**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 September 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**


(Exact
      name of registrant as specified in its charter)





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





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


**Pittsford,
      NY 14534**


(Address
      of principal executive offices, including Zip Code)





**(585)
      218-6550**


(Registrant's
      telephone number, including area code)





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


YES x NO o





Indicate
      by check mark whether the registrant is an accelerated filer (as defined in
      Rule
      12b-2 of the Exchange Act).


YES x NO o





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


YES o NO x





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


YES x NO o





The
      number of shares outstanding of the issuer's common stock, as of October 31,
      2005:





Common
      stock (par value $0.001 per common share).... 91,500,515 shares
      outstanding





**MPOWER
      HOLDING CORPORATION**





**INDEX**





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




2


**PART
      I - FINANCIAL INFORMATION**


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





**MPOWER
      HOLDING CORPORATION**


**CONSOLIDATED
      BALANCE SHEETS**


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


**(UNAUDITED)**





**September
                30,**
            
            
            **December
                31**,**2005**
            
            
            **2004****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            16,220
            
            $
            27,327Investments
                available-for-sale
            
            
            9,758
            
            
            8,064Accounts
                receivable, less allowance for doubtful accounts of $2,011 and$1,375
                at September 30, 2005 and December 31, 2004, respectively
            
            
            15,254
            
            
            10,140Other
                receivables
            
            
            1,304
            
            
            3,164Prepaid
                expenses and other current assets
            
            
            2,989
            
            
            3,060Total
                current assets
            
            
            45,525
            
            
            51,755Property
                and equipment, net
            
            
            66,043
            
            
            33,012Long-term
                restricted cash and cash equivalents
            
            
            9,531
            
            
            9,515Long-term
                investments available-for-sale
            
            
            448
            
            
            2,041Goodwill
            
            
            8,861
            
            
            —Intangibles,
                net of accumulated amortization of $14,499 and $11,072 atSeptember
                30, 2005 and December 31, 2004, respectively
            
            
            4,036
            
            
            4,367Other
                long-term assets
            
            
            4,535
            
            
            4,274Total
                assets
            
            $
            138,979
            
            $
            104,964**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Current
                liabilities:Current
                maturities of capital lease obligations
            
            $
            538
            
            $
            —Accounts
                payable
            
            
            14,644
            
            
            20,462Accrued
                sales tax payable
            
            
            2,210
            
            
            2,190Accrued
                bonus
            
            
            723
            
            
            2,508Deferred
                revenue
            
            
            5,133
            
            
            5,059Accrued
                other expenses
            
            
            14,138
            
            
            11,756Total
                current liabilities
            
            
            37,386
            
            
            41,975Long-term
                capital lease obligations
            
            
            23,141
            
            
            —Other
                long-term liabilities
            
            
            2,212
            
            
            1,833Total
                liabilities
            
            
            62,739
            
            
            43,808Commitments
                and contingenciesStockholders’
                equity:Preferred
                stock, 49,900,000 shares authorized but unissued at September 30,
                2005 and
                December 31, 2004
            
            
            —
            
            
            —Series
                A preferred stock, 100,000 shares authorized but unissued at September
                30,
                2005 and December 31, 2004
            
            
            —
            
            
            —Common
                stock, $0.001 par value, 1,000,000,000 shares authorized, 91,478,015
                and
                78,570,772 shares issued and outstanding at September 30, 2005 and
                December 31, 2004, respectively
            
            
            91
            
            
            79Additional
                paid-in capital
            
            
            121,891
            
            
            104,054Accumulated
                deficit
            
            
            (45,742
            )
            
            (42,977
            )Total
                stockholders’ equity
            
            
            76,240
            
            
            61,156Total
                liabilities and stockholders’ equity
            
            $
            138,979
            
            $
            104,964


See
      accompanying condensed notes to unaudited interim consolidated financial
      statements.


3




**MPOWER
      HOLDING CORPORATION**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


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


**(UNAUDITED)**





**Three
                Months Ended**
            **Nine
                Months Ended****September
                30**,
            **September
                30**,**2005**
            
            
            **2004**
            
            
            **2005**
            
            
            **2004**Operating
                revenues:Telecommunication
                services
            
            $
            49,149
            
            $
            37,593
            
            $
            144,137
            
            $
            113,242Operating
                expenses:Cost
                of operating revenues
              (exclusive
                of depreciation and amortization shown separately below of $3,970
                and
                $2,024 for the three months ended September 30, 2005 and 2004,
                respectively, and $11,559 and $5,926 for the nine months ended September
                30, 2005 and 2004, respectively)
            
            
            22,998
            
            
            18,007
            
            
            66,953
            
            
            52,135Selling,
                general and administrative
              (exclusive
                of depreciation and amortization shown separately below of $1,195
                and
                $1,851 for the three months ended September 30, 2005 and 2004,
                respectively, and $5,197 and $5,729 for the nine months ended September
                30, 2005 and 2004, respectively)
            
            
            22,577
            
            
            17,705
            
            
            68,278
            
            
            53,544Gain
                on sale of assets, net
            
            
            (28
            )
            
            (108
            )
            
            (74
            )
            
            (368
            )Depreciation
                and amortization
            
            
            5,165
            
            
            3,875
            
            
            16,756
            
            
            11,65550,712
            
            
            39,479
            
            
            151,913
            
            
            116,966Loss
                from operations
            
            
            (1,563
            )
            
            (1,886
            )
            
            (7,776
            )
            
            (3,724
            )Other
                income (expense):Interest
                income
            
            
            214
            
            
            104
            
            
            635
            
            
            269Interest
                expense
            
            
            (941
            )
            
            (61
            )
            
            (2,872
            )
            
            (194
            )Other
                income (expense)
            
            
            11
            
            
            —
            
            
            7,315
            
            
            (95
            )Loss
                on sale of investments, net
            
            
            —
            
            
            (11
            )
            
            —
            
            
            (11
            )Loss
                from continuing operations
            
            
            (2,279
            )
            
            (1,854
            )
            
            (2,698
            )
            
            (3,755
            )Discontinued
                operations:(Loss)
                income from discontinued operations
            
            
            (32
            )
            
            508
            
            
            (67
            )
            
            742Net
                loss
            
            $
            (2,311
            )
            $
            (1,346
            )
            $
            (2,765
            )
            $
            (3,013
            )Basic
                and diluted (loss) income per common share:Loss
                from continuing operations
            
            $
            (0.03
            )
            $
            (0.02
            )
            $
            (0.03
            )
            $
            (0.05
            )(Loss)
                income from discontinued operations
            
            
            (0.00
            )
            
            0.00
            
            
            (0.00
            )
            
            0.01Net
                loss
            
            $
            (0.03
            )
            $
            (0.02
            )
            $
            (0.03
            )
            $
            (0.04
            )Basic
                and diluted weighted average common shares outstanding
            
            
            91,473,028
            
            
            78,476,418
            
            
            91,415,956
            
            
            78,405,511




See
      accompanying condensed notes to unaudited interim consolidated financial
      statements.




4


**MPOWER
      HOLDING CORPORATION**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(IN
      THOUSANDS)**


**(UNAUDITED)**


**Nine
                  Months Ended****September
                  30,****2005**
              
              **2004**Cash
                  flows from operating activities:Net
                  loss
              
              $
              (2,765
              )
              $
              (3,013
              )Adjustments
                  to reconcile net loss to net cash provided by operating
                  activities:Depreciation
                  and amortization
              
              
              16,756
              
              
              11,655Gain
                  on disposal of assets from discontinued operations
              
              
              —
              
              
              (50
              )Gain
                  on sale of assets, net
              
              
              (74
              )
              
              (368
              )Bad
                  debt expense
              
              
              1,675
              
              
              1,053Loss
                  on sale of investments, net
              
              
              —
              
              
              11Amortization
                  of investment premiums
              
              
              100
              
              
              —Stock-based
                  compensation expense
              
              
              —
              
              
              91Agent
                  selling expense - warrants
              
              
              315
              
              
              135Changes
                  in assets and liabilities:(Increase)
                  decrease in accounts receivable
              
              
              (5,239
              )
              
              2,624(Increase)
                  decrease in other receivables
              
              
              (519
              )
              
              3,291Decrease
                  in prepaid expenses and other current assets
              
              
              261
              
              
              2,099Decrease
                  (increase) in other long-term assets
              
              
              64
              
              
              (463
              )Decrease
                  in accounts payable
              
              
              (2,486
              )
              
              (3,811
              )Decrease
                  in accrued sales tax payable
              
              
              (591
              )
              
              (372
              )Decrease
                  in deferred revenue
              
              
              (1,620
              )
              
              (95
              )Decrease
                  in accrued other expenses
              
              
              (2,447
              )
              
              (3,900
              )Net
                  cash provided by operating activities
              
              
              3,430
              
              
              8,887Cash
                  flows from investing activities:Purchase
                  of property and equipment, net of payables
              
              
              (13,421
              )
              
              (4,504
              )Deposits
                  on property and equipment purchase commitments
              
              
              (1,349
              )
              
              —Costs
                  associated with business acquisition
              
              
              (379
              )
              
              —Proceeds
                  from sale of assets from continuing operations
              
              
              155
              
              
              385Receipt
                  of escrowed amounts from sale of assets from discontinued
                  operations
              
              
              1,000
              
              
              63Purchase
                  of investments available-for-sale
              
              
              (1,451
              )
              
              —Sale
                  of investments available-for-sale
              
              
              1,250
              
              
              —(Purchase)
                  sale of restricted investments, net
              
              
              (146
              )
              
              137Net
                  cash used in investing activities
              
              
              (14,341
              )
              
              (3,919
              )Cash
                  flows from financing activities:Costs
                  associated with line of credit
              
              
              (262
              )
              
              —Payments
                  on capital lease obligations
              
              
              (2,479
              )
              
              (256
              )Proceeds
                  from issuance of common stock, net of costs
              
              
              2,545
              
              
              58Net
                  cash used in financing activities
              
              
              (196
              )
              
              (198
              )Net
                  (decrease) increase in cash and cash equivalents
              
              
              (11,107
              )
              
              4,770Cash
                  and cash equivalents at beginning of period
              
              
              27,327
              
              
              29,307Cash
                  and cash equivalents at end of period
              
              $
              16,220
              
              $
              34,077




5


**Nine
                  Months Ended****September
                  30,****2005**
              
              **2004**Supplemental
                  schedule of non-cash investing and financing activities:Fair
                  value of assets acquired in business acquisition
              
              $
              46,393
              
              $
              —Liabilities
                  assumed in business acquisition
              
              $
              (29,752
              )
              $
              —Common
                  stock issued in business acquisition
              
              $
              14,070
              
              $
              —Warrants
                  issued in business acquisition
              
              $
              1,246
              
              $
              —Property
                  and equipment purchased under capital leases
              
              $
              161
              
              $
              —Net
                  payable related to purchase of property and equipment
              
              $
              2,512
              
              $
              1,206Supplemental
                  cash flow information:Cash
                  paid for interest
              
              $
              1,865
              
              $
              96


See
      accompanying condensed notes to unaudited interim consolidated financial
      statements.


6







**MPOWER
      HOLDING CORPORATION**


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


**(UNAUDITED)**





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





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





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





On
      January 1, 2005, the Company acquired certain assets and assumed certain
      liabilities of ICG Communications, Inc. (“ICG”). The assets acquired include
      ICG’s customer base and certain network assets in California. See Note 3 for
      additional discussion of this acquisition.





These
      condensed consolidated financial statements reflect all normal recurring
      adjustments, which management believes are necessary to present fairly the
      financial position, results of operations, and cash flows for the Company for
      the respective periods presented. Certain information and footnote disclosures
      normally included in the annual consolidated financial statements prepared
      in
      accordance with accounting principles generally accepted in the United States
      of
      America have been condensed or omitted pursuant to the rules and regulations
      of
      the Securities and Exchange Commission for Form 10-Q. These unaudited interim
      condensed consolidated financial statements should be read in conjunction with
      the audited consolidated financial statements and notes thereto included in
      the
      Company’s annual report on Form 10-K for the year ended December 31, 2004, filed
      with the Securities and Exchange Commission.





The
      consolidated balance sheet at December 31, 2004 included herein was derived
      from
      the audited consolidated financial statements of the Company.





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





The
      results of operations for the three and nine months ended September 30, 2005
      and
      cash flows for the nine months ended September 30, 2005 are not necessarily
      indicative of the results to be expected for other interim periods or for the
      year ending December 31, 2005.





Certain
      reclassifications, which have no effect on net loss, have been made in the
      prior
      period financial statements to conform to the current presentation.





**Effects
      of New Accounting Standards**





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





In
      March
      2005, the Financial Accounting Standards Board (“FASB”) issued Interpretation
      No. (“FIN”) 47, "Accounting for Conditional Asset Retirement Obligations - an
      interpretation of FASB Statement No. 143, " which clarifies the term
      "conditional asset retirement obligation" used in FASB No. 143 "Accounting
      for
      Asset Retirement Obligations" and specifically when an entity would have
      sufficient information to reasonably estimate the fair value of an asset
      retirement obligation. The Company is required to adopt FIN 47 no later than
      December 31, 2005. The Company does not expect the adoption of FIN 47 to have
      a
      material impact on its consolidated results of operations or financial
      condition.





7


*Share-Based
      Payment*





In
      April
      2005, the effective date of Statement of Financial Accounting Standards (“SFAS”)
      No. 123 (revised 2004), “Share-Based Payment”, which replaces SFAS No. 123,
“Accounting for Stock-Based Compensation,” and supersedes Accounting Principles
      Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” was
      deferred and will now be effective beginning with the first fiscal year that
      begins after June 15, 2005, with early adoption encouraged. SFAS No. 123(R)
      requires all share-based payments to employees, including grants of employee
      stock options, to be recognized in the financial statements based on their
      fair
      values. At this time, the Company cannot yet estimate the effect of adopting
      SFAS No. 123(R) as the Company has not yet selected the period of adoption,
      the
      method of adoption or an option-pricing model and it has not yet finalized
      estimates of its expected forfeitures.




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





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





**(2)
      STOCK OPTION PLAN**





The
      Company measures the compensation cost of its stock option plan under the
      provisions of APB Opinion No. 25, as permitted under SFAS No. 123, as amended
      by
      SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and
      Disclosure.” Under the provisions of APB No. 25, compensation cost is measured
      based on the intrinsic value of the equity instrument awarded. Under the
      provisions of SFAS No. 123, compensation cost is measured based on the fair
      value of the equity awarded.





Had
      compensation cost for the employee stock options been determined consistent
      with
      SFAS No. 123, the Company’s results from operations would approximate the
      following pro forma amounts for the three and nine months ended September 30,
      2005 and 2004 (in thousands, except per common share amounts):





**Three
                Months Ended**
            
            **Nine
                Months Ended****September
                30**,
            
            **September
                30**,**2005**
            
            **2004**
            
            **2005**
            
            **2004**Net
                loss, as reported
            
            $
            (2,311
            )
            $
            (1,346
            )
            $
            (2,765
            )
            $
            (3,013
            )Add:
                Stock-based compensation expense included in reported net loss, net
                of
                related income tax effects
            
            
            —
            
            
            13
            
            
            —
            
            
            91Deduct:
                Total stock-based compensation expense to be determined under a fair
                value
                based method for all awards, net of related income tax
                effects
            
            
            (432
            )
            
            (592
            )
            
            (2,948
            )
            
            (3,349
            )Pro
                forma net loss
            
            $
            (2,743
            )
            $
            (1,925
            )
            $
            (5,713
            )
            $
            (6,271
            )Basic
                and diluted net loss per common share, as reported
            
            $
            (0.03
            )
            $
            (0.02
            )
            $
            (0.03
            )
            $
            (0.04
            )Basic
                and diluted net loss per common share, pro forma
            
            $
            (0.03
            )
            $
            (0.02
            )
            $
            (0.06
            )
            $
            (0.08
            )






Pro
      forma
      amounts for the three and nine months ended September 30, 2004 have been
      restated from figures previously reported as a result of an error in the vesting
      periods utilized for disclosure purposes and adjustments made to properly
      reflect compensation expense under SFAS No. 123. For the three months ended
      September 30, 2004, such adjustments decreased the pro forma stock-based
      compensation expense determined under a fair value based method by $0.5 million
      and pro forma basic and diluted net loss per common share by $0.01. For the
      nine
      months ended September 30, 2004, such adjustments increased the pro forma
      stock-based compensation expense determined under a fair value based method
      by
      $0.6 million and pro forma basic and diluted net loss per common share by
      $0.01.


8




**(3)
      ACQUISITION**





On
      January 1, 2005, the Company completed the acquisition of ICG’s retail and
      wholesale customers in California; a 1,412 route mile state-wide fiber ring
      and
      915 route miles of metropolitan fiber rings which connect 128 commercial
      buildings across major cities in California, along with certain network assets
      and assumed certain liabilities related to those assets ( “ICG California”)
      pursuant to an Asset Purchase Agreement (“Agreement”) dated October 22, 2004 by
      and among MCCC ICG Holdings, LLC (“MCCC”), ICG and the Company. MCCC is a joint
      venture between Columbia Capital and M/C Venture Partners. ICG is a Denver-based
      nationwide communications provider focused on delivering data and voice services
      to corporate customers, internet service providers and telecommunication
      carriers using a network that it owned and operated. It was a publicly held
      company until October 18, 2004 when it became a private entity through a merger
      transaction. As a result of this merger, MCCC owns 100% of the voting stock
      of
      ICG.





The
      Company purchased these assets for $16.6 million excluding liabilities assumed,
      comprised of (i) $14.1 million in the form of 10,740,030 shares of the Company’s
      common stock, (ii) $1.2 million in the form of warrants dated January 1, 2005,
      to purchase another 2,000,000 shares of the Company’s common stock exercisable
      on or prior to the fifth anniversary of the date of issuance at an exercise
      price of $1.38 per share and (iii) $1.3 million of direct acquisition costs
      (described below). The Company also assumed certain of ICG’s capital lease
      obligations in California, including its long-term leases for its fiber network,
      which had a fair value of $26.0 million as of January 1, 2005. The $14.1 million
      value of 10,740,030 shares of common stock was determined using an average
      stock
      price of $1.31 during the three days before and three days after the date the
      acquisition was announced. The fair value of the warrants was determined using
      the Black-Scholes method, with the following assumptions: dividend yield of
      0%;
      expected warrant life of 5 years; risk free interest rate of 3.35%; and an
      expected volatility of 57%.





MCCC
      received one seat on the Company’s board of directors as a result of this
      transaction. In connection with the acquisition, Columbia Capital and M/C
      Venture Partners, through their ownership of MCCC, invested $2.5 million in
      cash
      for an additional 1,988,894 shares of the Company’s common stock on January 5,
      2005.





The
      ICG
      transaction described above involved a management services agreement and a
      transition services agreement that maintained the continuity of the ICG
      operations in California and prepared for the transfer of required business
      functions to the Company. Under the management services agreement, the Company
      reimbursed ICG for the cost of specific services provided by ICG on the
      Company’s behalf between the date the definitive agreement was signed (October
      22, 2004) and final closing (January 1, 2005). The Company recognized gross
      direct acquisition costs of $0.5 million for services and fees incurred under
      the management services agreement. The management services agreement also
      provided that the operating results of ICG’s California operations accrued to
      the benefit of the Company during the period of the agreement. During this
      period, ICG’s California operations generated operating income of $0.3 million,
      which has been recorded as an offset to the gross direct acquisition costs
      the
      Company incurred under the management services agreement. The Company recorded
      additional direct acquisition costs of $1.1 million primarily for legal and
      consulting fees incurred in connection with the ICG California acquisition.
      The
      $1.3 million of net direct acquisition costs described above has been included
      as a component of the purchase price in accordance with SFAS No. 141, “Business
      Combinations.”





Commencing
      on the transaction closing date, January 1, 2005, certain services have been
      provided by ICG to the Company under a transition services agreement providing
      for services through December 31, 2005. For the nine months ended September
      30,
      2005, the Company incurred $1.3 million of expense under the transition services
      agreement, primarily related to accounting, billing, collections, provisioning,
      call center and network support services performed by ICG on the Company’s
      behalf, which are included in selling, general and administrative expenses
      in
      the Company’s consolidated statements of operations. The expense incurred under
      the transition services agreement for the three months ended September 30,
      2005
      was minimal.





At
      September 30, 2005, approximately $0.4 million of cash has been received by
      ICG
      from customer payments on behalf of the Company, which amounts are to be
      remitted to the Company under the terms of the transition services agreement.
      This amount is recorded on the accompanying consolidated balance sheets in
      other
      receivables and is expected to be received by the Company in the fourth quarter
      of 2005, net of amounts due to ICG under the transition services agreement
      and
      other operating expenses paid on behalf of the Company by ICG.





The
      Company retained independent appraisers to assist in determining the fair value
      of certain assets acquired and liabilities assumed as required under SFAS No.
      141, “Business Combinations.” The final valuation was completed in the second
      quarter of 2005 and resulted in adjustments consisting of changes from the
      January 1, 2005 estimated fair values reflected in the Company’s first quarter
      2005 consolidated financial statements. At September 30, 2005, certain
      components of purchase accounting related to final reconciliation of the amounts
      to be recognized under the management services agreeement with ICG are still
      considered to be preliminary and represent management’s best estimate of current
      values, which are subject to revision; however, no material changes in estimates
      are anticipated to be required. The following table summarizes the adjustments
      made to the estimated fair values of the assets acquired and liabilities assumed
      as of January 1, 2005 (in thousands):


9
  **Assets
                  Acquired**
              
              
              **Initial****Estimate
                  ***
              
              
              **Adjustments**
              
              
              **Revised****Estimate**Accounts
                  receivable
              
              $
              1,526
              
              $
              —
              
              $
              1,526Other
                  receivables
              
              
              301
              
              
              —
              
              
              301Prepaid
                  expenses and other current assets
              
              
              55
              
              
              5
              
              
              60Property
                  and equipment
              
              
              29,771
              
              
              2,528
              
              
              32,299Goodwill
              
              
              5,301
              
              
              3,560
              
              
              8,861Other
                  intangibles
              
              
              3,420
              
              
              (324
              )
              
              3,096Other
                  long-term assets
              
              
              255
              
              
              (5
              )
              
              250Total
                  assets acquired
              
              
              40,629
              
              
              5,764
              
              
              46,393**Liabilities
                  Assumed**Current
                  maturities of capital lease obligations
              
              
              2,077
              
              
              399
              
              
              2,476Deferred
                  revenue
              
              
              1,526
              
              
              87
              
              
              1,613Accrued
                  other expenses
              
              
              1,652
              
              
              71
              
              
              1,723Long-term
                  capital lease obligations
              
              
              19,105
              
              
              4,421
              
              
              23,526Long-term
                  deferred revenue
              
              
              —
              
              
              78
              
              
              78Asset
                  retirement obligations
              
              
              336
              
              
              —
              
              
              336Total
                  liabilities assumed
              
              
              24,696
              
              
              5,056
              
              
              29,752Total
                  purchase price (exclusive of liabilities assumed)
              
              $
              15,933
              
              $
              708
              
              $
              16,641


*
            As
                reported by the Company prior to the completion of the independent
                valuation.


Commencing
      on January 1, 2005, the results of operations for ICG California have been
      included as part of the accompanying consolidated financial statements of the
      Company. The following unaudited pro forma financial information represents
      the
      combined results of operations for the Company and ICG California for the three
      and nine months ended September 30, 2004, assuming that the ICG California
      acquisition had occurred as of January 1, 2004, after giving effect to certain
      adjustments including depreciation and amortization expense, interest expense
      and the issuance of common stock and warrants. These pro forma results of
      operations have been prepared for comparative purposes only and are not
      necessarily indicative of the results that may occur in the future or that
      would
      have occurred had the acquisition occurred during the prior year (in thousands,
      except common share and per common share amounts):




**Three
                Months Ended**
            
            
            **Nine
                Months Ended****September
                30, 2004**
            
            
            **September
                30, 2004****(pro
                forma)**Operating
                revenue
            
            $
            47,070
            
            $
            145,936Net
                loss
            
            $
            (4,372
            )
            $
            (14,754
            )Basic
                and diluted net loss per common share
            
            $
            (0.05
            )
            $
            (0.17
            )Basic
                and diluted weighted average common shares outstanding
            
            
            89,216,448
            
            
            89,106,344





**(4)
      INVESTMENTS**





The
      Company’s short-term and long-term investments consist of investment-grade debt
      securities which are recorded at fair value and classified as available-for-sale
      in accordance with the provisions of SFAS No. 115, “Accounting for Certain
      Investments in Debt and Equity Securities.” Interest and amortization of
      premiums for available-for-sale securities have been included in interest income
      for the three and nine months ended September 30, 2005. The Company recorded
      proceeds from the sale of investments available-for-sale of $ 0.3 million
      and $ 1.3  million for the
      three and nine months ended September 30, 2005, respectively. The Company does
      not hold these investments for speculative or trading purposes. As of September
      30, 2005, no securities were impaired under the provisions of Emerging Issues
      Task Force (“EITF”) 03-1, “ The
      Meaning of Other-Than-Temporary Impairment and Its Application to Certain
      Investments .”


10





The
      fair
      value of investments available-for-sale as of September 30, 2005 and December
      31, 2004 were as follows (in thousands):





**September
                30,**
            
            
            **December
                31**,**2005**
            
            
            **2004**Short-term
                investments:Auction
                rate securities
            
            $
            6,050
            
            $
            6,150Certificates
                of deposit
            
            
            335
            
            
            —Corporate
                bonds
            
            
            1,859
            
            
            1,396U.S.
                government agency notes
            
            
            1,514
            
            
            518Total
                short-term investments
            
            $
            9,758
            
            $
            8,064Long-term
                investments:U.S.
                government agency notes
            
            $
            —
            
            $
            1,032Certificates
                of deposit
            
            
            190
            
            
            —Corporate
                bonds
            
            
            258
            
            
            1,009Total
                long-term investments
            
            $
            448
            
            $
            2,041





**(5)
      PROPERTY AND EQUIPMENT**





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





**September
                  30,**
            
            
            **December
                31**,**2005**
            
            
            **2004**Buildings
                and property
            
            $
            1,713
            
            $
            1,716Telecommunication
                and switching equipment
            
            
            64,322
            
            
            33,968Leasehold
                improvements
            
            
            7,300
            
            
            6,892Fiber
                optic network
            
            
            12,033
            
            
            —Computer
                hardware and software
            
            
            9,007
            
            
            7,638Office
                equipment and other
            
            
            3,810
            
            
            2,722Assets
                held for future use
            
            
            3,570
            
            
            3,296101,755
            
            
            56,232Accumulated
                depreciation and amortization
            
            
            (40,400
            )
            
            (27,206
            )61,355
            
            
            29,026Construction
                in progress
            
            
            4,688
            
            
            3,986Net
                property and equipment
            
            $
            66,043
            
            $
            33,012





Included
      in the table is $32.3 million of property and equipment acquired as a result
      of
      the ICG California acquisition, discussed in Note 3. Depreciation expense for
      the three months ended September 30, 2005 and 2004 was $4.6 million and $2.7
      million, respectively, and for the nine months ended September 30, 2005 and
      2004, depreciation expense was $13.4 million and $8.2 million,
      respectively.





Assets
      held for future use are directly related to the recovery of switch and
      collocation equipment from markets cancelled or exited, primarily during 2002
      and 2001, and continued network enhancements which are expected to be
      re-deployed throughout the Company's remaining operating markets. These assets
      continue to be depreciated and the net book value at September 30, 2005 and
      December 31, 2004 was $1.2 million and $1.4 million, respectively.





**(6)
      GOODWILL AND INTANGIBLE ASSETS**





The
      Company accounts for its goodwill and intangible assets in accordance with
      the
      provisions of SFAS No. 142, "Goodwill and Other Intangible Assets.” SFAS No. 142
      provides that goodwill and other separately recognized intangible assets with
      indefinite lives will no longer be amortized, but will be subject to at least
      an
      annual assessment for impairment through the application of a fair value-based
      test. Intangible assets that do have finite lives will continue to be amortized
      over their estimated useful lives.





11


Intangible
      assets consist of the following (in thousands):


**September
                30,**
              **2005**
            
            **December
                31,**
              **2004**Amortized
                intangible assets:Customer
                relationships
            
            $
            16,301
            
            $
            13,745Internally
                developed software
            
            
            340
            
            
            —Product
                licensing agreement
            
            
            200
            
            
            —16,841
            
            
            13,745Less:
                accumulated amortization:Customer
                relationships
            
            
            (14,384
            )
            
            (11,072
            )Internally
                developed software
            
            
            (85
            )
            
            —Product
                licensing agreement
            
            
            (30
            )
            
            —(14,499
            )
            
            (11,072
            )Amortized
                intangible assets, net
            
            
            2,342
            
            
            2,673Trademark
            
            
            1,694
            
            
            1,694Intangibles,
                net
            
            $
            4,036
            
            $
            4,367





Included
      in the table above are $3.1 million of intangible assets acquired as a result
      of
      the ICG California acquisition, as discussed in Note 3. Of that total amount,
      approximately $2.6 million was assigned to customer relationships, which have
      an
      estimated useful life of 3 years. Of the remainder, $0.3 million was assigned
      to
      software and $0.2 million was assigned to a product licensing agreement, which
      have estimated useful lives of 3 years and 5 years, respectively.





Goodwill
      of $8.9 million also resulted from the ICG California acquisition as discussed
      in Note 3, and was determined based on purchase accounting standards as the
      excess of the purchase price including liabilities assumed over the fair value
      of identifiable assets acquired.





Amortization
      expense related to customer relationships, software and the product licensing
      agreement for the three months ended September 30, 2005 and 2004 was $0.6
      million and $1.1 million, respectively, and for both the nine months ended
      September 30, 2005 and 2004, amortization expense was $3.4 million. The
      trademark was determined to have an indefinite life and is not subject to
      amortization.





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





Remaining
                2005
            
            $
            2522006
            
            
            1,0052007
            
            
            1,0052008
            
            
            402009
            
            
            40$
            2,342





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





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





**September
                30,**
            
            
            **December
                31,****2005**
            
            
            **2004**Deposits
                on operating leases
            
            $
            1,449
            
            $
            1,095Deposits
                on purchase commitments
            
            
            1,349
            
            
            —Deferred
                installation costs
            
            
            1,081
            
            
            1,101Prepaid
                insurance
            
            
            406
            
            
            572Other
            
            
            250
            
            
            396Direct
                acquisition costs
            
            
            —
            
            
            1,110Other
                long-term assets
            
            $
            4,535
            
            $
            4,274


12


During
      June 2005, the Company entered into an asset purchase agreement with IDACOMM,
      a
      subsidiary of IDACORP, Inc., to acquire four strands of dark fiber within a
      fiber network that IDACOMM is currently constructing in Las Vegas, Nevada.
      The
      total purchase commitment for this fiber network is $2.5 million, of which
      $1.3
      million was paid to IDACOMM as a deposit in June 2005. IDACOMM may transfer
      individual segments of the fiber network to the Company as each identifiable
      segment is completed and accepted. As of September 30, 2005, the Company has
      not
      accepted any individual segments of the fiber network. Accordingly, the $1.3
      million deposit has been included within “Deposits on purchase commitments” in
      the above table of other long-term assets.





As
      of
      December 31, 2004, other long-term assets included $1.1 million of direct
      acquisition costs incurred by the Company in preparation for the ICG
      acquisition. In January 2005, the direct acquisition costs were included as
      a
      component of the purchase price for the ICG acquisition, as discussed in Note
      3.





**(8)
      LINE OF CREDIT**





The
      Company’s agreement with a lending institution provides the Company with a
      revolving line of credit facility of up to $7.5 million, secured by certain
      customer accounts receivable. The agreement expires on January 24, 2006. This
      credit facility bears an interest rate equal to the prime lending rate plus
      two
      percent (2%) per annum. At September 30, 2005, the Company had $7.5 million
      in
      availability under this agreement. Interest expense related to the line of
      credit (consisting of the allocable portion of the annual commitment fee) was
      $0.1 million for the three months ended September 30, 2005 and 2004 and $0.2
      million for the nine months ended September 30, 2005 and 2004. The Company
      has
      not borrowed under the line of credit during 2005 and has no outstanding balance
      as of September 30, 2005.





**(9)
      CAPITAL LEASE OBLIGATIONS**





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





**September
                30**,**2005**Capital
                lease obligations
            
            $
            23,679Less
                current portion
            
            
            (538
            )$
            23,141





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





**September
                30**,**2005**Fiber
                optic network
            
            $
            8,033Office
                equipment and other
            
            
            1618,194Less:
                accumulated amortization
            
            
            (429
            )$
            7,765





Pursuant
      to the acquisition of ICG California in January 2005, discussed in Note 3,
      the
      Company assumed certain capital leases of ICG, including certain long-term
      leases for its fiber network, which had a fair value of $26.0 million as of
      January 1, 2005 utilizing an implicit interest rate of 15%. The capital lease
      obligations have terms that range from 2 to 16 years. The following table shows
      the future minimum lease payments under capital leases for each of the next
      five
      years ending December 31 and periods thereafter (in thousands):





Remaining
                2005
            
            $
            1112006
            
            
            4,0592007
            
            
            4,0312008
            
            
            4,0312009
            
            
            3,996Thereafter
            
            
            43,791Total
                minimum lease payments
            
            
            60,019Less:
                amounts representing interest
            
            
            (36,340
            )Net
                present value of capital lease obligations
            
            $
            23,679


13


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





The
      telecommunications and data equipment the Company has acquired from ICG is
      located in various leased facilities. In some cases, the Company has contractual
      obligations to remove certain of the assets associated with these lease
      agreements upon termination of the agreements. SFAS No. 143, “Accounting for
      Asset Retirement Obligations,” requires entities to record the fair value of a
      liability for an asset retirement obligation in the period in which the legal
      or
      contractual removal obligation is incurred. Accordingly, as part of the opening
      balance sheet for the ICG California acquisition, the Company has recorded
      a
      liability and asset for the present value of the estimated future exit costs
      associated with the related asset retirement obligations, which have been
      recorded within other long-term liabilities and property and equipment,
      respectively, in the consolidated balance sheet. The liability was established
      by calculating the present value of the asset retirement obligation using a
      discount rate over a period which is representative of the estimated useful
      life
      of the related assets. Changes in the asset retirement obligation resulting
      from
      the passage of time are recognized as an increase in the carrying amount of
      the
      liability and as accretion expense, which is a component of depreciation and
      amortization on the consolidated statements of operations.





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





Balance
                as of December 31, 2004
            
            $
            —Recognition
                of liability at January 1, 2005
            
            
            336Accretion
            
            
            46Balance
                as of September 30, 2005
            
            $
            382





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





**(11)
      COMMITMENTS AND CONTINGENCIES**





***Lease
      Obligations and Purchase Commitments***





In
      the
      ordinary course of business, the Company enters into purchase agreements with
      its vendors. As of September 30, 2005, the Company had total unfulfilled
      commitments with vendors of $5.5 million. Included in this amount is the
      remaining $1.2 million purchase commitment with IDACOMM, as discussed in Note
      7.
      The Company also has various agreements with certain carriers for transport,
      long distance and other network services. At September 30, 2005, the Company’s
      minimum commitment under these agreements is $17.4 million, which expire through
      December 2026.





On
      January 1, 2005, the Company experienced significant changes in its real estate
      operating lease obligations in connection with the acquisition of ICG
      California, discussed in Note 3. At September 30, 2005, the Company had $8.7
      million of remaining operating lease obligations assumed from ICG, which expire
      through March 2010.





Additionally,
      on February 10, 2005, the Company entered into an amendment to its Las Vegas,
      Nevada switch site lease. In consideration for the Company’s agreement to
      accelerate the expiration date of the lease to an earlier date, the landlord
      paid the Company $7.7 million in cash and agreed to $0.3 million in rent
      abatement from February 1, 2005 through the lease expiration at June 30, 2006.
      The cash was received in February 2005. This $8.0 million settlement, net of
      $0.8 million of estimated costs to exit the facility, has been included in
      other
      income in the consolidated statement of operations for the nine months ended
      September 30, 2005. The impact of this early termination of the existing lease
      as of September 30, 2005, reduced the Company’s lease obligations by
      approximately $0.9 million and changed the lease expiration date from August
      2011 to June 2006. The Company entered into a lease for a new switch site with
      a
      third party during the second quarter of 2005. Over the next two to three
      quarters, the Company expects to use a portion of the $7.7 million one-time
      payment to construct a new switch facility in the Las Vegas market and to cover
      exit costs related to the existing switch site.





Included
      in the table below are obligations for continuing operations as of September
      30,
      2005 (in thousands):





**2005**
            
            
            **2006**
            
            
            **2007**
            
            
            **2008**
            
            
            **2009**
            
            
            **Thereafter**Operating
                lease obligations
            
            $
            1,978
            
            $
            7,698
            
            $
            6,645
            
            $
            4,922
            
            $
            3,641
            
            $
            3,561Circuit
                lease obligations
            
            
            2,009
            
            
            6,523
            
            
            4,569
            
            
            774
            
            
            461
            
            
            3,103Purchase
                commitments
            
            
            4,223
            
            
            1,255
            
            
            —
            
            
            —
            
            
            —
            
            
            —Total
            
            $
            8,210
            
            $
            15,476
            
            $
            11,214
            
            $
            5,696
            
            $
            4,102
            
            $
            6,664





14


As
      provided in the asset sale agreements for the Company’s discontinued markets
      sold to third parties in 2003, the purchasers of these assets assumed the
      liabilities associated with the markets acquired. However, the Company remains
      contingently liable for several of the obligations in these markets. The
      Company is guarantor of future lease obligations with expirations through 2015.
      The guarantees arose from the assignment of leases resulting from the asset
      sales. The Company is fully liable for all obligations under the terms of the
      leases in the event that the assignee fails to pay any sums due under the lease.
      The remaining maximum potential amount of future payments the Company could
      be
      required to make under the guarantees at September 30, 2005 was $8.1 million.
      No
      payments have been made to date and none are expected to be required to be
      made
      in the future. In accordance with FASB Interpretation No. 45, “Guarantor’s
      Accounting and Disclosure Requirements for Guarantees, Including Indirect
      Guarantees of Indebtedness to Others,” the fair value of these obligations is
      limited and accordingly no liability was recorded on the Company’s consolidated
      balance sheet at September 30, 2005 or December 31, 2004.





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





***Litigation***





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





On
      February 17, 2005, a class action lawsuit was commenced against the Company,
      alleging violations of California Labor Code Sections 2802 and 2804. The group
      of plaintiffs attempting to be formed and certified as a class would include
      the
      Company’s sales representatives in California for the past four years. The
      plaintiffs are seeking to recover what they claim to be unreimbursed expenses
      incurred in the performance of their duties, including additional mileage
      reimbursement. The action is pending in Superior Court of the State of
      California for the County of Los Angeles. The Company denies any liability,
      intends to vigorously defend the action, and believes that ultimate damages
      awarded, if any, will not have a material adverse effect on its financial
      position, results of operations or cash flows.





The
      Company was party to an equipment lease dispute that resulted in claims being
      made against the Company and certain of its subsidiaries. On November 1, 2002,
      the plaintiff initiated the first of several actions against the subsidiary
      in
      the Circuit Court of St. Louis County, Missouri, and also filed actions in
      the
      U.S. Bankruptcy Court for the District of Delaware for recovery of claimed
      damages. In July 2005, a settlement was reached for all legal actions and the
      $0.6 million difference between the estimated liability previously recorded
      and
      the settlement amount was reflected as a reduction of selling, general and
      administrative expense on the consolidated statements of operations in the
      second quarter ended June 30, 2005. A contingent liability reserve of $0.8
      million for this matter has been recorded in accrued other expenses on the
      consolidated balance sheet as of September 30, 2005, and reflects the amount
      paid by the Company on October 3, 2005 as per the settlement.





***Interconnection
      Agreements***





In
      the
      ordinary course of business, the Company has negotiated interconnection
      agreements with SBC Corp. (with its California and Illinois subsidiaries),
      Sprint Nevada and Verizon California in each of the markets in which it
      operates. All of these agreements expired in 2004. While the parties negotiate
      new agreements, the existing terms and conditions of these agreements continue
      in full force and effect. These agreements specify the terms and conditions
      under which the Company leases unbundled network elements (“UNEs”) including
      type of UNE, price, delivery schedule, and maintenance and service levels.
      The
      Company has no minimum purchase obligations and pays for only those UNEs it
      orders and receives. While the Company has no performance requirements imposed
      upon it, the incumbent carriers must perform at specified levels, generally
      at a
      parity level with the same services provided to the incumbent's retail
      customers. To the extent the services of the local exchange carriers are used,
      the Company and its customers are subject to the quality of service, equipment
      failures and service interruptions of the local exchange carriers.





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





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





The
      Company maintains reserves for estimated exposure for various sales and use
      taxes that taxing jurisdictions may claim as being owed due to interpretations
      of state and local regulations as well as for positions taken related to the
      underlying taxable base of capital expenditures made in the past by the Company.
      Similarly, reserves are maintained for positions taken on the assessment basis
      used to pay certain property taxes to various state and local taxing
      jurisdictions. The Company believes that all such reserves are appropriately
      recorded in accordance with the provisions of SFAS No. 5, “Accounting for
      Contingencies,” at September 30, 2005.


15


**(12)
      STOCKHOLDERS’ EQUITY**





The
      Company maintains a warrant program which makes available to independent sales
      agents engaged by the Company, warrants to purchase shares of the Company’s
      common stock, with the number of warrants to be granted based on the increase
      in
      baseline sales performance achieved by these independent sales agents. For
      the
      three and nine months ended September 30, 2005, the Company issued warrants
      to
      purchase 192,645 and 545,483 shares of common stock through this program with
      a
      weighted average exercise price of $1.39 and $1.49 per common share,
      respectively. These warrants are exercisable at any time and expire three years
      from the issuance date. For the three and nine months ended September 30, 2005,
      $0.1 million and $0.3 million of agent selling expense was recognized,
      respectively, as a result of the issuance of these warrants. Agent selling
      expense is included as a component of selling, general and administrative
      expenses in the consolidated statements of operations. The amount of expense
      recognized was determined using the Black-Scholes method to calculate fair
      market value, with the following assumptions: dividend yield of 0%; expected
      warrant life of 3 years; risk free interest rate ranging from 3.39% to 4.08%;
      and an expected volatility ranging from 52% to 55%.





During
      September 2005, the Company filed with the Securities and Exchange Commission
      a
      registration statement on Form S-8 to register 11,500,000 shares of the
      Company’s common stock issuable by the Company upon the exercise of options and
      other stock-based awards that have been granted or may be granted under the
      Company’s 2005 Long-Term Incentive Plan (“the 2005 Plan”). The 2005 Plan
      replaces the Company’s previous non-stockholder approved plans, the Mpower
      Holding Corporation Stock Option Plan I and Mpower Holding Corporation Stock
      Option Plan II (together, the “Prior Plans”) and became effective upon approval
      of the stockholders on August 16, 2005 at the Company’s annual stockholders
      meeting. Additionally during September 2005, the Company filed Post-Effective
      Amendment No. 1 to Form S-8 to deregister a total of 2,460,954 unissued shares
      of the Company’s common stock that had been available for issuance under the
      Prior Plans since no further options may be granted under the Prior Plans.
      The
      prior registration statement remains in effect for outstanding options under
      the
      Prior Plans.





During
      May 2005, the Company filed with the Securities and Exchange Commission a
      registration statement on Form S-3 for the benefit of ICG and MCCC as the
      selling stockholders under the registration statement. The registration
      statement was declared effective by the SEC on May 13, 2005. The registration
      statement was required to be filed by the terms of the asset purchase agreement
      and related agreement entered into as a part of the ICG California acquisition,
      as discussed in Note 3. The selling stockholders may offer the shares of the
      Company’s common stock registered by the prospectus. The registration statement
      covers the possible resale of (A) 1,988,894 shares of common stock issued
      pursuant to the terms of a Subscription Agreement, dated as of January 1, 2005,
      by and between the Company and MCCC, (B) 10,740,030 shares of common stock
      issued pursuant to the terms of the asset purchase agreement, dated as of
      October 22, 2004, by and among the Company, MCCC and ICG and (C) 2,000,000
      shares of common stock issuable upon exercise of warrants issued pursuant to
      the
      asset purchase agreement. The Company will not receive any of the proceeds
      from
      the sale of the common shares pursuant to the registration
      statement.





**(13)
      DISCONTINUED OPERATIONS**





The
      Company’s September 30, 2005 consolidated balance sheet reflects a $0.5 million
      receivable related to asset sales from discontinued markets. This receivable
      has
      been included in other receivables in the consolidated balance sheets and the
      balance is being held in escrow by a third party escrow agent. No allowance
      for
      doubtful accounts for this receivable has been established as the Company
      received a disbursement of $1.0 million from escrow in March 2005 and expects
      to
      receive the remaining $0.5 million, net of expenses chargeable to the Company
      of
      $0.3 million included in accrued other expenses on the consolidated balance
      sheet, before the end of 2005.





The
      operating revenues and expenses of the Company’s discontinued markets have been
      classified as discontinued operations under
      SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,”
      for all periods presented. ( Loss)
      income related to these discontinued markets was as follows for the three and
      nine months ended September 30, 2005 and 2004 (in thousands):





**Three
                Months Ended**
            
            **Nine
                Months Ended****September
                30,**
            
            **September
                30,****2005**
            
            **2004**
            
            **2005**
            
            **2004**Operating
                revenues
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            3Operating
                expenses (income)
            
            
            32
            
            
            (508
            )
            
            67
            
            
            (689
            )Gain
                on disposal of assets
            
            
            —
            
            
            —
            
            
            —
            
            
            (50
            )(Loss)
                income from discontinued operations
            
            $
            (32
            )
            $
            508
            
            $
            (67
            )
            $
            742





16


**(14)
      LOSS PER COMMON SHARE**





SFAS
      No
      128, "Earnings Per Share," requires the Company to calculate its income (loss)
      per common share based on basic and diluted income (loss) per common share,
      as
      defined. Basic and diluted loss per common share for the three and nine months
      ended September 30, 2005 and 2004 was computed by dividing the loss applicable
      to common stockholders by the weighted average number of shares of common stock
      outstanding during the period.





For
      the
      three and nine months ended September 30, 2005 and 2004, the Company incurred
      losses from continuing operations. As a result of the losses, as of September
      30, 2005 and 2004, the Company had outstanding 26,171,673 and 21,728,256 options
      and warrants, respectively, which were convertible into common shares that
      were
      not included in the calculation of diluted loss per common share because the
      effect would be antidilutive.





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





**Three
                Months Ended**
            
            **Nine
                Months Ended****September
                30,**
            
            **September
                30,****2005**
            
            **2004**
            
            **2005**
            
            **2004****Basic
                and diluted loss per common share**Loss
                from continuing operations
            
            $
            (2,279
            )
            $
            (1,854
            )
            $
            (2,698
            )
            $
            (3,755
            )(Loss)
                income from discontinued operations
            
            
            (32
            )
            
            508
            
            
            (67
            )
            
            742Net
                loss
            
            $
            (2,311
            )
            $
            (1,346
            )
            $
            (2,765
            )
            $
            (3,013
            )Weighted
                average common shares outstanding
            
            
            91,473,028
            
            
            78,476,418
            
            
            91,415,956
            
            
            78,405,511Basic
                and diluted loss from continuing operations per common
                share
            
            $
            (0.03
            )
            $
            (0.02
            )
            $
            (0.03
            )
            $
            (0.05
            )Basic
                  and diluted (loss) income from discontinued operations per common
                  share
            
            
            (0.00
            )
            
            0.00
            
            
            (0.00
            )
            
            0.01Basic
                and diluted net loss per common share
            
            $
            (0.03
            )
            $
            (0.02
            )
            $
            (0.03
            )
            $
            (0.04
            )





**(15)
      OPERATING SEGMENTS**





*Reportable
      Segments*





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





*Products
      and Services*





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





**Three
                Months Ended**
            
            **Nine
                Months Ended****September
                30,**
            
            **September
                30,****2005**
            
            **2004**
            
            **2005**
            
            **2004**Plain
                old telephone service (“POTS”)/DSL
            
            $
            20,399
            
            $
            21,296
            
            $
            62,160
            
            $
            64,793T1
                based products and services
            
            
            15,873
            
            
            9,175
            
            
            43,896
            
            
            24,705Private
                lines
            
            
            4,527
            
            
            —
            
            
            13,116
            
            
            —Long
                distance and other usage
            
            
            5,009
            
            
            3,889
            
            
            14,891
            
            
            11,216Switched
                access
            
            
            3,341
            
            
            3,233
            
            
            10,074
            
            
            12,528Total
                operating revenue
            
            $
            49,149
            
            $
            37,593
            
            $
            144,137
            
            $
            113,242






17


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





**Introduction**





The
      following Management's Discussion and Analysis ("MD&A") is written to help
      the reader understand our company. The MD&A is provided as a supplement to,
      and should be read in conjunction with, our unaudited condensed consolidated
      financial statements, the accompanying condensed financial notes ("Notes")
      appearing elsewhere in this report and our annual report on Form 10-K for the
      year ended December 31, 2004. The overview provides our perspective on the
      individual sections of MD&A, which include the following:





*Executive
      Summary -* an
      executive review of our performance for the three and nine months ended
      September 30, 2005.





*Company
      Overview -* a
      general
      description of our business, the services we offer, the markets we serve, and
      our January 1, 2005 acquisition of certain assets from ICG Communications,
      Inc.
      (“ICG”).





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





*Results
      from Continuing Operations* - an
      analysis of our results of operations for the three and nine months ended
      September 30, 2005 and 2004, including a review of the material items and known
      trends and uncertainties.





*Discontinued
      Operations* - an
      analysis of our discontinued operations for the three and nine months ended
      September 30, 2005.





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





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





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





**Executive
      Summary**





Our
      total
      operating revenues for the third quarter of 2005 were $49.1 million, up 4%
      over
      the second quarter of 2005, and up 31% over the third quarter of 2004. Core
      customer revenues were $45.8 million in the third quarter of 2005 compared
      to
      $44.2 million and $34.4 million in the second quarter of 2005 and third quarter
      of 2004, respectively. We implemented a price increase in the third quarter
      of
      2005 that resulted in $0.7 million of additional revenue in the quarter. Total
      operating revenue and core customer revenues for the third quarter of 2004
      do
      not include revenue from the ICG California customer base acquired on January
      1,
      2005.





Continuing
      the evolution from a plain old telephone service (“POTS”) and DSL business to a
      facilities-based T1 platform company, T1 based recurring customer revenue
      increased 10% over the second quarter of 2005. This growth is due to a number
      of
      factors including our sales efforts across all channels, T1 customer churn
      of
      only 1.6% in the third quarter of 2005 and the price increase implemented in
      August 2005 which increased third quarter T1 platform revenues by $0.3 million.
      Our T1 platform products now represent 50% of our total monthly recurring
      revenue with 77% of our third quarter 2005 new recurring revenue being installed
      on our T1 platform.





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


**Three
                  Months Ended**
              
              **Nine
                  Months Ended****September
                  30,**
              
              **September
                  30,****2005**
              
              **2004**
              
              **2005**
              
              **2004**Plain
                  old telephone service (“POTS”)/DSL
              
              $
              20,399
              
              $
              21,296
              
              $
              62,160
              
              $
              64,793T1
                  based products and services
              
              
              15,873
              
              
              9,175
              
              
              43,896
              
              
              24,705Private
                  lines
              
              
              4,527
              
              
              —
              
              
              13,116
              
              
              —Long
                  distance and other usage
              
              
              5,009
              
              
              3,889
              
              
              14,891
              
              
              11,216Switched
                  access
              
              
              3,341
              
              
              3,233
              
              
              10,074
              
              
              12,528Total
                  operating revenue
              
              $
              49,149
              
              $
              37,593
              
              $
              144,137
              
              $
              113,242
 18
 We
          continue to be challenged in our ability to grow our direct sales force.
          We
          ended the third quarter of 2005 with 131 quota-carrying sales people. This
          compares to 145 at June 30, 2005. Our training and recruiting efforts are
          focused on obtaining sales people who will be productive and long-term,
          and we
          continue to aggressively look for qualified candidates to add to our direct
          sales force. Excluding quota-carrying sales people, our headcount increased
          from
          June 30, 2005 by 4 to 720 at September 30, 2005.
  In
          addition to our direct sales force and our growing agent channel, we see
          the
          need to sell more through “partner” channels such as value-added resellers or
          equipment systems integrators as we evolve to selling into larger business
          customers. We are investing in project management resources, enhanced back
          office systems and dedicated sales and engineering resources to support
          this
          sales channel opportunity.





We
      have
      been working over the past several months to transition to a new IP application
      platform. While we have offered voice over internet protocol (“VOIP”) in our
      network for over four years, we will now focus even more on making VOIP a key
      component of our service offerings. We believe our ability to package our
      broadband product set with our hosted IP Private Branch Exchange (“PBX”)
      capability, having our own network and extensive customer and field support
      capabilities will differentiate us in the market. We expect a full rollout
      of
      our new VOIP services during the first quarter of 2006.





At
      September 30, 2005, we believe we are poised to fully benefit from the
      integration of ICG’s California customer base and network. All significant
      back-office functions have now been integrated into the Mpower system and all
      customer traffic has been re-routed from ICG’s switch facilities to our network.
      We are pleased that these conversions have been largely on our expected
      timetable and with minimal impact to our customers.





We
      continue to make progress on our various network initiatives including the
      installation of a new soft switch in Los Angeles (now completed and ready for
      traffic), the construction of a new switch facility in Las Vegas to replace
      the
      existing facility in that market, build-out of our fiber network in Las Vegas
      that will put our switch and 12 Las Vegas market collocations on owned fiber,
      and various other network grooming activities designed to lower our operating
      costs and position us for adding further growth onto our fixed network. We
      will
      also complete the renovation of our network operations center (“NOC”) in
      November 2005.





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





We
      ended
      the third quarter of 2005 with $26.4 million of unrestricted cash, cash
      equivalents and investments available-for-sale, as compared to $32.4 million
      at
      the end of the second quarter of 2005. This decrease was expected and reflects
      our results from operations, changes in working capital accounts, third quarter
      cash outlays for capital expenditures of $5.6 million and scheduled capitalized
      lease payments of $2.2 million made in the quarter.




We
      continue to believe that we are well-positioned to create value for our
      shareholders in any future consolidations because of our broad service offerings
      in our Tier One markets, our debt-free balance sheet and incremental operating
      income margins.





**Company
      Overview**





We
      were
      one of the first facilities-based competitive local telephone companies founded
      after the inception of the Telecommunications Act of 1996, which opened up
      the
      local telephone market to competition. Today, we offer local and long distance
      voice services as well as high-speed Internet access and voice over internet
      protocol (“VOIP”) by way of a variety of broadband product and service offerings
      over our own network of collocations, switches and fiber network. On January
      1,
      2005, we acquired certain assets and assumed certain liabilities of ICG. The
      assets acquired include ICG’s customer base and certain network assets in
      California, including a 1,412 route mile state-wide fiber ring and 915 miles
      of
      metropolitan fiber rings that connect 128 commercial buildings. All of our
      services are offered through our wholly-owned subsidiary, Mpower Communications
      Corp. (“Communications”) primarily to small and medium-sized business customers
      in all of our markets and residential customers primarily in the Las Vegas
      market. Our markets include Los Angeles, California, San Diego, California,
      Northern California (the San Francisco Bay area and Sacramento), Las Vegas,
      Nevada and Chicago, Illinois.





As
      a
      facilities-based provider, we own and control a substantial amount of our
      network infrastructure. Our network reaches across 297 central office
      collocation sites. In April 2004, we began selling T1 services to customers
      using facilities that do not directly connect to these collocation sites. We
      refer to this as “off-network.” Having off-network facilities increases the
      number of our potential customers. We have seven switches in our network,
      including one Lucent “soft switch” we installed in our Los Angeles market in
      September 2005. A soft switch enables us to provide more features to our
      customers at lower on-going operating costs and less capital expenditures than
      traditional Class 5 switch equipment.





The
      addition of the ICG California assets in January 2005, including a statewide
      SONET-based fiber network in California, and the June 2005 agreement to purchase
      a 141 route mile fiber network with three survivable rings in Las Vegas will
      add
      to our deep collocation and switching infrastructure. These network additions
      allow us to offer new products such as private line, accelerate our
      speed-to-market with IP Centrex capabilities, including VOIP, position us as
      a
      strong player in the wholesale market, and reduce our reliance on the
      ILECs.





19




As
      of
      November 2005, we have approximately 845 employees. We have established working
      relationships with Verizon, Sprint, and SBC (including its operating
      subsidiaries PacBell and Ameritech).




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





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





***ICG
      California Acquisition***





On
      January 1, 2005, we completed the acquisition of certain assets and assumption
      of certain liabilities of ICG in California. The assets acquired include ICG’s
      customer base and certain network assets in California, including a 1,412 route
      mile state-wide fiber ring connecting major cities in California. We have
      already integrated most of ICG California’s key operations into ours and expect
      to fully integrate the ICG California assets with our business during the
      remainder of 2005.





We
      purchased these assets for $16.6 million excluding liabilities assumed,
      comprised of (i) $14.1 million in the form of 10,740,030 shares of our common
      stock, (ii) $1.2 million in the form of warrants dated January 1, 2005, to
      purchase another 2,000,000 shares of our common stock exercisable on or prior
      to
      the fifth anniversary of the date of issuance at an exercise price of $1.38
      per
      share and (iii) $1.3 million of direct acquisition costs (described below).
      We
      also assumed certain of ICG’s capital lease obligations in California, including
      its long-term leases for its fiber network which had a fair value of $26.0
      million as of January 1, 2005. The $14.1 million value of 10,740,030 shares
      of
      common stock was determined using an average stock price of $1.31 during the
      three days before and three days after the date the acquisition was announced.
      The fair value of the warrants was determined using the Black-Scholes method,
      with the following assumptions: dividend yield of 0%; expected warrant life
      of 5
      years; risk free interest rate of 3.35%; and an expected volatility of
      57%.





Upon
      completion of the ICG California acquisition on January 1, 2005, consideration
      was paid and we took title to that business. We retained independent appraisers
      to assist us in determining the fair value of certain assets acquired and
      liabilities assumed as required under SFAS No. 141, “Business Combinations.” The
      final valuation was completed in the second quarter of 2005 and resulted in
      adjustments consisting of changes from the January 1, 2005 estimated fair values
      reflected in our first quarter 2005 consolidated financial statements. At
      September 30, 2005, certain components of purchase accounting related to final
      reconciliation of the amounts to be recognized under the management services
      agreement with ICG are still considered to be preliminary and represent
      management’s best estimate of current values, which are subject to revision;
      however, no material changes in estimates are anticipated to be required. The
      following are the adjustments made to the estimated fair value of assets
      acquired and liabilities assumed as of the closing date (in
      thousands):






20




**Assets
                    Acquired**
                
                
                **Initial****Estimate
                    ***
                
                
                **Adjustments**
                
                
                **Revised****Estimate**Accounts
                    receivable
                
                $
                1,526
                
                $
                —
                
                $
                1,526Other
                    receivables
                
                
                301
                
                
                —
                
                
                301Prepaid
                    expenses and other current assets
                
                
                55
                
                
                5
                
                
                60Property
                    and equipment
                
                
                29,771
                
                
                2,528
                
                
                32,299Goodwill
                
                
                5,301
                
                
                3,560
                
                
                8,861Other
                    intangibles
                
                
                3,420
                
                
                (324
                )
                
                3,096Other
                    long-term assets
                
                
                255
                
                
                (5
                )
                
                250Total
                    assets acquired
                
                
                40,629
                
                
                5,764
                
                
                46,393**Liabilities
                    Assumed**Current
                    maturities of capital lease obligations
                
                
                2,077
                
                
                399
                
                
                2,476Deferred
                    revenue
                
                
                1,526
                
                
                87
                
                
                1,613Accrued
                    other expenses
                
                
                1,652
                
                
                71
                
                
                1,723Long-term
                    capital lease obligations
                
                
                19,105
                
                
                4,421
                
                
                23,526Long-term
                    deferred revenue
                
                
                —
                
                
                78
                
                
                78Asset
                    retirement obligations
                
                
                336
                
                
                —
                
                
                336Total
                    liabilities assumed
                
                
                24,696
                
                
                5,056
                
                
                29,752Total
                    purchase price (exclusive of liabilities assumed)
                
                $
                15,933
                
                $
                708
                
                $
                16,641


*
            As
                reported by us prior to the completion of the independent
                valuation.






The
      assets of ICG California consist primarily of:





•
            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.





Of
      the
      $3.1 million of acquired other intangible assets, approximately $2.6 million
      was
      assigned to ICG California’s customer base, which has an estimated useful life
      of 3 years. Approximately $0.3 million was assigned to ICG California’s acquired
      software that has an estimated useful life of 3 years and approximately $0.2
      million was assigned to a product licensing agreement with a useful life of
      5
      years. Additionally, $8.9 million was assigned to goodwill.





The
      ICG
      transaction described above involved a management services agreement and a
      transition services agreement that maintained the continuity of the ICG
      operations in California and prepared for the transfer of required business
      functions to us. Under the management services agreement, we reimbursed ICG
      for
      the cost of specific services provided by ICG on our behalf between the date
      the
      definitive agreement was signed (October 22, 2004) and final closing (January
      1,
      2005). We recognized gross direct acquisition costs of $0.5 million for services
      and fees incurred under the management services agreement. The management
      services agreement also provided that the operating results of the ICG
      California operations accrued to our benefit during the period of the agreement.
      During this period, ICG’s California operations generated operating income of
      $0.3 million, which has been recorded as an offset to the gross direct
      acquisition costs we incurred under the management services agreement. We
      recorded additional direct acquisition costs of $1.1 million primarily for
      legal
      and consulting fees incurred in connection with the ICG California acquisition.
      The $1.3 million of net direct acquisition costs described above has been
      included as a component of the purchase price in accordance with SFAS No. 141,
      “Business Combinations.”





Commencing
      on the transaction closing date, January 1, 2005, certain services have been
      provided by ICG to us under a transition services agreement providing for
      services through December 31, 2005. For the nine months ended September 30,
      2005, we incurred $1.3 million of expense under the transition services
      agreement, primarily related to accounting, billing, collections, provisioning,
      call center and network support services performed by ICG on our behalf, which
      are included in selling, general and administrative expenses in our consolidated
      statements of operations. The expense incurred under the transition services
      agreement for the three months ended September 30, 2005 was minimal. A reduced
      amount of these transition services are expected to be provided through the
      fourth quarter of 2005, therefore we anticipate incurring minimal additional
      expenses for this item in the future.


21


At
      September 30, 2005, approximately $0.4 million of cash has been received by
      ICG
      from customer payments on our behalf, which amounts are to be remitted to us
      under the terms of the transition services agreement. This amount is recorded
      on
      our consolidated balance sheet in other receivables and we expect to receive
      this amount in the fourth quarter of 2005, net of amounts due to ICG under
      the
      transition services agreement and other operating expenses paid on our behalf
      by
      ICG.





**Liquidity
      and Capital Resources**





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





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





Developing
      and maintaining our network and business has required and will continue to
      require us to incur capital expenditures primarily consisting of the costs
      of
      purchasing network and customer premise equipment and maintaining our operations
      support system. Cash outlays for capital expenditures for the three and nine
      months ended September 30, 2005 were $5.6 million and $13.4 million,
      respectively, which is exclusive of capitalized labor of $0.5 million and $1.3
      million for the three and nine months ended September 30, 2005, respectively.
      In
      June 2005, we paid a $1.3 million deposit, which is approximately one half
      of
      the total purchase price, for a 141-route mile fiber network with three fully
      survivable rings in Las Vegas. This deposit is recorded as an other long-term
      asset on our September 30, 2005 consolidated balance sheet and will be
      recognized as a capital expenditure when the conditions of the purchase
      agreement are met. This is expected to be in the first quarter of
      2006.





As
      of
      September 30, 2005, we had $26.4 million in unrestricted cash and cash
      equivalents and short and long-term investments available-for-sale. We believe
      that our cash balances, when combined with our cash flow from operations will
      generate enough liquidity to fully fund our operations and our capital
      expenditures on a continuing basis. Based on our current business plan, we
      do
      not expect to draw from our $7.5 million line of credit during the remainder
      of
      2005. The line of credit expires on January 24, 2006. Our investments
      available-for-sale consist of auction rate securities, government agency notes,
      certificates of deposit and corporate bonds. All investments are made in
      accordance with our investment policy and guidelines approved by our board
      of
      directors.





*Cash
      Flow Discussion*





In
      summary, our cash flows for the nine months ended September 30, 2005, were
      as
      follows (in thousands):





**Nine
                Months E****nded**
              **September
                30, 2005**Net
                cash provided by operating activities
            
            $
            3,430Net
                cash used in investing activities
            
            $
            (14,341
            )Net
                cash used in financing activities
            
            $
            (196
            )





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




At
      September 30, 2005, cash, cash equivalents and short and long-term investments
      available-for-sale were $26.4 million. This balance has the following components
      (in thousands):





Cash
                and cash equivalents
            
            $
            16,220Investments
                available-for-sale
            
            
            9,758Long-term
                investments available-for-sale
            
            
            448Total
                at September 30, 2005
            
            $
            26,426





22


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





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


**Nine
                Months Ended**
              **September
                30,****2005**
            
            **2004**Net
                cash provided by operating activities
            
            $
            3,430
            
            $
            8,887Cash
                flows from investing activities:Purchases
                of property and equipment, net of payables
            
            $
            (13,421
            )
            $
            (4,504
            )Deposits
                on property and equipment purchase commitments
            
            
            (1,349
            )
            
            —Costs
                associated with business acquisition
            
            
            (379
            )
            
            —Proceeds
                from sale of assets from continuing operations
            
            
            155
            
            
            385Receipt
                of escrowed amounts from sale of assets from discontinued
                operations
            
            
            1,000
            
            
            63Purchase
                of investments available-for-sale
            
            
            (1,451
            )
            
            —Sale
                of investments available-for-sale
            
            
            1,250
            
            
            —(Purchase)
                sale of restricted investments, net
            
            
            (146
            )
            
            137Net
                cash used in investing activities
            
            $
            (14,341
            )
            $
            (3,919
            )





*Operating
      Activities:* Cash
      flows from operating activities were $ 3.4 million
      for the nine months ended September 30, 2005. This is a decrease of $5.5 million
      compared to the nine months ended September 30, 2004. The decrease is primarily
      a result of an increase in accounts receivable due to the increased revenue
      generated from adding the ICG California customers, a reduction in accounts
      payable due to significant payments for services delivered at the end of 2004
      not paid for until the first quarter 2005, and timing differences in other
      working capital accounts. These decreases more than offset the $7.7 million
      we
      received in February 2005 for the Las Vegas switch site lease amendment. The
      Las
      Vegas switch site lease amendment and related impact on cash will not be
      recurring.





*Investing
      Activities:* For
      the
      nine months ended September 30, 2005 we used $14.3 million in cash for investing
      activities compared to $3.9 million for the nine months ended September 30,
      2004. The cash used in 2005 primarily represents the investment of $13.4 million
      in capital expenditures and the $1.3 million initial deposit made for the
      purchase of the Las Vegas market fiber ring, partially offset by $1.0 million
      of
      funds received from escrowed amounts related to previous asset sales from
      discontinued operations.





***Cash
      Flows from Financing Activities***





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


**Nine
                Months Ended**
              **September
                30,****2005**
            
            **2004**Cash
                flows from financing activities:Costs
                associated with line of credit
            
            $
            (262
            )
            $
            —Payments
                on capital lease obligations
            
            
            (2,479
            )
            
            (256
            )Proceeds
                from the issuance of common stock, net of costs
            
            
            2,545
            
            
            58Net
                cash used in financing activities
            
            $
            (196
            )
            $
            (198
            )





*Financing
      Activities:* For
      the
      nine months ended September 30, 2005, we used $0.2 million of cash for financing
      activities. The cash used in 2005 primarily represents cash paid for capital
      lease obligations offset by the proceeds from the issuance of common stock
      to
      MCCC ICG Holdings, LLC (“MCCC”) in connection with the acquisition of ICG
      California. Cash paid for capital lease obligations increased in 2005 as a
      result of the assumption of the capital lease obligations in connection with
      the
      ICG California acquisition and the timing of payments made on the capital lease
      obligations in 2005.





*Commitments
      and Contingencies*





In
      the
      ordinary course of business, we enter into purchase agreements with our vendors.
      As of September 30, 2005, we had total unfulfilled commitments with vendors
      of
      $5.5 million. Included in this amount is the remaining $1.2 million purchase
      commitment with IDACOMM for the Las Vegas market fiber ring. We also have
      various agreements with certain carriers for transport, long distance and other
      network services. At September 30, 2005, our minimum commitments under these
      agreements are $17.4 million, which expire through December
      2026.


23


On
      January 1, 2005 we experienced significant changes in our real estate operating
      lease obligations with the acquisition of ICG California. At September 30,
      2005,
      we had $8.7 million of remaining operating lease obligations assumed from ICG,
      which expire through March 2010.





Additionally,
      in February 2005, we entered into an amendment to our Las Vegas, Nevada switch
      site lease as described above. In consideration for our agreement to accelerate
      the expiration date of the lease to an earlier date, the landlord paid us $7.7
      million in cash and agreed to $0.3 million in rent abatement from February
      1,
      2005 through the lease expiration at June 30, 2006. The impact of this early
      termination reduced our lease obligations by approximately $0.9 million and
      changed our lease expiration date from August 2011 to June 2006. We entered
      into
      a lease for a new switch site with a third party during the second quarter
      2005.
      Over the next two to three quarters, we expect to use a portion of the $7.7
      million one-time payment to construct a new switch facility in the Las Vegas
      market and to cover exit costs related to the existing switch site.





Pursuant
      to the acquisition of ICG California in January 2005, we assumed certain capital
      leases of ICG, including certain long-term leases for its fiber network, which
      had a fair value of $26.0 million as of January 1, 2005. The assumed capital
      lease obligations have terms that range from 2 to 16 years.





Included
      in the table below are obligations for continuing operations as of September
      30,
      2005 (in thousands):





**2005**
            
            **2006**
            
            **2007**
            
            **2008**
            
            **2009**
            
            **Thereafter**Operating
                lease obligations
            
            $
            1,978
            
            $
            7,698
            
            $
            6,645
            
            $
            4,922
            
            $
            3,641
            
            $
            3,561Circuit
                lease obligations
            
            
            2,009
            
            
            6,523
            
            
            4,569
            
            
            774
            
            
            461
            
            
            3,103Purchase
                commitments
            
            
            4,223
            
            
            1,255
            
            
            —
            
            
            —
            
            
            —
            
            
            —Capital
                lease obligations, including interest
            
            
            111
            
            
            4,059
            
            
            4,031
            
            
            4,031
            
            
            3,996
            
            
            43,791Total
            
            $
            8,321
            
            $
            19,535
            
            $
            15,245
            
            $
            9,727
            
            $
            8,098
            
            $
            50,455





As
      provided in the asset sale agreements for the discontinued markets sold to
      third
      parties in 2003, the purchasers of these assets assumed the liabilities
      associated with the markets acquired. However, we remain contingently liable
      for
      several of the obligations in these markets. We are
      guarantor of future lease obligations with expirations through 2015. The
      guarantees arose from the assignment of leases associated with the asset sales.
      We are fully liable for all obligations under the terms of the leases in the
      event that the assignee fails to pay any sums due under the lease. The remaining
      maximum potential amount of future payments we could be required to make under
      the guarantees at September 30, 2005 was $8.1 million. No payments have been
      made to date and none are expected to be required to be made in the future.
      In
      accordance with FASB Interpretation No. 45, “Guarantor’s Accounting and
      Disclosure Requirements for Guarantees, Including Indirect Guarantees of
      Indebtedness to Others,” the fair value of these obligations is limited and
      accordingly no liability was recorded on our consolidated balance sheet at
      September 30, 2005 or December 31, 2004.





**Results
      from Continuing Operations**


*Analysis
        of Consolidated Statements of Operations for the three months ended September
        30, 2005 and 2004* (in
        millions):


**Three
                Months Ended**
              **September
                30, 2005**
            
            **Three
                Months Ended**
              **September
                30, 2004**
            
            **Percentage
                Change Increase/****(Decrease)****%
                ofRevenue**
            ****
            ****
            ****
            ****
            
            **%
                ofRevenue**
            ****
            ****
            **2005
                vs.2004**Operating
                revenuesCore
                customer trade revenue
            
            $
            45.8
            
            
            93
            %
            $
            34.4
            
            
            91
            %
            
            33
            %Switched
                access revenue
            
            
            3.3
            
            
            7
            %
            
            3.2
            
            
            9
            %
            
            3
            %Total
                revenue
            
            
            49.1
            
            
            100
            %
            
            37.6
            
            
            100
            %
            
            31
            %Cost
                of operating revenues (1)
            
            
            23.0
            
            
            47
            %
            
            18.0
            
            
            48
            %
            
            28
            %Selling,
                general and administrative expenses (2)
            
            
            22.6
            
            
            46
            %
            
            17.7
            
            
            47
            %
            
            28
            %Other
                operating expenses
            
            
            5.1
            
            
            10
            %
            
            3.8
            
            
            10
            %
            
            34
            %Loss
                from operations
            
            
            (1.6
            )
            
            *
            
            
            (1.9
            )
            
            *
            
            
            16
            %Other
                income (expense):Interest
                income
            
            
            0.2
            
            
            *
            
            
            0.1
            
            
            *
            
            
            100
            %Interest
                expense
            
            
            (0.9
            )
            
            *
            
            
            —
            
            
            *
            
            
            *Other
                expense
            
            
            —
            
            
            *
            
            
            —
            
            
            *
            
            
            *Loss
                from continuing operations
            
            
            (2.3
            )
            
            *
            
            
            (1.8
            )
            
            *
            
            
            28
            %Discontinued
                operations:(Loss)
                income from discontinued operations
            
            
            —
            
            
            *
            
            
            0.5
            
            
            *
            
            
            *Net
                loss
            
            $
            (2.3
            )
            
            *
            
            $
            (1.3
            )
            
            *
            
            
            77
            %


24




*
            Calculation
                is not meaningful.(1)
            Exclusive
                of depreciation and amortization of $3,970 and $2,024 for the three
                months
                ended September 30, 2005 and 2004, respectively.(2)
            Exclusive
                of depreciation and amortization of $1,195 and $1,851 for the three
                months
                ended September 30, 2005 and 2004,
                respectively.





*Analysis
      of Consolidated Statements of Operations for the nine months ended September
      30,
      2005 and 2004* (in
      millions):




**Nine
                Months**
              **Ended**
              **September
                30, 2005**
            
            **Nine
                Months**
              **Ended**
              **September
                30, 2004**
            
            **Percentage
                Change Increase/****(Decrease)****%
                ofRevenue**
            
            
            
            
            
            **%
                of****Revenue**
            
            
            **2005
                vs.****2004**Operating
                revenuesCore
                customer trade revenue
            
            $
            134.0
            
            
            93
            %
            $
            100.7
            
            
            89
            %
            
            33
            %Switched
                access revenue
            
            
            10.1
            
            
            7
            %
            
            12.5
            
            
            11
            %
            
            (19
            )%Total
                revenue
            
            
            144.1
            
            
            100
            %
            
            113.2
            
            
            100
            %
            
            27
            %Cost
                of operating revenues (1)
            
            
            67.0
            
            
            46
            %
            
            52.1
            
            
            46
            %
            
            29
            %Selling,
                general and administrative expenses (2)
            
            
            68.3
            
            
            47
            %
            
            53.5
            
            
            47
            %
            
            28
            %Other
                operating expenses
            
            
            16.6
            
            
            12
            %
            
            11.3
            
            
            10
            %
            
            47
            %Loss
                from operations
            
            
            (7.8
            )
            
            *
            
            
            (3.7
            )
            
            *
            
            
            (111
            )%Other
                income (expense):Interest
                income
            
            
            0.6
            
            
            *
            
            
            0.3
            
            
            *
            
            
            100
            %Interest
                expense
            
            
            (2.8
            )
            
            *
            
            
            (0.2
            )
            
            *
            
            
            *Other
                income (expense)
            
            
            7.3
            
            
            5
            %
            
            (0.1
            )
            
            *
            
            
            *Loss
                from continuing operations
            
            
            (2.7
            )
            
            *
            
            
            (3.7
            )
            
            *
            
            
            27
            %Discontinued
                operations:(Loss)
                income from discontinued operations
            
            
            (0.1
            )
            
            *
            
            
            0.7
            
            
            *
            
            
            (114
            )%Net
                loss
            
            $
            (2.8
            )
            
            *
            
            $
            (3.0
            )
            
            *
            
            
            (7
            )%





*
            Calculation
                is not meaningful.(1)
            Exclusive
                of depreciation and amortization of $11,559 and $5,926 for the nine
                months
                ended September 30, 2005 and 2004, respectively.(2)
            Exclusive
                of depreciation and amortization of $5,197 and $5,729 for the nine
                months
                ended September 30, 2005 and 2004,
                respectively.





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




**Comparison
      of Financial Results**




Our
      operational results for the three months ended September 30, 2005 are discussed
      below. As the acquisition of the ICG California business closed on January
      1,
      2005, results of operations from the ICG California business are included for
      the three months ended September 30, 2005, but not for three months ended
      September 30, 2004. In parts of our analysis we have included some insight
      into
      how our pre-ICG California business performed in the quarter ended September
      30,
      2005. As we more fully integrate this acquired business in future quarters,
      only
      consolidated results will be reported.





Results
      from discontinued operations have been excluded from this
      comparison.






25




***Operating
      Revenues.*** Revenue
      for the quarter ended September 30, 2005 was $49.1 million as compared to
      $37.6 **** million
      for the quarter ended September 30, 2004. The 31% or $11.5 million increase
      was
      primarily due to:


•
            An
              August 2005 price increase across selected products and services resulted
              in additional operating revenues of $0.7 million in the quarter ended
              September 30, 2005.•
            An
                increase of $6.3 million in our higher-end integrated voice and data
                services revenue resulting from an increase of approximately 4,000
                average
                lines in service for these products since September 30, 2004 and the
                August 2005 price increase described above. The increase in lines
                resulted
                from a combination of the addition of the ICG California business
                and
                growth in our pre-ICG California business.•
            An
                increase of $4.5 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 more
                minutes
                per customer, which resulted in an overall increase in minutes of
                use.•
            An
                increase of $0.5 million in our other revenue primarily due to a
                $0.3
                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.




These
      increases were offset by:





•
            A
                decrease in plain old telephone service (“POTS”) revenue of $0.7 million,
                primary the result of an average 13,000 fewer POTS billable lines
                in
                service in the quarter ended September 30, 2005 compared to the quarter
                ended September 30, 2004. The decrease occurred despite the addition
                of
                ICG California POTS revenue in 2005 and the August 2005 price increase
                described above.





***Cost
      of Operating Revenues.*** Cost
      of
      operating revenue (excluding depreciation and amortization which is stated
      separately) for the quarter ended September 30, 2005 was $23.0 million as
      compared to $18.0 million for the quarter ended September 30, 2004. The 28%
      or
      $5.0 million increase was primarily due to:


•
            An
                increase in our customer T1 expense of $2.3 million. Our pre-ICG
                California business had increased cost of operating revenues of $0.9
                million or a 62% increase. This is a result of an increase in the
                number
                of customer T1 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 $1.4 million is for ICG California acquired
                customer T1 lines.•
            An
                increase of $1.5 million for network access expense. $0.4 million
                of the
                increase was related to an increase in our core network access lines
                that
                were needed to support the ICG California fiber network. Additionally,
                we
                had a $1.1 million increase resulting from the acquired ICG California
                access lines. With the conversion of customers to our network from
                ICG
                switches in California in the third quarter of 2005, we anticipate
                network
                access cost to be reduced in the fourth quarter of
                2005.•
            An
                increase of $1.3 million in rents and utilities as a result of the
                switch
                sites we acquired from ICG California that now house our transmission
                equipment.•
            An
                increase of $0.2 million in collocation costs as a result of the
                assumption of the rented space in the ICG California collocation
                sites.





These
      increases were offset by:





•
            A
                decrease of $0.4 million in loop expense resulting from a reduction
                of
                POTS lines. This reduction in expense is a result of the continued
                focus
                on selling T1 or higher capacity circuits and less focus on selling
                POTS.





***Selling,
      General and Administrative.*** For
      the
      quarter ended September 30, 2005, selling, general and administrative expenses
      (excluding depreciation and amortization which is stated separately) totaled
      $22.6 million, a 28% or $4.9 million increase from the $17.7 million for the
      quarter ended September 30, 2004. The increase is primarily due to:


•
            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 quarter ended September 30, 2004
                to
                approximately 860 employees for the quarter ended September 30, 2005,
                due
                to the growth of our business and the impact of the ICG California
                acquisition.•
            Property
                tax related expenses were $1.2 million higher than during the quarter
                ended September 30, 2004 due to the reversal of certain accrued property
                tax payables during the quarter ended September 30, 2004 resulting
                from
                the resolution of property tax audits in California and adjustments
                in
                estimated audit exposure in other states.•
            Additional
                expenses of $0.4 million incurred internally as well as the use of
                external labor and materials necessary to transition the ICG California
                business to our business platform (“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 through the fourth
                quarter of 2005.•
            A
                $0.5 million increase in agent commissions as a result of significant
                revenue growth within the independent agent sales
                channel.•
            A
                $0.3 million increase in bad debt expense which was primarily a result
                of
                the acquired ICG California wholesale revenue streams.•
            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.





26


These
      increases were offset by:





•
            A
                $0.2 million decrease in expense related to a paid time off policy
                change
                for certain of our employees effective September 1, 2005. We anticipate
                an
                additional reduction of this expense of approximately $0.5 million
                to $0.8
                million in the quarter ending December 31,
                2005.





***Gain
      on Sale of Assets.*** Gain on
      sale of assets was minimal for the quarter ended September 30, 2005 as compared
      to $0.1 million for the quarter ended September 30, 2004.





***Depreciation
      and Amortization.*** For
      the
      quarters ended September 30, 2005 and 2004, depreciation and amortization were
      $5.2 million and $3.9 million, respectively. The additional depreciation and
      amortization was primarily attributable to the $32.3 million of property and
      equipment and $3.1 million of intangibles acquired from ICG.





***Loss
      from Operations.*** Our
      loss
      from operations was $1.6 million for the quarter ended September 30, 2005 as
      compared to $1.9 million for the quarter ended September 30, 2004.





***Interest
      Income.*** Interest
      income was $0.2 million for the quarter ended September 30, 2005 as compared
      to
      $0.1 million for the quarter ended September 30, 2004. Interest income is
      derived primarily from the investment of cash and cash equivalents, investments
      available-for-sale, and restricted cash and cash equivalents.





***Interest
      Expense.*** Gross
      interest expense was $0.9 million and $0.1 million for the quarters ended
      September 30, 2005 and 2004, respectively. Interest expense includes interest
      on
      capital lease commitments and commitment fees and interest paid relating to
      our
      line of credit. The increase is primarily a result of our assumption of capital
      leases in the ICG California acquisition.





***Loss
      from Continuing Operations.*** We
      generated net loss from continuing operations of $2.3 million for the quarter
      ended September 30, 2005, compared to a $1.9 million loss from continuing
      operations for the quarter ended September 30, 2004.





***Net
      Loss.*** As
      a
      result of the above and a minimal amount of loss from discontinued operations,
      net loss was $2.3 million for the quarter ended September 30, 2005 compared
      to a
      net loss of $1.3 million for the quarter ended September 30, 2004.





*Nine
      Month Period Comparison - September 30, 2005 vs. September 30,
      2004*




**Comparison
      of Financial Results**




Our
      operational results for the nine months ended September 30, 2005 are discussed
      below. As the acquisition of the ICG California business closed on January
      1,
      2005, results of operations from the ICG California business are included for
      the nine months ended September 30, 2005, but not for nine months ended
      September 30, 2004. In parts of our analysis we have included some insight
      into
      how our pre-ICG California business performed in the nine months ended September
      30, 2005. As we more fully integrate this acquired business in future quarters,
      only consolidated results will be reported.





Results
      from discontinued operations have been excluded from this
      comparison.





***Operating
      Revenues.*** Revenue
      for the nine months ended September 30, 2005 was $144.1 million as compared
      to
      $113.2 million for the nine months ended September 30, 2004. The 27% or $30.9
      million increase was primarily due to:


•
            An
                increase of $18.1 million in our higher-end integrated voice and
                data
                services revenue resulting from an increase of approximately 4,200
                average
                lines in service from a combination of the addition of the ICG California
                business and growth in our pre-ICG California business.•
            An
                increase of $13.1 million in our private line revenue from our ICG
                California acquisition.•
            An
                increase of $2.5 million in our toll revenue primarily due to more
                minutes
                per customer, which resulted in an overall increase in minutes of
                use.•
            An
                increase of $1.5 million in our other revenue primarily due to an
                increase
                in directory assistance revenue as a result of rate increases that
                became
                effective in the quarter ended March 31,
                2005.





These
      increases were offset by:





•
            A
                decrease of $2.4 million in switched access revenues primarily a
                result of
                a decrease of $1.4 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 $0.7 million in Primary
                Interexchange Carrier Charge ("PICC") revenue. The decrease occurred
                despite the addition of the ICG California switched access revenue
                in
                2005.•
            A
                decrease in POTS revenue of $1.8 million, primarily the result of
                an
                average of 12,000 fewer POTS billable lines in service for the nine
                months
                ended September 30, 2005 compared to the nine months ended September
                30,
                2004. The decrease occurred despite the addition of the ICG California
                POTS revenue in 2005.





27


***Cost
      of Operating Revenues.*** Cost
      of
      operating revenue (excluding depreciation and amortization which is stated
      separately) for the nine months ended September 30, 2005 was $67.0 million
      as
      compared to $52.1 million for nine months ended September 30, 2004. The 29%
      or
      $14.9 million increase was primarily due to:


•
            Increases
                in our POTS expense of $0.2 million resulting from a 5% increase
                in rates
                for the loops charged by one of the ILECs in
                California.•
            An
                increase in our customer T1 expense of $6.7 million. Our pre-ICG
                California business accounted for $2.8 million of the increase. This
                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. The remaining $3.9 million increase
                is
                attributable to the ICG California acquired customer T1
                lines.•
            An
                increase of $4.3 million for network access expense. Of this increase,
                $0.5 million was related to an increase in our core network access
                lines
                that were needed to support the ICG California fiber network. The
                remaining $3.8 million of the increase in the nine months ended September
                30, 2005 was the result of the acquired ICG California access lines.
                With
                the conversion of customers to our network from ICG switches in California
                in the third quarter of 2005, the network access expense should decrease
                in the fourth quarter of 2005.•
            An
                increase of $4.1 million in rent and utilities, as a result of the
                switch
                sites we acquired from ICG California that now house our transmission
                equipment.•
            Collocation
                cost increased $0.6 million or a 10% increase. This is a result of
                the
                assumption of the rented space in the ICG California collocation
                sites.•
            An
                increase in non-recurring charges on circuits of $0.6 million. This
                increase is from ordering higher capacity circuits for our core network
                backbone to support the ICG acquired network and our existing
                infrastructure.





These
      increases were offset by:





•
            A
                settlement with a major ILEC on disputes that resulted in an $0.8
                million
                reduction of cost of operating revenue.•
            A
                decrease of $0.7 million for operator and directory assistance expense.
                In
                2005 we moved our service to a lower cost vendor resulting in a reduction
                in the rates we are charged for this
                service.





***Selling,
      General and Administrative.*** For
      the
      nine months ended September 30, 2005, selling, general and administrative
      expenses (excluding depreciation and amortization which is stated separately)
      totaled $68.3 million, a 28% or $14.8 million increase from the $53.5 million
      for the nine months ended September 30, 2004. The increase is primarily due
      to:


•
            A
                $6.4 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 nine months ended September 30,
                2004
                compared to approximately 830 employees for the nine months ended
                September 30, 2005, due to the growth of our business and the impact
                of
                the ICG California acquisition.•
            Additional
                expenses of $2.4 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 through the fourth
                quarter of 2005.•
            A
                $1.7 million increase in agent commissions as a result of significant
                revenue growth within the independent agent sales
                channel.•
            Additional
                expenses of $1.1 million pursuant to our transition services agreement
                with ICG in which certain services related to the acquired operations
                of
                ICG California were performed for us by ICG primarily related to
                accounting, billing, collections, provisioning, call center and network
                support. A reduced amount of these transition services are expected
                to be
                provided through the fourth quarter of 2005, therefore we anticipate
                incurring minimal additional expenses for this item in the
                future.•
            Property
                tax related expenses were $1.4 million higher than during the nine
                months
                ended September 30, 2004 due to the reversal of certain accrued property
                tax payables during the nine months ended September 30, 2004 resulting
                from the resolution of property tax audits in California and adjustments
                in estimated audit exposure in other states.•
            A
                $0.6 million increase in bad debt expense which was primarily a result
                of
                the recently acquired ICG California wholesale revenue streams.•
            A
                $0.6 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
                $0.5 million increase in outside services expenses for the nine months
                ended September 30, 2005 resulting from higher expenses relating
                to
                contract services and timing of professional fees for Sarbanes-Oxley
                compliance and audit expenses.•
            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
                nine months ended September 30, 2005. The issuance of warrants is
                based on
                the increase in baseline sales performance achieved by the independent
                sales agents.





These
      increases were offset by:





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





***Gain
      on Sale of Assets.*** Gain on
      sale of assets was $0.1 million for the nine months ended September 30, 2005
      as
      compared to $0.4 million for the nine months ended September 30,
      2004.





28


***Depreciation
      and Amortization.*** For
      nine
      months ended September 30, 2005 and 2004, depreciation and amortization were
      $16.8 million and $11.7 million, respectively. The additional depreciation
      and
      amortization was primarily attributable to the $32.3 million of property and
      equipment and $3.1 million of intangibles acquired from ICG.





***Loss
      from Operations.*** Our
      loss
      from operations was $7.8 million for the nine months ended September 30, 2005
      as
      compared to $3.7 million for the nine months ended September 30,
      2004.





***Other
      Income (Expense).*** We
      recorded $7.3 million of other income for the nine months ended September 30,
      2005. Other income was primarily comprised of $7.2 million related to early
      termination of our Las Vegas, Nevada switch site lease, net of exit expenses.
      We
      expect to apply a portion of the cash received ($7.7 million) to the
      construction of a replacement switch facility in Las Vegas during 2005. We
      recorded $0.1 million of other expense for the nine months ended September
      30,
      2004.





***Interest
      Income.*** Interest
      income was $0.6 million for the nine months ended September 30, 2005 as compared
      to $0.3 million for the nine months ended September 30, 2004. Interest income
      is
      derived primarily from the investment of cash and cash equivalents, investments
      available-for-sale, and restricted cash and cash equivalents.





***Interest
      Expense.*** Gross
      interest expense was $2.9 million for the nine months ended September 30, 2005
      as compared to $0.2 million for the nine months ended September 30, 2004.
      Interest expense includes interest on capital lease commitments and commitment
      fees and interest paid relating to our line of credit. The increase is primarily
      a result of our assumption of capital leases in the ICG California
      acquisition.





***Loss
      from Continuing Operations.*** We
      generated net loss from continuing operations of $2.7 million for the nine
      months ended September 30, 2005, compared to a net loss from continuing
      operations of $3.8 million for the nine months ended September 30,
      2004.





***Net
      Loss.*** As
      a
      result of the above and (loss) income from discontinued operations, net loss
      was
      $2.8 million for the nine months ended September 30, 2005 and $3.0 million
      for
      the nine months ended September 30, 2004.





**Discontinued
      Operations**





Our
      September 30, 2005 consolidated balance sheet reflects a $0.5 million receivable
      related to asset sales from discontinued markets. This receivable has been
      included in other receivables in our consolidated balance sheets and the balance
      is being held in escrow by a third party escrow agent. No allowance for doubtful
      accounts for this receivable has been established as we received a disbursement
      of $1.0 million from escrow in March 2005 and we expect to receive the remaining
      $0.5 million, net of expenses chargeable to us of $0.3 million included in
      accrued other expenses on the consolidated balance sheet, before the end of
      2005.





The
      operating revenues and expenses of our discontinued markets have been classified
      as discontinued operations under
      SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,”
      for all periods presented. (Loss) income related
      to these discontinued markets was as follows for the three and nine months
      ended
      September 30, 2005 and 2004 (in thousands):




**Three
                  Months Ended**
              
              **Nine
                  Months Ended****September
                  30,**
              
              **September
                  30,****2005**
              
              **2004**
              
              **2005**
              
              **2004**Operating
                  revenues
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              3Operating
                  expenses (income)
              
              
              32
              
              
              (508
              )
              
              67
              
              
              (689
              )Gain
                  on disposal of assets
              
              
              —
              
              
              —
              
              
              —
              
              
              (50
              )(Loss)
                  income from discontinued operations
              
              $
              (32
              )
              $
              508
              
              $
              (67
              )
              $
              742


**Application
      of Critical Accounting Estimates**





Our
      condensed consolidated financial statements and accompanying condensed notes
      are
      prepared in accordance with accounting principles generally accepted in the
      United States of America. Preparing consolidated financial statements requires
      us to make estimates and assumptions that affect the reported amounts of assets,
      liabilities, revenue and expenses. These estimates and assumptions are affected
      by the application of our accounting policies. Our significant accounting
      policies are described in the “Significant Accounting Policies” footnote in our
      notes to consolidated financial statements included in our Form 10-K for the
      year ended December 31, 2004. Critical accounting estimates are those that
      require application of management’s most difficult, subjective or complex
      judgments, often as a result of matters that are inherently uncertain and may
      change in subsequent periods. Critical accounting estimates for us include:
      (i)
      revenue recognition on services, (ii) allowance for doubtful accounts, (iii)
      billing from network carriers, (iv) reserves for sales and property taxes,
      (v)
      deferred income taxes, and (vi) impairment of long-lived assets. For additional
      discussion of these critical accounting estimates, see our “Management’s
      Discussion and Analysis of Financial Condition and Results of Operations” in our
      Form 10-K for the year ended December 31, 2004.


29


As
      a
      result of our recent acquisition of ICG California, we now consider the
      following a part of our application of critical accounting
      estimates:





*Business
      Combinations*





We
      account for acquisitions in accordance with Statement of Financial Accounting
      Standards (“SFAS”) No. 141, “Accounting for Business Combinations”. Accordingly,
      when a business combination occurs, we allocate the cost of the acquired
      enterprise to the estimated fair value of the assets acquired and liabilities
      assumed. This allocation requires significant estimates of the fair value of
      assets acquired and liabilities assumed, primarily property and equipment and
      identifiable intangible assets and capital lease obligations. Any excess of
      cost
      over the net of the amounts assigned to assets acquired and liabilities assumed
      is recognized as goodwill. Direct costs of the acquisition are included in
      the
      cost of the acquired enterprise, while indirect and general expenses such as
      salaries and overhead costs are expensed as incurred. Costs of issuing equity
      securities in connection with business combinations are deducted from the amount
      of additional paid-in-capital resulting from the issuance.





*Goodwill
      and Other Intangible Assets*





We
      account for goodwill and other intangible assets in accordance with SFAS No.
      142, “Goodwill and Other Intangible Assets”. Goodwill is evaluated for
      impairment at least annually. The annual impairment test for goodwill will
      require significant estimates necessary to determine the fair value of the
      acquired business. Other intangible assets consist of customer relationships,
      internally developed software, trademark and product licensing agreements.
      Customer relationships and internally developed software are amortized using
      the
      straight-line method over the estimated useful lives of three years. The
      trademark was determined to have an indefinite life and is not subject to
      amortization, but is reviewed at least annually for impairment. License
      agreements are amortized using the straight-line method over their estimated
      useful lives of five years.





**Effects
      of New Accounting Standards**





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





In
      March
      2005, the Financial Accounting Standards Board (“FASB”) issued Interpretation
      No. (“FIN”) 47, "Accounting for Conditional Asset Retirement Obligations - an
      interpretation of FASB Statement No. 143, " which clarifies the term
      "conditional asset retirement obligation" used in FASB No. 143 "Accounting
      for
      Asset Retirement Obligations" and specifically when an entity would have
      sufficient information to reasonably estimate the fair value of an asset
      retirement obligation. We are required to adopt FIN 47 no later than December
      31, 2005. We do not expect the adoption of FIN 47 to have a material impact
      on
      our consolidated results of operations or financial condition.





*Share-Based
      Payment*





In
      April
      2005, the effective date of SFAS No. 123 (revised 2004), “Share-Based Payment”,
      which replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” and
      supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for
      Stock Issued to Employees,” was deferred and will now be effective beginning
      with the first fiscal year that begins after June 15, 2005, with early adoption
      encouraged. SFAS No. 123(R) requires all share-based payments to employees,
      including grants of employee stock options, to be recognized in the financial
      statements based on their fair values. At this time we cannot yet estimate
      the
      effect of adopting SFAS No. 123(R) as we have not yet selected the period of
      adoption, the method of adoption or an option-pricing model and we have not
      yet
      finalized estimates of our expected forfeitures.





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





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





30


**Forward
      Looking Statements**





Under
      the
      safe harbor provisions of the Private Securities Litigation Reform Act of 1995,
      we caution the reader that certain statements contained in this report regarding
      our and/or management’s intentions, hopes, beliefs, expectations or predictions
      of the future are forward-looking statements. We wish to caution the reader
      these forward-looking statements are not historical facts and are only estimates
      or predictions. Actual results, including projections with respect to our future
      operating performance, may differ materially from those projected as a result
      of
      risks and uncertainties including, but not limited to, our ability to retain
      ICG
      California customers and increase revenues from the acquired ICG California
      business, our ability to effectively integrate the ICG California business
      into
      our operations, unexpected costs of integrating the ICG California business
      into
      our operations, future sales growth, changes in federal or state
      telecommunications regulations, market acceptance of our product and service
      offerings, the liquidity of our common stock, our ability to secure adequate
      financing or equity capital to fund our operations and network expansion, our
      ability to manage growth and maintain a high level of customer service, the
      performance of our network and equipment, our ability to enter into strategic
      alliances or transactions, the cooperation of incumbent local exchange carriers
      in provisioning lines and interconnecting our equipment, regulatory approval
      processes, the effect of regulatory decisions on our access charges and
      operating costs, changes in technology, price competition and other market
      conditions and risks detailed from time to time in our filings with the
      Securities and Exchange Commission. We undertake no obligation to update
      publicly any forward-looking statements, whether as a result of future events,
      new information, or otherwise.





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





We
      do not
      use interest rate derivative instruments to manage our exposure to interest
      rate
      changes. The interest rate under our line of credit floats with the prime rate
      and therefore we do have exposure to interest rate changes as a result of our
      line of credit agreement. As of September 30, 2005, we did not have any
      outstanding borrowings under the line of credit.





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





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





(a)
            Evaluation
                of disclosure controls and procedures.
                As of the end of the period covered by this report, which period
                includes
                the operating results of ICG California acquired on January 1, 2005,
                under
                the supervision and with the participation of our management, including
                our chief executive officer (“CEO”) and chief financial officer (“CFO”),
                we evaluated the design and operation of our disclosure controls
                and
                procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
                Exchange Act of 1934, as amended, or the “Exchange Act”). Based on this
                evaluation, our management, including our CEO and CFO, has concluded
                that
                our disclosure controls and procedures are designed, and are effective,
                to
                give reasonable assurance that the information we are required to
                disclose
                is recorded, processed, summarized and reported within the time periods
                specified in the SEC’s rules and forms. Based upon this evaluation, the
                CEO and CFO concluded that our disclosure controls and procedures
                are
                effective in providing reasonable assurance that information required
                to
                be disclosed in our reports filed with or submitted to the SEC
                under
                the Exchange Act is accumulated and communicated to management, including
                the CEO and CFO, as appropriate to allow timely decisions regarding
                required disclosure.(b)
            Changes
                in internal control.
                There were no changes in our internal control over financial reporting
                that occurred during our quarter ended September 30, 2005, that have
                materially affected, or are reasonably likely to materially affect,
                our
                internal control over financial
                reporting.




31


**PART
      II. OTHER INFORMATION**





**Item
      1.** *Legal Proceedings*





From
      time
      to time, we are involved in litigation and governmental proceedings in the
      ordinary course of our business, including some claims that we have asserted
      against others, in which monetary damages are sought. The result of current
      or
      future litigation is inherently unpredictable; however, we do not believe any
      asserted or pending litigation or governmental proceedings will have a material
      adverse effect on our financial position, results of operations or cash flows.
      A
      description of pending litigation and governmental proceedings is contained
      in
      our annual report on Form 10-K for the year ended December 31, 2004. The
      following updates the discussion in the Form 10-K for developments that have
      occurred since January 1, 2005.





**California**





Before
      the end of 2005, the California Public Utilities Commission (“CPUC”) is expected
      to issue a decision in the Verizon unbundled network elements (“UNEs”) rate case
      regarding permanent rates for UNEs purchased by competitive carriers from
      Verizon in California. In March 2003, the CPUC issued an interim rate order
      setting Verizon UNEs rates at a level expected to be a close approximation
      of
      permanent rates (subject to a true up after permanent rates are determined).
      While we cannot predict the permanent rates, we expect they will be similar
      to
      the current interim rates and, therefore, we do not believe that the
      establishment of permanent rates will have a material adverse effect on our
      business, financial condition or results of operations.





**Illinois**





Subsequent
      to the May 2004 UNE rate increase, the Illinois Commerce Commission (“ICC”)
      opened a proceeding (“Imputation Docket”) to analyze whether the UNE rates
      charged by Southwestern Bell Corporation (“SBC”) Illinois to competitive local
      telephone companies are competitively fair in light of the rates SBC charges
      its
      retail customers. In June 2005, the ICC ruled that SBC’s retail rates for access
      lines and for integrated service digital network (“ISDN”) pass the imputation
      test but that some pay phone rates failed the test. The ICC is being petitioned
      for rehearing. While the ICC requiring SBC to raise its payphone rates may
      have
      the effect of making our payphone product more competitive, we do not believe
      this will materially increase revenues.





**Triennial
      Review Remand**





On
      February 4, 2005, the Federal Communications Commission (“FCC”) issued a
      Triennial Review Remand Order (“TRRO”) announcing that it modified the
      unbundling obligations for ILECs. The FCC clarified and modified the impairment
      standard adopted in its earlier Triennial Review Order (“TRO”). The revised
      standard removes under certain circumstances an ILEC’s unbundling obligations
      with regard to local loops, dedicated transport, and local switching. The
      removal of local switching as a UNE will not affect us as we own our own switch
      sites and do not rely on the ILEC. The impairment findings for loops and
      transport vary based upon the capacity of the loop and availability of
      competitive alternatives to the ILEC. Based upon the FCC loop and transport
      criteria, relatively few of our loops and transport are affected. Also,
      currently, the FCC is reviewing a Petition to Reconsider and the D.C. Circuit
      is
      reviewing an appeal of the TRRO. Therefore, we cannot predict the outcome of
      these appeals and how possible resulting changes to the new rules regarding
      loops and transport might affect us. Regardless of the outcome, we expect to
      be
      able to continue to purchase some network elements from competitive local
      telephone companies at market rates (e.g., transport which is used to connect
      parts of our network and some high capacity loops). At present, it is not
      possible to predict how future long-term rates will compare to the current
      TELRIC rates but for those relatively few loops and transport that will affect
      us, those elements will continue to be available at 115% of the TELRIC rate
      through March 10, 2006. The TRRO will have a significant impact on
      telecommunications competition, but it is not possible at this time to predict
      the full extent of its impact upon us or our competition.





**Equipment
      Lease Settlement**





We
      were
      party to an equipment lease dispute that resulted in claims being made against
      us and certain of our subsidiaries. On November 1, 2002, the plaintiff initiated
      the first of several actions against our subsidiary in the Circuit Court of
      St.
      Louis County, Missouri, and also filed actions in the U.S. Bankruptcy Court
      for
      the District of Delaware for recovery of claimed damages. In July 2005, a
      settlement was reached for all legal actions and the $0.6 million difference
      between the estimated liability previously recorded and the settlement amount
      was reflected as a reduction of selling, general and administrative expense
      on
      our consolidated statements of operations in the second quarter ended June
      30,
      2005. A contingent liability reserve of $0.8 million for this matter has been
      recorded in accrued other expenses on our consolidated balance sheet as of
      September 30, 2005, and reflects the amount that we paid on October 3, 2005
      as
      per the settlement.





32


**Mergers
      of SBC with AT&T Corp. and Verizon with MCI, Inc.**





On
      October 31, 2005, the FCC approved the mergers of SBC with AT&T Corp.
      (“AT&T”) and Verizon with MCI, Inc. (“MCI”). The FCC concluded that the
      mergers are not likely to have anticompetitive effects, but adopted
      enforceable conditions to protect competition. As a result, SBC and Verizon
      (1)
      will not seek to increase any state-approved rates for UNEs for two years
      (except for rates subject to current appeals); (2) will make a one-time
      recalculation to exclude fiber-based collocation arrangements established by
      AT&T in SBC’s region and MCI in Verizon’s region in identifying wire centers
      in which there is no impairment pursuant to the TRRO; and (3) will not increase
      for 30 months the rates paid by existing in-region customers of AT&T in
      SBC’s region or MCI in Verizon’s region for wholesale DS1 and DS3 local private
      line circuits. While we cannot predict the long-term effects of the mergers,
      we
      believe the conditions adopted by the FCC will help to lessen any short-term
      anti-competitive effect of the mergers over the next 24 to 30
      months.





**Item
      4.** *Submission
      of Matters to a Vote of Security Holders*





Our
      annual meeting of stockholders was held on Tuesday, August 16, 2005. At the
      meeting, Michael E. Cahr and Richard L. Shorten, Jr. were re-elected to serve
      on
      our board of directors. Mr. Cahr and Mr. Shorten have been designated as Class
      II directors who will serve a three year term expiring in 2008. The votes for
      these nominees for directors were as follows: Cahr - 84,469,889 votes for and
      902,147 votes against or withheld; Shorten - 78,706,441 votes for and 6,665,595
      votes against or withheld. There were no abstentions or broker non-votes as
      this
      was a routine election. Anthony J. Cassara, Peter H. O. Claudy, Michael M.
      Earley, Rolla P. Huff, Andrew D. Lipman and Robert M. Pomeroy continued as
      our
      directors after the meeting.





The
      adoption of the 2005 Long-Term Incentive Plan (the “2005 Plan”) was also voted
      on and approved during the annual meeting. The votes to adopt the plan were
      as
      follows: 53,428,582 votes for; 5,795,498 votes against or withheld; 43,413
      abstentions and 26,104,543 not voted. The 2005 Plan provides for the granting
      of
      stock options, stock appreciation rights, restricted stock, restricted stock
      units and other equity- based awards. No other matters were voted upon at the
      meeting.





**Item
      5.**  *Other
      Information*





During
      September 2005, we filed with the Securities and Exchange Commission a
      registration statement on Form S-8 to register 11,500,000 shares of our common
      stock issuable by us upon the exercise of options and other stock-based awards
      that have been granted or may be granted under our 2005 Long-Term Incentive
      Plan
      (“the 2005 Plan”). The 2005 Plan replaces our previous non-stockholder approved
      plans, the Mpower Holding Corporation Stock Option Plan I and Mpower Holding
      Corporation Stock Option Plan II (together, the “Prior Plans”) and became
      effective upon approval by our stockholders on August 16, 2005 at our annual
      stockholders meeting. Additionally during September 2005, we filed
      Post-Effective Amendment No. 1 to Form S-8 to deregister a total of 2,460,954
      unissued shares of our common stock that had been available for issuance under
      the Prior Plans since no further options may be granted under the Prior Plans.
      The prior registration statement remains in effect for outstanding options
      under
      the Prior Plans.





**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
                3.2.10.1
            Mpower
                Holding Corporation 2005 Long-Term Incentive Plan. (7)31.1
            Rule
                13a-14(a)/15d-14(a) Certification of Chief Executive
                Officer31.2
            Rule
                13a-14(a)/15d-14(a) Certification of Chief Financial
                Officer32
            Section
                1350 Certifications




33


(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 Current Report 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.(7)
            Incorporated
                by reference to definitive proxy statement for 2005 annual meeting
                of
                stockholders of Mpower Holding Corporation filed with the Commission
                on
                June 27, 2005.


34


**SIGNATURES**





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




**MPOWER
                HOLDING CORPORATION**Date: 
              November 4, 2005
            By:
            /s/ Rolla
              P. HuffRolla
                P. Huff*Chief
                Executive Officer and Chairman of the
                Board*




Date: November
              4, 2005
            By:
            /s/ S.
              Gregory ClevengerS.
                Gregory Clevenger*Executive
                Vice President - Chief Financial
                Officer*






35