**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 Washington,
        D.C. 20549
 **_____________________**
 **FORM
        10-K**
 
 ANNUAL
        REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
        1934
 For
        the
        fiscal year ended December 31, 2005
 Commission
        File No. 000-26728
 
 **TALK
        AMERICA HOLDINGS, INC.**
 (Exact
        name of registrant as specified in its charter)
 
 **Delaware**
              **23-2827736**(State
                  or other jurisdiction of
              (I.R.S.
                  Employerincorporation
                  or organization)
              Identification
                  Number)**6805
                  Route 202**
              **18938****New
                  Hope, PA**
              (zip
                  code)(Address
                  of principal executive offices)
 **(215)
        862-1500**
 (Registrant’s
        telephone number, including area code)
 
 **Securities
        registered pursuant to Section 12(b) of the Act:**
 **Title
                  of each class**
              **Name
                  of each exchange on which registered**None
              Not
                  applicable
 
 **Securities
        registered pursuant to Section 12(g) of the Act:**
 **Common
        Stock, Par Value $.01 Per Share**
 **Rights
        to Purchase Series A Junior Participating Preferred Stock**
 (Title
        of class)
 
 
 Indicate
        by check mark if the registrant is a well-known seasoned issuer, as defined
        in
        Rule 405 of the Securities Act.
 Yes
        [ ]
        No [ X]
 
 Indicate
        by check mark if the registrant is not required to file reports pursuant
        to
        section 13 or Section 15(d) of the Act.
 Yes
        [ ]
        No [ X]
 
 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 if disclosure of delinquent filers pursuant to Item 405 of
        Regulation S-K is not contained herein, and will not be contained, to the
        best
        of registrant's knowledge, in definitive proxy or information statements
        incorporated by reference in Part III of this Form 10-K or any amendment
        of this
        Form 10-K. [X]
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange
        Act.
 
 Large
        accelerated filer [ ]   Accelerated
        filer [ X ]   Non-accelerated
        filer [ ]
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Act).
 Yes
        [ ]
        No [ X]
 
 As
        of
        June 30, 2005, the aggregate market value of the voting stock held by
        non-affiliates of the registrant, based on the average of the high and low
        prices of the common stock on June 30, 2005 of $10.04 per share as reported
        on
        the Nasdaq National Market, was approximately $277,788,698 (calculated by
        excluding solely for purposes of this form outstanding shares owned by directors
        and executive officers).
 
 As
        of
        March 1, 2006, the registrant had issued and outstanding 30,396,192 shares
        of common stock, par value $.01 per share.
  **DOCUMENTS
        INCORPORATED BY REFERENCE**
 
 None.
 
 **ITEMS
        OMITTED PURSUANT TO RULE 12b-25**
 
 Item
        6,
        Item 7, Item 8, Item 9A, Item 15 - Financial Statement Schedules and Exhibits
        23, 31 and 32.
 
  **TALK
        AMERICA HOLDINGS, INC. AND SUBSIDIARIES**
 
 **INDEX
        TO FORM 10-K**
 **FOR
        THE YEAR ENDED DECEMBER 31, 2005**
 
 
 **ITEM**
                **NO.**
              **PAGE**
                **NO.****PART
                  I**1.    
                  Business.
              21A. 
                  Risk Factors
              331B.  Unresolved
                  Staff Comments
              412.     Properties
              423.  
                    Legal Proceedings
              424.    
                  Submission of Matters to a Vote of Security Holders
              42**PART
                  II**5.   
                  Market for Registrant's Common Equity, Related Stockholder Matters
                  and
                  Issuer Purchases
                of Equity Securities
              449.    
                  Changes in and Disagreements with Accountants on Accounting and
                  Financial
                  Disclosure
              449B.  Other
                  Information
              44**PART III**
              45**PART
                  IV**15.   Exhibits
              45
 
 
 Unless
        the context otherwise requires, references to "us," "we," and "our" or to
        "Talk
        America" refer to Talk America Holdings, Inc. and its subsidiaries.
 1
  **PART
        I**
 
 **Cautionary
        Note Concerning Forward-Looking Statements**
  Certain
        of
        the statements contained in this Form 10-K Report may be considered
        "forward-looking statements" for purposes of the securities laws. From time
        to
        time, oral or written forward-looking statements may also be included in
        other
        materials released to the public. These forward-looking statements are intended
        to provide our management’s current expectations or plans for our future
        operating and financial performance, based on our current expectations and
        assumptions currently believed to be valid. For these statements, we claim
        protection of the safe harbor for forward-looking statements provided by
        the
        Private Securities Litigation Reform Act of 1995. These forward-looking
        statements can be identified by the use of forward-looking words or phrases,
        including, but not limited to, "believes," "estimates," "expects," "expected,"
        "anticipates," "anticipated," "plans," "strategy," "target," "prospects"
        and
        other words of similar meaning in connection with a discussion of future
        operating or financial performance. Although we believe that the expectations
        reflected in such forward-looking statements are reasonable, there can be
        no
        assurance that such expectations will prove to have been correct.
  All
        forward-looking statements involve risks and uncertainties that may cause
        our
        actual results to differ materially from those expressed or implied in the
        forward-looking statements. This Form 10-K Report includes important information
        as to risk factors in the "Risk Factors" section and in the "Business" section
        under the headings “Business Strategies,” "Business Operations," "Competition"
        and "Regulation" and in "Management’s Discussion and Analysis of Financial
        Condition and Results of Operations." In addition to those factors discussed
        in
        this Form 10-K Report, you should see our other reports on Forms 10-K, 10-Q
        and
        8-K subsequently filed with the Securities and Exchange Commission from time
        to
        time for information identifying factors that may cause actual results to
        differ
        materially from those expressed or implied in the forward-looking
        statements.
 
 
 **ITEM
        1. BUSINESS.**
 
 **Overview**
 
 Talk
        America Holdings, Inc., through its subsidiaries, is a leading competitive
        communications services provider offering integrated voice and data services,
        including local, long distance, enhanced voice features and dedicated Internet
        access services, to commercial (primarily small and medium-sized business)
        and
        residential customers. We are focused on markets where we have our own
        networking assets. Today, we are collocated in 313 end offices in Michigan,
        Ohio, Kentucky, Tennessee, North Carolina, Louisiana, Mississippi, Alabama,
        Florida and Georgia. As of December 31, 2005, including the lines of Network
        Telephone Corporation, which we acquired on January 3, 2006, we had
        approximately 745,000 local voice and data equivalent lines, of which
        approximately 466,000 were on our own network. The balance of our customers
        are “off-net”
        (that is, our services over another carrier’s networking facilities) and
        represent a large, profitable base of bundled phone service customers that
        we
        service using the wholesale operating platforms of the incumbent local exchange
        companies.
 
 We
        expanded into the commercial business market with the acquisition in July
        2005
        of LDMI Telecommunications, Inc. (“LDMI”), a privately held facilities-based
        competitive local exchange provider serving business and residential customers
        primarily in Michigan and Ohio. On January 3, 2006, we further significantly
        expanded our network and commercial business through our acquisition of Network
        Telephone Corporation (“NTC”), a privately held facilities based competitive
        local exchange provider serving commercial customers in the Southeast. During
        2005, we also completed the construction of our network in Michigan, integrated
        this network with LDMI’s network assets and migrated over 200,000 lines from the
        incumbent local exchange company wholesale platform to our network.
 
 2
 Our
        business strategy is to continue to expand our network and grow our “on-net”
(that is, our services over our own networking facilities) customer and revenue
        base through (i) organic growth in our core markets, serving both commercial
        and
        residential customers; (ii) additional acquisitions that either supplement
        our
        existing markets or offer expansion into new markets; and (iii) enhancement
        of
        our product portfolio. Growth in our business, both commercial and residential,
        on our network will permit us to leverage our investment in our network
        facilities due to the complementary telecommunication traffic or usage patterns
        of these customer bases.
 
 We
        have
        developed our own proprietary integrated order processing, provisioning,
        leads
        management, billing, payment, collection, customer service and information
        systems that enable us to provide high-quality service to our customers.
        We have
        automated the business processes required to migrate our customers off the
        incumbent local exchange company platform to our local network. To promote
        our
        services and to generate new sales, we use both our internal and partner
        sales
        forces and we use our own sales and customer service centers. We focus on
        providing consumers value through competitively priced plans designed to
        fit
        their particular telecommunication needs, broad feature selections, consolidated
        billing and customer service.
 
 Talk
        America Inc. (formerly, Talk.com Holding Corp. and Tel-Save, Inc.), our
        predecessor and now our principal operating subsidiary, was incorporated
        in
        Pennsylvania in May 1989 as a provider of long distance phone service. We
        were
        incorporated in June 1995. In 2000, we decided to expand beyond our historical
        long distance service offerings and utilize the unbundled network element
        platform to enter the large local telecommunications market and diversify
        our
        product portfolio through the bundling of local service with our core long
        distance service offerings. The address of our principal executive offices
        is
        6805 Route 202, New Hope, Pennsylvania 18938 and our telephone number is
        (215)
        862-1500. **** Our
        web
        address is **** www.talkamerica.com .
        We make
        available free of charge on our website, www.talkamerica.com, our annual
        report
        on Form 10-K, our quarterly reports on Form 10-Q, our current reports on
        Form
        8-K, and amendments to our reports filed or furnished pursuant to Section
        13(a)
        or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably
        practicable after we file such material with, or furnish it to, the Securities
        and Exchange Commission.
 
 3
 **OUR
        SERVICES AND PRODUCTS**
 
 We
        provide our commercial and residential customers with a variety of bundled
        phone
        service packages, stand-alone long distance services, data and Internet access
        products and a broad range of business communication services.
 
 **Commercial
        Services and Products**
 
 We
        provide our business customers a wide range of voice, data and advanced services
        designed to meet their needs. Our SmarT product, which utilizes a single
        connection to deliver both integrated voice service and high-speed data service,
        is our primary commercial product for new sales; our primary competitor,
        AT&T, does not offer an equivalent service. In 2006, we will continue to
        develop new commercial products to expand our portfolio, while introducing
        existing products and services into markets that were previously not serviced.
 
 ***Voice
        Services.*** Our
        commercial voice service offerings allow our business customers to build
        the
        calling plan that best suits their organization's needs. We offer basic dial
        tone service and vertical features, such as call forwarding, line hunting
        and
        voicemail. We also offer domestic and international long distance services,
        both
        bundled with local voice services and on a stand-alone basis. These voice
        services are available with unlimited local and long distance calls or calls
        billed on a per-minute basis, depending upon calling patterns and the needs
        of
        the business.
 
 ***Data
        Services.*** Our
        commercial data service offerings are designed to provide our customers with
        a
        full range of data services. We offer high-speed data transmission services
        with
        data connection speeds as high as 6.0 megabytes per second, or Mbps. We also
        offer high-speed data transmission services that are integrated with a voice
        product and delivered simultaneously over the same connection. In addition, we
        are
        one of only four companies in the United States certified as an ANX (Advanced
        Network Exchange) Service Provider, which allows us to supply data services
        to
        certain types of enterprises, such as Ford, Dow Chemical, General Motors,
        Delphi, and Visteon.
 
 ***Advanced
        Services.*** We offer
        business customers several advanced services to assist them with their data
        and
        business needs, including: (i) data hosting services (shared, dedicated and
        collocated), (ii) managed security services (firewall, virtual private
        networking, anti-virus/SPAM, vulnerability assessment and compliance reporting),
        and (iii) professional services management (technical project management,
        wide
        and local area network, or WAN/LAN, design and development, technical assessment
        and maintenance).
 
 **Residential
        Services and Products**
 
 We
        provide residential customers with a wide-range of voice calling plans and,
        beginning with our deployment of networking assets in Michigan in 2005, data
        services.
 
 ***Voice
        Services.*** **** We offer
        our residential customers the flexibility to create their own phone service
        package, including local phone service, long distance phone service or a
        combination thereof. We offer several different local and long distance calling
        plans tailored to the customer’s calling needs. Our local phone service
        customers receive free “member-to-member” calling and may add additional
        features and services to their service, including enhanced domestic and
        international calling plans, caller identification and voicemail.
 
 ***Data
        Services.***  ****** Customers
        who receive our local phone service may also purchase data services from
        us. We
        offer both digital subscriber line services (DSL) and dial-up access services.
        Our DSL service, which utilizes ADSL2+ technology, is available to customers
        on
        our local network whose wiring permits it. This service provides access speeds
        of up to 4.0 Mbps download speed and enables us to offer download speeds
        of up
        to 8.0 Mbps. We offer a standard and accelerated dial-up access service to
        all
        of our phone service customers. The accelerated dial-up services utilize
        compression, caching and other technologies that reduce the time for certain
        web
        pages to download to users' computers when compared to standard dial-up access
        services.
 
 
 4
  **NETWORK
        OPERATIONS**
 
 **How
        We Provide Local Voice and Data Services**
 
 ***Overview***
 
 We
        offer
        telecommunications services to commercial (small and medium size businesses)
        and
        residential customers in our markets through either the use of our own network
        facilities and the unbundled network element loops or T-1 circuits of the
        incumbent local exchange carriers, or, through wholesale agreements with
        carriers.
 
 In
        2003,
        we began deploying networking assets in Michigan. At
        the
        end of 2004, we had approximately 25,000 local voice equivalent lines on
        our own
        network in 8 end offices in Michigan. In July
        2005, in an effort to both expand our networking footprint and accelerate
        our
        market entry into the business communication services segment, we acquired
        LDMI, a
        facilities-based communications provider in Michigan
        and Ohio. The deployment of our own networking assets, along with the
        acquisition of LDMI, enabled us to migrate more than 200,000 local voice
        equivalent lines to our own network in 2005 and end the year with 341,000
        local
        voice and data equivalent lines on our own network in 151 end offices in
        Michigan and Ohio. In January 2006, we acquired NTC, a facilities-based
        communications provider in the Southeast United States. The acquisition of
        NTC added 156 more end offices in 8 states throughout the Southeast and
        125,000 local voice and data equivalent lines on our network.  Subsequent
        to the end of the year we have opened 6 additional end offices in the Southeast
        United States.  Prior to construction of our network, we delivered our
        services exclusively through the use of the unbundled network element platforms
        of the incumbent local exchange companies. The following map details our
        local
        networking assets as of March 1, 2006:
   
    As
        a
        result of these acquisitions, we have expanded into the commercial market
        and
        now provide a full suite of voice and data offerings, including specialized
        services such as hosted applications and security services in these areas
        to
        small and medium-sized business customers. In addition to adding significantly
        to our commercial services capabilities, these transactions provide residential
        growth opportunities in our networking markets while allowing us to realize
        capital expenditure savings and operating synergies.
 
 5
 ***Composition
        of Our Network***
 
 Our
        local
        network is comprised of equipment and facilities that are either owned or
        leased
        by us and certain telecommunication services for which we contract with a
        variety of other carriers. We maintain certain pieces of equipment that are
        collocated in end office sites owned or leased by AT&T (formerly SBC), the
        incumbent local exchange company in Michigan and Ohio, and by BellSouth,
        the
        incumbent local exchange company throughout the Southeast United States.
        The
        incumbent local exchange companies provide us with access to these end offices
        through both our interconnection agreements with the incumbent local exchange
        company or through state and/or federal regulations that require the incumbent
        local exchange companies to provide us access to certain elements. Such access,
        however, may be conditioned upon our paying charges for upgrading the power
        supply or physical layout of the end office.
 
 In
        order
        to provide a customer with voice and data service on our local network delivered
        via a copper loop, we must first submit an order with the incumbent local
        exchange company to move, or “hot cut,” the customer’s existing copper loop. The
        loop is the copper telephone line that connects the customer’s premises to the
        incumbent local exchange company’s switch. We hot cut transfer the customer’s
        loop from the incumbent local exchange company’s switch to our loop carrier
        equipment in the end office at the incumbent local exchange company’s end office
        assigned to that customer.
 
 Upon
        confirmation that the customer line has been switched to either our digital
        loop
        carrier and digital subscriber line access multiplexer equipment or our
        broadband loop carrier equipment, we update numerous external databases,
        including E911 databases, which, as the customer’s local phone provider, we are
        required to timely and accurately update.
 
 Once
        the
        loop is cut over to our network, we switch local voice traffic between the
        customer’s premises and the public switched telephone network using either
        circuit switch-based or packet switch-based technology, depending upon the
        location of the customer and how our network is deployed in that geographic
        area.
 
 Like
        many
        networks today, most of our network carries local voice traffic via a circuit
        switch-based network. Circuit switch-based systems establish a dedicated
        channel
        for each telecommunication signal (such as a telephone call for voice or
        fax),
        maintain the channel for the duration of the call, and disconnect the channel
        at
        the conclusion of the call. The balance of our network utilizes packet
        switch-based systems, a newer technology that we began introducing in 2005.
        Under packet switch-based systems, the information to be transmitted is
        formatted into a series of shorter digital messages called “packets”. In
        addition to supporting data, packet switch-based systems have been used for
        long
        haul voice traffic and is now being deployed to support local phone service.
        Each packet consists of a portion of the complete message plus the addressing
        information to identify the destination and return address. A key feature
        that
        distinguishes Internet architecture from the public telephone network is
        that on
        the packet-switched Internet, a single dedicated channel between
        telecommunication points is not required. Packet switch-based systems may
        offer
        several advantages over circuit switch-based systems, particularly the ability
        to commingle packets from several telecommunications sources together
        simultaneously onto a single channel. For most telecommunications, particularly
        those with bursts of information followed by periods of “silence,” the ability
        to commingle packets provides for superior network utilization and efficiency,
        resulting in more information being transmitted through a given
        telecommunication channel. We believe that, in the future, most new networks
        will be based on packet switching to take advantage of transport efficiencies,
        more open standards for interoperability, lower capital costs and easier
        deployment and maintenance.
 
 6
 In
        Grand
        Rapids, Michigan and Atlanta, Georgia, we have deployed a newly developed
        soft-switch technology. The soft-switch is a distributed computer system
        that
        performs the same functions as a circuit switch. It can support both circuit
        and
        packet-switched communications. We use this technology to complement and
        relieve
        traffic from our Lucent 5ESS-2000 circuit switches. Soft-switch technology
        is
        currently being used by very few residential phone providers and, to our
        knowledge, has not been used on this scale. We expect however, that, if
        successful, the soft-switched technology will enable us to enter into more
        markets because of the lower cost of the soft-switch technology compared
        to the
        cost of traditional circuit switch technology.
 
 We
        continue to actively explore other new networking technology opportunities
        with
        a variety of vendors in order to decrease our cost of delivering service,
        reduce
        our reliance upon the incumbent local exchange companies and provide local
        telephone services through new, innovative methods of delivery.
 
 ***Internet
        Access Services***
 
 We
        offer
        SDSL, ADSL2+, and T1 Internet access to customers who are on our local network.
        These services are provided through either broadband loop carrier equipment
        or
        digital loop carrier equipment and digital subscriber line (or DSL) access
        multiplexer equipment. We are dependent upon a small number of vendors to
        provide us with this equipment and failure to attain the equipment in a timely
        manner will affect our ability to offer these services. Some of our network
        customers will not be able to receive ADSL service due to line conditions,
        the
        presence of a fiber-optic cable connection to their premises and other
        limitations of the incumbent local exchange company’s line facilities and
        customer premises wiring. We utilize a third party vendor to supply modems
        to
        our ADSL customers to enable them to establish an ADSL connection at their
        premises. Commercial customers receive their modems and routers via our
        installation and activation process, which includes a technician visit to
        install, test and verify service delivery to each business customer.
 
 We
        also
        offer dial-up Internet access service, whether or not such customer is on
        our
        local network. The service is provided through a third party vendor, who
        also
        hosts the email service for both our dial-up and ADSL services.
 
 ***Collocation
        Equipment***
 
 Each
        collocation at an incumbent local exchange company’s end office facility
        contains a standard configuration of equipment, including DSL and DS-1
        aggregation equipment, Internet protocol (or IP) and ATM routing equipment
        and
        facility interface equipment to connect to each carrier we are collocated
        with.
        The collocations generally use a DS3 uplink transport to link the collocation
        to
        the backbone of our network. These DS3 interconnects carry voice, data and
        in-band management traffic. Each collocation is also outfitted with remote
        access terminal equipment in order to assess and diagnose any collocation
        network anomalies and provide remote repair whenever possible.
 
 Our
        Atlanta, Georgia and Michigan collocations have recently been augmented with
        the
        broadband loop carrier technology offering IP-based connectivity for ADSL2+
        and
        IP controlled voice services over the same copper loop. We also have TDM
        transport equipment to provide multiplexing and fiber interfaces in the more
        heavily populated collocations.
 
 7
 ***Transport***
 
 The
        Michigan and Ohio customer lines in each collocated end office are aggregated
        and connected to our Lucent 5ESS-2000 switches, using DS3 or higher capacity
        transmission equipment that we lease primarily from AT&T, the incumbent
        local exchange company, supplemented by leases with competitive access
        providers. The Southeast customer lines in each end office are aggregated
        and
        connected to our Lucent 5ESS-2000 switch located in Atlanta, Georgia, and
        Distinctive Remote Modules in 12 other Southeast locations, using DS3 or
        higher
        capacity transmission equipment that we lease primarily from BellSouth, the
        incumbent local exchange company, supplemented by leases with competitive
        access
        providers. This transmission is referred to as transport. As we expand our
        local
        switching capacity during 2006, these dedicated transport facilities, dark
        fiber
        (otherwise unused fiber optic cable that is leased by us for transport),
        and
        entrance facilities may, under the FCC’s rules, be unavailable to us on an
        unbundled basis at cost-based rates along certain routes. This may adversely
        impact us where our own switching facilities have been deployed and could
        substantially impede our plans to deploy additional network facilities. We
        could
        be forced to use other means to effect this deployment, including the use
        of
        facilities purchased from the incumbent local exchange carrier at higher
        tariffed special access rates or transport services purchased from other
        competitive access providers.   In either event, our cost of service
        could rise dramatically and our plans for a service roll-out using our own
        network facilities could be delayed substantially or derailed entirely.
 
 Our
        Lucent 5ESS-2000 switches are generally considered extremely reliable and
        feature the Digital Networking Unit-SONET technology. The Digital Networking
        Unit is a switching interface that is designed to increase the reliability
        of
        these switches and to provide much greater capacity in a significantly smaller
        footprint. We deliver the line side services to our customers through a packet
        gateway that converts the traditional voice services to packet-based services
        in
        order to integrate voice and data on to a single customer loop. This loop
        is
        terminated to a customer router that delivers analog voice and packet-based
        data
        to each customer premises. Our switches are connected to other carriers in
        the
        public switched telephone network through circuit trunking equipment. We
        lease
        the circuit trunking equipment primarily from the incumbent local exchange
        companies. If the incumbent local exchange companies are no longer required
        to
        provide this circuit trunking equipment or to provide it at Total
        Element Long Run Incremental Cost, or TELRIC,
        based rates, we will be forced to acquire this trunking equipment at higher
        rates from either a competitive access provider, if available, or, if they
        are
        willing to lease the trunking equipment to us, from the incumbent local exchange
        company. The equipment that comprises this physical layer of our network
        can
        support both voice and data communications technologies.
 
 **How
        We Provide Our Long Distance Phone Services**
  Our
        long
        distance network is comprised of equipment and facilities that are either
        owned
        or leased by us. We contract for certain telecommunication services with
        a
        variety of other carriers. We own, operate and maintain three Lucent 5ESS-2000
        switches in our long distance network, which feature the Digital Networking
        Unit-SONET technology. The switches are connected to each other by connection
        lines and digital cross-connect equipment that we own or lease. We also have
        installed lines to connect our long distance switches to switches owned by
        various local telecommunication service carriers. We are responsible for
        maintaining these lines and have entered into a contract with a third party
        vendor with respect to the monitoring, servicing and maintenance of this
        equipment. In addition to the three long distance switches we have in service
        currently, in 2005, we decommissioned two of our other switches as part of
        our network optimization.
 
 **** With
        respect to connections to local carriers, international and operator assisted
        services, in December 2003, we entered into a four-year master carrier agreement
        with AT&T. The agreement provides us with a variety of services, including
        transmission facilities to connect our long distance network switches as
        well as
        services for international calls, local traffic, international calling cards,
        overflow traffic and operator assisted calls. The agreement also provides
        that,
        subject to certain terms and conditions, we will purchase these services
        exclusively from AT&T during the term of the agreement, provided, however,
        that we are not obligated to purchase exclusively in certain cases, including
        if
        such purchases would result in a breach of any contract with another carrier
        that was in place when we entered into the AT&T agreement, or if vendor
        diversity is required. Our
        AT&T agreement establishes pricing and provides for annual minimum
        commitments based upon usage as follows: 2006 - $32 million and 2007 - $32
        million and obligates us to pay 65 percent of the revenue shortfall, if any.
        In
        February 2006, we amended the AT&T agreement to provide that certain
        services that we purchase or may purchase from AT&T (and its affiliates)
        will now count toward the minimum commitment. With this amendment we anticipate
        that we will not be required to make any shortfall payments under this contract. To
        the
        extent that we are unable to meet these minimum commitments, however, our
        costs
        of purchasing the services under the agreement would correspondingly
        increase.
 
 8
 **Additional
        Network Technologies and Management Solutions**
 
 We
        have
        extensive testing facilities in Pensacola, Florida and Detroit, Michigan,
        where
        we conduct rigorous testing of new technologies including service provider
        and
        customer premises equipment. As network technologies advance, we are continuing
        to evaluate network transport and have kept our infrastructure flexible enough
        to migrate to any topology when beneficial.
 
 We
        also
        operate a centralized network management center in Reston, Virginia and
        regionalized subscriber management centers in Detroit, Michigan and Pensacola,
        Florida. Our network management center monitors our network elements facilities
        and elements 24 hours a day, 7 days a week to identify and resolve any network
        anomalies and/or customer -related service issues. Our regionalized subscriber
        monitoring centers provide proactive customer monitoring for the commercial
        customer base and are directly aligned with switch technicians and regional
        network technicians in the field to quickly and accurately respond to any
        requirement identified.
 
 Telecommunications
        and data technologies evolve quickly in this industry. We
        believe that our network design positions us to rapidly implement future
        voice
        and data switching technology and seamlessly migrate to new topologies while
        keeping costs low and delivering quality services to our customers.
 **INTEGRATED
        INFORMATION SYSTEMS**
 
 We
        have
        integrated leads management, order processing, provisioning, billing, payment,
        collection, customer service and information systems that enable us to offer
        and
        deliver high-quality, competitively priced telecommunication services to
        our
        customers and process millions of call records each day. These operational
        support systems were developed by us and customized for our business and
        operational requirements and, due to the system's component-based architecture,
        provide an extensible framework for the introduction of new products and
        services.
 
 We
        use
        "state-of-the-art" software and hardware applications and products to support
        our systems and development efforts. During
        2005, we successfully migrated our Talk America Inc. database systems from
        an
        Informix to an Oracle architecture. As a result of our acquisition of LDMI
        and
        NTC, we are currently operating and maintaining three separate information
        systems. In 2006, we will begin to enhance and consolidate the database systems
        to support our commercial and residential product offerings on a single
        integrated operating system, but there can be no assurances that we will
        be able
        to integrate these systems timely and successfully. Through
        dedicated electronic connections with our local and long distance networks
        and
        the incumbent local exchange companies, we have designed our systems to process
        information on a "real time" basis. We have automated the business processes
        required to deploy and support our local circuit switch-based network, and
        continue to automate the business processes required to provide DSL service.
        The
        information functions of our systems are designed to provide easy access
        to all
        information about a customer, including volumes and patterns of use. This
        information can be used to identify emerging customer trends and to respond
        with
        services to meet customers' changing needs. This information also allows
        us to
        identify unusual usage by an individual customer, which may indicate fraud.
        FCC
        rules, however, limit our use of customer proprietary network information.
        See
        "Regulation."
 
 9
 Our
        core
        operational support systems include the following:
 
 ·
              Our
                  leads database system is utilized in the marketing of our
                  telecommunication services. The leads database system enables us
                  to alter
                  telemarketing campaigns to track areas where mass advertisements
                  are
                  airing, manage the product sales price by customer, zone and state,
                  maintain customer credit information, and comply with various regulatory
                  requirements.
 ·
              Our
                  automated order processing system enables us to shorten the customer
                  provisioning time cycle and reduce associated costs. Prior to submitting
                  an order to provision a customer to our service, our system processes
                  the
                  customer's credit history, and, once the customer's credit is approved,
                  the customer's service record detailing the customer's existing
                  phone
                  service is immediately verified. In addition, our system has enabled
                  us to
                  significantly increase our customer provisioning rate for qualified
                  and
                  verified orders while reducing the number of orders that are rejected
                  by
                  the incumbent local exchange company, reducing manual work
                  requirements.
 ·
              Our
                  automated service provisioning system enhances our ability to add
                  customer
                  lines to our telecommunication service and to change the features
                  associated with that particular customer's service, reducing manual
                  work
                  requirements.
 ·
              Our
                  billing system enables us to preview and run a bill cycle for the
                  many
                  different, tailored service packages, increasing customer satisfaction
                  while minimizing revenue leakage in the provision of local
                  telecommunication service.
 ·
              Our
                  automated payment and collections management system is integrated
                  with our
                  billing and customer relationship management system. This system
                  increases
                  the efficiency of our collection process, accelerates the recovery
                  of
                  accounts receivable and assists in the retention of valuable
                  customers.
 ·
              Our
                  customer relationship manager system, enables our customer service
                  representatives to access data in a real-time, organized manner,
                  while the
                  representative is speaking with the customer, thereby reducing
                  the length
                  of customer service calls and improving the customer
                  experience.
  In
        addition, we maintain our own web sites at www.talkamerica.com, www.talk.com,
        www.ldmi.com and www.networktelephone.net to provide for customer sign-up
        and to
        provide customers and potential customers with information about our products
        and services as well as billing information and customer service.
 
 
 10
 **SALES
        AND MARKETING**
 
 We
        focus
        on targeting, acquiring and retaining profitable commercial and residential
        customers that we can directly provision to our own network platform by
        providing savings, simplicity and service. We currently market to customers
        to
        whom we can provide service over our own network in Michigan, Ohio and the
        Southeast United States. We continue to seek new marketing partners and
        arrangements to expand both our opportunities to attract customers to our
        services and the products and services that we offer to our
        customers.
 
 We
        use
        diverse sales and marketing channels to reach the commercial and residential
        markets with our service offerings. Our sales and marketing efforts focus
        on (i)
        marketing to business customers voice, data and advanced services applications,
        and (ii) marketing to residential customers a bundle of local and long distance
        phone services with complementary data services. We market to commercial
        customers utilizing the Talk America, LDMI and Network Telephone brands and
        residential customers utilizing the Talk America brand.
 
 We
        market
        our commercial services in the Michigan and Ohio markets predominantly through
        our direct sales force and partner sales force, and, in the Southeast markets,
        almost exclusively through our direct sales force. We purchase business lead
        databases to assist our direct sales force in targeting particular customers.
        Our commercial independent agents also usually provide other types of
        communication or data services to the businesses to which they market our
        products and services. Often, these customers rely heavily upon the independent
        agent in making a decision regarding their voice and data services.
 
 We
        market
        our residential services within our targeted markets through the following
        channels:
 
 ·
              Telemarketing
                  - We operate our own call centers and purchase residential lead
                  databases
                  utilized for targeted, professional and courteous outbound telesales
                  campaigns.
 ·
              Direct
                  Mail - We purchase residential lead databases utilized for demographically
                  targeted direct mail campaigns designed to direct inbound calls
                  to our
                  telemarketing centers.
 ·
              Referrals
                  - We solicit potential customers by gathering their names from
                  our
                  existing customers through the use of referral promotions and our
                  free
                  member-to-member calling.
 ·
              Online
                  Marketing - We have developed a productive online marketing presence,
                  through traditional online media and business
                  relationships.
 ·
              Direct
                  Sales - Utilizing independent agents, we solicit new customers
                  in targeted
                  geographic areas.
 ·
              Broadcast
                  Media - We solicit inbound subscriber calls through advertising
                  on
                  television, radio and in print.
 
 We
        employ
        a targeted approach to customer acquisition and use database-marketing tools
        to
        identify and prioritize target customers. For our business customers, we
        offer
        customized communications, data, Internet and specialized network solutions
        that
        permit us to work with our business customers to meet their needs. For our
        residential customers, we offer our customers the ability to build their
        own
        telecommunications package beginning with an extended local calling area,
        a
        diverse selection of intrastate and interstate calling plans, discounted
        feature
        packages and “a la carte” feature selection, and several options for Internet
        access. While we do not actively market our stand-alone long distance
        telecommunications service, we offer the long distance telecommunications
        service when contacted by persons located in those regions where local service
        is unavailable. We also add long distance customers when the customer requests
        its local service provider to provide the customer with our long distance
        telecommunications service. Customers can switch to us online, through a
        telesales representative, through a direct sales agent, or through an authorized
        independent agent, each of which uses consultative sales tools to assist
        the
        customer’s creation of the right plan for their telecommunications needs.
 
 At
        the
        point of sale, we provide each customer with an estimate of their first month’s
        invoice, including all fees and taxes. Customers are able to keep their same
        phone lines and number, can easily add features, and, generally within days
        of
        the sale, residential customers are switched to our service and receive a
        personalized welcome kit explaining their service. For our business customers,
        we enter into service relationships through negotiated contracts that specify
        the services we offer and that bind the customers to a term commitment, with
        penalties for early termination.
 
 We
        only
        actively market our services in those markets where we can provision customers
        directly to our own network facilities. In addition, we offer, but do not
        actively market, services to customers that cannot be provisioned to our
        own
        network facilities and that we service using services purchased from
        the incumbent local exchange company under negotiated wholesale arrangements.
 
 11
 
 **REGULATION
        OF OUR SERVICES**
 
 **Overview**
 
 We
        are
        subject to federal, state, local and foreign laws, regulations, and orders
        affecting the rates, billing, terms, and conditions of certain of our service
        offerings, our costs and other aspects of our operations, including our
        relations with other service providers. Regulation varies in each jurisdiction
        and may change in response to judicial proceedings, legislative and
        administrative proposals, government policies, competition and technological
        developments. We cannot predict what impact, if any, such changes or proceedings
        may have on our business or results of operations, and we cannot guarantee
        that
        regulatory authorities will not raise material issues regarding our compliance
        with applicable regulations.
 
 The
        FCC
        has jurisdiction over our facilities and services to the extent they are
        used in
        the provision of interstate or international communications services or as
        otherwise required by federal law. State regulatory commissions, commonly
        referred to as PUCs, generally have jurisdiction over facilities and services
        to
        the extent they are used in the provision of intrastate services. Local
        governments may assert authority to regulate aspects of our business through
        zoning requirements, permit or right-of-way procedures and franchise fees.
        Foreign laws and regulations apply to communications that originate or terminate
        in a foreign country. Generally, the FCC and state public utility commissions
        do
        not regulate Internet, video conferencing and certain data services, although
        the underlying communications components of such offerings may be regulated.
        Our
        operations also are subject to various environmental, building, safety, health
        and other governmental laws and regulations.
 
 Federal
        law generally preempts state statutes and regulations that restrict the
        provision of competitive local, long distance and enhanced services;
        consequently, we generally are free to provide the full range of local, long
        distance and data services in every state. While this federal preemption
        greatly
        increases our potential for growth, it also increases the amount of competition
        to which we may be subject.
 
 **Federal
        Regulation**
 
 The
        Communications Act of 1934, as amended, or the “1934 Act,” grants the FCC
        authority to regulate interstate and foreign communications by wire or radio.
        We
        are regulated by the FCC as a non-dominant carrier and are subject to less
        comprehensive regulation than dominant carriers. Nevertheless, we remain
        subject
        to numerous requirements of the Communications Act, applicable to most common
        carriers, which require us to offer service upon reasonable request and pursuant
        to just and reasonable charges and terms that are not unjustly or unreasonably
        discriminatory. The FCC has authority to impose additional requirements on
        non-dominant carriers.
 
 The
        Telecommunications Act of 1996, or the “1996 Act,” amended the 1934 Act to
        eliminate many barriers to competition in the U.S. communications industry,
        by
        setting standards for relationships between communications providers, including
        between new entrants, such as our company, and the Regional Bell Operating
        Companies and other incumbent local exchange companies. In general, the 1996
        Act
        requires incumbent local exchange companies to provide competitors with
        nondiscriminatory access to, and interconnection with, the incumbent local
        exchange company networks, and to provide unbundled network elements at
        cost-based prices. The FCC and state public utility commissions have adopted
        extensive rules to implement the 1996 Act, and revisit such regulations on
        an
        ongoing basis in light of court decisions and as marketplaces
        evolve.
 
 Legislation
        has recently been introduced in Congress that would rewrite substantial portions
        of the 1996 Act. Any effort to reform the 1996 Act could result in changes
        that
        would materially reduce the obligations of the incumbent
        local exchange companies to
        interconnect with, or provide unbundled network elements to, competitors.
        Any
        such legislative change could have a material adverse impact on our business
        and
        operations.
 
 **Long
        Distance Competition**
 
 Section 271
        of the 1934 Act, enacted as part of the 1996 Act, established a process by
        which
        a Regional Bell Operating Company could obtain authority to provide long
        distance service in a state within its region. The process required
        demonstrating to the FCC that the Regional Bell Operating Company has adhered
        to
        a 14-point competitive checklist and that granting such authority would be
        in
        the public interest. Each of the Regional Bell Operating Companies already
        has
        received FCC approval to provide long distance services in each state within
        its
        respective region, resulting in increased competition in certain markets
        and
        services. The Regional Bell Operating Companies have a continuing obligation
        to
        comply with the checklist. Section 272 of the 1934 Act requires that, for a
        period of three years after receiving Section 271 approval in any state
        (absent an FCC extension), a Regional Bell Operating Company must comply
        with
        certain other structural and operational safeguards, including the provision
        of
        in-region long distance service through a separate affiliate.
 
 12
 **Local
        Service Regulation**
 
 The
        1996
        Act required the FCC to establish national rules implementing the local
        competition provisions of the 1996 Act, which impose duties on all local
        exchange carriers, including competitive local exchange companies such as
        our
        company, to provide network interconnection, reciprocal compensation, resale,
        number portability and access to rights-of-way.
 
 The
        1996
        Act imposes additional duties on incumbent local exchange companies, including
        the duty to provide access on an unbundled basis to individual network elements
        on non-discriminatory terms and cost-based rates; to allow competitors to
        interconnect with their networks in a nondiscriminatory manner at any
        technically feasible point on their networks; to permit collocation of
        competitors' equipment at the incumbent local exchange company premises;
        and to
        offer retail services at wholesale rates to competitive local exchange companies
        for resale.
 
 **Unbundled
        Network Elements**
 
 Access
        to incumbent
        local exchange companies’ unbundled network elements at cost-based rates is critical to our business.
        Historically, our local telecommunications services were predominantly provided
        through the use of combinations of unbundled network elements, and it was
        the
        availability of cost-based rates for these elements that had enabled us to
        price
        our local telecommunications services competitively. However, the obligation
        of incumbent
        local exchange companies to
        provide the unbundled network elements upon which we have relied at such
        cost-based rates is the subject of recent regulatory action that resulted
        in the
        availability of these elements being substantially reduced or otherwise subject
        to significantly higher, non-cost-based rates.
 
 The
        1996
        Act requires incumbent local exchange companies to provide requesting
        telecommunications carriers with nondiscriminatory access to network elements
        on
        an unbundled basis at any technically feasible point on rates, terms and
        conditions that are just, reasonable and nondiscriminatory, in accordance
        with
        the other requirements set forth in Sections 251 and 252 of the 1934 Act.
        The
        1996 Act gives the FCC authority to determine which network elements must
        be
        made available to requesting carriers such as us. For network elements that
        are
        not proprietary, the Commission is required to determine whether the failure
        to
        provide access to such network elements would impair the ability of the carrier
        seeking access to provide the services it seeks to offer. The FCC has determined
        that most network elements are nonproprietary in nature and thus are subject
        to
        the "impair" standard. The FCC's initial list of incumbent local exchange
        company network elements that are required to be unbundled on a national
        basis
        was first released in 1996 and has been subject to almost constant review
        and
        revision since then.
 
 When
        the
        FCC first adopted unbundled network element rules, it indicated that it would
        reexamine the list of unbundled network elements every three years. In
        December 2001, the FCC initiated its first so-called “triennial review” of
        those rules. In August 2003, in the Triennial Review Order, or *TRO* ,
        the FCC
        substantially modified its rules governing access to unbundled network elements.
        The FCC redefined the "impair" standard, concluding that a requesting carrier
        is
        impaired when a lack of access to an unbundled network element poses barriers
        to
        entry, including operational and economic barriers that are likely to make
        entry
        into a market uneconomic. The FCC limited requesting carrier access to certain
        aspects of the loop, transport, switching and signaling databases unbundled
        network elements but continued to require some unbundling of these elements.
        In
        the *TRO* ,
        the FCC
        also determined that certain broadband elements, including fiber-to-the-home
        loops in greenfield situations, broadband services over fiber-to-the-home
        loops
        in overbuild situations, packet switching and the packetized portion of hybrid
        loops, are not subject to unbundling obligations.
 
 13
 All
        of
        the FCC’s decisions regarding unbundling have been the subject of judicial
        review. Most recently, on March 2, 2004, the U.S. Court of Appeals for the
        District of Columbia Circuit, or the D.C. Circuit, in *United
        States Telecom Ass'n v. FCC* ,
        or the *USTA
        II* decision, vacated certain portions of the *TRO* and
        remanded to the FCC for further proceedings. Specifically, the D.C. Circuit
        vacated the FCC's delegation of decision-making authority to state commissions
        and several of the FCC's nationwide impairment determinations. The D.C. Circuit
        found that the FCC used a flawed methodology when making certain impairment
        determinations, including those relating to the mass market switching and
        local
        transport network elements, and remanded those determinations to the FCC
        for
        further analysis and justification. The D.C. Circuit affirmed the FCC's decision
        to relieve the incumbent local exchange companies from unbundling obligations
        with respect to broadband elements. The D.C. Circuit did not make a formal
        pronouncement regarding the status of the FCC's findings regarding enterprise
        market loops, batch hot cuts or preemption of inconsistent state laws. The
        FCC
        and the United States Solicitor General declined to seek *certiorari* from the
        Supreme Court. The National Association of Regulatory Utility Commissioners
        and
        a coalition of competitive local exchange companies separately petitioned
        for
        certiorari. The Supreme Court denied those petitions.
 
 Thereafter,
        the FCC released a series of orders that further reduced the facility unbundling
        obligations of incumbent local exchange carriers. First, in orders released
        in
        August 2004, the FCC extended relief from the unbundling obligations to
        fiber-to-the-home loops serving predominantly residential multiple dwelling
        units and granted the same relief to fiber-to-the-curb that it has applied
        to
        fiber-to-the-home.
 
 Second,
        on October 27, 2004, the FCC issued an order granting requests by the
        Regional Bell Operating Companies that the FCC forbear from enforcing the
        independent unbundling requirements of Section 271 of the 1934 Act with
        regard to the broadband elements that the FCC had determined in the *TRO* are not
        subject to unbundling obligations (fiber-to-the-home loops, fiber-to-the-curb
        loops, the packetized functionality of hybrid loops and packet switching).
        The
        FCC declined to address broader forbearance requests by SBC and Qwest, who
        had
        asked the FCC to forbear from applying applicable Section 271 requirements
        to any element that the FCC has determined no longer meets the impairment
        standard.
 
 Third,
        on
        December 15, 2004, the FCC adopted rules modifying the unbundling obligations
        for incumbent local exchange companies under Section 251 of the 1934 Act,
        substantially reducing the incumbent local exchange companies’ obligation to
        provide unbundled local switching as well as certain levels of unbundled
        loops
        and transport. The FCC issued final rules on February 4, 2005 in its Triennial
        Review Remand Order, or *TRRO* .
        Those
        rules were effective on March 11, 2005. In response to the *USTA
        II* decision, t he
        FCC
        clarified that it evaluated impairment with regard to the capabilities of
        a
        reasonably efficient competitor. The FCC also modified the impairment standard
        set forth in the *TRO* by: (1)
        setting aside the *TRO* ’s
        “qualifying service” interpretation of section 251(d)(2), but prohibiting the
        use of unbundled
        network elements for the
        provision of exclusively long distance or exclusively wireless services;
        (2)
        drawing inferences regarding the prospects for competition in one geographic
        market based on the state of competition in another, similar market; and
        (3)
        determining that in the context of local exchange markets, a general rule
        prohibiting access to unbundled
        network elements whenever
        a requesting carrier is able to compete using an incumbent
        local exchange company’s tariffed
        special access offering would be inappropriate. It is not clear at this time
        whether we will be successful in finding viable substitutes for unbundled
        switching and the other elements affected by the *TRO* ,
        the *USTA
        II* decision
        or the *TRRO* and what
        the ultimate effect will be on our business and operations. However, as a
        result
        of these decisions, the availability of unbundled
        network elements at
        cost-based rates has been substantially reduced and will have a material
        effect
        on the way we conduct our business and operations and may have a material
        adverse effect on our profitability.
  The
        principal parts of the *TRRO* regarding unbundled switching and unbundled loops and transport and the expected
        impact to our business are summarized below:
  14
 Local
        Switching :
        The FCC
        eliminated an incumbent
        local exchange company ’s
        obligation to provide local switching (and the unbundled network element
        platform, in particular, upon which we have historically relied) to requesting
        carriers at Total
        Element Long Run Incremental Cost ,
        or
        TELRIC, rates. In doing so, the FCC found that competitive
        local exchange companies are not
        impaired nationwide without access to unbundled local switching. The FCC
        adopted
        a twelve-month transition plan for competitive
        local exchange companies to
        transition away from the unbundled network element platform commencing on
        March
        11, 2005 and ending on March 10, 2006. The transition plan applied only to
        our
        customer base as it existed on March 11, 2005 and we were able to obtain
        local
        switching for those customers at a rate per customer equal to the greater
        of:
        (1) the rate at which we leased that combination of elements on June 15,
        2004,
        plus one dollar; and (2) the rate, if any, the applicable state public utility
        commission establishes between June 16, 2004 and the effective date of the
        FCC’s
        order, for the unbundled network element platform, plus one dollar.
  Because
        local circuit switching effectively became unavailable to us for new orders
        as
        of March 11, 2005, we were unable to offer our telecommunications services
        as we
        had done in the past for new customers. As a result, to provide service to
        customers that were not on our own network facilities, we signed commercial
        agreements with AT&T (formerly SBC), Verizon and BellSouth. The terms of
        these commercial agreements enable us to continue offering high quality
        telecommunications services to our customers who were previously served on
        unbundled network element platforms. In addition, we could serve customers
        by
        other means, including through total service resale agreements with the incumbent
        local exchange companies ,
        by
        migrating customers onto the networks of other facilities-based competitive
        local telephone companies or by purchasing critical network elements on an
        unbundled basis at "just and reasonable" rates pursuant to Section 271 of
        the
        1996 Act, which presumably will be higher than the rates currently available
        to
        us.  Since network element purchases pursuant to Section 271would be on an
        unbundled basis, we would need to pay additional charges to combine these
        elements. For existing customers, as detailed earlier, the FCC announced
        a one
        year transition during which we migrated customers to our own network facilities
        and to commercial arrangements with the incumbent local exchange carriers.
        At
        this time, no regional bell operating company has offered elements industry
        wide
        through Section 271, although in January 2006, the Georgia Public Service
        Commission voted to commence a proceeding to set rates for unbundled loops,
        transport, and switching that must be made available by the incumbent local
        exchange carrier, BellSouth, pursuant to Section 271 of the 1996 Act.
 
 This
        determination and others by the FCC, courts, or state commission(s) that
        make
        unbundled local switching and/or combinations of unbundled network elements
        effectively unavailable to us in some or all of our geographic service areas,
        require us either to provide services in these areas through other means,
        including resale of the incumbent local exchange companies' retail services,
        commercial agreements with incumbent local exchange companies, purchase of
        special access services, or the purchase of network elements from the Regional
        Bell Operating Companies at "just and reasonable" rates under Section 271
        of the
        Act, in all cases likely at significantly increased costs, or to provide
        services over our own switching facilities, if we are able to deploy
        them.
 
 15
 Although
        the incumbent
        local exchange companies’ unbundling requirements for local circuit switching arising under Section
        251 of
        the 1996 Act have been eliminated by the *TRRO* ,
        competitive carriers’ access to local circuit switching on an unbundled basis is
        preserved under Section 271 of the 1996 Act as a condition to the Regional
        Bell Operating Company ’s
        ability to provide in-region long distance services. However, the local circuit
        switching element, if accessible to competitive carriers only pursuant to
        Section 271 of the 1996 Act, are likely to be offered at significantly higher
        rates and subject to less favorable terms and conditions imposed by the incumbent
        local exchange companies ,
        including the possibility that the incumbent
        local exchange companies will not
        be required to combine unbundled local circuit switching provided pursuant
        to
        Section 271 with other non-unbundled network elements or tariffed
        services.
 
 Because
        of the (a) significant changes to the FCC rules that previously required
        the
        incumbent local exchange companies to provide us access to the unbundled
        network
        element platform at TELRIC rates, and (b) increases in TELRIC rates for network
        elements adopted by various state PUCs, the rates that we are charged by
        the
        incumbent local exchange companies to provide our services increased
        significantly in 2004 and 2005 and will likely continue to increase over
        time,
        despite the fact that the FCC has prohibited both SBC and Verizon from
        affirmatively seeking state commission-approved TELRIC rate increases for
        a
        period of two years from the closing dates of their mergers with AT&T and
        MCI, respectively. These cost increases have and will continue to lead us
        to
        increase our product pricing for customers located in those areas where we
        do
        not currently have or plan to deploy network facilities, which we believe
        inhibits our ability to add new customers and to retain existing customers.
        While these price increases may increase our current revenues from such
        customers, it will adversely affect our ability to retain such customers
        on our
        service and negatively affect our revenues over time.
 
 Local
        Loops and Transport :
        The FCC
        also made impairment findings and placed certain limitations with respect
        to
        local loops and dedicated interoffice transport. The FCC established 10 DS1s
        and
        12 DS3s as the maximum transport a carrier can purchase per route. Furthermore,
        for local loops, the FCC concluded that competitive local exchange companies
        are
        impaired without access to (1) DS1-capacity
        loops except in any building within the service area of a wire center containing
        60,000 or more business lines and ** four
        or
        more fiber-based collocators; and (2) DS3-capacity loops except in any building
        within the service area of a wire center containing 38,000 or more business
        lines and ** four
        or
        more fiber-based collocations. The FCC determined that competitive
        local exchange companies are not
        impaired without access to dark fiber loops in any instance. For dedicated
        transport, the FCC found that competitive
        local exchange companies are
        impaired without access to (1) DS1 transport except on routes connecting
        a pair
        of wire centers where both ** wire
        centers contain at least four fiber-based collocators or at least 38,000
        business lines; and (2) DS3 or dark fiber transport except on routes connecting
        a pair of wire centers where both ** wire
        centers contain at least three fiber-based collocators or at least 24,000
        business lines. The FCC concluded that competitive
        local exchange companies are not
        impaired without access to entrance facilities connecting an incumbent
        local exchange company ’s
        network with a competitive
        local exchange company ’s
        network in any instance. For both local loops and dedicated transport, the
        FCC
        adopted a twelve-month transition plan for competitive
        local exchange companies to
        transition away from the use of DS1 and DS3 loops and dedicated transport
        where
        there is no impairment, and an eighteen-month transition plan to transition
        away
        from dark fiber. The transition plans apply only to the customer base as
        it
        exists on March 11, 2005, and do not permit competitive
        local exchange companies to add
        new dedicated transport unbundled
        network elements in the
        absence of impairment. During the transition periods, competitive
        local exchange companies will
        retain access to unbundled high-capacity loops and transport at a rate equal
        to
        the greater of: (1) 115% of the rate the requesting carrier paid for the
        unbundled network element on June 15, 2004; and (2) 115% of the rate the
        state
        commission has established or establishes, if any, between June 16, 2004,
        and
        the effective date of the FCC’s order.
 
 16
 The
        determination of whether a particular network element is either impaired
        or
        unimpaired in a particular market, as defined in the FCC’s final rules, has a
        significant effect on markets where we already have networking facilities
        and on
        our plans for entering a new market. It is difficult to predict which geographic
        areas will become unimpaired for network elements because the incumbent local
        exchange companies are using non-public information to determine the thresholds
        for availability; while we may challenge the incumbent local exchange companies’
threshold assumptions, we may not be successful in such challenges. If a
        market
        is determined to be unimpaired, we may be unable to cost-effectively offer
        service in that market.
 
 The
        incumbent local exchange companies have issued accessible letters, which
        announced that they would not provision any loops in areas that they deemed
        to
        be unimpaired and further that they would not provision any transport on
        routes
        they deemed to be competitive. Although we and other competitive local exchange
        carriers are challenging this action, if the incumbent local exchange companies
        are successful, our business could be negatively impacted. On September 9,
        2005,
        SBC issued a revised list of its Michigan end offices that SBC maintains
        meets
        the FCC’s criteria for non-impairment. After a successful challenge on December
        20, 2005, the Michigan PUC required AT&T (formerly SBC) to file all of its
        data with the Commission to support its assertion that certain wire centers
        are
        non-impaired for the provision of high capacity loops and transport and to
        re-classify any wire center in which the former AT&T was identified as a
        competitive fiber based collocator. In January 2006, AT&T complied with such
        requirement and provided a revised list of wire centers it deemed as unimpaired
        for either loops or transport. As part the proceeding, competitive carriers
        are
        given an opportunity to inspect wire centers identified in the January 2006
        AT&T list and challenge AT&T’s designation of the wire centers as
        unimpaired. We are participating in this proceeding and expect a resolution
        by
        April 15, 2006. We cannot predict the outcome of these wire center challenges
        or
        whether they will have any impact on our operations. If AT&T were to prevail
        on its current position, we would be limited in our ability to
        purchase local
        loops and dedicated interoffice transport. As we
        expand our local network during 2006, the unavailability of these dedicated
        transport facilities, dark fiber and entrance facilities under the FCC’s rules
        at cost-based rates may adversely impact us where our own switching facilities
        have been deployed and could substantially impede our plans to deploy additional
        network facilities. We could be forced to use other means to effect this
        deployment, including the use of facilities purchased from the incumbent
        local
        exchange carrier at higher tariffed special access rates or transport services
        purchased from other competitive access providers.   In either event,
        our cost of service could rise dramatically and our plans for a service roll-out
        for use of our own network facilities could be delayed substantially or derailed
        entirely.
 
 Beginning
        in 2003, we deployed networking assets in Michigan and, as of December 31,
        2005,
        including the lines from the January 3, 2006 acquisition of NTC, we had
        approximately 466,000 local voice and data equivalent lines on our network.
        We
        are continuing the expansion of our network by collocating our networking
        equipment in the incumbent local exchange companies’ end offices to provide
        service over our own network. We have, and continue to improve, the automation
        of the business processes required to provide local network-based
        services.  We are utilizing next generation networking equipment for the
        build-out of our network in Grand Rapids and certain other areas in Michigan,
        as
        well as in the Atlanta market.
 
 Our
        business strategy is to serve small and medium-sized businesses, in addition
        to
        residential consumers, in those areas where we have our own network facilities.
        Expansion into this business market increases our addressable market in such
        areas and permits us to leverage our investment in our network facilities
        due to
        the complementary telecommunication traffic or usage patterns of these business
        customers and our residential customers. We continue to explore acquisitions
        that will further expand our marketing footprint.
 
 Furthermore,
        we utilize enhanced extended links, or EELs, which are a combination of
        dedicated interoffice transport and high capacity loops, to provide T-1 level
        services to medium-sized businesses. While the FCC did not explicitly restrict
        the availability of EELs, the incumbent local exchange companies have taken
        the
        position that EELs are not available in any geographic area where DS1 transport
        is not available as a network element at TELRIC rates. A negative determination
        on this issue by the FCC or the public utility commission in any state in
        which
        we provide services could negatively affect our network rollout and results
        of
        operations.
 
 17
 Where
        competitive local exchange carriers are deemed “impaired,” under the FCC’s new
        rules, they are permitted to lease unbundled network elements at rates
        determined by state PUCs employing the FCC's TELRIC forward looking, cost-based
        pricing model. On September 15, 2003, the FCC opened a proceeding
        reexamining the TELRIC methodology and wholesale pricing rules for
        communications services made available for resale by incumbent local exchange
        companies in accordance with the 1996 Act. This proceeding will comprehensively
        re-examine whether the TELRIC pricing model produces unpredictable pricing
        inconsistent with appropriate economic signals; fails to adequately reflect
        the
        real-world attributes of the routing and topography of an incumbent local
        exchange company's network; and creates disincentives to investment in
        facilities by understating forward-looking costs in pricing Regional Bell
        Operating Company network facilities and overstating efficiency assumptions.
        We
        have participated in this proceeding as a member of a consortium of competitive
        local exchange companies. To date, the FCC has not issued revised TELRIC
        rules;
        thus the TELRIC methodology still governs our pricing for loops purchased
        from
        the incumbent local exchange companies. We cannot predict if the FCC will
        order
        new TELRIC pricing or if Congress will amend the 1996 Act, affecting such
        pricing. The application and effect of a revised TELRIC pricing model on
        the
        communications industry generally and on certain of our business activities
        cannot be determined at this time but it would have a material impact on
        our
        business.
  On
        December 12, 2005 the FCC granted, in part, a petition for forbearance filed
        by
        Qwest Corporation seeking relief from statutory and regulatory obligations
        that
        apply to it as the incumbent local exchange company in the Omaha-Council
        Bluffs,
        NE-IA Metropolitan Statistical Area (“Omaha MSA”). The FCC relieved Qwest of
        certain legacy monopoly regulations after finding that the Omaha MSA was
        subject
        to facilities-based competition, including the substantial infrastructure
        investment made by Cox Communications, Inc. in its competitive network.
        Specifically, the FCC relieved Qwest of the obligation to provide unbundled
        network elements to competitors in 9 of Qwest’s 24 wire center service areas in
        the Omaha MSA. The FCC left in place, however, unbundling requirements such
        as
        interconnection and interconnection-related collocation obligations, as well
        as
        Section 271 obligations to provide wholesale access to local loops, local
        transport, and local switching at just and reasonable rates. For mass market
        telephone services, the FCC granted Qwest relief from dominant carrier
        regulations that apply to it in the entire Omaha MSA. Specifically, the
        Commission granted Qwest’s request to forbear from applying price cap, rate of
        return, 15-day tariffing and 60-day discontinuance regulations to Qwest for
        its
        provision of interstate mass market exchange access services and broadband
        Internet access services. On October 6, 2005, the incumbent local exchange
        company in Alaska asked that similar forbearance relief be granted in the
        Anchorage, Alaska market. We expect other incumbent local exchange carriers
        to
        file similar petitions covering other markets.
 
 ***Broadband
        Services***
 
 On
        March
        25, 2005, the FCC issued an order finding that a state commission may not
        require an incumbent local exchange carrier to provide digital subscriber
        line
        (“DSL”) service to an end user customer over the same unbundled network element
        loop that a competitive local exchange provider uses to provide voice services
        to that end user. Incumbent local exchange carriers, with the exception of
        AT&T and Verizon for a limited period of time as a result of the FCC’s
        merger orders, may now lawfully refuse to offer stand-alone DSL service to
        their
        retail customers, making it more difficult for us to attract new voice customers
        that want to retain their existing incumbent-provided DSL service.
  18
 On
        August
        5, 2005, the
        FCC
        issued an order finding that wireline broadband Internet access services
        are
“information services” functionally integrated with a telecommunications
        component and therefore eliminated the long-standing requirement that incumbent
        local exchange companies share the underlying transmission component used
        to
        provide Internet access services. The FCC had previously required
        facilities-based providers to offer that wireline broadband transmission
        component separately from their Internet service as a stand-alone service
        on a
        common-carrier basis, and thus had previously classified that component as
        a
        telecommunications service. As a result, i ncumbent
        local exchange companies may now
        refuse to offer underlying broadband transmission services to unaffiliated
        providers of broadband services or charge above-cost rates that make it
        economically infeasible for unaffiliated providers to compete with the incumbent
        local exchange company ’s
        broadband services. We use unbundled high capacity services purchased from
        incumbent local exchange carriers as network elements to provide Internet
        access
        to some of our customers. These carriers may contend that, as a result of
        the
        FCC’s wireline broadband order, they will no longer provide high capacity
        facilities as network elements for use in providing Internet access. If so,
        we
        may be forced to substitute higher priced special access services for this
        purpose.
  Subsequently,
        Verizon filed a petition asking the FCC to extend the Wireline Broadband
        Order
        to all packetized and optical special access services. If granted, this would
        enable incumbent local exchanges companies to offer most services that are
        not
        TDM-based on an unregulated basis. The petition is one that asks the FCC
        to
        forbear from regulation of its packetized and optical services, and the deadline
        for decision is March 19, 2006.
  ***SBC-AT&T
        and Verizon-MCI Mergers and the Announced AT&T-BellSouth
        Merger***
 
 On
        October 31, 2005, the FCC approved the SBC-AT&T and Verizon-MCI mergers,
        subject to certain conditions. The merger conditions, which the FCC set out
        in
        two separate orders issued on November 17, 2005, include: (1) the Regional
        Bell
        Operating Companies are prohibited from affirmatively seeking any increase
        in
        state-approved rates for unbundled network elements for a period of two years
        from the respective merger closing dates; (2) the Regional Bell Operating
        Companies shall not raise rates for DS1 and DS3 private line service provided
        by
        AT&T and MCI for a period of 30 months from the respective merger closing
        dates; (3) the Regional Bell Operating Companies shall not increase their
        interstate access rates for a period of 30 months following the respective
        merger closing dates; (4) for a period of 30 months following the merger
        closing
        dates, the Regional Bell Operating Companies will not provide special access
        offerings to their wireline affiliates that are not available to other similarly
        situated special access customers on the same terms and conditions; and (5)
        within 12 months of the respective merger closing dates, the Regional Bell
        Operating Companies will offer “stand-alone” Asynchronous Digital Subscriber
        Line (“ADSL”) service throughout their regions for two years. The mergers of
        AT&T with SBC and Verizon with MCI effectively eliminated the two largest
        competitive local exchange carriers in the United States, each of which was
        a
        strong voice in federal and state lobbying related to telecommunications
        matters. These mergers will place an increased demand on our resources and
        employees for lobbying and other regulatory matters and there can be no
        assurances that our efforts will prove effective.
 
 On
        March
        5, 2006, AT&T and BellSouth announced that they had entered into an
        agreement to merge the companies. The proposed merger, which is subject to
        regulatory approval, will merge our two largest vendors into one entity.
        This
        merger, if completed, may have an adverse impact on our business.
 
 19
 ***Interconnection
        Agreements***
 
 Pursuant
        to FCC rules implementing the 1996 Act, we negotiate interconnection agreements
        with incumbent local exchange companies to obtain access to unbundled network
        elements and other services, generally on a state-by-state basis. These
        agreements typically have two- to three-year terms. We currently have
        interconnection agreements, or their equivalent, in effect with AT&T,
        BellSouth, Verizon and Qwest in the states where such companies act as the
        incumbent local exchange company. Our agreements generally are subject to
        amendment based upon a change of law. Following the adoption or vacating
        of
        unbundling rules, the incumbent local exchange companies typically invoke
        the
        change of law provisions in our interconnection agreements. These provisions
        generally provide that when a party to the agreement believes that its
        obligations under the agreement have changed as a result of a change in
        applicable law, it may request that the other party enter into negotiations
        to
        amend the agreement, and that in the event the parties are unable to agree
        upon
        an amendment, the **** dispute
        is to be arbitrated either by a neutral arbitrator or by the relevant state
        commission.
 
 We
        have
        participated in and continue to participate in generic “change of law”
proceedings to determine the affect of the change of law on the various
        unbundling rules as a result of the TRO and TRRO. We have signed “change of law”
amendments as required by those proceedings. The affect of these amendments
        are
        to implement the TRO and TRRO into our interconnection agreements, thereby
        eliminating our access to local switching and curtailing our access to unbundled
        loops and transport as required by the FCC rules.
 
 We
        are in
        the process of renegotiating certain of our interconnection agreements and/or
        replacing them by opting into other carriers’ existing agreements. In addition,
        due to regulatory changes, we are frequently negotiating amendments to our
        existing interconnection agreements to reflect these changes. We are generally
        negotiating these agreements with little leverage or ability to actually
        negotiate the terms. If any negotiation process does not produce, in a timely
        manner, an interconnection agreement that we find acceptable, we may petition
        the applicable PUC to arbitrate any open issues. Arbitration decisions in
        turn
        may be reviewed by federal courts. We cannot predict how successful we will
        be
        in negotiating terms critical to our provision of local network services,
        and we
        may be forced to arbitrate certain provisions of necessary agreements. Pending
        the completion of such proceedings and approval of successor agreements,
        we
        operate in these states with these incumbent local exchange companies under
        the
        rates, terms and conditions of the predecessor agreements pursuant to their
        evergreen provisions. Other interconnection agreement arbitration proceedings
        before various state commissions brought by other carriers may result in
        decisions that could affect our business, but we cannot predict the extent
        of
        any such impact. As an alternative to negotiating an interconnection agreement,
        we may adopt, or opt into, another carrier's approved agreement, in its
        entirety. We cannot predict whether an acceptable alternative will be available
        for us to opt into at such time as we are looking for a new or successor
        agreement in any given state with a particular incumbent local exchange
        company.
 
 ***Collocation***
 
 FCC
        rules
        generally require incumbent local exchange companies to permit competitors
        to
        collocate equipment used for interconnection and/or access to unbundled network
        elements. Changes to those rules, upheld in 2002 by the D.C. Circuit, allow
        competitors to collocate multifunctional equipment and require incumbent
        local
        exchange companies to provision cross-connects between collocated carriers.
        We
        cannot determine the effect, if any, of future changes in the FCC’s collocation
        rules on our business or operations.
 
 20
 ***Access
        Charges***
 
 We
        pay
        access charges to local exchange carriers for the origination and termination
        of
        our long distance communications traffic. Generally, intrastate access charges
        are higher than interstate access charges. Therefore, to the extent access
        charges increase or a greater percentage of our long distance traffic is
        intrastate, our costs of providing long distance services will increase.
        As a
        local exchange provider, we bill long distance providers access charges for
        the
        origination and termination of those providers' long distance calls.
        Accordingly, in contrast with our long distance operations, our local exchange
        business benefits from the receipt of intrastate and interstate long distance
        traffic. As an entity that collects and remits access charges, we must properly
        track and record the jurisdiction of our communications traffic and remit
        or
        collect access charges accordingly. The result of any changes to the existing
        regulatory scheme for access charges or a determination that we have been
        improperly recording the jurisdiction of our communications traffic could
        have a
        material adverse effect on our business.
 
 The
        FCC
        has indicated that its existing carrier compensation rules constitute
        transitional regimes that will conclude upon the establishment of a new
        interstate intercarrier compensation regime based on bill-and-keep or another
        alternative. Because we both make payments to and receive payments from other
        carriers for the exchange of local and long distance calls, we will be affected
        by changes in the FCC's intercarrier compensation rules. We cannot predict
        the
        impact that any such changes may have on our business.
 
 Our
        costs
        of providing long distance services, and our revenues for providing local
        services, also are affected by changes in access charge rates imposed on
        competitive local exchange companies. Pursuant to the FCC's 2001 CLEC Access
        Charge Order, which lowered the rates that competitive local exchange companies
        may charge long distance carriers for the origination and termination of
        calls
        over local facilities, access rates were reduced during 2003 and were reduced
        again during 2004. AT&T and Sprint have appealed the CLEC Access Charge
        Order to the D.C. Circuit, arguing that the FCC's benchmark rates are too
        high.
 
 The
        FCC
        issued the first Access Charge Reform Report and Order in 1997. Although
        the FCC
        has since issued five further orders in that docket, several petitions for
        reconsideration and clarification of the 1997 Order remain pending. On
        December 15, 2003, the FCC issued a public notice requesting that the
        parties to such petitions file supplemental notices identifying any issues
        that
        were raised in the petitions and that have not been otherwise resolved. We
        cannot predict whether the FCC will further modify its access charge rules
        as a
        result of this proceeding, or the effect that any such changes would have
        on our
        business.
 
 Over
        the
        last several years, the FCC has granted incumbent local exchange companies
        significant flexibility in pricing interstate special and switched access
        services. In August 1999, the FCC granted immediate pricing flexibility to
        many incumbent local exchange companies and established a framework for granting
        greater flexibility in the pricing of all interstate access services once
        an
        incumbent local exchange company market satisfies certain prescribed competitive
        criteria. In February 2001, the D.C. Circuit upheld the FCC's prescribed
        competitive criteria. To date, the FCC has granted pricing flexibility in
        numerous specific markets to the Regional Bell Operating Companies. This
        pricing
        flexibility may result in Regional Bell Operating Companies lowering their
        prices in high traffic density areas, including areas where we compete or
        plan
        to compete. We anticipate that the FCC will continue to grant incumbent local
        exchange companies greater pricing flexibility for access services if the
        number
        of actual and potential competitors increases in each of these
        markets.
 
 The
        FCC
        issued a Notice of Public Rulemaking on February 10, 2005 in WCC Docket No.
        05-25. This notice includes a broad examination of the regulatory framework
        that
        is applied to local exchange carriers’ interstate special access services
        preventing them from exceeding certain prices after June 30, 2005. In conducting
        this examination, the FCC announced that it seeks comment on the special
        access
        regulatory regime that should follow the expiration of the Coalition for
        Affordable Local and Long Distance Service plan, including whether to maintain
        or modify the Commission’s pricing flexibility rules for special access
        services. We cannot predict whether the FCC will further modify its access
        change rules as a result of this proceeding or the effect that any such changes
        would have on our business.
 
 21
 On
        February 10, 2005, the FCC also adopted a Further Notice of Proposed Rulemaking,
        and solicited comment on whether to adopt any of seven different comprehensive
        proposals for reform of the FCC's existing rules relating to intercarrier
        compensation. Further action in that proceeding could lead to substantial
        changes to the way that reciprocal compensation, switched access and universal
        charges are established and administered, and could lead to material reductions
        in our intercarrier compensation revenues.
 
 During
        late
        2005, petitions for declaratory ruling were filed by SBC, Vartec, Grande
        and
        Frontier asking the FCC to clarify in various ways the extent to which
        IP-enabled services are subject to the assessment of switched access charges,
        and how access charge liability should be parsed out when several carriers
        participate in the transport and termination of IP-enabled services. During
        the
        same timeframe, two carriers and a coalition of mid-sized incumbent local
        exchange companies asked the FCC to adopt new rules designed to reduce the
        amount of so-called “phantom traffic” terminated over their networks. Traffic is
        referred to as “phantom” when it lacks certain signaling information required to
        determine its originating location or jurisdictional character. Resolution
        of
        these petitions could result in the imposition of access charges on certain
        IP-based services.
 
 ***Detariffing***
 
 Consistent
        with other deregulatory measures, the FCC has largely eliminated carriers'
        obligations to file tariffs with the FCC containing prices, terms and conditions
        of service. In lieu of federal tariffs, the FCC requires carriers to post
        information relating to the rates, terms, and conditions of services on their
        corporate web sites. Detariffing precludes our ability to rely on filed rates,
        terms and conditions as a means of providing notice to customers of prices,
        terms and conditions under which we offer services, and requires us instead
        to
        rely on individually negotiated agreements with end users. We remain subject
        to
        the 1934 Act's requirements that rates, terms and conditions of communications
        service be just, reasonable and not discriminatory, and we are subject to
        the
        FCC's jurisdiction over customer complaints regarding our communications
        services.
 
 ***Universal
        Service***
 
 Section 254
        of the 1934 Act and the FCC's implementing rules require all communications
        carriers providing interstate or international communications services to
        periodically contribute to the Universal Service Fund, or USF. The USF supports
        four programs administered by the Universal Service Administrative Company
        with
        oversight from the FCC: (i) communications and information services for
        schools and libraries, (ii) communications and information services for
        rural health care providers, (iii) basic telephone service in regions
        characterized by high communications costs or low income levels, and
        (iv) interstate common line support. Periodic USF contribution requirements
        currently are measured and assessed based on the total subsidy funding needs
        and
        each contributor's percentage of the total of certain interstate and
        international end user communications revenues reported to the FCC by all
        communications carriers. We measure and report our revenues in accordance
        with
        rules adopted by the FCC. The contribution rate factors are calculated and
        revised quarterly and we are billed for our contribution requirements each
        month
        based on projected interstate and international end-user communications
        revenues, subject to periodic true up.
 
 22
 USF
        contributions may be passed through to consumers on an equitable and
        nondiscriminatory basis either as a component of the rate charged for
        communications services or as a separately invoiced line item. Since
        April 1, 2003, communications carriers have been prohibited from using a
        separate line item on invoices to identify, as a recovery of USF contributions,
        amounts that exceed the rate of actual USF contributions.
 
 A
        proceeding pending before the FCC has the potential to significantly alter
        our
        USF contribution obligations. The FCC is considering changing the basis upon
        which our USF contributions are determined from a revenue percentage measurement
        to a connection or telephone number measurement. Adoption of this proposal
        could
        have a material adverse affect on our costs, our ability to separately list
        USF
        contributions on end-user bills and our ability to collect these fees from
        our
        customers.
 
 The
        application and effect of changes to the USF contribution requirements and
        similar state requirements on the communications industry generally and on
        certain of our business activities cannot be predicted. If our collection
        procedures result in over-collection, we could be required to make
        reimbursements of such over-collection and be subject to penalty, which could
        have a material adverse affect on our business, financial condition and results
        of operations. If a federal or state regulatory body determines that we have
        incorrectly calculated or remitted any USF contribution, we could be subject
        to
        the assessment and collection of past due remittances as well as interest
        and
        penalties thereon. No such proceeding has been commenced at this time against
        us.
 
 ***Telephone
        Numbering***
 
 The
        FCC
        oversees the administration and the assignment of local telephone numbers,
        an
        important asset to voice carriers, by NeuStar, Inc., in its capacity as
        North American Numbering Plan Administrator. Extensive FCC regulations govern
        telephone numbering, area code designation and dialing procedures. Since
        1996,
        the FCC has permitted businesses and residential customers to retain their
        telephone numbers when changing local telephone companies, referred to as
        Local
        Number Portability. The availability of number portability is important to
        competitive carriers like us, because customers, especially businesses, may
        be
        less likely to switch to a competitive carrier if they cannot retain their
        existing telephone numbers.
 
 On
        November
        3, 2005, BellSouth filed a petition at the FCC asking the commission to revise
        the system by which the costs of implementing local number portability are
        recovered. Specifically, BellSouth has asked the Commission to move from
        a
        system where cost recovery is allocated according to a carrier’s proportion of
        overall industry revenue to a cost recovery mechanism based on usage. If
        adopted, the modifications could significantly increase our LNP
        charges.
 
 23
 ***Communications
        Assistance for Law Enforcement Act***
 
 The
        Communications Assistance for Law Enforcement Act, or CALEA, requires
        communications providers to provide law enforcement officials with call content
        and call identifying information under a valid electronic surveillance warrant,
        and to reserve a sufficient number of circuits for use by law enforcement
        officials in executing court-authorized electronic surveillance. Because
        we
        provide facilities-based services, we incur costs in meeting these requirements.
        Noncompliance with these requirements could result in substantial fines.
        Although we will attempt to comply, we cannot assure that we would not be
        subject to a fine in the future.
 
 ***Network
        Information***
 
 FCC
        rules
        protect the privacy of certain information about customers that communications
        carriers, including us, acquire in the course of providing communications
        services. Such protected information, known as Customer Proprietary Network
        Information, or CPNI, includes information related to the quantity,
        technological configuration, type, destination and the amount of use of a
        communications service. The FCC's initial CPNI rules prevented a carrier
        from
        using CPNI to market certain services without the express approval of the
        affected customer, referred to as an opt-in approach. In July 2002, the FCC
        revised its opt-in rules in a manner that limits our ability to use the CPNI
        of
        our subscribers without first engaging in extensive customer service processes
        and record keeping. Certain states have also adopted state-specific CPNI
        rules.
        On January 30, 2005 the FCC issued an order requiring all wireline and wireless
        carriers to file with the Federal Communications Commission ("FCC" or
        "Commission") a certificate verifying that they are in full compliance with
        the
        Commission's customer proprietary network information ("CPNI") rules. We
        use our
        subscribers' CPNI in accordance with applicable regulatory requirements and
        complied with the FCC’s January 30, 2005 order. However, if a federal or state
        regulatory body determines that we have implemented those guidelines
        incorrectly, we could be subject to fines or penalties. In addition, on February
        10, 2006, the Commission released the text of a Notice of Proposed Rulemaking
        asking for comment on whether various proposals are feasible and/or advisable:
        (a) requiring carriers to adopt a consumer-set password system; (b) requiring
        carriers to record audit trails which would show all instances when a customer’s
        CPNI records were accessed, what information was disclosed and to whom; (c)
        requiring data stored by carriers to be encrypted; (d) requiring carriers
        to
        remove identifying information from customer records they maintain; and (e)
        requiring carriers to notify customers when the security of CPNI may have
        been
        breached. We cannot predict whether any or all of these proposals will be
        ultimately adopted by the Commission or what the impact of implementation
        of new
        CPNI rules would have on our operations.
 
 ***Billing***
 
 In
        1999,
        the FCC first adopted its so-called “Truth-in-Billing” rules, which specify the
        information that must be included in, and the format of, carrier invoices
        for
        telecommunications services. The primary objective of the FCC’s Truth-in-Billing
        regulations is to reduce telecommunications fraud, including slamming and
        cramming, by making telephone bills easier for subscribers to read and
        understand. Pursuant to the Truth-in-Billing rules, carrier bills must be
        clearly organized and “clearly and conspicuously” satisfy the following
        requirements: (1) identify each service provider associated with each charge
        on
        the bill; (2) where charges for more than one carrier appear on the same
        bill
        separate charges by service provider; (3) identify any “new” service provider,
        that is, a service provider that did not bill the subscriber for service
        during
        the previous billing cycle; (4) describe billed charges by use of a brief,
        clear, non-misleading, plain language description of the service or services
        rendered; (5) distinguish between “deniable” and “non-deniable” charges, *i.e.,* where a
        bill contains charges for basic local service, the bill must distinguish
        between
        charges for which non-payment will result in the disconnection of basic local
        service and those charges for which non-payment will not result in such
        disconnection; and (6) carriers must include a toll-free number for billing
        questions.
 
 24
 ***Regulation
        of Internet Service Providers and VoIP***
 
 To
        date,
        the FCC has treated Internet service providers, or ISPs, as enhanced service
        providers exempt from federal and state regulations governing common carriers,
        including the obligation to pay access charges and contribute to the USF.
        Nevertheless, regulations governing the disclosure of confidential
        communications, copyright, excise tax and other requirements may apply to
        our
        Internet access services. In addition, Congress has passed a number of laws
        that
        concern the Internet and Internet users. Generally, these laws limit the
        potential liability of ISPs and hosting companies that do not knowingly engage
        in unlawful activity. Congress is actively considering a variety of Internet
        regulation bills, some of which, if signed into law, could impose obligations
        on
        us to monitor the Internet activities of our customers.
 
 Where
        communications service providers have offered enhanced services in addition
        to
        their communications services, the FCC and state PUCs generally have exempted
        the enhanced service component and its associated revenue from legacy
        communications regulations. Some of the services we provide are enhanced
        services. Future and pending FCC and state proceedings may significantly
        affect
        our future provision of enhanced services.
 
 The
        use
        of the public Internet and private Internet protocol networks to provide
        voice
        communications services, including voice-over-Internet protocol, or VoIP,
        is a
        relatively recent market development. The provision of such services is largely
        unregulated within the United States. In a 1998 Report to Congress, the FCC
        declined to conclude that IP telephony services constitute telecommunications
        services and stated that it would undertake a subsequent examination of whether
        certain forms of phone-to-phone Internet telephony are information services
        or
        telecommunications services. The FCC indicated that, in the future, it would
        consider the extent to which phone-to-phone Internet telephony providers
        could
        be considered telecommunications carriers such that they could be subject
        to
        regulations governing traditional telephone companies. The FCC also stated
        that,
        although it did not have a sufficient record upon which to make a definitive
        ruling, the record suggested that, to the extent that certain forms of
        phone-to-phone IP telephony appear to possess the same characteristics as
        traditional communications services and to the extent the providers of those
        services utilize circuit-switched access in the same manner as interexchange
        carriers, the FCC may find it reasonable to require that IP telephony providers
        pay charges similar to access charges. The FCC recognized, however, that
        it
        should consider forbearing from imposing rules that would apply to
        phone-to-phone Internet telephony providers if they were classified as
        telecommunications carriers. To date, the FCC has not imposed regulatory
        surcharges or traditional common carrier regulation upon providers of Internet
        communications services.
 
 Several
        pending FCC proceedings will affect the regulatory status of Internet telephony.
        On February 12, 2004, the FCC adopted a notice of proposed rulemaking to
        address, in a comprehensive manner, the future regulation of services and
        applications making use of Internet protocol, including VoIP. In the absence
        of
        federal legislation, we expect that through this proceeding, the FCC will
        resolve certain regulatory issues relating to VoIP services and develop a
        regulatory framework that is unique to IP telephony providers or that subjects
        VoIP providers to minimal regulatory requirements. We cannot predict when
        the
        FCC may take such actions. The FCC may determine that certain types of Internet
        telephony should be regulated like basic interstate communications services,
        rendering VoIP calls subject to the access charge regime that permits local
        telephone companies to charge long distance carriers for the use of the local
        telephone networks to originate and terminate long-distance calls, generally
        on
        a per minute basis. The FCC also may conclude that Internet telephony providers
        should contribute to the USF. The FCC's pending review of intercarrier
        compensation policies (discussed above) also may have an adverse impact on
        enhanced service providers.
 
 25
 In
        a
        series of decisions issued in 2004, the FCC clarified that the FCC, not the
        state PUCs, has jurisdiction to decide the regulatory status of certain
        IP-enabled services, including certain types of VoIP. On November 12, 2004,
        in response to a request by Vonage Holdings Corp. (“Vonage”), a VoIP services
        provider, the FCC issued an order preempting the Minnesota PUC from imposing
        traditional telephone company regulation of VoIP service, finding that the
        FCC
        alone could make such decisions because the service cannot be separated into
        interstate and intrastate communications without negating federal rules and
        policies. In September 2003, the Minnesota PUC had issued an order
        requiring Vonage to comply with Minnesota laws that regulate telephone
        companies. That order was appealed to the U.S. District Court for the District
        of Minnesota, which issued a permanent injunction based on its determination
        that federal communications law preempts the Minnesota PUC from imposing
        state
        law common carrier telecommunications regulations on information service
        providers such as Vonage. The Minnesota PUC appealed the judgment to the
        U.S.
        Court of Appeals for the Eighth Circuit. While the appeal was pending, the
        FCC
        issued its preemption order. In an order filed December 22, 2004, the Eighth
        Circuit concluded that the intervening FCC preemption order was binding on
        the
        court and could not be challenged in the litigation. On that basis, the Court
        of
        Appeals affirmed the judgment of the district court, that the Minnesota PUC
        did
        not have jurisdiction to regulate the provision of the Vonage services. Four
        state commissions, including Minnesota, and the National Association of State
        Utility Consumer Advocates (“NASUCA”) have asked federal appeals courts to
        overturn the FCC’s November 2004 order.
 
 On
        October 18, 2002, AT&T filed a petition with the FCC seeking a
        declaratory ruling that would prevent incumbent local exchange companies
        from
        imposing traditional circuit-switched access charges on phone-to-phone IP
        services. In April 2004, the FCC issued an order concluding that, under
        current rules, AT&T's phone-to-phone IP telephony service is a
        telecommunications service upon which interstate access charges may be assessed.
        AT&T's service consists of an interexchange call initiated by an end user
        who dials 1 + the called number from a regular telephone. When the
        call reaches AT&T's network, AT&T converts it into an IP format and
        transports it over AT&T's Internet backbone. AT&T then converts the call
        back from the IP format and delivers it to the called party through local
        exchange carrier local business lines. This decision is thus limited to
        interexchange service that: (1) uses ordinary customer premises equipment
        with no enhanced functionality; (2) originates and terminates on the public
        switched telephone network; and (3) undergoes no net protocol conversion
        and provides no enhanced functionality to end users due to the provider's
        use of
        IP technology. The FCC made no determination regarding retroactive application
        of its ruling, and stated that the decision does not preclude it from adopting
        a
        different approach when it resolves the *IP-Enabled
        Services* or *Intercarrier
        Compensation* rulemaking proceedings.
 
 On
        February 5, 2003, pulver.com filed a petition with the FCC seeking a
        declaratory ruling that its Free World Dialup service, which facilitates
        point-to-point broadband Internet protocol voice communications, is neither
        telecommunications nor a telecommunications service as these terms are defined
        in the 1934 Act. The FCC granted the pulver.com petition on February 12,
        2004, establishing that Free World Dialup is an information service, as defined
        in the 1934 Act. The FCC limited this finding to VoIP services that, like
        Free
        World Dialup, exist solely as an Internet application, similar to electronic
        mail and instant messaging, and which do not rely on the public switched
        telephone network. Information services are subject to federal regulatory
        authority, but may not be regulated by state authorities.
 
 26
 On
        February 23, 2005, the FCC denied a petition filed by AT&T requesting that
        the FCC deem its “enhanced” prepaid calling card plan interstate and
        informational in nature, and thus exempt from universal service and intrastate
        access charge payments. The FCC ruled that the AT&T prepaid calling cards at
        issue constituted “telecommunications service” that is subject to the assessment
        of switched access charges and universal service fund assessments. The FCC
        also
        requested further comment on whether other types of prepaid cards, including
        those that provide callers the option to listen to information or are
        transmitted using internet protocol technology, are also subject to switched
        access charge and universal service fund assessment.
 
 Other
        aspects of VoIP and Internet telephony services, such as regulations relating
        to
        the confidentiality of data and communications, copyright issues, taxation
        of
        services, licensing and 911 emergency access, may be subject to federal or
        state
        regulation. For instance, in 2002 the FCC undertook an examination of whether
        emergency 911 requirements should be extended to packet-based networks and
        services, and on June 3, 2005 it released an order requiring providers of
        certain Voice over Internet Protocol services to provide enhanced 911 emergency
        services to their customers. Similarly,
        changes in the legal and regulatory environment relating to the Internet
        connectivity market, including regulatory changes that affect communications
        costs or that may increase the likelihood of competition from Regional Bell
        Operating Companies or other communications companies could increase our
        costs
        of providing service.
  ***Taxes
        and Regulatory Fees***
 
 We
        are
        subject to numerous local, state and federal taxes and regulatory fees,
        including but not limited to a 3% Federal excise tax on communications service,
        FCC regulatory fees and PUC regulatory fees. We have procedures in place
        to
        ensure that we properly collect taxes and fees from our customers and remit
        such
        taxes and fees to the appropriate entity pursuant to applicable law and/or
        regulation. If our collection procedures prove to be insufficient or if a
        taxing
        or regulatory authority determines that our remittances were inadequate,
        we
        could be required to make additional payments, which could have a material
        adverse effect on our business.
 
 On
        July 2, 2004, the Internal Revenue Service issued an advance notice of
        proposed rulemaking asking for public comment on expanding the current 3%
        excise
        tax to new communications services, such as VoIP and other IP-based services,
        applications, and technologies, to reflect changes in technology. The comment
        cycle ended September 30, 2004. We cannot predict the outcome of this
        proceeding on our business.
 
 27
 **Federal
        Legislation**
 
 For
        the
        past several years, there has been a concerted effort, particularly by the
        regional bell operating companies and their allies, to rewrite the 1934 Act
        and
        the 1996 Act by repealing or weakening their pro-competition provisions.
        Until
        recently, that effort did not gain much traction, but, with the introduction
        of
        legislation in both the House and Senate in 2006, the dynamics have shifted,
        and
        the Congress has begun to consider seriously moving legislation.
 
 In
        the
        Senate, in late 2005, Senator Ensign (R-NV) and 14 co-sponsors introduced
        S.
        1504, the Broadband Investment and Consumer Choice Act, which would grant
        extensive regulatory relief to the regional bell operating companies and
        other
        incumbent local exchange carriers. Soon thereafter Senator Jim DeMint (R-SC)
        introduced legislation that would phase out most existing telecommunications
        regulations. As drafted, both pieces of legislation would phase out most
        existing interconnection and network unbundling requirements over time.
        Partially in response to the Ensign bill, the Chairman of this Committee,
        Senator Ted Stevens (R- AK), has announced a sweeping set of hearings to
        review
        a broad range of telecommunications issues - from regulation and competition
        to
        intercarrier compensation and USF. These hearings began in earnest in January,
        and the Chairman is likely to introduce legislation after the
        hearings.
 
 In
        the
        House, the Chairman (Joe Barton (R-TX)) and the Ranking Democrat (John Dingell
        (D-MI)) of the Energy and Commerce Committee directed their staff in September
        2005 to release a draft bill. While not as deregulatory as the Ensign and
        DeMint
        bills, this draft also substantially limits the pro-competition provisions
        of
        the 1996 Act. The staff has received voluminous comments from a large number
        of
        companies and groups, many of whom criticized one or more provisions of the
        draft. Staff later released a new version of the bill, but it was not supported
        by the Democrats on the Committee because it took a much more pro-regional
        bell
        operating company view on critical issues. Hearings were held on this bill,
        and,
        once again, the staff is redrafting, but any new draft is unlikely to appease
        the many opponents of the legislation. These
        range from competitive providers, who are upset about the deregulatory
        provisions, to cable operators and municipalities, who oppose the video
        franchising relief awarded the incumbent local exchange companies. Despite
        the
        opposition, Chairman Barton has stated that he would like the Telecommunications
        Subcommittee to consider the bill in March 2006 and for the full Committee
        to
        consider the bill in late March or April. The chances of enactment of such
        sweeping federal telecommunications legislation in 2006 is uncertain. However,
        passage of any such legislation could substantially reduce or eliminate our
        ability to interconnect with incumbent local exchange carriers or lease their
        unbundled facilities at cost-based rates.
 
 Additional
        legislation during 2006 is possible to address Congressional concerns that
        the
        FCC does not have jurisdiction to extend USF assessments to intraLATA and
        local
        calling, to clarify the scope of FCC jurisdiction over VoIP services, and
        to
        limit the ability of local governments to require telephone companies to
        obtain
        video franchise rights. Legislation is also possible to address customer
        proprietary network information to address Congressional concerns with regard
        to
        impersonation of consumers in order to illegally obtain calling information
        (pre-texting) as well as other issues relating identify fraud and privacy.
        We
        are unable to predict when any such legislation will be enacted and if such
        legislation will have an impact on our operations.
 
 28
 **State
        Regulation**
 
 The
        1934
        Act maintains the authority of individual states to impose their own regulation
        of rates, terms and conditions of intrastate services, so long as such
        regulation is not inconsistent with the requirements of federal law. Because
        we
        provide communications services that originate and terminate within individual
        states, including both local service and in-state long distance toll calls,
        we
        are subject to the jurisdiction of the PUC and other regulators in each state
        in
        which we provide such services. For instance, we must obtain a Certificate
        of
        Public Convenience and Necessity or similar authorization before we may commence
        the provision of communications services in a state. We have obtained
        Certificates of Public Convenience and Necessity to provide facilities-based
        or
        resold competitive local and interexchange service in every state, including
        the
        District of Columbia. As our local service business expands, we may offer
        additional intrastate services and may become subject to additional state
        regulations.
 
 In
        addition to requiring certification, state regulatory authorities may impose
        tariff and filing requirements and obligations to contribute to state universal
        service and other funds. State commissions also have jurisdiction to approve
        negotiated rates, and to establish rates through arbitration for
        interconnection, including rates for unbundled network elements.
 
 We
        also
        are subject to state laws and regulations regarding slamming, cramming and
        other
        consumer protection and disclosure regulations. These rules could substantially
        increase the cost of doing business in any particular state. State commissions
        have issued or proposed several substantial fines against competitive local
        exchange companies for slamming or cramming. The risk of financial damage
        from
        slamming, in the form of fines, penalties and legal fees and costs, and to
        business reputation is significant. A slamming complaint before a state
        commission could generate substantial litigation expenses. In addition, state
        law enforcement authorities may use their consumer protection authority against
        us if we fail to meet applicable state law requirements.
 
 States
        also retain the right to sanction a service provider or to revoke certification
        if a service provider violates relevant laws or regulations. If any regulatory
        agency were to conclude that we are or were providing intrastate services
        without the appropriate authority, the agency could initiate enforcement
        actions, which could include the imposition of fines, a requirement to disgorge
        revenues, or refusal to grant regulatory authority necessary for the future
        provision of intrastate services.
 
 We
        may be
        subject to requirements in some states to obtain prior approval for, or notify
        the state commission of, any transfers of control, sales of assets, corporate
        reorganizations, issuance of stock or debt instruments and related transactions.
        Although we believe such authorizations could be obtained in due course,
        there
        can be no assurance that state commissions would grant us authority to complete
        any of these transactions, or that such authority would be granted on a timely
        basis.
 
 29
 Rates
        for
        intrastate switched access services, which we provide to long-distance companies
        to originate and terminate in-state toll calls, are subject to the jurisdiction
        of the state in which the call originated and /or terminated. Such regulation
        by
        states could have a material adverse affect on our revenues and business
        opportunities within that state. State PUCs also regulate the rates incumbent
        local exchange companies charge for interconnection of network elements with,
        and resale of services by, competitors. In response to the *USTA II* decision
        and the FCC's *TRO* and *TRRO* proceedings, some state commissions have continued proceedings to address
        issues
        affecting the rates, terms and conditions of intrastate services while other
        states suspended or terminated their proceedings. Any such proceedings may
        affect the rates, terms, and conditions contained in our interconnection
        agreements. The pricing, terms and conditions under which the incumbent local
        exchange company in each of the states in which we currently operate offers
        such
        services may preclude our ability to offer a competitively viable and profitable
        product within these and other states prospectively.
 
 Some
        states are considering enactment of legislation that would deregulate incumbent
        local exchange company broadband facilities and services. If such legislation became law, it could
        prevent state regulators from requiring that incumbent
        local exchange companies allow
        competitive carriers to interconnect with critical facilities used to provide
        broadband services on reasonable terms.
 
 In
        November 2005, the Michigan Telecommunications Act was renewed for four years
        and was amended to eliminate retail price regulation over most telecommunication
        services.
 
 **Local
        Regulation**
 
 In
        some
        municipalities where we have installed facilities, we are required to pay
        license or franchise fees based on a percentage of our revenue generated
        from
        within the municipal boundaries. We cannot guarantee that fees will remain
        at
        their current levels following the expiration of existing franchises or that
        other local jurisdictions will not impose similar fees.
 
 **Federal
        and State Regulation of Marketing**
 
 Our
        current and past direct and partner marketing efforts all require compliance
        with relevant federal and state regulations that govern the sale of
        telecommunication services. The FCC and many states have rules that prohibit
        switching a customer from one carrier to another without the customer’s express
        consent and specify how that consent must be obtained and verified. Most
        states
        also have consumer protection laws that further define the framework within
        which our marketing activities must be conducted. While directed at curbing
        abusive marketing practices, the design and enforcement of these rules can
        have
        the incidental effect of entrenching incumbent local exchange companies and
        hindering the growth of new competitors, such as our business.
 
 30
 Our
        marketing efforts are carried out through a variety of marketing programs,
        including referrals from existing customers, outbound telemarketing, direct
        sales through independent agents, broadcast media, online marketing initiatives
        and direct mail. Restrictions on the marketing of telecommunication services
        are
        becoming stricter in the wake of widespread consumer complaints throughout
        the
        industry about "slamming" (the unauthorized change of a customer’s service from
        one carrier to another carrier) and "cramming" (the unauthorized provision
        of
        additional telecommunication services). The 1996 Act strengthened penalties
        against slamming, and the FCC issued and updated rules tightening federal
        requirements for the verification of orders for telecommunication services
        and
        establishing additional financial penalties for slamming. In addition, many
        states have been active in restricting marketing through new legislation
        and
        regulation, as well as through enhanced enforcement activities. On October
        1,
        2003, the FCC's rules and regulations governing the creation and enforcement
        of
        national "do not call" databases became effective, which has had the effect
        of
        reducing the total number of leads available to us for outbound telemarketing
        (which is currently one of our important sales channels) in a given market.
        On
        February 18, 2005, the FCC released new rules that clarified certain aspects
        of
        the national “do not call” database. Notwithstanding, we can still market to
        these leads through our other sales channels, including direct mail. Our
        marketing activities have subjected us to investigations or enforcement actions
        by government authorities. The constraints of federal and state regulation,
        as
        well as increased FCC, Federal Trade Commission and state enforcement attention,
        could limit the scope and the success of our marketing efforts and subject
        them
        to enforcement actions, which may have an adverse effect on us.
 
 Statutes
        and regulations designed to protect consumer privacy also may have the
        incidental effect of hindering the growth of newer telecommunication carriers
        such as us. For example, the FCC rules that restrict the use of "customer
        proprietary network information" (information that a carrier obtains about
        its
        customers through their use of the carrier’s services) may make it more
        difficult for us to market additional telecommunication services (such as
        local
        and wireless), as well as other services and products, to our existing
        customers.
 
 **Other
        Domestic Regulation**
 
 We
        are
        subject to a variety of federal, state, and local environmental, safety and
        health laws, and regulations governing matters such as the generation, storage,
        handling, use, and transportation of hazardous materials, the emission and
        discharge of hazardous materials into the atmosphere, the emission of
        electromagnetic radiation, the protection of wetlands, historic sites, and
        endangered species and the health and safety of employees. We also may be
        subject to laws requiring the investigation and cleanup of contamination
        at
        sites we own or operate or at third-party waste disposal sites. Such laws
        often
        impose liability even if the owner or operator did not know of, or was not
        responsible for, the contamination.
 
 We
        operate several sites in connection with our operations. We are not aware
        of any
        liability or alleged liability at any operated sites or third-party waste
        disposal sites that would be expected to have a material adverse effect on
        us.
        Although we monitor our compliance with environmental, safety and health
        laws
        and regulations, we cannot give assurances that it has been or will be in
        complete compliance with these laws and regulations. We may be subject to
        fines
        or other sanctions by federal, state and local governmental authorities if
        we
        fail to obtain required permits or violate applicable laws and
        regulations.
 
 
 31
 **OUR
        COMPETITION**
 
 We
        face
        significant competition in all of our service areas, both residential and
        business. The telecommunications industry is highly competitive. Major
        participants in the industry regularly introduce new services and marketing
        activities. Competition in the telecommunication industry is based upon the
        ability to offer services at competitive prices, customer service, billing
        service and perceived quality. We face competition in all of our service
        areas,
        including voice, data, Internet, managed services, etc. Competition has led
        to
        lower prices for services.
 
 Our
        principal competitors are AT&T and BellSouth, incumbent local exchange
        companies in our networked markets. On March 5, 2006, AT&T and BellSouth
        announced that they had entered into an agreement to merge the companies.
        The
        proposed merger, which is subject to regulatory approval, if completed, may
        have
        an adverse impact on our business. The incumbent local exchange companies
        are
        well-capitalized, well-known companies that have the capacity to "bundle"
        other
        services, such as local and wireless telephone services and high speed Internet
        access, with long distance telephone services. The incumbent local exchange
        companies' name recognition in their existing markets, the established
        relationships that they have with their existing local service customers,
        their
        ability to take advantage of those relationships, and the FCC’s final rules
        regarding the unbundled network element platform that are favorable to the
        incumbent local exchange companies, also make it more difficult for us to
        compete with them. These companies as well as other incumbent local exchange
        companies and the major carriers, including Verizon, have targeted price
        plans
        at residential customers with significantly simplified rate structures and
        with
        bundles of local services with long distance, which may lower overall local
        and
        long distance prices. Competition is also fierce for the small and medium
        sized
        businesses that we also serve. In addition, other competitive local exchange
        carriers, cable televisions companies, direct broadcast satellite companies,
        other DSL resellers as well as technological substitutions such as VoIP,
        high-speed cable and broadband internet service, e-mail and wireless services
        are additional competitors to our services. Many of our competitors have
        greater
        financial, technical and marketing resources.
 
 During
        2005, the number of competitors in the telecommunication industry shrank
        significantly as a result of the FCC’s final rules regarding access to the
        incumbent local exchange companies’ networks. We expect other competitive local
        exchange carriers to likewise decide to cease marketing in 2006, resulting
        in
        very limited competition for the incumbent local exchange company.
 
 **EMPLOYEES**
 
 As
        of
        December 31, 2005, we employed approximately 1,100 persons. Following the
        acquisition of NTC, we employed approximately 1,500 persons as of January
        4,
        2006. We consider relations with our employees to be good.
 
 32
 
 **ITEM
        1A. RISK FACTORS**
 
 **Our
        business is subject to extensive regulation that continues to change, and
        we are
        therefore exposed to a variety of risks.**
 
 Our
        marketing and provision of telecommunication services is subject to significant
        regulation and may be adversely affected by regulatory developments at the
        federal, state and local levels. These regulations can, among other things,
        affect the way we conduct our business, the types of services we may offer,
        how
        we can market our services, the rates we are permitted to charge for our
        services, the availability to us of services and network access that we may
        need
        from others and the rates we must pay them for these services and the use
        of
        their networks, all of which may reduce the revenue we generate from our
        operating activities and the profitability of our business. These regulations
        can affect the level of regulation of other telecommunication services
        providers, including the incumbent local exchange carriers, or ILECs, and
        their
        ability to compete with us. These regulations also determine the level of
        contribution we must make to state and federal telecommunication subsidy
        programs. If we fail to comply with applicable regulations, or if the
        regulations change in a manner adverse to us, including in any of the ways
        described in some of the following risk factors, our business and operating
        results may suffer.
 
 **Our
        own local network is dependent upon our ability to obtain access to key network
        elements from some of our primary competitors. If we are unable to obtain
        these
        elements on acceptable terms, we may not be able to continue to offer our
        telecommunications services on a profitable basis, if at
        all.**
 
 We
        will
        not be able to provide our local voice and data services on a profitable
        basis,
        if at all, unless we are able to obtain key network elements from some of
        our
        primary competitors on acceptable terms. To offer local voice and data services
        in a market, we must connect our network with the network of the incumbent
        carrier in that market. This relationship is governed by an interconnection
        agreement between us and the incumbent carrier. We also must lease from these
        or
        other providers the telephone and data transmission lines we need to connect
        customers to our network. Our ability to provide our local voice and data
        services is dependent on existing regulations that require these elements
        to be
        provided to us on specified terms and on the compliance by our competitors
        with
        these provisioning regulations. In addition, because we rely on a limited
        number
        of suppliers for access to these network elements, we are vulnerable to the
        risk
        that we may not be able to renew or renegotiate our contracts with these
        suppliers on favorable terms or be able to obtain services under these contracts
        promptly.
 
 As
        a
        result of recent and pending regulatory changes, the incumbent carriers in
        the
        future may be able to increase significantly the rates they charge us for
        these
        network elements and services, or even decline to provide some of these network
        elements and services under certain circumstances. The rates that these or
        other
        providers may charge us under future interconnection, lease or resale agreements
        may not allow us to offer usage rates that are low enough to attract a
        sufficient number of network services customers or to operate at satisfactory
        profit margins. In addition, recent and pending regulatory developments and
        related judicial decisions have restricted the list of network components
        that
        incumbent carriers are required to make available on a nondiscriminatory
        basis
        to competitive carriers such as we.
 
 These
        developments or future similar developments could limit or terminate our
        access
        to the network components we need to provide local voice and data services
        and
        maintain and expand our own local network and could adversely affect our
        ability
        to grow our customer base and cost-effectively offer services in our existing
        and planned markets.
 
 33
 **Our
        need to comply with extensive government regulatory requirements could increase
        our costs and slow our growth and ongoing changes in regulatory requirements
        could adversely affect our competitive position.**
 
 We
        are
        subject to varying degrees of federal, state and local regulation. The FCC
        exercises jurisdiction over us with respect to interstate and international
        services. For example, we must comply with various federal regulations, such
        as
        the duty to contribute to universal service subsidies. State regulatory
        commissions exercise jurisdiction over us because we provide intrastate
        services. We are required to obtain regulatory authorization and/or file
        tariffs
        at state agencies in most of the states in which we operate. Constructing
        a
        network and selling telephone service is also subject to numerous local
        regulations such as building codes and licensing. Such regulations vary on
        a
        city by city and county by county basis. Failure to comply with federal and
        state reporting and regulatory requirements may result in fines or other
        penalties, including loss of certification to provide services.
 
 The
        ILECs
        with whom we compete generally have significantly greater resources than
        we do
        to pursue their regulatory and legislative agendas in the jurisdictions where
        we
        compete. State authorities may continue to relax restrictions on the ILECs
        through increased pricing flexibility for their services and other regulatory
        relief, which could have a material adverse effect on competitive service
        providers, including us. Future regulatory provisions may be less favorable
        to
        competitive service providers and more favorable to the ILECs. Changes in
        current or future regulations adopted by the FCC or state regulators, or
        other
        legislative, administrative or judicial initiatives relating to the
        communications industry, could have a material adverse effect on our business,
        operating results and financial condition.
 
 **Increased
        regulation of marketing may hinder our ability to obtain new customers and
        may
        expose us to increased costs and certain liabilities** **.**
 
 Our
        current and past direct and partner marketing efforts all require compliance
        with relevant federal and state regulations that govern the sale of
        telecommunication services. The FCC and many states have rules that prohibit
        switching a customer from one carrier to another without the customer’s express
        consent and specify how that consent must be obtained and verified. Most
        states
        also have consumer protection laws that further define the framework within
        which our marketing activities must be conducted. While directed at curbing
        abusive marketing practices, the design and enforcement of these rules can
        have
        the incidental effect of entrenching incumbent local exchange companies and
        hindering the growth of new competitors, such as our business.
 
 Our
        marketing efforts are carried out through a variety of marketing programs,
        including referrals from existing customers, outbound telemarketing, direct
        sales through independent contractors, broadcast media, online marketing
        initiatives and direct mail. In recent years, restrictions on the marketing
        of
        telecommunication services have become stricter, including the creation of
        national "do not call" databases, and the enforcement of the restrictions
        by
        federal and state regulatory authorities has intensified. Our marketing
        activities have subjected us to investigations or enforcement actions by
        government authorities. The constraints of federal and state regulation,
        as well
        as increased FCC, Federal Trade Commission and state enforcement attention,
        could limit the scope and the success of our marketing efforts and subject
        them
        to enforcement actions, which may have an adverse effect on us.
 
 Statutes
        and regulations designed to protect consumer privacy also may have the
        incidental effect of hindering the growth of newer telecommunication carriers
        such as we. For example, the FCC rules that restrict the use of "customer
        proprietary network information" (information that a carrier obtains about
        its
        customers through their use of the carrier’s services) may make it more
        difficult for us to market additional telecommunication services (such as
        local
        and wireless), as well as other services and products, to our existing
        customers.
 
 34
 **We
        are in a highly competitive industry** **.**
 
 We
        face
        significant competition in all of our service areas, both business and
        residential. The telecommunications industry is highly competitive. Major
        participants in the industry regularly introduce new services and marketing
        activities. Competition in the telecommunication industry is based upon the
        ability to offer services at competitive prices, customer service, billing
        service and perceived quality. We face competition in all of our service
        areas,
        including voice, data, Internet and managed services. Many of our competitors
        have greater financial, technical and marketing resources. Competition has
        led
        to lower prices for services.
 
 Our
        principal competitors are AT&T and BellSouth, the incumbent local exchange
        carriers in our networked markets. The incumbent local exchange carriers
        are
        well-capitalized, well-known companies with significantly greater resources
        than
        we. They have the capacity to "bundle" other services, such as local and
        wireless telephone services and high speed Internet access, with long distance
        telephone services. On March 5, 2006, AT&T and BellSouth announced that they
        had entered into an agreement to merge the companies. The proposed merger,
        which
        is subject to regulatory approval, will merge our two largest vendors into
        one
        entity. This merger, if completed, may have an adverse impact on our business.
 
 The
        incumbent local exchange carriers' name recognition in their existing markets,
        the established relationships that they have with their existing local service
        customers, their ability to take advantage of those relationships, and their
        ability to apply their significantly greater resources to influence applicable
        regulations in ways that are more favorable to them, also make it more difficult
        for us to compete with them. These companies as well as other incumbent local
        exchange carriers and the major carriers, including Verizon and Sprint Nextel,
        have targeted price plans at residential customers with significantly simplified
        rate structures and with bundles of local services with long distance, which
        may
        lower overall local and long distance prices. Competition is also fierce
        for the
        small- and medium-sized businesses that we also serve. Other competitive
        local
        exchange carriers, such as we, are competitors to our services.
 
 We
        are
        also experiencing increasing competition from wireless communication companies.
        Telecommunications carriers that offer both wireless and landline
        telecommunications services can offer bundled services that may be more
        attractive to our customers than landline offerings alone. Mobile wireless
        is
        also "cannibalizing" long distance minutes and local landline installations.
        In
        addition, several wireless competitors operate or plan to operate wireless
        telecommunications systems that encompass most of the United States, which
        could
        give them a significant competitive advantage. We currently do not offer
        wireless services in our bundle of services. We could also face additional
        competition from users of new wireless technologies including, but not limited
        to, currently unlicensed spectrum.
 
 Additionally,
        cable companies and companies using the cable lines for access to the customer,
        direct broadcast satellite companies, other DSL resellers, as well as
        technological substitutions such as Voice over Internet Protocol, or VoIP,
        high-speed cable and broadband internet service and e-mail are competitors
        to
        our services. Many of these service providers are able to offer service at
        lower
        prices and have begun replacing the traditional land line telecommunications
        provider, such as we.
 
 If
        we are
        not able to compete successfully against our existing competitors and the
        new
        entrants into the telecommunication services market, our financial condition
        and
        results of operations could be materially and adversely affected.
 
 35
 **We
        have increased and will continue to increase prices for those customers that
        we
        are unable to service over our own local network, which will result in increased
        customer attrition and associated loss of revenues** **.**
 
 As
        a
        result of the changes in government regulation that effectively prevent us
        from
        profitably obtaining new customers in markets where we do not have our own
        local
        network, we have increased rates for our existing customers that are located
        in
        such markets and plan to continue increasing rates for these customers to
        reflect the increasing costs to us of providing telecommunication services
        to
        them. While these price increases may increase our current revenues from
        such
        customers, it will adversely affect our ability to retain such customers
        on our
        service and negatively affect our revenues over time. These price increases
        will
        also result in these customers seeking other providers for their
        telecommunications needs, further bolstering the dominance of the incumbent
        local exchange companies, with whom we compete, in these markets.
 
 **We
        may be unable to replace those customers that leave our
        service** **.**
 
 Purchasers
        of our residential local bundled product, which represent the large majority
        of
        our customers, are not obligated to purchase any minimum amount of our services,
        and can stop using our services at any time without penalty. Our customers
        may
        not continue to buy their local and/or long distance telephone service through
        us. If a significant portion of our customers were to decide to purchase
        telecommunications service from other service providers, we may not be able
        to
        replace these customers. Furthermore, we do not intend to seek to replace
        those
        customers that are outside the service area of our local networks. A high
        level
        of customer attrition is common in the telecommunications industry, and our
        financial results are affected by this attrition. Attrition is attributable
        to a
        variety of factors, including our termination of customers for nonpayment,
        changes in the economy, public impression of the quality of our services
        and the
        initiatives of existing and new competitors who, to attract new customers,
        may
 
 ·
              implement
                  national advertising campaigns,
 
 ·
              utilize
                  telemarketing programs, and
 
 ·
              provide
                  cash payments and other forms of
                  incentives.
 
 While
        we
        cannot predict future pricing by our competitors, we anticipate aggressive
        price
        competition to continue. Lower prices offered by our competitors could
        contribute to an increase in our customer turnover, or churn.
 
 36
 **We
        rely upon our local network, long-distance network, proprietary back office
        technology and information systems, and third parties to provide services
        to our
        customers. Interruption or failure of, or failure to manage, these systems
        increases the likelihood that we could incur losses or face other
        difficulties** **.**
 
 Since
        we
        operate our own local and long distance switches, our network is subject
        to the
        risk of significant interruption. Fires or natural disasters, for example,
        could
        cause damage to our switching equipment or to transmission facilities connecting
        our switches. Any interruption in our services over our network caused by
        such
        damage could have a material adverse impact on our financial condition and
        results of operations. In operating our network, we may be unable to connect
        and
        manage a large number of customers or a large quantity of traffic at high
        speeds. Any failure or perceived failure to achieve or maintain high-speed
        data
        transmission could significantly reduce demand for our services and adversely
        affect our operating results. In addition, computer viruses, break-ins, human
        error, natural disasters and other problems may disrupt our network. The
        network
        security and stability measures we implement may be circumvented in the future
        or otherwise fail to prevent the disruption of our services. The costs and
        resources required to eliminate computer viruses and other security problems
        may
        result in interruptions, delays or cessation of services to our customers,
        which
        could decrease demand, decrease our revenue and slow our planned
        expansion.
 
 We
        rely
        on our proprietary back office technology to support all aspects of our
        operations. Should our systems fail and we are unable to return them to
        operation in an acceptable timeframe or lose valuable customer data, our
        operational and financial condition will be adversely affected. If we are
        unable
        to integrate the back-office systems of our newly acquired companies, or
        to
        maintain or enhance our back office information systems, we may not be able
        to
        expand our revenue as quickly as we plan or to compete effectively.
        Sophisticated back office information systems are vital to our revenue growth
        and our ability to monitor costs, bill customers, initiate, implement and
        track
        customer orders and achieve operating efficiencies. We must select products
        and
        services offered by third-party vendors and efficiently integrate those products
        and services into our existing back office operations. We may not successfully
        implement these products, services and systems on a timely basis, and our
        systems may fail to perform as we expect. A failure or delay in the expected
        integration or performance of our back office systems could slow the pace
        of our
        expected revenue growth or harm our competitiveness by adversely affecting
        our
        service quality.
 
 We
        obtain
        services from various long distance and local carriers of telecommunications
        services for our customers. If these carriers fail to provide service or
        the
        provision of such services is interrupted, our customers would still hold
        us
        responsible and this could have a material adverse effect on our financial
        condition and results of operations.
 
 We
        obtain
        the majority of our network equipment and software from third party suppliers.
        In addition, we rely on these suppliers for technical support and assistance.
        If
        any of our suppliers were to terminate our relationship or were to cease
        making
        the equipment we use, our ability to maintain, upgrade or expand our network
        could be impaired. Although we believe that we would be able to address our
        future equipment needs with equipment obtained from other suppliers, such
        equipment could prove to be incompatible with our network or only compatible
        with significant modifications and cost. If we are unable to obtain the
        equipment necessary to maintain our network, our ability to attract and retain
        customers and provide our services would be impaired and our results of
        operations could be materially adversely affected.
 
 37
 **Difficulties
        presented by natural disaster, economic, political, legal, health, accounting
        and business factors could negatively affect our
        business** **.**
 
 We
        provide services in various states across the United States. As a result,
        our
        business is subject to political and economic fluctuations in various states
        and
        geographic regions. In addition, we currently have physical assets and employees
        in sixteen states.
 
 The
        day-to-day operation of our business is highly dependent on the integrity
        of our
        communications and information technology systems, and on our ability to
        protect
        those systems from damage or interruptions by events beyond our control.
        Sabotage, computer viruses or other infiltration by third parties could damage
        our systems. Such events could disrupt our service, damage our facilities,
        damage our reputation, and cause us to lose customers, among other things,
        and
        could harm our results of operations. In addition, a catastrophic event could
        materially harm our operating results and financial condition. Catastrophic
        events could include a terrorist attack on the United States, or a major
        earthquake, hurricane, fire, or similar event that affects our central offices,
        corporate offices, network operations center or network equipment. We believe
        that communications infrastructures, such as the ones on which we rely, may
        be
        vulnerable in the case of such an event and our markets, which are generally
        urban markets, may be more likely to be the targets of terrorist activity.
        If we
        fail to manage these operations successfully, our ability to service our
        clients
        and grow our business will be seriously impeded.
 
 **We
        currently use soft-switching IP technology in lieu of traditional switching
        to
        offer local service in certain markets, which may result in operational failures
        and higher-than-anticipated costs.**
 
 We
        currently use soft-switching IP technology in certain markets to reduce our
        costs of servicing our existing and new customers. We are initially implementing
        the technology in Grand Rapids, Michigan and Atlanta, Georgia and continue
        to
        evaluate the use of this technology in other markets. IP technology enables
        voice and data services to be carried using common transport elements, reducing
        the cost of providing services compared to traditional circuit switched
        technology. However, in contrast to the legacy circuit-switch technology
        used by
        the ILECs and other providers of communications services, our network is
        based
        on IP technology. This technology is much newer than that used by the legacy
        carriers and has not been used on active networks for as long. Although we
        believe that IP technology is well-designed for the provision of a broad
        array
        of communications services to large numbers of users, we have and could continue
        to encounter difficulties in adapting our IP-based network to meet the
        requirements of future technological advancements or to handle increasingly
        higher volumes of voice and data traffic as we grow our business or as our
        customers’ usage increases. Further, the newer IP technology may prove to be
        unreliable over a long period of time. Any failure of our network could cause
        us
        to lose market share and could materially harm our results of
        operations.
 
 **We
        must continue to keep pace with technological changes in our industry in
        order
        to succeed** **.**
 
 We
        face
        rapid and significant changes in technology. The telecommunications industry
        has
        changed significantly over the past several years and is continuing to evolve
        rapidly. Emerging technologies and services, such as VoIP applications,
        broadband services and advanced wireless offerings, could alter the economic
        conditions under which the telecommunications industry operates. New
        technologies also could lead to the development of new, more convenient and
        cost-effective services. In addition, the preferences and requirements of
        customers are rapidly changing. Our ability to retain current customers and
        attract new customers may be highly dependent on whether we choose the
        technologies that have the greatest customer acceptance, are able to adopt
        these
        new technologies and offer new services when appropriate, or can compete
        successfully against other service providers that use these new technologies.
        We
        cannot predict the effect of technological changes on our business. The
        development and offering of new services in response to new technologies
        or
        consumer demands may require us to increase our capital expenditures
        significantly.
 
 38
 **We
        depend upon qualified personnel to implement our strategy and achieve our
        goals.
        The loss of qualified personnel or our inability to attract and retain key
        personnel could materially harm our business** **.**
 
 Our
        success in implementing our strategy and achieving our goals will depend,
        in
        large part, upon the contributions of our qualified technical, marketing,
        programming, engineering, sales and management personnel. We also rely on
        independent contractors to market and sell our services. If we are unable
        to
        attract and retain experienced and motivated personnel, including a large
        and
        effective direct sales force, we may not be able to obtain new customers
        or sell
        sufficient amounts of service to execute our business plan.
 
 Competition
        for qualified personnel is intense. The loss of the services of qualified
        personnel, or the inability to attract, retain and motivate qualified personnel,
        may prevent us from achieving our goals and could have a material adverse
        effect
        on our business, financial condition and results of operations. We do not
        have
        "key man" life insurance on any of our officers or directors.
 
 The
        rapid
        development of our own network and the efforts to expand its capacity and
        our
        customer base places a significant strain on our management, operational,
        financial and information management systems and controls, personnel and
        other
        resources. Failure to implement and improve the operational and financial
        information management systems and controls necessary to support this growth
        and
        to maintain our other resources at a pace consistent with industry changes
        and
        the growth of our business could cause customers to switch to other
        telecommunication service providers, which would have a material adverse
        effect
        on us.
 
 **Failure
        to provide adequate service to our customers could have a negative effect
        on our
        financial condition** **.**
 
 We
        are
        focused upon providing our customers with quality service. We believe that
        satisfactorily servicing our customers will encourage customers to remain
        on our
        service and positively separate us from our competitors. If we are unable
        to
        provide adequate service to our customers, including customer service, we
        could
        experience greater attrition of our existing customers and a decrease in
        new
        customers, which could have a negative effect on our financial
        condition.
 
 **If
        we are unable to successfully continue our acquisition strategy, our growth
        may
        suffer.**
 
 In
        the
        past twelve months, we have relied on our acquisitions of other companies
        to
        supplement our internal expansion of our network and customer base and a
        significant portion of our current network assets and lines on net have been
        added through these acquisitions. In that period, we have acquired customers
        and
        assets through our acquisitions of LDMI and NTC. In connection with these
        acquisitions, we expended an aggregate of approximately $39 million of our
        cash-on-hand and issued 1.8 million shares of our common stock. While we
        intend,
        as part of our growth strategy, to actively seek to identify and pursue further
        acquisitions on acceptable terms, which could include the payment of cash
        or the
        issuance of shares of our stock, we do not know whether we will be able to
        make
        such acquisitions or the size, timing or terms thereof. If we are unable
        to
        continue to identify, fund and complete acquisitions on acceptable terms,
        our
        ability to implement our growth strategy and continue the expansion of our
        network and customer base could be significantly hampered, with potentially
        adverse consequences to our competitive flexibility, revenues and operating
        results.
 
 39
  **We
        may not be successful with the integration of our
        acquisitions** **.**
 
 As
        part
        of our growth strategy, we seek to supplement internal expansion with targeted
        acquisitions. We may not be successful in integrating any newly acquired
        businesses into our operations. The integration of acquired businesses poses
        a
        number of significant risks, including the following:
 
 ·
              we
                  may be unable to retain skilled management, technical, sales and
                  back
                  office personnel of acquired
                  companies;
 ·
              customers
                  of acquired companies may resist our marketing programs, pricing
                  levels or
                  services;
 ·
              we
                  may not successfully incorporate the services of acquired businesses
                  into
                  our package of service offerings;
 ·
              the
                  attention we can devote to any one acquired company may be restricted
                  by
                  our allocation of limited management resources among various integration
                  efforts;
 ·
              our
                  acquisition and integration activities may disrupt our ongoing
                  business
                  activities;
 ·
              we
                  may be unable to maintain uniform standards, controls, procedures
                  and
                  policies throughout all of our acquired companies;
                  and
 ·
              our
                  relationships with vendors may be adversely
                  affected.
 
 We
        have
        never attempted to integrate operating platforms of this scale, or with the
        necessity to serve business customers, and there can be no assurance that
        we
        will be successful in integrating these customers or be able to enhance these
        systems on a timely basis. Even if acquired companies eventually contribute
        to
        an increase in our profitability, the acquisitions may adversely affect our
        operating results in the short term. Our operating results may decrease as
        a
        result of transaction-related expenses we record for the period in which
        we
        complete an acquisition. Our operating results may be further reduced by
        the
        higher operating and administrative expenses we may incur in the periods
        immediately preceding and following an acquisition as we seek to integrate
        the
        acquired business into our operations.
 
 Furthermore,
        companies that we may acquire may not have adequate controls and procedures,
        including internal control over financial reporting, or may have control
        systems
        that are not compatible with ours. We will be required to integrate these
        companies with our disclosure and financial reporting controls and procedures.
        Our failure to do so in a timely manner could have the adverse results discussed
        below under the heading, “There are risks with our financial
        reporting.”
 
 40
 **We
        may be required to seek financing to support our ongoing efforts to implement
        our growth strategy through acquisitions** **.**
 
 We
        have
        to date been meeting our ongoing cash requirements (including for the conduct
        of
        our operations, acquisitions and capital expenditures) from our cash-on-hand
        and
        from cash generated from operations. However, our continued growth through
        further acquisitions, may require that we seek alternative sources of funding.
        While we believe that we would have access to financing in the public or
        private
        markets, there can be no assurance as to the timing, amounts, terms or
        conditions of any such financing or whether it could be obtained on terms
        acceptable to us. The terms of any debt financing will likely include
        restrictive covenants that could limit our operating flexibility and our
        flexibility in planning for, or reacting to changes in, our business, any
        of
        which could place us at a competitive disadvantage.
  **There
        are risks with our financial reporting** **.**
 
 We
        have
        reported material weaknesses in our internal control over financial reporting
        in
        the past and additional material weaknesses could be identified in the future.
        These control deficiencies resulted in the restatement of our financial
        statements for each of the quarters in 2003 and year ended December 31, 2003,
        and the first, second and third quarters of 2004 and certain audit adjustments
        to the fourth quarter 2004 financial statements.
 
 Any
        failure by us to maintain or implement required new or improved controls
        or to
        integrate any newly acquired companies with such controls, or any difficulties
        we encounter in their implementation or such integration, could result in
        additional significant deficiencies or material weaknesses, cause us to fail
        to
        meet our periodic reporting obligations or result in material misstatements
        in
        our financial statements. Any such failure could also adversely affect the
        results of periodic management evaluations and annual auditor attestation
        reports regarding the effectiveness of our internal control over financial
        reporting. The existence of a material weakness could result in errors in
        our
        financial statements, including errors that would not be prevented or detected,
        which in turn could result in a restatement of our financial statements,
        cause
        us to fail to meet our reporting obligations and cause investors to lose
        confidence in our reported financial information, leading to a decline in
        our
        stock price.
 
 
 **ITEM
        1B. UNRESOLVED STAFF COMMENTS**
 
 None.
 
 41
 
 **ITEM
        2. PROPERTIES.**
 
 We
        own a
        24,000 square foot facility in New Hope, Pennsylvania that serves as our
        headquarters and is the location of executive, finance, marketing, legal
        and
        certain information technology development departments. We also own a 32,000
        square foot facility located in Palm Harbor, Florida for our sales, provisioning
        and customer service operations. We lease 10,000 square feet of office space
        in
        Reston, Virginia, that is the location of our networking personnel and our
        network management center. We lease 43,000 square feet of office space in
        Southfield, Michigan, (LDMI’s former headquarters) that is the location of
        certain networking, sales, finance and information technology personnel.
        We also
        lease 54,000 square feet of office space in Pensacola, Florida, (NTC’s former
        headquarters), where certain networking, sales, finance and information
        technology personnel are located.
 
 We
        also
        lease properties in the cities in which switches for our network have been
        installed and where we have local sales offices. These other leased facilities
        included, as of March 1, 2006, 22 office facilities and nine switch facilities
        in 25 U.S. cities.
 
 
 **ITEM
        3. LEGAL PROCEEDINGS.**
 
 We
        are
        party to a number of legal actions and proceedings arising from our provision
        and marketing of telecommunications services (including matters involving
        do not
        call, customer proprietary network information and billing regulations),
        as well
        as certain legal actions and regulatory matters arising in the ordinary course
        of business. We believe that the ultimate outcome of the foregoing actions
        will
        not result in a liability that would have a material adverse effect on our
        financial condition or results of operations.
 
 **ITEM
        4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.**
 
 None.
 
 **EXECUTIVE
        OFFICERS OF THE REGISTRANT**
 
 Our
        executive officers, as of March 1, 2006, were as follows:
 
 **Name**
              
              **Age**
              
              **Position**Edward
                  B. Meyercord, III (1)
              
              40
              
              Chief
                  Executive Officer, President and DirectorWarren
                  Brasselle
              
              48
              
              Executive
                  Vice President - Network OperationsJeffrey
                  Earhart
              
              44
              
              Executive
                  Vice President - Customer OperationsAloysius
                  T. Lawn, IV
              
              47
              
              Executive
                  Vice President - General Counsel and SecretaryTimothy
                  W. Leonard
              
              45
              
              Chief
                  Information OfficerPatrick
                  O'Leary
              
              50
              
              Executive
                  Vice President - Business ServicesThomas
                  Walsh
              
              46
              
              Senior
                  Vice President - Finance and TreasurerPaul
                  Walker
              
              41
              
              Senior
                  Vice President - MarketingMark
                  Wayne
              
              48
              
              Senior
                  Vice President - Business SalesDavid
                  G. Zahka
              
              46
              
              Chief
                  Financial Officer
 
 (1)
              Director
                  whose term expires in 2006.
 
 42
 All
        officers are elected annually by the Board of Directors and hold office until
        their successors are elected and qualified.
 
 EDWARD
        B.
        MEYERCORD, III. Mr. Meyercord currently serves as our Chief Executive Officer
        and President. From May 2001 through December 2003, Mr. Meyercord served
        as our
        President. He served as our Chief Financial Officer between August 1999 and
        December 2001 and Chief Operating Officer between January 2000 and May 2001.
        He
        joined us in September of 1996 as the Executive Vice President, Marketing
        and
        Corporate Development. Prior to joining us, Mr. Meyercord was a Vice President
        in the Global Telecommunications Corporate Finance Group at Salomon Brothers,
        Inc., based in New York. Prior to Salomon Brothers he worked in the corporate
        finance department at PaineWebber Incorporated. Mr. Meyercord is also a member
        of our Board of Directors.
 
 WARREN
        BRASSELLE. Mr. Brasselle currently serves us as Executive Vice President
        -
        Network Operations. Between April 2000 and February 2004, Mr. Brasselle served
        us as Senior Vice President - Operations. Prior to joining us, Mr. Brasselle
        was
        Vice President of Operations for Cable and Wireless North America since 1996,
        where he was broadly responsible for the design, provisioning, and maintenance
        of Cable & Wireless' voice, data, and IP network. Mr. Brasselle also held a
        variety of operational positions at MCI and Williams
        Telecommunications.
 
 JEFFREY
        EARHART. Mr. Earhart currently serves us as Executive Vice President - Customer
        Operations. Between 2000 and 2004, he served us as Senior Vice President
        -
        Customer Operations and between 1997 and 2000, as Vice President, Operations.
        Mr. Earhart originally joined us as our Director of Retail Sales and
        Provisioning in 1990, a position he held until 1992. Prior to rejoining us
        in
        1997, Mr. Earhart served as President of Collective Communications Services,
        an
        independent long distance reseller of our long distance services.
 
 ALOYSIUS
        T. LAWN, IV. Mr. Lawn joined us in January 1996 and currently serves as our
        Executive Vice President - General Counsel and Secretary. Prior to joining
        us,
        from 1985 through 1995, Mr. Lawn was an attorney in private
        practice.
 
 TIMOTHY
        W. LEONARD. Mr. Leonard joined us in September 2000 and currently serves
        as our
        Chief Information Officer. Prior to joining us, from 1991 through 2000, Mr.
        Leonard was an independent contractor who performed engagements in the
        information technology area for numerous Fortune 1000 companies. From 1988
        to
        1991, Mr. Leonard served as a senior consultant with the PA Consulting Group,
        an
        information technology consulting company.
 
 PATRICK
        O'LEARY. Mr. O'Leary currently serves as our Executive Vice President - Business
        Services. Mr.
        O'Leary joined us in July 2005 in connection with our acquisition of LDMI,
        where
        he served as Chairman of the Board, Chief Executive Officer and President.
        Prior
        to joining LDMI in 1995, Mr. O'Leary served as the Director of Marketing
        for
        Allnet Communications, a telecommunications provider.
 
 THOMAS
        M.
        WALSH. Mr. Walsh joined us in September 2000 and currently serves as our
        Senior
        Vice President - Finance and Treasurer. Before joining us, he served as director
        of finance at Comcast Cellular Communications, a telecommunications company,
        from 1996 to 1999, and Regional Controller of SBC Mobil Systems, a successor
        corporation, from 1999 to 2000. Prior to Comcast Cellular Communications,
        he
        worked for Call Technology Corporation, a telecommunications company, where
        he
        was responsible for all finance and accounting functions as Chief Financial
        Officer. Prior to his tenure with Call Technology Corporation, Mr. Walsh
        served
        as an Audit Manager for Ernst & Young. Mr. Walsh is a Certified Public
        Accountant.
 
 PAUL
        WALKER. Mr. Walker joined us in January 2005 and currently serves as our
        Senior
        Vice President - Marketing. Prior to joining us, he served as the Director
        of
        Marketing for Worldnet, a telecommunications division of AT&T, for fourteen
        years.
 
 MARK
        WAYNE. Mr. Wayne currently serves as our Senior Vice President - Business
        Sales.
        Mr. Wayne joined us in July 2005 in connection with our acquisition of LDMI,
        where he served as the Executive Vice President of Sales and Marketing. Prior
        to
        joining LDMI in 2001, he served as President, Chief Operating Officer and
        a
        member of the Board of Directors of BullsEye Telecom. Prior to that, he served
        as director of marketing, local services at Midcom Communications and vice
        president, marketing and vendor relations at USN Communications in Chicago.
        Mr.
        Wayne also spent 13 years at Ameritech, where he was a senior director at
        Ameritech Information Industry Services.
 
 DAVID
        G.
        ZAHKA. Mr. Zahka joined us in December 2001 as Chief Financial Officer. Before
        joining us, he spent more than 15 years with PaineWebber Incorporated, and
        its
        successor UBS Warburg, where he served most recently as Executive Director
        of
        the Financial Sponsors Group. At PaineWebber, Mr. Zahka also served as Senior
        Vice President of Debt Capital Markets and First Vice President of its Utility
        Finance Group.
 
 
 43
  **PART
        II**
 
 **ITEM
        5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
        ISSUER
        PURCHASES OF EQUITY SECURITIES.**
 
 **Market
        Information; Holders; Dividends**
 
 Our
        common stock, $.01 par value per share, is traded on the Nasdaq National
        Market
        under the symbol "TALK." As of March 1, 2006, there were approximately 870
        record holders of our common stock. We have never declared or paid any cash
        dividends on our capital stock and do not anticipate paying cash dividends
        in
        the foreseeable future. High and low quotations listed below are actual closing
        sales prices as reported by the Nasdaq National Market:
 
 
 **Common
                  Stock**
              
              **Price
                  Range Of Common Stock****High******
              
              
              **Low****2004**First
                  Quarter
              
              $
              12.05
              
              $
              8.14Second
                  Quarter
              
              
              10.05
              
              
              7.07Third
                  Quarter
              
              
              7.70
              
              
              5.05Fourth
                  Quarter
              
              
              7.47
              
              
              5.01**2005**First
                  Quarter
              
              
              6.71
              
              
              5.85Second
                  Quarter
              
              
              10.21
              
              
              6.26Third
                  Quarter
              
              
              11.61
              
              
              8.58Fourth
                  Quarter
              
              
              10.01
              
              
              8.63
 
 **Stock
        Purchases**
 
 We
        made
        no purchases of our common stock in the quarter ended December 31, 2005.
        On June
        1, 2004, we announced that our Board of Directors had authorized a share
        buy
        back program for us to purchase up to $50 million of our outstanding shares.
        The
        shares may be purchased from time to time on the open market and in private
        transactions. There is currently no stated expiration date for this program
        and
        through December 31, 2005, we had not purchased any shares under this
        program.
 
 
 **ITEM
        9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
        DISCLOSURE.**
 
 None.
 
 **ITEM
        9B. OTHER INFORMATION.**
 
 None.
 
 44
 **PART
        III**
 
 The
        information called for by Part III of Form 10-K (Item 10 —
Directors and Executive Officers of the Registrant, Item 11 —
Executive Compensation, Item 12 — Security Ownership of Certain
        Beneficial Owners and Management and Related Stockholder Matters,
        Item 13 — Certain Relationships and Related Transactions, and
        Item 14 — Principal Accounting Fees and Services), to the extent not
        set forth in
        Part I
        of this Form 10-K Report under the caption “ EXECUTIVE
        OFFICERS OF THE REGISTRANT ,”
is
        incorporated by reference from our definitive proxy statement, which will
        be
        filed with the Securities and Exchange Commission within 120 days after the
        end of the fiscal year to which this Annual Report relates. The
        information regarding our executive officers included in Part I of this Annual
        Report under the caption “EXECUTIVE OFFICERS OF THE REGISTRANT” is incorporated
        herein by reference.
  **PART
        IV**
 
 **ITEM
        15. EXHIBITS**
 
 **(a)**
 
 **(3)
        EXHIBITS:**
 
 EXHIBIT
 NUMBER
        DESCRIPTION
 
 3.1
              Our
                  composite form of Amended and Restated Certificate of Incorporation,
                  as
                  amended through October 15, 2002 (incorporated by reference to
                  Exhibit 3.2
                  to our Current Report on Form 8-K, dated October 16, 2002).
 
 3.2
              Our
                  Bylaws (incorporated by reference to Exhibit 3.2 to our registration
                  statement on Form S-1 (File No. 33-94940)).
 
 3.3
              Certificate
                  of Designation of Series A Junior Participating Preferred Stock
                  dated
                  August 27, 1999 (incorporated by reference to Exhibit A to Exhibit
                  1 to
                  our registration statement on Form 8-A (File No. 000-26728)).
 
 4.1
              Specimen
                  of Talk America Holdings, Inc. common stock certificate (incorporated
                  by
                  reference to Exhibit 4.1 to our Annual Report on Form 10-K for
                  the year
                  ended December 31, 2002).
 
 4.2
              Form
                  of Warrant Agreement for MCG Credit Corporation dated August 9,
                  2000
                  (incorporated by reference to Exhibit 4.3 to our Annual Report
                  on Form
                  10-K for the year ended December 31, 2000).
 
 4.3
              Form
                  of Warrant Agreement for MCG Credit Corporation dated October 20,
                  2000
                  (incorporated by reference to Exhibit 4.4 to our Annual Report
                  on Form
                  10-K for the year ended December 31, 2000).
 
 4.4
              Form
                  of Warrant Agreement for MCG Finance Corporation dated October
                  20, 2000
                  (incorporated by reference to Exhibit 4.5 to our Annual Report
                  on Form
                  10-K for the year ended December 31, 2000).
 
 
 10.1
              Employment
                  Agreement with Aloysius T. Lawn, IV dated July 30, 2004 (incorporated
                  by
                  reference to Exhibit 10.4 to our Quarterly Report on Form 10-Q
                  for the
                  quarter ended September 30, 2004).*
 
 10.2
              Employment
                  Agreement with Edward B. Meyercord, III dated January 1, 2004
                  (incorporated by reference to Exhibit 10.2 to our Annual Report
                  on Form
                  10-K for the year ended December 31, 2003).*
 
 10.3
              Tel-Save
                  Holdings, Inc. 1995 Employee Stock Option Plan (incorporated by
                  reference
                  to Exhibit 10.15 to our registration statement on Form S-1 (File
                  No.
                  33-94940)).*
 
 10.4
              Stock
                  Option Agreement, dated as of November 13, 1998, with Gabriel Battista
                  (incorporated by reference to Exhibit 10.4 to our Current Report
                  on Form
                  8-K dated January 20, 1999).*
 
 10.5
              1998
                  Long-Term Incentive Plan (incorporated by reference to Exhibit
                  10.14 to
                  our Current Report on Form 8-K dated January 20, 1999).*
 
 10.6
              2000
                  Long-Term Incentive Plan (incorporated by reference to Exhibit
                  10.31 to
                  our Registration Statement on Form S-4 (No. 333-40980)). *
 
 10.7
              Form
                  of Non-Qualified Stock Option Agreement, dated December 12, 2000,
                  for each
                  of Gabriel Battista, Aloysius T. Lawn IV and Edward B. Meyercord,
                  III
                  (incorporated by reference to Exhibit 10.40 to our Annual Report
                  on Form
                  10-K for the year ended December 31, 2000).*
 
 10.8
              Rights
                  Agreement dated as of August 19, 1999 by and between the Talk.com
                  Inc. and
                  First City Transfer Company, as Rights Agent (incorporated by reference
                  to
                  Exhibit 1 to our registration statement on Form 8-A (File No. 000-26728)).
 
 10.9
              Employment
                  Agreement with Thomas M. Walsh dated as of May 9, 2005 (incorporated
                  by
                  reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q
                  dated March
                  31, 2005).*
 
 10.10
              Indemnification
                  Agreement with Thomas M. Walsh dated as of August 7, 2000 (incorporated
                  by
                  reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q
                  dated
                  November 14, 2000).*
 
 10.11
              Non-Qualified
                  Stock Option Agreement with Thomas M. Walsh dated as of August
                  7, 2000
                  (incorporated by reference to Exhibit 10.3 to our Quarterly Report
                  on Form
                  10-Q dated November 14, 2000).*
 
 10.12
              Lease
                  by and between Talk.com Holding Corp. and University Science Center,
                  Inc.
                  dated April 10, 2000 (incorporated by reference to Exhibit 10.54
                  to our
                  Annual Report on Form 10-K for the year ended December 31, 2000).
 
 
 10.13
              Lease
                  by and between The Other Phone Company, dba Access One Communications
                  and
                  University Science Center, Inc. dated December 8, 1999 (incorporated
                  by
                  reference to Exhibit 10.55 to our Annual Report on Form 10-K for
                  the year
                  ended December 31, 2000).
 
 10.14
              Restated
                  Access One Communications Corp. 1997 Stock Option Plan (incorporated
                  by
                  reference to Exhibit 4.2 to our registration statement on Form
                  S-8 (File
                  No. 333-52166).*
 
 10.15
              Restated
                  Access One Communications Corp. 1999 Stock Option Plan (incorporated
                  by
                  reference to Exhibit 4.3 to our registration statement on Form
                  S-8 (File
                  No. 333-52166).*
 
 10.16
              Employment
                  Agreement with Jeffrey Earhart dated July 30, 2004 (incorporated
                  by
                  reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q
                  for the
                  quarter ended September 30, 2004). *
 
 10.17
              Employment
                  Agreement with Warren Brasselle dated July 30, 2004 (incorporated
                  by
                  reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q
                  for the
                  quarter ended September 30, 2004).
                  *
  10.18
              Employment
                  Agreement with Timothy Leonard dated March 15, 2005 (incorporated
                  by
                  reference to Exhibit 10.18 to our Annual Report on Form 10-K for
                  the year
                  ended December 31, 2004).*
 
 10.19
              Lease
                  by and between Talk America Inc. and BTS Owners LLC, dated as of
                  July 1,
                  2003 (incorporated by reference to Exhibit 10.24 to our annual
                  Report on
                  Form 10-K for the year ended December 31,
                  2003).
 
 10.20
              Amendment
                  to Office Lease by and between Michigan Plaza LLC (predecessor-in-interest
                  to BTS Owners LLC) and Talk America Inc. dated November 30, 2005
                  (filed
                  herewith).
 
 10.21
              First
                  Amendment, dated as of September 19, 2001, to the Rights Agreement
                  dated
                  as of August 19, 1999, by and between Talk America Holdings, Inc.
                  and
                  First City Transfer Company, as Rights Agent (incorporated by reference
                  to
                  Exhibit 10.9 to our Current Report on Form 8-K filed on September
                  24,
                  2001).
 
 10.22      
        Employment Agreement with David G. Zahka dated July 30, 2004 (incorporated
        by
        reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter
        ended September 30, 2004).*
 
 10.23
              Our
                  2001 Non-Officer Long Term Incentive Plan (incorporated by reference
                  to
                  Exhibit 4.1 to our registration statement on Form S-8 (File No.
                  333-74820).*
 
 10.24
              Office
                  Lease by and between TMT Reston I & II, Inc. and Talk America Inc.
                  dated as of September 16, 2005 (filed herewith).
 
 10.25
              Our
                  2003 Long Term Incentive Plan (incorporated by reference to Exhibit
                  B of
                  our Definitive Proxy Statement filed on May 6,
                  2003).*
 
 
 10.26
              Second
                  Amendment to Rights Agreement, dated as of December 13, 2002, to
                  the
                  Rights Agreement dated as of August 19, 1999, by and between Talk
                  America
                  Holdings, Inc., First City Transfer Company and Stocktrans, Inc.
                  (incorporated by reference to Exhibit 10.1 to our Current Report
                  on Form
                  8-K filed on December 13, 2002).
 
 10.27
              2005
                  Executive Officer and Management Bonus Program Summary (incorporated
                  by
                  reference to Exhibit 10.1 to our Current Report on Form 8-K filed
                  on April
                  26, 2005) *
 
 10.28
              2005
                  Supplemental Incentive Compensation Plan Summary (incorporated
                  by
                  reference to Exhibit 10.2to our Current Report on Form 8-K filed
                  on April
                  26, 2005). *
 
 10.29
              Consulting
                  Agreement between Talk America Holdings, Inc. and Gabriel Battista,
                  dated
                  as of January 1, 2005 (incorporated by reference to Exhibit 10.1
                  to our
                  Current Report on Form 8-K dated January 1, 2005).
 
 10.30
              Indemnification
                  Agreement with Edward B. Meyercord, III dated January 1, 2004
                  (incorporated by reference to Exhibit 10.4 to our Annual Report
                  on Form
                  10-K for the year ended December 31,
                  2003).
 
 10.31
              Employment
                  Agreement with Gabriel Battista dated January 1, 2004 (incorporated
                  by
                  reference to Exhibit 10.6 to our Annual Report on Form 10-K for
                  the year
                  ended December 31, 2003).*
 
 10.32
              Agreement
                  and Plan of Merger dated May 23, 2005 among LDMI Telecommunications,
                  Inc.,
                  Talk America Holdings, Inc. and Lion Acquisition Corp. (incorporated
                  by
                  reference to Exhibit 10.1 to our Current Report on Form 8-K filed
                  on May
                  23, 2005).
 
 10.33
              Escrow
                  Agreement, dated as of July 13, 2005 among LDMI Telecommunications,
                  Inc.,
                  Talk America Holdings, Inc., the representatives named therein
                  and U.S.
                  Bank National Association, as Escrow Agent (incorporated by reference
                  to
                  Exhibit 10.2 to our Current Report on Form 8-K filed on July 13,
                  2005).
 
 10.34
              Agreement
                  and Plan of Merger dated as of October 18, 2005 among NT Corporation,
                  Talk
                  America Holdings, Inc. and THNetco, Inc. (incorporated by reference
                  to
                  Exhibit 10.1 to our Current Report on Form 8-K filed on October
                  18, 2005).
 
 10.35
              Employment
                  Agreement with Patrick O'Leary dated July 13, 2005 (incorporated
                  by
                  reference to Exhibit 10.3 to our Current Report on Form 8-K filed
                  on July
                  13, 2005).*
 
 
 10.36 Employment
        Agreement with Mark Wayne dated July 13, 2005 (filed herewith).*
 
 10.37
              Summary
                  of Talk America Holdings, Inc. Non-Employee Director Compensation
                  (incorporated by reference to Exhibit 10.1 to our Current Report
                  on Form
                  8-K filed on December 28, 2005).*
 
 10.38
              Talk
                  America Executive Nonqualified Savings Plan (incorporated by reference
                  to
                  Exhibit 4.1 to Registrant's Registration Statement on Form S-8
                  (Registration No. 333-131230)).*
 
 10.39
              Executive
                  Officer and Management Bonus Program Summary, as amended as of
                  February
                  14, 2006 (incorporated by reference to Exhibit 10.1 to our Current
                  Report
                  on Form 8-K filed on February 14,
                  2005).*
 
 10.40
              2006
                  Executive Officer and Management Bonus Program Summary (incorporated
                  by
                  reference to Exhibit 10.2 to our Current Report on Form 8-K filed
                  on
                  February 14, 2005).*
 
 10.41
              2006
                  Supplemental Incentive Compensation Plan Summary (incorporated
                  by
                  reference to Exhibit 10.3 to our Current Report on Form 8-K filed
                  on
                  February 14, 2005).*
 
 10.42
              Office
                  Lease by and between Cordova Associates, LLC and NT Corporation
                  dated as
                  of September 7, 2000 (filed herewith).
 
 10.43
              Amendment
                  to Office Lease by and between Cordova Associates, LLC and NT Corporation
                  dated as of November 28, 2001 (filed
                  herewith).
 
 10.44
              Second
                  Amendment to Office Lease by and between Cordova Associates, LLC
                  and NT
                  Corporation dated as of October 21, 2002 (filed
                  herewith).
 
 10.45
              Office
                  Lease by and between BSRT Phoenix Business Park, LLC and LightNetworks,
                  Inc. dated as of January 13, 2000 (filed herewith).
 
 
 10.46
              Amendment
                  to Office Lease by and between BSRT Phoenix Business Park, LLC
                  and
                  LightNetworks, Inc. dated February 17, 2000 (filed herewith).
 
 10.47
              Second
                  Amendment to Office Lease by and between BSRT Phoenix Business
                  Park, LLC
                  and LightNetworks, Inc. dated April 17, 2000 (filed
                  herewith).
 
 10.48
              Assignment
                  of Office Lease by and between LightNetworks, Inc., Network Telephone
                  Corporation and BSRT Phoenix Business Park, LLC dated September
                  21, 2000
                  (filed herewith).
  10.49
              Amendment
                  to Office Lease by and between Phoenix Business Park, LLC, successor
                  to DA
                  Phoenix, LLC, successor to BSRT Phoenix Business Park LLC and Network
                  Telephone Inc., successor to LightNetworks, Inc. dated August 4,
                  2005
                  (filed herewith).
 
 10.50
              Amendment
                  to Office Lease by and between Phoenix Business Park, LLC and Network
                  Telephone Inc., dated October ___, 2005 (filed
                  herewith).
 
 10.51
              Amendment
                  to Office Lease by and between Phoenix Business Park, LLC and Network
                  Telephone Inc., dated December 21, 2005 (filed
                  herewith).
 
 10.52
              Amendment
                  to Office Lease by and between Phoenix Business Park, LLC (successor
                  in
                  interest to BSRT Phoenix Business Park, LLC and Network Telephone,
                  Inc.
                  (successor in interest to LightNetworks, Inc.) dated as of January
                  9, 2005
                  (filed herewith).
 
 10.53
              Office
                  Lease by and between American Center LLC and LDMI Telecommunications,
                  Inc.
                  dated as of January 28, 2003 (filed herewith).
 
 10.54       
        First Lease Modification to Office Lease by and between American Center LLC
        and
        LDMI Telecommunications, Inc. dated as of February 13, 2003 (filed herewith).
 
 10.55       
        Second Lease Modification to Office Lease by and between American Center
        LLC and
        LDMI Telecommunications, Inc. dated as of May 9, 2003 (filed
        herewith).
 
 10.56       
        Third Lease Modification to Office Lease by and between American Center LLC
        and
        LDMI Telecommunications, Inc. dated as of October 22, 2003 (filed
        herewith).
 
 10.57       
        Fourth Lease Modification to Office Lease by and between American Center
        LLC and
        LDMI Telecommunications, Inc. dated as of May 19, 2004 (filed
        herewith).
 
 10.58      
        Fifth Lease Modification to Office Lease by and between American Center LLC
        and
        LDMI Telecommunications, Inc. dated as of February 1, 2005 (filed
        herewith).
 
 10.59      
        Six Lease Modification to Office Lease by and between American Center LLC
        and
        LDMI Telecommunications, Inc. dated as of May 1, 2005 (filed
        herewith).
 
 10.60      
        Seventh Lease Modification to Office Lease by and between American Center
        LLC
        and LDMI Telecommunications, Inc. dated as of October 1, 2005 (filed
        herewith).
 
 10.61
              Office
                  Lease by and between Galleria Equities, LLC and LDMI Telecommunications,
                  Inc. dated May 31, 2000 (filed
                  herewith).
 
 10.62
              Office
                  Lease by and between Southfield Technecenter Re 1 LLC and Talk
                  America
                  Inc. dated February 24, 2003 (filed
                  herewith).
 
 10.63      
        Talk America Holdings, Inc. 2003 Long Term Incentive Plan Non-Qualified Stock
        Option Agreement for Non-Employee Directors (incorporated by reference to
        Exhibit 10.2 to our Current Report on Form 8-K filed on December 29, 2005).
 
 14.1
              Code
                  of Ethics (incorporated by reference to Exhibit 14.1 to our Annual
                  Report
                  on Form 10-K for the year ended December 31,
                  2003).
 
 21.1
              Our
                  Subsidiaries (filed herewith).
 
 
 
 *
        Management contract or compensatory plan or arrangement.
  **SIGNATURES**
 
 Pursuant
        to the requirements of Section 13 or 15(d) 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.
 
 Date:
        March 16, 2006
 
 **TALK
        AMERICA HOLDINGS, INC.**
 
 
 By:  /s/
        Edward B. Meyercord, III
 Edward
        B. Meyercord, III
 Chief Executive Officer, President
 and Director
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, this report has
        been
        signed by the following persons on behalf of the registrant in the capacities
        and on the dates indicated.
 
 
 **SIGNATURE**    ****  **TITLE**    **DATE**
  /s/
        Edward B. Meyercord III   Chief
        Executive
        Officer, March
        16,
        2006
 Edward
        B.
        Meyercord,
        III President
        and Director
 (Principal
        Executive Officer)
  /s/
        David G. Zahka    Chief
        Financial Officer   March
        16,
        2006
 David
        G.
        Zahka    (Principal
        Financial Officer)
 
 /s/
        Thomas M. Walsh   Senior
        Vice President -
        Finance March
        16,
        2006
 Thomas
        M.
        Walsh    and
        Treasurer
 (Principal
        Accounting Officer)
 
 /s/
        Gabriel Battista    Chairman
        of the Board   March
        16,
        2006
 Gabriel
        Battista       of
        Directors
 
 /s/
        Mark S. Fowler    Director     March
        16,
        2006
 Mark
        S.
        Fowler
 
 /s/
        Robert J. Korzeniewski   Director     March
        16,
        2006
 Robert
        J.
        Korzeniewski
 
 /s/
        Ronald R.
        Thoma Director     March
        16,
        2006
 Ronald
        R.
        Thoma