anticipates total cash payments for
        employee termination benefits, which is contingent upon the actual termination
        date of the remaining employees, and rent expense for vacated premises upon
        completion of the restructuring, which is estimated to be March 2006, to
        be
        approximately $572,000 and $65,000, respectively. However, should TelePacific
        exercise its option to extend the term of the TSA, the Company may incur
        additional employee termination benefit costs.
  A
        summary of the
        restructuring expenses and the associated liability pertaining to the Company's
        2005 restructuring plan, which is included in other accrued liabilities in
        the
        accompanying condensed consolidated balance sheet as of June 30, 2005, consist
        of the following:


**Restructuring**
              
              **Additional**
              
              
              
              **Restructuring****Liability**
              
              **Restructuring**
              
              
              
              **Liability****as
                  of**
              
              **Expense**
              
              **Cash**
              
              **as
                  of****Dec.
                  31, 2004**
              
              **Incurred**
              
              **Payments**
              
              **June
                  30, 2005**(Dollars
                  in thousands)One-time
                  employee termination benefits
              
              $
              -
              
              $
              526
              
              $
              (441
              )
              $
              85Rent
                  expense for vacated premises
              
              
              -
              
              
              34
              
              
              (34
              )
              
              -$
              -
              
              $
              560
              
              $
              (475
              )
              $
              85




**6.**
            **Income
                Taxes:**


The
        Company's effective income tax rate for the quarters ended June 30, 2005
        and
        2004 was 0%, and was 3.4% and 0.0%, for the six months ended June 30, 2005
        and
        2004, respectively. The Company anticipates using its available tax net
        operating losses to offset the majority of any income tax owed on the gain
        from
        the sale of substantially all of its enterprise customer base to TelePacific.
        As
        of June 30, 2005, income taxes payable was $0.2 million, which is included
        in
        other accrued liabilities in the accompanying condensed consolidated balance
        sheet.


9
 **7.**
                **Other
                    Comprehensive Income
                    (Loss):**
  For
        the quarters ended
        June 30, 2005 and 2004, there was $42,000 and $(120,000), respectively, of
        other
        comprehensive income (loss) pertaining to net unrealized investment gains
        (losses) on available-for-sale marketable securities. For the six months
        ended
        June 30, 2005 and 2004, there was $20,000 and $(120,000), respectively, of
        other
        comprehensive income (loss) pertaining to net unrealized investment gains
        (losses) on available-for-sale marketable securities.
  **8.**
              **Commitments
                  and
                  Contingencies:**
  From
        time to time, the
        Company is subject to audits with various tax authorities that arise during
        the
        normal course of business. The Company believes resolutions to various tax
        audits that the Company may be involved with in the normal course of business,
        will not materially harm its business, financial condition or results of
        operations.
  There
        have been no material
        developments in the litigation previously reported in the Company’s Annual
        Report on Form 10-K for the period ended December 31, 2004 as filed with
        the SEC
        on March 30, 2005. From time to time, the Company is a party to litigation
        that
        arises in the ordinary course of business. The Company believes that the
        resolution of this litigation, and any other litigation the Company may be
        involved with in the ordinary course of business, will not materially harm
        its
        business, financial condition or results of operations.
  As
        noted above, the
        Company’s TSA with TelePacific includes a cap during the first 12 months on
        certain types of network related services for which TelePacific is obligated
        to
        reimburse the Company. The Company believes that the $8.5 million of reimbursed
        circuit and usage costs is adequate to cover the estimated network related
        costs
        based upon the Company’s understanding of TelePacific’s transition plan. However
        if the number or timing of customers transitioned off the Company’s network by
        TelePacific changes significantly from the Company’s understanding, the Company
        may incur additional expenses that will not be reimbursed by
        TelePacific.
  **9.**
              **Related
                  Party
                  Transactions:**
  A
        significant stockholder
        of the Company, Bay Alarm, together with its subsidiary InReach Internet,
        LLC,
        is a customer of the Company. As of March 11, 2005, Bay Alarm was included
        in
        the sale of substantially all of the enterprise customer base to TelePacific,
        however InReach Internet, LLC, remains a customer of the Company. Bay Alarm
        continues to provide the Company with security monitoring services at its
        normal
        commercial rates. The Company also leases a facility in Oakland, California
        from
        Bay Alarm. Certain information concerning these arrangements with Bay Alarm
        are
        as follows:




**Three
                  Months Ended**
              
              **Six
                  Months Ended****June
                  30,**
              
              **June
                  30,****2005**
              
              **2004**
              
              **2005**
              
              **2004**(Dollars
                  in thousands)Revenues
              
              $
              253
              
              $
              363
              
              $
              533
              
              $
              757Revenues
                  as a percentage of total revenues
              
              
              1.2
              %
              
              1.3
              %
              
              1.1
              %
              
              1.3
              %Security
                  monitoring costs
              
              $
              9
              
              $
              8
              
              $
              19
              
              $
              18Oakland
                  property rent payments
              
              $
              89
              
              $
              89
              
              $
              177
              
              $
              186
  At
        June 30, 2005 and
        December 31, 2004 the Company had amounts receivable from Bay Alarm of
        approximately $8,000 and $0, respectively. All expenses paid to Bay Alarm
        are
        included in selling, general and administrative expenses in the accompanying
        condensed consolidated statements of operations.
  10
  **10.**
              **Debt
                  and interest expense,
                  net:**
 **** At
          June
          30, 2005 and December 31, 2004, long-term debt and capital lease obligations
          consist of the following:
 **June
                    30,**
                
                **December
                    31,****2005**
                
                **2004**(Dollars
                    in thousands)Senior
                    Notes
                
                $
                36,102
                
                $
                36,102Senior
                    Secured Note
                
                
                -
                
                
                24,500Capital
                    lease obligations
                
                
                877
                
                
                1,285Notes
                    payable
                
                
                6,690
                
                
                6,040Less
                    current portion of notes payable and capital leases
                
                
                (3,396
                )
                
                (2,889
                )$
                40,273
                
                $
                65,038


The
      Senior Notes of which
      there is $36.1 million in principal amount outstanding at June 30, 2005, mature
      on February 1, 2009 and bear interest at 13.5% per annum payable in semiannual
      installments, with all principal due in full on February 1, 2009.




The
      Senior Secured Note,
      which was initially issued in the principal amount of $40.0 million accrued
      interest at a rate of LIBOR plus 0.5%, and was to mature December 2006. On
      March
      11, 2005, pursuant to the terms of a Payoff Letter, by and between the Company
      and Deutsche Bank AG — London (Deutsche Bank), the Company utilized $26.9
      million of proceeds from the sale of substantially all of its enterprise
      customer base to TelePacific, as well as $13.8 million from cash on hand, to
      prepay in full the Senior Secured Note (including all outstanding principal
      and
      accrued and unpaid interest). In addition, pursuant to the terms of the Payoff
      Letter, the Company retired the related warrants to acquire up to 26,666,667
      shares of the Company’s common stock in connection with the Senior Secured Note,
      which decreased additional paid in capital by approximately $13.5 million.
      The
      prepayment of the Senior Secured Note and the retirement of the related warrants
      resulted in a $2.1 million loss on the extinguishment of debt.




During
      the second quarter
      of 2004, the Company entered into a secured financing arrangement with Merrill
      Lynch Capital, a division of Merrill Lynch Business Financial Services, Inc.,
      pursuant to which the Company may borrow up to an aggregate amount of $10.0
      million, subject to certain conditions. This financing arrangement was
      structured in a manner that provides for multiple credit facilities up to an
      aggregate of $10.0 million with each facility having separate closing dates
      and
      repayment schedules. Additional borrowing under this secured financing
      arrangement expired on December 31, 2004. The principal and accrued interest
      of
      each facility shall be payable in 36 equal monthly installments. The Company
      has
      the option to prepay the outstanding facility after 18 months subject to a
      maximum premium of 3% of the outstanding facility. Interest on each facility
      was
      fixed at 5% plus the 3-year swap rate, as published by Bloomberg Professional
      Services, determined two business days prior to the closing date of each
      facility. During the second and third quarters of 2004, the Company had borrowed
      a total of approximately $5.4 million under the Merrill Lynch Capital financing
      arrangement under two credit facilities both with interest rates of 8.6%. The
      Company used the proceeds of this financing arrangement to acquire new
      telecommunication switch and related equipment, which secure borrowings under
      this financing arrangement. As of June 30, 2005, the principal balance was
      $3.8
      million and is included under Notes payable in the above table.




In
      May 2005, the Company
      entered into a secured borrowing arrangement with Merrill Lynch Capital pursuant
      to which the Company borrowed $1.9 million at a fixed rate of 8.6%. The
      principal and accrued interest shall be payable in 36 consecutive monthly
      installments commencing July 1, 2005. The Company has the option to prepay
      the
      outstanding balance after 18 months but prior to 24 months subject to a premium
      of 3%, and if paid thereafter, accompanied by a premium of 1%. The borrowing
      arrangement is secured by telecommunications switching and computer equipment.
      As of June 30, 2005, the principal balance of $1.9 million is included under
      Notes payable in the above table.




In
      May 2004, the Company
      completed financing agreements for various network equipment with Cisco Systems,
      Inc. These financing agreements were comprised of $1.4 million of equipment
      capital leases and a $1.6 million note payable exchanged for a 36-month
      maintenance services agreement. As of June 30, 2005, the principal of the
      capital lease was $0.9 million and is included under Capital lease obligations
      in the above table. As of June 30, 2005, the balance of the note payable was
      $1.0 million and is included under Notes payable in the above
      table.


11
 Interest
        expense, net for
        the three and six months ended June 30, 2005 and 2004 was as
        follows:


**Three
                  Months Ended**
              
              **Six
                  Months Ended****June
                  30,**
              
              **June
                  30,****2005**
              
              **2004**
              
              **2005**
              
              **2004**(Dollars
                  in thousands)Interest
                  on Senior Notes
              
              $
              1,218
              
              $
              1,218
              
              $
              2,437
              
              $
              2,450Accreted
                  discount on Senior Secured Note
              
              
              -
              
              
              1,323
              
              
              1,262
              
              
              2,578Amortization
                  of deferred financing costs
              
              
              51
              
              
              171
              
              
              205
              
              
              339Other
                  interest expense
              
              
              158
              
              
              380
              
              
              519
              
              
              547Less
                  interest income
              
              
              (126
              )
              
              (94
              )
              
              (316
              )
              
              (135
              )Interest
                  expense, net
              
              $
              1,301
              
              $
              2,998
              
              $
              4,107
              
              $
              5,779




**11.**
              ****Recent
                  Accounting
                  Pronouncements:****
  In
        December 2004, the
        Financial Accounting Standards Board (FASB) issued SFAS No. 123R, “Share-Based
        Payment.” Among other items, the standard requires the Company to recognize
        compensation cost for all share-based payments, in the Company’s consolidated
        statements of operations. Depending on the model used to calculate stock-based
        compensation expense in the future and other requirements of SFAS No. 123R,
        the
        pro forma disclosure in Note 3 may not be indicative of the stock-based
        compensation expense that will be recognized in the Company’s future financial
        statements. On April 14, 2005, the Securities and Exchange Commission (SEC)
        amended Regulation S-X to allow SEC registrants to delay the implementation
        date
        of SFAS No. 123R to the beginning of the first fiscal year after June 15,
        2005.
        The Company plans to implement SFAS No. 123R beginning with its first quarterly
        report after January 1, 2006. The Company is currently evaluating the new
        standard and models, which may be used to calculate future stock-based
        compensation expense.
  In
        March 2005, the SEC
        issued Staff Accounting Bulletin (SAB) No. 107, "Share-Based Payment," which
        provides the staff's views regarding the valuation of share-based payment
        arrangements for public companies.
 
 In
        May 2005, the FASB
        issued SFAS No. 154, “Accounting Changes and Error Corrections.” Among other
        changes, SFAS No. 154 requires that a voluntary change in accounting principle
        be applied retrospectively with all prior period financial statements presented
        on the new accounting principle, unless it is impracticable to do so. SFAS
        No.
        154 also provides that (1) a change in method of depreciating or amortizing
        a
        long-lived non-financial asset be accounted for as a change in estimate
        (prospectively) that was effected by a change in accounting principle, and
        (2)
        correction of errors in previously issued financial statements should be
        termed
        a "restatement." This statement shall be effective for accounting changes
        and
        corrections of errors made in fiscal years beginning after December 15, 2005.
        The Company does not expect the adoption of SFAS No. 154 to have a material
        impact on its financial position, results of operations, or cash
        flows.
 
  12
 
  **ITEM
          2.**  **MANAGEMENT'S
          DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
          OPERATIONS**
  ***Except
        for the historical information contained herein, this report contains
        forward-looking statements, subject to uncertainties and risks. In this
        Quarterly Report on Form 10-Q, our use of the words "outlook," "expect,"
        "anticipate," "estimate," "forecast," "project," "likely," "objective," "plan,"
        "designed," "goal," "target," and similar expressions is intended to identify
        forward-looking statements. While these statements represent our current
        judgment on what the future may hold, and we believe these judgments are
        reasonable, actual results may differ materially due to numerous important
        risk
        factors that are described in our Annual Report on Form 10-K for the period
        ended December 31, 2004, as filed with the SEC on March 30, 2005, which may
        be
        revised or supplemented in subsequent reports filed by us with the SEC. Such
        risk factors include, but are not limited to our level of indebtedness; an
        inability to generate sufficient cash to service our indebtedness; regulatory
        and legal uncertainty with respect to intercarrier compensation payments
        received by us; the inability to expand our business as a result of the
        unavailability of funds to do so; 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
        which could result if the migration of our enterprise customer base to U.S.
        TelePacific Corp. occurs sooner or later than contemplated; and our principal
        competitors for local services and potential additional competitors have
        advantages that may adversely affect our ability to compete with
        them.***
  **Introduction**
  We
        are an
        independent provider of integrated communication solutions that enable
        communication providers to use our network and services as an alternative
        to
        building and maintaining their own network to meet their end-users needs.
        Our
        customers currently include Internet service providers (ISP), enhanced
        communication service providers (ESPs) and other direct providers of
        communication services to business or residential end-users, collectively
        referred to as service providers (SPs).
 
 We
        built
        our facilities-based network to capitalize on the significant growth in Internet
        usage and in the related demand for local telephone service by SPs. We believe
        the statewide footprint of our network, which encompasses all of the major
        metropolitan areas of California, provides us with a competitive advantage
        over
        incumbent local exchange carriers (ILECs) and competitive local exchange
        carriers (CLECs). Our ubiquitous network in California, our expansion into
        new
        territories, most recently into Utah, and our networks and growth in Arizona,
        Nevada, Oregon and Washington enable SPs to provide their end-users with
        access
        to Internet, paging and other data and voice services, such as voice over
        Internet protocol (VoIP), from almost any point in the state through a local
        call. We are positioning ourselves as a key player in the SP space with a
        focus
        on expansion through enabling others to become voice service providers. We
        are
        in the business of enabling any company to become a phone company. We believe
        the breadth of our product offerings, such as the expansion of our VoiceSource
        product during 2005, and the structure of our network enables us to generate
        high network utilization.
 
 In
        response to our evolving business model, which as described above, is focused
        on
        providing communication solutions to other communication providers, on March
        11,
        2005, we sold substantially all of our enterprise customer base to U.S.
        TelePacific Corp. (TelePacific) while retaining our associated network assets,
        impacting approximately 150 employees. Under the terms of this transaction,
        TelePacific acquired certain assets, such as property and equipment with
        a net
        book value of approximately $3.0 million and other assets of approximately
        $0.6
        million, and assumed certain liabilities of approximately $0.7 million, in
        exchange for $26.9 million in cash. As a result, we recorded a gain of $24.0
        million from this sale during the first quarter of 2005. During the second
        quarter of 2005 we recorded a loss of $0.2 million for adjustments associated
        with this sale. In addition, 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. The estimated costs
        to
        be reimbursed to us include network related and administrative support services,
        which are provided exclusively to TelePacific. TelePacific’s obligation to pay
        us for circuit and usage costs during the initial 12 month transition period
        is
        limited to $10.5 million, and TelePacific received a $2.0 million credit
        against
        the total amount to be billed. We believe that the $8.5 million of reimbursed
        circuit and usage costs is adequate to cover the estimated network related
        costs
        based upon our understanding of TelePacific’s transition plan. However if the
        number or timing of customers transitioned off our network by TelePacific
        changes significantly from our understanding, we may incur additional expenses
        that will not be reimbursed by TelePacific. The TSA is for a one-year period
        subject to extension for two additional three-month periods.
 
 13
 During
        the second quarter of 2005, we recorded reimbursed transition expenses of
        $2.8
        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. Costs billed under the TSA are based upon estimated
        costs to us, and we anticipate that no profit will be recognized on the services
        performed under the TSA. The enterprise services are provided by the same
        network assets and maintained and operated by the same employee base as other
        services provided by us until TelePacific can transition the enterprise customer
        base onto its own network. As such, our common network services or expenses
        cannot be segregated based upon the services provided and therefore the
        estimated costs have primarily been billed based upon a fixed fee per type
        of
        service or transaction. Due to the inseparability of our network, the absence
        of
        identifiable shared costs, and as no network assets were sold to TelePacific,
        we
        determined the assets sold did not constitute discontinued
        operations.
 
 In
        connection with the completion of the sale of substantially all of our
        enterprise customer base to TelePacific on March 11, 2005, we recorded
        restructuring charges of approximately $384,000 during the quarter ended
        March
        31, 2005. These charges primarily consist of employee separation costs for
        approximately 85 employees previously associated with the enterprise customer
        base who had been or would be involuntarily terminated, as well as rent expense
        for vacated premises. During the quarter ended June 30, 2005, additional
        costs
        of approximately $176,000 were incurred for employee termination benefits
        and
        costs incurred for vacated premises. We anticipate that future cash requirements
        associated with the separation plan will be approximately $0.1 million, the
        timing of which is contingent upon the actual termination date of the remaining
        employees. We anticipate that the majority of the employees associated with
        this
        separation plan will leave their positions by the end of 2005. The final
        cash
        payment to be recorded against this reserve is expected to occur in March
        2006.
        However, should TelePacific exercise its option to extend the term of the
        TSA,
        we may incur additional employee termination benefit costs.
 
 The
        following table shows our financial performance for the three and six months
        ended June 30, 2005 and 2004:




**Three
                  Months Ended**
              
              **Six
                  Months Ended****June
                  30,**
              
              **June
                  30,****2005**
              
              **2004**
              
              **2005**
              
              **2004**(unaudited)
              
              (unaudited)
              
              (unaudited)
              
              (unaudited)(Dollars
                  in thousands)
              
              (Dollars
                  in thousands)Total
                  Revenue
              
              $
              21,869
              
              $
              27,837
              
              $
              50,000
              
              $
              57,260Net
                  (loss) income
              
              $
              (2,315
              )
              $
              (9,105
              )
              $
              15,024
              
              $
              (16,270
              )(Loss)
                  income per share diluted
              
              $
              (0.06
              )
              $
              (0.25
              )
              $
              0.39
              
              $
              (0.44
              )


We
        derive
        our revenues from monthly recurring charges, usage charges and amortization
        of
        initial non-recurring charges. Since the sale of substantially all of the
        enterprise customer base on March 11, 2005, we provide services primarily
        to SP
        customers. Monthly recurring charges include the fees paid by customers for
        lines in service and additional features on those lines, as well as equipment
        collocation services. Usage charges consist of fees paid by end users for
        each
        call made, fees paid by our customers as intercarrier compensation for
        completion of their customers' calls through our network, and access charges
        paid by carriers for long distance traffic terminated on our network. Initial
        non-recurring charges consist of fees paid by end users for the installation
        of
        our service. These payments and related costs are recognized as revenue and
        expense ratably over the term of the service contracts, which is generally
        24 to
        36 months. We recognize revenue when there is persuasive evidence of an
        arrangement, delivery of the product or performance of the service has occurred,
        the selling price is fixed or determinable and collectibility is reasonably
        assured.
 
 14
 We
        have
        carrier customers who pay us to terminate their originating call traffic
        on our
        network. These payments consist of meet point access charges, third party
        transit traffic and intercarrier compensation payments, collectively referred
        to
        as intercarrier compensation. Intercarrier compensation payments are a function
        of the number of calls we terminate, the minutes of use associated with such
        calls and the rates at which we are compensated by the carriers originating
        the
        calls. Intercarrier compensation payments have historically been a significant
        portion of our revenues but the intercarrier payments are not currently a
        targeted customer. Intercarrier compensation payments accounted for 36.0%
        and
        26.0% of our total revenues for the six months ended June 30, 2005 and 2004,
        respectively. Although the rate at which we believe we will be compensated
        by
        the carriers in 2005 is expected to be consistent with 2004, the sale of
        our
        enterprise customer base to TelePacific may affect the percentage of total
        revenues represented by intercarrier compensation in 2005. The failure, for
        any
        reason, of one or more carriers from which we ordinarily receive intercarrier
        compensation payments to make all or a significant portion of such payments
        would adversely affect our financial results.
 
 Our
        right
        to receive intercarrier compensation payments from other carriers, as well
        as
        the right of CLECs and other competitors to receive such payments is the
        subject
        of numerous regulatory and legal challenges. For example, in 2003, Verizon
        and
        SBC adopted the Federal Communications Commission’s, or FCC’s, Intercarrier ISP
        Compensation Order. The FCC ISP order introduced a series of declining
        intercarrier compensation pricing tiers for minutes of use, at rates starting
        below the rates previously negotiated in our interconnection agreements (ICAs)
        with both carriers. The lowest pricing tier specified by the FCC ISP order
        was
        reached on June 15, 2003 and will remain in effect until such time that a
        replacement FCC ISP order, may become effective. Additionally, the FCC ISP
        order
        introduced artificial annual growth limits on compensable minutes of use
        subject
        to intercarrier compensation based on the composition and balance of traffic
        between carriers. The FCC ceased enforcing the growth cap in October 2004.
 
 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.
 
 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, including, but not limited to, potential acquisitions or new
        business services. We believe that the statewide footprint of our network,
        which
        encompasses all of the major metropolitan areas of California, provides us
        with
        a significant competitive advantage that will enable us to successfully compete
        in the future, but we cannot guarantee that we will be able to sustain continued
        growth.
 
 **Application
        of Critical Accounting Policies**
 
 *Critical
        Accounting Policies.* The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States of America requires management to
        make
        estimates and assumptions that effect the reported amounts of assets and
        liabilities, disclosure of contingent assets and liabilities, and reported
        amounts of revenues and expenses for the reporting period. We consider the
        following accounting policies to be critical policies due to the estimation
        processes involved in each:
 
 •  revenue
        recognition;
 
 •  provision
        for doubtful accounts receivable;
 
 •  estimated
        settlement of disputed billings;
 15
 •  impairment
        of long-lived assets; and
 
 •  warrant
        valuation.
 
 By
        their
        nature, these judgments are subject to an inherent degree of uncertainty.
        Thus,
        actual results could differ from estimates made and these differences could
        be
        material.
 
 *Revenue
        Recognition.* We
        recognize revenue when:
 
 •  there
        is
        pervasive evidence of an arrangement;
 
 •  delivery
        of the product or performance of the service has occurred;
 
 •  the
        selling price is fixed and determined; and
 
 •  collectibility
        is reasonably assured.
 
 Non-refundable
        up-front payments received for installation services and related costs are
        recognized as revenue and expense ratably over the term of the service
        contracts, generally 24 to 36 months.
 
 Revenues
        from service access agreements are recognized as the service is provided,
        except
        for intercarrier compensation fees paid by our intercarrier customers for
        completion of their customers’ calls through our network, and access charges
        paid by carriers for long distance traffic terminated on our network. Our
        right
        to receive this type of compensation is the subject of numerous regulatory
        and
        legal challenges. Until all issues affecting a given item of revenue are
        resolved, we will continue to recognize intercarrier compensation as revenue
        when the price becomes fixed and determinable and collectibility is reasonably
        assured.
 
 Some
        ILECs with which we have interconnection agreements have withheld payments
        from
        amounts billed by us under their agreements. The process of collection of
        intercarrier compensation can be complex and subject to interpretation of
        regulations and laws. This can lead to the requirement for negotiated
        settlements between us and the ILEC where we agree to accept a portion of
        what
        we believe is owed to us. These settlements generally reflect the mutual
        agreements of both parties that exist at the date of the settlement.
 
 *Provision
        for doubtful accounts receivable.* Provisions for allowances for doubtful accounts receivable are estimated
        based
        upon:
 
 •  historical
        collection experience;
 
 •  customer
        delinquencies and bankruptcies;
 
 •  information
        provided by our customers;
 
 •  observance
        of trends in the industry; and
 
 •  other
        current economic conditions.
 
 *Accruals
        for disputed billings.* During
        the ordinary course of business, we may be billed for carrier traffic for
        which
        management believes we are not responsible. In such instances, we may dispute
        with the appropriate vendor and withhold payment until the matter is resolved.
        Our current disputes are primarily related to incorrect facility rates or
        incorrect billing elements we believe we are being charged. Management regularly
        reviews and monitors all disputed items and, based on industry experience,
        records an accrual that represents what we estimate that we owe on the disputed
        billings. Although we continue to actively try to expedite resolutions, often
        times the state Public Utilities Commission must become involved to arbitrate
        such agreements. This process is often not timely and resolutions are often
        subject to appeal.
 
 16
 *Long-lived
        assets.* In 2002,
        we adopted Statement of Financial Accounting Standards (SFAS) No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets.” We evaluate
        our long-lived assets when events or changes in circumstances indicate that
        the
        carrying amount of such assets may not be fully recoverable. Recoverability
        of
        assets to be held and used is measured by a comparison of the carrying amount
        of
        an asset to the future undiscounted cash flows expected to be generated by
        the
        asset. When we consider an asset to be impaired, it is written down to its
        estimated fair market value. This is assessed based on factors specific to
        the
        type of asset. In assessing the recoverability of these assets, we make
        assumptions regarding, among other things, estimated future cash flows to
        determine the fair value of the respective assets. If these estimates and
        the
        related assumptions change in the future, we may be required to record
        additional impairment charges for these assets.
 
 *Warrant
        Valuation* .
        During
        the quarter ended March 31, 2005, we performed an internal evaluation of
        the
        warrants related to the Senior Secured Note. We used the Black Scholes model
        to
        value the warrants at March 11, 2005. This valuation was used to record the
        value of the warrants related to the prepayment of the Senior Secured
        Note.
 
 **Results
        of Operations**
 
 *Quarter
        Ended June 30, 2005 Compared to the Quarter Ended June 30,
        2004*
 
 Our
        significant revenue components and operational metrics for the quarters ended
        June 30, 2005 and 2004 are as follows:




**Three
                  Months Ended****June
                  30,****2005**
              
              **2004**
              
              **%
                  Change**(unaudited)
              
              (unaudited)(Dollars
                  in millions)**Revenues:**Intercarrier
                  compensation
              
              $
              9.2
              
              $
              6.9
              
              
              33.3
              %Direct
                  billings to SP customers
              
              
              9.8
              
              
              10.5
              
              
              (6.7
              )%Direct
                  billings to enterprise customers
              
              
              -
              
              
              4.9
              
              
              (100.0
              )%Other
              
              
              2.9
              
              
              5.5
              
              
              (47.3
              )%Total
                  revenues
              
              $
              21.9
              
              $
              27.8
              
              
              (21.2
              )%**Operational
                  metrics:**Minutes
                  of use (in billions)
              
              
              12.2
              
              
              10.2
              
              
              19.6
              %




Consolidated
        revenues decreased 21.2% to $21.9 million in the quarter ended June 30, 2005
        from $27.8 million during the same period in 2004. The decrease in revenue
        was
        primarily the result of a decrease of $4.9 million in direct billings to
        enterprise customers due to the sale of the enterprise customer base during
        the
        first quarter of 2005.
  Intercarrier
        compensation increased 33.3% to $9.2 million in the quarter ended June 30,
        2005
        from $6.9 million during the same period in 2004 primarily due to an increase
        in
        minutes of use of approximately 19% and collection efforts compared to the
        same
        period in 2004.
  Direct
        billings to SP customers decreased 6.7% to $9.8 million in the quarter ended
        June 30, 2005 from $10.5 million during the same period in 2004 primarily
        due to
        customers disconnecting lines not in use.
  Direct
        billings to enterprise customers decreased $4.9 million to $0 in the quarter
        ended June 30, 2005 compared to the same period in 2004 due to the sale of
        substantially all of our enterprise customer base during the first quarter
        of
        2005.
  Other
        revenues decreased 47.3% to $2.9 million in the quarter ended June 30, 2005
        from
        $5.5 million during the same period in 2004. The decline is principally due
        to a
        $2.3 million decrease in outbound local and long distance revenues primarily
        due
        to a decrease in minutes of use resulting from the sale of substantially
        all of
        our enterprise customer base. As a result of this sale we expect these revenues
        to continue to decrease in future periods.
  17
 Minutes
        of use increased 19.6% to 12.2 billion in the quarter ended June 30, 2005
        compared to 10.2 billion during the same period in 2004 as discussed
        above.
 
 The
        significant costs and expenses for the quarters ended June 30, 2005 and 2004
        are
        as follows:
  **Three
                  Months Ended****June
                  30,****2005**
              
              **2004**
              
              **%
                  Change**(unaudited)
              
              (unaudited)(Dollars
                  in millions)**Costs
                  and expenses:**Network
                  expenses (exclusive of depreciation shown separately
                  below)
              
              $
              9.7
              
              $
              11.1
              
              
              (12.6
              )%Selling,
                  general and administrative
              
              
              12.4
              
              
              14.3
              
              
              (13.3
              )%Reimbursed
                  transition expenses
              
              
              (2.8
              )
              
              -
              
              
              -Depreciation
                  and amortization
              
              
              3.2
              
              
              8.1
              
              
              (60.5
              )%Restructuring
                  charges
              
              
              0.2
              
              
              0.4
              
              
              (50.0
              )%Total
                  costs and expenses
              
              $
              22.7
              
              $
              33.9
              
              
              (33.0
              )%


Consolidated
        network
        expenses decreased 12.6% to $9.7 million in the quarter ended June 30, 2005
        compared to $11.1 million during the same period in 2004 primarily due to
        network efficiencies and the sale that occurred during the first quarter
        of 2005
        for the enterprise customer base that related primarily to the amortization
        of
        installation costs and repair expenses. As a result of the sale of substantially
        all of our enterprise customer base, we expect our network expenses to decrease
        in future periods as former customers transition 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. See discussion of reimbursed transition expenses below.
  Consolidated
        selling,
        general and administrative expenses decreased 13.3% to $12.4 million in the
        quarter ended June 30, 2005 from $14.3 million during the same period in
        2004.
        The decrease was primarily due to the decrease in employees ,
        primarily sales employees, as
        a
        result of the sale of the enterprise customer base during the first quarter
        of
        2005. Under the TSA, the estimated costs to be reimbursed to us include
        administrative support services. See discussion of reimbursed transition
        expenses below.
  Reimbursed
        transition
        expenses were $2.8 million in the quarter ended June 30, 2005 and no such
        reimbursed expenses were recorded during the same period in 2004. The reimbursed
        transition expenses relate to network and administrative services in accordance
        with the TSA. Costs billed under the TSA are based upon estimated costs to
        us,
        and we anticipate that no profit will be recognized on the services performed
        under the TSA. The enterprise services are provided by the same network assets
        and maintained and operated by the same employee base as other services provided
        by us until TelePacific can transition the enterprise customer base onto
        its own
        network. As such, our common network services or expenses cannot be segregated
        based upon the services provided and therefore the estimated costs have
        primarily been billed based upon a fixed fee per type of service or transaction.
        Due to the inseparability of our network, the absence of identifiable shared
        costs, and as no network assets were sold to TelePacific, we determined the
        assets sold did not constitute discontinued operations. TelePacific’s obligation
        to pay us for circuit and usage costs during the initial 12 month transition
        period is limited to $10.5 million, and TelePacific received a $2.0 million
        credit against the total amount to be billed. We believe that the $8.5 million
        of reimbursed circuit and usage costs is adequate to cover the estimated
        network
        related costs based upon our understanding of TelePacific’s transition plan.
        However if the number or timing of customers transitioned off our network
        by
        TelePacific changes significantly from our understanding, we may incur
        additional expenses that will not be reimbursed by TelePacific.
  
 18
 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 60.5% to $3.2 million in
        the
        quarter ended June 30, 2005 from $8.1 million during the same period in 2004.
        The decrease in depreciation and amortization expense was primarily due to
        recording a non-cash asset impairment charge of $54.6 million for our tangible
        assets during the fourth quarter of 2004. The impairment resulted in a new
        cost
        basis for these assets resulting in a reduction of gross property and equipment.
        As a result, future depreciation expense is expected to be less for the affected
        assets than in prior years. In addition, as part of the sale of substantially
        all of our enterprise customer base during the first quarter, we sold property
        and equipment with a net book value of approximately $3.0 million.
 
 Restructuring
        charges were $0.2 million in the quarter ended June 30, 2005 as compared
        to $0.4
        million during the same period in 2004. Restructuring charges for the quarter
        ended June 30, 2005 related primarily to the completion of the sale of
        substantially all of our enterprise customer base primarily for employee
        termination benefits and rent expense for vacated premises. We anticipate
        that
        future cash requirements associated with the separation plan will be
        approximately $0.1 million, the timing of which is contingent upon the actual
        termination date of the remaining employees. We anticipate that the majority
        of
        the employees associated with this separation plan will leave their positions
        by
        the end of 2005. The final cash payment to be recorded against this reserve
        is
        expected to occur in March 2006. However, should TelePacific exercise its
        option
        to extend the term of the TSA, we may incur additional employee termination
        benefit costs and the timing of our final cash payments under the restructuring
        plan would be extended. Restructuring charges were $0.4 million for the quarter
        ended June 30, 2004. These charges related to adjustments to estimated costs
        of
        previously announced restructuring plans, and did not represent new
        restructuring activities.
 
 Consolidated
        loss from operations improved to $0.9 million in the quarter ended June 30,
        2005
        from $6.1 million during the same period in 2004 primarily due to the factors
        discussed in the preceding paragraphs.
  Consolidated
        interest expense, net decreased 56.6% to $1.3 million in the quarter ended
        June
        30, 2005 from $3.0 million during the same period in 2004 due to the termination
        of the discount accretion on the extinguishment of the senior secured note.
        Interest
        expense, net is expected to decrease during 2005 due to the termination of
        the
        discount accretion on the extinguishment of the senior secured note.Our interest expense, net was as follows:




**Three
                  Months Ended****June
                  30,****2005**
              
              **2004**(unaudited)
              
              (unaudited)(Dollars
                  in thousands)Interest
                  on Senior Notes
              
              $
              1,218
              
              $
              1,218Accreted
                  discount on Senior Secured Note
              
              
              -
              
              
              1,323Amortization
                  of deferred financing costs
              
              
              51
              
              
              171Other
                  interest expense
              
              
              158
              
              
              380Less
                  interest income
              
              
              (126
              )
              
              (94
              )Interest
                  expense, net
              
              $
              1,301
              
              $
              2,998


For
        the quarters ended
        June 30, 2005 and 2004, our effective income tax rate was 0.0%.
  Consolidated
        net loss was
        $2.3 million in the quarter ended June 30, 2005 compared to a net loss of
        $9.1
        million during the same period in 2004 primarily due to the factors discussed
        in
        the preceding paragraphs.
 
 19
 *Six
        Months Ended June 30, 2005 Compared to the Six Months Ended June 30,
        2004*
 
 Our
        significant revenue components and operational metrics for the six months
        ended
        June 30, 2005 and 2004 are as follows:





**Six
                    Months Ended****June
                    30,****2005**
                
                **2004**
                
                **%
                    Change**(unaudited)
                
                (unaudited)(Dollars
                    in millions)**Revenues:**Intercarrier
                    compensation
                
                $
                17.9
                
                $
                14.9
                
                
                20.1
                %Direct
                    billings to SP customers
                
                
                19.9
                
                
                21.6
                
                
                (7.9
                )%Direct
                    billings to enterprise customers
                
                
                4.8
                
                
                9.6
                
                
                (50.0
                )%Other
                
                
                7.4
                
                
                11.2
                
                
                (33.9
                )%Total
                    revenues
                
                $
                50.0
                
                $
                57.3
                
                
                (12.7
                )%**Operational
                    metrics:**Minutes
                    of use (in billions)
                
                
                24.4
                
                
                21.5
                
                
                13.5
                %


Consolidated
        revenues decreased 12.7% to $50.0 million in the six months ended June 30,
        2005
        from $57.3 million during the same period in 2004. The decrease in revenue
        was
        primarily the result of a decrease of $4.8 million in direct billings to
        enterprise customers and a decrease of $3.2 million in outbound local and
        long
        distance revenues both decreased due to the sale of the enterprise customer
        base
        during the first quarter of 2005.
  Intercarrier
        compensation increased 20.1% to $17.9 million in the six months ended June
        30,
        2005 from $14.9 million during the same period in 2004 primarily due to an
        increase in minutes of use of approximately 13% and collection efforts compared
        to the same period in 2004.
  Direct
        billings to SP customers decreased 7.9% to $19.9 million in the six months
        ended
        June 30, 2005 from $21.6 million during the same period in 2004 primarily
        due to
        customers disconnecting lines not in use.
  Direct
        billings to enterprise customers decreased 50% to $4.8 million in the six
        months
        ended June 30, 2005 from $9.6 million during the same period in 2004 due
        to the
        sale of substantially all of our enterprise customer base during the first
        quarter of 2005.
  Other
        revenues decreased 33.9% to $7.4 million in the six months ended June 30,
        2005
        from $11.2 million during the same period in 2004. The decline is principally
        due to a $3.2 million decrease in outbound local and long distance revenues
        primarily due to a decrease in minutes of use resulting from the sale of
        substantially all of our enterprise customer base in the first quarter of
        2005.
        As a result of this sale we expect these revenues to continue to decrease
        in
        future periods.
  Minutes
        of use increased 13.5% to 24.4 billion in the six months ended June 30, 2005
        compared to 21.5 billion during the same period in 2004 as discussed
        above.
 
 20
 The
        significant costs and expenses for the six months ended June 30, 2005 and
        2004
        are as follows:




**Six
                  Months Ended****June
                  30,****2005**
              
              **2004**
              
              **%
                  Change**(unaudited)
              
              (unaudited)(Dollars
                  in millions)**Costs
                  and expenses:**Network
                  expenses (exclusive of depreciation shown separately
                  below)
              
              $
              20.3
              
              $
              21.6
              
              
              (6.0
              )%Selling,
                  general and administrative
              
              
              27.1
              
              
              28.5
              
              
              (4.9
              )%Reimbursed
                  transition expenses
              
              
              (2.8
              )
              
              -
              
              
              -Depreciation
                  and amortization
              
              
              7.0
              
              
              17.2
              
              
              (59.3
              )%Restructuring
                  charges
              
              
              0.6
              
              
              0.4
              
              
              50.0
              %Total
                  costs and expenses
              
              $
              52.2
              
              $
              67.7
              
              
              (22.9
              )%




Consolidated
        network expenses decreased 6.0% to $20.3 million in the six months ended
        June
        30, 2005 from $21.6 million during the same period in 2004 primarily due
        to
        network efficiencies and the sale that occurred during the first quarter
        of 2005
        for the enterprise customer base that related primarily to the amortization
        of
        installation costs and repair expenses. As a result of the sale of substantially
        all of our enterprise customer base, we expect our network expenses to decrease
        in future periods as former customers transition 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. See reimbursed transition expenses below.
 
 Consolidated
        selling, general and administrative expenses decreased 4.9% to $27.1 million
        in
        the six months ended June 30, 2005 from $28.5 million during the same period
        in
        2004. The decrease was primarily due to the decrease in employees, primarily
        sales employees, as a result of the sale of the enterprise customer base
        during
        the first quarter of 2005. Under the TSA, the estimated costs to be reimbursed
        to us include administrative support services. See discussion of reimbursed
        transition expenses below.
 
 Reimbursed
        transition expenses were $2.8 million in the six ended June 30, 2005 and
        no such
        reimbursed expenses were recorded during the same period in 2004. The reimbursed
        transition expenses relate to network and administrative services in accordance
        with the TSA. Costs billed under the TSA are based upon estimated costs to
        us,
        and we anticipate that no profit will be recognized on the services performed
        under the TSA. The enterprise services are provided by the same network assets
        and maintained and operated by the same employee base as other services provided
        by us until TelePacific can transition the enterprise customer base onto
        its own
        network. As such, our common network services or expenses cannot be segregated
        based upon the services provided and therefore the estimated costs have
        primarily been billed based upon a fixed fee per type of service or transaction.
        Due to the inseparability of our network, the absence of identifiable shared
        costs, and as no network assets were sold to TelePacific, we determined the
        assets sold did not constitute discontinued operations. TelePacific’s obligation
        to pay us for circuit and usage costs during the initial 12 month transition
        period is limited to $10.5 million, and TelePacific received a $2.0 million
        credit against the total amount to be billed. We believe that the $8.5 million
        of reimbursed circuit and usage costs is adequate to cover the estimated
        network
        related costs based upon our understanding of TelePacific’s transition plan.
        However if the number or timing of customers transitioned off our network
        by
        TelePacific changes significantly from our understanding, we may incur
        additional expenses that will not be reimbursed by TelePacific.
 
 21
 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 59.3% to $7.0 million in
        the six
        months ended June 30, 2005 from $17.2 million during the same period in 2004.
        The decrease in depreciation and amortization expense was primarily due to
        recording a non-cash asset impairment charge of $54.6 million for our tangible
        assets during the fourth quarter of 2004. The impairment resulted in a new
        cost
        basis for these assets resulting in a reduction of gross property and equipment.
        As a result, future depreciation expense is expected to be less for the affected
        assets than in prior years. In addition, as part of the sale of substantially
        all of our enterprise customer base during the first quarter, we sold property
        and equipment with a net book value of approximately $3.0 million.
 
 Restructuring
        charges were $0.6 million in the six months ended June 30, 2005 as compared
        to
        $0.4 million during the same period in 2004. Restructuring charges for the
        six
        months ended June 30, 2005, related primarily related to the completion of
        the
        sale of substantially all of our enterprise customer base primarily for employee
        termination benefits and rent expense for vacated premises. We anticipate
        that
        future cash requirements associated with the separation plan will be
        approximately $0.1 million, the timing of which is contingent upon the actual
        termination date of the remaining employees. We anticipate that the majority
        of
        the employees associated with this separation plan will leave their positions
        by
        the end of 2005. The final cash payment to be recorded against this reserve
        is
        expected to occur in March 2006. However, should TelePacific exercise its
        option
        to extend the term of the TSA, we may incur additional employee termination
        benefit costs and the timing of our final cash payments under the restructuring
        plan would be extended. Restructuring charges were $0.4 million for the six
        months ended June 30, 2004. These charges related to adjustments to estimated
        costs of previously announced restructuring plans, and did not represent
        new
        restructuring activities.
 
 Consolidated
        loss from operations improved to $2.1 million in the six months ended June
        30,
        2005 from $10.5 million during the same period in 2004 primarily due to the
        factors discussed in the preceding paragraphs.
  Consolidated
        interest expense, net decreased 29.3% to $4.1 million in the six months ended
        June 30, 2005 from $5.8 million during the same period in 2004 due to the
        termination of the discount accretion on the extinguishment of the senior
        secured note. Interest
        expense, net is expected to decrease during 2005 due to the termination of
        the
        discount accretion on the extinguishment of the senior secured note.Our interest expense, net was as follows:
  **Six
                    Months Ended****June
                    30,****2005**
                
                **2004**(unaudited)
                
                (unaudited)(Dollars
                    in thousands)Interest
                    on Senior Notes
                
                $
                2,437
                
                $
                2,450Accreted
                    discount on Senior Secured Note
                
                
                1,262
                
                
                2,578Amortization
                    of deferred financing costs
                
                
                205
                
                
                339Other
                    interest expense
                
                
                519
                
                
                547Less
                    interest income
                
                
                (316
                )
                
                (135
                )Interest
                    expense, net
                
                $
                4,107
                
                $
                5,779
 
 During
          the six months ended June 30, 2005, w e
          recorded a gain of $23.9 million from the sale of substantially all of
          our
          enterprise customer base that occurred during the first quarter of
          2005.
 
 On
          March
          11, 2005, pursuant to the terms of a Payoff Letter, by and between
          us and
          Deutsche Bank, we utilized $26.9 million of the proceeds from the sale
          of
          substantially all of our enterprise customer base to TelePacific, as well
          as
          $13.8 million cash on hand, to prepay in full the Senior Secured Note (including
          all outstanding principal and accrued and unpaid interest). In addition,
          pursuant to the terms of the Payoff Letter, we retired the related warrants
          to
          acquire up to 26,666,667 shares of our common stock in connection with
          the
          Senior Secured Note, which decreased additional paid in capital by approximately
          $13.5 million. The prepayment of the Senior Secured Note and the retirement
          of
          the related warrants resulted in a $2.1 million loss on the extinguishment
          of
          debt.
  For
          the
          six months ended June 30, 2005 and 2004, our effective income tax rate
          was 3.4%
          and 0%, respectively.
  Consolidated
          net income was $15.0 million in the six months ended June 30, 2005 compared
          to a
          net loss of $16.3 million during the same period in 2004 primarily due
          to a
          $24.0 million gain related to the sale of the enterprise customer base
          in
          addition to the items noted in the preceding paragraphs.
 **Quarterly
          Operating and Statistical Data:**
  The
          following tables
          summarize the unaudited results of operations as a percentage of revenues
          for
          the three and six months ended June 30, 2005 and 2004. The following data
          should
          be read in conjunction with the unaudited condensed consolidated financial
          statements and notes thereto included elsewhere in this
          report:
 22
  **Three
                      Months Ended**
                  
                  **Six
                      Months Ended****June
                      30,**
                  
                  **June
                      30,****2005**
                  
                  **2004**
                  
                  **2005**
                  
                  **2004**(unaudited)
                  
                  (unaudited)
                  
                  (unaudited)
                  
                  (unaudited)**Consolidated
                      Statements of Operations****Data:**Revenue
                  
                  
                  100.0
                  %
                  
                  100.0
                  %
                  
                  100.0
                  %
                  
                  100.0
                  %Network
                      expenses (exclusive of depreciation shown separately
                      below)
                  
                  
                  44.4
                  %
                  
                  40.0
                  %
                  
                  40.5
                  %
                  
                  37.8
                  %Selling,
                      general and administrative expenses
                  
                  
                  56.9
                  %
                  
                  51.4
                  %
                  
                  54.2
                  %
                  
                  49.8
                  %Reimbursed
                      transition expenses
                  
                  
                  (13.0
                  )%
                  
                  -
                  %
                  
                  (5.7
                  )%
                  
                  -
                  %Depreciation
                      and amortization expenses
                  
                  
                  14.8
                  %
                  
                  29.2
                  %
                  
                  14.0
                  %
                  
                  30.1
                  %Loss
                      from operations
                  
                  
                  (4.1
                  )%
                  
                  (22.0
                  )%
                  
                  (4.3
                  )%
                  
                  (18.3
                  )%Net
                      income (loss)
                  
                  
                  (10.6
                  )%
                  
                  (32.7
                  )%
                  
                  30.0
                  %
                  
                  (28.4
                  )%
 The
          following table sets
          forth unaudited statistical data for each of the specified quarters of
          2005 and
          2004. The operating and statistical data for any quarter are not necessarily
          indicative of results for any future period.
 **Three
                    Months Ended****2005**
                
                **2004****June
                    30,**
                
                **March
                    31,**
                
                **Dec.
                    31,**
                
                **Sept.
                    30,**
                
                **June
                    30,**(unaudited)
                
                
                (unaudited)
                
                
                (unaudited)
                
                
                (unaudited)
                
                
                (unaudited)Ports
                    equipped
                
                
                1,052,400
                
                
                1,052,400
                
                
                1,052,400
                
                
                998,400
                
                
                998,400Quarterly
                    minutes of useswitched
                    (in billions)
                
                
                12.2
                
                
                12.2
                
                
                11.9
                
                
                11.3
                
                
                10.2Capital
                    additions(in
                    thousands)
                
                $
                1,575
                
                $
                1,600
                
                $
                1,205
                
                $
                5,201
                
                $
                3,488Employees
                
                
                248
                
                
                250
                
                
                373
                
                
                392
                
                
                398
 **Liquidity
          and Capital Resources:**
  *Sources
          and use of cash.* At
          June
          30, 2005 cash and short term investments decreased $17.3 million to $25.5
          million from $42.8 million at December 31, 2004. The decrease was primarily
          due
          to the prepayment of the $40.0 million Senior Secured Note (including all
          outstanding principal and accrued and unpaid interest) with cash on hand
          and
          proceeds of $26.9 million from the sale of substantially all of the enterprise
          customer base to TelePacific.
 
 Net
          cash
          provided by operating activities remained constant at $2.5 million for
          the six
          months ended June 30, 2005 and 2004.
 
 Net
          cash
          provided by investing activities was $20.8 million for the six months ended
          June
          30, 2005 compared to net cash used in investing activities of $16.4 million
          during the same period in 2004. The net cash provided by investing activities
          during 2005 was primarily due to proceeds of $26.9 million for the sale
          of
          substantially all of our enterprise customer base to TelePacific during
          the
          first quarter of 2005. The net cash used in investing activities during
          2004 was
          primarily due to purchases of short-term investments.
 
 Net
          cash
          used in financing activities was $40.3 million in the six months ended
          June 30,
          2005 compared to $0.1 million for the same period in 2004. The net cash
          used in
          financing activities during 2005 was primarily due to the prepayment of
          the
          Senior Secured Note with proceeds from the sale of the enterprise customer
          base
          of $26.9 million and cash on hand of $13.8 million during the first quarter
          of
          2005.
  *Cash
          requirements.* The
          telecommunications service business is capital intensive. Our operations
          have
          required the expenditure of substantial amounts of cash for the design,
          acquisition, construction and implementation of our network. We continue
          to seek
          further ways to enhance our infrastructure in 2005 and beyond. As a result
          of
          various capital projects and our business plan, as currently contemplated,
          we
          currently anticipate making capital expenditures, excluding acquisitions,
          of
          approximately $7.5 million for the next 12 months. However, if management
          deems
          it to be prudent, capital expenditures may increase an additional $5.0
          million
          over the next 12 months, the actual cost of capital expenditures will depend
          on
          a variety of factors. Accordingly, our actual capital requirements may
          exceed,
          or fall below, the amount described above.
 
 23
 Under
          the
          TSA with TelePacific we are obligated, 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 and administrative support
          services,
          which are provided exclusively to TelePacific. TelePacific’s obligation to pay
          us for circuit and usage costs during the initial 12 month transition period
          is
          limited to $10.5 million, and TelePacific received a $2.0 million credit
          against
          the total amount to be billed. We believe that the $8.5 million of reimbursed
          circuit and usage costs is adequate to cover the estimated network related
          costs
          based upon our understanding of TelePacific’s transition plan. However if the
          number or timing of customers transitioned off our network by TelePacific
          changes significantly from our understanding, we may incur additional expenses
          that will not be reimbursed by TelePacific. The TSA is for a one-year period
          subject to extension for two additional three-month periods.


We
          anticipate that future cash requirements associated with the separation
          plan due
          to the sale of substantially all of our enterprise customers will be
          approximately $0.1 million, the timing of which is contingent upon the
          actual
          termination date of the remaining employees. We anticipate that the majority
          of
          the employees associated with this separation plan will leave their positions
          by
          the end of 2005. The final cash payment to be recorded against this reserve
          is
          expected to occur in March 2006. However, should TelePacific exercise its
          option
          to extend the term of the TSA, we may incur additional employee termination
          benefit costs and the timing of our final cash payments under the restructuring
          plan would be extended.
 
 During
          the normal course of business, we may enter into agreements with some suppliers,
          which allow these suppliers to have equipment or inventory available for
          purchase based upon criteria as defined by us. As of June 30, 2005, we
          did not
          have any material future purchase commitments to purchase equipment from
          any of
          our vendors.
 
 *Debt
          outstanding.* At June
          30, 2005 and December 31, 2004 long-term debt and capital lease obligations
          consist of the following:


**June
                  30,**
              
              **December
                  31,****2005**
              
              **2004**(unaudited)
              
              (unaudited)(Dollars
                  in thousands)Senior
                  Notes
              
              $
              36,102
              
              $
              36,102Senior
                  Secured Note
              
              
              -
              
              
              24,500Capital
                  lease obligations
              
              
              877
              
              
              1,285Notes
                  payable
              
              
              6,690
              
              
              6,040Less
                  current portion of notes payable and capital leases
              
              
              (3,396
              )
              
              (2,889
              )$
              40,273
              
              $
              65,038


The
        Senior Notes, of
        which there is $36.1 million in principal amount outstanding at June 30,
        2005,
        bear interest at 13.5% per annum payable in semiannual installments, with
        all
        principal due in full on February 1, 2009.
  The
        Senior Secured Note,
        which was initially issued in the principal amount of $40.0 million, accrued
        interest at a rate of LIBOR plus 0.5%, and was to mature December 2006. On
        March
        11, 2005, pursuant to the terms of the Payoff Letter by and between us and
        Deutsche Bank, we utilized $26.9 million of the proceeds from the sale of
        substantially all of our enterprise customer base to TelePacific as well
        as
        $13.8 million cash on hand, to prepay in full the Senior Secured Note (including
        all outstanding principal and accrued and unpaid interest). In addition,
        pursuant to the terms of the Payoff Letter, we retired the related warrants
        to
        acquire up to 26,666,667 shares of our common stock in connection with the
        Senior Secured Note, which decreased additional paid in capital by approximately
        $13.5 million. The prepayment of the Senior Secured Note and the retirement
        of
        the related warrants resulted in a $2.1 million loss on the extinguishment
        of
        debt.
 
 24
 In
        May
        2005, we entered into a secured borrowing arrangement with Merrill Lynch
        Capital
        pursuant to which we borrowed $1.9 million at a fixed rate of 8.6%. The
        principal and accrued interest shall be payable in 36 consecutive monthly
        installments commencing July 1, 2005. We have the option to prepay the
        outstanding balance after 18 months but prior to 24 months subject to a premium
        of 3%, and if paid thereafter, accompanied by a premium of 1%. The borrowing
        arrangement is secured by telecommunications switching and computer equipment.
        As of June 30, 2005, the principal balance of $1.9 million is included under
        Notes payable in the above table.
 
 *Future
        uses and sources of cash.* Our
        principal sources of funds for 2005 are anticipated to be current cash and
        short-term investment balances and cash flows from operating activities.
        We
        believe that these funds will provide us with sufficient liquidity and capital
        resources to fund our business plan for the next 12 months. No assurance
        can be
        given, however, that this will be the case. We may also seek to obtain leases
        or
        additional lines of credit in 2005. There can be no assurance that additional
        lines of credit or leases will be made available to us on terms that we find
        acceptable. As currently contemplated, we expect to fund, among other
        things:
 
 •  interest
        payments of approximately $5 million on Senior Notes and other
        notes;
 
 •  anticipated
        capital expenditures ranging from approximately $7.5 million to $12.5 million;
        and
 
 •  capital
        lease payments (including interest) of approximately $0.5 million.
 
 The
        foregoing statements do not take into account (i) acquisitions, which, if
        made,
        are expected to be funded through a combination of cash and equity (ii) the
        repurchase of any of our remaining outstanding Senior Notes or (iii) any
        potential payments made in respect of adjustments which may arise from our
        ongoing tax audits. Depending upon our rate of growth and profitability,
        among
        other things, we may require additional equity or debt financing to meet
        our
        working capital requirements or capital needs. There can be no assurance
        that
        additional financing will be available when required, or, if available, will
        be
        on terms satisfactory to us. Key factors which could affect our liquidity
        include:
 
 •  future
        demand of our services;
 
 •  financial
        stability of our customers;
 
 •  outcomes
        of regulatory proceedings involving intercarrier compensation;
 
 •  capital
        expenditures;
 
 •  our
        debt
        payments;
 
 •  capital
        lease repayments;
 
 •  loss
        of
        enterprise revenues due to the sale of our enterprise customer
        base;
 
 •  interest
        expense on debt; and
 
 •  development
        and market rollout of new service offerings.
  **ITEM
        3.**  **QUANTITATIVE
        AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS**
  The
        SEC's
        rule related to market risk disclosure requires that we describe and quantify
        our potential losses from market risk sensitive instruments attributable
        to
        reasonably possible market changes. Market risk sensitive instruments include
        all financial or commodity instruments and other financial instruments that
        are
        sensitive to future changes in interest rates, currency exchange rates,
        commodity prices or other market factors. We are not exposed to market risks
        from changes in foreign currency exchange rates or commodity prices. We do
        not
        hold derivative financial instruments nor do we hold securities for trading
        or
        speculative purposes. Since the payoff of our Senior Secured Note on March
        11,
        2005, our remaining debt carries fixed interest rates. Therefore, we are
        not
        exposed to changes in interest rates associated with our debt as of June
        30,
        2005.
 
 25
 We
        are
        exposed to changes in interest rates on our investments in cash equivalents
        and
        short-term investments. Approximately half of our investments are in cash
        equivalents with original maturities of less than three months and the other
        half are in short-term investments with maturities of less than 12 months.
        A
        hypothetical 1% decrease in short-term interest rates would reduce the
        annualized pretax interest income on our $25.5 million cash, cash equivalents
        and short-term investments at June 30, 2005 by approximately $0.3
        million.
 
 **ITEM
        4.**  **CONTROLS
        AND PROCEDURES**
 
 As
        of the
        end of the period covered by this Report, the Company carried out an evaluation,
        under the supervision and with the participation of the Company's management,
        including the Chief Executive Officer and Chief Financial Officer, of the
        effectiveness of the Company's “disclosure controls and procedures” (as defined
        in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the
        “Exchange Act”), in accordance with Rule 13a-15 of the Exchange Act. Based on
        that evaluation, the Chief Executive Officer and Chief Financial Officer,
        together with the other members of management participating in the evaluation,
        concluded that the Company's disclosure controls and procedures are effective
        at
        the reasonable assurance level.
 
 There
        have been no changes in the Company's internal control over financial reporting
        that occurred during the quarter ended June 30, 2005 that have materially
        affected, or are reasonably likely to materially affect, the Company’s internal
        control over financial reporting. It should be recognized that the design
        of any
        system of controls is based upon certain assumptions about the scope of the
        tasks to be performed and the environment in which the tasks are to be
        performed. As such, the Company's internal controls provide the Company with
        a
        reasonable assurance of achieving their intended effect.
  **PART
        II**
 **OTHER
        INFORMATION**
 
 **ITEM
        1.** **Legal
        Proceedings**
  See
        Note 8 to
        the Unaudited Condensed Consolidated Financial Statements included elsewhere
        in
        this Form 10-Q and “Management's Discussion and Analysis of Financial Condition
        and Results of Operations—Introduction” for a description of certain legal
        proceedings involving the Company.
 
 26
 **ITEM
        4. Submission of Matters to a Vote of Security Holders**
  The
        Company’s
        Annual Meeting of Shareholders was held on June 21, 2005 and considered the
        following proposals:
 
 The
        first
        proposal was to elect eight directors to hold office for a term of one year.
        Votes cast were as follows:
   **Votes
                    cast (thousands)**
                
                **Percentage
                    of total votes cast**Wallace
                    W. GriffinFor
                
                
                31,432
                
                
                97.9
                %Withheld
                
                
                669
                
                
                2.132,101
                
                
                100.0
                %Henry
                    R. CarabelliFor
                
                
                31,423
                
                
                97.9
                %Withheld
                
                
                678
                
                
                2.132,101
                
                
                100.0
                %David
                    G. ChandlerFor
                
                
                31,463
                
                
                98.0
                %Withheld
                
                
                638
                
                
                2.032,101
                
                
                100.0
                %Jerry
                    L. JohnsonFor
                
                
                31,308
                
                
                97.5
                %Withheld
                
                
                793
                
                
                2.532,101
                
                
                100.0
                %John
                    K. La RueFor
                
                
                31,287
                
                
                97.5
                %Withheld
                
                
                814
                
                
                2.532,101
                
                
                100.0
                %Samuel
                    A. PlumFor
                
                
                31,455
                
                
                98.0
                %Withheld
                
                
                646
                
                
                2.032,101
                
                
                100.0
                %Thomas
                    A. MunroFor
                
                
                31,298
                
                
                97.5
                %Withheld
                
                
                803
                
                
                2.532,101
                
                
                100.0
                %Timothy
                    A. SamplesFor
                
                
                31,462
                
                
                98.0
                %Withheld
                
                
                639
                
                
                2.032,101
                
                
                100.0
                %
   27
 The
            second proposal was the approval of an amendment to the Company’s bylaws
            authorizing the Company’s Board of Directors to (a) establish the size of the
            board and (b) divide the board members into either two or three classes
            if and
            when the Company is qualified as a listed company under California law.
            This
            proposal did not pass, as it required a majority of the issued and outstanding
            shares voting in favor of the proposal. Broker non-votes counted as votes
            against the proposal. Votes cast were as follows:
  **Non-Vote
                        (thousands)**
                    
                    
                    **Votes
                        cast (thousands)**
                    
                    
                    **Percentage
                        of total votes cast**For
                    
                    
                    -
                    
                    
                    12,907
                    
                    
                    40.2
                    %Against
                    
                    
                    -
                    
                    
                    2,164
                    
                    
                    6.7Abstain
                    
                    
                    -
                    
                    
                    53
                    
                    
                    0.2Broker
                    
                    
                    16,977
                    
                    
                    -
                    
                    
                    52.916,977
                    
                    
                    15,124
                    
                    
                    100.0
                    %




**ITEM
      5. Other Information**


None.





**ITEM
      6.** **Exhibits**





Exhibits





10.72
            Dial
                Access Services Agreement between the Company and Qwest Communications
                Corporation dated January 31, 2002 (certain confidential portions
                have
                been omitted and filed separately with the Securities and Exchange
                Commission pursuant to a request for confidential
                treatment).




10.73
            Amendment
                No. 1 to the Dial Access Services Agreement between the Company and
                Qwest
                Communications Corporation dated June 28, 2002 (certain confidential
                portions have been omitted and filed separately with the Securities
                and
                Exchange Commission pursuant to a request for confidential treatment).




10.74
            Amendment
                No. 2 to the Dial Access Services Agreement between the Company and
                Qwest
                Communications Corporation dated January 1, 2003 (certain confidential
                portions have been omitted and filed separately with the Securities
                and
                Exchange Commission pursuant to a request for confidential treatment).




10.75
            Amendment
                No. 3 to the Dial Access Services Agreement between the Company and
                Qwest
                Communications Corporation dated May 21, 2003 (certain confidential
                portions have been omitted and filed separately with the Securities
                and
                Exchange Commission pursuant to a request for confidential treatment).




10.76
            Amendment
                No. 4 to the Dial Access Services Agreement between the Company and
                Qwest
                Communications
                Corporation dated July 18,
                2004.





10.77
            Amendment
                No. 5 to the Dial Access Services Agreement between the Company and
                Qwest
                Communications Corporation dated May 17, 2005 (certain confidential
                portions have been omitted and filed separately with the Securities
                and
                Exchange Commission pursuant to a request for confidential
                treatment).




10.78
            Term
                loan and security agreement, dated May 27, 2005, between the Company
                and
                MerrillLynch
                Capital.




10.79
            Collateral
                installment note, dated May 27, 2005,
                between the Company and Merrill Lynch
                Capital.




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 and 3 are not applicable and have been omitted.**


28


**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 August 15, 2005.
 
 
 
 
 PAC-WEST
        TELECOMM, INC.
 
 /s/
        Henry
        R. Carabelli
 _____________________________
 Henry
        R.
        Carabelli
 President
        and Chief Executive Officer
 
 
 
 
 
 
 
 
 /s/
        H.
        Ravi Brar
 ______________________________
 H.
        Ravi
        Brar
 Chief
        Financial Officer and Vice President of Human Resources




29