**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**





**(Mark
      One)**


x
            **QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**





**For
      the Quarterly Period Ended March 31, 2006**





**OR**





o
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**





**For
      the transition period from __________ to __________**





**Commission
      File Number 0-32941**





**Mpower
      Holding Corporation**


(Exact
      name of registrant as specified in its charter)





**DELAWARE**
            
            **52-2232143**(State
                or other jurisdiction of incorporation or organization)
            
            (I.R.S.
                Employer Identification No.)





**175
      Sully's Trail, Suite 300**


**Pittsford,
      NY 14534**


(Address
      of principal executive offices, including Zip Code)





**(585)
      218-6550**


(Registrant's
      telephone number, including area code)





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.


YES x NO o





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. (Check
      one):





Large
                accelerated filero
            Accelerated
                filerx
            Non-accelerated
                filero





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


YES o NO x





Indicate
      by check mark whether the registrant has filed all documents and reports
      required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange
      Act
      of 1934 subsequent to the distribution of securities under a plan confirmed
      by a
      court.


YES x NO o





The
      number of shares outstanding of the issuer's common stock, as of May 4,
      2006:





Common
      stock (par value $0.001 per common share).... 92,074,369 shares
      outstanding





**MPOWER
      HOLDING CORPORATION**





**INDEX**





**Page****No**.**PART
                I -**
            **FINANCIAL
                INFORMATION**Item
                1.
            Condensed
                Consolidated Financial Statements (Unaudited)Consolidated
                Balance Sheets - as of March 31, 2006 and December 31,
                2005
            3Consolidated
                Statements of Operations - for the three months ended March 31, 2006
                and
                2005
            4Consolidated
                Statements of Cash Flows - for the three months ended March 31, 2006
                and
                2005
            5Condensed
                Notes to Unaudited Interim Consolidated Financial
                Statements
            7Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            20Item
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            29Item
                4.
            Controls
                and Procedures
            29**PART
                II -**
            **OTHER
                INFORMATION**Item
                1.
            Legal
                Proceedings
            30Item
                1A.
            Risk
                Factors
            31Item
                2.
            Unregistered
                Sales of Equity and Use of Proceeds
            31Item
                5.
            Other
                Information
            31Item
                6.
            Exhibits
            32SIGNATURES
            
            33





2


**PART
      I - FINANCIAL INFORMATION**


**Item
      1.**  *Condensed
      Consolidated Financial Statements (Unaudited)*





**MPOWER
      HOLDING CORPORATION**


**CONSOLIDATED
      BALANCE SHEETS**


**(IN
      THOUSANDS, EXCEPT PREFERRED AND COMMON SHARE AND PER SHARE
      AMOUNTS)**


**(UNAUDITED)**


**March
                31**,
            
            **December
                31**,**2006**
            
            
            **2005****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            15,239
            
            $
            18,278Investments
                available-for-sale
            
            
            8,621
            
            
            8,845Accounts
                receivable, less allowance for doubtful accounts of $1,415 and$1,531
                at March 31, 2006 and December 31, 2005, respectively
            
            
            13,080
            
            
            13,828Other
                receivables
            
            
            931
            
            
            890Prepaid
                expenses and other current assets
            
            
            3,220
            
            
            3,075Total
                current assets
            
            
            41,091
            
            
            44,916Property
                and equipment, net
            
            
            67,133
            
            
            65,492Long-term
                restricted cash and cash equivalents
            
            
            9,320
            
            
            9,237Long-term
                investments available-for-sale
            
            
            1,683
            
            
            1,317Goodwill
            
            
            8,861
            
            
            8,861Intangibles,
                net of accumulated amortization of $15,001 and $14,750 at March 31,
                2006
                and December 31, 2005, respectively
            
            
            3,534
            
            
            3,785Other
                long-term assets
            
            
            3,004
            
            
            4,396Total
                assets
            
            $
            134,626
            
            $
            138,004**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Current
                liabilities:Current
                maturities of capital lease obligations
            
            $
            554
            
            $
            540Accounts
                payable
            
            
            10,295
            
            
            12,545Accrued
                sales tax payable
            
            
            1,822
            
            
            1,841Accrued
                bonus
            
            
            1,004
            
            
            904Deferred
                revenue
            
            
            5,234
            
            
            5,141Accrued
                other expenses
            
            
            11,986
            
            
            13,741Total
                current liabilities
            
            
            30,895
            
            
            34,712Long-term
                capital lease obligations
            
            
            22,921
            
            
            23,120Other
                long-term liabilities
            
            
            2,403
            
            
            2,415Total
                liabilities
            
            
            56,219
            
            
            60,247Commitments
                and contingenciesStockholders’
                equity:Preferred
                stock, 49,900,000 shares authorized but unissued at March 31, 2006
                and
                December 31, 2005
            
            
            —
            
            
            —Series
                A preferred stock, 100,000 shares authorized but unissued at March
                31,
                2006 and December 31, 2005
            
            
            —
            
            
            —Common
                stock, $0.001 par value, 1,000,000,000 shares authorized, 91,942,985
                and
                91,506,765 shares issued and outstanding at March 31, 2006 and December
                31, 2005, respectively
            
            
            92
            
            
            92Additional
                paid-in capital
            
            
            122,532
            
            
            121,991Accumulated
                deficit
            
            
            (44,174
            )
            
            (44,326
            )Less:
                Treasury stock, 29,021 shares at March 31, 2006, at cost
            
            
            (43
            )
            
            —Total
                stockholders’ equity
            
            
            78,407
            
            
            77,757Total
                liabilities and stockholders’ equity
            
            $
            134,626
            
            $
            138,004


See
      accompanying condensed notes to unaudited interim consolidated financial
      statements.


3


**MPOWER
      HOLDING CORPORATION**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**(IN
      THOUSANDS, EXCEPT COMMON SHARE AND PER COMMON SHARE
      AMOUNTS)**


**(UNAUDITED)**





**Three
                Months Ended****March
                31**,**2006**
            
            **2005**Operating
                revenues:Telecommunication
                services
            
            $
            49,958
            
            $
            47,726Costs,
                expenses and other:Cost
                of operating revenues
              (exclusive
                of depreciation and amortization shown separately below of $3,885
                and
                $3,512 for the three months ended March 31, 2006 and 2005,
                respectively)
            
            
            21,677
            
            
            21,835Selling,
                general and administrative
              (exclusive
                of depreciation and amortization shown separately below of $784 and
                $2,089
                for the three months ended March 31, 2006 and 2005,
                respectively)
            
            
            22,915
            
            
            22,730Depreciation
                and amortization
            
            
            4,669
            
            
            5,601Interest
                income
            
            
            (263
            )
            
            (183
            )Interest
                expense
            
            
            937
            
            
            1,167Other
                income, net
            
            
            (49
            )
            
            (7,301
            )Income
                from continuing operations
            
            
            72
            
            
            3,877Discontinued
                operations:Income
                (loss) from discontinued operations
            
            
            80
            
            
            (32
            )Net
                income
            
            $
            152
            
            $
            3,845Basic
                and diluted income (loss) per common share:Income
                from continuing operations
            
            $
            0.00
            
            $
            0.04Income
                (loss) from discontinued operations
            
            
            0.00
            
            
            (0.00
            )Net
                income
            
            $
            0.00
            
            $
            0.04Basic
                weighted average common shares outstanding
            
            
            91,671,787
            
            
            91,331,930Diluted
                weighted average common shares outstanding
            
            
            100,939,506
            
            
            102,111,366







See
      accompanying condensed notes to unaudited interim consolidated financial
      statements.


4


**MPOWER
      HOLDING CORPORATION**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(IN
      THOUSANDS)**


**(UNAUDITED)**




**Three
                Months Ended****March
                31,****2006**
            
            **2005**Cash
                flows from operating activities:Net
                income
            
            $
            152
            
            $
            3,845Adjustments
                to reconcile net income to net cash provided by operating
                activities:Depreciation
                and amortization
            
            
            4,669
            
            
            5,601Bad
                debt expense
            
            
            560
            
            
            451Loss
                (gain) on sale of assets, net
            
            
            13
            
            
            (9
            )Amortization
                of investment premiums
            
            
            14
            
            
            37Amortization
                of deferred debt financing costs
            
            
            33
            
            
            —Stock-based
                compensation expense
            
            
            408
            
            
            —Agent
                selling expense - warrants
            
            
            —
            
            
            122Changes
                in assets and liabilities:Decrease
                (increase) in accounts receivable
            
            
            188
            
            
            (2,028
            )Increase
                in other receivables
            
            
            (357
            )
            
            (4,276
            )Increase
                in prepaid expenses and other current assets
            
            
            (320
            )
            
            (9
            )Decrease
                in other long-term assets
            
            
            43
            
            
            80(Decrease)
                increase in accounts payable
            
            
            (1,473
            )
            
            467Decrease
                in accrued sales tax payable
            
            
            (19
            )
            
            (159
            )Increase
                (decrease) in accrued bonus
            
            
            100
            
            
            (1,767
            )Increase
                in deferred revenue
            
            
            105
            
            
            1,432Decrease
                in accrued other expenses
            
            
            (2,812
            )
            
            (837
            )Net
                cash provided by operating activities
            
            
            1,304
            
            
            2,950Cash
                flows from investing activities:Purchase
                of property and equipment, net of payables
            
            
            (4,177
            )
            
            (4,333
            )Proceeds
                from sale of assets from continuing operations
            
            
            —
            
            
            13Proceeds
                from sale of assets from discontinued operations
            
            
            316
            
            
            1,000Costs
                associated with sale of assets from discontinued
                operations
            
            
            (200
            )
            
            —Purchase
                of investments available-for-sale, net
            
            
            (2,461
            )
            
            (566
            )Sale
                of investments available-for-sale, net
            
            
            2,305
            
            
            500Sale
                (purchase) of restricted investments, net
            
            
            92
            
            
            (30
            )Other
            
            
            —
            
            
            85Net
                cash used in investing activities
            
            
            (4,125
            )
            
            (3,331
            )Cash
                flows from financing activities:Payments
                on capital lease obligations
            
            
            (214
            )
            
            (1,837
            )Payment
                of deferred debt financing costs
            
            
            (33
            )
            
            —Proceeds
                from issuance of common stock, net of costs
            
            
            29
            
            
            2,522Net
                cash (used in) provided by financing activities
            
            
            (218
            )
            
            685Net
                (decrease) increase in cash and cash equivalents
            
            
            (3,039
            )
            
            304Cash
                and cash equivalents at beginning of period
            
            
            18,278
            
            
            27,327Cash
                and cash equivalents at end of period
            
            $
            15,239
            
            $
            27,631






5





Supplemental
                schedule of non-cash investing and financing activities:Fair
                value of assets acquired in business acquisition
            $—
            $40,629Liabilities
                assumed in business acquisition
            $—
            $(24,696)Common
                stock issued in business acquisition
            $—
            $13,533Warrants
                issued in business acquisition
            $—
            $1,246Accrued
                costs associated with business acquisitions
            $—
            $274Property
                and equipment purchased under capital leases
            $29
            $64Common
                stock issued to purchase property and equipment
            $61
            $—Net
                issuance of stock options under treasury stock method
            $43
            $—Net
                payable related to purchase of property and equipment
            $2,957
            $1,473Capitalization
                of deposit on purchase commitment
            $1,349
            $—Supplemental
                cash flow information:Cash
                paid for interest
            $1,427
            $21





See
      accompanying condensed notes to unaudited interim consolidated financial
      statements.


6


**MPOWER
      HOLDING CORPORATION**


**CONDENSED
      NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL
      STATEMENTS**


**(UNAUDITED)**





**(1)
      PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION**





The
      accompanying unaudited interim condensed consolidated financial statements
      of
      Mpower Holding Corporation (“Holding”), a Delaware corporation, include the
      accounts of Holding and its wholly-owned subsidiary, Mpower Communications
      Corp.
      (“Communications”) and other subsidiaries of Communications (collectively the
“Company”). All intercompany balances and transactions have been
      eliminated.





The
      Company was one of the first facilities-based competitive local telephone
      companies founded after the inception of the Telecommunications Act of 1996,
      which opened up the local telephone market to competition. The Company offers
      local and long distance voice services as well as high-speed Internet access
      and
      voice over internet protocol (“VOIP”) by way of a variety of broadband product
      and service offerings over its network of collocations, switches and fiber
      network. The Company’s services have historically been offered through
      Communications primarily to small and medium-sized business customers in all
      of
      its markets and residential customers primarily in the Las Vegas, Nevada market.
      The Company’s markets include Los Angeles, California, San Diego, California,
      Northern California (the San Francisco Bay area and Sacramento), Las Vegas,
      Nevada and Chicago, Illinois. The Company also bills a number of major local
      and
      long distance carriers for the costs of originating and terminating traffic
      on
      the Company’s network for the Company’s local service customers. The Company
      does not have any unbundled network element platform (“UNE-P”) revenues although
      it has recently signed agreements with certain carriers and is actively pursuing
      additional opportunities to provide network-based alternatives to UNE-P carriers
      on a wholesale basis in light of recent regulatory changes.





These
      condensed consolidated financial statements (unaudited) reflect all normal
      recurring adjustments, which management believes are necessary to present fairly
      the financial position, results of operations, and cash flows for the Company
      for the respective periods presented. Certain information and footnote
      disclosures normally included in the annual consolidated financial statements
      prepared in accordance with accounting principles generally accepted in the
      United States of America have been condensed or omitted pursuant to the rules
      and regulations of the Securities and Exchange Commission for Form 10-Q. These
      unaudited interim condensed consolidated financial statements should be read
      in
      conjunction with the audited consolidated financial statements and notes thereto
      included in the Company’s annual report on Form 10-K for the year ended December
      31, 2005, filed with the Securities and Exchange Commission.





The
      consolidated balance sheet at December 31, 2005 included herein was derived
      from
      the audited consolidated financial statements of the Company.





The
      preparation of the financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the date
      of
      the financial statements and the reported amounts of revenues and expenses
      during the reporting period. Actual results could differ from these
      estimates.





The
      results of operations and cash flows for the three months ended March 31, 2006
      are not necessarily indicative of the results to be expected for other interim
      periods or for the year ending December 31, 2006.





Certain
      reclassifications, which have no effect on net income, have been made in the
      prior period financial statements to conform to the current presentation. The
      Company eliminated presentation of income from operations from its consolidated
      statements of operations effective for the quarter ended March 31,
      2005.





7


**Effects
      of New Accounting Standards**





*Share-Based
      Payment*





In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards (“SFAS”) No. 123(R), "Share-Based
      Payment" (FAS 123R) which requires companies to measure and recognize
      compensation expense for all share-based payments at fair value. In addition,
      the FASB has issued a number of supplements to FAS 123R to guide the
      implementation of this new accounting pronouncement. Share-based payments
      include stock option grants and other equity-based awards granted under the
      Company’s long-term incentive and stock option plans. FAS 123R was effective for
      the Company beginning January 1, 2006. The Company uses the Black-Scholes
      valuation model as the method for determining the fair value of its equity
      awards issued after January 1, 2006. The Company used the modified prospective
      transition method, which requires that compensation cost be recognized in the
      financial statements for all awards granted after the date of adoption as well
      as for existing awards for which the requisite service has not been rendered
      as
      of the date of adoption (the “Existing Awards”) and requires that prior periods
      not be restated. FAS 123R also requires an entity to calculate the pool of
      excess tax benefits available to absorb tax deficiencies recognized subsequent
      to adopting FAS 123R (the “APIC Pool”). In November 2005, the FASB issued FSP
      No. FAS 123(R)-3 “Transition Election Related to Accounting for the Tax Effects
      of Share-Based Payment Awards.” This FSP provides an elective alternative
      simplified method for calculating the pool of excess tax benefits available
      to
      absorb tax deficiencies recognized subsequent to the adoption of SFAS No. 123R
      and reported in the Condensed Consolidated Statements of Cash Flows. Companies
      may take up to one year from the effective date of the FSP to evaluate the
      available transition alternatives and make a one-time election as to which
      method to adopt. The Company is currently in the process of evaluating the
      alternative methods. See Note 2.




*Accounting
      Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB
      Statement No. 3*





In
      May
      2005, the FASB issued SFAS No. 154 "Accounting Changes and Error Corrections,
      a
      replacement of APB Opinion No. 20 and FASB Statement No. 3" (SFAS No. 154).
      SFAS
      No. 154 requires that all voluntary changes in accounting principles be
      recognized as a retroactive restatement of all periods presented except when
      retroactive restatement is impracticable. In addition, SFAS No. 154 also
      requires that a change in depreciation method be accounted for as a change
      in
      accounting estimate that is affected by a change in accounting principle, which
      would be accounted for in the period of change if the change affects that period
      and also in future periods if the change affects both the period of change
      and
      future periods. SFAS No. 154 also eliminates paragraph 4 of APB 20, which
      specifies that APB 20 does not apply to changes made to comply with new
      pronouncements. This Statement requires that any change in an accounting
      principle made as a result of a new pronouncement be reported following the
      same
      guidance as that for voluntary changes in accounting principles unless the
      new
      pronouncement's transition provisions require another method. SFAS No. 154
      is
      effective for years beginning after December 15, 2005. The adoption of SFAS
      No.
      154 has not had a material impact on the Company’s consolidated results of
      operations or financial condition.





*Minimum
      Revenue Guarantees Granted to a Business or Its Owners*





In
      November 2005, the FASB issued FASB Staff Position (“FSP”) No. FIN
      45-3, *“* Application
      of FASB Interpretation No. 45 to Minimum Revenue Guarantees Granted to a
      Business or Its Owners,” which amends paragraph 3 of FIN 45, “Guarantor's
      Accounting and Disclosure Requirements for Guarantees, Including Indirect
      Guarantees of Indebtedness of Others,” to include minimum revenue guarantees.
      FSP No. FIN 45-3 requires that a liability be recognized at inception for the
      fair value of the obligation to stand ready to perform under the guarantee,
      even
      if it is not probable that the contingent events that would cause payment will
      occur. FSP No. FIN 45-3 is effective for new minimum revenue guarantees issued
      or modified on or after the beginning of the first fiscal quarter following
      November 10, 2005, with disclosure requirements effective for any minimum
      revenue guarantee issued prior to the initial application of the FSP. The
      adoption of FSP No. FIN 45-3 has not had a material impact on the Company’s
      consolidated results of operations or financial condition.





**(2)
      SHARE-BASED TRANSACTIONS**





The
      Company has adopted SFAS No. 123 (Revised 2004), “Share-Based Payment” (SFAS
      123R), effective January 1, 2006. SFAS 123R requires companies to recognize
      compensation expense in an amount equal to the fair value of all share-based
      payments granted to employees. The Company has elected the modified prospective
      transition method and therefore adjustments to prior periods are not required
      as
      a result of adopting SFAS 123R. Under this method, the provisions of SFAS 123R
      apply to all awards granted after the date of adoption and to any unrecognized
      expense attributable to awards unvested at the date of adoption based on the
      grant date fair value. SFAS 123R also amends SFAS No. 95, “Statement of Cash
      Flows,” to require that excess tax benefits that had been reflected as operating
      cash flows be reflected as financing cash flows. Tax benefits recognized related
      to stock-based compensation and related cash flow impacts were not material
      during the first quarter of 2006 as the Company had a net operating loss for
      tax
      purposes.





8


As
      of
      March 31, 2006, the Company offers share-based compensation through its 2005
      Long-Term Incentive Plan and **** its
      warrant program. The Company recognized $0.4 million of share-based compensation
      expense for the three months ended March 31, 2006, which was solely attributable
      to the Company’s stock options and restricted shares. For the three months ended
      March 31, 2005, the Company recognized $0.1 million of share-based compensation
      expense, which was related to its agent warrant program. Share-based
      compensation expense is a reduction to income as it is recognized as a component
      of selling, general and administrative expense. During the first quarter of
      2006, the Company entered into an agreement with an outside vendor in which
      it
      agreed to exchange 200,000 shares of its common stock for a software license.
      50,000 shares were to be issued as of the inception of the contract and an
      additional 150,000 shares will be issued upon receipt of the license which
      is
      expected to take place in the third quarter of 2006. This transaction was
      accounted for under Emergency Issuance Task Force (“EITF”) issue No. 96-18,
“Accounting for Equity Instruments that are Issued to Other Than Employees for
      Acquiring or in Conjunction with Selling Goods or Services.” In January 2006,
      the Company issued the 50,000 shares to the vendor and as a result $0.1 million
      of compensation cost was capitalized as a software license.


The
        Company received less than $0.1 million of cash related to the exercise of
        stock
        options for each of the three months ended March 31, 2006 and 2005.


Prior
      to
      January 1, 2006, the Company measured the compensation cost of its stock option
      plan based on the intrinsic value of the equity instrument awarded, which
      followed the recognition and measurement principles of APB Opinion No. 25,
      “Accounting for Stock Issued to Employees” and the related Interpretations.
      Prior to 2006, no compensation expense was recognized under stock option plans
      other than for stock options issued with an exercise price below fair market
      value. For the three months ended March 31, 2005, the Company’s results from
      operations would have approximated the following pro forma amounts (in
      thousands, except per common share amounts) had the Company measured the
      compensation cost of its employee stock options based on the fair value of
      the
      equity award, consistent with SFAS 123R:




**Three
                Months Ended****March
                31,****2005**Net
                income, as reported
            
            $
            3,845Add:
                Stock-based compensation expense included in reported net income,
                net of
                related income tax effects
            
            
            —Deduct:
                Total stock-based compensation expense to be determined under a fair
                value
                based method for all awards, net of related income tax
                effects
            
            
            (2,052
            )Pro
                forma net income
            
            $
            1,793Basic
                and diluted net income per common share, as reported
            
            $
            0.04Basic
                and diluted net income per common share, pro forma
            
            $
            0.02





***Long-Term
      Incentive Plans***





The
      Company’s 2005 Long-Term Incentive Plan (the “2005 Plan”), which is shareholder
      approved, provides for the grant of options to purchase shares of common stock,
      stock appreciation rights, restricted stock, restricted stock units and other
      equity-based awards to employees and non-employee directors of the Company
      and
      consultants who are eligible to participate in the 2005 Plan. The Company has
      reserved 11,500,000 shares of its common stock to be issued by the Company
      upon
      the exercise of options and other stock-based awards that have been granted
      or
      may be granted under the 2005 Plan.





Options
      granted under the 2005 Plan can be non-qualified or incentive stock options
      and
      have a term of 10 years. Options are granted at a price equal to the fair market
      value of the Company’s common stock at the date of grant. Generally, options are
      granted for general retention purposes and vest evenly over three years. All
      of
      the options granted to date under the 2005 Plan would fully vest upon the
      employee’s termination without cause or a resignation with good cause and upon a
      change of control unrelated to any equity investment in the Company, at which
      time any unrecognized compensation costs would be recognized. See Note 14
      (Subsequent Events).





The
      Company calculates the fair value of its stock options under the Black-Scholes
      option-pricing model at the time of grant. The Company estimates the expected
      volatility of its options based on the historical closing stock prices of its
      stock over a period beginning in May 2003 through the grant date. The expected
      term of options represents the weighted average period of time that options
      granted are expected to be outstanding given consideration to vesting schedules
      and the Company’s historical exercise patterns. The risk free interest rate of
      an option is estimated based on the Federal Reserve’s historical data for the
      maturity of nominal treasury instruments that corresponds to the expected term
      of the option.





9


For
      options granted during the three months ended March 31, 2006, the weighted
      average fair value of options on the date of grant, estimated using the
      Black-Scholes option pricing model, was $0.72, using the following assumptions:
      dividend yield of 0%; expected option life of 5.58 years for non-executive
      employees and 6.31 years for executive employees; risk free interest rate
      ranging from 4.36% to 4.57% and an expected volatility ranging from 52% to
      53%.





For
      pro
      forma disclosure with respect to share-based payment expense for the three
      months ended March 31, 2005, the weighted average fair value of options on
      the
      date of grant, estimated using the Black-Scholes option pricing model, was
      $0.91, using the following assumptions: dividend yield of 0%; expected option
      life of 6.0 years; risk free interest rate ranging from 3.84% to 4.25% and
      an
      expected volatility ranging from 54% to 56%.




Stock
      option transactions were as follows:


**Number
                of****Shares**
            
            **Weighted
                Average Exercise****Price**
            
            **Weighted-Average
                Remaining Contractual****Term**
            
            **Aggregate
                Intrinsic****Value**Outstanding
                at January 1, 2006
            
            
            20,361,876
            
            $
            0.92Granted
            
            
            509,000
            
            $
            1.35Exercised
            
            
            (415,241
            )
            $
            0.17Forfeited
            
            
            (197,111
            )
            $
            1.30Outstanding
                at March 31, 2006
            
            
            20,258,524
            
            $
            0.94
            
            
            7.1
                years
            
            $
            13,969,511Exercisable
                at March 31, 2006
            
            
            17,447,706
            
            $
            0.87
            
            
            6.8
                years
            
            $
            13,522,098




The
      Company calculated its intrinsic value for those options that had an exercise
      price lower than the market price of its common shares as of March 31, 2006.
      The
      aggregate intrinsic value of options outstanding as of March 31, 2006 is
      calculated as the difference between the exercise price of the underlying
      options and the market price of our common shares for the 15,180,688 shares
      that
      were in-the-money at that date. The aggregate intrinsic value of exercisable
      options as of March 31, 2006 is calculated as the difference between the
      exercise price of the underlying options and the market price of our common
      shares for the 12,627,116 exercisable shares that were in-the-money at that
      date. The Company’s closing stock price was $1.48 as of March 31, 2006. The
      total intrinsic value of stock options exercised during the first quarter of
      2006 and 2005 were $0.5 million and $0.2 million, respectively.





The
      Company’s restricted shares contain only a restriction as to the vesting of the
      shares, by which 25% of the restricted shares will vest at the end of each
      year
      over four years consecutively unless an employee terminates prior to vesting,
      in
      which case the unvested shares are forfeited. Certain of the restricted shares
      granted to date under the 2005 Plan would fully vest upon the employee’s
      termination without cause or a resignation with good cause and upon a change
      of
      control unrelated to any equity investment in the Company, at which time any
      unrecognized compensation costs would be recognized. See Note 14 (Subsequent
      Event).





The
      Company calculates the fair value of its restricted shares based on the closing
      market price of its common stock as of the date of grant. For the three months
      ended March 31, 2006, the Company recognized approximately $0.1 million of
      compensation expense related to its restricted shares. The Company recognizes
      compensation expense as a component of selling, general and administrative
      expense on its consolidated statement of operations.





Restricted
      share transactions were as follows:


**Number
                of****Shares**
            
            **Weighted
                Average Grant Date****Fair
                Value**Nonvested
                at January 1, 2006
            
            
            —
            
            $
            —Granted
            
            
            1,674,076
            
            $
            1.32Vested
            
            
            —
            
            $
            —Forfeited
            
            
            (45,000
            )
            $
            1.25Nonvested
                at March 31, 2006
            
            
            1,629,076
            
            $
            1.32





As
      of
      March 31, 2006, the remaining future compensation cost related to nonvested
      stock options and restricted shares is $3.6 million with a weighted average
      period of 2.71 years over which compensation is expected to be
      recognized.





10


***Warrants***





The
      Company maintains a warrant program under which up to 1,000,000 shares of the
      Company’s common stock are authorized for issuance. The warrant program makes
      available to independent sales agents engaged by the Company, warrants to
      purchase shares of the Company’s common stock, with the number of warrants to be
      granted based on the increase in defined baseline sales performance achieved
      by
      these independent sales agents. The agent warrants are granted monthly based
      on
      the performance of the agents and the warrants vest immediately upon issuance
      and have a contractual life of 3 years.





The
      Company calculates the fair value of its warrants using the same option pricing
      model used in its calculation of stock options granted under the 2005 Plan.
      Compensation expense is recognized immediately upon the sales agents meeting
      the
      necessary sales performance criteria under the warrant program. If the sales
      agents do not meet the necessary sales performance criteria under the warrant
      program, no warrants are granted that month and no compensation expense is
      recognized. The Company estimates the expected volatility, expected term, and
      risk free interest rate on its warrants using the same method used in estimating
      those of a stock option under the 2005 Plan.





Agent
      warrant transactions were as follows:


**Number
                of****Shares**
            
            **Weighted
                Average Exercise****Price**
            
            **Weighted-Average
                Remaining Contractual****Term**
            
            **Aggregate
                Intrinsic****Value**Outstanding
                at January 1, 2006
            
            
            967,736
            
            $
            1.42Granted
            
            
            —
            
            $
            —Exercised
            
            
            —
            
            $
            —Forfeited
            
            
            —
            
            $
            —Outstanding
                at March 31, 2006
            
            
            967,736
            
            $
            1.42
            
            
            2.0
                years
            
            $
            107,959Exercisable
                at March 31, 2006
            
            
            967,736
            
            $
            1.42
            
            
            2.0
                years
            
            $
            107,959




For
      the
      three months ended March 31, 2006, the Company did not issue warrants to
      purchase shares of common stock and therefore did not recognize any share-based
      compensation related to agent selling expense.





For
      the
      three months ended March 31, 2005, the Company issued warrants to purchase
      198,785 shares of common stock and recognized $0.1 million of share-based
      compensation related to agent selling expense. The weighted average fair value
      of warrants on the date of grant, estimated using the Black-Scholes model,
      was
      $0.62 per common share, using the following assumptions: dividend yield of
      0%;
      expected warrant life of 3 years; risk free interest rate ranging from 2.85%
      to
      3.91%; and an expected volatility ranging from 54% to 57%. Since the agent
      warrants are immediately vested, the Company has no future compensation costs
      related to these warrants.





**(3)
      INVESTMENTS**





The
      Company’s short-term and long-term investments consist of investment-grade debt
      securities which are recorded at fair value and classified as available-for-sale
      in accordance with the provisions of SFAS No. 115, “Accounting for Certain
      Investments in Debt and Equity Securities.” During the three months ended March
      31, 2006, net unrealized holding gains and losses were not significant and
      accordingly the amortized cost of these investments approximated fair value
      as
      of March 31, 2006. Interest and amortization of premiums for available-for-sale
      securities have been included in interest income, and realized gains and losses
      on available-for-sale investments sold were determined based on the specific
      identification method and included in other income, net in the Company’s
      consolidated statements of operations. The Company does not hold these
      investments for speculative or trading purposes. As of March 31, 2006, no
      securities were deemed to be impaired.





11


The
      fair
      value of investments available-for-sale were as follows (in
      thousands):


**March
                31,**
            
            **December
                31,****2006**
            
            **2005**Short-term
                investments:Auction
                rate securities
            
            $
            6,000
            
            $
            5,850Certificates
                of deposit
            
            
            850
            
            
            255Corporate
                bonds
            
            
            1,272
            
            
            1,737U.S.
                government agency notes
            
            
            499
            
            
            1,003Total
                short-term investments
            
            $
            8,621
            
            $
            8,845Long-term
                investments:U.S.
                government agency notes
            
            $
            1,020
            
            $
            461Certificates
                of deposit
            
            
            —
            
            
            190Corporate
                bonds
            
            
            663
            
            
            666Total
                long-term investments
            
            $
            1,683
            
            $
            1,317





Proceeds
      from the sale of investments available-for-sale were as follows (in
      thousands):


**Three
                Months Ended****March
                31,****2006**
            
            **2005**Proceeds
                from the sale of investments available-for-sale
            
            $
            2,305
            
            $
            500




**(4)
      PROPERTY AND EQUIPMENT**





Property
      and equipment consists of the following (in thousands):


**March
                31,**
            
            **December
                31**,**2006**
            
            **2005**Buildings
                and property
            
            $
            1,712
            
            $
            1,712Telecommunication
                and switching equipment
            
            
            68,528
            
            
            67,217Leasehold
                improvements
            
            
            7,433
            
            
            7,397Fiber
                optic network
            
            
            14,734
            
            
            12,033Computer
                hardware and software
            
            
            9,510
            
            
            9,408Office
                equipment and other
            
            
            3,921
            
            
            3,874Assets
                held for future use
            
            
            3,468
            
            
            3,530109,306
            
            
            105,171Accumulated
                depreciation and amortization
            
            
            (49,354
            )
            
            (44,975
            )59,952
            
            
            60,196Construction
                in progress
            
            
            7,181
            
            
            5,296Net
                property and equipment
            
            $
            67,133
            
            $
            65,492




12


Depreciation
      expense for the three months ended March 31, 2006 and 2005 was $4.4 million
      and
      $4.2 million, respectively. Assets held for future use are directly related
      to
      the recovery of switch and collocation equipment from markets cancelled or
      exited, primarily during 2002 and 2001, and other continuing network
      enhancements which are expected to be re-deployed throughout the Company's
      remaining operating markets. These assets continue to be depreciated and the
      net
      book value at March 31, 2006 and December 31, 2005 was $0.9 million and $1.1
      million, respectively.





As
      of
      March 31, 2006 and December 31, 2005, respectively, construction in progress
      included capital investments of $2.7 million and $2.6 million in preparation
      for
      the relocation of the Company’s Las Vegas switch in the second quarter of
      2006.





**(5)
      GOODWILL AND INTANGIBLE ASSETS**





The
      Company accounts for its goodwill and intangible assets in accordance with
      the
      provisions of SFAS No. 142, "Goodwill and Other Intangible Assets.” SFAS No. 142
      provides that goodwill and other separately recognized intangible assets with
      indefinite lives are not amortized, but are subject to at least an annual
      assessment for impairment through the application of a fair value-based test.
      Intangible assets that do have finite lives are amortized over their estimated
      useful lives.





As
      of
      March 31, 2006 and December 31, 2005, the Company had goodwill of $8.9 million
      resulting from the ICG California acquisition, which was determined based on
      purchase accounting standards as the excess of the purchase price including
      liabilities assumed over the fair value of identifiable assets
      acquired.





Intangible
      assets consist of the following (in thousands):


**March
                31,**
              **2006**
            
            **December
                31,**
              **2005**Amortized
                intangible assets:Customer
                relationships
            
            $
            16,301
            
            $
            16,301Internally
                developed software
            
            
            340
            
            
            340Product
                licensing agreement
            
            
            200
            
            
            20016,841
            
            
            16,841Less
                accumulated amortization:Customer
                relationships
            
            
            (14,809
            )
            
            (14,597
            )Internally
                developed software
            
            
            (142
            )
            
            (113
            )Product
                licensing agreement
            
            
            (50
            )
            
            (40
            )(15,001
            )
            
            (14,750
            )Amortized
                intangible assets, net
            
            
            1,840
            
            
            2,091Trademark
            
            
            1,694
            
            
            1,694Intangibles,
                net
            
            $
            3,534
            
            $
            3,785





Amortization
      expense related to customer relationships, software and the product licensing
      agreement for the three months ended March 31, 2006 and 2005 was $0.3 million
      and $1.4 million, respectively. The trademark was determined to have an
      indefinite life and is not subject to amortization.





Estimated
      amortization expense for each of the next four years ending December 31,
      consists of the following (in thousands):





Remaining
                2006
            
            $
            7552007
            
            
            1,0052008
            
            
            402009
            
            
            40$
            1,840





13


**(6)
      OTHER LONG-TERM ASSETS**





Other
      long-term assets consist of the following (in thousands):





**March
                31,**
            
            **December
                31,****2006**
            
            **2005**Deposits
                on operating leases
            
            $
            1,297
            
            $
            1,277Deferred
                installation costs
            
            
            1,108
            
            
            1,105Prepaid
                insurance
            
            
            295
            
            
            351Other
            
            
            304
            
            
            314Deposits
                on property and equipment purchase commitments
            
            
            —
            
            
            1,349Other
                long-term assets
            
            $
            3,004
            
            $
            4,396





During
      June 2005, the Company entered into an asset purchase agreement with IDACOMM,
      a
      subsidiary of IDACORP, Inc., to acquire four strands of dark fiber within a
      fiber network that IDACOMM constructed in Las Vegas, Nevada. The total purchase
      commitment for this fiber network was $2.5 million, of which $1.3 million was
      paid to IDACOMM as a deposit in June 2005. As of March 31, 2006, all segments
      of
      the fiber network were completed and accepted. Accordingly, the $2.5 million
      cost of the fiber has been included within “Property and Equipment” as fiber
      optic network as of March 31, 2006. As of March 31, 2006, the remaining purchase
      price of $1.2 million has been accrued within “Accrued Other Expenses” and was
      subsequently paid in April 2006.





**(7)
      LINE OF CREDIT**





The
      Company’s agreement with a lending institution provides the Company with a
      revolving line of credit facility of up to $7.5 million, secured by certain
      customer accounts receivable. The agreement was due to expire on April 24,
      2006
      before it was extended to June 23, 2006. This credit facility bears an interest
      rate equal to the prime lending rate plus two percent (2%) per annum. At March
      31, 2006, the Company had $7.5 million in availability under this agreement.
      Interest expense related to the line of credit (consisting of the allocable
      portion of the annual commitment fee) was $0.1 million for the three months
      ended March 31, 2006 and 2005. The Company has not borrowed under the line
      of
      credit during 2006 and has no outstanding balance as of March 31,
      2006.





**(8)
      CAPITAL LEASE OBLIGATIONS**





Capital
      lease obligations consist of the following (in thousands):





**March
                31**,
            
            **December
                31,****2006**
            
            **2005**Capital
                lease obligations
            
            $
            23,475
            
            $
            23,660Less
                current portion
            
            
            (554
            )
            
            (540
            )$
            22,921
            
            $
            23,120





The
      following is the leased property under capital leases by major classes (in
      thousands):





**March
                31**,
            
            **December
                31,****2006**
            
            **2005**Fiber
                optic network
            
            $
            8,033
            
            $
            8,033Office
                equipment and other
            
            
            191
            
            
            1628,224
            
            
            8,195Less:
                accumulated amortization
            
            
            (724
            )
            
            (577
            )$
            7,500
            
            $
            7,618





14


The
      capital lease obligations have terms that range from 2 to 16 years. The
      following table shows the future minimum lease payments under capital leases
      for
      each of the next five years ending December 31 and periods thereafter (in
      thousands):





Remaining
                2006
            
            $
            2,4582007
            
            
            4,0412008
            
            
            4,0412009
            
            
            4,0002010
            
            
            3,986Thereafter
            
            
            39,805Total
                minimum lease payments
            
            
            58,331Less:
                amounts representing interest
            
            
            (34,856
            )Net
                present value of capital lease obligations
            
            $
            23,475





**(9)
      ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS**





The
      Company has contractual obligations to remove certain assets associated with
      lease agreements upon termination of the agreements. The Company has recorded
      a
      liability and asset for the present value of the estimated future exit costs
      associated with the related asset retirement obligations, which have been
      recorded within other long-term liabilities and property and equipment,
      respectively, in the consolidated balance sheet. The liability was established
      by calculating the present value of the asset retirement obligation using a
      discount rate of 19.60% over a period that is representative of the estimated
      useful life of the related assets. Changes in the asset retirement obligation
      resulting from the passage of time are recognized as an increase in the carrying
      amount of the liability and as accretion expense, which is a component of
      depreciation and amortization on the consolidated statements of
      operations.





The
      following table is a reconciliation of the beginning and ending asset retirement
      obligations (in thousands):





Balance
                as of December 31, 2005
            
            $
            398Accretion
            
            
            18Balance
                as of March 31, 2006
            
            $
            416





The
      asset
      retirement obligations and associated assets are estimated based on several
      assumptions. If information becomes known that is different than the assumptions
      in use, revisions will be made using the more precise information. If actual
      costs differ from the assumptions used, the amount of the obligations will
      differ, perhaps significantly, from the amounts reflected in the accompanying
      consolidated financial statements.





**(10)
      COMMITMENTS AND CONTINGENCIES**





***Lease
      Obligations and Purchase Commitments***





The
      Company has entered into various operating lease agreements with expirations
      through 2015 for its switching facilities and offices (the “Operating Lease
      Obligations”). Rent expense included in continuing operations was as follows (in
      thousands):





**Three
                Months Ended****March
                31,****2006**
            
            **2005**Rent
                expense
            
            $
            2,115
            
            $
            2,180





In
      the
      ordinary course of business, the Company enters into purchase agreements with
      its vendors. As of March 31, 2006, the Company had total unfulfilled purchase
      commitments with vendors of $3.0 million. The Company also has various
      agreements with certain carriers for transport, long distance and other network
      services. At March 31, 2006, the Company’s minimum commitment under these
      agreements is $14.4 million, which expire through December 2022.





15


As
      of
      March 31, 2006, the Company is obligated to make cash payments in connection
      with various lease obligations and purchase commitments. All of these
      obligations require cash payments to be made by the Company over varying periods
      of time. Certain of these arrangements are cancelable on short notice and others
      require payments upon early termination, if any. Included in the table below
      are
      obligations for continuing operations as of March 31, 2006 (in
      thousands):





**2006**
            
            **2007**
            
            **2008**
            
            **2009**
            
            **2010**
            
            **Thereafter**Operating
                lease obligations
            
            $
            5,700
            
            $
            6,599
            
            $
            4,867
            
            $
            3,478
            
            $
            1,661
            
            $
            1,739Circuit
                lease obligations
            
            
            5,777
            
            
            3,583
            
            
            894
            
            
            528
            
            
            451
            
            
            3,159Purchase
                commitments
            
            
            2,991
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Total
            
            $
            14,468
            
            $
            10,182
            
            $
            5,761
            
            $
            4,006
            
            $
            2,112
            
            $
            4,898





As
      provided in the asset sale agreements for the Company’s discontinued markets
      sold to third parties in 2003, the purchasers of these assets assumed the
      liabilities associated with the markets acquired. However, the Company remains
      contingently liable for several of the obligations in these markets. The
      Company is guarantor of future lease obligations with expirations through 2015.
      The guarantees arose from the assignment of leases resulting from the asset
      sales. The Company is fully liable for all obligations under the terms of the
      leases in the event that the assignee fails to pay any sums due under the lease.
      The remaining maximum potential amount of future payments the Company could
      be
      required to make under the guarantees at March 31, 2006 was $7.3 million. No
      payments have been made to date and none are expected to be required to be
      made
      in the future. In accordance with FASB Interpretation No. 45, “Guarantor’s
      Accounting and Disclosure Requirements for Guarantees, Including Indirect
      Guarantees of Indebtedness to Others,” the fair value of these obligations is
      limited and accordingly no liability was recorded on the Company’s consolidated
      balance sheet at March 31, 2006 or December 31, 2005.





The
      Company’s services are subject to varying degrees of federal, state and local
      regulation. These regulations are currently subject to change by federal and
      state administrative agencies, judicial proceedings, and proposals that could
      change, in varying degrees, the manner in which the Company operates. The
      Company cannot predict the outcome of these proceedings or their impact upon
      the
      Company’s industry generally or upon the Company specifically.





***Minimum
      Revenue Guarantees***





The
      Company has adopted FSP No. FIN 45-3 “Application of FASB Interpretation No. 45
      to Minimum Revenue Guarantees Granted to a Business or its Owners,” effective
      January 1, 2006. The Company has not issued or modified any new minimum revenue
      guarantees since the adoption of FSP No. FIN 45-3 and has therefore not
      recognized any liability.




***Litigation***





From
      time
      to time, the Company is involved in legal proceedings arising in the ordinary
      course of business, including some claims asserted by the Company against
      others, in which monetary damages are sought. The result of any current or
      future litigation is inherently unpredictable; however, management believes
      there is no litigation asserted or pending against the Company that could have,
      individually or in the aggregate, a material adverse effect on its financial
      position, results of operations or cash flows.





On
      February 17, 2005, a class action lawsuit was commenced against the Company,
      alleging violations of California Labor Code Sections 2802 and 2804. The group
      of plaintiffs attempting to be formed and certified as a class would have
      included the Company’s sales representatives in California for the past four
      years. The plaintiffs were seeking to recover what they claimed to be
      unreimbursed expenses incurred in the performance of their duties, including
      additional mileage reimbursement. The Company settled the action pursuant to
      a
      Memorandum of Understanding dated March 7, 2006. The settlement is subject
      to
      approval by the Superior Court of the State of California for the County of
      Los
      Angeles. The settlement will not have a material adverse effect on the Company’s
      financial position, results of operations or cash flows.





***Interconnection
      Agreements***





In
      the
      ordinary course of business, the Company has negotiated interconnection
      agreements with SBC Corp. (now known as AT&T) including its California and
      Illinois subsidiaries, Sprint Nevada and Verizon California. These agreements
      specify the terms and conditions under which the Company leases unbundled
      network elements (“UNEs”) including type of UNE, price, delivery schedule, and
      maintenance and service levels. The term of these agreements is generally two
      years. While the initial terms have expired, the agreements provide for
      continued enforceability while the parties negotiate and, if necessary,
      arbitrate the terms and conditions of a new agreement or amendments to existing
      agreements. Although the Company is not currently negotiating new agreements,
      the Company is in the process of amending its interconnection agreements to
      conform to the Triennial Review Order and Triennial Review Remand Order
      (“TRO/TRRO”). Amendments are expected to be completed in the second quarter of
      2006.





16


The
      Company has no minimum purchase obligations for UNEs and pays for only those
      UNEs it orders and receives. While the Company has no performance requirements
      imposed upon it, the incumbent carriers must perform at specified levels,
      generally at a parity level with the same services provided to the incumbent's
      retail customers. To the extent the services of the local exchange carriers
      are
      used, the Company and its customers are subject to the quality of service,
      equipment failures and service interruptions of the local exchange
      carriers.





The
      Company is dependent on the cooperation of the incumbent local exchange carriers
      to provide service for the origination and termination of its local and long
      distance traffic. Historically, charges for these services have made up a
      significant percentage of the overall cost of providing these services. The
      Company incurs costs through the use of services agreed to in the
      interconnection agreements. The costs are recognized in the period in which
      the
      service is delivered and are included as items within cost of operating
      revenues. From time to time the carriers present inaccurate bills which the
      Company disputes and ultimately settles in the normal course of
      business.





***Sales
      Tax and Property Tax Reserves***





The
      Company maintains reserves for estimated exposure for various sales and use
      taxes that taxing jurisdictions may claim as being owed due to interpretations
      of state and local regulations as well as for positions taken related to the
      underlying taxable base of capital expenditures made in the past by the Company.
      Similarly, reserves are maintained for positions taken on the assessment basis
      used to pay certain property taxes to various state and local taxing
      jurisdictions. The Company believes that all such reserves are appropriately
      recorded in accordance with the provisions of SFAS No. 5, “Accounting for
      Contingencies,” at March 31, 2006 and December 31, 2005.





**(11)
      DISCONTINUED OPERATIONS**





The
      Company’s March 31, 2006 consolidated balance sheet reflects a $0.1 million
      receivable related to asset sales from discontinued markets. This receivable
      has
      been included in other receivables in the consolidated balance sheets and the
      balance is being held in escrow by a third party escrow agent. No allowance
      for
      doubtful accounts for this receivable has been established as the Company
      received a net disbursement of $0.1 million from escrow in February 2006
      representing $0.3 million of proceeds from the sale of assets from discontinued
      operations net of $0.2 million of costs associated with that sale and expects
      to
      receive the remaining $0.1 million, net of expenses chargeable to the Company
      of
      $0.1 million included in accrued other expenses on the consolidated balance
      sheet, before the end of 2006.





The
      operating revenues and expenses of the Company’s discontinued markets have been
      classified as discontinued operations under
      SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,”
for all periods presented. Income
      (loss) related to these discontinued markets was as follows for the three months
      ended March 31, 2006 and 2005 (in thousands):





**Three
                Months Ended****March
                31,****2006**
            
            **2005**Operating
                income (expense)
            
            $
            80
            
            $
            (32
            )





For
      the
      three months ended March 31, 2006, the Company recognized $0.1 million of income
      from discontinued operations, which is primarily driven by the settlement of
      its
      lease obligations with the landlord of its Tampa, Florida discontinued market.
      The loss from discontinued operations for the three months ended March 31,
      2005,
      is primarily comprised of rental expense in the Tampa, Florida
      market.





**(12)
      INCOME (LOSS) PER COMMON SHARE**





SFAS
      No.
      128, "Earnings Per Share," requires the Company to calculate its income (loss)
      per common share based on basic and diluted income (loss) per common share,
      as
      defined. Basic income (loss) per common share for the three months ended March
      31, 2006 and 2005 were computed by dividing the income (loss) applicable to
      common stockholders by the weighted average number of shares of common stock
      outstanding during the period. Diluted income per common share for the three
      months ended March 31, 2006 and 2005 were computed by dividing the income (loss)
      applicable to common stockholders by the weighted average number of shares
      of
      common stock and potential common stock outstanding during the period. The
      Company’s potential common stock consists of its equity awards that are
      convertible into stock such as its options, warrants and restricted shares,
      which do not have an antidilutive effect on income (loss) per share. The
      inclusion of potential common stock in this calculation for the quarters ended
      March 31, 2006 and 2005 did not result in a change to basic income (loss) per
      common share amounts. As of March 31, 2006 and 2005, the Company had outstanding
      5,056,022 and 1,402,206 options, warrants and restricted shares, respectively,
      which were convertible into common shares that were not included in the
      calculation of diluted income per common share because the effect would be
      antidilutive.





17




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





**Three
                Months Ended****March
                31,****2006**
            
            **2005****Basic
                income (loss) per common share**Income
                from continuing operations
            
            $
            72
            
            $
            3,877Income
                (loss) from discontinued operations
            
            
            80
            
            
            (32
            )Net
                income
            
            $
            152
            
            $
            3,845Weighted
                average common shares outstanding
            
            
            91,671,787
            
            
            91,331,930Basic
                income from continuing operations per common share
            
            $
            0.00
            
            $
            0.04Basic
                income (loss) from discontinued operations per common
                share
            
            
            0.00
            
            
            (0.00
            )Basic
                net income per common share
            
            $
            0.00
            
            $
            0.04**Diluted
                income (loss) per common share**Income
                from continuing operations
            
            $
            72
            
            $
            3,877Income
                (loss) from discontinued operations
            
            
            80
            
            
            (32
            )Net
                income
            
            $
            152
            
            $
            3,845Weighted
                average common shares outstanding - basic
            
            
            91,671,787
            
            
            91,331,930Dilutive
                effect of options, warrants and restricted shares - treasury stock
                method
            
            
            9,267,719
            
            
            10,779,436Common
                shares and common share equivalents
            
            
            100,939,506
            
            
            102,111,366Diluted
                income from continuing operations per common share
            
            $
            0.00
            
            $
            0.04Diluted
                income (loss) from discontinued operations per common
                share
            
            
            0.00
            
            
            (0.00
            )Diluted
                net income per common share
            
            $
            0.00
            
            $
            0.04





**(13)
      OPERATING SEGMENTS**





*Reportable
      Segments*





The
      Company operates its business as one segment and as a consolidated entity
      managed at a national level. The Company’s products and services have similar
      network operations, back-office support and technology requirements and are
      sold
      through similar sales channels to a similar targeted customer base. Therefore,
      the Company manages these services as a single segment that are sold in
      geographic areas, or markets, within the United States, or that are sold to
      customers with a presence across geographical markets. The Company regularly
      evaluates the makeup of its business to determine whether more than a single
      segment exists as its business evolves and develops.





18


*Products
      and Services*





The
      Company classifies its products and services into various revenue categories
      as
      shown in the following table (in thousands):





**Three
                Months Ended****March
                31,****2006**
            
            **2005**Plain
                old telephone service (“POTS”)/DSL
            
            $
            19,490
            
            $
            21,216T1
                based products and services
            
            
            17,991
            
            
            13,659Private
                lines
            
            
            4,571
            
            
            4,343Long
                distance and other usage
            
            
            4,927
            
            
            4,838Switched
                access
            
            
            2,979
            
            
            3,670Total
                operating revenue
            
            $
            49,958
            
            $
            47,726





**(14)
      SUBSEQUENT EVENT**





On
      May 5,
      2006, the Company signed a definitive agreement to be acquired by U.S.
      TelePacific Holding Corp. (TelePacific), a privately held company that provides
      telecommunications services to businesses in California and Las Vegas, Nevada.
      Under the terms of the agreement, TelePacific will pay $1.92 in cash per Mpower
      share, which equates to a total equity value of approximately $204 million.
      TelePacific will finance the acquisition through a fully committed senior credit
      facility arranged by Credit Suisse. The transaction has been approved by the
      Company’s and TelePacific’s boards of directors but still requires the approval
      of the Company’s shareholders and other customary conditions including the
      receipt of applicable state and federal regulatory approvals. The transaction
      is
      expected to close in the third quarter of 2006. The definitive agreement
      provides for the Company to pay TelePacific $6 million as a non-refundable
      fee
      plus reimburse them for transaction expenses of up to $2 million if the Company
      terminates the agreement under certain conditions. TelePacific has provided
      a $6
      million letter of credit that the Company can draw down on as partial
      satisfaction for damages incurred in the event of termination by TelePacific
      under certain conditions.


19


**Item
      2.** ***Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations***





**Introduction**





The
      following Management's Discussion and Analysis ("MD&A") is written to help
      the reader understand our company. The MD&A is provided as a supplement to,
      and should be read in conjunction with, our unaudited interim condensed
      consolidated financial statements, the accompanying condensed financial notes
      ("Notes") appearing elsewhere in this report and our annual report on Form
      10-K
      for the year ended December 31, 2005. The overview provides our perspective
      on
      the individual sections of MD&A, which include the following:





*Executive
      Summary -* an
      executive review of our performance for the three months ended March 31,
      2006.





*Company
      Overview -* a
      general
      description of our business, the services we offer and the markets we
      serve.





*Liquidity
      and Capital Resources* -
      an
      analysis of historical information regarding our sources of cash and capital
      expenditures, the existence and timing of commitments and contingencies, changes
      in capital resources and a discussion of balance sheet and cash flow items
      affecting liquidity.





*Results
      from Continuing Operations* - an
      analysis of our results of operations for the three months ended March 31,
      2006
      and 2005, including a review of the material items and known trends and
      uncertainties.





*Discontinued
      Operations* - an
      analysis of our discontinued operations for the three months ended March 31,
      2006 and 2005.





*Application
      of Critical Accounting Estimates* -
      an
      overview of accounting policies that require critical judgments and
      estimates.





*Effects
      of New Accounting Standards -* a
      discussion of new accounting standards and any implications related to our
      financial statements.





*Forward
      Looking Statements* -
      cautionary information about forward-looking statements and a description of
      certain risks and uncertainties that could cause our actual results to differ
      materially from our historical results or our current expectations or
      projections.





**Executive
      Summary**





On
      May 5,
      2006, we signed a definitive agreement to be acquired by U.S. TelePacific
      Holding Corp. (TelePacific), a privately held company that provides
      telecommunications services to businesses in California and Las Vegas, Nevada.
      Under the terms of the agreement, TelePacific will pay $1.92 in cash per Mpower
      share, which equates to a total equity value of approximately $204 million.
      TelePacific will finance the acquisition through a fully committed senior credit
      facility arranged by Credit Suisse. The transaction has been approved by our
      and
      TelePacific’s boards of directors but still requires the approval of our
      shareholders and other customary conditions including the receipt of applicable
      state and federal regulatory approvals. The transaction is expected to close
      in
      the third quarter of 2006. The definitive agreement provides for us to pay
      TelePacific $6 million as a non-refundable fee plus reimburse them for
      transaction expenses of up to $2 million if we terminate the agreement under
      certain conditions. TelePacific has provided a $6 million letter of credit
      that
      we can draw down on as partial satisfaction for damages incurred in the event
      of
      termination by TelePacific under certain conditions.





Our
      total
      operating revenues for the first quarter of 2006 were $50.0 million, up 2%
      over
      the fourth quarter of 2005, and up 5% over the first quarter of 2005. Core
      customer revenues were $47.0 million in the first quarter of 2006 compared
      to
      $45.9 million and $44.0 million in the fourth quarter of 2005 and first quarter
      of 2005, respectively. We implemented a price increase in the third quarter
      of
      2005 that resulted in $1.5 million of additional revenue in the first quarter
      of
      2006.





Continuing
      our evolution from a plain old telephone service (“POTS”) and DSL business to a
      facilities-based T1 platform company, T1 based recurring customer revenue
      increased 7% over the fourth quarter of 2005. This growth is due to a number
      of
      factors including our sales efforts across all channels, T1 customer churn
      of
      only 1.7% in the first quarter of 2006 and the price increase implemented in
      August 2005 which increased first quarter T1 platform revenues by $0.6 million.
      Our T1 platform products now represent 54% of our total monthly recurring
      revenue with 74% of our first quarter 2006 new recurring revenue being installed
      on our T1 platform.





20


In
      the
      first quarter of 2006, we signed agreements with three UNE-P companies to carry
      their traffic on our network. No revenue has been generated to date but all
      the
      new agreements are three year agreements that will generate a total of
      approximately $0.1 million in monthly revenue when fully provisioned. We are
      continually looking for more of these kinds of relationships.





We
      classify our products and services into various revenue categories as shown
      in
      the following table (in thousands):





**Three
                Months Ended****March
                31,****2006**
            
            **2005**Plain
                old telephone service (“POTS”)/DSL
            
            $
            19,490
            
            $
            21,216T1
                based products and services
            
            
            17,991
            
            
            13,659Private
                lines
            
            
            4,571
            
            
            4,343Long
                distance and other usage
            
            
            4,927
            
            
            4,838Switched
                access
            
            
            2,979
            
            
            3,670Total
                operating revenue
            
            $
            49,958
            
            $
            47,726





We
      continue to be challenged in our ability to grow our direct sales force. We
      ended the first quarter of 2006 with 108 quota-carrying sales people. This
      compares to 117 at December 31, 2005. Our training and recruiting efforts are
      focused on obtaining sales people who will be productive and long-term, and
      we
      continue to aggressively look for qualified candidates to add to our direct
      sales force. Excluding quota-carrying sales people, our headcount increased
      from
      December 31, 2005 by 72 to 728 at March 31, 2006.





In
      addition to our direct sales force and our growing agent channel, we recognize
      the need to sell more through “partner” channels such as value-added resellers
      or equipment systems integrators as we evolve to selling into larger business
      customers. We are investing in project management resources, enhanced back
      office systems and dedicated sales and engineering resources to support this
      sales channel opportunity.





We
      have
      been working over the past several months to transition to a new IP application
      platform. While we have offered voice over internet protocol (“VOIP”) in our
      network for over four years, we will now focus even more on making VOIP a key
      component of our service offerings. We believe our ability to package our
      broadband product set with our hosted IP Private Branch Exchange (“PBX”)
      capability, having our own network and extensive customer and field support
      capabilities will differentiate us in the market.





At
      March
      31, 2006, we believe we are poised to fully benefit from the integration of
      ICG’s California customer base and network. All significant back-office
      functions have now been integrated into the Mpower system and all customer
      traffic has been re-routed from ICG’s switch facilities to our network. We are
      pleased that these conversions have been largely on our expected timetable
      and
      with minimal impact to our customers.





We
      continue to make progress on our various network initiatives including the
      installation of a new soft switch in Los Angeles (now completed) and the
      construction of a new switch facility in Las Vegas to replace the existing
      facility in that market (replacement scheduled for May 2006). In March 2006,
      we
      accepted the completed fiber network acquired from IDACOMM that will put our
      switch and 12 Las Vegas market collocations on owned fiber. We continue various
      other network grooming activities designed to lower our operating costs and
      position us for adding further growth onto our fixed network.





We
      ended
      the first quarter of 2006 with $25.5 million of unrestricted cash, cash
      equivalents and short and long-term investments available-for-sale, as compared
      to $28.4 million at the end of the fourth quarter of 2005. This decrease was
      expected and reflects our results from operations, changes in working capital
      accounts (including the payment of an extra payroll in March as we pay on a
      bi-weekly basis), first quarter 2006 cash outlays for capital expenditures
      of
      $4.2 million and scheduled capitalized lease payments of $1.8 million made
      in
      the quarter.





We
      actively participate in various regulatory proceedings in order to monitor
      Federal or state matters that could impact our business.





21


**Company
      Overview**





We
      were
      one of the first facilities-based competitive local telephone companies founded
      after the inception of the Telecommunications Act of 1996, which opened up
      the
      local telephone market to competition. Today, we offer local and long distance
      voice services as well as high-speed Internet access and voice over internet
      protocol (“VOIP”) by way of a variety of broadband product and service offerings
      over our own network of collocations, switches and fiber network. Our fiber
      network includes a 1,412 route mile state-wide fiber ring in California, a
      141
      route mile fiber network in Las Vegas and 915 miles of metropolitan fiber rings
      that connect 128 commercial buildings. All of our services are offered through
      our wholly-owned subsidiary, Mpower Communications Corp. (“Communications”)
      primarily to small and medium-sized business customers in all of our markets
      and
      residential customers primarily in the Las Vegas market. Our markets include
      Los
      Angeles, California, San Diego, California, Northern California (the San
      Francisco Bay area and Sacramento), Las Vegas, Nevada and Chicago,
      Illinois.





As
      a
      facilities-based provider, we own and control a substantial amount of our
      network infrastructure. Our network reaches across 297 central office
      collocation sites. We also sell T1 services to customers using facilities that
      do not directly connect to these collocation sites. We refer to this as
“off-network.” Having off-network facilities increases the number of our
      potential customers. We have seven switches in our network, including one Lucent
      “soft switch” we installed in our Los Angeles market. A soft switch enables us
      to provide more features to our customers at lower on-going operating costs
      and
      less capital expenditures than traditional Class 5 switch
      equipment.





In
      addition to our deep collocation and switching infrastructure, we also own
      a
      fiber network comprised of a statewide SONET-based fiber network in California
      and a 141 route mile fiber network with three survivable rings in Las Vegas.
      This fiber network allows us to offer new products such as private line,
      accelerate our speed-to-market with IP Centrex capabilities, including VOIP,
      position us as a strong player in the wholesale market, and reduce our reliance
      on the Incumbent Local Exchange Carriers (ILECs).





As
      of May
      2006, we have approximately 830 employees. We have established working
      relationships with Verizon, Sprint, and AT&T (formerly known as SBC,
      including its operating subsidiaries PacBell and Ameritech).





Our
      business is to deliver integrated voice and broadband data solutions. Our
      emphasis is on providing small and medium-sized and now larger size business
      customers, as well as wholesale customers, with a full suite of communications
      services and features, integrated on one bill, with the convenience of a single
      source provider. By
      using
      our existing equipment and interconnection agreements with incumbent carriers
      and network capabilities, we are able to offer fully integrated and channelized
      voice and data product and service offerings over a T1 connection. In order
      to
      serve the largest portion of our target audience, our combined voice and data
      network allows us to deliver services in several combinations over the most
      favorable technology: basic phone service on the traditional phone network,
      SDSL
      service, integrated T1 voice and data service, or data-only T1 connectivity.
      Our
      service offerings have been increased through the acquisition of ICG California,
      providing us with the ability to be a wholesale provider to large interexchange
      carriers (“IXCs”), competitive local exchange carriers (“CLECs”), and internet
      service providers (“ISPs”). We have established a dedicated wholesale channel to
      focus on the unique needs of this customer base. With access to our
      facilities-based distributed network architecture and broad range of products
      and services, we offer wholesale customers opportunities to enhance or expand
      their business models.





We
      operate our business as one segment and as a consolidated entity managed at
      a
      national level. Our products and services have similar network operations,
      back-office support and technology requirements and are sold through similar
      sales channels to a similar targeted customer base. Therefore, we manage these
      services as a single segment that are sold in geographic areas, or markets,
      within the United States, or that are sold to customers with a presence across
      geographical markets. We regularly evaluate the makeup of our business to
      determine whether more than a single segment exists as our business evolves
      and
      develops.





**Liquidity
      and Capital Resources**





We
      believe that we have sufficient resources and liquidity to fund our planned
      operations. We will continue to pursue initiatives to increase liquidity and
      better position us to compete under current and projected
      conditions.





22


In
      February 2005, we entered into an amendment to the lease with our landlord
      for
      our switch site in Las Vegas, Nevada. Under the amendment, our landlord paid
      us
      the sum of $7.7 million of cash and agreed to $0.3 million in rent abatement
      in
      consideration for our agreement to terminate our lease early and vacate the
      switch site by June 30, 2006. The rent abatement applies to our rent obligations
      from February 1, 2005 through June 30, 2006. In addition, in the event we needed
      to supply fiber optic cable to our new location, the landlord agreed to
      reimburse us for the actual costs incurred up to $0.5 million. In April 2006,
      we
      received this full reimbursement from the landlord. We are expending a portion
      of the $7.7 million to construct a new switch facility in the Las Vegas market,
      so that the new switch will be operational prior to closing the old switch
      and
      vacating the existing premises. The new switch will be fully operational by
      the
      end of the second quarter of 2006. Through March 31, 2006, approximately $3.5
      million has been expended, of which approximately $0.8 million was incurred
      during the first quarter of 2006. We expect that most of the cash expenditures
      associated with this relocation will be spent by September 30,
      2006.




Developing
      and maintaining our network and business has required and will continue to
      require us to incur capital expenditures primarily consisting of the costs
      of
      purchasing network and customer premise equipment and maintaining our operations
      support system. Cash outlays for capital expenditures for the three months
      ended
      March 31, 2006 were $4.2 million, which is exclusive of capitalized labor of
      $0.4 million for the three months ended March 31, 2006. In June 2005, we paid
      a
      $1.3 million deposit, which is approximately one half of the total purchase
      price, for a 141-route mile fiber network with three fully survivable rings
      in
      Las Vegas. As of March 31, 2006 we have received title to the 141-route mile
      fiber network. Accordingly the $2.5 million price of the fiber has been included
      within “Property and Equipment” as fiber optic network as of March 31, 2006. As
      of March 31, 2006, the remaining purchase price of $1.2 million has been accrued
      within “Accrued Other Expenses” and was subsequently paid in April
      2006.





As
      of
      March 31, 2006, we had $25.5 million in unrestricted cash and cash equivalents
      and short and long-term investments available-for-sale. We believe that our
      cash
      balances, when combined with our cash flow from operations, will generate enough
      liquidity to fully fund our operations and our capital expenditures on a
      continuing basis. Based on our current business plan, we do not expect to draw
      from our $7.5 million line of credit during the remainder of its current term.
      The line of credit was renewed before scheduled expiration in April 2006 and
      now
      expires on June 23, 2006. Our investments available-for-sale consists of auction
      rate securities, government agency notes, certificates of deposit and corporate
      bonds. All investments are made in accordance with our investment policy and
      guidelines approved by our board of directors.





*Cash
      Flow Discussion*





In
      summary, our cash flows for the three months ended March 31, 2006, were as
      follows (in thousands):





**Three
                Months Ended**
              **March
                31, 2006**Net
                cash provided by operating activities
            
            $
            1,304Net
                cash used in investing activities
            
            $
            (4,125
            )Net
                cash used in financing activities
            
            $
            (218
            )





The
      above
      summary of cash flows includes cash and cash equivalents.





At
      March
      31, 2006, cash, cash equivalents and short and long-term investments
      available-for-sale were $25.5 million. This balance has the following components
      (in thousands):





Cash
                and cash equivalents
            
            $
            15,239Investments
                available-for-sale
            
            
            8,621Long-term
                investments available-for-sale
            
            
            1,683Total
                at March 31, 2006
            
            $
            25,543





23


***Cash
      Flows from Operating Activities and Investing
      Activities***





Our
      cash
      flows from operating and investing activities are summarized as follows (in
      thousands):





**Three
                Months Ended**
              **March
                31,****2006**
            
            **2005**Net
                cash provided by operating activities
            
            $
            1,304
            
            $
            2,950Cash
                flows from investing activities:Purchases
                of property and equipment, net of payables
            
            $
            (4,177
            )
            $
            (4,333
            )Proceeds
                from sale of assets from continuing operations
            
            
            —
            
            
            13Proceeds
                from sale of assets from discontinued operations
            
            
            316
            
            
            1,000Costs
                associated with sale of assets from discontinued
                operations
            
            
            (200
            )
            
            —Purchase
                of investments available-for-sale, net
            
            
            (2,461
            )
            
            (566
            )Sale
                of investments available-for-sale, net
            
            
            2,305
            
            
            500Sale
                (purchase) of restricted investments, net
            
            
            92
            
            
            (30
            )Other
            
            
            —
            
            
            85Net
                cash used in investing activities
            
            $
            (4,125
            )
            $
            (3,331
            )





*Operating
      Activities:* Cash
      flows from operating activities were $1.3 million for the three months ended
      March 31, 2006. This is a decrease of $1.6 million compared to the three months
      ended March 31, 2005. The decrease is primarily a result of a reduction in
      accounts payable due to significant payments for services delivered at the
      end
      of 2005 not paid for until the first quarter of 2006, timing differences in
      other working capital accounts and the impact in 2005 of the $7.7 million we
      received in February 2005 for the Las Vegas switch site lease
      amendment.





*Investing
      Activities:* For
      the
      three months ended March 31, 2006 we used $4.1 million in cash for investing
      activities compared to $3.3 million for the three months ended March 31, 2005.
      The cash used in 2006 primarily represents the investment of $4.2 million in
      capital expenditures. The cash used in 2005 primarily represents the investment
      of $4.3 million in capital expenditures, partially offset by $1.0 million of
      funds received from escrowed amounts related to previous asset sales from
      discontinued operations.





***Cash
      Flows from Financing Activities***





Our
      cash
      flows from financing are summarized as follows (in thousands):


**Three
                Months Ended**
              **March
                31,****2006**
            
            **2005**Cash
                flows (used in) provided by financing activities:Payments
                on capital lease obligations
            
            $
            (214
            )
            $
            (1,837
            )Payment
                of deferred debt financing costs
            
            
            (33
            )
            
            —Proceeds
                from the issuance of common stock, net of costs
            
            
            29
            
            
            2,522Net
                cash (used in) provided by financing activities
            
            $
            (218
            )
            $
            685





*Financing
      Activities:* For
      the
      three months ended March 31, 2006, we used $0.2 million of cash for financing
      activities. For the three months ended March 31, 2005, we were provided $0.7
      million of cash from financing activities. The cash used in 2006 primarily
      represents cash paid on capital lease obligations. The cash provided in 2005
      primarily represents the proceeds from the issuance of common stock to MCCC
      ICG
      Holdings, LLC (“MCCC”) in connection with the acquisition of ICG California,
      offset by cash paid on capital lease obligations. As a result of the ICG
      California acquisition, we have assumed $21.2 million of capital lease
      obligations.





24


*Commitments
      and Contingencies*





In
      the
      ordinary course of business, we enter into purchase agreements with our vendors.
      As of March 31, 2006, we had total unfulfilled purchase commitments with vendors
      of $3.0 million. We also have various agreements with certain carriers for
      transport, long distance and other network services. At March 31, 2006, our
      minimum commitments under these agreements are $14.4 million, which expire
      through December 2022.





We
      have
      certain capital leases, including certain long-term leases for our fiber
      network. The capital lease obligations have terms that range from 2 to 16
      years.





Included
      in the table below are obligations for continuing operations as of March 31,
      2006 (in thousands):


**2006**
            
            **2007**
            
            **2008**
            
            **2009**
            
            **2010**
            
            **Thereafter**Operating
                lease obligations
            
            $
            5,700
            
            $
            6,599
            
            $
            4,867
            
            $
            3,478
            
            $
            1,661
            
            $
            1,739Circuit
                lease obligations
            
            
            5,777
            
            
            3,583
            
            
            894
            
            
            528
            
            
            451
            
            
            3,159Purchase
                commitments
            
            
            2,991
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Capital
                lease obligations, including interest
            
            
            2,458
            
            
            4,041
            
            
            4,041
            
            
            4,000
            
            
            3,986
            
            
            39,805Total
            
            $
            16,926
            
            $
            14,223
            
            $
            9,802
            
            $
            8,006
            
            $
            6,098
            
            $
            44,703




As
      provided in the asset sale agreements for the discontinued markets sold to
      third
      parties in 2003, the purchasers of these assets assumed the liabilities
      associated with the markets acquired. However, we remain contingently liable
      for
      several of the obligations in these markets. We are
      guarantor of future lease obligations with expirations through 2015. The
      guarantees arose from the assignment of leases associated with the asset sales.
      We are fully liable for all obligations under the terms of the leases in the
      event that the assignee fails to pay any sums due under the lease. The remaining
      maximum potential amount of future payments we could be required to make under
      the guarantees at March 31, 2006 was $7.3 million. No payments have been made
      to
      date and none are expected to be required to be made in the future. In
      accordance with FASB Interpretation No. 45, “Guarantor’s Accounting and
      Disclosure Requirements for Guarantees, Including Indirect Guarantees of
      Indebtedness to Others,” the fair value of these obligations is limited and
      accordingly no liability was recorded on our consolidated balance sheet at
      March
      31, 2006 or December 31, 2005.





*Minimum
      Revenue Guarantees*





We
      have
      adopted FSP No. FIN 45-3 “Application of FASB Interpretation No. 45 to Minimum
      Revenue Guarantees Granted to a Business or its Owners,” effective January 1,
      2006. We have not issued or modified any new minimum revenue guarantees since
      the adoption of FSP No. FIN 45-3 and have therefore not recognized any
      liability.




**Results
      from Continuing Operations**





*Analysis
      of Consolidated Statements of Operations for the three months ended March 31,
      2006 and 2005* (in
      thousands):


**Three
                Months Ended March****31, 2006**
            
            **Three
                Months Ended**
              **March
                31, 2005**
            
            **Percentage
                Change Increase/****(Decrease)****$**
            
            **%
                ofRevenue**
            
            **$**
            
            **%
                ofRevenue**
            
            **2006
                vs.****2005**Operating
                revenuesCore
                customer trade revenue
            
            $
            46,979
            
            
            94
            %
            $
            44,056
            
            
            92
            %
            
            7
            %Switched
                access revenue
            
            
            2,979
            
            
            6
            %
            
            3,670
            
            
            8
            %
            
            (19
            )%Total
                revenue
            
            
            49,958
            
            
            100
            %
            
            47,726
            
            
            100
            %
            
            5
            %Cost
                of operating revenues (1)
            
            
            21,677
            
            
            43
            %
            
            21,835
            
            
            46
            %
            
            (1
            )%Selling,
                general and administrative (2)
            
            
            22,915
            
            
            46
            %
            
            22,730
            
            
            48
            %
            
            1
            %Other
                operating expenses
            
            
            4,669
            
            
            9
            %
            
            5,601
            
            
            12
            %
            
            (17
            )%Interest
                income
            
            
            (263
            )
            
            *
            
            
            (183
            )
            
            *
            
            
            *Interest
                expense
            
            
            937
            
            
            *
            
            
            1,167
            
            
            *
            
            
            *Other
                income
            
            
            (49
            )
            
            *
            
            
            (7,301
            )
            
            *
            
            
            *Income
                from continuing operations
            
            
            72
            
            
            *
            
            
            3,877
            
            
            *
            
            
            (98
            )%Discontinued
                operations:Income
                (loss) from discontinued operations
            
            
            80
            
            
            *
            
            
            (32
            )
            
            *
            
            
            *Net
                income
            
            $
            152
            
            
            *
            
            $
            3,845
            
            
            *
            
            
            (96
            )%




25




*
            Calculation
                is not meaningful.(1)
            Exclusive
                of depreciation and amortization of $3,885 and $3,512 for the three
                months
                ended March 31, 2006 and 2005, respectively.(2)
            Exclusive
                of depreciation and amortization of $784 and $2,089 for the three
                months
                ended March 31, 2006 and 2005,
                respectively.





*Quarterly
      Comparison - March 31, 2006 vs. March 31, 2005*




**Comparison
      of Financial Results**




Our
      operational results for the three months ended March 31, 2006 are discussed
      below. Results from discontinued operations have been excluded from this
      comparison.





***Operating
      Revenues.*** Revenue
      for the quarter ended March 31, 2006 was $50.0 million as compared to
      $47.7 **** million
      for the quarter ended March 31, 2005. The 5% or $2.3 million increase was
      primarily due to:





•
            An
                increase of $4.3 million in our higher-end integrated voice and data
                services revenue resulting from an increase of approximately 2,700
                average
                loops in service.•
            An
                increase of $0.2 million in our private line revenue due to an increase
                of
                approximately 400 average private lines in service.•
            An
                increase of $0.1 million in our toll and usage revenue primarily
                caused by
                an increase in long distance of $0.3 million, due to an increase
                in the
                minutes of use per customer offset by a decrease in directory
                assistance/operator service of $0.2
                million.





These
      increases were offset by:





•
            A
                decrease in plain old telephone service (“POTS”) revenue of $1.7 million,
                primarily the result of an average of 21,200 fewer POTS billable
                lines in
                service for the quarter ended March 31, 2006 compared to the quarter
                ended
                March 31, 2005.•
            A
                decrease of $0.7 million in switched access revenues caused by a
                decrease
                of $0.4 million in Primary Interexchange Carrier Charge (“PICC”) revenue,
                a decrease of $0.1 million due to a reduction in the types of the
                Intralata toll traffic we agreed to bill to one of the ILECs beginning
                in
                April 2005, and a decrease of $0.2 million of reciprocal compensation
                billed to the ILECs.





***Cost
      of Operating Revenues.*** Cost
      of
      operating revenues (excluding depreciation and amortization which is stated
      separately) for the quarter ended March 31, 2006 was $21.7 million as compared
      to $21.8 million for the quarter ended March 31, 2005. The 1% or $0.1 million
      decrease was primarily due to:





•
            A
                $0.8 million or 24% increase in the cost of T1 services for the quarter
                ended March 31, 2006, compared to the quarter ended March 31, 2005.
                This
                increase is a result of a continued shift of our sales focus from
                POTS to
                our T1 platform.•
            An
                increase of $0.3 million in the quarter ended March 31, 2006 due
                to
                favorable settlements with ILECs, which reduced the cost of operating
                revenues in the quarter ended March 31,
                2005.





These
      increases were offset by:





•
            A
                decrease of $0.7 million or 10% in loop expense resulting from a
                reduction
                of POTS lines. This reduction in expense is a result of the continued
                focus on selling T1 or higher capacity circuits and less focus on
                selling
                POTS.•
            A
                decrease in network access expense of $0.2 million or 5% from the
                grooming
                of the network infrastructure in relation to the turn down of the
                nine ICG
                Lucent switches in 2005.•
            A
                reduction of switch rents of $0.1 million associated with the turn-down
                of
                the Sacramento switch location.




***Selling,
      General and Administrative.*** For
      the
      quarter ended March 31, 2006, selling, general and administrative expenses
      (excluding depreciation and amortization which is stated separately) totaled
      $22.9 million, a 1% or $0.2 million increase from the $22.7 million for the
      quarter ended March 31, 2005. The increase is primarily due to:





•
            A
                $1.2 million increase in salary, wages and benefit related expenses.
                This
                is primarily the result of an increase in average headcount from
                approximately 770 employees for the quarter ended March 31, 2005
                to
                approximately 810 employees for the quarter ended March 31, 2006,
                due to
                the growth of our business combined with the impact of annual salary
                increases of approximately 3.5%.•
            A
                $0.4 million increase in agent commissions as a result of significant
                revenue growth within the independent agent sales channel and changes
                made
                to our agent commission structure for competitive
                reasons.•
            A
                $0.4 million increase in stock based compensation expense for share-based
                payments resulting from the adoption of FAS 123R effective January
                1,
                2006. See note 2 to the financial statements for additional information
                related to share-based transactions.




26


These
      increases were offset by:





•
            Additional
                expenses of $0.8 million incurred during the first quarter of 2005
                pursuant to our transition services agreement with ICG under which
                certain
                services related to the acquired operations of ICG California were
                performed for us by ICG. These services primarily related to accounting,
                billing, collections, provisioning, call center and network support.
                We
                have not incurred any transition services during the first quarter
                of 2006
                and do not expect to incur any additional expenses in the
                future.•
            Additional
                expenses of $0.9 million incurred during the first quarter of 2005
                for
                incremental transition expenses related to the integration of assets
                as a
                result of the ICG California acquisition on January 1, 2005. We have
                not
                incurred any incremental transition expenses during the first quarter
                of
                2006 and do not expect to incur any additional expenses in the
                future.





***Depreciation
      and Amortization.*** For
      the
      quarters ended March 31, 2006 and 2005, depreciation and amortization were
      $4.7
      million and $5.6 million, respectively. The decrease in depreciation and
      amortization is primarily attributable to a decrease in amortization expense
      resulting from one of our customer relationship intangible assets becoming
      fully
      amortized during 2005.





***Interest
      Income.*** Interest
      income was $0.3 million for the quarter ended March 31, 2006 as compared to
      $0.2
      million for the quarter ended March 31, 2005. Interest income is derived
      primarily from the investment of cash and cash equivalents, investments
      available-for-sale, and restricted cash and cash equivalents.





***Interest
      Expense.*** Gross
      interest expense was $0.9 million and $1.2 million for the quarters ended March
      31, 2006 and 2005, respectively. Interest expense includes interest on capital
      lease commitments and commitment fees and interest paid relating to our line
      of
      credit. The $0.3 million decrease in interest expense is primarily driven by
      an
      adjustment to the estimated fair value of the capital lease obligations assumed
      from ICG, which was recorded in the second quarter of 2005.





***Other
      Income.*** Other
      income for the quarter ended March 31, 2006 was $0.1 million. For the quarter
      ended March 31, 2005, we recorded $7.3 million of other income, which was
      primarily comprised of $7.2 million related to early termination of our Las
      Vegas, Nevada switch site lease, net of exit expenses. This was a one-time
      transaction and is not expected to occur again. We are spending a portion of
      the
      cash received on the construction of our replacement switch facility in Las
      Vegas during 2006.





**Discontinued
      Operations**





As
      of
      March 31, 2006, we have recorded a $0.1 million receivable related to asset
      sales from discontinued markets. This receivable has been included in other
      receivables in our consolidated balance sheets and the balance is being held
      in
      escrow by a third party escrow agent. No allowance for doubtful accounts for
      this receivable has been established as we received a net disbursement of $0.1
      million from escrow in February 2006 representing $0.3 million of proceeds
      from
      the sale of assets from discontinued operations net of $0.2 million of costs
      associated with that sale of assets. We expect to receive the remaining $0.1
      million, net of expenses chargeable to us of $0.1 million included in accrued
      other expenses on our consolidated balance sheet, before the end of the second
      quarter of 2006.





The
      operating revenues and expenses of our discontinued markets have been classified
      as discontinued operations under
      SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,”
for all periods presented. Income (loss) related
      to these discontinued markets was as follows for the three months ended March
      31, 2006 and 2005 (in thousands):


**Three
                Months Ended****March
                31,****2006**
            
            **2005**Operating
                income (expense)
            
            $
            80
            
            $
            (32
            )





For
      the
      three months ended March 31, 2006, we recognized $0.1 million of income from
      discontinued operations, which is primarily driven by the settlement of our
      lease obligations with the landlord of our Tampa, Florida discontinued market.
      The loss from discontinued operations, for the three months ended March 31,
      2005, is primarily comprised of rental expense in the Tampa, Florida
      market.





27


**Application
      of Critical Accounting Estimates**





Our
      unaudited interim condensed consolidated financial statements and accompanying
      condensed notes are prepared in accordance with accounting principles generally
      accepted in the United States of America. Preparing consolidated financial
      statements requires us to make estimates and assumptions that affect the
      reported amounts of assets, liabilities, revenue and expenses. These estimates
      and assumptions are affected by the application of our accounting policies.
      Our
      significant accounting policies are described in the “Significant Accounting
      Policies” footnote in our notes to consolidated financial statements included in
      our Form 10-K for the year ended December 31, 2005. Critical accounting
      estimates are those that require application of management’s most difficult,
      subjective or complex judgments, often as a result of matters that are
      inherently uncertain and may change in subsequent periods. Critical accounting
      estimates for us include: (i) revenue recognition on services, (ii) allowance
      for doubtful accounts, (iii) billing from network carriers, (iv) reserves for
      sales and property taxes, (v) deferred income taxes, (vi) impairment of
      long-lived assets and (vii) share-based payments. For additional discussion
      of
      these critical accounting estimates, see our “Management’s Discussion and
      Analysis of Financial Condition and Results of Operations” in our Form 10-K for
      the year ended December 31, 2005.





**Effects
      of New Accounting Standards**





*Share-Based
      Payment*





In
      December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment" (FAS
      123R)
      which requires us to measure and recognize compensation expense for all
      share-based payments at fair value. In addition, the FASB has issued a number
      of
      supplements to FAS 123R to guide the implementation of this new accounting
      pronouncement. Share-based payments include stock option grants and other
      equity-based awards granted under our long-term incentive and stock option
      plans. FAS 123R was effective beginning as of January 1, 2006. We use the
      Black-Scholes valuation model as the method for determining the fair value
      of
      our equity awards that we issue after January 1, 2006. We use the modified
      prospective transition method, which requires that compensation cost be
      recognized in our financial statements for all awards granted after the date
      of
      adoption as well as for existing awards for which the requisite service has
      not
      been rendered as of the date of adoption (the “Existing Awards”) and requires
      that prior periods not be restated. FAS 123R also requires us to calculate
      the
      pool of excess tax benefits available to absorb tax deficiencies recognized
      subsequent to adopting FAS 123R (the “APIC Pool”). In November 2005, the FASB
      issued FSP No. FAS 123(R)-3, “Transition Election Related to Accounting for the
      Tax Effects of Share-Based Payment Awards.” This FSP provides an elective
      alternative simplified method for calculating the pool of excess tax benefits
      available to absorb tax deficiencies recognized subsequent to the adoption
      of
      SFAS No. 123R and reported in the Condensed Consolidated Statements of Cash
      Flows. Companies may take up to one year from the effective date of the FSP
      to
      evaluate the available transition alternatives and make a one-time election
      as
      to which method to adopt. We are currently in the process of evaluating the
      alternative methods.





*Accounting
      Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB
      Statement No. 3*





In
      May
      2005, the FASB issued SFAS No. 154 "Accounting Changes and Error Corrections,
      a
      replacement of APB Opinion No. 20 and FASB Statement No. 3" (SFAS No. 154).
      SFAS
      No. 154 requires that all voluntary changes in accounting principles be
      recognized as a retroactive restatement of all periods presented except when
      retroactive restatement is impracticable. In addition, SFAS No. 154 also
      requires that a change in depreciation method be accounted for as a change
      in
      accounting estimate that is affected by a change in accounting principle, which
      would be accounted for in the period of change if the change affects that period
      and also in future periods if the change affects both the period of change
      and
      future periods. SFAS No. 154 also eliminates paragraph 4 of APB 20, which
      specifies that APB 20 does not apply to changes made to comply with new
      pronouncements. This Statement requires that any change in an accounting
      principle made as a result of a new pronouncement be reported following the
      same
      guidance as that for voluntary changes in accounting principles unless the
      new
      pronouncement's transition provisions require another method. SFAS No. 154
      is
      effective for years beginning after December 15, 2005. The adoption of SFAS
      154
      has not had a material impact on our consolidated results of operations or
      financial condition.





*Minimum
      Revenue Guarantees Granted to a Business or Its Owners*





In
      November 2005, the FASB issued FASB Staff Position (“FSP”) No. FIN
      45-3, *“* Application
      of FASB Interpretation No. 45 to Minimum Revenue Guarantees Granted to a
      Business or Its Owners,” which amends paragraph 3 of FIN 45, “Guarantor's
      Accounting and Disclosure Requirements for Guarantees, Including Indirect
      Guarantees of Indebtedness of Others,” to include minimum revenue guarantees.
      FSP No. FIN 45-3 requires that a liability be recognized at inception for the
      fair value of the obligation to stand ready to perform under a guarantee, even
      if it is not probable that the contingent events that would cause payment will
      occur. FSP No. FIN 45-3 is effective for new minimum revenue guarantees issued
      or modified on or after the beginning of the first fiscal quarter following
      November 10, 2005, with disclosure requirements effective for any minimum
      revenue guarantee issued prior to the initial application of the FSP. The
      adoption of FSP No. FIN 45-3 has not had a material impact on our consolidated
      results of operations or financial condition.




28


**Forward-Looking
      Statements**





Under
      the
      safe harbor provisions of the Private Securities Litigation Reform Act of 1995,
      we caution the reader that certain statements contained in this report regarding
      our and/or management’s intentions, hopes, beliefs, expectations or predictions
      of the future are forward-looking statements. We wish to caution the reader
      these forward-looking statements are not historical facts and are only estimates
      or predictions. Actual results, including projections with respect to our future
      operating performance, may differ materially from those projected as a result
      of
      risks and uncertainties including future sales growth, changes in federal or
      state telecommunications regulations, market acceptance of our product and
      service offerings, the liquidity of our common stock, our ability to secure
      adequate financing or equity capital to fund our operations and network
      expansion, our ability to manage growth and maintain a high level of customer
      service, the performance of our network and equipment, our ability to close
      the
      recently announced merger with U.S. TelePacific Holdings Corp., the effect
      the
      announced merger may have on our customers, prospective customers, employees
      and
      sales agents, the cooperation of incumbent local exchange carriers in
      provisioning lines and interconnecting our equipment, regulatory approval
      processes, the effect of regulatory decisions on our access charges and
      operating costs, changes in technology, price competition and other market
      conditions and risks. We undertake no obligation to update publicly any
      forward-looking statements, whether as a result of future events, new
      information, or otherwise.




**Item
      3.**  *Quantitative
      and Qualitative Disclosures About Market Risk*





We
      do not
      use interest rate derivative instruments to manage our exposure to interest
      rate
      changes. The interest rate under our line of credit floats with the prime rate
      and therefore we do have exposure to interest rate changes as a result of our
      line of credit agreement. As of March 31, 2006, we did not have any outstanding
      borrowings under the line of credit.





As
      a
      result of the ICG acquisition in January 2005, we acquired certain capital
      leases that have fixed interest rates and as a result we do not have exposure
      to
      interest rate changes for those obligations.





**Item
      4.**  *Controls
      and Procedures*





(a)
            Evaluation
                of disclosure controls and procedures.
                As of the end of the period covered by this report, which period
                includes
                the operating results of ICG California acquired on January 1, 2005,
                under
                the supervision and with the participation of our management, including
                our chief executive officer (“CEO”) and chief financial officer (“CFO”),
                we evaluated the design and operation of our disclosure controls
                and
                procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
                Exchange Act of 1934, as amended, or the “Exchange Act”). Based on this
                evaluation, our management, including our CEO and CFO, has concluded
                that
                our disclosure controls and procedures are designed, and are effective,
                to
                give reasonable assurance that the information we are required to
                disclose
                is recorded, processed, summarized and reported within the time periods
                specified in the SEC’s rules and forms. Based upon this evaluation, the
                CEO and CFO concluded that our disclosure controls and procedures
                are
                effective in providing reasonable assurance that information required
                to
                be disclosed in our reports filed with or submitted to the SEC under
                the Exchange Act is accumulated and communicated to management, including
                the CEO and CFO, as appropriate to allow timely decisions regarding
                required disclosure.(b)
            Changes
                in internal control.
                There were no changes in our internal control over financial reporting
                that occurred during our quarter ended March 31, 2006, that have
                materially affected, or are reasonably likely to materially affect,
                our
                internal control over financial
                reporting.





29


**PART
      II. OTHER INFORMATION**





**Item
      1.** *Legal Proceedings*





From
      time
      to time, we are involved in litigation and governmental proceedings in the
      ordinary course of our business, including some claims that we have asserted
      against others, in which monetary damages are sought. The result of current
      or
      future litigation is inherently unpredictable; however, we do not believe any
      asserted or pending litigation or governmental proceedings will have a material
      adverse effect on our financial position, results of operations or cash flows.
      A
      description of pending litigation and governmental proceedings is contained
      in
      our annual report on Form 10-K for the year ended December 31, 2005. The
      following updates the discussion in the Form 10-K for developments that have
      occurred since January 1, 2006.





On
      February 17, 2005, a class action lawsuit commenced against us, alleging
      violations of California Labor Code Sections 2802 and 2804. The group of
      plaintiffs attempting to be formed and certified as a class would have included
      our sales representatives in California for the past four years. The plaintiffs
      were seeking to recover what they claimed to be unreimbursed expenses incurred
      in the performance of their duties, including additional mileage reimbursement.
      We settled the action pursuant to a Memorandum of Understanding dated March
      7,
      2006. The settlement is subject to approval by the Superior Court of the State
      of California for the County of Los Angeles. The settlement will not have a
      material adverse effect on our financial position, results of operations or
      cash
      flows.





**California**





On
      March
      20, 2006, the California Public Utilities Commissions (“CPUC”) adopted new rates
      in the Verizon unbundled network elements (“UNE”) rate case to set permanent
      rates for UNEs purchased by competitive carriers from Verizon in California.
      In
      2003, the CPUC issued an interim rate order setting Verizon UNE rates at a
      level
      expected to be a close approximation of permanent rates (subject to a true
      up
      after permanent rates were determined). The new rates will increase the cost
      of
      2-wire loops, but will decrease the cost of high-capacity digital loops. We
      do
      not believe the new rates or retroactive true up will have a material adverse
      effect on our business, financial condition, or results of operations. Verizon
      has subsequently filed a petition for rehearing certain aspects of the decision.
      The CPUC is expected to rule on the petition in the second quarter of 2006.
      We
      are not able to predict the outcome of Verizon’s petition or its effect on our
      business.





**Illinois**





On
      September 15, 2005, SBC (now known as AT&T) filed a collocation tariff in
      Illinois that would significantly change how power usage in CLEC facilities
      used
      to interconnect with the ILEC is measured and billed. The ICC stayed the tariff
      and opened a docket to investigate the proposed changes. The parties have
      submitted testimony and anticipate a decision by the ICC in the third quarter
      of
      2006. We are unable to predict the outcome of this proceeding or its effect
      on
      our business.





**FCC
      Triennial Review**





The
      2005
      Triennial Review Remand Order modifying the unbundling obligations for UNEs
      that
      we purchase from ILECs affected relatively few wire centers where we are
      collocated. As a result, we have negotiated with the ILECs to purchase some
      high
      capacity loops and transport (less than 10% of our high capacity circuits)
      at
      regulated prices as special access. As relatively few circuits are affected,
      we
      do not believe these new rates will have a material adverse effect on our
      business, financial condition or results of operations.





30


**Item
      1A.** *Risk
      Factors*





*Before
      you invest in shares of our securities, you should be aware of various risks,
      including the risks described in our annual report on Form 10-K for the year
      ended December 31, 2005. With the announced sale of our Company, the following
      risk factors should also be considered.*





**Uncertainty
      regarding the recently announced merger of Mpower and U.S. TelePacific Holdings
      Corp. may cause customers, suppliers and agent partners to delay or defer
      decisions concerning business with us, which may negatively affect our
      business.**





The
      recently announced merger of Mpower and U.S. TelePacific Holdings Corp. on
      May
      5, 2006 will happen only if stated conditions are met, including approval of
      the
      merger by our stockholders, regulatory approvals, and the absence of any
      material adverse effect on the business of either company. Many of these
      conditions are outside our control. Both parties also have stated rights to
      terminate the agreement. Accordingly, there may be uncertainty regarding the
      completion of the merger. This uncertainty may cause customers, suppliers and
      agent partners to delay or defer decisions concerning business with us, which
      could negatively affect our business. Customers, suppliers and agent partners
      may also seek to change existing agreements with us as a result of the merger.
      Any delay or deferral of those decisions or changes in existing agreements
      could
      have a material adverse effect on our business, regardless of whether the merger
      is ultimately completed.





**Failure
      to complete the merger could cause our stock price to decline and could harm
      our
      business and operating results.**





The
      agreement contains conditions which each party must satisfy to complete the
      transaction. In addition, the agreement may be terminated by either party under
      specified circumstances. If the merger is not completed for any reason, we
      may
      be subject to a number of risks, including the following:





•
            the
                market price of our common stock may decline to the extent that the
                relevant current market price reflects a market assumption that the
                merger
                will be completed•
            many
                costs related to the merger, such as legal, accounting, financial
                advisor
                and financial printing fees, have to be paid regardless of whether
                the
                merger is completed•
            there
                may be substantial disruption to our business and distraction of
                our
                workforce and management team.





**Item
      2.** *Unregistered
      Sales of Equity and Use of Proceeds*





On
      January 18, 2006, we announced that our board of directors had approved a stock
      repurchase program pursuant to Rule 10b-18 under which we are authorized to
      acquire up to $10 million of our outstanding common stock in the open market
      over a 12-month period expiring on January 18, 2007. As of March 31, 2006,
      we
      had not repurchased any of our outstanding common stock under this repurchase
      program.





**Item
      5.**  *Other
      Information*





On
      May 5,
      2006, we signed a definitive agreement to be acquired by U.S. TelePacific
      Holdings Corp. (TelePacific), a privately held company that provides
      telecommunications services to businesses in California and Las Vegas, Nevada.
      Under the terms of the agreement, TelePacific will pay $1.92 in cash per Mpower
      share, which equates to a total equity value of approximately $204 million.
      TelePacific will finance the acquisition through a fully committed senior credit
      facility arranged by Credit Suisse. The transaction has been approved by our
      and
      TelePacific’s boards of directors but still requires the approval of our
      shareholders and other customary conditions including the receipt of applicable
      state and federal regulatory approvals. The transaction is expected to close
      in
      the third quarter of 2006. The definitive agreement provides for us to pay
      TelePacific $6 million as a non-refundable fee plus reimburse them for
      transaction expenses of up to $2 million if we terminate the agreement under
      certain conditions. TelePacific has provided a $6 million letter of credit
      that
      we can draw down on as partial satisfaction for damages incurred in the event
      of
      termination by TelePacific under certain conditions. The definitive agreement
      on
      Form 8-K was filed with the Commission on May 9, 2006.





31


**Item
      6.**  *Exhibits*





The
                following exhibits are filed herewith or incorporated by reference
                as
                indicated. Exhibit numbers refer to Item 60l of Regulation
                S-K.





3.1
            Second
                Amended and Restated Certificate of Incorporation filed with the
                Secretary
                of State of the State of Delaware on July 30, 2002. (1)3.2
            Second
                Amended and Restated By-laws. (1)3.3
            Rights
                Agreement between Mpower Holding Corporation and Continental Stock
                Transfer & Trust Company as Rights Agent. (2)3.4
            Certificate
                of Designation for the Series A Preferred Stock. (3)3.5
            Amendment
                of Rights Agreement and Certificate of Compliance with Section 26
                dated
                March 14, 2005, between Mpower Holding Corporation and Continental
                Stock
                Transfer & Trust Company. (4)3.6
            Amendment
                of Rights Agreement and Certificate of Compliance with Section 26
                dated
                June 30, 2005, between Mpower Holding Corporation and Continental
                Stock
                Transfer & Trust Company. (5)4.1
            See
                the Second Amended and Restated Certificate of Incorporation filed
                as
                Exhibit 3.1 and the Second Amended and Restated By-laws filed as
                Exhibit
                3.2.10.1
            Separation
                of Employment Agreement dated January 5, 2006, between Mpower
                Communications Corp. and Steven Reimer. (6)10.2
            Separation
                of Employment Agreement dated January 5, 2006, between Mpower
                Communications Corp. and Roger Pachuta. (6)10.3
            Form
                of Non-Executive Restricted Stock Award Agreement. (7)10.4
            Form
                of Executive Restricted Stock Award Agreement. (7)10.5
            Alternative
                Form of Executive Restricted Stock Award Agreement. (7)31.1
            Rule
                13a-14(a)/15d-14(a) Certification of Chief Executive
                Officer31.2
            Rule
                13a-14(a)/15d-14(a) Certification of Chief Financial
                Officer32
            Section
                1350 Certifications





(1)
            Incorporated
                by reference to the Company's Registration Statement on Form 8-A
                filed
                with the Commission on July 30, 2002.(2)
            Incorporated
                by reference to the Company’s Current Report on Form 8-K (file No.
                000-32941) filed with the Commission on July 16, 2003.(3)
            Incorporated
                by reference to the Company’s Registration Statement on Form 8-A filed
                with the Commission on July 16, 2003.(4)
            Incorporated
                by reference to the Company’s Annual Report on Form 10-K for the year
                ended December 31, 2004.(5)
            Incorporated
                by reference to the Company’s Current Report on Form 8-K filed with the
                Commission on July 1, 2005.(6)
            Incorporated
                by reference to the Company’s Annual Report on Form 10-K for the year
                ended December 31, 2005.(7)
            Incorporated
                by reference to the Company’s Current Report on Form 8-K filed with the
                Commission on January 31, 2006.


32


**SIGNATURES**





Pursuant
      to the requirements of the Securities Exchange Act of 1934, the registrant
      has
      duly caused this report to be signed on its behalf by the undersigned thereunto
      duly authorized.








**MPOWER
                HOLDING CORPORATION**Date: 
May
              10, 2006
            By:
            /s/ Rolla
              P.
              HuffRolla
              P. Huff*Chief
                Executive Officer and Chairman of the
                Board*




Date: 
May
              10, 2006
            By:
            /s/ S.
              Gregory ClevengerS.
              Gregory Clevenger*Executive
                Vice President - Chief Financial
                Officer*








33