**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 June 30, 2005**

**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**

| **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**

**(585)      218-6550**

----

**MPOWER      HOLDING CORPORATION**

**INDEX**

|                           |                                                                                                                                                 | **Page****No**. |
|--------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------|
| **PART                  I -**  | **FINANCIAL                  INFORMATION**                                                                                                           |            |
|                           |                                                                                                                                                 |            |
| Item                  1.       | Condensed                  Consolidated Financial Statements (Unaudited)                                                                             |            |
|                           | Consolidated                  Balance Sheets - as of June 30, 2005 and December 31, 2004                                                             | 3               |
|                           | Consolidated                  Statements of Operations - for the three and six months ended June                  30,                  2005 and 2004 | 4               |
|                           | Consolidated                  Statements of Cash Flows - for the six months ended June 30, 2005                  and                  2004           | 5               |
|                           | Condensed                  Notes to Unaudited Interim Consolidated Financial                  Statements                                             | 7               |
| Item                  2.       | Management’s                  Discussion and Analysis of Financial Condition and Results of                  Operations                        | 18              |
| Item                  3.       | Quantitative                  and Qualitative Disclosures About Market Risk                                                                          | 32              |
| Item                  4.       | Controls                  and Procedures                                                                                                             | 32              |
|                           |                                                                                                                                                 |            |
| **PART                  II -** | **OTHER                  INFORMATION**                                                                                                               |            |
| Item                  1.       | Legal                  Proceedings                                                                                                                   | 33              |
| Item                  6.       | Exhibits                                                                                                                                             | 34              |
| SIGNATURES                     |                                                                                                                                                 | 35              |

----

**PART      I - FINANCIAL INFORMATION**

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

**MPOWER      HOLDING CORPORATION**

**CONSOLIDATED      BALANCE SHEETS**

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

**(UNAUDITED)**

|                                                                                                                                                                                                                                                     |   | **June                30**, |     | **December                31**, |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|----------|---------------------------------|--------|
|                                                                                                                                                                                                                                                     |   |                        | **2005** |                            |   | **2004** |   |
| **ASSETS**                                                                                                                                                                                                                                               |
| Current                assets:                                                                                                                                                                                                                           |   |                        |     |                            |   |   |   |
| Cash                and cash equivalents                                                                                                                                                                                                                 |   | $                           | 22,299   |                            | $      | 27,327 |   |
| Investments                available-for-sale                                                                                                                                                                                                            |   |                        | 9,841    |                            |   | 8,064 |   |
| Accounts                receivable, less allowance for doubtful accounts of $1,651 and                $1,375                at June 30, 2005 and December 31, 2004, respectively                                                                         |   |                        | 12,518   |                            |   | 10,140 |   |
| Other                receivables                                                                                                                                                                                                                         |   |                        | 2,770    |                            |   | 3,164 |   |
| Prepaid                expenses and other current assets                                                                                                                                                                                                 |   |                        | 3,144    |                            |   | 3,060 |   |
| Total                current assets                                                                                                                                                                                                                      |   |                        | 50,572   |                            |   | 51,755 |   |
| Property                and equipment, net                                                                                                                                                                                                               |   |                        | 64,315   |                            |   | 33,012 |   |
| Long-term                restricted cash and cash equivalents                                                                                                                                                                                            |   |                        | 9,530    |                            |   | 9,515 |   |
| Long-term                investments available-for-sale                                                                                                                                                                                                  |   |                        | 260      |                            |   | 2,041 |   |
| Goodwill                                                                                                                                                                                                                                                 |   |                        | 8,798    |                            |   | — |   |
| Intangibles,                net of accumulated amortization of $13,866 and $11,072 at June                30, 2005 and December 31, 2004, respectively                                                                                                   |   |                        | 4,669    |                            |   | 4,367 |   |
| Other                long-term assets                                                                                                                                                                                                                    |   |                        | 4,623    |                            |   | 4,274 |   |
| Total                assets                                                                                                                                                                                                                              |   | $                           | 142,767  |                            | $      | 104,964 |   |
|                                                                                                                                                                                                                                                     |   |                        |     |                            |   |   |   |
|                                                                                                                                                                                                                                                     |   |                        |     |                            |   |   |   |
| **LIABILITIES                AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                            |
| Current                liabilities:                                                                                                                                                                                                                      |   |                        |     |                            |   |   |   |
| Current                maturities of capital lease obligations                                                                                                                                                                                           |   | $                           | 749      |                            | $      | — |   |
| Accounts                payable                                                                                                                                                                                                                          |   |                        | 13,160   |                            |   | 20,462 |   |
| Accrued                sales tax payable                                                                                                                                                                                                                 |   |                        | 2,436    |                            |   | 2,190 |   |
| Accrued                bonus                                                                                                                                                                                                                             |   |                        | 777      |                            |   | 2,508 |   |
| Deferred                revenue                                                                                                                                                                                                                          |   |                        | 5,197    |                            |   | 5,059 |   |
| Accrued                other expenses                                                                                                                                                                                                                    |   |                        | 16,406   |                            |   | 11,756 |   |
| Total                current liabilities                                                                                                                                                                                                                 |   |                        | 38,725   |                            |   | 41,975 |   |
| Long-term                capital lease obligations                                                                                                                                                                                                       |   |                        | 23,353   |                            |   | — |   |
| Other                long-term liabilities                                                                                                                                                                                                               |   |                        | 2,244    |                            |   | 1,833 |   |
| Total                liabilities                                                                                                                                                                                                                         |   |                        | 64,322   |                            |   | 43,808 |   |
| Commitments                and contingencies                                                                                                                                                                                                             |   |                        |     |                            |   |   |   |
| Stockholders’                equity:                                                                                                                                                                                                               |   |                        |     |                            |   |   |   |
| Preferred                stock, 49,900,000 shares authorized but unissued at June 30, 2005                and                December 31, 2004                                                                                                           |   |                        | —  |                            |   | — |   |
| Series                A preferred stock, 100,000 shares authorized but unissued at June                30, 2005                and December 31, 2004                                                                                                     |   |                        | —  |                            |   | — |   |
| Common                stock, $0.001 par value, 1,000,000,000 shares authorized, 91,463,484                and                78,570,772 shares issued and outstanding at June 30, 2005 and December                31,                2004, respectively |   |                        | 91       |                            |   | 79 |   |
| Additional                paid-in capital                                                                                                                                                                                                                |   |                        | 121,785  |                            |   | 104,054 |   |
| Accumulated                deficit                                                                                                                                                                                                                       |   |                        | (43,431  | )                               |   | (42,977 | ) |
| Total                stockholders’ equity                                                                                                                                                                                                          |   |                        | 78,445   |                            |   | 61,156 |   |
| Total                liabilities and stockholders’ equity                                                                                                                                                                                          |   | $                           | 142,767  |                            | $      | 104,964 |   |
|                                                                                                                                                                                                                                                     |   |                        |     |                            |   |   |   |

----

**MPOWER      HOLDING CORPORATION**

**CONSOLIDATED      STATEMENTS OF OPERATIONS**

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

**(UNAUDITED)**

|                                                                                                                                                                                                                                                                                                                                                                                      |   | **Three                Months Ended****June                30**, |       | **Three                Months Ended****June                30**, |   | **Six                Months****Ended****June                30**, |   | **Six                Months****Ended****June                30**, |       |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------|------------|------------------------------------------------------------------|--------|-------------------------------------------------------------------|--------|-------------------------------------------------------------------|------------|
|                                                                                                                                                                                                                                                                                                                                                                                      |   |                                                             | **2005**   |                                                             |   | **2004**                                                          |   |                                                              | **2005**   |   |   | **2004** |   |
| Operating                revenues:                                                                                                                                                                                                                                                                                                                                                        |   |                                                             |       |                                                             |   |                                                              |   |                                                              |       |   |   |   |   |
| Telecommunication                services                                                                                                                                                                                                                                                                                                                                                 |   | $                                                                | 47,262     |                                                             | $      | 38,496                                                            |   | $                                                                 | 94,988     |   | $ | 75,649 |   |
| Operating                expenses:                                                                                                                                                                                                                                                                                                                                                        |   |                                                             |       |                                                             |   |                                                              |   |                                                              |       |   |   |   |   |
| Cost                of operating revenues(exclusive                of depreciation and amortization shown separately below of $4,077                and                $1,964 for the three months ended June 30, 2005 and 2004, respectively,                and $7,589 and $3,902 for the six months ended June 30, 2005 and                2004,                respectively)          |   |                                                             | 22,120     |                                                             |   | 17,740                                                            |   |                                                              | 43,955     |   |   | 34,128 |   |
| Selling,                general and administrative(exclusive                of depreciation and amortization shown separately below of $1,913                and                $1,915 for the three months ended June 30, 2005 and 2004, respectively,                and $4,002 and $3,878 for the six months ended June 30, 2005 and                2004,                respectively) |   |                                                             | 22,971     |                                                             |   | 18,251                                                            |   |                                                              | 45,701     |   |   | 35,839 |   |
| Gain                on sale of assets, net                                                                                                                                                                                                                                                                                                                                                |   |                                                             | (37        | )                                                                |   | (62                                                               | )      |                                                              | (46        | ) |   | (260 | ) |
| Depreciation                and amortization                                                                                                                                                                                                                                                                                                                                              |   |                                                             | 5,990      |                                                             |   | 3,879                                                             |   |                                                              | 11,591     |   |   | 7,780 |   |
|                                                                                                                                                                                                                                                                                                                                                                                      |   |                                                             | 51,044     |                                                             |   | 39,808                                                            |   |                                                              | 101,201    |   |   | 77,487 |   |
| Loss                from operations                                                                                                                                                                                                                                                                                                                                                       |   |                                                             | (3,782     | )                                                                |   | (1,312                                                            | )      |                                                              | (6,213     | ) |   | (1,838 | ) |
| Other                income (expense):                                                                                                                                                                                                                                                                                                                                                    |   |                                                             |       |                                                             |   |                                                              |   |                                                              |       |   |   |   |   |
| Interest                income                                                                                                                                                                                                                                                                                                                                                            |   |                                                             | 238        |                                                             |   | 77                                                                |   |                                                              | 421        |   |   | 165 |   |
| Interest                expense                                                                                                                                                                                                                                                                                                                                                           |   |                                                             | (764       | )                                                                |   | (67                                                               | )      |                                                              | (1,931     | ) |   | (133 | ) |
| Other                income (expense)                                                                                                                                                                                                                                                                                                                                                     |   |                                                             | 12         |                                                             |   | (95                                                               | )      |                                                              | 7,304      |   |   | (95 | ) |
| Loss                from continuing operations                                                                                                                                                                                                                                                                                                                                            |   |                                                             | (4,296     | )                                                                |   | (1,397                                                            | )      |                                                              | (419       | ) |   | (1,901 | ) |
| Discontinued                operations:                                                                                                                                                                                                                                                                                                                                                   |   |                                                             |       |                                                             |   |                                                              |   |                                                              |       |   |   |   |   |
| (Loss)                income from discontinued operations                                                                                                                                                                                                                                                                                                                                 |   |                                                             | (3         | )                                                                |   | (7                                                                | )      |                                                              | (35        | ) |   | 234 |   |
| Net                loss                                                                                                                                                                                                                                                                                                                                                                   |   | $                                                                | (4,299     | )                                                                | $      | (1,404                                                            | )      | $                                                                 | (454       | ) | $ | (1,667 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                      |   |                                                             |       |                                                             |   |                                                              |   |                                                              |       |   |   |   |   |
| Basic                and diluted (loss) income per common share:                                                                                                                                                                                                                                                                                                                          |   |                                                             |       |                                                             |   |                                                              |   |                                                              |       |   |   |   |   |
| Loss                from continuing operations                                                                                                                                                                                                                                                                                                                                            |   | $                                                                | (0.05      | )                                                                | $      | (0.02                                                             | )      | $                                                                 | (0.00      | ) | $ | (0.02 | ) |
| (Loss)                income from discontinued operations                                                                                                                                                                                                                                                                                                                                 |   |                                                             | (0.00      | )                                                                |   | (0.00                                                             | )      |                                                              | (0.00      | ) |   | 0.00 |   |
| Net                loss                                                                                                                                                                                                                                                                                                                                                                   |   | $                                                                | (0.05      | )                                                                | $      | (0.02                                                             | )      | $                                                                 | (0.00      | ) | $ | (0.02 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                      |   |                                                             |       |                                                             |   |                                                              |   |                                                              |       |   |   |   |   |
| Basic                and diluted weighted average common shares outstanding                                                                                                                                                                                                                                                                                                               |   |                                                             | 91,441,361 |                                                             |   | 78,417,485                                                        |   |                                                              | 91,386,947 |   |   | 78,369,668 |   |
|                                                                                                                                                                                                                                                                                                                                                                                      |   |                                                             |       |                                                             |   |                                                              |   |                                                              |       |   |   |   |   |

----

**MPOWER      HOLDING CORPORATION**

**CONSOLIDATED      STATEMENTS OF CASH FLOWS**

**(IN      THOUSANDS)**

**(UNAUDITED)**

|                                                                                                          |   | **Six                Months Ended** |    | **Six                Months Ended** |   |
|---------------------------------------------------------------------------------------------------------------|--------|-------------------------------------|---------|-------------------------------------|--------|
|                                                                                                          |   | **June                30, 2005**    |    | **June                30, 2004**    |   |
| Cash                flows from operating activities:                                                          |   |                                |    |                                |   |   |   |
| Net                loss                                                                                       |   | $                                   | (454    | )                                   | $      | (1,667 | ) |
| Adjustments                to reconcile net loss to net cash provided by operating                activities: |   |                                |    |                                |   |   |   |
| Depreciation                and amortization                                                                  |   |                                | 11,591  |                                |   | 7,780 |   |
| Gain                on disposal of assets from discontinued operations                                        |   |                                | — |                                |   | (50 | ) |
| Gain                on sale of assets, net                                                                    |   |                                | (46     | )                                   |   | (260 | ) |
| Bad                debt expense                                                                               |   |                                | 1,052   |                                |   | 737 |   |
| Amortization                of investment premiums                                                            |   |                                | 71      |                                |   | — |   |
| Stock-based                compensation expense                                                               |   |                                | — |                                |   | 78 |   |
| Agent                selling expense - warrants                                                               |   |                                | 212     |                                |   | 41 |   |
| Changes                in assets and liabilities:                                                             |   |                                |    |                                |   |   |   |
| (Increase)                decrease in accounts receivable                                                     |   |                                | (1,876  | )                                   |   | 1,727 |   |
| (Increase)                decrease in other receivables                                                       |   |                                | (2,025  | )                                   |   | 2,527 |   |
| (Increase)                decrease in prepaid expenses and other current assets                               |   |                                | (24     | )                                   |   | 2,137 |   |
| Increase                in other long-term assets                                                             |   |                                | (23     | )                                   |   | (328 | ) |
| Decrease                in accounts payable                                                                   |   |                                | (4,064  | )                                   |   | (5,760 | ) |
| Decrease                in accrued sales tax payable                                                          |   |                                | (358    | )                                   |   | (44 | ) |
| Decrease                in accrued other expenses                                                             |   |                                | (1,096  | )                                   |   | (2,657 | ) |
| Net                cash provided by operating activities                                                      |   |                                | 2,960   |                                |   | 4,261 |   |
| Cash                flows from investing activities:                                                          |   |                                |    |                                |   |   |   |
| Purchase                of property and equipment, net of payables                                            |   |                                | (7,789  | )                                   |   | (1,979 | ) |
| Deposits                on future purchase commitments                                                        |   |                                | (1,349  | )                                   |   | — |   |
| Proceeds                from sale of assets from continuing operations                                        |   |                                | 103     |                                |   | 265 |   |
| Receipt                of escrowed amounts from sale of assets from discontinued                operations    |   |                                | 1,000   |                                |   | 500 |   |
| Purchase                of investments available-for-sale, net                                                |   |                                | (1,067  | )                                   |   | — |   |
| Sale                of investments available-for-sale, net                                                    |   |                                | 1,000   |                                |   | — |   |
| (Purchase)                sale of restricted investments, net                                            |   |                                | (15     | )                                   |   | 147 |   |
| Net                cash used in investing activities                                                          |   |                                | (8,117  | )                                   |   | (1,067 | ) |
| Cash                flows from financing activities:                                                          |   |                                |    |                                |   |   |   |
| Costs                associated with line of credit                                                           |   |                                | (262    | )                                   |   | — |   |
| Costs                associated with issuance of common stock                                                 |   |                                | (10     | )                                   |   | — |   |
| Costs                under management agreement with acquired business                                        |   |                                | (187    | )                                   |   | — |   |
| Payments                on capital lease obligations                                                          |   |                                | (1,964  | )                                   |   | (190 | ) |
| Proceeds                from issuance of common stock                                                         |   |                                | 2,552   |                                |   | 45 |   |
| Net                cash provided by (used in) financing activities                                            |   |                                | 129     |                                |   | (145 | ) |
| Net                (decrease) increase in cash and cash equivalents                                           |   |                                | (5,028  | )                                   |   | 3,049 |   |
| Cash                and cash equivalents at beginning of period                                               |   |                                | 27,327  |                                |   | 29,307 |   |
| Cash                and cash equivalents at end of period                                                     |   | $                                   | 22,299  |                                | $      | 32,356 |   |
|                                                                                                          |   |                                |    |                                |   |   |   |

----

**MPOWER        HOLDING CORPORATION**

**CONSOLIDATED        STATEMENTS OF CASH FLOWS - CONTINUED**

**(IN        THOUSANDS)**

**(UNAUDITED)**

|   |   | **Six                    Months Ended** |                                 | **Six                    Months Ended** |   |
|--------|--------|-----------------------------------------|--------------------------------------|-----------------------------------------|--------|
|   |   |                                    | **June                    30, 2005** |                                    |   | **June                    30, 2004** |   |

| Supplemental                    schedule of non-cash investing and financing activities: |   |   |    |   |   |    |   |
|------------------------------------------------------------------------------------------|--------|--------|---------|--------|--------|---------|--------|
| Fair                    value of assets acquired in business acquisition                 |   | $      | 46,291  |   | $      | — |   |
| Liabilities                    assumed in business acquisition                           |   | $      | (29,735 | )      | $      | — |   |
| Common                    stock issued in business acquisition                           |   | $      | 14,070  |   | $      | — |   |
| Warrants                    issued in business acquisition                               |   | $      | 1,246   |   | $      | — |   |
| Accrued                    costs associated with business acquisition                    |   | $      | 88      |   | $      | — |   |
| Property                    and equipment purchased under capital leases                 |   | $      | 64      |   | $      | — |   |
| Net                    payable related to purchase of property and equipment             |   | $      | 2,444   |   | $      | 749     |   |
| Supplemental                    cash flow information:                                   |   |   |    |   |   |    |   |
| Cash                    paid for interest                                                |   | $      | 131     |   | $      | 68      |   |
|                                                                                     |   |   |    |   |   |    |   |

----

**MPOWER      HOLDING CORPORATION**

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

**(UNAUDITED)**

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

**Effects      of New Accounting Standards**

*Accounting      for Conditional Asset Retirement Obligations - an interpretation of FASB      Statement No. 143*

----

*Share-Based      Payment*

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

**(2)      STOCK OPTION PLAN**

|                                                                                                                                                                                                          |   | **Three                Months Ended** |    | **Six                Months Ended** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|---------|-------------------------------------|--------|
|                                                                                                                                                                                                          |   | **June                30**,           |    | **June                30**,         |   | **June                30**, |   | **June                30**, |   |
|                                                                                                                                                                                                          |   | **2005**                              |    | **2004**                            |   | **2005** |   | **2004** |   |
| Net                loss, as reported                                                                                                                                                                          |   | $                                     | (4,299  | )                                   | $      | (1,404 | ) | $ | (454 | ) | $ | (1,667 | ) |
| Add:                Stock-based compensation expense included in reported net loss, net                of                related income tax effects                                                           |   |                                  | — |                                |   | 39 |   |   | — |   |   | 78 |   |
| Deduct:                Total stock-based compensation expense to be determined under a fair                value                based method for all awards, net of related income tax                effects |   |                                  | (463    | )                                   |   | (451 | ) |   | (2,516 | ) |   | (2,757 | ) |
| Pro                forma net loss                                                                                                                                                                             |   | $                                     | (4,762  | )                                   | $      | (1,816 | ) | $ | (2,970 | ) | $ | (4,346 | ) |
|                                                                                                                                                                                                          |   |                                  |    |                                |   |   |   |   |   |   |   |   |   |
| Basic                and diluted net loss per common share, as reported                                                                                                                                       |   | $                                     | (0.05   | )                                   | $      | (0.02 | ) | $ | (0.00 | ) | $ | (0.02 | ) |
| Basic                and diluted net loss per common share, pro forma                                                                                                                                         |   | $                                     | (0.05   | )                                   | $      | (0.02 | ) | $ | (0.03 | ) | $ | (0.06 | ) |

----

**(3)      ACQUISITION**

----

| **Assets                Acquired**                                     |   | **Initial                Estimate** |    | **Adjustments** |   | **Revised                Estimate** |   |
|------------------------------------------------------------------------|--------|-------------------------------------|---------|-----------------|--------|-------------------------------------|--------|
| Accounts                receivable                                     |   | $                                   | 1,526   |            | $      | —                             |   | $ | 1,526 |   |
| Other                receivables                                       |   |                                | 301     |            |   | (40                                 | )      |   | 261 |   |
| Prepaid                expenses and other current assets               |   |                                | 55      |            |   | 5                                   |   |   | 60 |   |
| Property                and equipment                                  |   |                                | 29,771  |            |   | 2,528                               |   |   | 32,299 |   |
| Goodwill                                                               |   |                                | 5,301   |            |   | 3,497                               |   |   | 8,798 |   |
| Other                intangibles                                       |   |                                | 3,420   |            |   | (324                                | )      |   | 3,096 |   |
| Other                long-term assets                                  |   |                                | 255     |            |   | (4                                  | )      |   | 251 |   |
| Total                assets acquired                                   |   |                                | 40,629  |            |   | 5,662                               |   |   | 46,291 |   |
|                                                                   |   |                                |    |            |   |                                |   |   |   |   |
| **Liabilities                Assumed**                                 |   |                                |    |            |   |                                |   |   |   |   |
| Current                maturities of capital lease obligations         |   |                                | 2,077   |            |   | 572                                 |   |   | 2,649 |   |
| Deferred                revenue                                        |   |                                | 1,526   |            |   | 87                                  |   |   | 1,613 |   |
| Accrued                other expenses                                  |   |                                | 1,652   |            |   | 54                                  |   |   | 1,706 |   |
| Long-term                capital lease obligations                     |   |                                | 19,105  |            |   | 4,248                               |   |   | 23,353 |   |
| Long-term                deferred revenue                              |   |                                | — |            |   | 78                                  |   |   | 78 |   |
| Asset                retirement obligations                            |   |                                | 336     |            |   | —                             |   |   | 336 |   |
| Total                liabilities assumed                               |   |                                | 24,696  |            |   | 5,039                               |   |   | 29,735 |   |
|                                                                   |   |                                |    |            |   |                                |   |   |   |   |
| Total                purchase price (exclusive of liabilities assumed) |   | $                                   | 15,933  |            | $      | 623                                 |   | $ | 16,556 |   |

|                                                                        |   | **Three                Months Ended** |       | **Six                Months Ended** |   |
|-----------------------------------------------------------------------------|--------|---------------------------------------|------------|-------------------------------------|--------|
|                                                                        |   | **June                30, 2004**      |       | **June                30, 2004**    |   |
|                                                                        |   | **(pro                forma)**        |       |
|                                                                        |   |                                  |       |
| Operating                revenue                                            |   | $                                     | 48,376     |                                | $      | 98,866 |   |
| Net                loss                                                     |   | $                                     | (6,641     | )                                   | $      | (10,382 | ) |
| Basic                and diluted net loss per common share                  |   | $                                     | (0.07      | )                                   | $      | (0.12 | ) |
|                                                                        |   |                                  |       |                                |   |   |   |
| Basic                and diluted weighted average common shares outstanding |   |                                  | 89,157,515 |                                |   | 89,050,687 |   |

**(4)      INVESTMENTS**

----

|                                        |   | **June                30,** |    | **December                31**, |   |
|---------------------------------------------|--------|-----------------------------|---------|---------------------------------|--------|
|                                        |   | **2005**                    |    | **2004**                        |   |
| Short-term                investments:      |   |                        |    |                            |   |   |   |
| Auction                rate securities      |   | $                           | 6,200   |                            | $      | 6,150 |   |
| Certificates                of deposit      |   |                        | 240     |                            |   | — |   |
| Corporate                bonds              |   |                        | 1,875   |                            |   | 1,396 |   |
| U.S.                government agency notes |   |                        | 1,526   |                            |   | 518 |   |
| Total                short-term investments |   | $                           | 9,841   |                            | $      | 8,064 |   |
|                                        |   |                        |    |                            |   |   |   |
| Long-term                investments:       |   |                        |    |                            |   |   |   |
| U.S.                government agency notes |   | $                           | — |                            | $      | 1,032 |   |
| Corporate                bonds              |   |                        | 260     |                            |   | 1,009 |   |
| Total                long-term investments  |   | $                           | 260     |                            | $      | 2,041 |   |

**(5)        PROPERTY AND EQUIPMENT**

|                                                     |   | **June                30,** |    | **December                31**, |   |
|----------------------------------------------------------|--------|-----------------------------|---------|---------------------------------|--------|
|                                                     |   | **2005**                    |    | **2004**                        |   |
| Buildings                and property                    |   | $                           | 1,716   |                            | $      | 1,716 |   |
| Telecommunication                and switching equipment |   |                        | 60,195  |                            |   | 33,968 |   |
| Leasehold                improvements                    |   |                        | 7,055   |                            |   | 6,892 |   |
| Fiber                optic network                       |   |                        | 12,033  |                            |   | — |   |
| Computer                hardware and software            |   |                        | 9,010   |                            |   | 7,638 |   |
| Office                equipment and other                |   |                        | 3,157   |                            |   | 2,722 |   |
| Assets                held for future use                |   |                        | 3,625   |                            |   | 3,296 |   |
|                                                     |   |                        | 96,791  |                            |   | 56,232 |   |
| Accumulated                depreciation and amortization |   |                        | (35,899 | )                               |   | (27,206 | ) |
|                                                     |   |                        | 60,892  |                            |   | 29,026 |   |
| Construction                in progress                  |   |                        | 3,423   |                            |   | 3,986 |   |
| Net                property and equipment                |   | $                           | 64,315  |                            | $      | 33,012 |   |

**(6)      GOODWILL AND INTANGIBLE ASSETS**

----

|                                          |   | **June                30,****2005** |    | **December                31,****2004** |   |
|-----------------------------------------------|--------|-------------------------------------|---------|-----------------------------------------|--------|
| Customer                relationships         |   | $                                   | 16,301  |                                    | $      | 13,745 |   |
| Internally                developed software  |   |                                | 340     |                                    |   | — |   |
| Product                licensing agreement    |   |                                | 200     |                                    |   | — |   |
| Less:                accumulated amortization |   |                                | (13,866 | )                                       |   | (11,072 | ) |
|                                          |   |                                | 2,975   |                                    |   | 2,673 |   |
| Trademark                                     |   |                                | 1,694   |                                    |   | 1,694 |   |
| Intangibles,                net               |   | $                                   | 4,669   |                                    | $      | 4,367 |   |

| Remaining                2005 |   | $      | 885   |   |
|-------------------------------|--------|--------|-------|--------|
| 2006                          |   |   | 1,005 |   |
| 2007                          |   |   | 1,005 |   |
| 2008                          |   |   | 40    |   |
| 2009                          |   |   | 40    |   |
|                          |   | $      | 2,975 |   |

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

|                                            |   | **June                30,** |    | **December                31,** |   |
|-------------------------------------------------|--------|-----------------------------|---------|---------------------------------|--------|
|                                            |   | **2005**                    |    | **2004**                        |   |
|                                            |   |                        |    |                            |   |
| Deposits                on operating leases     |   | $                           | 1,457   |                            | $      | 1,095 |   |
| Deposits                on purchase commitments |   |                        | 1,349   |                            |   | — |   |
| Deferred                installation costs      |   |                        | 1,088   |                            |   | 1,101 |   |
| Prepaid                insurance                |   |                        | 461     |                            |   | 572 |   |
| Other                                           |   |                        | 268     |                            |   | 396 |   |
| Direct                acquisition costs         |   |                        | — |                            |   | 1,110 |   |
| Other                long-term assets           |   | $                           | 4,623   |                            | $      | 4,274 |   |

----

**(8)      LINE OF CREDIT**

**(9)      CAPITAL LEASE OBLIGATIONS**

|                                     |   | **June                30**, |   |
|------------------------------------------|--------|-----------------------------|--------|
|                                     |   | **2005**                    |   |
| Capital                lease obligations |   | $                           | 24,102 |   |
| Less                current portion      |   |                        | (749   | ) |
|                                     |   | $                           | 23,353 |   |

|                                          |   | **June                30**, |   |
|-----------------------------------------------|--------|-----------------------------|--------|
|                                          |   | **2005**                    |   |
| Fiber                optic network            |   | $                           | 8,033  |   |
| Office                equipment and other     |   |                        | 64     |   |
|                                          |   |                        | 8,097  |   |
| Less:                accumulated depreciation |   |                        | (282   | ) |
|                                          |   | $                           | 7,815  |   |

| Remaining                2005                                 |   | $      | 2,325   |   |
|---------------------------------------------------------------|--------|--------|---------|--------|
| 2006                                                          |   |   | 4,032   |   |
| 2007                                                          |   |   | 4,004   |   |
| 2008                                                          |   |   | 4,004   |   |
| 2009                                                          |   |   | 3,986   |   |
| Thereafter                                                    |   |   | 43,791  |   |
| Total                minimum lease payments                   |   |   | 62,142  |   |
| Less:                amounts representing interest            |   |   | (38,040 | )      |
| Net                present value of capital lease obligations |   | $      | 24,102  |   |

----

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

| Balance                as of December 31, 2004             |   | $      | — |   |
|------------------------------------------------------------|--------|--------|---------|--------|
| Recognition                of liability at January 1, 2005 |   |   | 336     |   |
| Accretion                                                  |   |   | 31      |   |
| Balance                as of June 30, 2005                 |   | $      | 367     |   |

**(11)      COMMITMENTS AND CONTINGENCIES**

***Lease      Obligations and Purchase Commitments***

|                                       |   | **2005** |   | **2006** |   | **2007** |   | **2008** |    | **2009** |   | **Thereafter** |   |
|--------------------------------------------|--------|----------|--------|----------|--------|----------|--------|----------|---------|----------|--------|----------------|--------|
| Operating                lease obligations |   | $        | 3,929  |     | $      | 7,669    |   | $        | 6,635   |     | $      | 4,748          |   | $ | 3,628 |   | $ | 3,557 |   |
| Circuit                lease obligations   |   |     | 4,014  |     |   | 6,826    |   |     | 4,256   |     |   | 1,537          |   |   | 462 |   |   | 3,104 |   |
| Purchase                commitments        |   |     | 7,225  |     |   | 1,255    |   |     | — |     |   | —        |   |   | — |   |   | — |   |
| Total                                      |   | $        | 15,168 |     | $      | 15,750   |   | $        | 10,891  |     | $      | 6,285          |   | $ | 4,090 |   | $ | 6,661 |   |

----

***Litigation***

***Interconnection      Agreements***

----

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

**(12)      STOCKHOLDERS’ EQUITY**

**(13)      DISCONTINUED OPERATIONS**

|                                                      |   | **Three                Months Ended** |    | **Six                Months Ended** |   |
|-----------------------------------------------------------|--------|---------------------------------------|---------|-------------------------------------|--------|
|                                                      |   | **June                30,**           |    | **June                30,**         |   | **June                30,** |   | **June                30,** |   |
|                                                      |   | **2005**                              |    | **2004**                            |   | **2005** |   | **2004** |   |
| Operating                revenues                         |   | $                                     | — |                                | $      | 1 |   | $ | — |   | $ | 3 |   |
| Operating                expenses (income)                |   |                                  | 3       |                                |   | 8 |   |   | 35 |   |   | (181 | ) |
| Gain                on disposal of assets                 |   |                                  | — |                                |   | — |   |   | — |   |   | (50 | ) |
| (Loss)                income from discontinued operations |   | $                                     | (3      | )                                   | $      | (7 | ) | $ | (35 | ) | $ | 234 |   |

----

**(14)      LOSS PER COMMON SHARE**

|                                                                                                            |   | **Three                  Months Ended** |       | **Six                  Months Ended** |   |
|-----------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------|------------|---------------------------------------|--------|
|                                                                                                            |   | **June                  30,**           |       | **June                  30,**         |   | **June                  30,** |   | **June                  30,** |   |
|                                                                                                            |   | **2005**                                |       | **2004**                              |   | **2005** |   | **2004** |   |
| **Basic                  and diluted loss per common share**                                                    |   |                                    |       |                                  |   |   |   |   |   |   |   |   |   |
| Loss                  from continuing operations                                                                |   | $                                       | (4,296     | )                                     | $      | (1,397 | ) | $ | (419 | ) | $ | (1,901 | ) |
| (Loss)                  income from discontinued operations                                                     |   |                                    | (3         | )                                     |   | (7 | ) |   | (35 | ) |   | 234 |   |
| Net                  loss                                                                                       |   | $                                       | (4,299     | )                                     | $      | (1,404 | ) | $ | (454 | ) | $ | (1,667 | ) |
|                                                                                                            |   |                                    |       |                                  |   |   |   |   |   |   |   |   |   |
| Weighted                  average common shares outstanding                                                     |   |                                    | 91,441,361 |                                  |   | 78,417,485 |   |   | 91,386,947 |   |   | 78,369,668 |   |
|                                                                                                            |   |                                    |       |                                  |   |   |   |   |   |   |   |   |   |
| Basic                  and diluted loss from continuing operations per common                  share            |   | $                                       | (0.05      | )                                     | $      | (0.02 | ) | $ | (0.00 | ) | $ | (0.02 | ) |
| Basic                  and diluted (loss) income from discontinued operations per common                  share |   |                                    | (0.00      | )                                     |   | (0.00 | ) |   | (0.00 | ) |   | 0.00 |   |
| Basic                  and diluted net loss per common share                                                    |   | $                                       | (0.05      | )                                     | $      | (0.02 | ) | $ | (0.00 | ) | $ | (0.02 | ) |

**(15)        OPERATING SEGMENTS**

*Reportable      Segments*

*Products      and Services*

|                                           |   | **Three                Months Ended** |   | **Six                Months Ended** |   |
|------------------------------------------------|--------|---------------------------------------|--------|-------------------------------------|--------|
|                                           |   | **June                30,**           |   | **June                30,**         |   | **June                30,** |   | **June                30,** |   |
|                                           |   | **2005**                              |   | **2004**                            |   | **2005** |   | **2004** |   |
| Plain                old telephone service/DSL |   | $                                     | 20,545 |                                | $      | 21,536 |   | $ | 41,761 |   | $ | 43,497 |   |
| T1                based products and services  |   |                                  | 14,364 |                                |   | 8,205 |   |   | 28,023 |   |   | 15,530 |   |
| Private                lines                   |   |                                  | 4,246  |                                |   | — |   |   | 8,590 |   |   | — |   |
| Long                distance and other usage   |   |                                  | 5,045  |                                |   | 3,843 |   |   | 9,882 |   |   | 7,328 |   |
| Switched                access                 |   |                                  | 3,062  |                                |   | 4,912 |   |   | 6,732 |   |   | 9,294 |   |
| Total                operating revenue         |   | $                                     | 47,262 |                                | $      | 38,496 |   | $ | 94,988 |   | $ | 75,649 |   |

----

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

**Introduction**

*Executive      Summary - *

*Company      Overview - *

*Liquidity      and Capital Resources *

*Results      from Continuing Operations*

*Discontinued      Operations*

*Application      of Critical Accounting Estimates *

*Effects      of New Accounting Standards -*

*Forward      Looking Statements *

**Executive      Summary**

----

|   | • | Our                first half of 2005 has been focused on completing the integration                of ICG                California, including the integration of new personnel, billing systems,                and the network operations center and customer care                processes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|--------|---------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   | • | In                addition, to support new opportunities in our wholesale private line                business, we have been working to turn up and have fully operational                in                the fourth quarter 2005 a new soft switch in the Los Angeles                market.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   | • | In                June 2005 we adjusted our revenue forecast for 2005 and 2006 due                to                increased revenue churn in April and May 2005 from the recent acquisition                of ICG’s California business, as well as continued shortfalls to our plan                in the number of sales people who carry a quota and delays in UNE-P                wholesale opportunities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   | • | During                the second quarter of 2005, we have continued to achieve growth and                increase our installed customer revenue, while transitioning a substantial                amount of revenue from the nine Lucent switches that ICG California                had to                our four California-based Nortel DMS-500 switches.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   | • | By                completing the switch conversions, we believe we are in a better                position                to begin to realize more network and operating synergies than our                current                gross margin reflects. We expect to see gross margin improvement                in the                remaining six months of 2005, as we realize acquisition                synergies.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   | • | We                also expect to implement price increases on some product categories                that                we expect will translate into margin improvement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   | • | We                have already completed much of the ICG California integration as                we can                now process orders, bill customers, monitor networks, and flow traffic                through our systems. We will continue with data cleanup over the                next two                quarters, but we are now ready to begin to eliminate duplicate network                expense and the transition services we have been paying to                ICG.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   | • | We                expect to be able to begin turning down certain leased backbone circuits                in Las Vegas and converting them to our owned fiber in the first                quarter                2006. We expect that this will have a positive impact on our gross                margin,                as well as open up a new opportunity for our wholesale and retail                sales                and marketing efforts.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   | • | The                mix of our business continues its evolution to a facilities based                T1                platform. Plain old telephone service (“POTS”) and DSL based recurring                customer revenue streams decreased by approximately 3% for the quarter                ended June 30, 2005 as compared to the quarter ended March 31, 2005,                while                higher margin T1 based recurring customer revenue has increased 3.3%                during the same period. For the quarter ended June 30, 2005, recurring                POTS and DSL customer revenue has decreased 4.0% from the quarter                ended                June 30, 2004 while T1 based recurring customer revenue has increased                128%.                                                                                                                                                                                                                                                                        |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   | • | We                ended the second quarter with 145 sales people who carry a quota                compared                with 123 sales people at the end of the first quarter 2005. We have                expanded both recruiting and training resources since the end of                the first                quarter 2005, and we have expanded sales engineering and product                marketing                resources to provide more support to our sales organization in an                effort                to continue to improve productivity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   | • | We                will continue to closely manage SG&A and headcount levels. Total                headcount has increased by approximately 16% over the quarter ending                June                30, 2004, while customer revenue has increased 32% and total revenue                has                increased 23%. Of the 120 net employee additions, 43 have been in                sales                and marketing, 29 have been in network services to support our new                fiber                networks and larger business, and 43 in provisioning and customer                services                primarily to support the substantial growth we are experiencing in                the T-1                and trunking platforms. Our remaining headcount has increased by                five                people since June 30, 2004. We expect to see continued reductions                in                provisioning headcount associated with POTS services reflecting the                evolution of our business. |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   | • | We                continue to believe that real value creation opportunity exists in                industry consolidation. We believe we are well positioned to leverage                our                assets to create substantial value by consolidating with other competitive                providers in the markets in which we operate. We believe consolidation                represents our largest value creation opportunity for us and for                our                competitors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   | • | While                we will always work to grow and optimize our core business, we believe                it                is imperative to stay positioned to create value in future consolidations.                We expect to do that by continuing our network strategy, continuing                to                maintain our strong financial position, and continuing to operate                against                a business model that does not excessively spend cash on capital                expenditure and debt service.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |

----

**Company      Overview**

***ICG      California Acquisition***

----

| **Assets                Acquired**                                     |   | **Initial                Estimate** |    | **Adjustments** |   | **Revised                Estimate** |   |
|------------------------------------------------------------------------|--------|-------------------------------------|---------|-----------------|--------|-------------------------------------|--------|
| Accounts                receivable                                     |   | $                                   | 1,526   |            | $      | —                             |   | $ | 1,526 |   |
| Other                receivables                                       |   |                                | 301     |            |   | (40                                 | )      |   | 261 |   |
| Prepaid                expenses and other current assets               |   |                                | 55      |            |   | 5                                   |   |   | 60 |   |
| Property                and equipment                                  |   |                                | 29,771  |            |   | 2,528                               |   |   | 32,299 |   |
| Goodwill                                                               |   |                                | 5,301   |            |   | 3,497                               |   |   | 8,798 |   |
| Other                intangibles                                       |   |                                | 3,420   |            |   | (324                                | )      |   | 3,096 |   |
| Other                long-term assets                                  |   |                                | 255     |            |   | (4                                  | )      |   | 251 |   |
| Total                assets acquired                                   |   |                                | 40,629  |            |   | 5,662                               |   |   | 46,291 |   |
|                                                                   |   |                                |    |            |   |                                |   |   |   |   |
| **Liabilities                Assumed**                                 |   |                                |    |            |   |                                |   |   |   |   |
| Current                maturities of capital lease obligations         |   |                                | 2,077   |            |   | 572                                 |   |   | 2,649 |   |
| Deferred                revenue                                        |   |                                | 1,526   |            |   | 87                                  |   |   | 1,613 |   |
| Accrued                other expenses                                  |   |                                | 1,652   |            |   | 54                                  |   |   | 1,706 |   |
| Long-term                capital lease obligations                     |   |                                | 19,105  |            |   | 4,248                               |   |   | 23,353 |   |
| Long-term                deferred revenue                              |   |                                | — |            |   | 78                                  |   |   | 78 |   |
| Asset                retirement obligations                            |   |                                | 336     |            |   | —                             |   |   | 336 |   |
| Total                liabilities assumed                               |   |                                | 24,696  |            |   | 5,039                               |   |   | 29,735 |   |
|                                                                   |   |                                |    |            |   |                                |   |   |   |   |
| Total                purchase price (exclusive of liabilities assumed) |   | $                                   | 15,933  |            | $      | 623                                 |   | $ | 16,556 |   |

|   | • | Certain                switching and routing equipment, located both in ICG California facilities                and in facilities operated by one or more incumbent local exchange                carriers; |
|--------|---------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |    |                                                                                                                                                                                                         |
|   | • | Customer                and sales agreements that constitute a majority of ICG California’s voice                and data revenues;                                                                    |
|   |    |                                                                                                                                                                                                         |
|   | • | Lit                fiber capacity originally purchased by ICG as well as leased fiber                network                capacity, which are both expansive of our current                network.        |

----

**Liquidity      and Capital Resources**

*Cash      Flow Discussion*

|                                                     |   | **Six                Months****Ended****June                30, 2005** |   |
|----------------------------------------------------------|--------|------------------------------------------------------------------------|--------|
| Net                cash provided by operating activities |   | $                                                                      | 2,960  |   |
| Net                cash used in investing activities     |   | $                                                                      | (8,117 | ) |
| Net                cash provided by financing activities |   | $                                                                      | 129    |   |

| Cash                and cash equivalents                |   | $      | 22,299 |   |
|---------------------------------------------------------|--------|--------|--------|--------|
| Investments                available-for-sale           |   |   | 9,841  |   |
| Long-term                investments available-for-sale |   |   | 260    |   |
| Total                at June 30, 2005                   |   | $      | 32,400 |   |

----

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

|                                                                                                       |   | **Six                Months Ended****June                30,** |   |
|------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------|--------|
|                                                                                                       |   | **2005**                                                       |   | **2004** |   |
|                                                                                                       |   |                                                           |   |   |   |
| Net                cash provided by operating activities                                                   |   | $                                                              | 2,960  |   | $ | 4,261 |   |
|                                                                                                       |   |                                                           |   |   |   |   |   |
| Cash                flows from investing activities:                                                       |   |                                                           |   |   |   |   |   |
| Purchases                of property and equipment, net of payables                                        |   | $                                                              | (7,789 | ) | $ | (1,979 | ) |
| Deposits                on future purchase commitments                                                     |   |                                                           | (1,349 | ) |   | — |   |
| Proceeds                from sale of assets from continuing operations                                     |   |                                                           | 103    |   |   | 265 |   |
| Receipt                of escrowed amounts from sale of assets from discontinued                operations |   |                                                           | 1,000  |   |   | 500 |   |
| Purchase                of investments available-for-sale                                                  |   |                                                           | (1,067 | ) |   | — |   |
| Sale                of investments available-for-sale                                                      |   |                                                           | 1,000  |   |   | — |   |
| (Purchase)                sale of restricted investments                                              |   |                                                           | (15    | ) |   | 147 |   |
| Net                cash used in investing activities                                                       |   | $                                                              | (8,117 | ) | $ | (1,067 | ) |

*Operating      Activities:*

*Investing      Activities: *

***Cash      Flows from Financing Activities***

|                                                                   |   | **Six                Months Ended****June                30,** |   |
|------------------------------------------------------------------------|--------|----------------------------------------------------------------|--------|
|                                                                   |   | **2005**                                                       |   | **2004** |   |
| Cash                flows from financing activities:                   |   |                                                           |   |   |   |   |   |
| Costs                associated with line of credit                    |   | $                                                              | (262   | ) | $ | — |   |
| Costs                associated with issuance of common stock          |   |                                                           | (10    | ) |   | — |   |
| Costs                under management agreement with acquired business |   |                                                           | (187   | ) |   | — |   |
| Payments                on capital lease obligations                   |   |                                                           | (1,964 | ) |   | (190 | ) |
| Proceeds                from the issuance of common stock              |   |                                                           | 2,552  |   |   | 45 |   |
| Net                cash provided by (used in) financing activities     |   | $                                                              | 129    |   | $ | (145 | ) |

*Financing      Activities: *

----

*Commitments      and Contingencies*

|                                       |   | **2005** |   | **2006** |   | **2007** |   | **2008** |    | **2009** |   | **Thereafter** |   |
|--------------------------------------------|--------|----------|--------|----------|--------|----------|--------|----------|---------|----------|--------|----------------|--------|
| Operating                lease obligations |   | $        | 3,929  |     | $      | 7,669    |   | $        | 6,635   |     | $      | 4,748          |   | $ | 3,628 |   | $ | 3,557 |   |
| Circuit                lease obligations   |   |     | 4,014  |     |   | 6,826    |   |     | 4,256   |     |   | 1,537          |   |   | 462 |   |   | 3,104 |   |
| Purchase                commitments        |   |     | 7,225  |     |   | 1,255    |   |     | — |     |   | —        |   |   | — |   |   | — |   |
| Capital                lease obligations   |   |     | 526    |     |   | 516      |   |     | 566     |     |   | 652            |   |   | 733 |   |   | 21,109 |   |
| Total                                      |   | $        | 15,694 |     | $      | 16,266   |   | $        | 11,457  |     | $      | 6,937          |   | $ | 4,823 |   | $ | 27,770 |   |

----

**Results      from Continuing Operations**

*Analysis      of Consolidated Statements of Operations for the three months ended June 30,      2005 and 2004 *

|                                                            |   | **Three                Months Ended****June                30, 2005** |    | **Three                Months Ended****June                30, 2004** |   | **Percentage                Change Increase/****(Decrease)** |   |
|-----------------------------------------------------------------|--------|-----------------------------------------------------------------------|---------|-----------------------------------------------------------------------|--------|--------------------------------------------------------------|--------|
|                                                            |   | ** $**                                                           |    | **%                of                Revenue**                        |   | ** $**                                                  |   | **%                of                Revenue** |   | **2005                vs.****2004** |   |
| Operating                revenues                               |   |                                                                  |    |                                                                  |   |                                                         |   |   |   |   |   |   |   |   |   |   |
| Core                customer trade revenue                      |   | $                                                                     | 44.2    |                                                                  |   | 93                                                           | %      | $ | 33.6 |   |   | 87 | % |   | 32 | % |
| Switched                access revenue                          |   |                                                                  | 3.1     |                                                                  |   | 7                                                            | %      |   | 4.9 |   |   | 13 | % |   | (37 | )% |
| Total                revenue                                    |   |                                                                  | 47.3    |                                                                  |   | 100                                                          | %      |   | 38.5 |   |   | 100 | % |   | 23 | % |
| Cost                of operating revenues (1)                   |   |                                                                  | 22.1    |                                                                  |   | 47                                                           | %      |   | 17.7 |   |   | 46 | % |   | 25 | % |
| Selling,                general and administrative expenses (2) |   |                                                                  | 23.0    |                                                                  |   | 49                                                           | %      |   | 18.3 |   |   | 48 | % |   | 26 | % |
| Other                operating expenses                         |   |                                                                  | 6.0     |                                                                  |   | 13                                                           | %      |   | 3.8 |   |   | 10 | % |   | 58 | % |
| Loss                from operations                             |   |                                                                  | (3.8    | )                                                                     |   | *                                                            |   |   | (1.3 | ) |   | * |   |   | 192 | % |
| Other                income (expense):                          |   |                                                                  |    |                                                                  |   |                                                         |   |   |   |   |   |   |   |   |   |   |
| Interest                income                                  |   |                                                                  | 0.2     |                                                                  |   | *                                                            |   |   | 0.1 |   |   | * |   |   | 100 | % |
| Interest                expense                                 |   |                                                                  | (0.7    | )                                                                     |   | *                                                            |   |   | (0.1 | ) |   | * |   |   | * |   |
| Other                expense                                    |   |                                                                  | — |                                                                  |   | *                                                            |   |   | (0.1 | ) |   | * |   |   | * |   |
| Loss                from continuing operations                  |   |                                                                  | (4.3    | )                                                                     |   | *                                                            |   |   | (1.4 | ) |   | * |   |   | 207 | % |
| Discontinued                operations:                         |   |                                                                  |    |                                                                  |   |                                                         |   |   |   |   |   |   |   |   |   |   |
| (Loss)                income from discontinued operations       |   |                                                                  | — |                                                                  |   | *                                                            |   |   | — |   |   | * |   |   | * |   |
| Net                loss                                         |   | $                                                                     | (4.3    | )                                                                     |   | *                                                            |   | $ | (1.4 | ) |   | * |   |   | 207 | % |

|   | *      | Calculation                is not meaningful.                                                                                                                                 |   |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |   |                                                                                                                                                                          |   |
|   | (1)    | Exclusive                of depreciation and amortization of $4,077 and $1,964 for the three                months                ended June 30, 2005 and 2004, respectively. |   |
|   |   |                                                                                                                                                                          |   |
|   | (2)    | Exclusive                of depreciation and amortization of $1,913 and $1,915 for the three                months                ended June 30, 2005 and 2004, respectively. |   |

----

*Analysis      of Consolidated Statements of Operations for the six months ended June 30,      2005      and 2004 *

|                                                            |   | **Six                Months****Ended****June                30, 2005** |    | **Six                Months****Ended****June                30, 2004** |   | **Percentage                Change Increase/****(Decrease)** |   |
|-----------------------------------------------------------------|--------|------------------------------------------------------------------------|---------|------------------------------------------------------------------------|--------|--------------------------------------------------------------|--------|
|                                                            |   | ** $**                                                            |    | **%                of                Revenue**                         |   | **$ **                                                  |   | **%                of                Revenue** |   | **2005                vs.****2004** |   |
| Operating                revenues                               |   |                                                                   |    |                                                                   |   |                                                         |   |   |   |   |   |   |   |   |   |   |
| Core                customer trade revenue                      |   | $                                                                      | 88.3    |                                                                   |   | 93                                                           | %      | $ | 66.3 |   |   | 88 | % |   | 33 | % |
| Switched                access revenue                          |   |                                                                   | 6.7     |                                                                   |   | 7                                                            | %      |   | 9.3 |   |   | 12 | % |   | (28 | )% |
| Total                revenue                                    |   |                                                                   | 95.0    |                                                                   |   | 100                                                          | %      |   | 75.6 |   |   | 100 | % |   | 26 | % |
| Cost                of operating revenues (1)                   |   |                                                                   | 44.0    |                                                                   |   | 46                                                           | %      |   | 34.1 |   |   | 45 | % |   | 29 | % |
| Selling,                general and administrative expenses (2) |   |                                                                   | 45.7    |                                                                   |   | 48                                                           | %      |   | 35.8 |   |   | 47 | % |   | 28 | % |
| Other                operating expenses                         |   |                                                                   | 11.5    |                                                                   |   | 12                                                           | %      |   | 7.5 |   |   | 10 | % |   | 53 | % |
| Loss                from operations                             |   |                                                                   | (6.2    | )                                                                      |   | *                                                            |   |   | (1.8 | ) |   | * |   |   | 244 | % |
| Other                income (expense):                          |   |                                                                   |    |                                                                   |   |                                                         |   |   |   |   |   |   |   |   |   |   |
| Interest                income                                  |   |                                                                   | 0.4     |                                                                   |   | *                                                            |   |   | 0.1 |   |   | * |   |   | 300 | % |
| Interest                expense                                 |   |                                                                   | (1.9    | )                                                                      |   | *                                                            |   |   | (0.1 | ) |   | * |   |   | * |   |
| Other                income (expense)                           |   |                                                                   | 7.2     |                                                                   |   | 8                                                            | %      |   | (0.1 | ) |   | * |   |   | * |   |
| Loss                from continuing operations                  |   |                                                                   | (0.5    | )                                                                      |   | *                                                            |   |   | (1.9 | ) |   | * |   |   | (74 | )% |
| Discontinued                operations:                         |   |                                                                   |    |                                                                   |   |                                                         |   |   |   |   |   |   |   |   |   |   |
| (Loss)                income from discontinued operations       |   |                                                                   | — |                                                                   |   | *                                                            |   |   | 0.2 |   |   | * |   |   | * |   |
| Net                loss                                         |   | $                                                                      | (0.5    | )                                                                      |   | *                                                            |   | $ | (1.7 | ) |   | * |   |   | (71 | )% |

|   | *      | Calculation                is not meaningful.                                                                                                                               |   |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |   |                                                                                                                                                                        |   |
|   | (1)    | Exclusive                of depreciation and amortization of $7,589 and $3,902 for the six                months                ended June 30, 2005 and 2004, respectively. |   |
|   |   |                                                                                                                                                                        |   |
|   | (2)    | Exclusive                of depreciation and amortization of $4,002 and $3,878 for the six                months                ended June 30, 2005 and 2004, respectively. |   |

*Quarterly      Comparison - June 30, 2005 vs. June 30, 2004*

**Comparison      of Financial Results**

***Operating      Revenues.***
** **

|   | • | An                increase of $5.8 million in our higher-end integrated voice and data                services revenue primarily resulting from an increase in our pre-ICG                California revenue of approximately $3.8 million driven by an increase                of                average lines in service of approximately 2,000 T1 lines and                approximately 560 trunk lines from June 30, 2004 and the addition                of approximately $2.0 million of ICG California acquired                revenue. |
|--------|---------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | • | An                increase of $4.2 million in our private line revenue as a result                of our                ICG California acquisition.                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | • | An                increase of $0.8 million in our toll revenue primarily due to an                increase                of 40% in our pre-ICG California minutes of use.                                                                                                                                                                                                                                                                                                                                                                                          |
|   | • | An                increase of $0.5 million in our other revenue primarily due to $0.2                million increase in directory assistance revenue as a result of rate                increases that became effective in the first quarter of 2005 and                a $0.2                million increase due to a settlement with one of our wholesale                customers.                                                                                                                                                                             |

----

|   | • | A                decrease in plain old telephone service (“POTS”) revenue of                $0.7** **million,                driven primarily by 15,000 fewer POTS billable lines in our pre-ICG                California business. The decrease was calculated after taking into                account                the addition of the ICG California revenue in 2005.                                                                                                                                                                                         |
|--------|---------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | • | A                decrease of $1.8** **million                in switched access revenues driven primarily by a decrease of                $0.8                million due                to a reduction in the types of the Intralata toll traffic we agreed                to                bill to one of the ILECs during the first quarter of 2005, and a                decrease                of $0.5 million driven by rate step downs. The decrease was calculated                after taking into account the addition of the ICG California                revenue. |

***Cost      of Operating Revenues.***

|   | • | An                increase in our customer T1 expense of $2.3 million. Our pre-ICG                California business had increased cost of operating revenues of $0.8                million or a 54% increase. This increase is a result of an increase                in the                number of customer lines in service and an increase in the average                cost                per T1 resulting from ordering higher cost circuits to meet customer                needs. An additional increase of $1.5 million is for ICG California                acquired customer T1 lines. |
|--------|---------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | • | An                increase of $1.5 million for network access expense. $0.2 million                of the                increase was from an increase in our core network access lines to                support                the ICG California fiber network. Additionally, we had a $1.4 million                increase resulting from the acquired ICG California access                lines.                                                                                                                                                                                                  |
|   | • | An                increase of $1.2 million in rents and utilities for ICG California                sites                that include electrical, optical and multiplexing                equipment.                                                                                                                                                                                                                                                                                                                                                                                                    |
|   | • | An                increase of $0.2 million in collocation costs associated with the                acquisition of the ICG California                business.                                                                                                                                                                                                                                                                                                                                                                                                                                           |

|   | • | A                settlement with a major ILEC on disputes that resulted in a reduction                of                cost of operating revenue by $0.8                million. |
|--------|---------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

***Selling,      General and Administrative.***

|   | • | A                $2.2 million increase in salary, wages and benefit related expenses.                This                is primarily the result of an increase in average headcount from                approximately 740 employees for the three months ended June 30, 2004                to                approximately 840 employees for the three months ended June 30, 2005,                due                to the growth of our business and the impact of the ICG California                acquisition.                                                                                                                      |
|--------|---------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | • | Additional                expenses of $1.2 million incurred internally as well as the                use of external labor and materials necessary to transition                the                ICG California business to our business (“incremental transition                expense”). We completed the acquisition of ICG’s California retail and                wholesale customers and statewide fiber network on January 1, 2005,                and                expect to incur additional incremental transition expenses during                the                third quarter of 2005. |
|   | • | Additional                expenses of $0.6 million pursuant to our transition services agreement                with ICG in which certain services related to the acquired operations                to                ICG California are performed for us by ICG primarily related to                accounting, billing, collections, provisioning, call center and network                support. As these transition services are expected to continue to                be                provided through the third quarter of 2005, we anticipate incurring                additional expenses.                                    |
|   | • | A                $0.6 million increase in agent commissions as a result of significant                revenue growth within the independent agent channel.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | • | A                $0.3 million increase in bad debt expense which was primarily a result                of the recently acquired ICG California wholesale revenue                streams. We                do not expect a trend of increasing our reserves for this revenue                stream.                                                                                                                                                                                                                                                                                                                                   |
|   | • | A                $0.2 million increase in engineering equipment and network maintenance                expense which was driven by our network expansion as a result of                the ICG                California acquisition.                                                                                                                                                                                                                                                                                                                                                                                                      |

|   | • | A                $0.6 million decrease resulting from a favorable settlement reached                on an                equipment lease dispute during the three months ended June 30, 2005.                See                Note 11 to the financial statements for additional information related                to                this settlement. |
|--------|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

***Gain      on Sale of Assets.***

----

***Depreciation      and Amortization.***

***Loss      from Operations.***

***Other      Income (Expense).***

***Interest      Income.***

***Interest      Expense.***

***Loss      from Continuing Operations.***

***Net      Loss.***

*Six      Month Period Ended Comparison - June 30, 2005 vs. June 30,      2004*

**Comparison      of Financial Results**

***Operating      Revenues.***

|   | • | An                increase of $11.8 million in our higher-end integrated voice and                data                services revenue, primarily resulting from an increase in our pre-ICG                California revenue of approximately $7.2 million driven by an increase                in                average lines in service of approximately 2,000 T1 lines and approximately                500 trunk lines and the addition of approximately                $4.5 million of  ICG California acquired revenue from                June 30,                2004. |
|--------|---------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | • | An                increase of $8.6 million in our private line revenue as a result                of our                ICG California acquisition.                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | • | An                increase of $1.7 million in our toll revenue primarily due to an                increase                of 42% to our pre-ICG California business minutes of                use.                                                                                                                                                                                                                                                                                                                                                                                                   |
|   | • | An                increase of $1.0 million in our other revenue due to $0.6 million                increase                in directory assistance revenue as a result of rate increases that                became                effective in the first quarter of 2005. $0.3 million relates to an                increase in collocation revenue and a $0.2 million increase due to                a                settlement with one of our wholesale                customers.                                                                                                               |

|   | • | A                decrease of $2.6 million in switched access revenues driven by a                decrease                in our pre-ICG California revenue of $1.8 million due to a reduction                in                the types of Intralata toll traffic we agreed to bill one of the                ILECs                during the first quarter of 2005, a decrease of $0.7 million driven                by                rate step downs, a decrease in 800 query revenue of $0.2 million,                a                decrease of $0.1 million in Primary Interexchange Carrier Charge                (“PICC”)                revenue; offset by increase in reciprocal compensation of $0.3 million.                The $2.6 million decrease was calculated after taking into account                the                addition of ICG revenue in 2005. |
|--------|---------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | • | A                decrease in plain old telephone service (“POTS”) revenue of $1.1 million                driven by 15,000 fewer POTS billable lines during the six months                ended                June 30, 2005 versus the six months ended June 30, 2004. The $1.1                million                decrease was calculated after taking into account the addition of                ICG                revenue in 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                      |

----

***Cost      of Operating Revenues.***

|   | • | Increases                in our POTS loop expense of $0.8 million resulting from a 10% increase                in                rates for the loops charged by one of the ILECs in                California.                                                                                                                                                                                                                                                                                                                                                                                      |
|--------|---------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | • | An                increase in our customer T1 expense of $4.1 million. Our pre-ICG                California business had a $1.3 million or a 45% increase. The remaining                $2.8 million increase is related to the ICG California acquired customer                T1 lines.                                                                                                                                                                                                                                                                                                          |
|   | • | An                increase of $2.8 million for network access expense. Of this increase,                $0.1 million was related to our core network access lines to support                new                ICG California fiber network. Another $2.7 million of the increase                in the                six months ended June 30, 2005 is the result of the acquired ICG                California access lines. The ICG California access cost is expected                to                decrease as circuits are migrated onto our existing core                infrastructure. |
|   | • | An                increase of $2.8 million in rent and utilities for ICG California                sites                that include electrical, optical, and multiplexing                equipment.                                                                                                                                                                                                                                                                                                                                                                                                |
|   | • | Collocation                cost increased $0.4 million or an 11% increase. This is a result                of the                new collocation sites associated with the acquisition of the ICG                California network.                                                                                                                                                                                                                                                                                                                                                                |
|   | • | An                increase in non-recurring charges on circuits of $0.5 million. This                increase is from ordering of higher capacity circuits for our core                network                backbone to support the ICG acquired network and our existing                infrastructure.                                                                                                                                                                                                                                                                                          |

|   | • | Resolution                of disputes with two ILECs and a credit for a billing error from                a third                ILEC resulted in a reduction in cost of operating revenues for the                six                months ended June 30, 2005 of $1.5                million. |
|--------|---------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

***Selling,      General and Administrative.***

|   | • | A                $4.1 million increase in salary, wages and benefit related expenses.                This                is primarily the result of an increase in average headcount from                approximately 735 employees for the six months ended June 30, 2004                to                approximately 815 employees for the six months ended June 30, 2005,                due to                the growth of our business and the impact of the ICG California                acquisition.                                                                                       |
|--------|---------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | • | Additional                expenses of $2.1 million for incremental transition expenses related                to                the integration of assets as a result of the ICG California acquisition.                We completed the acquisition of ICG’s California retail and wholesale                customers and statewide fiber network on January 1, 2005, and expect                to                incur additional incremental transition expenses during the third                quarter                of 2005.                                                               |
|   | • | Additional                expenses of $1.4 million pursuant to our transition services agreement                with ICG in which certain services related to the acquired operations                to                ICG California are performed for us by ICG primarily related to                accounting, billing, collections, provisioning, call center and network                support. As these transition services are expected to continue to                be                provided through the third quarter of 2005, we anticipate incurring                additional expenses. |
|   | • | A                $1.2 million increase in agent commissions as a result of significant                revenue growth within the independent agent channel.                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | • | A                $0.4 million increase in engineering equipment and network maintenance                expense, which was driven by our network expansion as a result of                the ICG                California acquisition.                                                                                                                                                                                                                                                                                                                                                                  |
|   | • | A                $0.3 million increase in bad debt expense which was primarily a result                of                the recently acquired ICG California wholesale revenue streams.                We do                not expect a trend of increasing our reserves for this revenue                stream.                                                                                                                                                                                                                                                                                 |
|   | • | A                $0.2 million increase in agent selling expense - warrants as a result                of                an increased number of warrants issued to independent sales agents                for the                six months ended June 30, 2005. The issuance of warrants is based                on the                increase in baseline sales performance achieved by the independent                sales                agents.                                                                                                                                                  |

|   | • | A                $0.6 million decrease resulting from a favorable settlement reached                on an                equipment lease dispute during the six months ended June 30, 2005.                See                Note 11 to the financial statements for additional information related                to                this settlement. |
|--------|---------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

***Gain      on Sale of Assets.***

***Depreciation      and Amortization.***

----

***Loss      from Operations.***

***Other      Income (Expense).***

***Interest      Income.***

***Interest      Expense.***

***Loss      from Continuing Operations.***

***Net      Loss.***

**Discontinued      Operations**

|                                                      |   | **Three                Months Ended** |    | **Six                Months Ended** |   |
|-----------------------------------------------------------|--------|---------------------------------------|---------|-------------------------------------|--------|
|                                                      |   | **June                30,**           |    | **June                30,**         |   | **June                30,** |   | **June                30,** |   |
|                                                      |   | **2005**                              |    | **2004**                            |   | **2005** |   | **2004** |   |
| Operating                revenues                         |   | $                                     | — |                                | $      | 1 |   | $ | — |   | $ | 3 |   |
| Operating                expenses (income)                |   |                                  | 3       |                                |   | 8 |   |   | 35 |   |   | (181 | ) |
| Gain                on disposal of assets                 |   |                                  | — |                                |   | — |   |   | — |   |   | (50 | ) |
| (Loss)                income from discontinued operations |   | $                                     | (3      | )                                   | $      | (7 | ) | $ | (35 | ) | $ | 234 |   |

**Application      of Critical Accounting Estimates**

----

*Business      Combinations*

*Goodwill      and Other Intangible Assets*

**Effects      of New Accounting Standards**

*Accounting      for Conditional Asset Retirement Obligations - an interpretation of FASB      Statement No. 143*

*Share-Based      Payment*

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

----

**Forward      Looking Statements**

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

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

| (a)    | Evaluation                of disclosure controls and procedures.                As of the end of the period covered by this report, 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 by our management                on a                timely basis in order to comply with our disclosure obligations under                the                Exchange Act and the SEC rules thereunder. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (b)    | Changes                in internal control.                There were no changes in our internal control over financial reporting                that occurred during our quarter ended June 30, 2005, that have materially                affected, or are reasonably likely to materially affect, our internal                control over financial reporting.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |

----

**PART      II. OTHER INFORMATION**

**Item      1.**
*      Legal Proceedings *

**California**

**Illinois**

**Triennial      Review Remand**

**Equipment      Lease Settlement**

----

**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. |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 2.1  | Asset                Purchase Agreement, dated October 22, 2004, by and among MCCC ICG                Holdings, LLC, ICG Communications, Inc., Mpower Holding Corporation                and                Mpower Communications Corp. (1)                             |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1  | Second                Amended and Restated Certificate of Incorporation filed with the                Secretary                of State of the State of Delaware on July 30, 2002. (2)                                                                                  |
| 3.2  | Second                Amended and Restated By-laws. (2)                                                                                                                                                                                                                 |
| 3.3  | Rights                Agreement between Mpower Holding Corporation and Continental Stock                Transfer & Trust Company as Rights Agent. (3)                                                                                                               |
| 3.4  | Certificate                of Designation for the Series A Preferred Stock. (4)                                                                                                                                                                                         |
| 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. (5) |
| 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. (6)  |
| 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.                                      |
| 31.1 | Rule                13a-14(a)/15d-14(a) Certification of Chief Executive                Officer                                                                                                                                                                         |
| 31.2 | Rule                13a-14(a)/15d-14(a) Certification of Chief Financial                Officer                                                                                                                                                                         |
| 32   | Section                1350 Certifications                                                                                                                                                                                                                              |

| (1)    | Incorporated                by reference to the Company’s Current Report on Form 8-K/A filed with the                Commission on October 27, 2004.                         |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                               |
| (2)    | Incorporated                by reference to the Company's Registration Statement on Form 8-A                filed                with the Commission on July 30, 2002.             |
|   |                                                                                                                                                                               |   |
| (3)    | Incorporated                by reference to the Company’s Registration Statement on Form 8-K (file No.                000-32941) filed with the Commission on July 16, 2003. |
|   |                                                                                                                                                                               |   |
| (4)    | Incorporated                by reference to the Company’s Registration Statement on Form 8-A filed                with the Commission on July 16, 2003.                      |
|   |                                                                                                                                                                               |   |
| (5)    | Incorporated                by reference to Mpower Holding Corporation’s Annual Report on Form 10-K                for the year ended December 31, 2004.                     |
|   |                                                                                                                                                                               |   |
| (6)    | Incorporated                by reference to Mpower Holding Corporation’s Current Report on Form 8-K                filed with the Commission on July 1, 2005.                |
|   |                                                                                                                                                                               |

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**SIGNATURES**

|                                   |                                                                              |                                |
|----------------------------------------|-----------------------------------------------------------------------------------|-------------------------------------|
|                                   | MPOWER                HOLDING CORPORATION                                         |
|                              |                                                                         |                           |
| Date: August              9, 2005 | By:                                                                     | /s/ Rolla              P. Huff |
|                                   | Rolla              P. Huff                                                        |
|                                   | *Chief                Executive Officer and Chairman of the                Board* |

|                                   |                                                                               |                                       |
|----------------------------------------|------------------------------------------------------------------------------------|--------------------------------------------|
|                                   |                                                                               |
|                              |                                                                          |                                  |
| Date: August              9, 2005 | By:                                                                      | /s/ S.              Gregory Clevenger |
|                                   | S.              Gregory Clevenger                                                  |
|                                   | *Executive                Vice President - Chief Financial                Officer* |

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