**UNITED
STATES**
**SECURITIES
AND EXCHANGE COMMISSION**
**Washington,
D.C. 20549**

_______________

**Form
10-K**

**(Mark
      One)**x
    **ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934****For
      the fiscal year ended December 31, 2004****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*
    *(I.R.S.
      Employer**incorporation
      or organization)*
    *Identification
      No.)***175
      Sully's Trail, Suite 300, Pittsford, NY**
    **14534***(Address
      of principal executive offices)*
    *(Zip
      Code)*

**(585)
218-6550**
*(Registrant's
telephone number, including area code)*


**Securities
registered pursuant to Section 12(b) of the Act:**

**Title
      of each class**
    
    **Name
      of each exchange on which registered**Common
      Stock, $0.001 par value per common share
    
    American
      Stock Exchange


**Securities
registered pursuant to Section 12(g) of the Act:**
None

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. YesxNoo

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.o

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

As of
June 30, 2004, the aggregate market value of common stock held by non-affiliates
of the registrant, based on the last sale price of such stock in the American
Stock Exchange on June 30, 2004, was approximately $92.2 million.

Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Section 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. YesxNoo

As of
March 7, 2005, the registrant had 91,317,495 shares of common stock
outstanding.

**Documents
Incorporated by Reference**
Not
Applicable

Exhibit
Index is located on page 80.

**PART
I**

**Item
1.*****Business***
**THE
COMPANY**

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”) telephony by way of a variety of broadband product and service
offerings over our own network of collocations and switches. On January 1, 2005,
we acquired certain assets of ICG Communications, Inc. (“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 and 915 miles of
metropolitan fiber rings that connect 128 commercial buildings throughout major
cities in California. Our services have historically been offered primarily to
small and medium-sized business customers in all of our markets and residential
customers primarily in the Las Vegas, Nevada market through our wholly-owned
subsidiary, Mpower Communications Corp. (“Communications”). 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
of February 2005, we have approximately 48,000 business customers and
approximately 18,000 residential customers, excluding the customers we obtained
in the ICG acquisition. Many of the ICG customers acquired are larger accounts
that generate more average monthly revenue than our existing customer base. We
also bill a number of major local and long distance carriers for the costs of
originating and terminating traffic on our network for our local service
customers. We do not have any unbundled network element platform (“UNE-P”)
revenues although we are actively pursuing opportunities to provide
network-based alternatives to UNE-P carriers on a wholesale basis in light of
recent regulatory changes. During 2004, we acquired approximately 78% of our new
sales through our direct sales force and supporting staff, with the remainder
acquired through agent relationships and outbound telemarketing.

As used
in this report, the terms “we,” “us,” “our,” “our company” and “Mpower” mean
Mpower Holding Corporation and its subsidiaries.

***Financial
History***

In May
1998, we completed our initial public offering of common stock, raising net
proceeds of $63.0 million. From May 1999 to March 2000, we raised over $900
million of additional funds through debt and equity issuances to pursue an
aggressive business plan to rapidly expand our business using Class 5 circuit
switching technology, the same as used by Verizon, SBC (through its operating
subsidiaries Pacific Bell and Ameritech), and other major telecommunication
companies, in each of our markets and began deploying digital loop carriers in
each collocation site. This business plan required significant up-front capital
expenditures in each market as well as lower recurring margins in its early
phase. In mid-2000, the capital markets became virtually inaccessible to early
stage communications ventures. Consequently, in September 2000, we commenced a
process to restructure our business, both operationally and
financially.

From
September 2000 through May 2001, we significantly scaled back our operations,
canceling more than 500 existing collocations, and canceling plans to enter the
Northeast and Northwest Regions (representing more than 350
collocations).

From
February 2002 through July 2002, we undertook a comprehensive recapitalization
through a Chapter 11 bankruptcy plan that eliminated $593.9 million in carrying
value of long-term debt and preferred stock (as well as $65.3 million of
associated annual interest and dividend costs) in exchange for cash and 98.5% of
our common stock.

From
November 2002 to January 2003, we eliminated the remaining $51.3 million of
carrying value of our long-term debt for cash payments, which released all of
our network equipment from any remaining security interests, giving us the
ability to pursue alternative financing and strategic transactions.

In
January 2003, we entered into an agreement with RFC Capital Corporation, a
wholly-owned subsidiary of Textron Financial Corporation, for a three-year
funding credit facility of up to $7.5 million, secured only by certain of our
accounts receivable.
**1**

In
January 2003, we announced a series of strategic sale transactions to further
strengthen us financially and focus our operations on our California, Nevada and
Illinois markets. The sale of our customers and assets in Florida, Georgia,
Ohio, Michigan and Texas to other service providers (the “Asset Sales”) brought
more geographic concentration to our business. The Asset Sales in Ohio, Michigan
and Texas were completed in March 2003. The Asset Sales in Georgia and Florida
were completed in April 2003. The Asset Sales generated net proceeds to us of
approximately $19.3 million, of which approximately $1.5 million remained unpaid
and held in escrow as of December 31, 2004. We received a disbursement from
escrow of $1.0 million in March 2005. The remainder, net of expenses, is
expected to be received in the first or second quarter of 2005.

In
September 2003, we raised net proceeds of approximately $16.0 million through a
private placement of shares of our common stock and warrants to purchase
additional shares of common stock.

On
January 1, 2005, we completed the acquisition of ICG’s California retail and
wholesale customers and certain network assets, including a 1,412 route mile
state-wide self-healing DWDM and SONET-based fiber ring connecting San Jose, San
Francisco, Oakland, Sacramento, Stockton, Fresno, Bakersfield, San Diego,
Anaheim and Los Angeles and 915 route miles of fully-survivable metropolitan
SONET-based fiber rings in San Jose, San Francisco, Oakland, Sacramento, San
Diego and Los Angeles which connect 128 commercial buildings.

We
purchased these assets for (i) $13.5 million in the form of 10,740,030 shares of
our common stock and (ii) warrants to purchase another 2,000,000 shares of our
common stock with a strike price of $1.383 per share. These shares and warrants
were issued to ICG, a privately held company recently acquired by Columbia
Capital and M/C Venture Partners. We also assumed certain ICG capitalized leases
in California, including its long-term leases for its fiber network. These
leases have an approximate value of $24 million.

**Emergence
from Chapter 11 Proceedings**

On July
30, 2002, we and our subsidiary, Communications, formally emerged from Chapter
11 as our recapitalization plan (the “Plan”) became effective. See Note 12 in
the Notes to the consolidated financial statements for a summary of the material
features of the Plan.

As of
July 30, 2002, we implemented fresh-start accounting under the provisions of
Statement of Position (“SOP”) 90-7 “Financial Reporting by Entities in
Reorganization under the Bankruptcy Code.” Under SOP 90-7, our reorganized fair
value was allocated to our assets and liabilities, our accumulated deficit was
eliminated, and our new equity was issued according to the Plan as if we were a
new reporting entity. In conformity with fresh-start accounting principles,
Predecessor Mpower Holding recorded a $244.7 million reorganization charge to
adjust the historical carrying value of our assets and liabilities to fair
market value reflecting the allocation of our $87.3 million estimated
reorganized equity value as of July 30, 2002. We also recorded a $315.3 million
gain on the cancellation of debt on July 30, 2002 pursuant to the Plan. As a
result of the Plan implementation, our ability to use net operating loss
carryforwards existing as of July 30, 2002 against future taxable income is
limited to $4.4 million per year. Our ability to utilize new net operating
losses arising after July 30, 2002 is not affected. Of the $112.0 million in net
operating losses existing at December 31, 2004, $78.7 million are subject to the
annual utilization limits and $33.3 million are not.

As a
result of our reorganization, the financial statements published by us for the
periods following the effectiveness of the Plan will not be comparable to those
published before the effectiveness of the Plan.

**2**
**Reshaping
Mpower**

The next
step in reshaping our company is to accelerate our growth in the markets within
which we currently operate while continuing to retain our current customers. We
intend to accomplish this growth through acquisitions such as the ICG asset
purchase as described above, organic growth, focus on the newly-formed wholesale
channel, the increased investment in our sales force and agent channels which we
expect to result in the acceleration in the growth of our customer base, as well
as growth through other strategic transactions. In terms of strategic
transactions, we will continue to explore opportunities to increase our customer
base and service offerings through merger and/or acquisition transactions that
we would expect to be accretive to shareholder value.

**Company
Overview**

Mpower
Communications Corp. is a facilities-based communications provider offering an
integrated bundle of broadband data and voice communication services to business
and wholesale customers. We provide a full range of telephone, high-speed data,
Internet access, VOIP telephony, Web hosting and network access solutions in Las
Vegas, Nevada, Chicago, Illinois and throughout California. Our service
offerings have been increased through the January 2005 acquisition of
ICG.

As a
facilities-based provider, we own and control a substantial amount of our
network infrastructure and bring the power of that directly to our customers.
Our regional footprint provides us concentrated service coverage and experience
in the markets we serve. With the addition of the ICG assets, we added a
statewide SONET-based fiber network to our deep collocation and switching
infrastructure, which allows us to offer new products such as private line,
accelerates our speed-to-market with VOIP Centrex capabilities, positions us as
a strong player in the wholesale market, and reduces our reliance on the
incumbent local exchange carriers (“ILEC”). In our markets, Verizon, Sprint, and
SBC are the ILECs.

We have
acquired new customers primarily through our dedicated account managers (sales
representatives) who personally work with customers to find the best solution
for their unique communications needs. We also maintain relationships with
agents and have a telemarketing sales organization. We intend to aggressively
grow all of our sales channels through continued hiring for our direct sales
force and recruiting of agents active in our markets. We plan to continue to
evolve our product and service offerings in order to maximize the value
perceived by our customers while delivering such products and services as
cost-effectively as possible. With the acquisition of ICG’s customers, we became
a wholesale provider to many large interexchange carriers (“IXCs”), competitive
local exchange carriers (“CLECs”), and internet service providers (“ISPs”) and
we have established a dedicated wholesale channel to focus on the unique needs
of this customer segment. With access to our facilities-based distributed
network architecture and a broad range of products and services, we offer
wholesale customers opportunities to enhance or expand their business
models.

**Available
Information**

We
maintain a website with the addresswww.mpowercom.com. We have
not incorporated by reference into this report on Form 10-K the information on
our website and you should not consider it to be a part of this document. Our
website address is included in this document for reference only. We make
available free of charge through our website our Annual Report on Form 10-K,
quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments
to these reports, through a link to the EDGAR database, as soon as reasonably
practicable after we electronically file such material with, or furnish such
material to, the Securities and Exchange Commission.

**Market
Opportunity**

We
believe we have a significant market opportunity as a result of the following
factors:

**3**
***Impact
of the Telecommunications Act of 1996***

The
Telecommunications Act of 1996 allowed CLECs to use the existing infrastructure
established by incumbent carriers, as opposed to building a competing
infrastructure at significant cost. The Telecommunications Act requires all
incumbent carriers to allow CLECs to collocate their equipment in the incumbent
carrier's central offices. This enables us to access customers through existing
telephone line connections. See "Government Regulations”.

***Needs
of Small and Medium-Sized Businesses for Integrated Communications
Solutions***

Small and
medium-sized businesses are our primary customer target. Small and medium-sized
businesses are subject to the cost and complexity of using multiple service
providers: local dial-tone providers, long distance carriers, Internet service
providers and equipment integrators. We believe these businesses can benefit
significantly from an integrated cost-effective communications solution
delivered by a single provider.

***Growing
Market Demand for High-Speed Data Services***

The use
of the Internet as a commercial medium as well as a necessary business tool
continues to drive the demand for high-speed data services. Businesses are
increasingly establishing website and corporate intranets and extranets to
expand their customer reach and improve their communications efficiency. To
remain competitive, small and medium-sized businesses increasingly need
high-speed data and Internet connections to access critical business information
and communicate more effectively with employees, customers, vendors and business
partners.

***Shrinking
Competitive Landscape***

The shake
out in the telecommunications industry in recent years has significantly reduced
the number of competitors in the marketplace. Many companies in the competitive
communications industry have succumbed to heavy debt loads and burdensome
interest payments without the revenue streams to compensate, and therefore have
not been able to sustain their business model. In addition, as a result of
recent Federal Communications Commission (“FCC”) rulings, UNE-P based CLEC
business models may no longer be viable. As a result of these factors and
consolidation among surviving companies, fewer competitors are vying for the
same customers and we believe that companies such as ours, with a debt-free
balance sheet and a deep and dense facilities-based network, have significant
market opportunities.

**The
Mpower Solution**

In
today’s competitive business landscape, businesses must utilize every advantage
to gain additional market share. We believe companies that most efficiently meet
customer needs will have the upper hand in gaining new business and being
successful. Advances in telecommunications and technology are vital resources in
this environment. We believe stakeholders will tend to choose communications
providers that have a proven track record of successfully providing solutions
that help overcome business challenges, maintain a solid balance sheet, are
“easy to do business with” and offer a compelling business
proposition.

We
believe we are such a service provider. The continually growing and evolving
product and service offerings we deliver are designed to assist businesses in
enhancing the efficiency and effectiveness of an organization, while decreasing
expenses in both hard and soft dollars. We seek to understand business
challenges and build the appropriate solutions. We believe we have both the
agility and capability to tailor our services in the most meaningful
configuration for our customers.

**4**
***Facilities-Based
Network***

We were
one of the first competitive communications carriers to implement a
facilities-based network strategy. As a result, we own the network switches that
control how voice and data communications originate and terminate, and we lease
the telephone lines or transport systems over which the voice and data traffic
are transmitted. We install much of our network equipment at collocation sites
of the incumbent carriers from whom we lease standard telephone lines. As we
have already invested in and built our network, we believe our strategy has
allowed us to establish and sustain service in our markets at a comparatively
low cost while maintaining control of the access to our customers.

Our
network consists of 297 incumbent carrier central office collocation sites, from
which we can provision plain old telephone service (“POTS”), DSL T1, and VOIP
services. In April 2004, we began selling T1 services to customers using
facilities that do not directly connect to our collocation sites. We refer to
this as “off-network.” Currently, there are 177 off-network locations that can
be provisioned with T1 service. Having off-network facilities increases our
number of potential customers. We have established working relationships with
Verizon, Sprint, and SBC. As of February 2005, we have over 268,000 billable
lines in service, excluding the customers we obtained in the ICG acquisition.
The services we provide for these billable lines generate our
revenue.

With the
acquisition of ICG, our network now also includes 1,412 route mile intrastate
SONET fiber ring connecting all the major cities in California: San Diego, Los
Angeles, San Francisco, Oakland, San Jose, Sacramento, Stockton, Fresno,
Bakersfield, Anaheim, plus 915 miles of metropolitan fiber rings in San Diego,
Los Angeles, San Francisco, Oakland, San Jose, Sacramento, and Anaheim
connecting 128 commercial buildings.

***Intelligent
Network Design*******

Traditional
service providers deliver narrowband voice and data services over a
circuit-switched network. When these services are bundled they are delivered
over “separate” voice and data networks. We assimilate the components of
traditional Time Division Multiplexing (“TDM”) technology with cost efficiencies
of packet-switched data networks. Our Internet Protocol (“IP”)-enabled system
integrates voice and data services into a single platform, resulting in our
ability to provide voice and data services to our customers at a lower operating
cost. This IP enabled system is more commonly known as VOIP.

**Business
Strategies**

*Targeting
Small and Medium-Sized Businesses.*We
target suburban areas of the metropolitan areas we serve because these areas
have high concentrations of small and medium-sized businesses. By providing a
package of voice and data services and focusing on small and medium-sized
business sales, we believe we will gain a competitive advantage over the
incumbent carrier, our primary competitor for these customers.

*Targeting
Wholesale Customers*. We
believe that our deep and dense network of fiber and collocations provides the
breadth and depth of transport services that other carriers need. One example of
this is the $3.3 million (total contract value),30 month
agreement for private line services that we signed in January 2005 with
Tierzero, a California internet service provider. In addition, our switch
services offer an alternative for local services provided by UNE-P resellers who
do not have their own network facilities.

*Direct
Sales Force.*In order
to better align the needs of our customers with the skills of our direct sales
force, we have established distinct sales channels to create a strategy that
allows us to benefit from the unique talents in our sales organization and
various customers needs.

Major
Markets:This
sales channel focuses on multi-location, higher revenue prospectswith
longer and more complex decision processes. This channel sells all of our
product and service offerings with a focus on primary rate interfaces (“PRIs”),
trunks, data T1 services, VoicePipe (described below), private lines, virtual
private networks (“VPNs”) and long distance.

Mid
Markets:This
sales channel focuses on simpler sales environments with a shorter sales cycle.
It sells all of our product and service offerings with a focus on our integrated
T1 services, DSL and POTS.

Wholesale
Channel: This
sales channel focuses on the needs of IXCs, CLECs, ISPs and other service
providers needing network services.

**5**
Agent
Channel:This
sales channel works with Master Agents, which are independent parties who have
direct agreements with various carriers, and partners through subsidiaries of
sub-agents to offer our services to customers.

Inside
Sales:This
sales channel sells voice and data services over the phone to the lower end
segment of business customers and provides lead generation for the direct sales
force.

When
fully staffed, we expect to have a total of approximately 125 quota carrying
account managers serving our mid and major markets customers and prospects. The
number of account managers allocated to these channels could change based on
business results of each channel. As of February 2005, we have approximately 30
quota carrying account managers serving our major markets and approximately 70
quota carrying account managers serving our mid markets.

*Product
and Service Offerings.*We focus
on offering bundled communications packages to our small and medium-sized
business customers. These services include integrated T1 services, trunks and
PRIs, as well as traditional voice and data services and VOIP telephony
solutions. See “Product & Service Offerings” below.

*Increase
Market Share and Profitable Revenue.*We plan
to continue to aggressively sell into our existing network footprint and target
customers within that footprint with the product and service offerings that we
believe will generate the highest margin revenue. We expect that the vast
majority of these services will be delivered to our customers under term
contracts of up to three years. We believe that this strategy will further
increase the quality of our revenue streams. We expect that the majority of
network expansion will be centered around augmentation of our existing network
to further enhance our product and service offerings and service delivery
capabilities.

*Control
Customer Relationship.*By
connecting the standard telephone line originating at our customer's site to our
central office collocation, we effectively place the customer on our network.
This connection serves as the platform for delivering our current and future
communications services to our customers. Any future changes our customers want
to make to their services, including purchasing more services from us, are under
our direct control. The one exception is for repairs, which are infrequent but
may require the participation of the incumbent carrier's network maintenance
staff.

*Capital
Efficient Network.*We were
one of the first CLECs to implement a facilities-based network strategy of
purchasing and installing switches, collocating in the central offices of the
incumbent carrier and leasing local telephone lines, referred to as a "smart
build" strategy. This network footprint is complete and operational. Even before
our acquisition of ICG, we had installed SDSL technology across our existing
network, and have T1 technology in the majority of our network
collocations.

*Optimize
Current Network Infrastructure.*The
footprint of our facilities-based network is completely built out and
operational. All of our traffic and revenue is on-switch, allowing us better
control over our costs. Our strategy going forward is to maximize the investment
in this infrastructure and increase market share in the areas we serve. Our
ability to provide certain of our T1 service offerings off-network is a part of
our overall strategy to increase our market share while containing
costs.

*Dynamic
Allocation of Bandwidth.*As part
of our product and service offerings for businesses, our voice and data
integrated solutions product, as described below, is designed to give customers
the ability to use dynamically allocated bandwidth coupled with combining our
customer’s data and voice needs on one medium. This simply means that data
bandwidth fluctuates (increases or decreases) based on phone usage. Customers
serviced by many of our competitors will typically be required to designate
certain amounts of bandwidth for data traffic and certain amounts for voice
traffic. Our integrated T1 service provides the ability for our customers to use
the entire circuit for data transfers while still being able to place and
receive phone calls all on one circuit.

**6**
*National
Network Operations Center and Traffic Monitoring.*Our
national operations center (“NOC”) provides a high standard of network
availability. Our network reliability was 99.998% for the fourth quarter of 2004
and 99.996% for all of 2004. This reliability rate is consistent with what we
achieved throughout 2004 and what we expect in the future. Our NOC utilizes
Fault, Configuration, Accounting, Performance and Security management to manage
our network footprint.

*Operations
Support System.*We have
a comprehensive operations support system to manage our business. Our system
provides integrated features addressing customer care, billing and collections,
general ledger, payroll, fixed asset tracking, and personnel management. Our
systems have the ability to adapt to multiple incumbent carrier provisioning
systems, which can improve our operating efficiencies and effectiveness. We
recently launched NetBill - a simple and secure way to allow customers to view
and pay bills online and manage their telecommunications accounts.

*Timely
and Accurate Provisioning for Customers.*We
believe one of the keys to our success is effectively managing the provisioning
process for new customers. We have a standardized service delivery process and
consolidated service delivery centers, which significantly reduce our
provisioning intervals and improve our provisioning quality metrics. In
addition, through electronic order interfaces with all of the incumbent
carriers, we have been able to substantially reduce the time, number of steps
and duplication of work typically involved in the provisioning process. Our
implementation team ensures that services are typically installed in a smooth
and timely fashion. This team manages the migration of existing services from
data and information gathering through installation and service
activation.

*Quality
Customer Care.*We have
a professionally trained workforce that seeks to generate customer satisfaction.
We operate one main call center that handles general billing, customer care and
related issues for all of our customers. Through low employee attrition, we
believe our call center has been able to develop a professional “teamwork”
approach to assisting with any customer issues.

We
believe our call center performs at a high level of proficiency, while
continually meeting service level targets for our customers. Our call center is
focused on first call resolution, which involves both an enhanced automated call
distribution system that directs callers into the customer service center based
on the type of question they have, and specially trained agents with the tools
to resolve customer issues. We further enhanced our call center functionality
with the implementation of an interactive voice response (“IVR”) system in 2004.
Our service representatives use our operations support system to gain immediate
access to our customers' data, enabling quick responses to customer requests and
needs at any time. This system also allows us to present our customers with one
fully integrated monthly billing statement for all communication services. We
believe that providing quality customer service is essential to offering a
superior product and service offering to our customers and creating customer
loyalty.

Our
quality customer “experience” is evidenced by the customer satisfaction ratings
received from new customers we poll 45 days after they began service with
Mpower.

One
measure of customer satisfaction is “churn.” Churn is defined as the percentage
of lines that are disconnected in any given period of time. Our average monthly
churn for business lines during the fourth quarter of 2004 was 1.6% and has been
approximately at that level over the prior several quarters. We expect our
monthly churn for business lines in 2005 to be similar to what we experienced in
the fourth quarter of 2004.

**Sales
Approach**

We
provide personal relationships for businesses that are designed to save our
customers time, energy and money. The Mpower team consists of the following
functions, whose responsibilities are as indicated below:

**7**
•
    **Dedicated
      Account Managers:**Understand our customers’ businesses and determine the best communications
      solution to meet their needs. Our organization structure has two distinct
      sales channels to separately pursue “major markets” and “mid markets”
      customers.•
    **Sales
      Engineers:**Provide technical expertise, solution design and interface with IT
      partners and vendors.•
    **Field
      Marketing**:
      Provide focused materials and qualified leads for key vertical markets
      such as real estate, automotive, financial and retail
  food.•
    **Provisioning
      Representatives:**Communicate with customers to ensure high quality
    conversions.•
    **Field
      Technicians:**Provide smooth installations and timely field repair.•
    **Customer
      Care Associates:**Committed
      to exceeding customer expectations.•
    **Customer
      Account Managers:**Located in each market to provide local-level
support.

As of
February 2005, we have approximately 30 quota carrying account mangers serving
our major markets and approximately 70 quota carrying account managers serving
our mid markets. During 2004, approximately 78% of our new sales were acquired
through our direct sales force and supporting staff. Our account managers
personally meet with customers to determine the best communications solution for
them. As a result of this design, much of our business comes through referrals
and networking. We have a highly focused relationship-building approach that
seeks to generate well-managed, profitable growth through increased market share
with minimal customer turnover. Our major markets and mid markets sales channels
are divided into teams within markets. Our direct sales efforts are complemented
by our telemarketing and agent channels.

Our
account managers are supported by sales coordinators, customer account managers,
service delivery personnel and lead generators. These support personnel function
as the liaison between the small business customer and our operational personnel
to effect a coordinated transfer of service from the incumbent carrier's network
to our network. Field technicians are responsible for the installation of
customer premise equipment, if required.

**Product
& Service Offerings**

As an
integrated service provider, we offer a variety of voice and data services that
come as a bundled solution, or can be conveniently packaged or purchased as
stand-alone products.

***Data
and Internet Services***

Our IP
network is designed to provide data solutions that meet the needs of today’s
growing businesses. We believe that our IP network is secure, reliable and
advanced. We deliver data in three ways:

•
    Over
      an economic variable speed loop with Modem (SDSL),•
    Over
      a dedicated circuit (typically a T1, which we call “MpowerConnect”),
      and•
    Integrated
      with Voice (typically over a T1, which we call
      “MpowerOffice”).

**8**
***Voice
and Data Integrated Solutions***

Our IP
network infrastructure enables integration of business voice and data
communications and e-commerce applications, while streamlining business
processes by way of the Internet (also known as VOIP). We package voice and data
applications to provide value-added solutions from one provider, one point of
contact and one invoice.

The
MpowerOffice service offering includes:

•
    High
      speed Internet access: 768k, 1.1 Megabit (“Mb”) or
1.5Mb•
    Voice
      lines: 4 - 24 lines•
    Choice
      of call control services: unlimited features or Centrex•
    Remote
      Internet access: 3 dialup accounts•
    IP
      applications: 20 email accounts, 70Mb web space and domain name service
      (“DNS”) (up to 4 domains)

The
MpowerEnterprise service offering includes:

•
    High
      speed Internet access: 1.544 Megabits per second
  (“Mbps”)•
    Integrated
      services digital network (“ISDN”) PRI: 23 channels•
    Choice
      of call control services: direct inward dialing (“DIDs”), CallerID,
      Automatic Channel Selection and Hunting•
    Long
      Distance: varying amounts of free domestic minutes are bundled depending
      on the sales.

***VoicePipe***

With the
acquisition of ICG, we have accelerated our speed-to-market with IP Centrex and
launched VoicePipe service.

•
    VoicePipe
      is an IP Telephony technology that converges (or combines) customers’
      voice, data and long distance over a single connection. Its dynamic
      bandwidth allocation provides 100% availability of all bandwidth and
      exceptional digital call quality•
    It
      requires no investment in a telephone system and works with both analog
      and certain Internet protocol phones•
    It
      offers all the features and functionality of a traditional phone system
      while providing a web interface/portal for each
user.

***SDSL
High Speed Internet***

SDSL
High-Speed Internet uploads and downloads files at equally fast rates, providing
Internet access at speeds equal to that of a T1—but at a fraction of the cost.
Our SDSL offers equal upstream and downstream speeds of up to 1.5 Mbps. Unlike
Asymmetrical Digital Subscriber Line (“ADSL”), which only allows quick
downloads, SDSL has the power to both receive and send large amounts of data at
high speeds. SDSL can move data 50 times faster than a dial-up modem and 10
times faster than ISDN. Our SDSL service offering includes:

**9**
•
    Multiple
      convenient tiers of speed up to 1.544 Mbps•
    SDSL
      modem•
    Web
      hosting•
    Email
      addresses•
    Domain
      name hosting•
    Always-on,
      secure high-speed Internet connection•
    24/7
      repair support•
    Full
      domain name registration and email support.

***MpowerConnect***

MpowerConnect
is fast, reliable Internet access with up to a full T1-worth of bandwidth. Use
of a T1 bypasses distance limitations associated with some technologies and
offers many benefits in terms of service quality while providing 1.544 Mbps of
bandwidth. Our product and service offering includes both integrated voice and
data T1 packages, as well as a data-only T1 service. Delivered through a
combination of telephone and data network facilities, MpowerConnect is designed
to be predictable, stable, fully symmetric, and feature speeds of up to 1.544
Mbps. Additional features, such as blocks of IP addresses, custom email
accounts, and Web Hosting, are also available.

Standard
packages are available at either 768 Kilobits per second (“Kbps”) or 1.544 Mbps
Internet access speeds, with a variety of feature package upgrades and a la
carte feature options including:

•
    DNS
      of public IP services such as Web Hosting and email•
    Custom
      email addresses•
    40,
      70, or 100 Mb Web Hosting•
    Dial-up
      Internet account•
    Block
      of up to 4, 8, or 16 IP addresses.

Web
hosting: Our customers can register a new domain name or transfer a current
domain name to our servers. Our servers will be the origination point for our
business customers’ online presence including their email services. Additional
options are available to build online storefronts with secure online credit card
transactions.

Email:We offer
email services with many features and hosted in our data centers. We offerUsername@mpowermail.netemail
addresses and domained email accounts are also available.

***Mpower
OfficeScreen***

•
    A
      turn-key all inclusive managed security and VPN solution for businesses
      that need secure connectivity for remote offices and mobile users for
      secure offices with up to 1,000 PCs going to the Internet concurrently and
      100 VPN tunnels and/or remote clients.

**10**
***Mpower’s
Dedicated Internet Access (DIA)***

•
    Designed
      for customers who normally need to rely on a specific amount of bandwidth
      above T1 speed, but may occasionally require more bandwidth due to traffic
      peaks. Our DIA product allows our customers with dynamic traffic needs to
      sporadically “burst” above the selected minimum port speed, so higher
      volume traffic gets through when it needs
to.

***Voice******Services***

Our
intelligent network has been designed to provide the platform to provide the
highest level of quality and reliability to deliver local and long distance
telephone services. We offer many combinations of voice services. A full suite
of features and calling plans are also available. Voice services options
include:

•
    PRI:
      A solution for businesses with high call volumes, includes local service,
      40 direct-dial numbers, caller ID, flat rate local and local-toll usage,
      low long distance rates, among other features.•
    Trunks:
      Cost-effective, digital voice communications with applications for call
      centers, general office use, smaller offices and sales
      offices.•
    Business
      Voice Services: A complete menu of custom calling features, local number
      portability, 911, directory, long distance information services, among
      other features.•
    Centrex:
      Standard features include unique phone numbers for each employee, 3-way
      calling, last number redial with additional features
      available.•
    Long
      Distance: Long distance service across the country and internationally at
      competitive rates.•
    Calling
      Card: Customers can make calls from anywhere and take advantage of our low
      rates.•
    Business
      Toll-Free Service: Toll-free phone numbers with no setup fees, monthly
      fees or minimums. Service options available for U.S., Canada and the
      Caribbean.•
    Voicemail:
      Retrieve messages from any touch-tone phone, post greeting announcements
      and store messages for up to 30 days. Optional features allow for
      expansion of voice mail capacity.•
    Local
      Operator Services support analog business lines, digital trunks and ISDN
      PRI.•
    Long
      Distance Operator Services are provided for domestic (1+ and Toll Free),
      international and calling card.•
    Features
      - Call control services: An extensive list of customer calling and Centrex
      features in addition to voicemail and audio and web
      conferencing.•
    Conference
      Calling: Automated 24/7 Reservationless Conferencing for virtual meetings
      24 hours a day, seven days a week.•
    Long
      Distance Account Codes: Group and track calls for accounting and billing
      purposes and prevent unwanted long distance calls over your company’s
      phone lines.

**11**
***Wholesale
Products***

•
    Mpower
      PRI: A communications package for businesses with high call volumes.
      Includes local service, 40 direct-dial numbers, caller ID, flat rate local
      and local-toll usage, low long distance rates, and other
      features.•
    Mpower
      Collocation: Leasing managed collocation space from us allows carriers to
      establish a presence in new markets quickly and cost effectively, improve
      their network performance, and take advantage of our broad portfolio of
      services.•
    Mpower
      Inbound PRI: Allows customers to manage incoming modem and voice traffic.
      Offers the feature of caller ID, DID, and hunting.•
    Mpower
      Private Line: Local and Inter-city Private Line Service. Dedicated
      bandwidth between LATAs, cities, or buildings.•
    Mpower
      Trunks: Cost-effective, digital voice communications that allow carriers
      to expand operations. Provides options for call centers, general office
      use, smaller offices, and sales offices.•
    Mpower
      UNE-P Solution: An alternative solution for UNE-P resellers. Provides
      carriers with access to our facilities-based deep and dense network with
      POTS switching service distributed over 297 wire
  centers.

**Markets**

As of
February 2005, we operate in five markets in three states and have 297 incumbent
carrier central office collocation sites and 177 off-network collocations. The
major markets in our footprint are: Los Angeles, California, San Diego,
California, Northern California (the San Francisco Bay area and Sacramento), Las
Vegas, Nevada and Chicago, Illinois. The table below shows the distribution of
our central office collocation sites within these markets.

**Number
      of Collocations****Market**
    
    **On-Network**
    **Off-Network**Los
      Angeles
    
    142
    63San
      Diego
    
    28
    19Northern
      California
    
    43
    64Las
      Vegas
    
    18
    —Chicago
    
    66
    31Totals
    
    297
    177

We
believe there is significant scaling potential within our existing market
footprint, given our past success in market penetration in our base of original
markets. In addition, our network backbone is scalable and can provide
reliability and service quality across our collocation footprint, while
affording us the benefit of spreading the fixed costs across our markets. Use of
off-network facilities will also allow us to sell certain T1 services to
customers that are not within the geographic reach of our collocation
sites.

With the
acquisition of ICG, our network now also includes a 1,412 route mile intrastate
SONET fiber ring connecting all the major cities in California: San Diego, Los
Angeles, San Francisco, Oakland, San Jose, Sacramento, Stockton, Fresno,
Bakersfield, Anaheim, plus 915 miles of metropolitan fiber rings in San Diego,
Los Angeles, San Francisco, Oakland, San Jose, Sacramento, and Anaheim
connecting 128 commercial buildings.

**12**
**Network
Architecture and Technology**

**Network
Architecture**

Our IP
network uses an integrated IP-based architecture to deliver converged voice and
data over a single platform with seamless integration and delivery. We control
the bandwidth and use dynamic bandwidth allocation when we offer integrated
voice and data services. We believe that our voice offerings, which are
delivered over T1s, are high quality VOIP.

Our
integrated voice and data offerings are delivered over a single, IP-based
network with a single invoice as opposed to an alternative which cobbles
together products and services over multiple networks and manages multiple
business support systems.

Network
Technology:

•
    Facilities-based
      network•
    Can
      support multiple “last mile loop” access methods•
    Single,
      integrated voice and data network•
    Network
      design benefits from favorable economics of VOIP, Internet and
      packet-based technologies.

We
believe our network technology offers the following benefits to our
customers:

•
    Seamless
      installation, integration and lower costs•
    Dynamic,
      efficient use of bandwidth - all applications using the same
      facility•
    Single
      bandwidth facility easier to manage as compared to voice channels and
      bandwidth•
    Today’s
      data business applications utilize IP protocol•
    One
      point of contact with one bill.

Traditional
networks provide narrowband voice and data services over a circuit-switched
network. When these services are bundled, they are delivered over “separate”
voice and data networks. Our IP network infrastructure enables integration of
business communication and commerce applications, while streamlining business
processes by way of the Internet.

Our
facilities-based, local telephone and data network consists of seven switches
and 474 network access points providing extensive service coverage in Las Vegas,
Nevada, Chicago, Illinois and throughout California. Our network
features:

•
    Recognized
      vendors at every layer of network architecture•
    Comprehensive
      collocation coverage in every market•
    Network
      architecture which fully supports integrated communications services from
      POTS to Integrated Voice and Data over IP, and designed to support future
      technologies•
    Our
      network reliability was 99.998% for the fourth quarter of 2004 and 99.996%
      for all of 2004.

**13**
We were
one of the first competitive communications carriers to implement a
facilities-based network strategy. As a result, we own the network switches that
control how voice and data transmissions originate and terminate, and we lease
from the incumbent local carrier only the telephone lines over which the voice
and data traffic are transmitted. In addition, FCC regulations currently require
incumbent carriers to lease telephone lines to us at just and reasonable rates.
Because we have already invested and built our network, we are able to serve our
markets at a comparatively low cost while maintaining control of the access to
our customers. By comparison, many CLECs do not control their own facilities
and, therefore, are more dependent upon the local Bell companies and the federal
and state regulatory environment in order to ensure the viability of their
business plans.

We have
implemented a strategy enabling us to own the hardware that routes voice calls
and data traffic, which we refer to as "switches," while leasing the telephone
lines and cable over which the voice calls and data traffic are actually
transmitted, which we refer to as "transport." We use three basic types of
transport to transmit voice calls and data traffic. First, we lease the standard
telephone line from the incumbent carrier. This allows us to move voice calls
and data traffic from a customer's location to the nearest central office owned
by the incumbent carrier. Inside these central offices, we have equipment that
allows us to deliver the services we sell to our customers. Second, we lease
network capacity from other communications companies, which connects the
equipment we installed in the central office of the incumbent carrier to our
switches. Third, we lease additional network capacity from other communications
companies, which connect our switches to each other and allow us to complete our
customers' long distance calls to national and international destinations in
addition to providing our customers connectivity to the Internet. We believe
this network strategy provides us an efficient capital deployment plan, which
should allow us to achieve an attractive return on our invested
capital.

We
believe that leasing the standard telephone line from the incumbent carrier’s
central office to the end-user provides a cost-efficient solution for gaining
control of access to our customers. Leasing costs are not incurred until we have
acquired a customer and revenue can be generated. It is our experience that the
network required to connect our collocation equipment located at an incumbent
carrier’s central office to our switching hardware and the network required to
connect our customers' voice calls and data traffic to the Internet and other
telephones is available at competitive rates in all of our current markets.
Because the network connection required to transport voice calls and data
traffic has become a readily available service from numerous other
communications companies, we focused our efforts on owning and installing the
hardware that determines where to route voice calls and data traffic and on
selling and delivering our services to our customers.

We have
seven operational voice switches. All of our current voice switches are DMS-500
switches manufactured by Nortel Networks. These switches offer a flexible and
cost efficient way for us to provide local and long distance services to our
customers.

Once we
install equipment in the collocation sites we lease from the incumbent carrier,
we initiate service to a customer by arranging for the incumbent carrier to
physically disconnect a standard telephone line from their equipment and
reconnect the same standard telephone line to our equipment. When the standard
telephone line has been connected to our equipment, we have direct access to the
customer and can deliver our voice and data services. Any future changes the
customer wishes to make, such as purchasing more services from us, are under our
direct control.

We have
installed our equipment in 297 collocation sites as of February 2005, and serve
another 177 adjacent collocations by way of off-network facilities for a total
of 474 collocations in our five markets. We began to sell into these off-network
areas commencing in April 2004. Our seven host switching sites are connected to
each other, which allows us to transmit data traffic using asynchronous transfer
mode (“ATM”) technology. ATM technology allows both voice calls and data traffic
to be transported in digital form over a single cable connection at high speeds
and reasonable costs. By deploying SDSL and T1 technology into our network, we
are now able to transport both voice calls and data traffic in digital form on a
single telephone line from a customer's location to one of our
switches.

**SDSL
Technology**

Using
SDSL technology, we can increase the amount of information we carry on a
standard telephone line, which we refer to as bandwidth, to up to 1.5 Mbps. This
bandwidth is the equivalent of 24 regular voice telephone lines. Our SDSL
equipment is programmed to allocate the available bandwidth. For example, voice
calls are carried at 64 Kbps; if a customer has eight phone lines and all are in
use at the same time, then 512 Kbps (eight phone lines multiplied by 64 Kbps
each) of the total 1.5 Mbps are allocated for the voice calls. The remaining
bandwidth, up to 1024 Kbps, is available to carry the data traffic.

**14**
We
believe the SDSL technology significantly reduces our customers' potential for
service outages when the incumbent carrier moves the standard telephone line
from their equipment to ours. Additionally, we believe this technology reduces
our costs since we lease a reduced number of standard telephone lines per
customer from the incumbent carrier. For example, if a customer today has eight
voice lines, we must order from and provision through the incumbent carrier
eight individual standard telephone lines. If the same customer were to buy our
service offering and we deliver the service using SDSL technology, we only order
and provision one standard telephone line from the incumbent carrier and are
still able to provide eight voice lines to the customer.

**T1
Technology**

With
4-wire T1 technology we eliminate the impact of distance limitations and service
quality sometimes associated with SDSL. A T1 will consistently offer 1.544
million Mbps data speed. With this technology, we now have an alternative to
SDSL when network restrictions will not permit SDSL usage. Our T1 product and
service offerings provide customers a choice between integrated service,
data-only service and trunks. All use the same underlying transport and
equipment technology.

"Integrated"
service refers to the combination of both traditional voice services such as
local and long distance service, and high speed Internet connectivity. It refers
to a service that offers both voice and data across a single cable. Hardware
specifically designed to manage these various types of traffic is needed at both
the customer premise and within our network. This service allocates unused
bandwidth from telephone lines not in use to the usable data bandwidth. For
example: A customer purchases a package of 8 voice lines and 1 Mbps of data
bandwidth. When the customer is not using any of the voice lines, the customer
will receive the full 1.544 Mbps for data. However, if the customer is using all
of the voice lines, only 1 Mbps will be available for data.

The
"data-only" T1 service provides a more robust and higher bandwidth data offering
that routes Internet traffic directly to the Internet backbone. Customers
receiving this service will not receive any voice lines, but likewise there will
be no voice lines to limit bandwidth. Even though no voice lines come with the
package, the same customer premise device is used in order to maintain a
consistency of equipment in our network.

The
“trunk” service provides up to 24 channels over a single T1 for carrying voice
or data traffic to and from the customers Private Branch Exchange (“PBX”) or Key
System. With our trunk service, the customer provides the equipment at their
premise. Our T1 trunk services offer various features with five different
pathing options including DID.

**Customer
Premise Equipment**

We use
two basic types of equipment at the customer premise. One is called a "modem"
and the other an Integrated Access Device ("IAD"). A modem is used for an SDSL
data-only connection. Here, no voice ports are needed and therefore the modem is
adequate to support the SDSL connection. The modem communicates with our
collocation by way of a DSL link and the customer's network by way of an
Ethernet link. The IAD is used for SDSL integrated access, T1 integrated access
and T1 Data Only. Within our network on the Wide Area Network (“WAN”), the IAD
has a built-in modem that communicates with the SDSL and/or T1 link. From the
customers' perspective, the IAD appears as regular phone service for the voice
channels, and an Ethernet port for data traffic. An IAD is also used for the
Data-Only T1 service to reduce the number of devices used at the customer
premise.

***Interconnection
Agreements and Competitive Carrier Certifications***

In the
ordinary course of business, we have negotiated interconnection agreements with
SBC Corp. (with its California and Illinois subsidiaries), Sprint Nevada and
Verizon California. We are in the process of negotiating new agreements as these
current agreements expired during 2004. While the parties negotiate new
agreements, these agreements continue in full force and effect under the
existing terms and conditions. These agreements specify the terms and conditions
under which we lease unbundled network elements (“UNEs”) including type of UNE,
price, delivery schedule, and maintenance and service levels. The term of these
agreements is generally two years. The agreements provide for continued
enforceability while the parties negotiate and, if necessary, arbitrate the
terms and conditions of a new agreement.

**15**
We
possess certificates of public convenience and necessity in each of our markets.
This certifies that we are approved to provide telephone service as both a local
telephone company and long distance carrier in all of our existing
markets.

**Government
Regulations**

***Overview***

Our
services are regulated at the federal, state and local levels. The FCC exercises
jurisdiction over all facilities of, and services offered by, communications
common carriers like us, when those facilities are used in connection with
interstate or international communications. State regulatory commissions have
some jurisdiction over most of the same facilities and services when they are
used in connection with communications within the state. In recent years, there
has been a dramatic change in the regulation of telephone services at both
federal and state levels as both legislative and regulatory bodies seek to
enhance competition in both the local exchange and interexchange service
markets. These efforts are ongoing and many of the legislative measures and
regulations adopted are subject to judicial review. We cannot predict the impact
on us of the results of these ongoing legislative and regulatory efforts or the
outcome of any judicial review.

***Federal
Regulation***

The FCC
regulates interstate and international communications services, including access
to local telephone facilities to place and receive interstate and international
calls. We provide these services as a common carrier. The FCC imposes more
regulation on common carriers that have some degree of market power, such as
incumbent local exchange carriers. The FCC imposes less regulation on common
carriers without market power, including competitive carriers like us. The FCC
grants automatic authority to carriers to provide interstate long distance
service, but requires common carriers to receive an authorization to construct
and operate communications facilities, and to provide or resell communications
services, between the United States and international points.

The FCC
has required competitive carriers like us to cancel their tariffs for domestic
interstate and international long distance services, which were schedules
listing the rates, terms and conditions of all these services offered. Even
without tariff filing, however, carriers offering interstate and international
services must charge just and reasonable rates and must not discriminate among
customers for like services. The FCC may adjudicate complaints against carriers
alleging violations of these requirements.

Our
charges for interstate access services, which includes the use of our local
facilities by other carriers to originate and terminate interstate calls, remain
governed by tariffs. In April 2001, the FCC adopted new rules that limit our
rates for these services. Under these rules, which took effect on June 20, 2001,
competitive carriers were required to reduce their switched access charges to
rates no higher than 2.5 cents per minute. After one year (effective June 2002),
the rate ceiling was reduced to 1.8 cents and after two years (effective June
2003) to 1.2 cents per minute. After three years (effective June 2004), all
competitive carriers were required to charge rates no higher than the incumbent
telephone company, currently in the range of 0.7 to 1.0 cents per minute. No
other rate decreases are currently mandated.

The FCC
imposes numerous other regulations on carriers subject to its jurisdiction, some
of the most important of which are discussed below. The FCC also hears
complaints against carriers filed by customers or other carriers and levies
various charges and fees.

**16**
Except
for certain restrictions placed on the Bell operating companies, the
Telecommunications Act permits virtually any entity, including cable television
companies and electric and gas utilities, to enter any communications market.
The Telecommunications Act takes precedence over inconsistent state regulation.
However, entities that enter communications markets must follow state
regulations relating to safety, quality, consumer protection and other matters.
Implementation of the Telecommunications Act continues to be affected by
numerous federal and state policy rulemaking proceedings and review by courts.
We are uncertain as to how our business may be affected by these
proceedings.

The
Telecommunications Act is intended to promote competition. The
Telecommunications Act opens the local services market to competition by
requiring incumbent carriers to permit interconnection to their networks and by
establishing incumbent carrier and competitive carrier obligations with respect
to:

*Reciprocal
Compensation.*All
incumbent carriers and competitive carriers are currently required to complete
local calls originated by each other under reciprocal arrangements at prices
based on tariffs or negotiated prices.

*Resale.*All
incumbent carriers and competitive carriers are required to permit resale of
their communications services without unreasonable restrictions or conditions.
In addition, incumbent carriers are required to offer wholesale versions of all
retail services to other common carriers for resale at discounted rates, based
on the costs avoided by the incumbent carrier by offering these services on a
wholesale basis.

*Interconnection.*All
incumbent carriers and competitive carriers are required to permit their
competitors to interconnect with their facilities. All incumbent carriers are
required to permit interconnection at any feasible point within their networks,
on nondiscriminatory terms, at prices based on cost, which may include a
reasonable profit. At the option of the carrier requesting interconnection,
collocation of the requesting carrier's equipment in the incumbent carriers'
premises must be offered.

*Unbundled
Access.*All
incumbent carriers are required to provide access to specified individual
components of their networks, which are sometimes referred to as UNEs, on
nondiscriminatory terms and at prices based on cost, which may include a
reasonable profit.

*Number
Portability.*All
incumbent carriers and competitive carriers are required to permit users of
communications services to retain their existing telephone numbers without
impairing quality, reliability or convenience when switching from one common
carrier to another.

*Dialing
Parity.*All
incumbent carriers and competitive carriers are required to provide "1+" equal
access dialing to competing providers of long distance service, and to provide
nondiscriminatory access to telephone numbers, operator services, directory
assistance and directory listing, with no unreasonable dialing
delays.

*Access
to Rights-of-Way.*All
incumbent carriers and competitive carriers are required to permit competing
carriers access to their poles, ducts, conduits and rights-of-way at regulated
prices.

Incumbent
carriers are required to negotiate in good faith with carriers requesting any or
all of the above arrangements. If the negotiating carriers cannot reach
agreement within a predetermined amount of time, either carrier may request
arbitration of the disputed issues by the state regulatory
commission.

Our
business relies to a considerable degree on the use of incumbent carrier network
elements, which we access through collocation arrangements in incumbent carrier
offices. The terms and conditions, including prices, of these network elements
and collocation elements are largely dictated by regulatory decisions, and
changes in the availability or pricing of these facilities can have significant
effects on our business plan and operating results.

**17**
The
requirement that incumbent carriers unbundle their network elements has been
implemented through rules adopted by the FCC. In January 1999, the United States
Supreme Court confirmed the FCC's broad authority to issue these rules, but
vacated a particular rule that defined the network elements the incumbent
carriers must offer. In a November 1999 order, the FCC reaffirmed that incumbent
carriers must provide unbundled access to a minimum of six network elements
including local loop and transport facilities (the elements in primary use by
us).

In August
2003, the FCC released its Triennial Review Order (“TRO”) in connection with the
FCC’s review of UNEs. The incumbent carriers are required to sell to competitive
carriers such as us at forward-looking or Total Element Long Run Incremental
Cost (“TELRIC”) rates, which reflect efficient costs plus a reasonable profit.
Competitive carriers such as us may depend upon the ability to obtain access to
these UNEs in order to provision services to their customers. The FCC ordered
that it would de-regulate access to the incumbent carriers’ fiber/broadband
network but would continue to require that incumbents provide access to their
copper network and to digital signal level 1 (“DS-1”) and digital signal level 3
(“DS-3”) loops and transport. We primarily buy access to the incumbents’ copper
network and to DS-1s/T-1s. Although the FCC found that competitive carriers are
impaired without access to UNE loops and transport, the FCC provided state
commissions with an analytical framework to determine impairment on a local
basis.

In March
2004, the U.S. Court of Appeals for the District of Columbia Circuit issued its
opinion in United States Telecom Associations v. FCC, No. 00-1012 ("USTA
Decision") affirming the de-regulation of access to the incumbent carriers'
broadband networks and vacating the FCC rules delegating authority to the
states. On February 4, 2005, the FCC issued an order announcing that it modified
the unbundling obligations for ILECs. The FCC clarified and modified the
impairment standard adopted in the 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, we expect few of our loops and
transport will be affected. The FCC has requested that the ILECs identify the
specific wire centers that will be affected. In response to an FCC request, the
ILECs have identified the specific wire centers that they contend will be
affected. Until the supporting data has been analyzed by competitive carriers
and state regulatory bodies, a definitive list of wire centers cannot be known
with certainty. Therefore, we cannot predict the degree to which the new rules
regarding loops and transport will 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., such as transport which is used
to connect parts of our network). At present, it is not possible to predict how
future rates will compare to the current TELRIC rates but it is possible the new
rules could adversely affect our cost of doing business by increasing the cost
of purchasing or leasing network facilities. The Triennial Review Remand Order
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.

On February 8, 2005, the FCC adopted (but has not yet released) an
order asking for comment on various plans that have been submitted to it
recently for reform of intercarrier compensation, including access charges and
reciprocal compensation. Some of these plans, if adopted by the FCC, could
establish “bill-and-keep” for intercarrier compensation, which could eliminate
or substantially restrict our ability to recover access charges and/or
reciprocal compensation. Although this could adversely affect our revenues, it
is not clear at this point when or whether the FCC will adopt any such reform
program or when it will complete this proceeding.

In
February 2002, the FCC requested comments on a number of issues relating to
regulation of broadband Internet access services offered over telephone company
facilities, including whether the incumbent carriers should continue to be
required to offer the elements of these services on an unbundled basis. Any
change in the existing rules that would reduce the obligation of incumbent
carriers to offer network elements to us on an unbundled basis could adversely
affect our business plan.

In May
2002, the prices that incumbent carriers may charge for access to these network
elements was determined by the Supreme Court, which affirmed that incumbent
carriers are required to price these network elements based on the efficient
replacement cost of existing technology, as the FCC methodology now requires,
rather than on their historical costs. The Court also determined that the FCC
may require incumbent carriers to combine certain previously uncombined elements
at the request of a competitive carrier. In September 2003, however, the FCC
initiated a review of these rules applicable to the pricing of UNEs. The FCC
review will determine whether the rules foster competition and investment. We
cannot predict the outcome of this review.

**18**
In
November 2001, the FCC initiated two rulemaking proceedings to establish a core
set of national performance measurements and standards for evaluating an
incumbent carrier's performance in provisioning wholesale facilities and
services to competitors. It sought comment on a set of specific performance
measurements and on related issues of implementation, reporting requirements,
and enforcement mechanisms. We cannot predict the ultimate outcome of these
proceedings and it is not clear when, or if, the FCC will complete this
proceeding.

In
December 2001, the FCC initiated a review of the current regulatory requirements
for incumbent carriers' broadband telecommunications services. Incumbent
carriers are generally treated as dominant carriers, and hence are subject to
certain regulatory requirements, such as tariff filings and pricing
requirements. In this proceeding, the FCC seeks to determine what regulatory
safeguards and carrier obligations, if any, should apply when a carrier that is
dominant in the provision of traditional local exchange and exchange access
services provides broadband service. A decision by the FCC to exempt the
incumbent carriers' broadband services from traditional regulation could have a
significant adverse competitive impact. However, it is not clear when, or if,
the FCC will complete this proceeding.

The
Telecommunications Act also contains special provisions that replace prior
antitrust restrictions that prohibited the regional Bell operating companies
from providing long distance services and engaging in communications equipment
manufacturing. Before the passage of the Telecommunications Act, the regional
Bell operating companies were restricted to providing services within a distinct
geographical area known as a local access and transport area (“LATA”). The
Telecommunications Act permits the regional Bell operating companies to provide
interLATA long distance service immediately in areas outside of their market
regions and within their market regions once they have satisfied several
procedural and substantive requirements, including:

•
    a
      showing that the regional Bell operating company is subject to meaningful
      local competition in the area in which it seeks to offer long distance
      service; and•
    a
      determination by the FCC that the regional Bell operating company's entry
      into long distance markets is in the public
interest.

All of
the Bell Operating Companies have obtained authority to provide interLATA long
distance services in all of their operating areas and are authorized to compete
throughout their operating areas with packages of bundled services, or “one stop
shopping.” With the completion of this process, incentives for incumbent
carriers to improve service to competitive carriers like us in order to obtain
interLATA long distance authority will be virtually eliminated while at the same
time, the regional Bell operating companies will be in a position to become more
efficient and attractive competitors.

In
several orders adopted in recent years, the FCC has made major changes in the
structure of the access charges incumbent carriers impose for the use of their
facilities to originate or complete interstate and international calls. Under
the FCC's plan, per-minute access charges have been significantly reduced, and
replaced in part with higher monthly fees to end-users and in part with a new
interstate universal service support system. Under this plan, the largest
incumbent carriers are required to reduce their average access charge to $0.0055
per minute over a period of time, and some of these carriers have already
reduced their charges to the target level.

In August
1999, the FCC adopted an order providing additional pricing flexibility to
incumbent carriers subject to price cap regulation in their provision of
interstate access services, particularly special access and dedicated transport.
The FCC eliminated rate scrutiny for "new services" and permitted incumbent
carriers to establish additional geographic zones within a market that would
have separate rates. Additional and more substantial pricing flexibility will be
given to incumbent carriers as specified levels of competition in a market are
reached through the collocation of competitive carriers and their use of
competitive transport. This flexibility includes, among other items, customer
specific pricing, volume and term discounts for some services and streamlined
tariffing. On January 31, 2005, the FCC initiated a proceeding to reexamine its
regulation of special access services provided by incumbent carriers. The FCC
will examine whether it should reset pricing for special access and/or modify
the price cap and pricing flexibility rules governing incumbent carrier
provision of special access service. We are not able to predict the outcome of
this proceeding.

**19**
In May
1997, the FCC released an order establishing a significantly expanded federal
universal service subsidy program. This order established new subsidies for
telecommunications and information services provided to qualifying schools,
libraries and rural health providers. The FCC also expanded federal subsidies
for local dial-tone services provided to low-income consumers. Providers of
interstate telecommunications service, including us, must contribute to these
subsidies. Subsequently, the FCC created additional subsidies that primarily
benefit incumbent telephone companies. On a quarterly basis, the FCC announces
the contribution factor proposed for the next quarter. For the first quarter of
the year 2005, the contribution factor is 10.7% of a provider's interstate and
international revenue for the third quarter of 2004. We recover our share of
these costs through charges assessed directly to our customers and participation
in federally subsidized programs. Amounts received from customers, and payments
made, are pass-through items only that do not get recorded as revenue or costs
of revenue. The FCC is considering proposals to change the way contributions are
assessed, but we cannot predict when or whether the FCC will act on these
proposals.

***State
Regulation***

To
provide services within a state, we generally must obtain a certificate of
public convenience and necessity from the state regulatory agency and comply
with state requirements for telecommunications utilities, including state
tariffing requirements. We have satisfied state requirements to provide local
and intrastate long distance services in the states in which we currently
operate.

State
regulatory agencies have jurisdiction over our intrastate services, including
our rates. State agencies require us to file periodic reports, pay various fees
and assessments and comply with rules governing quality of service, consumer
protection and similar issues. These agencies may also have to approve the
transfer of assets or customers located in the state, a change of control of our
company or our issuance of securities or assumption of debt. The specific
requirements vary from state to state. State regulatory agencies also must
approve our interconnection agreements with incumbent carriers. Price cap or
rate of return regulation for competitive carriers does not apply in any of our
current markets. Imposition of new regulatory burdens in a particular state
could affect the profitability of our services in that state.

***Local
Regulation***

Our
networks must comply with numerous local regulations such as building codes,
municipal franchise requirements and licensing. These regulations vary on a city
by city and county by county basis. In some of the areas where we provide
service, we may have to comply with municipal franchise requirements and be
required to pay license or franchise fees based on a percentage of gross revenue
or other factors. Municipalities that do not currently impose fees may seek to
impose fees in the future. Fees may not remain at their current levels following
the expiration of existing franchises.

**Competition**

The
communications industry is highly competitive. We believe the principal
competitive factors affecting our business are:

**20**
•
    pricing
      levels and policies•
    transmission
      speed•
    customer
      service•
    breadth
      of service availability•
    network
      security•
    ease
      of access and use•
    bundled
      service offerings•
    brand
      recognition•
    operating
      experience•
    capital
      availability•
    exclusive
      contracts•
    accurate
      billing•
    variety
      of services.

To
maintain our competitive posture, we believe we must be in a position to reduce
our prices to meet any reductions in rates by our competitors. Any reductions
could adversely affect us. Many of our current and potential competitors have
financial, personnel and other resources, including brand name recognition,
substantially greater than ours, as well as other competitive advantages over
us. In addition, competitive alternatives may result in substantial customer
turnover in the future. Many providers of communications and networking services
experience high rates of customer turnover.

A
continuing trend toward consolidation of communications companies and the
formation of strategic alliances within the communications industry, as well as
the development of new technologies, could give rise to significant new
competitors that could put us at a competitive disadvantage.

***Local
Dial-tone Services***

*Incumbent
Carriers*

In each
of the markets we target, we compete principally with the incumbent carrier
serving that area. We have not achieved, and do not expect to achieve, a
significant market share for any of our services. The incumbent carriers have
long-standing relationships with their customers, have financial, technical and
marketing resources substantially greater than ours and have the potential to
subsidize competitive services with revenues from a variety of
businesses.

Incumbent
carriers also have long-standing relationships with regulatory authorities at
the federal and state levels. While regulatory initiatives that allow
competitive carriers to interconnect with incumbent carrier facilities provide
increased business opportunities for us, interconnection opportunities have been
and likely will continue to be accompanied by increased pricing flexibility for,
and relaxation of regulatory oversight of, the incumbent carriers. If the
incumbent carriers are allowed by regulators to offer discounts to large
customers through contract tariffs, engage in aggressive volume and term
discount pricing practices for their customers, and/or seek to charge
competitors excessive fees for interconnection to their networks, our operating
margins could be materially adversely affected. Future regulatory decisions that
give the incumbent carriers increased pricing flexibility or other regulatory
relief could have a material adverse effect on us.

**21**
*Competitive
Carriers/Long Distance Carriers/Other Market Entrants*

We face,
and expect to continue to face, competition from long distance carriers,
including AT&T, MCI, and Sprint, seeking to enter, re-enter or expand entry
into the local exchange market. We also compete with other competitive carriers,
resellers of local dial-tone services, cable television companies, electric
utilities, microwave carriers and wireless telephone system
operators.

The
Telecommunications Act includes provisions that impose regulatory requirements
on all incumbent carriers and competitive carriers but grants the FCC expanded
authority to reduce the level of regulation applicable to these common carriers.
The manner in which these provisions of the Telecommunications Act are
implemented and enforced could have a material adverse effect on our ability to
successfully compete against incumbent carriers and other communications service
providers.

The
Telecommunications Act radically altered the market opportunity for competitive
carriers. Many existing competitive carriers that entered the market before 1996
had to build a fiber infrastructure before offering services. With the
Telecommunications Act requiring unbundling of the incumbent carrier networks,
competitive carriers have been able to enter the market more rapidly by
installing switches and leasing standard telephone lines and cable or by means
of a type of resale known as an UNE-P. However, under an FCC order issued in
February 2005, the ILECs will no longer be required to offer a UNE-P
alternative. The FCC order is subject to appellate court review. See “Government
Regulations” above.

A number
of competitive carriers are in our markets. We believe that not all competitive
carriers, however, are pursuing the same target customers we pursue. We intend
to keep our prices at competitive levels while seeking to provide, in our
opinion, a higher level of service and responsiveness to our customers.
Innovative packaging and pricing of basic telephone services are expected to
provide competitive differentiation for us in each of our markets.

***Long
Distance Services***

The long
distance services industry is very competitive and many long distance providers
experience a high average turnover rate as customers frequently change long
distance providers in response to offerings of lower rates or promotional
incentives by competitors. Prices in the long distance market have declined
significantly in recent years. We expect to face increasing competition from
companies offering long distance, data and voice services over the Internet.
Companies offering these services over the Internet could enjoy a significant
cost advantage because they do not currently pay common carrier access charges
or universal service fees.

***Data
and Internet Services***

We expect
the level of competition with respect to data and Internet services to intensify
in the future. We expect significant competition from:

**22**
•
    *Incumbent
      Carriers.*Incumbent
      carriers sell commercial data and internet services. Some incumbent
      carriers have announced they intend to aggressively market these services
      to their residential customers at attractive prices. The incumbent
      carriers have an established brand name in their service areas, possess
      sufficient capital to deploy their services rapidly, invest in new
      technologies, and are in a position to offer service from central offices
      where we may be unable to secure collocation space.•
    *Traditional
      Long Distance Carriers.*Many
      of the leading traditional long distance carriers, including AT&T, MCI
      and Sprint, have expanded their capabilities to support high-speed,
      end-to-end networking services. These carriers have extensive fiber
      networks in many metropolitan areas that primarily provide high-speed data
      and voice services to large companies. They could deploy DSL services in
      combination with their current fiber networks. They also have
      interconnection agreements with many incumbent carriers and have secured
      collocation space from which they could begin to offer competitive DSL
      services. It is unclear at this time how the announced combinations of
      some of the traditional long distance carriers and certain ILECs will
      impact us.•
    *Newer
      Long Distance Carriers.*Numerous
      long distance carriers are managing high-speed networks nationwide, with
      direct sales forces, and are partnering with Internet service providers to
      offer services directly to business customers. They could extend their
      existing networks either alone or in partnership with
    others.•
    *Cable
      Modem Service Providers.*Cable
      television operators such as Cox Communications are offering, or are
      preparing to offer, high-speed Internet access over cable networks to
      consumers and businesses. These networks provide high-speed data services
      similar to our services, and in some cases at higher speeds. These
      companies use a variety of new and emerging technologies, including
      point-to-point and point-to-multipoint wireless services, satellite-based
      networking and high-speed wireless digital
  communications.•
    *Internet
      Service Providers.*Internet
      service providers offer Internet portal services which compete with our
      service. We offer basic web hosting and e-mail services and anticipate
      offering an enhanced set of Internet product and service offerings in the
      future. The competitive Internet service providers generally provide more
      features and functions than our current Internet
portal.•
    *Wireless
      Broadband Providers*.
      Wireless technology is now available for certain business applications
      both in licensed and unlicensed spectrums. As this technology becomes more
      acceptable and as the cost of required equipment continues to decrease,
      wireless broadband providers will become more competitive with us. We
      recognize the potential of this medium and are conducting feasibility
      studies to assess the current technological and economic viability as a
      service offering.

**Personnel**

As of
February 2005, we had approximately 800 employees. This number includes
approximately 40 ICG employees who were hired during November and December 2004
in preparation for the purchase and integration of ICG assets in January 2005.
This is a 10% increase from the approximate 730 employees at December 31, 2003.
None of our employees are represented by a collective bargaining
unit.


**RISK
FACTORS**

*Before
you invest in shares of our securities, you should be aware of various risks,
including the risks described below. Our business, financial condition or
results of operations could be materially adversely affected by any of these
risks. The risks and uncertainties described below or elsewhere in this report
are not the only ones facing us. Additional risks and uncertainties not
presently known to us or that we currently deem immaterial may also adversely
affect our business and operations. If any of the matters included in the
following risks were to occur, our business, financial condition, results of
operations, cash flows or prospects could be materially adversely affected. In
such case, you could lose all or part of your investment.*

**Our
losses and negative cash flows will continue if we are unable to reverse our
history of losses.**

We have
incurred net losses and negative cash flow in each year of our existence. We
will need to continue to improve our operating results to achieve and sustain
profitability and to generate sufficient positive cash flow from operations to
meet our planned capital expenditures, working capital and any future debt
service requirements. We have contractual commitments for approximately $12.9
million of payments during 2005 and plan to make approximately $10 million to
$14 million of non-ICG capital expenditures during the year. If the revenues
generated from our operations are not sufficient to cover these commitments and
other operating expenses, we will need to rely on our cash balances, credit
facility or other financing. Under any of these circumstances, our financial
condition will be weakened.

**23**
**Market
conditions and our past performance resulted in our bankruptcy reorganization in
2002.**

We filed
for bankruptcy protection in April 2002 and completed our bankruptcy
reorganization in July 2002. Although we eliminated substantially all of our
substantial debt burden in the reorganization, are now long-term debt free and
have improved our operating performance, we still face many of the same hurdles
that existed prior to the bankruptcy and that resulted in the failure of a
number of companies in our industry. In particular, we still have to compete
with well-entrenched telephone companies such as Verizon and SBC, and we must
still look to these aggressive competitors to supply us with access to their
facilities in order for us to serve our own customers.

**Failure
of the ICG acquisition to achieve anticipated benefits could harm our business
and operating results.**

We expect
that our acquisition of ICG’s customer base and certain network assets in
California will result in significant benefits for us. The acquisition will not
achieve its anticipated benefits unless we are successful in combining ICG's
operations and integrating its products and services with ours in a timely
manner. Integration will be a complex, time consuming and expensive process and
may result in disruption of our operations and revenues if not completed in a
timely and efficient manner. There may be substantial difficulties, costs and
delays involved in integrating the acquired business with ours. These could
include:

•
    distraction
      of management from our business•
    incompatibility
      of business cultures•
    customer
      perception of an adverse change in service standards, business focus,
      billing practices or product and service offerings•
    costs
      and inefficiencies in delivering products and services to ICG
      customers•
    difficulty
      in integrating sales, support and product marketing•
    costs
      and delays in implementing common systems and procedures, including
      financial accounting systems•
    the
      inability to retain and integrate key management, research and
      development, technical sales and customer support
    personnel.

Further,
we may not be able to realize any of the anticipated benefits and synergies of
the acquisition. Any one or all of the factors identified above could cause
increased operating costs, lower than anticipated financial performance, or the
loss of customers, employees or business partners. The failure to integrate the
ICG business with ours successfully would have a material adverse effect on our
business, financial condition and results of operations.

**Failure
to retain key employees could diminish the anticipated benefits of the ICG
acquisition.**

The
success of the ICG acquisition will depend in part on the retention of personnel
critical to the business and operations of ICG due to, for example, their
technical skills or management expertise. Some of ICG's employees may not want
to work for us. In addition, competitors may seek to recruit employees during
the integration. If we are unable to retain personnel that are critical to the
successful integration and future operation of the acquired business, we could
face disruptions in our operations, loss of existing customers, loss of key
information, expertise or know-how, and unanticipated additional recruitment and
training costs. In addition, the loss of key personnel could diminish the
anticipated benefits of the acquisition.

**24**
**Failure
to integrate the ICG business in a timely and cost efficient manner could have a
negative effect on our liquidity and operating results.**

Our
inability to integrate the customers and network assets acquired from ICG in a
timely and cost efficient manner may prevent us from achieving some or all of
the planned operational and cost synergies. If the integration takes longer than
anticipated or costs more than planned, it could have a negative impact on our
liquidity and operating results.

**Our
failure to achieve or sustain market acceptance at desired pricing levels could
impair our ability to achieve profitability or positive cash
flow.**

Prices
for data communication services have fallen historically, a trend that may
continue. Accordingly, we cannot predict to what extent we may need to reduce
our prices to remain competitive or whether we will be able to sustain future
pricing levels as our competitors introduce competing services or similar
services at lower prices. Our ability to meet price competition may depend on
our ability to operate at costs equal to or lower than our competitors or
potential competitors. There is a risk that competitors may undercut our rates,
increase their services or take other actions that could be detrimental to us.
Lower prices will negatively affect our ability to achieve and sustain
profitability.

**Changes
in laws or regulations could restrict the way we operate our business and
negatively affect our costs and competitive position***.*

A
significant number of the services we offer are regulated at the federal, state
and/or local levels. If these laws and regulations change or if the
administrative implementation of laws develops in an adverse manner, there could
be an adverse impact on our costs and competitive position. In addition, we may
expend significant financial and managerial resources to participate in
administrative proceedings at either the federal or state level, without
achieving a favorable result. We believe incumbent carriers and others may work
aggressively to modify or restrict the operation of many provisions of the
Telecommunications Act. We expect ILECs and others to continue to pursue
litigation in courts, institute administrative proceedings with the FCC and
other state regulatory agencies and lobby the United States Congress, all in an
effort to affect laws and regulations in a manner favorable to them and against
the interest of competitive carriers. Adverse regulatory developments could
negatively affect our operating expenses and our ability to offer services
sought by our existing and prospective customers.

**The
prices we charge for our services and pay for the use of services of ILECs and
other competitive carriers may be negatively affected in regulatory proceedings,
which could result in decreased revenues, increased costs and loss of
business.**

If we
were required to decrease the prices we charge for our services or to pay higher
prices for services we purchase from ILECs and other competitive carriers, it
would have an adverse effect on our ability to achieve profitability and offer
competitively priced services. We must file tariffs with state and federal
regulators, which indicate the prices we charge for our services. In addition,
we purchase some tariffed services from ILECs and/or competitive carriers. The
rates we pay for other services we purchase from ILECs and other competitive
carriers are set by negotiations between the parties. All of the tariffed prices
may be challenged in regulatory proceedings by customers, including ILECs,
competitive carriers and long distance carriers who purchase these services.
Negotiated rates are also subject to regulatory review. During the pendency of
the negotiations, or if the parties cannot agree, the local carrier must charge
the long distance carrier the appropriate benchmark rate established by
regulation. This could have an adverse impact on our expected revenues and
operating results. The prices charged by incumbent carriers for unbundled
network elements, collocations and other services upon which we rely are subject
to periodic review by state regulatory agencies. Change in these prices may
adversely affect our business.For more
details about our regulatory situation, please see “Government
Regulations.”

**25**
**The
reorganization of our sales force and ability to attract and retain sales
personnel may adversely affect our operating results.**

The
reorganization of our sales force has created a specific sales channel that
focuses on large customers. These customers have more complex decision processes
and more cautious approaches towards decision-making, resulting in a longer
sales cycle for us. In addition, there may be periods of time when the sales
force is not at its desired headcount in some or all of our sales channels,
which may result in fewer sales and adversely affect our operating results. In
addition, until a greater number of our sales personnel have been fully trained,
there may be a delay in our achieving the desired effectiveness from our sales
force, again adversely affecting our operating results.

**Our
services may not achieve sufficient market acceptance to allow us to become
profitable.**

To be
successful, we must develop and market services that are widely accepted by
businesses at profitable prices. Our success will depend upon the willingness of
our target customers to accept us as an alternative provider of local, long
distance, high-speed data and Internet services. Although always in the process
of evaluating and rolling out additional products and services, we might not be
able to provide the range of communication services our target business
customers need or desire. A failure to develop acceptable product and service
offerings will adversely affect our revenues and ability to achieve
profitability.

**If
we are not able to compete successfully in the highly competitive
telecommunications industry with competitors that have greater resources than we
do, our revenues and operating results will be negatively
affected.**

Our
success depends upon our ability to compete with other telecommunications
providers in each of our markets, many of which have substantially greater
financial, marketing and other resources than we have. In addition, competitive
alternatives may result in substantial customer turnover in the future. A
growing trend towards consolidation of communications companies and the
formation of strategic alliances within the communications industry, as well as
the development of new technologies, could give rise to significant new
competitors. If we cannot compete successfully, our revenues and operating
results will suffer.

**If
we are not able to obtain additional funds if and when needed, our ability to
grow our business and our competitive position in our markets will be
jeopardized.**

If we
cannot generate or otherwise obtain sufficient funds, if needed, we may not be
able to grow our business or devote the funds to marketing, new technologies and
working capital necessary to compete effectively in the communications industry.
We expect to fund any capital requirements through existing resources,
internally generated funds and debt or equity financing, if needed. We may not
be able to raise sufficient debt or equity financing, if and when needed, on
acceptable terms or at all. This could result in stagnant or declining revenues
and hence, additional losses.

**Fluctuating
operating results may negatively affect our stock price.**

Our
annual and quarterly operating results may fluctuate as a result of numerous
factors, many of which are outside of our control. These factors
include:

**26**
•
    delays
      in the generation of revenue because certain network elements have lead
      times that are controlled by incumbent carriers and other third
      parties•
    the
      ability to develop and commercialize new services by us or our
      competitors•
    the
      ability to deploy on a timely basis our services to adequately satisfy
      customer demand•
    our
      ability to successfully operate and maintain our
  networks•
    the
      rate at which customers subscribe to our services•
    decreases
      in the prices for our services due to competition, volume-based pricing
      and other factors•
    the
      development and operation of our billing and collection systems and other
      operational systems and processes•
    the
      rendering of accurate and verifiable bills from the ILECs from whom we
      lease transport and resolution of billing disputes•
    the
      incorporation of enhancements, upgrades and new software and hardware
      products into our network and operational processes that may cause
      unanticipated disruptions•
    the
      interpretation and enforcement of regulatory developments and court
      rulings concerning the 1996 Telecommunications Act, interconnection
      agreements and the antitrust laws•
    the
      timing and cost of the integration of the ICG assets
      purchased.

If our
operating results fluctuate so as to cause us to miss earnings expectations, our
stock price may be adversely affected.

**The
loss of senior members of our management team may adversely affect our operating
results.**

The loss
of senior management personnel could impair our ability to carry out our
business plan. We believe our future success will depend in large part on our
ability to attract and retain highly skilled and qualified personnel. If one or
more senior members of our management team leaves us, it may be difficult to
find suitable replacements. The loss of senior management personnel may
adversely affect our operating results as we incur costs to replace the departed
personnel and potentially lose opportunities in the transition of important job
functions. We do not maintain key man insurance on any of our
officers.

**If
our equipment does not perform as we expect, it could delay our introduction of
new services resulting in the loss of existing or prospective
customers.**

In
implementing our strategy, we may use new or existing technologies to offer
additional services. We also plan to use equipment manufactured by multiple
vendors to offer our current services and future services in each of our
markets. If we cannot successfully install and integrate the technology and
equipment necessary to deliver our current services and any future services
within the time frame and with the cost effectiveness we currently contemplate,
we could be forced to delay or abandon the introduction of new services. This
could adversely affect our ability to attract and retain customers, resulting in
a reduction of expected revenues.

**27**
**The
failure of our operations support system to perform as we expect could impair
our ability to retain customers and obtain new customers or could result in
increased capital expenditures.**

Our
operations support system is an important factor in our success and we continue
to invest funds in maintaining and improving it. If our operations support
system fails or is unable to perform, we could suffer customer dissatisfaction,
loss of business or the inability to add customers on a timely basis, any of
which would adversely affect our business, financial condition and results of
operations. Furthermore, problems may arise with higher processing volumes or
with additional automation features, which could potentially result in system
breakdowns and delays and additional, unanticipated expense to remedy the defect
or to replace the defective system with an alternative system.

**Our
failure to manage growth could result in increased costs.**

We may be
unable to manage our growth effectively, including the integration of ICG. This
could result in increased costs and delay our introduction of additional
services resulting in a reduction of expected revenues. The development of our
business will depend on, among other things, our ability to achieve the
following goals in a timely manner, at reasonable costs and on satisfactory
terms and conditions:

•
    purchase,
      install and operate equipment•
    negotiate
      suitable interconnection agreements with, and arrangements for installing
      our equipment at the central offices of, ILECs on satisfactory terms and
      conditions•
    hire
      and retain qualified personnel•
    lease
      suitable access to transport networks•
    obtain
      required government authorizations.

Any
significant growth will place a strain on our operational, human and financial
resources and will also increase our operating complexity as well as the level
of responsibility for both existing and new management personnel. Our ability to
manage our growth effectively will depend on the continued development of plans,
systems and controls for our operational, financial and management needs and on
our ability to expand, train and manage our employee base.

**If
we are unable to negotiate and enforce favorable interconnection agreements, we
may incur higher costs that would impair our ability to operate profitably in
our existing markets.**

We must
renew interconnection agreements currently in place with SBC Corp. (with its
California and Illinois subsidiaries), Sprint Nevada and Verizon California
after the FCC issues its new rules in the first quarter of 2005. Upon renewal of
our interconnection agreements in the markets in which we operate, the rates
charged to us under the interconnection agreements might be increased. The
increased prices might impair our ability to price our services in a way to
attract a sufficient number of customers and to achieve profitability. We may be
able to contest price increases on regulatory grounds, but we may not be
successful with any challenges and we could incur significant costs seeking the
regulatory review.

**Delays
by the ILECs in connecting our customers to our network could result in customer
dissatisfaction and loss of business.**

We rely
on the timeliness of ILECs and other competitive carriers in processing our
orders for customers switching to our service and in maintaining the customers’
standard telephone lines to assure uninterrupted service. Therefore, the ILECs
might not be able to provide and maintain leased standard telephone lines in a
prompt and efficient manner as the number of standard telephone lines requested
by competitive carriers increases. This may result in customer dissatisfaction
and the loss of new business.

**28**
**Our
reliance on a limited number of equipment suppliers could result in additional
expenses and loss of revenues.**

We
currently rely and expect to continue to rely on a limited number of third party
suppliers to manufacture the equipment we require. If our suppliers enter into
competition with us, or if our competitors enter into exclusive or restrictive
arrangements with our suppliers it may materially and adversely affect the
availability and pricing of the equipment we purchase. Our reliance on
third-party vendors involves a number of additional risks, including the absence
of guaranteed supply and reduced control over delivery schedules, quality
assurance, production yields and costs.

Our
vendors may not be able to meet our needs in a satisfactory and timely manner in
the future and we may not be able to obtain alternative vendors when and if
needed. It could take a significant period of time to establish relationships
with alternative suppliers for critical technologies and to introduce substitute
technologies into our network. In addition, if we change vendors, we may need to
replace all or a portion of the equipment deployed within our network at
significant expense in terms of equipment costs and loss of revenues in the
interim.

**If
we are not able to obtain or implement new technologies, we may lose business
and limit our ability to attract new customers.**

We may be
unable to obtain access to new technology on acceptable terms or at all. We may
be unable to adapt to new technologies and offer services in a competitive
manner. If these events occur, we may lose customers to competitors offering
more advanced services and our ability to attract new customers would be
hindered. This will adversely affect our revenues and operating results. Rapid
and significant changes in technology are expected in the communications
industry. We cannot predict the effect of technological changes on our business.
Our future success will depend, in part, on our ability to anticipate and adapt
to technological changes, evolving industry standards and changing needs of our
current and prospective customers.

**A
system failure or breach of network security could cause delays or interruptions
of service to our customers and result in customer dissatisfaction and loss of
business.**

Interruptions
in service, capacity limitations or security breaches could have a negative
effect on customer acceptance and, therefore, on our ability to retain existing
customers and attract new customers. The loss of existing or prospective
customers would have a negative effect on our business, financial condition and
results of operations. Our networks may be affected by physical damage, power
loss, capacity limitations, software defects, breaches of security by computer
viruses, break-ins or otherwise and other factors which may cause interruptions
in service or reduced capacity for our customers.

**If
we are unable to effectively deliver our services to a substantial number of
customers, we may not achieve our revenue goals.**

Our
network may not be able to connect and manage a substantial number of customers
at high transmission speeds. If we cannot achieve and maintain digital
transmission speeds that are otherwise available in a particular market, we may
lose customers to competitors with higher transmission speeds and we may not be
able to attract new customers. The loss of existing or prospective customers
would have a negative effect on our business, financial condition and results of
operations. While digital transmission speeds of up to 1.5 Mbps are possible on
portions of our network, that speed may not be available over a majority of our
network. Actual transmission speeds on our network will depend on a variety of
factors many of which are beyond our control, including the distance an end user
is located from a central office, the quality of the telephone lines, the
presence of interfering transmissions on nearby lines and other
factors.

**29**
**We
may lose customers or potential customers because the telephone lines we require
may be unavailable or in poor condition.**

Our
ability to provide some of our services to potential customers depends on the
quality, physical condition, availability and maintenance of telephone lines
within the control of the ILECs. If the telephone lines are not adequate, we may
not be able to provide certain services to many of our target customers. In
addition, the ILECs may not maintain the telephone lines in a condition that
will allow us to implement certain services effectively or may claim they are
not of sufficient quality to allow us to fully implement or operate certain
services. Under these circumstances, we will likely suffer customer
dissatisfaction and the loss of existing and prospective customers.

**Interference
or claims of interference could result in customer dissatisfaction and loss of
customers.**

Interference,
or claims of interference by the ILECs, if widespread, could adversely affect
our speed of deployment, reputation, brand image, service quality and customer
satisfaction and retention. Technologies deployed on copper telephone lines,
such as DSL, have the potential to interfere with other technologies on the
copper telephone lines. Interference could degrade the performance of our
services or make us unable to provide service on selected lines and the
customers served by those lines. Although we believe our DSL technologies, like
other technologies, do not interfere with existing voice services, ILECs may
claim the potential for interference permits them to restrict or delay our
deployment of DSL services. The procedures to resolve interference issues
between competitive carriers and ILECs are still being developed. We may be
unable to successfully resolve interference issues with ILECs on a timely basis.
These problems will likely result in customer dissatisfaction and the loss of
existing and prospective customers.

**Our
future revenues and success will depend on continued growth in the demand for
Internet access and high-speed data services.**

If the
markets for the services we offer, including Internet access and high-speed data
services, fail to develop, grow more slowly than anticipated or become saturated
with competitors, we may not be able to achieve our projected revenues. Demand
for Internet services is still uncertain and depends on a number of factors,
including the growth in consumer and business use of new interactive
technologies, the development of technologies that facilitate interactive
communication between organizations and targeted audiences, security concerns
and increases in data transport capacity.

In
addition, the market for high-speed data transmission is still evolving. Various
providers of high-speed digital services are testing products from various
suppliers for various applications, and no industry standard has been broadly
adopted. Critical issues, including security, reliability, ease of use and cost
and quality of various service options, remain unresolved and may impact the
growth of these services.

**The
desirability and marketability of our Internet service and our revenues may be
adversely affected if we are not able to maintain reciprocal relationships with
other Internet service providers.**

The
Internet is comprised of many Internet service providers and underlying
transport providers who operate their own networks and interconnect with other
Internet service providers at various points. As we continue the operation of
Internet services, connections to the Internet will be provided through
wholesale carriers. We anticipate as our volume increases, we will enter into
reciprocal agreements with other Internet service providers. Other national
Internet service providers may not maintain reciprocal relationships with us. If
we are unable to maintain these relationships, our Internet services may not be
attractive to our target customers, which would impair our ability to retain and
attract customers and negatively affect revenues. In addition, the requirements
associated with maintaining relationships with the major national Internet
service providers may change. We may not be able to expand or adapt our network
infrastructure to meet any new requirements on a timely basis, at a reasonable
cost, or at all.

**30**
**We
may incur liabilities as a result of our Internet service
offerings.**

United
States law relating to the liability of on-line service providers and Internet
service providers for information carried on, disseminated through, or hosted on
their systems is currently unsettled. If liability is imposed on Internet
service providers, we would likely implement measures to seek to minimize our
liability exposure. These measures could require us to expend substantial
resources or discontinue some of our product or service offerings. In addition,
increased attention to liability issues, as a result of litigation, legislation
or legislative proposals could adversely affect the growth and use of Internet
services. Under these circumstances, our revenues and operating expenses may be
negatively affected.


**RISK
FACTORS RELATED TO OUR COMMON STOCK**

**Our
stock price has been volatile historically and may continue to be volatile. The
price of our stock may fluctuate significantly, which may make it difficult for
holders to sell our shares of stock when desired or at attractive
prices**.

The
market price for our stock has been and may continue to be volatile. We expect
our stock price to be subject to fluctuations as a result of a variety of
factors, including factors beyond our control. These factors
include:

•
    actual
      or anticipated variations in our operating results or our competitors’
      operating results•
    announcements
      of new product and service offerings by us or our
    competitors•
    changes
      in the economic performance or market valuations of communications
      carriers•
    changes
      in recommendations or earnings estimates by securities
      analysts•
    announcements
      of new contracts or customers by us or our competitors, and timing and
      announcement of acquisitions by us or our competitors•
    conditions
      and trends in the telecommunications industry•
    adverse
      rulings in one or more of the regulatory proceedings affecting
      us•
    conditions
      in the local markets or regions in which we
operate.

Because
of this volatility, we may fail to meet the expectations of our stockholders or
of securities analysts at some time in the future, and the trading prices of our
stock could decline as a result. In addition, the stock market has experienced
significant price and volume fluctuations that have particularly affected the
trading prices of equity securities of many telecommunication companies,
including ours. Our stock price has varied between $1.06 and $1.90 within the
last 12 months, based on end of day stock quotes. These fluctuations have often
been unrelated or disproportionate to the operating performance of these
companies. In addition, any negative change in the public’s perception of
competitive local exchange carriers could depress our stock price regardless of
our operating results.

**The
value of our common stock may be negatively affected by additional issuances of
common stock by us and general market factors.**

Issues or
sales of common stock by us will likely be dilutive to our existing common
stockholders. Future issuances or sales of common stock by us, or the
availability of such common stock for future issue or sale, could have a
negative impact on the price of our common stock prevailing from time to time.
Sales of substantial amounts of our common stock in the public or private
market, a perception in the market that such sales could occur, or the issuance
of securities exercisable or convertible into our common stock could also
adversely affect the prevailing price of our common stock.

**31**
**The
market price of our common stock may decline as a result of the ICG
acquisition.**

The
market price of our common stock may decline as a result of the acquisition
if:

•
    the
      integration of the ICG business with ours is
  unsuccessful•
    we
      do not achieve or are perceived not to have achieved the expected benefits
      of the acquisition as rapidly or to the extent anticipated by financial or
      industry analysts or investors, or•
    the
      effect of the acquisition on our financial results is not consistent with
      the expectations of financial or industry analysts or
      investors.

The
market price of our common stock could also decline as a result of unforeseen
factors related to the acquisition or other factors.

**The
costs of the ICG acquisition will be substantial, which could harm our financial
results.**

In
connection with the ICG acquisition, we have incurred substantial costs and
expect to continue to incur substantial costs. These include fees to investment
bankers, legal counsel, independent accountants, consultants, and other
expenses, as well as costs associated with the elimination of duplicative
facilities and operational realignment expenses. If the benefits of the
acquisition do not exceed the associated costs, including any dilution to our
stockholders resulting from the issuance of shares of our common stock in the
acquisition, our financial results, including earnings per share, could suffer,
and the market price of our common stock could decline.

**The
attractiveness of our stock to potential purchasers and our stock price may be
negatively affected by our rights plan and provisions of our certificate of
incorporation, by-laws and Delaware General Corporate Law, which may have
anti-takeover effects.**

Our
certificate of incorporation and by-laws contain provisions which may deter,
discourage or make more difficult a takeover or change of control of our company
by another corporation. These anti-takeover provisions include:

•
    the
      authority of our board of directors to issue shares of preferred stock
      without stockholder approval on such terms and with such rights as our
      board of directors may determine, and•
    the
      requirement of a classified board of directors serving staggered
      three-year terms.

We have
also adopted a rights plan, which may make it more difficult to effect a change
in control of our company and replace incumbent management.

Potential
purchasers seeking to obtain control of a company may not be interested in
purchasing our stock as a result of these matters. This may reduce demand for
our stock and thereby negatively affect our stock price.

**The
attractiveness of our stock to potential purchasers and our stock price may be
negatively affected since we do not pay dividends on our common
stock.**

We have
never paid a cash dividend on our common stock and do not plan to pay dividends
on our common stock for the foreseeable future. Potential purchasers of our
stock seeking a regular return on their investment may not be interested in
purchasing our stock as a result. This may reduce demand for our stock and
thereby negatively affect our stock price.

**32**
**Item
2.*****Properties***

We have
leased office space in Pittsford, New York, a suburb of Rochester, where we
maintain our corporate headquarters. The lease expires in March 2010, but
provides we can terminate at any time after March 2005 without cost or penalty.
We currently have no plans to terminate this lease.

We also
lease space in Las Vegas, Nevada for our national customer service operations
including our call center, national network operating center and local sales
personnel. This lease expires in October 2009.

We own
property housing three of our switches in California and one in Illinois. We
also lease switch sites for our three remaining switches in Nevada and
California. During February 2005, we entered into an agreement with the landlord
to terminate our Nevada switch lease as of June 2006. We will move to a new
leased site and have a new switch operational, all at our prior landlord’s
expense, prior to closing the existing switch and vacating the premises. The two
California leases will expire in 2010 and 2011. In addition, we have leased
facilities to house our local sales and administration staff in the markets in
which we operate.

With the
ICG acquisition, subsequent to December 31, 2004, we have acquired an additional
nine switch and four equipment hub sites all within our existing five markets.
These sites are all leased, with lease terms expiring through 2010. We did not
acquire any of the switches in these facilities.

**Item
3.*****Legal
Proceedings***

We are
party to numerous state and federal administrative proceedings. In these
proceedings, we are seeking to define and/or enforce incumbent carrier
performance requirements related to:

•
    the
      cost and provisioning of those network elements we
  lease;•
    the
      establishment of customer care and provisioning;•
    the
      allocation of subsidies; and•
    collocation
      costs and procedures.

The
outcome of these proceedings will establish the rates and procedures by which we
obtain and provide leased network elements and could have a material effect on
our operating costs.

On
February 17, 2005, a class action lawsuit was commenced against us, alleging
violations of California Labor Code Sections 2802 and 2804. The group of
plaintiffs attempting to be formed and certified as a class would include our
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. We deny any liability to the plaintiffs, and intend to vigorously
defend the action, and believe that ultimate settlement or damages awarded, if
any, will not have a material adverse effect on our financial position, results
of operations or cash flows.

**33**
We are
party to an equipment lease dispute that has 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 has also filed actions in the U.S.
Bankruptcy Court for the District of Delaware for recovery of claimed damages.
At December 31, 2004, we have recorded a contingent liability reserve for this
matter in “Accrued Other Expenses” on our consolidated balance sheet based on
the amount of lease payments that were unpaid when the legal actions commenced.
We intend to vigorously defend the action and believe that ultimate settlement
or damages awarded, if any, will not have a material adverse effect on our
financial position, results of operations or cash flows.

From time
to time, we engage in other 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
other asserted or pending litigation or governmental proceeding will have a
material adverse effect on our results of operations or financial
condition.

We are
also affected by regulatory proceedings, including those discussed above under
“Government Regulations” and the following:

**California**

On
September 23, 2004, the California Public Utilities Commission ("CPUC") adopted
new rates that Southwestern Bell Corporation ("SBC") California may charge us
and other competitive local telephone companies for access to its network. The
CPUC decision in the proceeding known as the "UNE Reexamination" increased the
cost of some network elements (e.g., 2-wire voice loops) and, decreased the cost
of others (e.g., high-capacity digital loops). Although we purchase both voice
loops and high-capacity digital loops, the likely net effect will be to increase
our costs in California in the future. However, if we continue our growth rate
in sales of high-capacity digital loops, the net impact of the new rates will be
reduced. The CPUC rates are subject to downward revision as a result of a
decision issued July 14, 2004, by the Ninth Circuit Court of Appeals.

In
addition, the CPUC will require a retroactive true up of rates dating back to
May 2002, which will result in a net payment due from us to SBC California. The
scope of the true up will be determined by the CPUC in a docket scheduled to be
completed in the first quarter of 2005. We do not believe that the revised rates
or the retroactive true up will have a material adverse effect on our business,
financial condition or results of operations.

**Illinois
Decision**

On May 9,
2004, the Illinois Commerce Commission issued its order regarding costs of loops
in Illinois (known as the TELRIC case). As a result of the decision, the rates
at which competitive local telephone companies purchase loops would increase for
some elements such as 2-wire voice loops and decrease for other elements such as
high-capacity digital loops. The likely net effect on us in the short term is
expected to be an increase in costs in Illinois as our current installed base
contains more voice loops than digital loops. However, if our current increases
in growth of high-capacity digital loops continues, the net impact of the new
rates will be reduced. The decision is being challenged via a related proceeding
(known as the Imputation case) at the Illinois Commerce Commission (“ICC”). The
ICC is analyzing the new UNE prices to determine whether the ILEC’s increased
prices create an anti-competitive price squeeze.

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

Not
applicable.**34****PART
II**

**Item
5.*****Market
for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchase
of Equity Securities***

**Market
Information**

Our
common stock, $0.001 par value, traded on the National Association of Securities
Dealers Over the Counter Bulletin Board, a regulated service that displays
real-time quotes, last-sale prices and volume information in over-the-counter
equity securities under the symbol “MPOW.OB” throughout 2003 and until May 20,
2004, when our common stock was approved for trading on the American Stock
Exchange under the symbol “MPE”. As of March 7, 2005, the closing price of our
common stock was $1.56. The following sets forth the reported high and low sale
prices for the common stock for each quarterly period in fiscal 2003 and
2004.

**High**
    
    **Low**Quarter
      Ending March 31, 2003
    $0.30
    
    $0.16Quarter
      Ending June 30, 2003
    $1.21
    
    $0.16Quarter
      Ending September 30, 2003
    $1.62
    
    $0.99Quarter
      Ending December 31, 2003
    $1.81
    
    $1.29Quarter
      Ending March 31, 2004
    $1.72
    
    $1.31Quarter
      Ending June 30, 2004
    $1.47
    
    $1.18Quarter
      Ending September 30, 2004
    $1.33
    
    $1.06Quarter
      Ending December 31, 2004
    $1.90
    
    $1.20

As of
March 7, 2005, there were approximately 280 holders of record of our common
stock.

**Dividends**

No cash
dividends have ever been declared by us on our common stock. We intend to retain
earnings to finance the development and growth of our business. We do not
anticipate that any dividends will be declared on our common stock for the
foreseeable future. Future payments of cash dividends, if any, will depend on
our financial condition, results of operations, business conditions, capital
requirements, restrictions contained in agreements, future prospects and other
factors deemed relevant by our board of directors. Our ability to declare and
pay dividends on our common stock may in the future be restricted by covenants
in debt indentures we may enter into.

**Securities
Authorized for Issuance under Equity Compensation Plans**

The
following table provides information regarding options, warrants or other rights
to acquire equity securities under our equity compensation plans as of December
31, 2004:

**35**
**Number
      of securities to be issued upon exercise of outstanding
      options,****warrants and rights**
    
    **Weighted-average
      exercise price of outstanding options,****warrants and rights**
    
    **Number
      of securities remaining available for future issuance under equity****compensation
      plans**Equity
      compensation plans approved by security holders
    
    —
    
    —
    
    —Equity
      compensation plans not approved by security holders
    
    
    21,794,568
    
    $
    0.94
    
    
    5,260,052Total
    
    
    21,794,568
    
    $
    0.94
    
    
    5,260,052

**Item
6.*****Selected
Financial Data***

The
information required by this Item is as follows (in thousands except per common
share amounts):

**Reorganized
      Mpower Holding**
    
    **Predecessor
      Mpower****Holding****2004**
    
    **2003**
    
    **2002
      (3)**
    
    **2002
      (3)**
    
    **2001**
    
    **2000**Operating
      revenues
    
    $
    151,010
    
    $
    148,172
    
    $
    62,815
    
    $
    83,289
    
    $
    136,116
    
    $
    111,292(Loss)
      income from continuing operations
    
    
    (6,313
    )
    
    (18,765
    )
    
    17,754
    
    
    (43,204
    )
    
    (400,343
    )
    
    (211,738
    )(Loss)
      income from continuing operations per common share (1)
    
    
    (0.08
    )
    
    (0.27
    )
    
    0.27
    
    
    (0.79
    )
    
    (7.13
    )
    
    (4.56
    )Total
      assets (2)
    
    
    104,964
    
    
    109,029
    
    
    127,423
    
    
    —
    
    
    613,647
    
    
    1,172,460Long-term
      debt and capital lease obligations including current maturities
      (2)
    
    
    —
    
    
    256
    
    
    5,009
    
    
    —
    
    
    430,686
    
    
    485,081Predecessor
      Mpower Holding Series C Convertible Redeemable Preferred Stock
      (2)
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    46,610
    
    
    42,760Predecessor
      Mpower Holding Series D Convertible Redeemable Preferred Stock
      (2)
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    156,220
    
    
    202,126

(1)
    See
      Note 1 to accompanying consolidated financial
  statements.(2)
    Not
      provided for “Predecessor Mpower Holding 2002” column since year-end
      information is indicated in “Reorganized Mpower Holding 2002”
      column.(3)
    “Predecessor
      Mpower Holding 2002” represents the period from January 1, 2002 to July
      30, 2002, whereas “Reorganized Mpower Holding 2002” represents the period
      from July 31, 2002 to December 31, 2002.

The
numbers reflected above may not be comparable because of our rapid growth until
2000, reduction of markets thereafter and the elimination of a substantial
portion of our debt and all of our preferred stock, as well as the application
of fresh-start accounting, in connection with our reorganization in
2002.

**36**
**Item
7.*****Management’s
Discussion and Analysis of Financial Condition and Results of
Operation***

**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 consolidated financial statements
and the accompanying financial notes ("Notes") appearing elsewhere in this
report. This 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 year ended December 31,
2004.

*Company
Overview -*a general
description of our business, the services we offer, the markets we serve, our
emergence from Chapter 11 proceedings, our adoption of fresh-start accounting,
our recapitalization and our recent 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 years presented in our
financial statements including a review of the material items and known trends
and uncertainties.

*Discontinued
Operations*- an
analysis of our discontinued operations over the past three years.

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

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

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

**37**
**Executive
Summary**

As we
look back over our 2004 results, it was clearly a year of progress for our
business as well as new challenges and opportunities.

•
    We
      saw our full-year core customer trade revenue grow 5% over
      2003.•
    Our
      total revenue from continuing operations for the full year 2004 was $151.0
      million, nearly 2% higher than the prior year, despite a reduction of $3.2
      million of switched access revenue year over year.•
    Our
      rate of core customer trade revenue growth continued to accelerate
      throughout the year. The percentage increase in core customer trade
      revenue from continuing operations in each quarter compared to the revenue
      from the same quarter in 2003 was 2% for the first quarter, 5% for the
      second quarter, 5% for the third quarter, and 7% for the fourth
      quarter.•
    Our
      average monthly business line churn in 2004 was 1.6% versus an average of
      2.3% in 2003 while our average monthly residential line churn decreased
      from an average of 5% in 2003 to 4% in 2004.•
    In
      terms of our trade accounts receivable, our days sales outstanding
      continued to improve and stood at 20.1 days at the end of 2004 versus 21.1
      days at September 30, 2004, and 24.7 days at December 31,
      2003.•
    Our
      cost of operating revenues (excluding depreciation and amortization) for
      2004 totaled $69.3 million, 8% lower than the full year
    2003.•
    Our
      selling, general and administrative expenses (excluding depreciation and
      amortization) totaled $73.1 million, $4.5 million or 6% lower than the
      full year 2003.•
    Our
      cash flow from operations improved from negative $9.4 million in 2003 to
      positive $14.3 million in 2004.•
    We
      believe we made an important acquisition when we acquired the fiber optic
      network, certain other assets and revenue stream of ICG’s California
      business in January 2005.•
    We
      announced the largest customer deal in our company’s history when we
      signed a 30 month contract with Tierzero in January 2005. We expect to
      bill this customer over $0.1 million each month during the contract term.
      This contract is a good example of the opportunity we now have to provide
      other carriers with network capability on a wholesale basis. We believe
      that our deep and dense network of fiber and collocations provides the
      breadth and depth of transport services that other carriers need. Our
      switch services offer a UNE-P alternative to these
    carriers.•
    We
      incurred $7.9 million of capital expenditures for the year, which is
      exclusive of $2.4 million related to preparing for the integration of the
      assets acquired from ICG on January 1, 2005. We had $7.8 million of
      capital expenditures in 2003.

**38**
*Opportunities
and Challenges*

Operating
in today’s telecommunications environment provides unique opportunities for our
company. Challenges accompany these opportunities. Looking forward, we have
identified three key challenges, which are:

*Evolving
      regulatory environment*•
    In
      2004, we were required to absorb substantial price increases in our basic
      copper voice-grade equivalent loops, but the increased costs were offset
      (to a large extent) by lower T-1 loop pricing.•
    The
      FCC has recently ruled in its triennial review order, that the incumbent
      local phone companies (“ILEC”) will no longer have to provide unbundled
      network element platform (“UNE-P”) level services.•
    That
      ruling goes into effect March 2005 for new customers, and March 2006 for
      existing bases of customers. As a result we believe that over the next 12
      months, any telecom company that has used UNE-P as a delivery platform
      must either negotiate a new arrangement with the ILEC, build a network, or
      find a wholesale provider (other than the ILEC) that has a network. We
      have not used UNE-P as our delivery platform although we are actively
      pursuing opportunities to provide network-based alternatives to UNE-P
      carriers on a wholesale basis in light of recent regulatory
      changes.•
    In
      California we now have a substantial fiber optic, switching, and
      collocation infrastructure that we can offer to these carriers on a
      wholesale basis. If this business unit is successful, any rapid growth may
      challenge our resources.

*Organic
      Revenue Growth*•
    We
      continue to find our ability to increase the number of our quota carrying
      account managers a challenge. We have been unable to hire and train the
      number of sales personnel that we had targeted in 2004. To address this,
      we will be investing in more recruiting and training initiatives
      throughout 2005 to meet this challenge.*Mergers
      and Acquisitions*•
    On
      the acquisition front, we continue to seek and evaluate potential
      transactions that will further leverage our network and other core
      strengths. We will, however, continue to be disciplined in our
      approach.

Inclusive
of our recent ICG acquisition in January 2005, we currently estimate 2005
revenue to be between $200 million and $208 million and our net loss to be
between $8.6 million and $5.5 million. We estimate 2006 revenue to be between
$220 million and $230 million with net income of $8.5 million to $12.6 million.
We estimate our non-ICG related capital expenditures to be between $10 million
and $14 million for 2005 and $10 million to $12 million in 2006. Finally,
we expect to incur $4.1 million to $5.2 million to integrate the acquired ICG
assets during the first three quarters of 2005.

**39**
**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 IP telephony by way of
a variety of broadband product and service offerings over our own network of
collocations and switches. On January 1, 2005 we acquired certain assets of ICG
Communications Inc. (“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 and 915 miles of metropolitan fiber rings that
connect 128 commercial buildings and 33 collocations throughout major cities in
California. Our services have historically been 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 of February
2005, we have approximately 48,000 business customers and approximately 18,000
residential customers, excluding the customers we obtained in the ICG
acquisition. The average ICG customer will generate more monthly revenue for us
than a typical traditional “Mpower” customer. We also bill a number of major
local and long distance carriers for the costs of originating and terminating
traffic on our network for our local services customers. We do not have any
unbundled network element platform (“UNE-P”) revenues, although we are actively
pursuing opportunities to provide network-based alternatives to UNE-P carriers
on a wholesale basis in light of recent regulatory changes. During 2004, we
acquired approximately 78% of our new sales through our direct sales force and
supporting staff, with the remainder acquired through agent relationships and
outbound telemarketing.

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 our
number of potential customers. With the addition of the ICG California assets in
January 2005, we have added a statewide SONET-based fiber network to our deep
collocation and switching infrastructure, which allows us to offer new products
such as private line, accelerates our speed-to-market with IP Centrex
capabilities, including VOIP, positions us as a strong player in the wholesale
market, and reduces our reliance on the ILECs.

We have
over 268,000 billable lines in service, excluding lines serving customers we
obtained in the ICG acquisition. The services we provide for these billable
lines generate our revenues. As of February 2005, we have approximately 800
employees, including those who joined us from ICG. We have established working
relationships with Verizon, Sprint, and SBC.

We were
one of the first competitive communications carriers to implement a
facilities-based network strategy. As a result, we own the network switches that
control how voice and data communications originate and terminate, we install
our network equipment at collocation sites of the incumbent carriers, and we
lease the telephone lines or transport systems, over which the voice and data
traffic are transmitted. As a result of the ICG acquisition we now also have a
fiber ring network in California that gives us additional network and traffic
routing options. As we have already invested in and built out our own network,
we believe that our strategy has allowed us to establish and sustain service in
our markets at a comparatively low cost, while maintaining control of the access
to our customers.

Our
business is to deliver integrated voice and broadband data solutions.
Specifically, we provide small, 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. As of February 2005, we have approximately 48,000 business
customers (excluding the customers obtained in the ICG acquisition), providing
local voice telephoneservice
and broadband Internet by way of SDSL and T1. 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, providing us with the ability to be a
wholesale provider to large IXCs, CLECs, and 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.

**40**
We have
operated our business as one segment. We manage our business 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
Acquisition***

On
January 1, 2005 we acquired certain assets 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 and 915 miles of metropolitan
fiber rings that connect 128 commercial buildings throughout major cities in
California. We expect to fully integrate the ICG assets throughout
2005.

We
purchased these assets for (i) $13.5 million in the form of 10,740,030 shares of
our common stock and (ii) warrants to purchase another 2,000,000 shares of our
common stock with a strike price of $1.383 per share. These shares and warrants
were issued to ICG, a privately held company recently acquired by Columbia
Capital and M/C Venture Partners. We also assumed certain of ICG’s capitalized
leases in California, including its long-term leases for its fiber network.
These leases have an approximate value of $24 million. MCCC received one seat on
our board of directors as a result of this transaction.

In
connection with the acquisition, in January 2005, Columbia Capital and M/C
Venture Partners, through their ownership of MCCC ICG Holdings, LLC (“MCCC”),
invested $2.5 million in cash for an additional 1,988,894 shares of our common
stock on January 5, 2005.

The ICG
transaction 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 are to reimburse ICG for the cost of specific
services provided by ICG on our behalf. For the year ended December 31, 2004, we
recognized direct acquisition costs of $0.7 million for services and fees
incurred under the management service agreement. The ICG definitive agreement
also provides that the operating results of the California operations acquired
accrued to our benefit between the date the definitive agreement was signed
(October 22, 2004) and final closing (January 1, 2005). The California
operations generated operating income of $0.3 million during the period which
has been recorded as an offset to the gross direct acquisition costs
incurred under the management services agreement. We have also recorded
additional direct acquisition costs during 2004 of $0.7 million primarily for
legal and consulting fees incurred in connection with the ICG acquisition. The
$1.1 million of net direct acquisition costs described above have been included
in our consolidated balance sheets in other long-term assets at December 31,
2004, and will be considered in our purchase accounting calculations in the
first quarter of 2005. Commencing on the transaction closing date, January 1,
2005, certain services will be provided by ICG to us under a transition services
agreement. These services are expected to be provided through approximately June
30, 2005 and will be included in our operating results commencing January 1,
2005.

*Markets*

As of
February 2005, we operate in five markets in three states and have 297 incumbent
carrier central office collocation sites and 177 off-network collocation sites.
The major markets in our footprint are: Los Angeles, California, San Diego,
California, Northern California (the San Francisco Bay area and Sacramento), Las
Vegas, Nevada and Chicago, Illinois. The table below shows the distribution of
our central office collocation sites within these markets.

**41**
**Number
      of Collocations****Market**
    
    **On-Network**
    **Off-Network**Los
      Angeles
    
    142
    63San
      Diego
    
    28
    19Northern
      California
    
    43
    64Las
      Vegas
    
    18
    —Chicago
    
    66
    31Totals
    
    297
    177

We
believe there is significant growth potential within our existing market
footprint, especially in California, with the customer base, network assets and
services offerings acquired from our ICG acquisition. In addition, our network
backbone, including our recent ICG fiber ring acquisition, is scalable and can
provide reliability and service quality across our collocation footprint, while
affording us the benefit of spreading the fixed costs across our base of
markets. Use of off-network facilities will also allow us to sell certain T1
services to customers that are not within the geographic reach of our
collocation sites.

*Emergence
from Chapter 11 Proceedings*

On April
8, 2002, we filed a voluntary, pre-negotiated reorganization plan for us along
with our subsidiaries, Mpower Communications Corp. (“Communications”) and Mpower
Lease Corporation, a wholly-owned subsidiary of Communications, under Chapter 11
of the Federal bankruptcy code in the U.S. Bankruptcy Court for the District of
Delaware. None of our other direct or indirect subsidiaries were parties to any
bankruptcy, reorganization or liquidation proceedings. We operated as a debtor
in possession from April 8, 2002 until our emergence from bankruptcy on July 30,
2002.

On July
30, 2002, we and our subsidiary Communications formally emerged from Chapter 11
as our recapitalization plan (the “Plan”) became effective. Also on July 30,
2002, the Bankruptcy Court dismissed the Chapter 11 case of Mpower Lease
Corporation.

*Adoption
of Fresh-Start Accounting*

As a
consequence of the reorganization occurring as of July 30, 2002, the 2002
financial results have been separately presented under the label “Predecessor
Mpower Holding” for the period January 1 to July 30, 2002 and “Reorganized
Mpower Holding” for the period July 31 to December 31, 2002. For discussion
purposes, the operating results for the periods January 1, 2002 to July 30, 2002
and July 31, 2002 to December 31, 2002 have been added together to compare 2002
results to the fiscal years ended December 31, 2003 and 2004.

**42**
As of
July 30, 2002, we implemented fresh-start accounting under the provisions of
Statement of Position (“SOP”) 90-7, “Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code.” Under SOP 90-7, our reorganization
fair value was allocated to our assets and liabilities, our accumulated deficit
was eliminated, and our new equity was issued according to the Plan as if we
were a new reporting entity. In conformity with fresh-start accounting
principles, Predecessor Mpower Holding recorded a $244.7 million reorganization
charge to adjust the historical carrying value of our assets and liabilities to
fair market value reflecting the allocation of our $87.3 million estimated
reorganized equity value as of July 30, 2002. We also recorded a $315.3 million
gain on the cancellation of debt on July 30, 2002 pursuant to the
Plan.

As a
result of reorganization, the financial statements published for the periods
following the effectiveness of the Plan will not be comparable to those
published before the effectiveness of the Plan.

As a
result of the implementation of the Plan in 2002, we have determined that we
have experienced an ownership change under Section 382 of the Internal Revenue
Code. An ownership change generally occurs when certain persons or groups
increase their aggregate ownership percentage in a corporation’s stock by more
than 50 percentage points during a measurement period. As a result of this
ownership change, Section 382 will apply to limit our ability to utilize any
remaining net operating losses (“NOLs”) generated before the ownership change as
well as certain subsequently recognized “built-in losses” and deductions
existing as of the date of the ownership change to $4.4 million per year. Our
ability to utilize new NOLs arising after the ownership change will not be
affected by the Section 382 ownership change that resulted from implementation
of the Plan.

*Recapitalization*

Our
emergence from the pre-negotiated Chapter 11 proceeding and the recapitalization
of our balance sheet in July 2002 was a significant first step in a multi-step
and sequential process to reshape our company. We also repurchased the remaining
secured notes in November 2002 and January 2003. Though these transactions, we
have no liens on any network equipment and there is no debt remaining on our
balance sheet.

In
January 2003, we furthered our commitment to reshaping our business with the
announcement of the sale of 15 of our markets to three other regional telephony
companies. The completion of these transactions in March and April 2003,
significantly reduced our cash burn, brought approximately $19.3 million of
additional cash to the business, and resulted in geographic concentration and
efficiencies for the rest of the business. These transactions are more fully
described in “Discontinued Operations.”

We
believe the next step in reshaping our company will be to scale the business for
future growth. This will continue to be our focus in 2005. To do this, we intend
to concentrate on being a significant presence and fierce competitor in the
telecommunications marketplace serving small, medium, and large business
customers, while establishing our wholesale revenue channel. Our continuing
markets will be in California, Nevada and Illinois. We intend to continue to
explore opportunities to add revenue streams to our existing network through
transactions that are accretive to shareholder value such as the ICG acquisition
in January 2005. In addition, we intend to continue to invest in our markets by
adding capacity and technology on our network to meet the demand for our
services.

***Summary***

We have
experienced operating losses since our inception as a result of efforts to build
our customer base, develop and construct our communications network
infrastructure, build our back-office capabilities, and expand our market base.
We intend to continue to focus on increasing our customer base through growth in
the numbers of direct quota carrying sales representatives selling our services,
selling through our agent channel, expanding our inside sales efforts and
establishing a wholesale channel. We will seek to bring increased capabilities
to our existing customer base, along with seeking to increase our operating
margins by improving the cost effectiveness of our network, offering higher
margin products and services to our customers as well as streamlining our
general and administrative functions.

**43**
With a
challenging and rapidly changing competitive and regulatory environment, we may
be forced to change our strategy. The following trends and uncertainties may
affect both us and our industry, but we have concluded that it is not reasonably
likely that these trends and uncertainties will have a material effect on our
liquidity, capital resources or results of operations.

•
    Competing
      technologies continue to emerge and grow that challenge our business such
      as wireless communications and various VOIP
  applications.•
    Consolidation
      in the industry may strengthen the surviving companies that compete with
      us.•
    In
      the regulatory environment, the District of Columbia Circuit on March 2,
      2004, ruled on the FCC’s Triennial Review Order (“TRO”) on local telephone
      competition. The rulingoverturned
      portions of the FCC's latest telephone competition policy
      rules.
      While we do not anticipate any significant impact to our business from
      this ruling, it is indicative that the environment in which we compete
      continues to evolve. We anticipate we will continue to grow in the midst
      of this environment, but may need to change our strategy in response to
      future changes to the competitive
environment.

**Liquidity
and Capital Resources**

We have
historically incurred negative cash flows from operating activities through the
year ended December 31, 2003. We believe that we now have sufficient resources
and liquidity to fund our planned operations.

Our
working capital improved from the year ended December 31, 2002 to December 31,
2003 by $13.1 million. Our working capital plus long-term investments
available-for-sale decreased slightly in the year ended December 31, 2004 by
$0.6 million. This decrease was primarily the result of an incremental capital
investment in the fourth quarter of 2004 of $2.4 million related to preparing
for the integration of the assets acquired from ICG on January 1, 2005.
**Working
      Capital:**
    
    **Year
      Ended December 31,****2004**
    
    **2003**
    
    **2002**Current
      Assets
    
    $
    51,755
    
    $
    53,001
    
    $
    52,778Current
      Liabilities
    
    
    41,975
    
    
    40,577
    
    
    56,131Working
      Capital
    
    $
    9,780
    
    $
    12,424
    
    $
    (3,353
    )Long-term
      investments available-for-sale
    
    $
    2,041
    
    $
    —
    
    $
    —

While we
anticipate our ICG acquisition will positively contribute to our operating
income in 2005**,**we
estimate that the related transition expenses and capital expenditures will have
a slightly negative impact on our cash, cash equivalent and investment balances
by December 31, 2005.

**44**
On
February 10, 2005, we entered into an amendment to our lease with our landlord
for a switch site in Las Vegas, Nevada. Under the amendment, our landlord agreed
to pay us the sum of $8.0 million in consideration for our agreeing to vacate
the switch site by 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 all or a
significant portion of the $8.0 million to purchase equipment and construct a
new switch at a new lease site to be determined in Las Vegas, Nevada, so that
the new switch will be operational prior to closing the switch and vacating the
existing premises. We received $7.7 million of cash in February 2005 related to
this agreement with the remainder ($0.3 million) to be recognized by abating our
rent obligations through June 30, 2006. We expect that most of the cash
expenditures associated with this relocation will be completed by December 31,
2005. A substantial portion of these expenditures will be capital expenditures
and these expenditures are in addition to the non-ICG related capital
expenditure of $10 million to $14 million planned to be spent in our business in
2005 as mentioned above.

We have
completed, and continue to pursue, several initiatives intended to increase
liquidity and better position us to compete under current conditions and
anticipated changes in the telecommunications sector. These
include:

•
    Having
      a $250 million shelf registration statement on Form S-3 declared effective
      by the Securities and Exchange Commission during May
  2004;•
    Continuing
      to have available a $7.5 million funding credit facility secured by
      certain customer accounts receivables;•
    Pursuing
      discussions with companies who may be interested in acquiring our assets
      or business, in whole or in part, and discussions with companies who may
      be interested in selling their assets or business, in whole or in part, to
      us;•
    Continuing
      to update our prospective business plans and forecasts to assist in
      monitoring current and future liquidity;•
    Reducing
      general and administrative expenses through various cost cutting
      measures;•
    Introducing
      new products and services with greater profit margins;•
    Analyzing
      the pricing of our current products and services to ensure they are
      competitive and meet our objectives; and•
    Re-deploying
      our assets held for future use to reduce the requirement for capital
      expenditures.

As of
December 31, 2004, we had $37.4 million in unrestricted cash, cash equivalents
and short and long-term investments available-for-sale. We believe that these
balances, when combined with the above initiatives that are the basis for our
on-going business model, will generate enough liquidity to fully fund our
business, including capital expenditures, on a continuing basis. Our investments
available-for-sale consist of auction rate securities, government agency notes,
and corporate bonds. All investments are made in accordance with our Investment
Policy and Guidelines approved by our Board of Directors.

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 during 2004 were $5.6
million.

**45**
Our
capital expenditures will focus on the augmentation of our operating support
system and our network to add new product and service offerings and customers
and to improve the cost efficiency of our network, as we have completed the
footprint build-out of our network in the markets in which we operate. We
estimate our non-ICG related capital expenditures to be between $10 million to
$14 million for 2005 and $10 million to $12 million in 2006. We will also spend
cash on integrating ICG assets to achieve network synergies and savings. In
addition, as discussed above, we will spend a significant portion of the $7.7
million we received from our landlord to purchase equipment and construct and
equip a new switch facility at a relocated lease site to be determined in Las
Vegas, Nevada.

We expect
that funding for our capital expenditures will be from cash on hand as well as
cash generated from operations. Included in our total planned capital
expenditures are the following:

*Network
Capacity and Capability:*Based on
our planned customer growth, we anticipate spending approximately $7.0 million
in 2005 to add to the capacity of our voice and data network as well as adding
additional capability and features for new product and service
offerings.

*Information
Technology:*We
anticipate spending approximately $1.5 million in 2005 in information technology
that we expect to improve our back-office productivity and improve the quality
of our customer interactions.

*Customer
Acquisition:*We
anticipate spending approximately $2.0 million in 2005 in acquiring customer
premise equipment that will support the addition of new customers to our
network.

We
continually evaluate our capital requirements plan in light of developments in
the telecommunications industry and market acceptance of our service offerings.
The actual amount and timing of future capital requirements may differ
materially from our estimates as a result of, among other things:

•
    the
      cost of the development and support of our networks in each of our
      markets•
    the
      extent of price and service competition for telecommunication services in
      our markets•
    the
      demand for our services•
    regulatory
      and technological developments•
    our
      ability to develop, acquire and integrate necessary operating support
      systems•
    our
      ability to re-deploy assets held for future
use

As such,
actual costs and revenues may vary from expected amounts, possibly to a material
degree, and such variations are likely to affect our future capital
requirements.

*Private
Placement*

During
September 2003, we entered into a Securities Purchase Agreement under which we
raised approximately $16.0 million, net of selling costs, through the private
placement of 12,940,741 shares of common stock at $1.35 per common share. We
also issued warrants to purchase 2,588,148 shares of common stock to the
investors who participated in the private placement at a price of $1.62 per
common share in connection with the transaction. In addition, pursuant to an
exclusive finders agreement between us and the Shemano Group, Inc. (“Shemano”),
we issued warrants to Shemano and its affiliates to purchase 349,400 shares of
common stock at a price of $1.62 per common share as partial consideration for
services rendered in connection with the private placement. These warrants are
exercisable at any time and expire five years from the issuance date. Additional
warrants to purchase up to 83,856 shares of common stock will be issued to
Shemano and its affiliates in the event the warrants held by the investors are
exercised.

**46**
*Shelf
Registration*

During
February 2004, we filed a universal shelf registration statement on Form S-3
with the Securities and Exchange Commission seeking to register up to $250
million of new securities, which could include shares of our common stock,
preferred stock, warrants to purchase common stock, or debt securities. This
filing was declared effective during May 2004. The filing of this shelf
registration statement could facilitate our ability to raise capital, should we
decide to do so, in the future. The amounts, prices and other terms of any new
securities would be determined at the time of any particular
transaction.

During
January 2004, we adopted a warrant program under which up to 1,000,000 shares of
our common stock are authorized for issuance. The shares issuable under the
warrant program are covered by our shelf registration statement on Form S-3
filed in 2004. The intent of the warrant program is to make available to
independent sales agents hired by us warrants to purchase shares of our common
stock, with the number of warrants to be granted based on the increase in
baseline sales performance achieved by these independent sales agents. During
2004, we issued warrants to purchase 260,430 shares of common stock through this
program with a weighted average exercise price of $1.38 per common share. These
warrants are exercisable at any time and expire three years from the date of
issuance.

This
shelf registration was also used for the sale of 1,988,894 shares of our common
stock to the owners of ICG in connection with the acquisition of certain ICG
assets in January 2005.

*Cash
Flow Discussion*

In
summary, our cash flows for the year ended December 31, 2004 were as follows (in
thousands):

**Year
      Ended December 31,****2004**Net
      Cash Provided by Operating Activities
    
    $
    14,342Net
      Cash Used in Investing Activities
    
    $
    (15,182
    )Net
      Cash Used in Financing Activities
    
    $
    (1,140
    )

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

For the
year ended December 31, 2004, we achieved positive cash from operations for the
first year in our history. We were able to achieve cash from operations
primarily as a result of generation of higher margin revenue streams,
operational efficiencies and associated expense reductions, elimination of
expenses associated with the markets we exited and management of accounts
payable and accounts receivable.

*Cash
and Cash Equivalents:*At
December 31, 2004, cash, cash equivalents, and short and long-term investments
available-for-sale were $37.4 million. This balance has the following components
(in thousands):
Cash
      and cash equivalents
    
    $
    27,327Investments
      available-for-sale
    
    
    8,064Long-term
      investments available-for-sale
    
    
    2,041Total
      at December 31, 2004
    
    $
    37,432

**47**
*Long-term
Restricted Cash:*Long-term restricted cash amounted to $9.5 million as of December 31, 2004. This
restricted cash primarily represents a commitment we made in September 2001, to
pay employee retention and incentive compensation bonuses, subject to the terms
of the agreements with certain employees. In addition, we committed to make
severance payments to certain employees in the event they are terminated
involuntarily, without cause or if they terminate voluntarily with good cause.
In November 2001, we established an irrevocable grantor trust, which was funded
at a level sufficient to cover the maximum commitment for retention, incentive
compensation and severance payments. For the years ended December 31, 2004 and
2003, we paid out $0.1 million and $2.1 million, respectively, relating to these
commitments. In October 2002, we established and funded a second irrevocable
grantor trust with $2.0 million, which was determined to be the amount
sufficient to pay all severance benefit obligations pursuant to employment
agreements for several of our executives and any other severance or retention
agreements in effect that were not funded by the trust adopted by us in November
2001. These two trusts were established prior to our bankruptcy filing to
reassure key employees that our retention, incentive compensation and severance
benefit obligations to employees would be able to be paid. Our ability to
successfully carry out our business plan depended on the retention of our key
employees, and we were concerned about the possible loss of some key employees
without the establishment of the trusts. In November 2002, we established a $2.0
million trust for the future purchase, if needed, of run-off insurance for our
directors and officers. This trust was established to reassure our board of
directors and key employees that no matter what our financial condition in the
future, they would be protected with run-off insurance in the event of a merger,
acquisition or other event requiring such insurance coverage.

The
trusts established to cover commitments for retention, incentive compensation
and severance payments will terminate when all employees have been paid all
amounts due them pursuant to the terms and conditions of those trust agreements.
The trust to purchase run-off insurance will terminate when the proceeds from
the trust have been used to purchase run-off insurance in the event of a merger,
acquisition or other event requiring such insurance.

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

Our
statements of cash flows are summarized as follows (in thousands):
**Year
      Ended December 31,****2004**
    
    
    **2003**
    
    
    **2002**Net
      cash provided by (used in) operating activities
    
    $
    14,342
    
    $
    (9,444
    )
    $
    (124,238
    )Cash
      flows (used in) provided by investing activities:Purchases
      of property and equipment, net of payables
    
    $
    (5,623
    )
    $
    (7,229
    )
    $
    (17,406
    )Proceeds
      from sale of assets from discontinued operations net of costs associated
      with sale of assets
    
    
    63
    
    
    19,364
    
    
    —(Purchase)
      sale of investments available-for-sale
    
    
    (10,505
    )
    
    —
    
    
    157,705Other
      investing activities
    
    
    883
    
    
    3,635
    
    
    5,760Net
      cash (used in) provided by investing activities
    
    $
    (15,182
    )
    $
    15,770
    
    $
    146,059

**48**
*Operating
Activities:*Cash
flows from operating activities increased by $23.8 million for 2004 compared to
2003. The key component of this improvement was a 7% reduction in operating
expenses from continuing operations and generation of higher margin revenue
streams. Cash flows used by operating activities decreased 92% for 2003 compared
to 2002, the key component of this improvement was a 21% reduction in operating
expenses from continuing operations and a 93% reduction in operating expenses
from discontinued operations.

*Investing
Activities:*For the
year ended December 31, 2004, we used $15.2 million in cash from investing
activities. The cash used in 2004 primarily represents the investment of $5.6
million in capital expenditures and a $10.5 million purchase of investments
available-for-sale. See the preceding discussions regarding our expected capital
expenditures in 2005.

***Cash
Flows from Financing Activities***

**Year
      Ended December 31,****2004**
    
    **2003**
    
    **2002**Cash
      flows (used in) provided by financing activities:Repurchase
      of Senior Notes
    
    $
    —
    
    $
    (2,154
    )
    $
    (13,707
    )Costs
      associated with planned acquisition
    
    
    (965
    )
    
    —
    
    
    —Payments
      on other long-term debt and capital lease obligations
    
    
    (256
    )
    
    (1,569
    )
    
    (6,629
    )Proceeds
      from issuance of common stock, net of costs associated with issuance of
      common stock
    
    
    81
    
    
    16,062
    
    
    —Other
      financing activities
    
    
    —
    
    
    (131
    )
    
    138Net
      cash (used in) provided by financing activities
    
    $
    (1,140
    )
    $
    12,208
    
    $
    (20,198
    )
*Financing
Activities:*For the
year ended December 31, 2004, we used $1.1 million of cash in financing
activities, primarily related to costs incurred in connection with the planned
acquisition of ICG.

The cash
provided in 2003 primarily represents the net effect of cash received from the
issuance of common stock in September 2003, partially offset by the repurchase
of our remaining senior notes and payments on capital lease obligations. In
September 2003, we entered into a securities purchase agreement under which we
raised approximately $16.0 million, net of selling costs, through the private
placement of 12,940,741 shares of common stock at $1.35 per common share. See
“Private Placement” above for more information on this transaction. In 2002 we
used cash for the repurchase of our Senior Notes as well as for payments on our
long-term capital leases and long-term debt obligations.

*Table
of Future Commitments*

As of
December 31, 2004, we are obligated to make cash payments in connection with our
operating lease obligations, circuit lease obligations and purchase commitments.
The effect
of these obligations and commitments on our liquidity and cash flows in future
periodsis set
forth below.All of
these arrangements require cash payments over varying periods of time. Certain
of these arrangements are cancelable on short notice and others require
termination or severance payments as part of any early termination. Included in
the table below are obligations for continuing operations (in
thousands):

**49**
**Continuing
      Operations:**
    
    
    **2005**
    
    
    **2006**
    
    
    **2007**
    
    
    **2008**
    
    
    **2009**
    
    
    **Thereafter**Operating
      lease obligations
    
    $
    3,880
    
    $
    3,637
    
    $
    3,522
    
    $
    2,784
    
    $
    2,183
    
    $
    1,384Circuit
      lease obligations
    
    
    6,369
    
    
    4,746
    
    
    3,000
    
    
    2,018
    
    
    —
    
    
    —Purchase
      commitments
    
    
    2,646
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —Total
    
    $
    12,895
    
    $
    8,383
    
    $
    6,522
    
    $
    4,802
    
    $
    2,183
    
    $
    1,384

This
Table of Future Commitments does not include any obligations we assumed in
connection with the acquisition of certain ICG assets in January
2005.

Approximately
$0.2 million of the operating lease payments and circuit lease payments are
remaining as part of our accrued network optimization costs originally recorded
in June 2001 and February 2002.

We have
sufficient liquidity and capital resources to fund these obligations in 2005 and
we believe our future cash flow from operations will be sufficient to continue
to pay these obligations as they become due in the future.

As
provided in the asset sale agreements for the discontinued markets, we remain
contingently liable for several of the obligations in these markets (the
“Contingent Liabilities”). We are guarantor of future lease obligations with
expirations through 2015. 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 assigned leases. As we have never been required to make any payments
and do not expect to make any in the future, in accordance with accounting
guidelines, no liability has been recorded on our consolidated balance sheet at
December 31, 2004 and 2003. Included in the table below are obligations for
discontinued operations (in thousands):
**2005**
    
    
    **2006**
    
    
    **2007**
    
    
    **2008**
    
    
    **2009**
    
    
    **Thereafter**Contingent
      liabilities
    
    $
    2,004
    
    $
    1,431
    
    $
    1,117
    
    $
    1,073
    
    $
    1,087
    
    $
    2,905

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 of Others,” the fair value of these obligations is
immaterial and accordingly no liability was recorded on our consolidated balance
sheet at December 31, 2004 and 2003 related to these obligations.

**Results
of Continuing Operations Overview**

Our
revenues are generated from the sale of communications services consisting
primarily of local phone services, data services, long-distance services,
switched access billings and non-recurring charges, such as installation
charges. Local, long distance and data services are generally provided and
billed as a bundled offering under which customers pay a fixed amount for a
package of combined local, long distance and data services. As a result, the
portion of our revenues attributable to each kind of service is not identifiable
and, therefore, we do not record or report these amounts separately. Our
revenues consist of:

•
    the
      monthly recurring charge for basic local voice and data
      services;•
    usage-based
      charges for local and toll calls in certain markets, including long
      distance services;•
    charges
      for services such as call waiting and call forwarding;•
    certain
      non-recurring charges, such as set-up charges for additional lines for
      existing customers; and•
    revenues
      from switched access charges to long distance
carriers.

**50**
Our
switched access revenues historically have been subject to uncertainties such as
various federal and state regulations and disputes with our long distance
carriers. The FCC in April 2001 adopted new rules that limit the rates we can
charge carriers for use of our facilities. Under these rules, which took effect
on June 20, 2001, competitive carriers were required to reduce their tariffed
interstate access charges to agreed upon contract rates or rates no higher than
2.5 cents per minute. After one year, the rate ceiling was reduced to 1.8 cents
and after two years to 1.2 cents per minute. As of June 2004, all competitive
carriers are required to charge rates no higher than the incumbent telephone
company. No further price decreases are mandated. However, the FCC is
considering further changes to the access rate structure that could result in a
further reduction or elimination of access charges. We are unable to predict at
this time the extent of any such decline.

As a
result of our switched access agreements, the final FCC rate step-down and
growth in our core customer trade revenue, we anticipate a continued decrease of
switched access revenues as a percent of total revenue. Switched access revenue
as a percent of total revenue was 10% for the year ended December 31, 2004, and
13% and 20% for the years ending December 31, 2003 and 2002, respectively.
Correspondingly, revenue from core trade customers (our business and residential
customers) increased to 90% of total year 2004 revenues as compared to 87% and
80% of total revenues for the two previous years.

Our
principal operating expenses consist of cost of operating revenues, selling
expenses, general and administrative expenses, and depreciation and amortization
expense. Cost of operating revenues consists primarily of access charges, line
installation expenses, transport expenses, long distance expenses and lease
expenses for our switch sites and our collocation sites. Cost of operating
revenues and selling, general and administrative expenses do not include an
allocation of our depreciation or amortization expenses.

Selling
expenses consist primarily of all other salaries, commissions and related
personnel costs, marketing costs and facilities costs. General and
administrative expenses consist primarily of all other salaries and related
personnel costs, the cost of maintaining the hardware and software in our
network and back office systems, provision for bad debts, professional fees,
insurance, property taxes, customer care and billing expense and facilities
expenses.

Depreciation
and amortization expense includes depreciation of switching and collocation
equipment, business application software as well as general property and
equipment and the amortization of certain intangible assets.

Other
income in 2003 resulted from the reversal of a sales tax contingency reserve
deemed no longer needed.

Gross
interest expense is primarily attributable to our capital leases and the 13%
Senior Notes due 2010 we issued in March 2000 and the 13% Senior Notes due 2004
issued in September 1997. All of the Senior Notes had been repaid as of January
2003.

Interest
income results from the investment of cash and cash equivalents, and investments
available-for-sale. These investments include auction rate securities,
government agency notes and corporate bonds. All investments are made in
accordance with our Investment Policies and Guidelines that have been approved
by our Board of Directors.

To date,
we have experienced operating losses and until the 2004 year, incurred negative
cash flows from operating activities. We believe we now have sufficient
resources and liquidity to fund our planned operations.

**51**
***Analysis
of Consolidated Statements of Operations***(in
millions):

**Year
      Ended December 31**,
    **Year
      Ended****December
      31,**
    **Year
      Ended****December
      31,**
    **Percentage
      Change****Increase/(Decrease)****2004**
    
    
    **%
      of****Revenue**
    
    
    **2003**
    
    
    **%
      of****Revenue**
    
    
    **2002**
    
    
    **%
      of****Revenue**
    
    
    **2004
      vs.****2003**
    
    
    **2003
      vs.****2002**Operating
      revenuesCore
      customer trade revenue
    
    $
    135.6
    
    
    90
    %
    $
    129.6
    
    
    87
    %
    $
    116.4
    
    
    80
    %
    
    5
    %
    
    11
    %Switched
      access revenue
    
    
    15.4
    
    
    10
    %
    
    18.6
    
    
    13
    %
    
    29.7
    
    
    20
    %
    
    (17
    %)
    
    (37
    %)Total
      revenue
    
    
    151.0
    
    
    100
    %
    
    148.2
    
    
    100
    %
    
    146.1
    
    
    100
    %
    
    2
    %
    
    1
    %Cost
      of operating revenues (1)
    
    
    69.3
    
    
    46
    %
    
    75.4
    
    
    51
    %
    
    84.7
    
    
    58
    %
    
    (8
    %)
    
    (11
    %)Selling,
      general and administrative (2)
    
    
    73.1
    
    
    48
    %
    
    77.6
    
    
    52
    %
    
    109.1
    
    
    74
    %
    
    (6
    %)
    
    (29
    %)Other
      operating expenses
    
    
    15.1
    
    
    10
    %
    
    15.0
    
    
    10
    %
    
    315.5
    
    
    216
    %
    
    1
    %
    
    (95
    %)Loss
      from operations
    
    
    (6.5
    )
    
    (4
    %)
    
    (19.8
    )
    
    (13
    %)
    
    (363.2
    )
    
    (249
    %)
    
    *
    
    
    *Other
      income (expense):Interest
      income
    
    
    0.4
    
    
    0
    %
    
    0.2
    
    
    0
    %
    
    4.2
    
    
    3
    %
    
    *
    
    
    *Interest
      expense
    
    
    (0.2
    )
    
    0
    %
    
    (0.5
    )
    
    0
    %
    
    (20.6
    )
    
    (14
    %)
    
    *
    
    
    *Other
      income
    
    
    —
    
    
    —
    
    
    1.4
    
    
    1
    %
    
    —
    
    
    —
    
    
    *
    
    
    *(Loss)
      gain on discharge of debt
    
    
    
    
    
    —
    
    
    (0.1
    )
    
    0
    %
    
    350.3
    
    
    240
    %
    
    *
    
    
    *Gain
      on sale of investments, net
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    3.8
    
    
    3
    %Loss
      from continuing operations
    
    
    (6.3
    )
    
    (4
    %)
    
    (18.8
    )
    
    (13
    %)
    
    (25.5
    )
    
    (17
    %)
    
    (66
    %)
    
    (26
    %)Discontinued
      operations:Income
      (loss) from discontinued operations
    
    
    0.9
    
    
    1
    %
    
    (2.3
    )
    
    (2
    %)
    
    (68.9
    )
    
    (47
    %)
    
    *
    
    
    *Net
      loss
    
    
    (5.4
    )
    
    (4
    %)
    
    (21.1
    )
    
    (14
    %)
    
    (94.4
    )
    
    (65
    %)
    
    *
    
    
    *Accrued
      preferred stock dividend
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (4.0
    )
    
    (3
    %)
    
    *
    
    
    *Net
      loss applicable to common stockholders
    
    $
    (5.4
    )
    
    (4
    %)
    $
    (21.1
    )
    
    (14
    %)
    $
    (98.4
    )
    
    (67
    %)
    
    (74
    %)
    
    (79
    %)

*
    Calculation
      is not meaningful.(1)
    Exclusive
      of depreciation and amortization included in other operating
      expenses of $8.0 million and $7.7 million for the years ended
      December 31, 2004 and 2003, respectively, and $3.6 million and $21.7
      million for the period July 31, 2002 through December 31, 2002 and
      for the period January 1, 2002 through July 30, 2002,
      respectively.(2)
    Exclusive
      of depreciation and amortization included in other operating
      expenses of $7.5 million and $8.7 million for the years
      ended December 31, 2004 and 2003, respectively, and $4.4 million and
      $7.0 million for the period July 31, 2002 through December 31, 2002
      and for the period January 1, 2002 through July 30, 2002,
      respectively.

**52**
*Year
Ended December 31, 2004 vs. 2003*

***Operating
Revenues.***Total
operating revenues increased to $151.0 million for the year ended December 31,
2004 as compared to $148.2 million for the year ended December 31, 2003. The 2%
increase in revenue was primarily the result of:

•
    A
      $12.9 million or 40% increase in revenue related to our T-1 based products
      and services as we had an increase in the number of business customers
      receiving those services, offset by:•
    A
      $7.0 million or 8% decline in our plain old telephone service (“POTS”)
      revenue as we focus more of our business and new revenue on our T-1 based
      products and services; and•
    A
      $3.2 million or 17% decrease in our switched access revenue. This decrease
      in switched access revenue was primarily a result of 1) a decrease in
      revenue of $1.5 million related to the reduction in rates we negotiated
      with our major carriers and a decrease in rates mandated by the FCC; 2) a
      decrease in revenue of $2.9 million related to a decrease in rates related
      to intralata toll charges for one of the ILECs and a dispute with another
      ILEC regarding intralata toll usage; and 3) an increase in revenue of $1.2
      million related to one-time resolution of disputes over presubscribed
      interexchange carrier charges, a switched access element.

Including
our recent ICG acquisition, we currently estimate 2005 revenue to be between
$200.0 million to $208.0 million. We anticipate that growth in total revenue
will come from organically driven growth in our core customer trade revenue from
multiple sales channels as well as revenues generated as a result of the ICG
acquisition. We anticipate increasing our quota carrying account manager
headcount from approximately 100 at December 31, 2004, to approximately 125 in
2005. We anticipate T-1, VOIP, trunk and private line and long-distance revenue
to be a significant part of our revenue growth in 2005. We anticipate a decline
in our POTS revenue in 2005 but at a rate less than 2004. Our switched access
revenue is also expected to decline in absolute dollars and as a percentage of
total revenue in 2005 as we anticipate continued downward pressure on our rate
per minute.

Churn is
defined as the percentage of lines that are disconnected in any given period of
time. Customer churn for the year ended December 31, 2004, trended down compared
to the year ended December 31, 2003. These favorable trends in churn contributed
toward more favorable operating results and better liquidity in 2004. We
anticipate churn levels to continue at their current level in 2005. We seek to
minimize churn by delivering high quality service, a high level of customer
care, and a portfolio of product and service offerings that is competitive with
other carriers. Changes in our level of churn and the achievement of our plans
to grow revenue from our new account managers will have a direct effect on our
future operating results and liquidity.

**53**
***Cost
of Operating Revenues.***Cost of
operating revenues (excluding depreciation and amortization) for the year ended
December 31, 2004, was $69.3 million as compared to $75.4 million for the year
ended December 31, 2003. The 8% or $6.1 million decrease in the cost of
operating revenues is primarily due to:

•
    A
      $3.0 million or 10% decrease in the recurring expense related to our POTS
      resulting from a 10% decrease in average POTS lines in service for the
      year ended December 31, 2004, versus the year ended December 31, 2003, as
      we continue to move more of our revenue toward data services. Increases in
      the unit cost of POTS service in California and Illinois resulting from
      recent Public Utility Commission decisions in those states are expected to
      keep our POTS cost of operating revenues relatively flat in 2005 compared
      with 2004 even as the average number of lines in service continues to
      decrease.•
    A
      $3.1 million or 84% increase in the cost of T-1 and trunk services for the
      year ended December 31, 2004, compared to the year ended December 31,
      2003. This increase is result of a revenue growth of 46% for these
      services for the year ended December 31, 2004, compared to the year ended
      December 31, 2003. We anticipate the cost of these services to increase in
      2005 in proportion to the revenue growth for these
    services.•
    A
      $2.0 million or 36% decrease in the cost of providing long-distance
      services for the year ended December 31, 2004, compared to the year ended
      December 31, 2003. This decrease is a result of a decrease in the average
      cost per minute partially offset by an increase in minutes of use for the
      year ended December 31, 2004, compared to the year ended December 31,
      2003. We anticipate the cost of these services to increase in 2005 as we
      expect our minutes of use and our revenue to increase while our cost per
      minute remains relatively constant.•
    A
      $4.3 million or 26% decrease in the cost of our network infrastructure for
      the year ended December 31, 2004, compared to the year ended December 31,
      2003. Cost savings have been achieved through grooming the network of
      unneeded capacity, routing traffic by a more cost effective means, and the
      effect of a capital project focused on replacing higher cost circuits with
      lower cost circuits. We anticipate this cost to remain relatively constant
      in 2005 as we expect any cost savings we achieve to be offset by the need
      to grow our network to handle increases in
revenue.

While we
have been successful in reducing our cost of operating revenues (exclusive of
depreciation and amortization as shown separately below) from 51% of revenue for
the year ended December 31, 2003, to 46% for the year ended December 31, 2004,
we do not anticipate that reduction will continue in the future.

***Selling,
General and Administrative.***For the
year ended December 31, 2004, selling, general and administrative expenses
(excluding depreciation and amortization) totaled $73.1 million, a 6% or $4.5
million decrease compared to the $77.6 million for the year ended December 31,
2003. The decrease is primarily due to:

•
    A
      $2.6 million reduction in bad debt expense as a result of higher credit
      standards for new customers and continued effective collection efforts. In
      addition, during 2003, we reached resolution of several disputes with our
      switched access customers resulting in the need for higher bad debt
      expense in that period.•
    A
      reduction in salary, wages and benefit related expense of $2.3 million.
      This decrease primarily results from severance obligations incurred during
      the year ended December 31, 2003, and reduced employee commission expense
      as a result of a comprehensive reshaping of our sales
      organization.•
    A
      $1.1 million reduction in occupancy expense, which is primarily the result
      of office space reductions in our Las Vegas, Nevada and Chicago, Illinois
      markets.•
    A
      $0.9 million reduction in insurance expense primarily driven by more
      competitive insurance rates available during 2004 than during 2003, as
      well as our lower asset-value base in 2004 resulting from the Asset Sales
      which contributed to the overall lower insurance
  expenses.•
    A
      $0.8 million reduction in property tax related expense primarily due to
      the reversal of accrued property tax payables resulting from the
      resolution of property tax audits in California and ongoing adjustments in
      estimated liability in other states.

**54**
The
reduced expenses were partially offset by:

•
    A
      $1.4 million increase in equipment related expense due to a favorable
      settlement with a vendor during the year ended December 31, 2003, and a
      $1.0 million increase in agent commissions as a result of significant
      growth within the independent agent channel.•
    Additional
      expenses of $0.5 million for incremental transition expenses related to
      preparation for the integration of the ICG acquisition. We completed the
      acquisition of ICG’s California retail and wholesale customers and
      statewide fiber network on January 1, 2005. We expect to incur additional
      incremental transition expenses related to the integration of the ICG
      assets of approximately $1.0 million in the first three quarters of
      2005.•
    Costs
      related to our required compliance with Section 404 provisions of the
      Sarbanes-Oxley Act during the year ended December 31, 2004. In 2004, we
      spent $0.5 million in these compliance efforts. This amount excludes any
      allocation of our personnel who spent time during 2004 on
      Sarbanes-Oxley.

We have
reduced headcount and associated expense over the past twenty-four months and it
has contributed materially to improving our operating results. As a result of
our ICG acquisition and other projected growth in our business, we anticipate a
modest growth in headcount and related expense in 2005. We anticipate increasing
our quota carrying account manager headcount from approximately 100 at December
31, 2004, to approximately 125 in 2005, which will result in a higher selling,
general and administrative expense in 2005 than 2004. Overall, including our ICG
acquisition, we anticipate our selling, general and administrative costs
(excluding depreciation and amortization) to be about the same percentage of
revenue in 2005 as in 2004.

***Network
Optimization Cost.***We
recognized $264.1 million of network optimization cost in connection with
reductions in markets during 2000 to 2002.

For the
year ended December 31, 2003, we recognized a $1.0 million reduction to our
previously recognized network optimization costs primarily resulting from a
final settlement with one of our network carriers.

With
respect to the network optimization charges, the total actual charges have been
based on ultimate settlements with the incumbent local exchange carriers,
recovery of costs from subleases, our ability to sell or re-deploy network
equipment for growth in our existing network and other factors. With our
emergence from the Chapter 11 proceedings in 2002, we were able to conclude
settlements with several network carriers and numerous office landlords. As a
result of these settlements, our future liabilities were dramatically reduced.
The closing down of these markets as part of the network optimization charges
have contributed materially to our improved operating performance and is
expected to materially benefit our future operating results. There are minimal
remaining liabilities attributable to our network optimization charges that will
have a future impact on our liquidity or results from operations. We do not
anticipate any additional savings from our closing of these markets. We do not
anticipate closing or selling any markets in 2005.

***Gain
on Sale of Assets.***For the
year ended December 31, 2004, we recorded a $0.4 million gain on sale of assets
as compared to $0.5 million for the year ended December 31, 2003. These gains
primarily resulted from the sale of equipment.

***Depreciation
and Amortization.***For the
year ended December 31, 2004, depreciation and amortization was $15.5 million as
compared to $16.4 million for the year ended December 31, 2003. The decrease was
a result of a reduction in the depreciable base of assets. As a result of our
recent ICG acquisition, we anticipate our depreciation expense will be higher in
2005 than we incurred in 2004.

***Loss/Gain
on Discharge of Debt.***For the
year ended December 31, 2003, we incurred a loss on the discharge of debt of
$0.1 million, attributable to our repurchase of the remaining $2.1 million in
carrying value of our 2004 Notes for $2.2 million in cash.

***Other
Income****.*******For the
year ended December 31, 2004, we reported a minimal amount of other income as
compared to $1.4 million for the year ended December 31, 2003. Other income
recognized during 2003 resulted from the reversal of a sales tax contingency
reserve deemed no longer needed.

**55**
***Interest
Income.***Interest
income was $0.4 million for the year ended December 31, 2004, compared to $0.2
million for the year ended December 31, 2003. Interest income is derived
primarily from the investment of cash and cash equivalents, investments
available-for-sale and restricted cash and cash equivalents. The increase in
interest income results from higher average cash and investments, primarily the
result of additional cash we raised from the issuance of common stock in
September 2003, as well as continued reductions to our operating
losses.

***Interest
Expense.***Gross
interest expense for the year ended December 31, 2004 totaled $0.2 million, as
compared to $0.5 million for the year ended December 31, 2003. Interest expense
includes commitment fees and interest paid relating to our line of credit and
interest on capital lease obligations. The decrease in interest expense is
primarily related to a reduction in average borrowings under our line of credit
and the fulfillment of capital lease obligations during 2004. We expect interest
expense to increase during 2005 as a result of capital lease obligations assumed
in the ICG acquisition in January 2005.

***Loss
from Continuing Operations.***As a
result of the above, we incurred losses from continuing operations of $6.3
million for the year ended December 31, 2004, and $18.8 million for the year
ended December 31, 2003.

***Net
Loss.***As a
result of the above and income (loss) from discontinued operations, net loss was
$5.4 million and $21.1 million for the years ended December 31, 2004 and 2003,
respectively.

*Year
Ended December 31, 2003 vs. 2002*

***Operating
Revenues.***Total
operating revenues increased to $148.2 million for the year ended December 31,
2003 as compared to $146.1 million for the year ended December 31, 2002. The 1%
increase in revenue was primarily the result of an increase in the number of our
business customers receiving service on one of our data products offset by a
reduction in switched access revenue as well as a decline in residential average
lines in service and the resulting lower revenue generated from our residential
customers.

Our
switched access revenues decreased $11.1 million or 37% for the year ended
December 31, 2003 compared to the year ended December 31, 2002. This decrease in
switched access revenues was primarily a result of the reduction in rates we
negotiated with our major carriers and a decrease in rates mandated by the
FCC.

Core
customer trade revenue increased by $13.2 million for the year ended December
31, 2003 compared to the year ended December 31, 2002. Our business line revenue
increased $16.4 million for the year ended December 31, 2003 versus the year
ended December 31, 2002 due to an increase in the average revenue generated per
line by increasing the number of business customers using our data services.
This increase in business line revenue was offset by a decline in residential
line revenue of $3.3 million for the year ended December 31, 2003 versus the
year ended December 31, 2002 due to a decrease in the average number of lines in
service.

***Cost
of Operating Revenues.***Cost of
operating revenues (excluding depreciation and amortization) for the year ended
December 31, 2003 was $75.4 million as compared to $84.7 million for the year
ended December 31, 2002. The 11% or $9.3 million decrease in the cost of
operating revenues is primarily due to:

•
    A
      reduction in the recurring customer related expense of $5.0 million for
      the year ended December 31, 2003 compared to the year ended December 31,
      2002. This decrease was achieved through lower unit prices charged by the
      ILEC for our local loops, lower per-minute long-distance rates we have
      negotiated with our carriers, and the grooming of our network of unneeded
      capacity;•
    A
      reduction in the non-recurring (external charges incurred by us to install
      and disconnect customers) customer related expense of $1.9 million for the
      year ended December 31, 2003 compared to the year ended December 31, 2002.
      These cost savings were achieved through utilizing more effective means of
      ordering services for our customers and installing a larger number of
      lines per order;•
    A
      reduction in our network cost of $2.4 million for the year ended December
      31, 2003 compared to the year ended December 31, 2002. Cost savings in
      this area were achieved through grooming the network of unneeded capacity,
      routing traffic by a more cost effective means, and the effect of a
      capital project focused on replacing higher cost circuits with lower cost
      circuits.

**56**
***Selling,
General and Administrative.***For the
year ended December 31, 2003, selling, general and administrative expenses
(excluding depreciation and amortization) totaled $77.6 million, a 29% or $31.5
million decrease compared to the $109.1 million for the year ended December 31,
2002. The decrease was primarily due to:

•
    A
      reduction in salary, wages and benefit related expense of $18.7 million.
      This reduction in salary, wages and benefit expense was a result of
      reduction in headcount, operating improvement initiatives and
      comprehensive reshaping of the sales organization.•
    A
      $4.8 million reduction in consulting fees. For the year ending December
      31, 2002 we incurred significant fees related to our
      recapitalization.•
    A
      $2.7 million reduction in bad debt expense as a result of higher credit
      standards for new customers, more effective collection efforts and
      resolution of disputes with our switched access
  carriers.•
    A
      $1.7 million reduction in property tax expense, as a result of lower
      valuations of our property in the revaluation of our property, plant and
      equipment in our fresh-start accounting.•
    A
      $0.5 million reduction in stock-based compensation expense.For
      the year ended December 31, 2003, we recorded $0.2 million in stock-based
      compensation expense compared to $0.7 million for the year ended December
      31, 2002.Outstanding
      options at December 31, 2003 were granted subsequent to our emergence from
      bankruptcy and have been accounted for as fixed awards. The expense for
      the year ended December 31, 2003 related to options granted with an
      exercise price below the market price of our stock. The expense for the
      year ended December 31, 2002 related to in-the-money stock options granted
      in 1999, 2000, and 2001, the establishment of a $0.1 million reserve
      against an employee note receivable from a stockholder and $0.2 million of
      expense relating to the new stock option plan and the application of fixed
      plan accounting.

***Reorganization
Expense.***In
accordance with SOP 90-7, expenses resulting from the reorganization of the
business in a bankruptcy proceeding are to be reported separately as
reorganization items. Reorganization items of $266.4 million were
recognized during 2002. The expenses consisted primarily of a $19.0 million
consent fee payment to our bondholders, $244.7 million related to fresh-start
fair market value adjustments and $2.7 million of legal and financial advisor
fees.

***Network
Optimization Cost.***In May
1998, we completed our initial public offering of common stock, raising net
proceeds of $63.0 million. From May 1999 to March 2000, we raised over $900
million of additional funds through debt and equity issuances to pursue an
aggressive business plan to rapidly expand our business using Class 5 circuit
switching technology in each of our markets (the same as used by Verizon, SBC,
and other major telecommunication companies) and began deploying digital loop
carriers in each collocation site.By the
end of 2000, we provided bundled high speed voice and data services through 761
incumbent carrier central office collocation sites, serving 40 metropolitan
areas in 15 states.

Due to
certain factors, including, but not limited to, a significant long-term debt
load, a downturn in economic conditions generally and the challenging economic
environment for competitive telecommunications companies in particular, we
determined that our cash flow from operations would be insufficient to both
service our long-term indebtedness and operate our business in the long term.From
September 2000 through February 2002, we significantly scaled back our
operations, canceling more than 500 existing collocations, and canceling plans
to enter the Northeast and Northwest Regions (representing more than 350
collocations).

During
third quarter 2000, we announced a plan to eliminate 339 collocations and delay
our expansion into 12 Northeast and Northwest markets. We recorded a
non-recurring network optimization charge of $12.0 million that represents
estimated amounts paid or to be paid to incumbent local exchange carriers for
collocation sites for which we have decided to discontinue
entrance.

**57**
During
February 2001, we announced the cancellation of our plans to enter 12 Northeast
and Northwest markets and the related elimination of 351 collocations. We
recorded a network optimization charge of $24.0 million in the first quarter of
2001 associated with the investment we made in switch sites and collocations for
these markets.

During
May 2001, we announced plans to close down operations in twelve of the markets
we had recently opened, representing more than 180 collocations. We exited those
markets over the period from June to September 2001 and recognized a network
optimization charge of $209.1 million in the second quarter of 2001. Included in
the charge is $126.8 million for the goodwill and customer base associated with
the Primary Network business, which was eliminated as a result of the market
closings, $65.1 million for property including collocations and switch sites,
and $17.2 million for other costs associated with exiting these markets. This
charge was reflected as a network optimization cost in our consolidated
financial statements.

In
February 2002, we closed our operations in Charlotte, North Carolina and
eliminated certain other non-performing sales offices. We also cancelled the
implementation of a new billing system in February 2002. As a result, we
recognized a network optimization charge of $19.0 million in the first quarter
of 2002. Included in the charge was $12.5 million for the write down of our
investment in software and assets for a new billing system, $3.7 million for
property and equipment including collocations and switch sites and $2.8 million
for other costs associated with exiting these markets.

For the
year ended December 31, 2003, we recognized a $1.0 million reduction to our
previously recognized network optimization costs primarily resulting from a
final settlement with one of our network carriers.

With
respect to the network optimization charges, the total actual charges were based
on ultimate settlements with the incumbent local exchange carriers, recovery of
costs from subleases, our ability to sell or re-deploy network equipment for
growth in our existing network and other factors. With our emergence from the
Chapter 11 proceedings, we were able to conclude settlements with several
network carriers and numerous office landlords. As a result of these
settlements, our future liabilities were dramatically reduced and we were
subsequently able to reduce our network optimization accrual in 2002 by $6.4
million.

***Gain
on Sale of Assets.***For the
year ended December 31, 2003, we recorded a $0.5 million gain on sale of assets
as compared to $0.2 million for the year ended December 31, 2002. These gains
primarily resulted from the sale of equipment.

***Depreciation
and Amortization.***For the
year ended December 31, 2003, depreciation and amortization was $16.4 million as
compared to $36.6 million for the year ended December 31, 2002. This 55%
decrease is primarily due to the reduced depreciable value of our fixed assets
resulting from the implementation of fresh-start accounting.

***Gain
on Sale of Investments.***For the
year ended December 31, 2002 we had a gain on sale of investments of $3.8
million which primarily resulted from the sales of our investments
available-for-sale.

***Loss/Gain
on Discharge of Debt.***For the
year ended December 31, 2003, we recorded a loss on the discharge of debt of
$0.1 million, attributable to our repurchase of the remaining $2.1 million in
carrying value of our 2004 Notes for $2.2 million in cash, as compared to a gain
on the discharge of debt of $350.3 million for the year ended December 31, 2002,
attributable to the cancellation of our 2010 Notes and our repurchase of $49.2
million in carrying value of our 2004 Notes.

***Other
Income****.*******During
2003, we reported other income of $1.4 million resulting from the reversal of a
sales tax contingency reserve deemed to no longer be required.

***Interest
Income.***Interest
income was $0.2 million during the year ended December 31, 2003, compared to
$4.2 million for the year ended December 31, 2002. The decrease was a result of
a decline in our average cash and investments since the third quarter of 2002.
Cash and investments were used to purchase capital equipment, retire our
remaining 2004 Senior Secured Notes and fund operating losses.

**58**
***Interest
Expense.***Gross
interest expense for 2003 totaled $0.5 million, as compared to $22.0 million for
2002. Interest capitalized for the year ended December 31, 2002 was $1.4
million. As required by SOP 90-7, interest expense ceased to accrue on our 2010
Senior Notes upon filing our petition for relief under Chapter 11 of the
Bankruptcy Code on April 8, 2002. Contractual interest was $33.5 million for the
period from January 1, 2002 until July 30, 2002. The decrease in interest
expense was primarily due to the retirement or discharge of substantially all of
our debt. All of our 2010 Notes were eliminated in our reorganization and all of
our 2004 Senior Secured Notes were repurchased by January 2003.

***Loss
from Continuing Operations.***We
incurred losses from continuing operations of $18.8 million for the year ended
December 31, 2003, and $25.5 million for the year ended December 31,
2002.

***Net
Loss.***Net loss
was $21.1 million and $94.4 million for the years ended December 31, 2003 and
2002, respectively.

***Accrued
Preferred Stock Dividend****.*For the
year ended December 31, 2002, we accrued dividends of $4.0 million, payable to
holders of our convertible preferred stock. As required by SOP 90-7, accrual of
preferred stock dividends ceased upon filing of our petition for relief under
Chapter 11 of the Bankruptcy Code on April 8, 2002. Contractual dividends were
$8.8 million for the period from January 1, 2002 to July 30, 2002. All our
preferred stock was eliminated in our reorganization effective July 30,
2002.

**Discontinued
Operations**

In
January 2003, we announced a series of strategic and financial transactions to
further strengthen us financially and focus our operations on our California,
Nevada and Illinois markets. We brought geographic concentration to our business
by selling our customers and assets in Florida, Georgia, Ohio, Michigan and
Texas to other service providers (the “Asset Sales”).

In March
2003, we completed the sale of our assets in our Ohio and Michigan markets to
LDMI Telecommunications, Inc. ("LDMI") pursuant to Asset Purchase Agreements
dated as of February 6, 2003 and January 8, 2003. The purchase price for the
assets in Ohio and Michigan was $3.3 million and $3.8 million, respectively. As
of December 31, 2003, the total purchase price had been received. In addition,
LDMI agreed to assume certain liabilities from us with respect to the Ohio and
Michigan assets.

In March
2003, we completed a transaction with Xspedius Equipment Leasing, LLC ("XE"), a
subsidiary of Xspedius Communications, LLC ("Xspedius") pursuant to an Asset
Contribution Agreement effective as of December 31, 2002. Under the terms of the
Asset Contribution Agreement, we contributed the assets in our Texas market to
XE in exchange for a 14% interest in XE. In April 2003, we sold 92.85% of our
interest in XE (13% of XE) to a current member of XE for $0.5 million. In
addition, XE agreed to assume certain liabilities from us with respect to the
Texas assets.

In April
2003, we completed the sale of our assets in our Florida and Georgia markets to
Florida Digital Networks, Inc. (“FDN”), pursuant to an Asset Purchase Agreement
dated as of January 8, 2003. The purchase price for the assets in Florida and
Georgia was $12.4 million. In addition, FDN agreed to assume certain of our
liabilities with respect to the Florida and Georgia assets. As of December 31,
2004, $10.9 million of the purchase price has been received and the remaining
$1.5 million was being held in escrow. 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, in the first or second quarter of
2005.

Each of
the transactions described above involved transition services and/or management
agreements that were sufficient to transfer the operations of these businesses.
We were reimbursed for the cost of specific services provided on behalf of the
buyer. For the year ended December 31, 2003, we recognized $3.7 million of
reimbursements for transition services and management agreement fees. The
amounts recognized from the transition services and management agreements have
been included as an offset to the operating expenses component of income (loss)
from discontinued operations in our consolidated statements of operations. We
ceased providing transition services as of December 31, 2003.

**59**
As of
December 31, 2004, we have recorded $1.5 million of receivables from the Asset
Sales, transition services and management agreements and pending reimbursements
for expenses paid on behalf of the buyers. These receivables have been included
in other receivables in our consolidated balance sheets. No allowance for
doubtful accounts for these receivables has been established as we expect to
collect all of these receivables.

During
the fourth quarter of 2002, our board of directors approved our commitment to
divest these markets and engage in transactions to sell these markets to other
providers. As a result of this decision, the operating revenue and expense of
these markets were classified as discontinued operations under SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets,” for all
periods presented. The assets being disposed of were written down to their fair
value, net of expected selling expenses. The write down and results of
operations of the discontinuedFlorida,
Georgia, Michigan, Ohio and Texas marketsresulted
in a charge to discontinued operationsfor all
periods presented.Net sales
and operating losses relating to these discontinued markets are as follows for
the periods ended in 2004, 2003 and 2002 (in thousands):

**Predecessor****Reorganized
      Mpower Holding**
    
    **Mpower
      Holding****2004**
    
    
    **2003**
    
    
    **2002**
    
    
    **2002**Operating
      revenues
    
    $
    4
    
    $
    6,150
    
    $
    36,284
    
    $
    45,282Operating
      (income) expenses (excluding depreciation and amortization shown
      separately below)
    
    
    (584
    )
    
    7,995
    
    
    45,723
    
    
    67,323Depreciation
      and amortization
    
    
    —
    
    
    —
    
    
    3,236
    
    
    12,724(Gain)
      loss on disposal
    
    
    (320
    )
    
    523
    
    
    21,518
    
    
    —Income
      (loss) from discontinued operations
    
    $
    908
    
    $
    (2,368
    )
    $
    (34,193
    )
    $
    (34,765
    )

During
2004, we recorded $0.6 million of operating income from discontinued operations,
primarily related to the reversal of sales and property tax liabilities
resulting from the resolution of tax audits and ongoing estimates of audit
exposure in other states, as well as the resolution of certain disputes with
several carriers. During 2003, we recorded $8.0 million in operating expenses
from discontinued operations, primarily related to the ongoing operation of the
discontinued markets through the date of sale. Operating expense for the year
ended December 31, 2003 included exit costs of $2.4 million, primarily related
to facility and lease contract termination costs of $1.8 million and one-time
severance termination benefits of $0.6 million.

For the
year ended December 31, 2004, we recorded a gain on disposal of $0.3 million to
account for an adjustment in the costs to sell the assets. For the year ended
December 31, 2003, we recorded a loss on disposal of $0.5 million, which was
comprised of a $1.2 million loss on disposal to account for the resolution of
purchase price adjustments and additional costs to sell the assets, partially
offset by a $0.7 million gain resulting from the reversal of pre-bankruptcy
sales tax contingency due to a favorable resolution regarding this
matter.

These
amounts are reflected in income (loss) from discontinued operations in our
consolidated statements of operations.

**60**
**Application
of Critical Accounting Estimates**

The
discussion and analysis of our financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to revenue recognition, allowance for doubtful accounts, disputes with
carriers, sales and property taxes payable, deferred income taxes and impairment
of long-lived assets. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. We believe the following critical accounting policies
reflect our more significant judgments and estimates used in the preparation of
our consolidated financial statements.

*Revenue
Recognition*: We
recognize operating revenues as services are rendered to customers in accordance
with the Securities and Exchange Commission’s (“SEC”) Staff Accounting Bulletin
(“SAB”) No. 104, “Revenue Recognition.” We recognize revenue from monthly
recurring charges, enhanced features and usage in the period in which service is
provided. Advance billings for services not yet provided are deferred and
recognized as revenue in the period in which service is provided. Nonrefundable
activation fees are also deferred and recognized as revenue over the expected
term of the customer relationship.

We
recognize revenue from switched access in the period in which service is
provided, when the price is fixed, the earnings process is complete and the
collectability is reasonably assured.As part
of the revenue recognition process for switched access, we evaluate whether
receivables are reasonably assured of collection based on certain factors,
including past credit history, financial condition of the customer, industry
norms, past payment history of the customer and the likelihood of billings being
disputed by customers.If the
amount we collect, in the future, from our switched access charges varies
significantly from our estimates, our revenue may be negatively
affected.

Since
March 2004, one of our ILEC customers, whom we charge for intrastate traffic,
has disputed our bills. This dispute is over the method of measuring the traffic
for which we are compensated. We continue to analyze and work with the customer
to resolve the dispute. We have recognized revenue at the level of compensation
that is consistent with what we consider to be a legally appropriate position
and in accordance with SAB No. 104. If the dispute resolution process proves us
to be incorrect, we estimate that our results from operations and cash flows
would be negatively affected by up to $0.7 million.

Judgments
in recognizing revenue may affect our results and cause our revenue to be
difficult to predict. Any changes in recognizing revenue could cause our
operating results to vary significantly.

*Allowance
For Doubtful Accounts*: We
maintain allowances for doubtful accounts for estimated losses resulting from
our inability to collect all amounts owed by our customers for our services. In
order to estimate the appropriate level of this allowance, we analyze historical
bad debts, current economic and competitive trends, changes in the credit
worthiness of our customers, changes in our customer payment patterns and other
relevant factors. If the financial condition of our customers were to
deteriorate and impact their ability to make payments, or certain carriers
dispute amounts we have billed, additional allowances may be required. In
establishing the allowance for doubtful accounts, we have taken into
consideration the aggregate risk of our receivables. If actual results differ
from our estimates, we may need to adjust our allowance for doubtful accounts in
the future.

**61**
*Billing
From Network Carriers*: Various
long distance carriers and incumbent carriers lease loop, transport and network
facilities to us. The pricing of such facilities are governed by either a tariff
or an interconnection agreement. These carriers bill us for our use of such
facilities. From time to time, the carriers present inaccurate bills to us,
which we dispute. As a result of such billing inaccuracies, we record an
estimate of our liability based on our measurement of services received. As of
December 31, 2004, we had $6.5 million of disputes with carriers. We have
reserved $2.8 million against those disputed balances. Based on the nature and
history of disputes with the carriers, we believe this amount to be adequate.
Any significant changes as a result of the resolution of these disputes may
require us to adjust our reserves in the future and would affect our operating
results accordingly.

On
September 23, 2004, the California Public Utilities Commission issued D.
04-09-063 (the “Decision”) adopting final monthly recurring loop rates of an
ongoing case. The Decision requires SBC California, among other things, to
retroactively adjust monthly recurring rates SBC California had billed us. SBC
California had determined the amount of this adjustment was an additional
billing to us of $2.7 million related to previous service. There continue to be
appeals and alternate proposals related to resolution of the amount that will
eventually be paid that have a wide range of estimates. Our judgment is the
final amount will be substantially less than the original amount. If we were
obligated to pay the $2.7 million, our results from operations would be
negatively affected. We do not expect any final decision prior to third quarter
2005.

*Sales
and Property Taxes:*We
maintain 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 past years by Mpower Lease
Corporation, a wholly-owned subsidiary of Communications. Similarly, reserves
are maintained for positions taken on the assessment basis used to pay certain
property taxes to various state and local taxing jurisdictions. We continually
review the facts and circumstances of each of these reserves in accordance with
the requirements of Statement of Financial Accounting Standards (“SFAS”) No. 5,
“Accounting for Contingencies”, and believe that each reserve recorded is
appropriate at December 31, 2004. Any significant results from audits, other
triggering events, or the passage of time, may require us to adjust our reserves
in the future and would affect our operating results at that time.

*Deferred
Income Taxes*: We
record deferred income tax assets and liabilities on our balance sheet related
to events that impact our financial statements and income tax returns in
different periods. To compute these deferred income tax balances, we first
analyze the differences between the book basis and tax base of our assets and
liabilities (referred to as “temporary differences”). These temporary
differences are then multiplied by current tax rates to arrive at the balances
for the deferred income tax assets and liabilities. If deferred income tax
assets exceed deferred income tax liabilities, we must estimate whether those
net deferred income tax asset amounts will be realized in the future. A
valuation allowance is then provided for the net deferred income tax asset
amounts that are not likely to be realized. At this time, our judgment is that
it is more likely than not that no benefit from these deferred income tax assets
will be recognized and therefore a full valuation allowance has been provided
for against these net deferred income tax assets as of December 31, 2004. Future
changes in this judgment could result in a material impact to our net
income.

*Impairment
of Long-Lived Assets:*We
periodically evaluate the carrying value of our long-lived assets, including
property, equipment and intangible assets, whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. If the
estimated future cash inflows attributable to the asset, less estimated future
cash outflows, is less than the carrying amount, an impairment loss is
recognized where appropriate by writing down the asset’s carrying value to its
fair value based on the present value of the estimated discounted cash flows of
the asset or other relevant measures. We believe no impairment indicators were
present during the years ended December 31, 2004 or 2003. Considerable
management judgment is necessary to complete this analysis. Although we believe
these estimates to be reasonable, actual results could vary significantly from
these estimates and our estimates could change based on market conditions.
Variances in results or estimates could result in changes to the carrying value
of our assets including, but not limited to, recording an impairment loss for
some of these assets in future periods.

*Other:*We do not
have any off-balance sheet arrangements.

**62**
**Effects
of New Accounting Standards**

*Share-Based
Payment*

In
December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment", which replaces SFAS No. 123 and supersedes APB Opinion No. 25. 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, beginning with the first interim or annual period after June
15, 2005, with early adoption encouraged. In addition, SFAS No. 123(R) will
cause unrecognized expense (based on the fair values determined for the pro
forma footnote disclosure, adjusted for estimated forfeitures) related to
options vesting after the date of initial adoption to be recognized as a charge
to results of operations over the remaining vesting period. We are required to
adopt SFAS No. 123(R) in our third quarter of 2005, beginning July 1, 2005.
Under SFAS No. 123(R), we must determine the appropriate fair value model to be
used for valuing share-based payments, the amortization method for compensation
cost and the transition method to be used at the date of adoption. The
transition alternatives include the modified prospective or the modified
retrospective adoption methods. Under the modified retrospective method, prior
periods may be restated either as of the beginning of the year of adoption or
for all periods presented. The modified prospective method requires that
compensation expense be recorded for all unvested stock options and share awards
at the beginning of the first quarter of adoption of SFAS No. 123(R), while the
modified retrospective methods would record compensation expense for all
unvested stock options and share awards beginning with the first period
restated. We are evaluating the requirements of SFAS No. 123(R) and expect that
the adoption of SFAS No. 123(R) will have a material impact on our statements of
operations and earnings per share. We cannot yet estimate the effect of adopting
SFAS No. 123(R) as we have not yet selected the method of adoption or an
option-pricing model and we have not yet finalized estimates of our expected
forfeitures.

**Forward
Looking Statements**

Under the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995,
we caution investors 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 may differ materially from those projected as a
result of factors described in “Risk Factors”. We undertake no obligation to
update publicly any forward-looking statements, whether as a result of future
events, new information, or otherwise.

**Item
7A.*****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 December 31, 2004, we did not have any
outstanding borrowings under the line of credit.

**Item
8.*****Financial
Statements and Supplementary Data***

The
response to this item is submitted as a separate section of this
report.

**63**
**Item
9.*****Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure***

The
information required by this Item was previously disclosed in Form 8-K dated
July 17, 2002, and later amended by Form 8-K/A dated July 30, 2002.

**Item
9A.*****Controls and Procedures***

*Disclosure
Controls*

As of the
end of the period covered by this report, under the supervision and with the
participation of our management, including our chief executive officer ("CEO")
and chief financial officer ("CFO"), we evaluated the design and operation of
our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934 as amended, or the "Exchange
Act"). Based on this evaluation, our management, including our CEO and CFO, has
concluded that our disclosure controls and procedures are designed, and are
effective, to give reasonable assurance that the information required to be
disclosed by us in reports that we file under the Exchange Act is recorded,
processed, summarized and reported by our management on a timely basis in order
to comply with our disclosure obligations under the Exchange Act and
the Securities and Exchange Commission rules thereunder.

*Changes
in Internal Controls*

There
were no changes in our internal controls over financial reporting during the
quarter ended December 31, 2004, that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.

*Management's
Annual Report on Internal Control over Financial Reporting*

Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act). Our management assessed the effectiveness of our internal control
over financial reporting as of December 31, 2004. In making this assessment, our
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO") in "Internal
Control-Integrated Framework". Our management has concluded that, as of December
31, 2004, our internal control over financial reporting is effective based on
these criteria. Our independent registered public accounting firm, Deloitte
& Touche LLP, has issued an audit report on our assessment of our internal
control over financial reporting, which is included herein.

The
effectiveness of our or any system of controls and procedures is subject to
certain limitations, including the exercise of judgment in designing,
implementing and evaluating the controls and procedures, the assumptions used in
identifying the likelihood of future events, and the inability to eliminate
misconduct completely. Our management, including our CEO and CFO, does not
expect that our disclosure controls and procedures or our internal controls will
prevent all error and all fraud. A control system, no matter how well designed
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within our company have been detected.**64**
**REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the
Board of Directors and Stockholders
Mpower
Holding Corporation
Rochester,
New York

We have
audited management’s assessment, included in the accompanying Management’s
Annual Report on Internal Control over Financial Reporting, that Mpower Holding
Corporation and subsidiaries (the “Company”) maintained effective internal
control over financial reporting as of December 31, 2004, based on criteria
established in*Internal
Control—Integrated Framework*issued
by the Committee of Sponsoring Organizations of the Treadway Commission. 
The Company’s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting.  Our responsibility is to
express an opinion on management’s assessment and an opinion on the
effectiveness of the Company’s internal control over financial reporting based
on our audit.

We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects.  Our audit included obtaining an understanding of
internal control over financial reporting, evaluating management’s assessment,
testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we considered necessary in the
circumstances.  We believe that our audit provides a reasonable basis for
our opinions.

A
company’s internal control over financial reporting is a process designed by, or
under the supervision of, the company’s principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company’s board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles.  A company’s internal control
over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.

Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis.  Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.

In our
opinion, management’s assessment that the Company maintained effective internal
control over financial reporting as of December 31, 2004, is fairly stated, in
all material respects, based on the criteria established in*Internal
Control—Integrated Framework*issued
by the Committee of Sponsoring Organizations of the Treadway Commission. 
Also in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2004, based on the
criteria established in*Internal
Control—Integrated Framework*issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.

We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements and
financial statement schedule of the Company as of and for the year ended
December 31, 2004, and our report dated March 14, 2005 expressed an unqualified
opinion on those financial statements and financial statement schedule and
includes an explanatory paragraph related to the preparation of the consolidated
financial statements of prior periods in conformity with AICPA Statement of
Position 90-7 “Financial Reporting by Entities in Reorganization under the
Bankruptcy Code.”

****Date: March 14,
2005
    
    /s/ DELOITTE & TOUCHE
      LLPDeloitte & Touche LLPRochester, New
York
**65**

**Item
9B.*****Other
Information***

On March
14, 2005, we and Continental Stock Transfer & Trust Company (the “Rights
Agent”), the rights agent under our Rights Agreement (the “Rights Agreement”)
dated July 10, 2003 between us and the Rights Agent, agreed and acknowledged an
amendment to the Rights Agreement dated as of December 31, 2004, to provide that
MCCC would not be deemed an “Acquiring Person” under the Rights Agreement until
such time as MCCC became the beneficial owner of 17% or more of our common
stock.**66****PART
III**

**Item
10.*****Directors
and Executive Officers of the Registrant***

Our
executive officers and directors, and their respective ages as of March 7, 2005,
are as follows:

**Name**
    
    **Age**
    
    **Position**Rolla
      P. Huff
    
    48
    
    Chief
      Executive Officer and Chairman of the BoardMichael
      E. Cahr
    
    64
    
    DirectorAnthony
      J. Cassara
    
    50
    
    DirectorPeter
      H.O. Claudy
    
    43
    
    DirectorMichael
      M. Earley
    
    49
    
    DirectorAndrew
      D. Lipman
    
    53
    
    DirectorRobert
      M. Pomeroy
    
    42
    
    DirectorRichard
      L. Shorten, Jr.
    
    37
    
    DirectorJoseph
      M. Wetzel
    
    49
    
    President
      and Chief Operating OfficerS.
      Gregory Clevenger
    
    41
    
    Executive
      Vice President and Chief Financial OfficerRussell
      I. Zuckerman
    
    57
    
    Senior
      Vice President, General Counsel and Corporate SecretaryJames
      G. Dole
    
    46
    
    Senior
      Vice President, Strategic ImplementationJames
      E. Ferguson
    
    50
    
    President,
      Sales and MarketingAnthony
      M. Marion, Jr.
    
    53
    
    Vice
      President, Information TechnologyRoger
      A. Pachuta
    
    62
    
    Senior
      Vice President, Network ServicesSteven
      A. Reimer
    
    49
    
    Senior
      Vice President, Customer OperationsMichele
      D. Sadwick
    
    38
    
    Vice
      President, Customer Base ManagementRussell
      A. Shipley
    
    42
    
    President,
      Wholesale DivisionMichael
      J. Tschiderer
    
    45
    
    Senior
      Vice President of Finance, Controller and
Treasurer

*Rolla
P. Huff*currently serves as our chief executive officer and has been chairman of our
board of directors since July 2001. Mr. Huff was elected to our board of
directors pursuant to the terms of his employment agreement. In addition, the
terms of our reorganization plan implemented upon the completion of our
bankruptcy proceeding provides for our chief executive officer to serve on our
board of directors. Mr. Huff’s current term as a director will expire in 2006.
Mr. Huff was elected as our chief executive officer and president and as a
member of our board of directors in November 1999. From March 1999 to September
1999, Mr. Huff served as president and chief operating officer of Frontier
Corporation and served as executive vice president and chief financial officer
of that corporation from May 1998 to March 1999. From July 1997 to May 1998, Mr.
Huff was president of AT&T Wireless for the Central U.S. region and Mr. Huff
served as senior vice president and chief financial officer of that company from
1995 to 1997. From 1994 to 1995, Mr. Huff was financial vice president of
mergers and acquisitions for AT&T.

*Michael
E. Cahr*has
served on our board of directors since July 30, 2002. Mr. Cahr’s current term as
a director will expire in 2005. Since April 1999, Mr. Cahr has been president
and chief executive officer of Saxony Consultants. He also served as president
of that company from 1980 to 1987. During the interim, from 1994 to March 1999,
Mr. Cahr served as chairman, president and chief executive officer of
Allscripts, a medication management solutions company. From 1987 to 1994, Mr.
Cahr was venture group manager for Allstate Venture Capital. Mr. Cahr was
president, chief executive officer and owner of Abbey Fishing Company from 1973
to 1980. From 1963 to 1973 Mr. Cahr held various positions at Sun Chemical
Corporation. Mr. Cahr also serves as a director of Lifecell Corporation and
PacificHealth Laboratories, Inc.

**67**
*Anthony
J. Cassara*has
served on our board of directors since May 2003.Mr.
Cassara’s current term as a director will expire in 2006.Since
January 2001, Mr. Cassara has been president of Cassara Management Group, Inc.,
a privately-held business consulting practice focusing on the telecommunications
industry. Prior to founding this firm, Mr. Cassara was president of the carrier
services division of Frontier Corporation from April 1996 to September 1999, and
after Frontier was acquired by Global Crossing continued in that position until
December 2000. During his sixteen years with Frontier and Global Crossing from
1984 until December 2000, Mr. Cassara held many executive positions in various
domestic and international business units. Mr. Cassara also served as chief
executive officer of Pangea, a telecommunications company, from February 2001
until June 2001. Mr. Cassara serves as a director of InSciTek Microsystems, Inc.
American Communications Network Inc. and TeleGlobe International Holdings,
Inc.

*Peter
H.O. Claudy*was
selected to serve on our board of directors in February 2005. Mr. Claudy's
current term as a director will expire in 2007. Mr. Claudy was designated to
serve on the board of directors by MCCC ICG Holdings, LLC ("MCCC") under the
terms of an investor rights agreement entered into with MCCC and ICG
Communications, Inc. ("ICG"). The investor rights agreement was entered into in
connection with our purchase of ICG's customer base and certain network assets
in California and an investment by MCCC in our common stock in January 2005. Mr.
Claudy is a director of ICG and a member of the managing board of MCCC. Since
1991, Mr. Claudy has been employed by M/C Venture Partners, a venture capital
firm specializing in communications and information technology companies. He
currently serves as general partner. Mr. Claudy also serves on the boards of
directors of Atlantis, Florida Digital Network and the New England Venture
Capital Association, the latter of which he is also president.

*Michael
M. Earley*has
served on our board of directors since July 30, 2002.**Mr.
Earley’s current term as a director will expire in 2007.Mr.
Earley has been an advisor to a number of businesses, acting in a variety of
management roles since 1997. He has served as chief executive officer of
Metropolitan Health Networks, Inc., a provider of healthcare and pharmacy
services, since March 2003 and he was elected chairman of the board in September
2004. From January 2001 until March 2003, Mr. Earley was self-employed as a
business advisor. During 2000 and 2001, Mr. Earley was a consultant to and
acting chief executive officer of Collins Associates, an institutional money
management firm. From 1998 to 1999, Mr. Earley served as principal and owner of
Triton Group Management Inc, a business advisory concern. From 1994 to 1997, Mr.
Earley served as president of Triton Group Ltd., a public diversified holding
company. From 1991 to 1993, Mr. Earley was senior vice president, chief
financial officer and director of Intermark, Inc. and Triton Group Ltd., during
which time the two companies were restructured and consolidated through a
pre-arranged Chapter 11 proceeding. From 1986 to 1990, Mr. Earley held the
positions of chief financial officer of Triton Group Ltd. and vice president,
corporate development for Triton Group Ltd. and Intermark, Inc. Mr. Earley was
controller for International Robomation/Intelligence from 1983 to 1985 and an
audit and tax member of the Ernst & Whinney accounting firm from 1978 to
1983.

*Andrew
D. Lipman*was
selected to serve on our board of directors in April 2004. Mr. Lipman’s current
term as director will expire in 2006. Since 1988, Mr. Lipman has been a partner
in the Washington, D.C. law firm of Swidler Berlin Shereff Friedman, where he
heads the firm’s telecommunications practice. He is currently vice chairman of
the firm. Mr. Lipman also served from 1988 until 1997 as senior vice president
legal and regulatory affairs for MFS Communications, at the time, a large local
competitive telecommunications carrier. Mr. Lipman also serves as director of
NuSkin Corporation, TMNG, World Cell, and Last Mile.

*Robert
M. Pomeroy*has
served on our board of directors since July 30, 2002. Mr. Pomeroy’s current term
as a director will expire in 2007. Since January 2004, Mr. Pomeroy has been the
chief executive officer of Gotham Donutz LLC, an owner/operator of quick service
restaurants. From August 2001 until January 2004, Mr. Pomeroy was a self
employed financial consultant. From September 2000 to August 2001, Mr. Pomeroy
was the chief financial officer of Graphnet, Inc., a multinational data
communications carrier. From June 1999 to August 2000, Mr. Pomeroy was a vice
president and equity research analyst for Goldman Sachs & Co. where he
covered the telecommunications industry. Prior to Goldman Sachs, Mr. Pomeroy was
a vice president and equity research analyst with Credit Suisse First Boston
from May 1998 to June 1999. Additionally, Mr. Pomeroy is a certified public
accountant with substantial auditing experience with multinational public
accounting firms.

**68**
*Richard
L. Shorten, Jr.*has
served on our board of directors since July 30, 2002. Mr. Shorten’s current term
as a director will expire in 2005. Since August 2000, Mr. Shorten has been the
managing member of Silvermine Capital Resources, LLC, a specialty merchant bank
focused in the telecommunications and technology sectors. From August 2001 until
July 2004, he was a partner with Pacific Alliance Limited, LLC. Mr. Shorten has
been a director and on the audit committee of First Avenue Networks, Inc., since
November 2001 and is currently chairman of the board of directors of that
company. As of September 2003, Mr. Shorten is also a director and member of the
compensation and governance committees of AboveNet, Inc. (formerly MetroMedia
Fibernet). Mr. Shorten is also a director of Stirling Technology Company since
January 2005. From May 2000 to August 2001, Mr. Shorten was executive vice
president and director of Graphnet, Inc. From December 1999 to April 2000, Mr.
Shorten served as senior vice president of Data Services for Viatel Inc.,
following the company’s acquisition of Destia Communications, Inc. where he held
the position of senior vice president from December 1997 to December 1999.
Viatel filed for Chapter 11 bankruptcy protection in May 2001. Mr. Shorten was a
corporate associate with the Cravath, Swaine and Moore law firm from 1992 to
1997.

*Joseph
M. Wetzel*currently serves as our president and chief operating officer. Mr. Wetzel joined
our company as president of operations in August 2000, and served in that role
from August 2000 through July 2001, at which time he assumed his current
position. He also served on our board of directors from March 2002 until April
2003. From 1997 to 2000, Mr. Wetzel was vice president of technology with
MediaOne Group and from 1993 to 1997 was vice president of technology with
MediaOne's multimedia group. From 1977 to 1993, Mr. Wetzel served in a number of
technology and operational leadership positions within US West
Companies.

*S.
Gregory Clevenger*has
served as our executive vice president and chief financial officer since April
2002. Mr. Clevenger joined our company as senior vice president - corporate
development in January 2000 and served from May 2001 to April 2002 as our
executive vice president - chief strategic and planning officer. He also served
on our board of directors from March 2002 until April 2003. From 1997 to
December 1999, Mr. Clevenger was vice president of investment banking at
Goldman, Sachs & Co. in the communications, media and entertainment group in
Singapore and New York. From 1992 to 1997, Mr. Clevenger was an associate and
vice president in the investment banking division of Morgan Stanley & Co.
Incorporated in New York, Hong Kong and Singapore in a variety of groups
including the global telecommunications group and the global project finance and
leasing group.

*Russell
I. Zuckerman*joined
our company in January 2000 as director of national legal affairs and has served
as our secretary since April 2000. Since December 2000, he has served as senior
vice president, general counsel and secretary. Prior to December 2000, Mr.
Zuckerman had been in private practice of law since 1973 with Underberg &
Kessler, LLP, and served as managing partner and chairman of the firm’s
litigation department.

*James
G. Dole*joined
our company as senior vice president of strategic implementation in February
2005. From September 2004 until February 2005, Mr. Dole worked for us as a
consultant focusing on the acquisition and integration of our acquisition of
ICG. Mr. Dole worked as an independent consultant providing services to both
startups and established companies from January 2002 until February 2005. Mr.
Dole served as senior vice president of global access management for Global
Crossing North America from February 2000 until January 2002. Mr. Dole was chief
financial officer of the business services division of Frontier Corporation from
March 1999 until January 2000. Between 1986 and 1999, Mr. Dole held numerous
management positions at Frontier, and its predecessor Rochester Telephone. From
1981 to 1986, Mr. Dole worked in various positions at Marine Midland
Bank.

*James
E. Ferguson*joined
our company as president of sales and marketing in July 2003. Prior to joining
our company, Mr. Ferguson held senior sales leadership positions with Frontier
Corporation from September 1996 until September 1999, and then with Global
Crossing after its acquisition of Frontier in September 1999 until July 2003
except during the period from August 2001 until June 2002, during which he
served as executive vice president - sales for Myrient, a managed hosting
company. During his seven years with Frontier and Global Crossing, Mr. Ferguson
served as Frontier’s president of the western division and Global Crossing’s
vice president of the west region, vice president of multi-national accounts and
vice president of nextgen markets. Prior to Frontier/Global Crossing, Mr.
Ferguson held sales management positions at Cable and Wireless, Sprint, Racal
Skynetworks and GTE.

**69**
*Anthony
M. Marion, Jr.*joined
our company in June 2000 as vice president of operations support systems
planning and development. Since February 2002, he has served as vice president,
information technology. Prior to joining our company, Mr. Marion was the
executive vice president and chief information officer for Concentrix
Corporation, an integrated customer management services business, from September
1999 to June 2000. From March 1998 to September 1999, Mr. Marion was the
director of information technology for CTGT Global where he was responsible for
Maxcom Telecommunications, a startup competitive local exchange carrier (“CLEC”)
in Mexico City, Mexico. Mr. Marion served as the director of applications
maintenance management for Computer Task Group, an information technology
services business, from September 1996 to March 1998. From 1991 through 1996,
Mr. Marion held various technical management and director-level positions with
ACC Corp, a telecommunications business, ultimately serving as the corporate
vice president of information technology. Since 1973, Mr. Marion has held
various progressive information technology and management positions in
education, financial services, health care, telecommunications and consulting
services.

*Roger
J. Pachuta*joined
our company as senior vice president of network services in February 2000. Prior
to joining our company, Mr. Pachuta was vice president of network field
operations and had various other network operations positions for AT&T
Wireless from 1993 to 2000. From 1987 to 1992, Mr. Pachuta served as vice
president of customer and network services for Ameritech Mobile Communications,
first starting with that company in 1983. Beginning in 1970, Mr. Pachuta’s
professional network experience included engineering and network operations
positions at AT&T and Ohio Bell Telephone Company.

*Steven
A. Reimer*is our
senior vice president of customer operations, joining our company in January
2001. Mr. Reimer was formerly with AT&T Broadband from June 1999 to December
2000 where he last served as vice president of operations. Mr. Reimer joined
AT&T Broadband through its acquisition of MediaOne, where he had been vice
president of operations from 1994 to June 1999. From 1981 to 1994, Mr. Reimer
held management positions at Continental Cablevision, ultimately serving as vice
president/district manager. From 1979 to 1981, he was manager of operations for
United Cable Television.

*Michele
D. Sadwick*is our
vice president of customer base management, serving in that role since October
2002. Ms. Sadwick joined our company in November 1999 as vice president of
corporate communications. Ms. Sadwick previously served as director of internal
and external communications for Global Crossing, joining that firm through its
acquisition of Frontier Corporation where she held communications management
positions since 1994.

*Russell
A. Shipley*joined
our company in June 2003 as new technology officer. In February 2005, Mr.
Shipley was named as president, wholesale division, a newly formed division
started in conjunction with our acquisition of certain ICG assets in January
2005. Prior to joining our company, Mr. Shipley served as vice president of
operations for Global Name Registry from September 2002 to June 2003. Mr.
Shipley provided individual consulting services for startups and telecom
investment firms from March 2002 to September 2002. Mr. Shipley served as senior
vice president of global network transport operations for Global Crossing from
January 2002 to March 2002, vice president of data engineering and operations
from June 2000 to December 2001 and as vice president of network services from
September 1999 until June 2000. Mr. Shipley joined Global Crossing in September
1999 when it acquired Frontier Corporation, where he had been vice president of
network services since June 1999, and was vice president of network planning and
development from September 1995 to May 1999. Mr. Shipley held numerous
management positions between 1985 and 1994 for Rochester Telephone, the
predecessor of Frontier.

**70**
*Michael
J. Tschiderer*joined
our company in May 2000 and as of February 2005 serves as our senior vice
president of finance, controller and treasurer. He had previously served as our
vice president of finance and controller from March 2001. He has served as
treasurer since April 2003. Mr. Tschiderer served as our vice president, finance
and administration from May 2000 to March 2001. Before joining us, Mr.
Tschiderer had been a partner in the accounting firm of Bonadio & Co. in
Rochester, New York from 1995 to April 2000. He is a certified public accountant
in the state of New York.

Messrs.
Huff, Wetzel, Clevenger, Zuckerman, Marion, Pachuta, Reimer and Tschiderer and
Ms. Sadwick all served as officers at the time we initiated our voluntary
pre-negotiated petition in bankruptcy in February 2002.

Robert M.
Pomeroy, Michael E. Cahr, Richard L. Shorten, Jr. and Michael M. Earley were
selected as directors effective July 30, 2002 as designees of the holders of our
senior notes due 2010 in accordance with the terms of our reorganization plan
implemented upon the completion of our bankruptcy proceeding.

Our board
of directors has also determined that Robert M. Pomeroy has been designated as
our “audit committee financial expert” and is independent within the meaning of
the rules of the Securities and Exchange Commission.

**Code
of Ethics**

Wehave
adopted a Corporate Code of Conduct and Ethics (the "Code of Ethics") that
applies to our principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing similar
functions, as well as to other directors, officers and employees of our company.
The Code of Ethics is posted on our website (www.mpowercom.com) and is
available in print free of charge to any stockholder who requests a copy.
Interested parties may address a written request for a printed copy of the Code
of Ethics to: General Counsel, Mpower Holding Corporation, 175 Sully's Trail,
Suite 300, Pittsford, New York 14534. We intend to satisfy the disclosure
requirement regarding any amendment to, or a waiver of, a provision of the Code
of Ethics for our principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing similar
functions by posting such information on our website.

**Section
16(a) Beneficial Ownership Reporting Compliance**

Section
16(a) of the Exchange Act requires our directors and executive officers and
persons who own more than 10% of our equity securities to file initial reports
of ownership and reports of changes in ownership with the Securities and
Exchange Commission. Such persons are required by the Exchange Act to furnish us
with copies of all Section 16(a) forms they file.

Based
solely on our review of the copies of such forms received by us with respect to
transactions during 2004, or written representations from certain reporting
persons, we believe that all filing requirements applicable to our directors,
executive officers and persons who own more than 10% of our equity securities
have been complied with except for the following: Anthony Marion, Michele
Sadwick, Russell Shipley and Michael Tschiderer each filed on June 10, 2004 a
Form 4 to report options granted as of April 22, 2004.

**71**
**Item
11.*****Executive
Compensation***

**Summary
of Cash and Certain Other Compensation**

The
following table shows, for the fiscal years ended December 31, 2004, 2003 and
2002, the cash compensation paid by us, as well as certain other compensation
paid or accrued for such year, for our chief executive officer and the four most
highly compensated executive officers other than the chief executive officer
employed by us as of December 31, 2004. This table also indicates the principal
capacities in which they served during 2004.
**Summary
      Compensation Table****Annual
      Compensation**
    
    **Long-Term****Other
      Annual**
    
    **Compensation**
    
    **All
      Other****Compensation**
    
    **Awards**
    
    **Compensation****Name
      and Principal Position**
    
    **Year**
    
    **Salary
      ($)**
    
    **Bonus
      ($)**
    
    **($)
      (1)**
    
    **Options
      (#)**
    
    **($)**Rolla
      P. Huff,
    
    
    2004
    
    
    453,539
    
    
    430,858(2
    )
    
    —
    
    
    562,800
    
    
    —Chairman
      and chief executive officer
    
    
    2003
    
    
    440,654
    
    
    455,554(3
    )
    
    —
    
    
    824,100
    
    
    —2002
    
    
    509,692
    
    
    624,097(4
    )
    
    —
    
    
    2,206,250
    
    
    —Joseph
      M. Wetzel,
    
    
    2004
    
    
    306,923
    
    
    187,561(2
    )
    
    —
    
    
    281,250
    
    
    —President
      and chief operating officer
    
    
    2003
    
    
    300,000
    
    
    191,231(3
    )
    
    71,561(5
    )
    
    202,500
    
    
    —2002
    
    
    263,462
    
    
    344,537(4
    )
    
    —
    
    
    1,456,250
    
    
    —S.
      Gregory Clevenger,
    
    
    2004
    
    
    269,231
    
    
    180,864(2
    )
    
    —
    
    
    281,250
    
    
    —Executive
      vice president and chief financial officer
    
    
    2003
    
    
    264,423
    
    
    191,231(3
    )
    
    —
    
    
    335,625
    
    
    —2002
    
    
    236,748
    
    
    157,037(4
    )
    
    —
    
    
    1,428,125
    
    
    168,750(6
    )James
      E. Ferguson,
    
    
    2004
    
    
    225,077
    
    
    124,557(2
    )
    
    —
    
    
    150,000
    
    
    —President
      - sales and marketing (7)
    
    
    2003
    
    
    104,923
    
    
    82,500(8
    )
    
    —
    
    
    350,000
    
    
    —Steven
      A. Reimer,
    
    
    2004
    
    
    204,615
    
    
    120,619(2
    )
    
    —
    
    
    187,500
    
    
    —Senior
      vice president - customer operations
    
    
    2003
    
    
    200,000
    
    
    127,487(3
    )
    
    —
    
    
    135,000
    
    
    66,670(9
    )2002
    
    
    200,000
    
    
    95,000(4
    )
    
    —
    
    
    225,000
    
    
    104,869(6
    )

**72**
(1)
    The
      amounts of perquisites received by executive officers have not been
      disclosed unless they exceed the lesser of $50,000 or 10% of salary and
      bonus for a particular year.(2)
    Includes
      the cash component of the 2004 annual bonus paid in
  2005.(3)
    Includes
      the cash component of the 2003 annual bonus paid in
  2004.(4)
    Represents
      2001 and 2002 annual bonuses, both paid in 2002.(5)
    Mr.
      Wetzel’s other annual compensation for 2003 includes perquisites received
      by him, which were comprised of approximately $51,000 related to the use
      of a townhouse in Las Vegas and approximately $21,000 of various other
      perquisites.(6)
    Represents
      retention payments paid in 2002.(7)
    Since
      Mr. Ferguson commenced employment with us in July 2003, the salary shown
      for him in 2003 is for the period from July 2003 through December
      2003.(8)
    Represents
      third quarter and fourth quarter 2003 management bonus. The amount earned
      for the fourth quarter bonus was paid in 2004.(9)
    Represents
      retention payments paid in 2003.

**Compensation
Committee Interlocks and Insider Participation**

Our
compensation committee consists of Michael E. Cahr and Anthony J. Cassara.
Neither of the members of the compensation committee ever served as officers or
employees of our company.

**Employment
Agreements**

*Rolla
P. Huff.*Our
employment agreement with Mr. Huff provides for a base salary of $536,000 per
year and an annual bonus of up to the greater of (i) $536,000; or (ii) his base
salary based on our achievement of certain annual targets to be established by
our board of directors in conjunction with our annual operating budget or in the
discretion of our board of directors. Mr. Huff is required to devote his full
time and efforts to the business of our company during the term of his
employment agreement, which expires on September 18, 2005. Mr. Huff's employment
may be terminated by either us or Mr. Huff at any time. Mr. Huff has agreed not
to participate in a competitive business during the term of his employment and
for a period of twelve months following termination. In the event Mr. Huff's
employment ceases, Mr. Huff will be entitled to severance pay equal to the
greater of (a) $1.5 million or (b) two times his base salary preceding his
cessation of employment (or $536,000 if higher), and the highest bonus paid to
him during any 12 month period between November 1, 1999 and the termination
date, with payment to be made in a lump-sum.

*Joseph
M. Wetzel.*Our
employment agreement with Mr. Wetzel provides for a base salary of $318,000 per
year and an annual bonus of up to 75% of his base salary based upon achieving
established corporate, functional and individual goals. Mr. Wetzel is required
to devote his full time and efforts to the business of our company during the
term of his employment agreement. Mr. Wetzel's employment may be terminated by
either us or Mr. Wetzel at any time. Mr. Wetzel has agreed not to participate in
a competitive business during the term of his employment and for a period of
twelve months following termination. If Mr. Wetzel's employment is terminated by
us without cause or due to a change of control or there is a material change in
Mr. Wetzel's responsibilities or salary or a relocation of more than 35 miles
from his present place of business, Mr. Wetzel will receive severance pay equal
to two times the higher of his fixed salary immediately preceding the
termination date or $300,000 and two times the highest bonus paid to him during
any 12 month period between September 20, 2002 and the termination date, with
payment to be made in a lump-sum.

**73**
*S.
Gregory Clevenger.*Our
employment agreement with Mr. Clevenger provides for a base salary of $300,000
per year and an annual bonus of up to 75% of the greater of (i) $300,000; or
(ii) his base salary based upon achieving established corporate, functional and
individual goals. Mr. Clevenger is required to devote his full time and efforts
to the business of our company during the term of his employment agreement. Mr.
Clevenger's employment may be terminated by either us or Mr. Clevenger at any
time. Mr. Clevenger has agreed not to participate in a competitive business
during the term of his employment and for a period of twelve months following
termination. If Mr. Clevenger's employment is terminated by us without cause or
due to a change of control or there is a material change in Mr. Clevenger's
responsibilities or salary or a relocation of more than 35 miles from his
present place of business, Mr. Clevenger will receive severance pay equal to two
times the higher of his fixed salary immediately preceding the termination date
or $300,000 and two times the highest bonus paid to him during any 12 month
period between April 25, 2002 and the termination date, with payment to be made
in a lump-sum.

*James
E. Ferguson.*Our
employment agreement with Mr. Ferguson provides for a base salary of $220,000
per year and an annual bonus of up to 75% of his base salary based upon
achieving established corporate, functional and individual goals. Mr. Ferguson
is required to devote his full time and efforts to the business of our company
during the term of his employment agreement. Mr. Ferguson's employment may be
terminated by either us or Mr. Ferguson at any time. Mr. Ferguson has agreed not
to participate in a competitive business during the term of his employment and
for a period of twelve months following termination. If Mr. Ferguson's
employment is terminated by us without cause or by him for good reason, Mr.
Ferguson will receive severance pay equal to his fixed salary immediately
preceding the termination date over the 12 month period after the termination
date.

*Steven
A. Reimer.*Our
retention and severance agreement with Mr. Reimer provides for a severance
benefit of $150,000, if terminated by us without cause or voluntarily by the
officer for good reason. Mr. Reimer has agreed not to participate in a
competitive business during the severance period.

**Option
Grants in Last Fiscal Year**

The table
below sets forth information regarding all stock options granted in the 2004
fiscal year under our Stock Option Plans to those executive officers named in
the Compensation Table above.

**Name**
    
    
    **Number
      of Securities Underlying Options Granted in****2004**
    
    
    **%
      of Total Options Granted to Employees in Fiscal****Year**
    
    
    **Exercise****Price**
    
    
    **Market
      Price or Fair Value on Date of****Grant**
    
    
    **Expiration****Date**
    
    **Potential
      Realized Assumed Annual Rates of Stock Price****Appreciation
      (1)****5%**
    ****
    
    **10%**
    ****Rolla
      P. Huff
    
    
    241,200
    
    
    5.3
    %
    $
    1.64
    
    $
    1.64
    
    
    01/15/14
    
    $
    248,771
    
    $
    630,434Rolla
      P. Huff
    
    
    321,600
    
    
    7.1
    %
    $
    1.25
    
    $
    1.25
    
    
    07/26/14
    
    $
    252,816
    
    $
    640,684Joseph
      M. Wetzel
    
    
    101,250
    
    
    2.2
    %
    $
    1.64
    
    $
    1.64
    
    
    01/15/14
    
    $
    104,428
    
    $
    264,641Joseph
      M. Wetzel
    
    
    180,000
    
    
    4.0
    %
    $
    1.25
    
    $
    1.25
    
    
    07/26/14
    
    $
    141,501
    
    $
    358,592S.
      Gregory Clevenger
    
    
    101,250
    
    
    2.2
    %
    $
    1.64
    
    $
    1.64
    
    
    01/15/14
    
    $
    104,428
    
    $
    264,641S.
      Gregory Clevenger
    
    
    180,000
    
    
    4.0
    %
    $
    1.25
    
    $
    1.25
    
    
    07/26/14
    
    $
    141,501
    
    $
    358,592James
      E. Ferguson
    
    
    150,000
    
    
    3.3
    %
    $
    1.25
    
    $
    1.25
    
    
    07/26/14
    
    $
    117,918
    
    $
    298,827Steven
      A. Reimer
    
    
    67,500
    
    
    1.5
    %
    $
    1.64
    
    $
    1.64
    
    
    01/15/14
    
    $
    69,619
    
    $
    176,427Steven
      A. Reimer
    
    
    120,000
    
    
    2.6
    %
    $
    1.25
    
    $
    1.25
    
    
    07/26/14
    
    $
    94,334
    
    $
    239,061

**74**
(1)
    The
      dollar amounts under these columns are the result of calculations at the
      5% and 10% rates set by the Securities and Exchange Commission and
      therefore are not intended to forecast possible future appreciation, if
      any, of the price of our common stock.

**Aggregated
Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values**

The
following table shows aggregate exercises of options during 2004 and the values
of options held as of December 31, 2004 by those executive officers named in the
Compensation Table above.

**Name**
    
    
    **Number
      of Shares Acquired****on
      Exercise**
    
    
    **Value****Realized**
    
    
    **Number
      of Unexercised Options December 31, 2004
      Exercisable(E)/****Unexercisable(U)**
    ****
    
    **Value
      of Unexercised In-The-Money Options December 31, 2004 (1)
      Exercisable(E)/****Unexercisable(U)**
    ****Rolla
      P. Huff
    
    
    —
    
    
    —
    
    
    3,271,550(E
    )
    $
    4,544,764(E
    )Rolla
      P. Huff
    
    
    —
    
    
    —
    
    
    321,600(U
    )
    $
    199,392(U
    )Joseph
      M. Wetzel
    
    
    —
    
    
    —
    
    
    1,726,667(E
    )
    $
    2,483,926(E
    )Joseph
      M. Wetzel
    
    
    —
    
    
    —
    
    
    213,333(U
    )
    $
    166,599(U
    )S.
      Gregory Clevenger
    
    
    —
    
    
    —
    
    
    1,831,667(E
    )
    $
    2,679,563(E
    )S.
      Gregory Clevenger
    
    
    —
    
    
    —
    
    
    213,333(U
    )
    $
    166,599(U
    )James
      E. Ferguson
    
    
    —
    
    
    —
    
    
    116,667(E
    )
    $
    113,167(E
    )James
      E. Ferguson
    
    
    —
    
    
    —
    
    
    383,333(U
    )
    $
    319,333(U
    )Steven
      A. Reimer
    
    
    —
    
    
    —
    
    
    410,833(E
    )
    $
    410,658(E
    )Steven
      A. Reimer
    
    
    —
    
    
    —
    
    
    136,667(U
    )
    $
    103,234(U
    )

(1)
    Amounts
      shown are based upon the closing sale price for our common stock on
      December 31, 2004, which was $1.87 per common
share.

**Director
Compensation**

Our
outside directors will each receive quarterly payments, in advance, of $12,000,
paid on January 1, April 1, July 1, and October 1, 2005, as compensation for
their services as board members for 2005. During 2004, outside director Mr.
Cassara received 100,000 non-qualified stock options, with one-third vesting on
the grant date of March 12, 2004, one-third on March 12, 2005 and the remaining
one-third on March 12, 2006. The options would become fully vested upon
termination of the board member without cause or his resignation for good
reason. The options were granted with an exercise price of $1.41 per common
share, which was the market price of our stock on the date of grant. During
2004, outside director Mr. Lipman received 150,000 non-qualified stock options,
with one-third vesting on April 22, 2005, one-third on April 22, 2006, and the
remaining one-third on April 22, 2007. The options would become fully vested
upon termination of the board member without cause or his resignation for good
reason. The options were granted with an exercise price of $1.40 per common
share, which was the market price of our stock on the date of
grant.

**75**
**Item
12.*****Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters***

The
following table shows information known to us with respect to beneficial
ownership of common stock as of March 7, 2005, by (A) each director, (B) each of
the executive officers named in the Summary Compensation Table beginning on page
72, (C) all
executive officers and directors as a group and (D) each person known by us to
be a beneficial owner of more than 5% of our outstanding common
stock.

**Name
      of Beneficial Owner**
    **Number
      of Shares Beneficially****Owned
      (1)**
    **Percentage
      of****Ownership
      (2)**MCCC
      ICG Holdings LLC (3)
    14,728,924
    15.8%Peter
      H.O. Claudy, director (4)
    14,728,924
    15.8%Aspen
      Advisors, LLC (5)
    10,010,200
    10.9%West
      Highland Capital, Inc. (6)
    8,656,257
    9.5%Rolla
      P. Huff, chief executive officer and chairman of the board
    (7)
    3,719,817
    3.9%S.
      Gregory Clevenger, executive vice president and chief financial officer
      (8)
    2,008,561
    2.2%Joseph
      M. Wetzel, president and chief operating officer (9)
    1,892,338
    2.0%Steven
      A. Reimer, senior vice president customer operations (10)
    531,528
    *Michael
      E. Cahr, director (11)
    325,000
    *Robert
      M. Pomeroy, director (12)
    280,000
    *Michael
      M. Earley, director (13)
    255,000
    *Richard
      L. Shorten, Jr., director (14)
    255,000
    *Anthony
      J. Cassara, director (15)
    216,667
    *James
      E. Ferguson, president sales and marketing (16)
    210,084
    *Andrew
      D. Lipman, director (17)
    50,000
    *All
      executive officers and directors as a group (19 persons)
      (4)(7)(8)(9)(10)(11)(12)(13)(14)(15)(16)(17)(18)
    27,100,139
    25.7%

*
      Less than 1% of total.

**76**
(1)
    In
      accordance with the Securities and Exchange Commission's rules, each
      beneficial owner's holdings have been calculated assuming the full
      exercise of options held by the holder which are currently exercisable or
      which will become exercisable within 60 days after the date indicated and
      no exercise of options held by any other person.(2)
    Applicable
      percentage of ownership for each holder is based on 91,317,495 shares of
      common stock outstanding on March 7, 2005, plus any common stock
      equivalents and presently exercisable stock options held by each such
      holder, and options held by each such holder which will become exercisable
      within 60 days after March 10, 2005.(3)
    Information
      is based on a Schedule 13D filed with the Securities and Exchange
      Commission on January 7, 2005. Of these shares 12,740,030 are owned by ICG
      Communications, Inc. (“ICG”) and 1,988,894 of these shares are owned by
      MCCC ICG Holdings LLC (“MCCC”) which owns 100% of ICG. Also includes
      warrants to purchase 2,000,000 shares owned by MCCC. Based upon MCCC’s
      ownership of ICG, MCCC and ICG may be deemed to have shared power to
      direct the vote and shared power to direct the disposition of these
      securities.(4)
    As
      a member of the board of managers of MCCC and as a director of ICG, Mr.
      Claudy may be deemed to beneficially own the shares owned by ICG and MCCC.
      Mr. Claudy disclaims beneficial ownership of the shares of common stock
      and warrants held by ICG and MCCC except to the extent of any pecuniary
      interest therein.(5)
    Information
      is based on a Schedule 13G filed with the Securities and Exchange
      Commission on February 11, 2005, by Aspen Partners, Aspen Capital LLC
      (general partner of Aspen Partners), Aspen Advisors LLC (investment
      advisor to Aspen Partners) and Nikos Hecht (managing member of Aspen
      Capital LLC and Aspen Advisors LLC). Aspen Partners LLC directly owns
      6,603,946 shares (including 125,000 shares issuable upon exercise of
      presently exercisable warrants). Aspen Partners, Aspen Capital, Aspen
      Advisors and Hecht each share the power to vote and dispose of 6,603,946
      shares. Aspen Advisors and Hecht share the power to vote and dispose of an
      additional 3,406,254 shares (including 75,000 shares issuable upon
      exercise of presently exercisable warrants) owned by private clients of
      Aspen Advisors. The address of Aspen Advisors and its affiliates is 152
      West 57thStreet, New York, New York 10019.(6)
    Information
      is based on a Schedule 13G filed with the Securities and Exchange
      Commission on January 10, 2005. West Highland Capital, Inc. (“WHC”) is a
      registered investment adviser whose clients have the right to receive or
      the power to direct the receipt of dividends from, or the proceeds from
      the sale of, the shares owned by them. Lang H. Gerhard is the sole
      shareholder of WHC and the manager of Estero Partners, LLC (“Estero”).
      Gerhard, Estero and WHC are the general partners of West Highland
      Partners, LP, an investment limited partnership (“WHPLP”). Each of the
      foregoing is identified on the Schedule 13G as having shared dispositive
      power of the shares owned by WHC. WHC, Estero and Gerhard are identified
      in the Schedule 13G as a group, and WHPLP disclaims membership in the
      group. The Schedule 13G indicates that Estero and WHPLP each share the
      power to vote and dispose of 7,742,104 shares. The Schedule 13G indicates
      that WHC and Gerhard each share the power to vote and dispose of an
      additional 914,153 shares for a total of 8,656,257 shares. The address of
      West Highland Capital, Inc. is 300 Drake’s Landing Road, Suite 290,
      Greenbrae, CA 94904.(7)
    Mr.
      Huff’s ownership includes options to purchase 3,594,695 shares which are
      presently exercisable. Excludes 10,024 shares owned by Mr. Huff’s wife and
      minor children, with respect to which shares Mr. Huff disclaims beneficial
      ownership.(8)
    Mr.
      Clevenger’s ownership includes options to purchase 1,967,315 shares which
      are presently exercisable. Also includes 6,000 shares owned by Mr.
      Clevenger’s minor children.(9)
    Mr.
      Wetzel’s ownership includes options to purchase 1,867,337 shares which are
      presently exercisable.(10)
    Mr.
      Reimer’s ownership includes options to purchase 501,297 shares which are
      presently exercisable.(11)
    Mr.
      Cahr’s ownership includes options to purchase 255,000 shares which are
      presently exercisable.(12)
    Mr.
      Pomeroy’s ownership includes options to purchase 255,000 shares which are
      presently exercisable.(13)
    Mr.
      Earley’s ownership includes options to purchase 255,000 shares which are
      presently exercisable.(14)
    Mr.
      Shorten’s ownership includes options to purchase 255,000 shares which are
      presently exercisable.(15)
    Mr.
      Cassara’s ownership includes options to purchase 216,667 shares which are
      presently exercisable or which will become exercisable within 60 days
      after the date of this report.(16)
    Mr.
      Ferguson’s ownership includes options to purchase 210,084 shares which are
      presently exercisable.(17)
    Mr.
      Lipman’s ownership includes options to purchase 50,000 shares which are
      presently exercisable or which will become exercisable within 60 days
      after the date of this report.(18)
    Includes
      options to purchase 2,621,366 shares, which are held by executive officers
      not named above and which are presently exercisable or which will become
      exercisable within 60 days after the date of this
  report.

**77**
**Securities
Authorized for Issuance under Equity Compensation Plans**

The
following table provides information regarding options, warrants or other rights
to acquire equity securities under our equity compensation plans as of December
31, 2004:

****
    
    
    **Number
      of securities to be issued upon exercise of outstanding
      options,****warrants and rights**
    
    
    **Weighted-average
      exercise price of outstanding options,****warrants and rights**
    
    
    **Number
      of securities remaining available for future issuance under equity****compensation
      plans**Equity
      compensation plans approved by security holders
    
    
    —
    
    
    —
    
    
    —Equity
      compensation plans not approved by security holders
    
    
    21,794,568
    
    $
    0.94
    
    
    5,260,052Total
    
    
    21,794,568
    
    $
    0.94
    
    
    5,260,052


**Item
13.*****Certain
Relationships and Related Transactions***

On April
22, 2004, Andrew D. Lipman was appointed to serve on our board of directors. Mr.
Lipman has been designated as a Class III director who will serve until the
third annual meeting after November 12, 2003. Mr. Lipman is a partner and vice
chairman of the Swidler Berlin Shereff Friedman law firm in Washington, D.C. We
retained that law firm for legal regulatory counsel in 2004 and intend to do so
in the future.

On
January 1, 2005, we acquired ICG Communications, Inc.'s customer base and
certain network assets in California pursuant to an asset purchase agreement,
dated October 22, 2004 (the "Agreement"). Under the terms of the Agreement, we
acquired ICG's California retail and wholesale customer segments, its state-wide
self-healing SONET fiber network with fully survivable metropolitan fiber rings
in six major metropolitan markets, which connect 128 on-net fiber-lit commercial
buildings. We purchased these assets for $13.5 million in the form of (i)
10,740,030 shares of our common stock and (ii) warrants to purchase up to an
additional 2,000,000 shares of our common stock. In connection with the
acquisition, MCCC ICG Holdings, LLC purchased 1,988,894 shares of our common
stock for an aggregate purchase price of $2.5 million on January 5, 2005. Our
director Peter H.O. Claudy is a director of ICG and a member of the managing
board of MCCC.

Mr.
Claudy is also a director of an entity that is more than 10% owner of Florida
Digital Networks, Inc. ("FDN"). In April 2003, we completed the sale of our
assets in its Florida and Georgia markets to FDN. The purchase price for the
assets in Florida and Georgia was $12.4 million. At December 31, 2004, we have
recorded $1.5 million of receivables remaining from the sale to FDN, with the
entire balance owed being held in escrow by a third party escrow agent. During
2004, we received approximately $0.5 million from FDN related to these
receivables. During 2004, we received approximately $1.3 million from BellSouth
that was due to FDN. All amounts received were promptly remitted to FDN in the
normal course of business.

Mr.
Claudy did not serve as a director of ours until after the completion of the ICG
acquisition and the sale of assets to FDN.

**Item
14.*****Principal
Accountant Fees and Services***

*Audit
Fees*

The
aggregate fees billed by Deloitte & Touche LLP for the audit of our annual
financial statements, the reviews of our financial statements included in our
quarterly reports on Form 10-Q, services relating to the audit of our internal
controls over financial reporting in connection with Section 404 of the
Sarbanes-Oxley Act of 2002, as well as services that are normally provided by
the accounting firm in connection with statutory and regulatory filings were
approximately $0.5 million and $0.2 million for the years ended December 31,
2004 and 2003, respectively.

**78**
*Audit-Related
Fees*

The
aggregate fees billed by Deloitte & Touche LLP for assurance and related
services that were reasonably related to the performance of the audit and
reviews referred to above were minimal for the year ended December 31, 2004, and
approximately $0.1 million for the year ended December 31, 2003.

*Tax
Fees*

The
aggregate fees billed for tax compliance, tax advice and tax planning rendered
by Deloitte & Touche LLP to us were minimal for the year ended December 31,
2004, and approximately $0.1 million for the year ended December 31, 2003. The
2004 and 2003 fees related to the preparation of our income tax returns and tax
consulting.

*All
Other Fees*

The
aggregate fees billed for all other non-audit services rendered by Deloitte
& Touche LLP to us were minimal for the years ended December 31, 2004 and
2003.

All
non-audit services require an engagement letter to be signed prior to commencing
any services. The engagement letter must detail the fee estimates and the scope
of services to be provided. The current policy of our audit committee is that
the audit committee must approve of the non-audit services in advance of the
engagement and the audit committee’s responsibilities in this regard may not be
delegated to management. No non-audit services were rendered that were not in
compliance with this policy.**79****PART
IV**

**Item
15.*****Exhibits
and Financial Statement Schedules***

(a)

(1)
    The
      response to this portion of Item 15 is submitted as a separate section of
      this report.(2)
    The
      response to this portion of Item 15 is submitted as a separate section of
      this report.(3)
    Filing
      of Exhibits:

Exhibit
      3.4
    —
    Amendment
      of Rights Agreement and Certification of Compliance with Section 26 dated
      March 14, 2005, between Mpower Holding Corporation and Continental Stock
      Transfer & Trust Company.Exhibit
      10.35
    —
    First
      Amendment to Employment Agreement dated February 3, 2005, between Mpower
      Communications Corp. and Russell A. Shipley. (9)Exhibit
      10.36
    —
    Employment
      Agreement dated February 2, 2005, between Mpower Communications Corp. and
      Michael Tschiderer. (9)Exhibit
      10.37
    —
    Amendment
      to Retention and Severance Agreement dated January 25, 2005, between
      Mpower Communications Corp. and Steven Reimer. (9)Exhibit
      10.38
    —
    Amendment
      to Retention and Severance Agreement dated February 4, 2005, between
      Mpower Communications Corp. and Roger Pachuta. (9)Exhibit
      10.39
    —
    Employment
      Agreement dated February 15, 2005, between Mpower Communications Corp. and
      James Dole. (9)Exhibit
      10.40
    —
    Third
      Amendment to Lease dated February 10, 2005, between Mpower Communications
      Corp. and Vista Holdings, LLC.Exhibit
      10.41
    —
    Consulting
      Agreement dated February 18, 2005, between Mpower Communications Corp. and
      Cassara Management Group, Inc.Exhibit
      10.42
    —
    First
      Amendment to Employment Agreement dated July 28, 2004, between Mpower
      Communications Corp. and James Ferguson. (9)Exhibit
      23.1
    —
    Consent
      of Deloitte & Touche LLPExhibit
      31.1
    —
    Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive
    OfficerExhibit
      31.2
    —
    Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial
    OfficerExhibit
      32
    —
    Section
      1350 Certifications

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

2.1
    Findings
      of Fact, Conclusions of Law, and Order Under Section 1129 of the
      Bankruptcy Code and Rule 3020 of the Bankruptcy Rules Confirming Debtors’
      First Amended Joint Plan of Reorganization, dated July 17, 2002.
      (1)2.2
    Debtors’
      First Amended Joint Plan of Reorganization dated May 20, 2002.
      (1)2.3
    Debtors’
      First Amended Disclosure Statement dated May 20, 2002.
  (1)2.4
    Amended
      and Restated Agreement and Plan of Merger among Mpower Communications
      Corp., Mpower Holding Corporation and Mpower Merger Company, Inc., dated
      as of April 12, 2001. (2)2.5
    Asset
      Purchase Agreement, dated as of January 8, 2003, between Mpower and LDMI
      Telecommunications, Inc. (3)2.6
    Amendment
      No. 1 to Asset Purchase Agreement, dated as of February 6, 2003, between
      Mpower and LDMI Telecommunications, Inc. (3)2.7
    Asset
      Contribution Agreement, effective as of December 31, 2002, between Mpower
      and Xspedius Equipment Leasing, LLC. (3)2.8
    Asset
      Purchase Agreement, dated as of January 8, 2003, between Mpower, Florida
      Digital Network, Inc. and Southern Digital Network, Inc.
    (3)2.9
    Acknowledgment
      and Amendment No. 1 to Asset Purchase Agreement, dated as of April 7,
      2003, between Mpower, Florida Digital Network, Inc. and Southern Digital
      Network, Inc. (3)2.10
    Asset
      Purchase Agreement, dated as of February 6, 2003, between Mpower and LDMI
      Telecommunications, Inc. (3)2.11
    Asset
      Purchase Agreement dated October 22, 2004, by and among MCCC ICG Holdings,
      LLC, ICG Communications, Inc., Mpower Holding Corporation and Mpower
      Communications Corp. (17)3.1
    Second
      Amended and Restated Certificate of Incorporation filed with the Secretary
      of State of the State of Delaware on July 30, 2002. (4)3.2
    Second
      Amended and Restated By-laws. (4)3.3
    Rights
      Agreement between Mpower Holding Corporation and Continental Stock
      Transfer & Trust Company as Rights Agent, including Certificate of
      Designation for the Series A Preferred Stock. (5)3.4
    Amendment
      of Rights Agreement and Certification of Compliance with Section 26 dated
      March 14, 2005, between Mpower Holding Corporation and Continental Stock
      Transfer & Trust Company.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
      3.2.4.2
    Form
      of Registration Rights Agreement, to be entered into by Mpower Holding
      Corporation pursuant to the Final Plan. (4)4.3
    Voting
      Agreements and Term Sheet for Exchange of (I) Cash and Newco Common Stock
      for 13% Senior Notes due 2010 Issued by Mpower Holding Corporation and
      (II) Newco Common Stock for Series C and Series D Preferred Stock Issued
      by the Company. (6)9.1
    Investor
      Rights Agreement listed in Item 10.34 below.10.1
    Amendment
      To Employment/Stock Repurchase Agreement dated August 1, 2001, between
      Mpower Holding Corporation and Rolla P. Huff. (8) (9)10.2
    Amendment
      To Employment/Stock Repurchase Agreement dated September 20, 2002 between
      Mpower Communications Corp. and Rolla P. Huff. (9) (10)10.3
    Amendment
      to Employment Agreement dated September 18, 2002 between Mpower
      Communications Corp. and Joseph M. Wetzel. (9) (10)10.4
    Amendment
      to Employment Agreement dated September 20, 2002 between Mpower
      Communications Corp. and S. Gregory Clevenger. (9) (10)10.5
    Amended
      Employment Agreement dated September 20, 2002 between Mpower
      Communications Corp. and Russell I. Zuckerman. (9) (18)10.6
    Retention
      and Severance Agreement dated October 24, 2001 between Mpower
      Communications Corp. and Michele Sadwick. (9) (11)10.7
    Severance
      Agreement dated October 18, 2001 between Mpower Communications Corp. and
      Roger Pachuta. (9) (11)10.8
    Retention
      and Severance Agreement dated October 28, 2001 between Mpower
      Communications Corp. and Steve Reimer. (9) (11)10.9
    Employment
      Letter dated August 8, 2000 between Mpower Communications Corp. and Joseph
      M. Wetzel. (9) (13)10.10
    RFC
      Capital Corporation Receivables Sale Agreement dated as of January 23,
      2003. (11)10.11
    Mpower
      Communications Corp. Employee Benefit Trust Agreement II. (9)
      (11)10.12
    Mpower
      Holding Corporation’s Directors and Officers Insurance Premium Trust
      Agreement dated November 15, 2002. (11)10.13
    Mpower
      Holding Corporation 2002 Stock Option Plan I. (7) (9)10.14
    Mpower
      Holding Corporation 2002 Stock Option Plan II. (7) (9)10.15
    Employment
      Agreement dated June 2, 2003 between Mpower Communications Corp. and
      Russell A. Shipley. (9) (14)10.16
    Employment
      Agreement dated June 18, 2003 between Mpower Communications Corp. and Jim
      Ferguson. (9) (14)10.17
    Form
      of Stock Purchase Agreement. (15)10.18
    Form
      of Registration Rights Agreement. (15)10.19
    Form
      of Warrant. (15)10.20
    Release
      Agreement dated September 24, 2003 between Mpower Holding Corporation and
      Pacific Alliance Limited, LLC. (16)10.21
    Employment/Stock
      Repurchase Agreement dated October 13, 1999, between Mpower Communications
      Corp. and Rolla P. Huff. (9) (12)10.22
    Employment
      Agreement dated April 25, 2002, between Mpower Communications Corp. and S.
      Gregory Clevenger. (9) (18)10.23
    Third
      Amendment to Employment Agreement dated March 19, 2003, between Mpower
      Communications Corp. and Rolla P. Huff. (9) (18)10.24
    Second
      Amendment to Employment Agreement dated March 19, 2003, between Mpower
      Communications Corp. and S. Gregory Clevenger. (9) (18)10.25
    Second
      Amendment to Employment Agreement dated March 19, 2003, between Mpower
      Communications Corp. and Joseph M. Wetzel. (9) (18)10.26
    Third
      Amendment to Employment Agreement dated June 2003 between Mpower
      Communications Corp. and S. Gregory Clevenger. (9) (18)10.27
    Third
      Amendment to Employment Agreement dated June 2003 between Mpower
      Communications Corp. and Joseph M. Wetzel. (9) (18)10.28
    Fourth
      Amendment to Employment Agreement dated December 31, 2003, between Mpower
      Communications Corp. and Joseph M. Wetzel. (9) (18)10.29
    Retention
      and Severance Agreement dated October 11, 2001, between Mpower
      Communications Corp. and Anthony M. Marion, Jr. (9)
(18)10.30
    First
      Amendment to Employment Agreement dated March 19, 2003, between Mpower
      Communications Corp. and Russell I. Zuckerman. (9) (18)10.31
    Second
      Amendment to Employment Agreement dated June 2003 between Mpower
      Communications Corp. and Russell I. Zuckerman. (9) (18)10.32
    Employee
      Benefit Trust Agreement dated October 23, 2001, between HSBC Bank USA and
      Mpower Communications Corp. (9) (18)10.33
    Subscription
      Agreement dated January 1, 2005, between MCCC ICG Holdings LLC and Mpower
      Holding Corporation. (19)10.34
    Investor
      Rights Agreement dated January 1, 2005, by and among MCCC ICG Holdings
      LLC, ICG Communications, Inc. and Mpower Holding Corporation.
      (19)10.35
    First
      Amendment to Employment Agreement dated February 3, 2005, between Mpower
      Communications Corp. and Russell A. Shipley. (9)10.36
    Employment
      Agreement dated February 2, 2005, between Mpower Communications Corp. and
      Michael Tschiderer. (9)10.37
    Amendment
      to Retention and Severance Agreement dated January 25, 2005, between
      Mpower Communications Corp. and Steven Reimer. (9)10.38
    Amendment
      to Retention and Severance Agreement dated February 4, 2005, between
      Mpower Communications Corp. and Roger Pachuta. (9)10.39
    Employment
      Agreement dated February 15, 2005, between Mpower Communications Corp. and
      James Dole. (9)10.40
    Third
      Amendment to Lease dated February 10, 2005, between Mpower Communications
      Corp. and Vista Holdings, LLC.10.41
    Consulting
      Agreement dated February 18, 2005, between Mpower Communications Corp. and
      Cassara Management Group, Inc.10.42
    First
      Amendment to Employment Agreement dated July 28, 2004, between Mpower
      Communications Corp. and James Ferguson. (9)21
    Subsidiaries
      of the Registrant (6)23.1
    Consent
      of Deloitte & Touche LLP31.1
    Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive
    Officer.31.2
    Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial
    Officer.32
    Section
      1350 Certifications.

**80**
(1)
    Incorporated
      by reference to Mpower Holding Corporation’s Current Report on Form 8-K
      filed with the Commission on July 30, 2002.(2)
    Incorporated
      by reference to Mpower Holding Corporation’s Amendment No. 1 to
      Registration Statement on Form S-4 filed with the Commission on April 13,
      2001.(3)
    Incorporated
      by reference to Mpower Holding Corporation’s Current Report on Form 8-K
      filed with the Commission on April 22, 2003.(4)
    Incorporated
      by reference to Mpower Holding Corporation’s Registration Statement of
      Form 8-A filed with the Commission on July 30, 2002.(5)
    Incorporated
      by reference to Mpower Holding Corporation’s Current Report on Form 8-K
      filed with the Commission on July 16, 2003.(6)
    Incorporated
      by reference to Mpower Holding Corporation’s Annual Report on Form 10-K
      for the year ended December 31, 2001.(7)
    Incorporated
      by reference to Mpower Holding Corporation’s Registration Statement on
      Form S-8 filed with the Commission on June 19, 2003.(8)
    Incorporated
      by reference to Mpower Holding Corporation’s Quarterly Report on Form 10-Q
      for the quarter ended September 30, 2001.(9)
    Management
      contract or compensation plan or agreement required to be filed as an
      Exhibit to this Report on Form 10-K pursuant to Item 15(a) (3) of Form
      10-K.(10)
    Incorporated
      by reference to Mpower Holding Corporation’s Quarterly Report on Form 10-Q
      for the quarter ended September 30, 2002.(11)
    Incorporated
      by reference to Mpower Holding Corporation’s Annual Report on Form 10-K
      for the year ended December 31, 2002.(12)
    Incorporated
      by reference to Mpower Communications Corp.'s Annual Report on Form 10-K
      for the year ended December 31, 1999.(13)
    Incorporated
      by reference to Mpower Holding Corporation’s Annual Report on Form 10-K
      for the year ended December 31, 2000.(14)
    Incorporated
      by reference to Mpower Holding Corporation’s Quarterly Report on Form 10-Q
      for the quarter ended June 30, 2003.(15)
    Incorporated
      by reference to Mpower Holding Corporation’s Current Report on Form 8-K
      filed with the Commission on September 30, 2003.(16)
    Incorporated
      by reference to Mpower Holding Corporation’s Quarterly Report on Form 10-Q
      for the quarter ended September 30, 2003.(17)
    Incorporated
      by reference to Mpower Holding Corporation’s Current Report on Form 8-K
      filed with the Commission on October 27, 2004.(18)
    Incorporated
      by reference to Mpower Holding Corporation’s Annual Report on Form 10-K
      for the year ended December 31, 2003.(19)
    Incorporated
      by reference to Mpower Holding Corporation’s Current Report on Form 8-K
      filed with the Commission on January 6, 2005.(c)
    Schedule
      II - Valuation and Qualifying Accounts and Reserves is included below. All
      other schedules have been omitted as they are not required under the
      related instructions, are inapplicable, or because the information
      required is included in the consolidated financial statements or related
      notes thereto.

**81**
**MPOWER
HOLDING CORPORATION**

**SCHEDULE
II — VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEAR
ENDED**
**DECEMBER
31, 2004**

****
    
    
    
    
    
    **Additions****Description**
    
    
    **Balance
      at Beginning****of
      Year**
    
    
    **Charged
      to costs and****expenses**
    
    
    **Deductions**
    
    
    **Balance
      at****End
      of Year**Allowance
      for doubtful accounts
    
    $
    2,292
    
    $
    1,509
    
    $
    2,426
    
    $
    1,375Accrued
      network optimization costs
    
    $
    243
    
    $
    —
    
    $
    10
    
    $
    233


**MPOWER
HOLDING CORPORATION**

**SCHEDULE
II — VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEAR
ENDED**
**DECEMBER
31, 2003**

****
    
    
    
    
    
    **Additions****Description**
    
    
    **Balance
      at Beginning****of
      Year**
    
    
    **Charged
      to costs and****expenses**
    
    
    **Deductions**
    
    
    **Balance
      at****End
      of Year**Allowance
      for doubtful accounts
    
    $
    3,151
    
    $
    4,743
    
    $
    5,602
    
    $
    2,292Accrued
      network optimization costs
    
    $
    1,480
    
    $
    (591
    )
    $
    646
    
    $
    243


**MPOWER
HOLDING CORPORATION**

**SCHEDULE
II — VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEAR
ENDED**
**DECEMBER
31, 2002**

**Additions****Description**
    
    
    **Balance
      at Beginning****of
      Year**
    
    
    **Charged
      to costs and****expenses**
    
    
    **Deductions**
    
    
    **Balance
      at****End
      of Year**Allowance
      for doubtful accounts
    
    $
    4,330
    
    $
    9,880
    
    $
    11,059
    
    $
    3,151Accrued
      network optimization costs
    
    $
    13,593
    
    $
    12,610
    
    $
    24,723
    
    $
    1,480**82**
**SIGNATURES**

Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
**MPOWER HOLDING
      CORPORATION**Date: March
      14, 2005
    
    /s/ ROLLA P.
HUFFRolla
      P. Huff*Chief
      Executive Officer and Chairman of the
Board*

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
/s/ ROLLA
      P. HUFF
    
    
    /s/ S.
      GREGORY CLEVENGERRolla P. Huff
    
    
    S. Gregory ClevengerChief
      Executive Officer and Chairman of the
    Board
    
    
    Executive
      Vice President - Chief Financial
Officer
March 14,
      2005
    
    
    March 14,
      2005/s/ MICHAEL J.
      TSCHIDERER
    
    
    /s/ MICHAEL E.
      CAHRMichael J. Tschiderer
    
    
    Michael E. CahrSenior Vice President
      of Finance, Controller and Treasurer
    
    
    Director
March 14,
      2005
    
    
    March 14,
      2005Anthony J. Cassara
    
    
    Peter H.O. ClaudyDirector
    
    
    Director
March 14,
      2005
    
    
    March 14,
      2005/s/ MICHAEL M. EARLEY
    
    
    /s/ ANDREW D.
      LIPMANMichael M. Earley
    
    
    Andrew D. LipmanDirector
    
    
    Director
March 14,
      2005
    
    
    March 14,
      2005/s/ ROBERT M.
      POMEROYRobert M. Pomeroy
    
    
    Richard L. Shorten, Jr.Director
    
    
    DirectorMarch 14, 2005
    
    
    March 14, 2005**83**
**MPOWER
HOLDING CORPORATION**

**INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS**


**Page**Report
      of Independent Registered Public Accounting Firm
    85Consolidated
      Balance SheetsReorganized
      Mpower Holding - as of December 31, 2004 and 2003
    86Consolidated
      Statements of OperationsReorganized
      Mpower Holding - for the year ended December 31, 2004
    87Reorganized
      Mpower Holding - for the year ended December 31, 2003
    87Reorganized
      Mpower Holding - for the period July 31, 2002 to December 31,
      2002
    87Predecessor
      Mpower Holding - for the period January 1, 2002 to July 30,
      2002
    87Consolidated
      Statements of Stockholders’ Equity (Deficit)Reorganized
      Mpower Holding - for the year ended December 31, 2004
    88Reorganized
      Mpower Holding - for the year ended December 31, 2003
    88Reorganized
      Mpower Holding - for the period July 31, 2002 to December 31,
      2002
    88Predecessor
      Mpower Holding - for the period January 1, 2002 to July 30,
      2002
    88Consolidated
      Statements of Cash FlowsReorganized
      Mpower Holding - for the year ended December 31, 2004
    89Reorganized
      Mpower Holding - for the year ended December 31, 2003
    89Reorganized
      Mpower Holding - for the period July 31, 2002 to December 31,
      2002
    89Predecessor
      Mpower Holding - for the period January 1, 2002 to July 30,
      2002
    89Notes
      to Consolidated Financial Statements
    90**84**
**REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

Board of
Directors and Stockholders
Mpower
Holding Corporation**
Rochester,
New York

We have
audited the accompanying consolidated balance sheets of Mpower Holding
Corporation and subsidiaries (the “Company”) as of December 31, 2004 and 2003,
and the related consolidated statements of operations, stockholders’ equity
(deficit), and cash flows for years ended December 31, 2004 and 2003 and for the
period from July 31, 2002 to December 31, 2002 (Reorganized Company operations),
for the period January 1, 2002 to July 30, 2002 (Predecessor Company
operations). Our audits also included the financial statement schedule listed in
the Index at Item 15.  These financial statements and financial statement
schedule are the responsibility of the Company’s management.  Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.

We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

As
discussed in Note 12 to the consolidated financial statements, on July 17, 2002,
the Bankruptcy Court entered an order confirming the Company’s plan of
reorganization which became effective after the close of business on July 30,
2002. Accordingly, the accompanying consolidated financial statements for the
period from January 1, 2002 to July 30, 2002, and the period from July 31, 2002
to December 31, 2002, have been prepared in conformity with AICPA Statement of
Position 90-7, “Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code,” and the Reorganized Company as a new entity has assets,
liabilities, and a capital structure with carrying values that are not
comparable with prior periods.

In our
opinion, the Reorganized Company consolidated financial statements present
fairly, in all material respects, the financial position of the Company as of
December 31, 2004 and 2003 and the results of their operations and their
cash flows for years ended December 31, 2004 and 2003 and for the period
from July 31, 2002 to December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America. Further, in our
opinion, the Predecessor Company consolidated financial statements present
fairly in all material respects, the results of its operations and cash flows
for the period January 1, 2002 to July 30, 2002, in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the financial statement schedule referred to above, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.

We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2004, based on the
criteria established in*Internal
Control—Integrated Framework*issued
by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated March 14, 2005 expressed an unqualified opinion on
management’s assessment of the effectiveness of the Company’s internal control
over financial reporting and an unqualified opinion on the effectiveness of the
Company’s internal control over financial reporting.
****Date:  March 14,
    2005
    
    /s/ DELOITTE
      & TOUCHE LLPDeloitte & Touche LLPRochester, New
York
**85**
**MPOWER
HOLDING CORPORATION**
**CONSOLIDATED
BALANCE SHEETS**
**(IN
THOUSANDS, EXCEPT PREFERRED AND COMMON SHARE AND COMMON SHARE
AMOUNTS)**

****
    
    
    **December
      31,**
    
    
    **December
      31,****2004**
    
    
    **2003****ASSETS**Current
      assets:Cash
      and cash equivalents
    
    $
    27,327
    
    $
    29,307Investments
      available-for-sale
    
    
    8,064
    
    
    —Accounts
      receivable, less allowance for doubtful accounts of $1,375 and $2,292 at
      December 31, 2004 and 2003, respectively
    
    
    10,140
    
    
    14,076Other
      receivables
    
    
    3,164
    
    
    5,039Prepaid
      expenses and other current assets
    
    
    3,060
    
    
    4,579Total
      current assets
    
    
    51,755
    
    
    53,001Property
      and equipment, net
    
    
    33,012
    
    
    33,762Long-term
      restricted cash and cash equivalents
    
    
    9,515
    
    
    9,537Long-term
      investments available-for-sale
    
    
    2,041
    
    
    —Intangibles,
      net of accumulated amortization of $11,072 and $6,491 at December 31, 2004
      and 2003, respectively
    
    
    4,367
    
    
    8,948Other
      long-term assets
    
    
    4,274
    
    
    3,781Total
      assets
    
    $
    104,964
    
    $
    109,029**LIABILITIES
      AND STOCKHOLDERS' EQUITY**Current
      liabilities:Current
      maturities of capital lease obligations
    
    $
    —
    
    $
    256Accounts
      payable
    
    
    20,462
    
    
    15,752Accrued
      sales taxes payable
    
    
    2,190
    
    
    3,647Accrued
      property taxes payable
    
    
    1,457
    
    
    2,818Accrued
      bonus
    
    
    2,508
    
    
    2,388Deferred
      revenue
    
    
    5,059
    
    
    4,696Accrued
      other expenses
    
    
    10,299
    
    
    11,020Total
      current liabilities
    
    
    41,975
    
    
    40,577Long-term
      deferred revenue
    
    
    1,833
    
    
    2,211Total
      liabilities
    
    
    43,808
    
    
    42,788Commitments
      and contingenciesStockholders’
      equity:Preferred
      stock, 49,900,000 shares authorized but unissued at December 31, 2004 and
      2003, respectively
    
    
    —
    
    
    —Series
      A preferred stock, 100,000 shares authorized but unissued at December 31,
      2004 and 2003, respectively
    
    
    —
    
    
    —Common
      stock, $0.001 par value, 1,000,000,000 shares authorized, 78,570,772 and
      78,232,742 shares issued and outstanding at December 31, 2004 and 2003,
      respectively
    
    
    79
    
    
    78Additional
      paid-in capital
    
    
    104,054
    
    
    103,735Accumulated
      deficit
    
    
    (42,977
    )
    
    (37,572
    )Total
      stockholders' equity
    
    
    61,156
    
    
    66,241Total
      liabilities and stockholders' equity
    
    $
    104,964
    
    $
    109,029

See
accompanying notes to consolidated financial statements.
**86**
**MPOWER
HOLDING CORPORATION**
**CONSOLIDATED
STATEMENTS OF OPERATIONS**
**(IN
THOUSANDS, EXCEPT COMMON SHARE AND PER COMMON SHARE
AMOUNTS)**

****
    
    
    **Reorganized**
    ****
    ****
    **Reorganized**
    ****
    ****
    **Reorganized**
    ****
    ****
    **Predecessor**
    ********
    ****
    ****
    **Mpower**
    ****
    ****
    **Mpower**
    ****
    ****
    **Mpower**
    ****
    ****
    **Mpower**
    ********
    ****
    ****
    **Holding**
    ****
    ****
    **Holding**
    ****
    ****
    **Holding**
    ****
    ****
    **Holding**
    ********
    ****
    ****
    **Year
      Ended**
    ****
    ****
    **Year
      Ended**
    ****
    ****
    **July
      31, 2002 to**
    ****
    ****
    **January
      1, 2002**
    ********
    ****
    ****
    **December
      31,**
    
    
    **December
      31,**
    
    
    **December
      31,**
    
    
    **to
      July 30,****2004**
    
    
    **2003**
    
    
    **2002**
    
    
    **2002**Operating
      revenues:Telecommunication
      services
    
    $
    151,010
    
    $
    148,172
    
    $
    62,815
    
    $
    83,289Operating
      expenses:Cost
      of operating revenues
      (exclusive
      of depreciation and amortization shown separately below of $8,006 and
      $7,697 for the years ended December 31, 2004 and 2003, respectively, and
      $3,562 and $21,669 for the period July 31, 2002 to December 31, 2002 and
      for the period January 1, 2002 to July 30, 2002,
      respectively)
    
    
    69,279
    
    
    75,445
    
    
    33,414
    
    
    51,320Selling,
      general and administrative
      (exclusive
      of depreciation and amortization shown separately below of $7,527 and
      $8,672 for the years ended December 31, 2004 and 2003, respectively, and
      $4,425 and $6,951 for the period July 31, 2002 to December 31, 2002 and
      for the period January 1, 2002 to July 30, 2002,
    respectively)
    
    
    73,111
    
    
    77,609
    
    
    43,055
    
    
    66,069Reorganization
      expense
    
    
    —
    
    
    —
    
    
    —
    
    
    266,383Network
      optimization cost
    
    
    —
    
    
    (954
    )
    
    (6,390
    )
    
    19,000Gain
      on sale of assets, net
    
    
    (388
    )
    
    (534
    )
    
    (90
    )
    
    (91
    )Depreciation
      and amortization
    
    
    15,533
    
    
    16,369
    
    
    7,987
    
    
    28,620157,535
    
    
    167,935
    
    
    77,976
    
    
    431,301Loss
      from operations
    
    
    (6,525
    )
    
    (19,763
    )
    
    (15,161
    )
    
    (348,012
    )Other
      income (expense):Interest
      income
    
    
    430
    
    
    199
    
    
    963
    
    
    3,237Interest
      expense, net of amount capitalized (contractual interest was $33,470 from
      January 1, 2002 to July 30, 2002)
    
    
    (248
    )
    
    (526
    )
    
    (2,539
    )
    
    (18,065
    )Other
      income
    
    
    41
    
    
    1,427
    
    
    —
    
    
    —(Loss)
      gain on discharge of debt
    
    
    —
    
    
    (102
    )
    
    35,030
    
    
    315,310(Loss)
      gain on sale of investments, net
    
    
    (11
    )
    
    —
    
    
    (539
    )
    
    4,326(Loss)
      income from continuing operations
    
    
    (6,313
    )
    
    (18,765
    )
    
    17,754
    
    
    (43,204
    )Discontinued
      operations:Income
      (loss) from discontinued operations
    
    
    908
    
    
    (2,368
    )
    
    (34,193
    )
    
    (34,765
    )Net
      loss
    
    
    (5,405
    )
    
    (21,133
    )
    
    (16,439
    )
    
    (77,969
    )Accrued
      preferred stock dividend (contractual dividend was $8,782 from January 1,
      2002 to July 30, 2002)
    
    
    —
    
    
    —
    
    
    —
    
    
    (3,974
    )Net
      loss applicable to common stockholders
    
    $
    (5,405
    )
    $
    (21,133
    )
    $
    (16,439
    )
    $
    (81,943
    )Basic
      and diluted (loss) income per common share applicable to common
      stockholders:(Loss)
      income from continuing operations
    
    $
    (0.08
    )
    $
    (0.27
    )
    $
    0.27
    
    $
    (0.79
    )Income
      (loss) from discontinued operations
    
    
    0.01
    
    
    (0.04
    )
    
    (0.52
    )
    
    (0.59
    )Net
      loss
    
    $
    (0.07
    )
    $
    (0.31
    )
    $
    (0.25
    )
    $
    (1.38
    )Basic
      weighted average common shares outstanding
    
    
    78,438,470
    
    
    68,515,811
    
    
    64,999,025
    
    
    59,461,374Diluted
      weighted average common shares outstanding
    
    
    78,438,470
    
    
    68,515,811
    
    
    65,247,708
    
    
    59,461,374

See
accompanying notes to consolidated financial statements.
**87**

**MPOWER
      HOLDING CORPORATION**
      **CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)**
      **(IN
      THOUSANDS, EXCEPT PREFERRED AND COMMON SHARE
      AMOUNTS)****Redeemable
      Preferred Stock**
    **Common
      Stock**
    ****
    **Additional
      Paid-In**
    ****
    ****
    **Accumulated**
    ****
    **Treasury
      Stock**
    ****
    ****
      **Notes
      Receivable From**
    ****
    ****
    **Accumulated
      Other Comprehensive Income**
    ****
    ****
    ****
      **Total
      Stockholders’ Equity**
    ********
    ****
    ****
    **Shares**
    
    
    **Amount**
    
    
    **Shares**
    
    
    **Amount**
    
    
    **Capital**
    
    
    **Deficit**
    
    
    **Shares**
    
    
    **Amount**
    
    
    **Stockholders**
    
    
    **(Loss)**
    ****
    
    **(Deficit)**
    ******Balance
      at January 1, 2002, Predecessor Mpower Holding**
    
    
    4,263,388
    
    $
    202,830
    
    
    59,488,843
    
    $
    59
    
    $
    712,334
    
    $
    (826,615
    )
    
    13,710
    
    $
    (76
    )
    $
    (973
    )
    $
    7,793
    
    $
    (107,478
    )Cancellation
      of stockholders’ notes for common stock
    
    
    —
    
    
    —
    
    
    (81,000
    )
    
    —
    
    
    (435
    )
    
    —
    
    
    —
    
    
    —
    
    
    435
    
    
    —
    
    
    —Principal
      stockholder’s short swing profit
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    588
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    588Stock-based
      compensation
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    342
    
    
    —
    
    
    —
    
    
    —
    
    
    100
    
    
    —
    
    
    442Accrued
      preferred stock dividend
    
    
    —
    
    
    3,974
    
    
    —
    
    
    —
    
    
    (3,974
    )
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (3,974
    )7.25%
      Series D convertible preferred stock converted to common
    stock
    
    
    (50,000
    )
    
    (2,425
    )
    
    57,390
    
    
    —
    
    
    2,425
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    2,425New
      common stock issued for exchange of 2010 Notes
    
    
    —
    
    
    —
    
    
    55,250,000
    
    
    55
    
    
    74,150
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    74,205Cancellation
      of preferred and common stock
    
    
    (4,213,388
    )
    
    (204,379
    )
    
    (59,465,233
    )
    
    (59
    )
    
    191,267
    
    
    —
    
    
    (13,710
    )
    
    76
    
    
    —
    
    
    —
    
    
    191,284New
      common stock issued for exchange of stock
    
    
    —
    
    
    —
    
    
    9,749,025
    
    
    10
    
    
    13,085
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    13,095Fresh-start
      accounting
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (902,547
    )
    
    904,584
    
    
    —
    
    
    —
    
    
    438
    
    
    (2,039
    )
    
    436Comprehensive
      loss:Net
      loss
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (77,969
    )
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (77,969
    )Unrealized
      loss on investments available-for-sale
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (5,754
    )
    
    (5,754
    )**Comprehensive
      Loss**
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (83,723
    )**Balance
      at July 30, 2002, Predecessor Mpower Holding**
    
    
    —
    
    
    —
    
    
    64,999,025
    
    
    65
    
    
    87,235
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    87,300Stock-based
      compensation
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    276
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    276Comprehensive
      loss:Net
      loss
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (16,439
    )
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (16,439
    )**Comprehensive
      Loss**
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,439
    )**Balance
      at December 31, 2002, Reorganized Mpower Holding**
    
    
    —
    
    
    —
    
    
    64,999,025
    
    
    65
    
    
    87,511
    
    
    (16,439
    )
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    71,137Options
      exercised for common stock
    
    
    —
    
    
    —
    
    
    292,976
    
    
    —
    
    
    64
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    64Stock-based
      compensation
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    175
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    175Private
      placement of common stock
    
    
    —
    
    
    —
    
    
    12,940,741
    
    
    13
    
    
    15,985
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    15,998Comprehensive
      loss:Net
      loss
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (21,133
    )
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (21,133
    )**Comprehensive
      Loss**
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,133
    )**Balance
      at December 31, 2003, Reorganized Mpower Holding**
    
    
    —
    
    
    —
    
    
    78,232,742
    
    
    78
    
    
    103,735
    
    
    (37,572
    )
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    66,241Options
      exercised for common stock
    
    
    —
    
    
    —
    
    
    338,030
    
    
    1
    
    
    80
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    81Stock-based
      compensation
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    91
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    91Agent
      selling expense - warrants
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    148
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    148Comprehensive
      loss:Net
      loss
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (5,405
    )
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (5,405
    )**Comprehensive
      Loss**
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,405
    )**Balance
      at December 31, 2004, Reorganized Mpower Holding**
    
    
    —
    
    $
    —
    
    
    78,570,772
    
    $
    79
    
    $
    104,054
    
    $
    (42,977
    )
    
    —
    
    $
    —
    
    $
    —
    
    $
    —
    
    $
    61,156
See
accompanying notes to consolidated financial statements.
**88**
**MPOWER
HOLDING CORPORATION**
**CONSOLIDATED
STATEMENTS OF CASH FLOWS**
**(IN
THOUSANDS)**

****
    
    
    **Reorganized**
    
    
    **Reorganized**
    
    
    **Reorganized**
    
    
    **Predecessor******
    
    
    **Mpower**
    
    
    **Mpower**
    
    
    **Mpower**
    
    
    **Mpower******
    
    
    **Holding**
    
    
    **Holding**
    
    
    **Holding**
    
    
    **Holding******
    
    
    **Year
      Ended**
    
    
    **Year
      Ended**
    
    
    **July
      31, 2002 to**
    
    
    **January
      1, 2002******
    
    
    **December
      31,**
    
    
    **December
      31,**
    
    
    **December
      31,**
    
    
    **to
      July 30,****2004**
    
    
    **2003**
    
    
    **2002**
    
    
    **2002**Cash
      flows from operating activities:Net
      loss
    
    $
    (5,405
    )
    $
    (21,133
    )
    $
    (16,439
    )
    $
    (77,969
    )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
    
    
    15,533
    
    
    16,369
    
    
    11,223
    
    
    41,344Bad
      debt expense
    
    
    1,509
    
    
    4,743
    
    
    4,426
    
    
    5,454(Gain)
      loss on disposal of assets from discontinued operations
    
    
    (320
    )
    
    523
    
    
    21,518
    
    
    —Loss
      (gain) on discharge of debt
    
    
    —
    
    
    102
    
    
    (35,030
    )
    
    (315,310
    )Non-cash
      reorganization expense
    
    
    —
    
    
    —
    
    
    —
    
    
    244,669Network
      optimization cost
    
    
    —
    
    
    (954
    )
    
    (6,390
    )
    
    19,000Gain
      on sale of assets, net
    
    
    (388
    )
    
    (534
    )
    
    (90
    )
    
    (91
    )Loss
      (gain) on sale of investments, net
    
    
    11
    
    
    —
    
    
    539
    
    
    (4,326
    )Amortization
      of investment premiums
    
    
    27
    
    
    —
    
    
    —
    
    
    —Amortization
      of debt discount
    
    
    —
    
    
    —
    
    
    61
    
    
    718Amortization
      of deferred debt financing costs
    
    
    —
    
    
    131
    
    
    84
    
    
    608Stock-based
      compensation expense
    
    
    91
    
    
    175
    
    
    276
    
    
    442Agent
      selling expense - warrants
    
    
    148
    
    
    —
    
    
    —
    
    
    —Changes
      in assets and liabilities:Decrease
      (increase) in accounts receivable
    
    
    2,427
    
    
    (3,695
    )
    
    (2,567
    )
    
    (2,334
    )Decrease
      (increase) in other receivables
    
    
    3,492
    
    
    (3,491
    )
    
    —
    
    
    —Decrease
      (increase) in prepaid expenses and other current assets
    
    
    1,427
    
    
    1,327
    
    
    2,176
    
    
    (3,271
    )Decrease
      (increase) in other long-term assets
    
    
    617
    
    
    6,987
    
    
    980
    
    
    (5,724
    )(Decrease)
      increase in accounts payable
    
    
    (75
    )
    
    (5,346
    )
    
    (12,792
    )
    
    10,495Decrease
      in sales taxes payable
    
    
    (1,457
    )
    
    (1,427
    )
    
    (475
    )
    
    (848
    )Decrease
      in accrued network optimization costs
    
    
    —
    
    
    (646
    )
    
    (3,552
    )
    
    (3,707
    )(Decrease)
      increase in accrued other expenses
    
    
    (3,295
    )
    
    (2,575
    )
    
    (7,152
    )
    
    9,816Net
      cash provided by (used in) operating activities
    
    
    14,342
    
    
    (9,444
    )
    
    (43,204
    )
    
    (81,034
    )Cash
      flows from investing activities:Purchase
      of property and equipment, net of payables
    
    
    (5,623
    )
    
    (7,229
    )
    
    (5,923
    )
    
    (11,483
    )Proceeds
      from sale of assets from continuing operations
    
    
    407
    
    
    872
    
    
    383
    
    
    185Proceeds
      from sale of assets from discontinued operations
    
    
    63
    
    
    19,364
    
    
    —
    
    
    —Costs
      associated with sale of assets from discontinued
operations
    
    
    —
    
    
    (1,239
    )
    
    —
    
    
    —Proceeds
      from sale of airplane
    
    
    —
    
    
    —
    
    
    6,119
    
    
    —Purchase
      of investments available-for-sale, net
    
    
    (10,505
    )
    
    —
    
    
    —
    
    
    —Sale
      of investments available-for-sale, net
    
    
    362
    
    
    —
    
    
    52,155
    
    
    105,550Sale
      of restricted investments, net
    
    
    114
    
    
    4,002
    
    
    1,361
    
    
    3,614Purchase
      of restricted investments, net
    
    
    —
    
    
    —
    
    
    (4,000
    )
    
    (1,902
    )Net
      cash (used in) provided by investing activities
    
    
    (15,182
    )
    
    15,770
    
    
    50,095
    
    
    95,964Cash
      flows from financing activities:Proceeds
      from principal stockholder’s short swing profit
    
    
    —
    
    
    —
    
    
    —
    
    
    588Repurchase
      of Senior Notes
    
    
    —
    
    
    (2,154
    )
    
    (13,707
    )
    
    —Fees
      paid for repurchase of Senior Notes
    
    
    —
    
    
    —
    
    
    (450
    )
    
    —Payments
      on other long-term debt and capital lease obligations
    
    
    (256
    )
    
    (1,569
    )
    
    (2,513
    )
    
    (4,116
    )Costs
      associated with line of credit
    
    
    —
    
    
    (131
    )
    
    —
    
    
    —Costs
      associated with planned acquisition
    
    
    (965
    )
    
    —
    
    
    —
    
    
    —Costs
      associated with issuance of common stock
    
    
    —
    
    
    (1,472
    )
    
    —
    
    
    —Proceeds
      from issuance of common stock
    
    
    81
    
    
    17,534
    
    
    —
    
    
    —Net
      cash (used in) provided by financing activities
    
    
    (1,140
    )
    
    12,208
    
    
    (16,670
    )
    
    (3,528
    )Net
      (decrease) increase in cash and cash equivalents
    
    
    (1,980
    )
    
    18,534
    
    
    (9,779
    )
    
    11,402Cash
      and cash equivalents at beginning of period
    
    
    29,307
    
    
    10,773
    
    
    20,552
    
    
    9,150Cash
      and cash equivalents at the end of period
    
    $
    27,327
    
    $
    29,307
    
    $
    10,773
    
    $
    20,552

Supplemental
      schedule of non-cash investing and financing activities:Net
      payable related to costs associated with planned
    acquisition
    
    $
    145
    
    $
    —
    
    $
    —
    
    $
    —Net
      proceeds receivable from sale of assets from discontinued
      operations
    
    $
    —
    
    $
    826
    
    $
    —
    
    $
    —New
      common stock issued for exchange of Senior Notes
    
    $
    —
    
    $
    —
    
    $
    —
    
    $
    74,205Cancellation
      of preferred and common stock
    
    $
    —
    
    $
    —
    
    $
    —
    
    $
    (13,095
    )New
      common stock issued for exchange of preferred and common
    stock
    
    $
    —
    
    $
    —
    
    $
    —
    
    $
    13,095Fresh-start
      accounting
    
    $
    —
    
    $
    —
    
    $
    —
    
    $
    436Preferred
      stock converted to common stock
    
    $
    —
    
    $
    —
    
    $
    —
    
    $
    2,425Preferred
      stock dividends accrued
    
    $
    —
    
    $
    —
    
    $
    —
    
    $
    3,974Other
      disclosures:Cash
      paid for interest, net of amounts capitalized
    
    $
    117
    
    $
    525
    
    $
    3,054
    
    $
    2,150

See
accompanying notes to consolidated financial statements.
**89****MPOWER
HOLDING CORPORATION**
**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
**Years
Ended December 31, 2004, 2003 and 2002**

**(1)
Description of Business, Financial History and Significant Accounting
Policies**

**Description
of Business**

The
accompanying 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”) telephony by way of a variety of broadband
product and service offerings over its network of collocations and switches. 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 of ICG Communications, Inc.
(“ICG”). The assets acquired include ICG’s customer base and certain network
assets in California. See Note 18 for additional discussion of this
acquisition.

As a
result of the Chapter 11 reorganization occurring as of July 30, 2002, and
discussed in Note 12, the financial results for the Company have been separately
presented under the label “Predecessor Mpower Holding” for the period January 1,
2002 to July 30, 2002 and “Reorganized Mpower Holding” for periods after July
31, 2002.

As a
result of the reorganization, the consolidated financial statements for
periods following the effectiveness of the First Amended Joint Plan of
Reorganization (the “Plan”), as modified by the Findings of Fact, Conclusions of
Law, and Order Under Section 1129 of the Bankruptcy Code and Rule 3020 of the
Bankruptcy Rules Confirming Debtors’ First Amended Joint Plan of Reorganization
entered by the Bankruptcy Court on July 17, 2002, (the “Confirmation Order,” the
Plan as modified by the Confirmation Order is referred to herein as the “Final
Plan”) on July 30, 2002, will not be comparable to those before the
effectiveness of the Final Plan.

**Financial
History**

In May
1998, the Company completed its initial public offering of common stock, raising
net proceeds of $63.0 million. From May 1999 to March 2000, the Company raised
over $900 million of additional funds through debt and equity issuances to
pursue an aggressive business plan to rapidly expand its business using Class 5
circuit switching technology, the same as used by Verizon, SBC (through its
operating subsidiaries Pacific Bell and Ameritech), and other major
telecommunication companies, in each of its markets and began deploying digital
loop carriers in each collocation site. This business plan required significant
up-front capital expenditures in each market as well as lower recurring margins
in its early phase. In mid-2000, the capital markets became virtually
inaccessible to early stage communications ventures. Consequently, in September
2000, the Company commenced a process to restructure its business, both
operationally and financially.

**90**
From
September 2000 through May 2001, the Company significantly scaled back its
operations, canceling more than 500 existing collocations, and canceling plans
to enter the Northeast and Northwest Regions (representing more than 350
collocations).

From
February 2002 through July 2002, the Company undertook a comprehensive
recapitalization through a Chapter 11 bankruptcy plan that eliminated $593.9
million in carrying value of long-term debt and preferred stock (as well as
$65.3 million of associated annual interest and dividend costs) in exchange for
cash and 98.5% of its common stock. See Note 12 for further discussion of the
Chapter 11 proceedings.

From
November 2002 to January 2003, the Company eliminated the remaining $51.3
million of carrying value of its long-term debt for cash payments, which
released all of its network equipment from any remaining security interests,
giving the Company the ability to pursue alternative financing and strategic
transactions.

In
January 2003, the Company entered into an agreement with RFC Capital
Corporation, a wholly-owned subsidiary of Textron Financial Corporation, for a
three-year funding credit facility of up to $7.5 million, secured only by
certain of its accounts receivable.

In
January 2003, the Company announced a series of strategic sale transactions to
further strengthen itself financially and focus its operations on the
California, Nevada and Illinois markets. The Company’s sale of customers and
assets in Florida, Georgia, Ohio, Michigan and Texas to other service providers
(the “Asset Sales”) brought more geographic concentration to its business. The
Asset Sales in Ohio, Michigan and Texas were completed in March 2003. The Asset
Sales in Georgia and Florida were completed in April 2003. The Asset Sales
generated net proceeds to the Company of approximately $19.3 million, of which
$1.5 million remained unpaid and held in escrow as of December 31, 2004. $1.0
million was subsequently received in March 2005 and the remainder, net of
expenses, is expected to be received in the first or second quarter of
2005.

In
September 2003, the Company raised net proceeds of approximately $16.0 million
through a private placement of shares of its common stock and warrants to
purchase additional shares of common stock.

As
further described in Note 18, in October 2004, the Company entered into a
definitive agreement to acquire ICG’s customer base and certain network assets
in California. In January 2005, the Company purchased ICG California through the
issuance of shares of its common stock, warrants to purchase additional shares
of common stock and the assumption of certain capitalized leases. In connection
with the acquisition, in January 2005, the Company raised net proceeds of
approximately $2.5 million through a private placement of shares of its common
stock.

**Significant
Accounting Policies**

***Revenue
Recognition***

The
Company recognizes operating revenues as services are rendered to customers in
accordance with the Securities and Exchange Commission’s (“SEC”) Staff
Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition.” The Company
recognizes revenue from monthly recurring charges, enhanced features and usage
in the period in which service is provided. Advance billings for services not
yet provided are deferred and recognized as revenue in the period in which
service is provided. Nonrefundable activation fees are also deferred and
recognized as revenue over the expected term of the customer relationship. The
Company recognizes revenue from switched access in the period in which service
is provided, when the price is fixed, the earnings process is complete and the
collectability is reasonably assured.As part
of the revenue recognition process for switched access, the Company evaluates
whether receivables are reasonably assured of collection based on certain
factors, including past credit history, financial condition of the customer,
industry norms, past payment history of the customer and the likelihood of
billings being disputed by customers.

The
Company maintains allowances for doubtful accounts for estimated losses
resulting from its inability to collect all amounts owed by its customers for
its services. In order to estimate the appropriate level of this allowance, the
Company analyzes historical bad debts, current economic and competitive trends,
changes in the credit worthiness of its customers, changes in its customer
payment patterns and other relevant factors. In establishing the allowance for
doubtful accounts, the Company has taken into consideration the aggregate risk
of its receivables.

**91**
***Cost
of Operating Revenues***

Cost of
operating revenues include the cost of leasing copper loops from the incumbent
local exchange carriers (“ILECs”), the cost to change over new customers onto
the Company’s network, the cost of transporting voice and data traffic over the
Company's network, long distance charges from service providers related to the
traffic generated by the Company’s customers, the cost of leasing collocation
space from the ILECs and the related utilities to operate the Company's
equipment at those sites, the leased space related to the Company's switch sites
and the related utilities needed to operate the Company’s switches and other
related services. Cost of operating revenues does not include internal labor
costs or an allocation of depreciation and amortization expense.

The
Company leases its loop, transport and network facilities from various long
distance carriers and ILEC’s. The pricing of such facilities are governed by
either a tariff or an interconnection agreement. These carriers bill the Company
for the use of such facilities and other services. From time to time, the
carriers present inaccurate bills, which the Company disputes. As a result of
such billing inaccuracies, the Company records an estimate of its liability
based on its measurement of services received. As of December 31, 2004 and 2003,
the Company had $6.5 million and $7.2 million, respectively, of disputes with
carriers and reserved $2.8 million and $5.4 million, respectively, against those
disputed balances.

***Other
Income***

During
2003, the Company reported other income of $1.4 million resulting from the
reversal of a sales tax contingency reserve deemed to no longer be
needed.

***Comprehensive
Loss***

The
Company reports comprehensive loss in accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 130, "Reporting Comprehensive Income." SFAS
No. 130 establishes rules for the reporting of comprehensive loss and its
components. For the years ended December 31, 2004 and 2003 and the period July
31, 2002 to December 31, 2002, comprehensive loss consisted of net losses. For
the period January 1, 2002 to July 30, 2002, comprehensive loss consisted of
unrealized losses on investments in available-for-sale securities, as well as
net losses. Comprehensive loss is presented in the consolidated statements of
stockholders’ equity (deficit).

***Concentration
of Credit Risk***

Financial
instruments that potentially subject the Company to concentrations of credit
risk consist principally of cash and cash equivalents and accounts receivables.
The Company places its cash and cash equivalents in financial institutions
considered by management to be high quality and limit the amount of credit
exposure to any one institution. The Company has not experienced any losses in
these accounts and believes that it is not exposed to any significant credit
risk on cash balances.

The
Company conducts business with a large base of customers. Concentrations of
credit risk with respect to accounts receivable are limited due to the large
number of customers comprising the Company's customer base. The Company performs
ongoing credit evaluations of its customers' financial condition. Additionally,
a significant portion of the Company's accounts receivable related to switched
access is concentrated in a limited number of carriers. The Company has reached
access rate agreements with its three largest carriers. Allowances are
maintained for potential credit issues and such losses to date have been within
management's expectations.

***Cash
and Cash Equivalents***

The
Company considers short-term investments with an original maturity of three
months or less at the date of purchase to be cash equivalents. The fair value of
the Company's cash and cash equivalents approximates carrying amounts due to the
relatively short maturities and variable interest rates of the instruments,
which approximate current market rates.

**92**
***Investments***

The
Company’s short-term and long-term investments consist of investment-grade debt
securities which are recorded at fair value and classified as available-for-sale
in accordance with the provisions of SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities.”

During
2004, net unrealized holding gains and losses were not significant and
accordingly the amortized cost of these investments approximated fair value as
of December 31, 2004. For the period from January 1, 2002 to July 30, 2002 net
unrealized holding gains and losses were reported in stockholders’ equity as a
component of accumulated other comprehensive loss. Interest and amortization of
premiums and discounts for available-for-sale securities were included in
interest income, and gains and losses on available-for-sale investments sold
were determined based on the specific identification method and included in
other income. The Company does not hold these investments for speculative or
trading purposes.

Investments
available-for-sale as of December 31, 2004 were as follows (in
thousands):

****
    
    
    **Fair
      Value**Short-term
      investments:Auction
      rate securities
    
    $
    6,150Corporate
      bonds
    
    
    1,396U.S.
      government agency notes
    
    
    518Total
      short-term investments
    
    $
    8,064Long-term
      investments:U.S.
      government agency notes
    
    $
    1,032Corporate
      bonds
    
    
    1,009Total
      long-term investments
    
    $
    2,041

Proceeds
from the sale of investments available-for-sale for the periods ended in 2004,
2003 and 2002 were as follows (in thousands):

****
    
    ****
    ****
    **Predecessor**
    ********
    ****
    **Reorganized
      Mpower Holding**
    
    **Mpower
      Holding****2004**
    
    
    **2003**
    
    
    **2002**
    
    
    **2002**Proceeds
      from the sale of investments available-for-sale
    
    $
    362
    
    $
    —
    
    $
    52,155
    
    $
    105,550

**93**
The
realized gains and losses from sales of investments for the periods ended in
2004, 2003 and 2002 were as follows (in thousands):

****
    
    
    
    **Predecessor******
    
    **Reorganized
      Mpower Holding**
    
    **Mpower
      Holding****2004**
    
    
    **2003**
    
    
    **2002**
    
    
    **2002**Gross
      realized gains
    
    $
    —
    
    $
    —
    
    $
    39
    
    $
    4,326Gross
      realized losses
    
    
    (11
    )
    
    —
    
    
    (578
    )
    
    —Net
      realized (loss) gain
    
    $
    (11
    )
    $
    —
    
    $
    (539
    )
    $
    4,326

***Restricted
Cash and Cash Equivalents***

In
September 2001, the Company committed to pay up to $4.5 million during the
period through December 31, 2002 for employee retention and incentive
compensation bonuses, subject to the terms of the agreements with certain
employees. In addition, the Company committed to pay up to $7.5 million in
severance payments to certain employees in the event they are terminated
involuntarily, without cause or voluntarily, with good cause. In November 2001,
the Company established an irrevocable grantor trust, which was funded at a
level sufficient to cover the maximum commitment for retention, incentive
compensation and severance payments. For the years ended December 31, 2004 and
2003, the Company paid out $0.1 million and $2.1 million, respectively relating
to these commitments.

In
October 2002, the Company established and funded a second irrevocable grantor
trust with $2.0 million, which was determined to be the amount sufficient to pay
all severance benefit obligations pursuant to employment agreements for several
of the Company’s executives and any other severance or retention agreements in
effect that were not funded by the trust adopted by the Company in November
2001. In November 2002, the Company established a $2.0 million trust for the
future purchase, if needed, of run-off insurance for the directors and
officers.

The three
trusts referred to above were all established prior to filing bankruptcy by the
Company to reassure key employees and members of the board of directors that the
Company’s obligations to pay retention, incentive compensation and severance
benefit obligations could be met, no matter what the future financial condition
of the Company. This was essential to the success of the Company’s business
plan, in that without the retention of key employees and members of the board of
directors, the ability to successfully carry out the Company’s business plan
would be greatly hampered. Key employees and members of the board of directors
needed the assurance that the severance and other compensation benefits they
were relying on were funded and could be paid whatever the financial condition
of the Company, and that they would be protected with run-off insurance in the
event of a merger, acquisition or other event requiring such insurance
coverage.

The
trusts established to cover commitments for retention, incentive compensation
and severance payments will terminate when all employees have been paid all
amounts due them pursuant to the terms and conditions of those trust agreements.
The trust to purchase run-off insurance will terminate when the proceeds from
the trust have been used to purchase run-off insurance in the event of a merger,
acquisition or other event requiring such insurance.

Restricted
investments at December 31, 2002, also included $1.9 million of escrow funds
related to disputed charges between SBC Telecommunications and the Company. In
February 2003, a final settlement of the disputed charges was reached and $1.2
million was released and returned to the Company, while $0.7 million was
released and paid to SBC Telecommunications.

***Prepaid
Expenses and Other Current Assets***

Prepaid
expenses and other current assets consist of prepaid rent, prepaid insurance,
prepaid maintenance agreements, deferred installation costs and the current
portion of deposits held by vendors. Prepaid expenses are expensed on a
straight-line basis over the corresponding life of the underlying agreements.
Deferred installation costs are expensed on a straight-line basis over the
estimated customer life, consistent with the corresponding revenue.

**94**
***Property
and Equipment***

Property
and equipment are carried at cost, less accumulated depreciation and
amortization. Direct and indirect costs of construction are capitalized, and
include interest costs related to construction for the periods ended during
2002. There were no capitalized interest costs for 2004 or 2003. Capitalized
interest costs for the period July 31, 2002 to December 31, 2002 was $0.1
million and $1.3 million for the period January 1, 2002 to July 30,
2002.

Depreciation
is computed using the straight-line method over estimated useful lives beginning
in the month an asset is placed into service. Estimated useful lives of property
and equipment are as follows:

Buildings
    39
      yearsTelecommunications
      and switching equipment
    3-10
      yearsComputer
      hardware and software
    3-5
      yearsOffice
      equipment and other
    3-10
      yearsLeasehold
      improvements
    the
      lesser of the estimated useful lives or term of
lease

The
Company capitalizes costs associated with the design, deployment and expansion
of the Company's network including internally and externally developed software.
Capitalized external software costs include the actual costs to purchase
software from vendors. Capitalized internal software costs generally include
personnel and related costs incurred in the enhancement and implementation of
purchased software packages. Repair and maintenance costs are expensed as
incurred.

Capitalized
internal labor costs for the periods ended in 2004, 2003 and 2002 were as
follows (in thousands):

****
    
    
    
    **Predecessor******
    
    **Reorganized
      Mpower Holding**
    
    **Mpower
      Holding****2004**
    
    
    **2003**
    
    
    **2002**
    
    
    **2002**Capitalized
      internal labor costs
    
    $
    1,130
    
    $
    1,330
    
    $
    2,293
    
    $
    3,956

***Deferred
Financing Costs***

Deferred
financing costs are amortized to interest expense over the life of the related
financing using the effective interest method.

***Goodwill
and Other Intangibles***

The
Company accounts for goodwill and other intangibles under 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. The Company had no goodwill recorded on the
consolidated balance sheets as of December 31, 2004 and 2003.

**95**
***Other
Long-Term Assets***

Other
long-term assets consist primarily of direct acquisition costs related to ICG
(See Note 18), the long-term portion of deferred installation costs and prepaid
insurance, and deposits on operating leases. Direct acquisition costs
represent direct costs incurred by the Company in the preparation for the ICG
acquisition in January 2005 such as professional fees, and amounts payable under
management services agreements and transition services agreements and will be
considered in the Company’s purchase accounting. The deposits on operating
leases are held for various periods of time by the respective lessors, and are
expected to be returned to the Company per the specific conditions of the
individual operating leases. Deferred installation costs are expensed on a
straight-line basis over the estimated customer life, consistent with the
corresponding revenue. Prepaid expenses are expensed on a straight-line basis
over the corresponding life of the underlying agreements.

***Income
Taxes***

The
Company has applied the provisions of SFAS No. 109, "Accounting for Income
Taxes," which requires the recognition of deferred income tax assets and
liabilities for the consequences of temporary differences between amounts
reported for financial reporting and income tax purposes, including net
operating loss carryforwards. SFAS No. 109 requires recognition of a future tax
benefit of net operating loss carryforwards and certain other temporary
differences to the extent that realization of such benefit is more likely than
not; otherwise, a valuation allowance is applied.

***Fair
Value of Financial Instruments***

SFAS No.
107, "Disclosure About Fair Value of Financial Instruments," requires entities
to disclose the fair value of financial instruments, both assets and liabilities
recognized and not recognized on the balance sheet, for which it is practicable
to estimate fair value. SFAS No. 107 defines fair value of a financial
instrument as the amount at which the instrument could be exchanged in a current
transaction between willing parties. At December 31, 2004 and 2003, the carrying
value of certain financial instruments (accounts receivable, accounts payable
and current portion of capital lease obligations) approximates fair value due to
the short-term nature of the instruments or interest rates, which are comparable
with current rates.

As of
December 31, 2004 and 2003, the Company had no long-term debt.

***Impairment
of Long-Lived Assets***

Property
and equipment, finite lived intangible assets, and other long-lived assets are
reviewed periodically for possible impairment in accordance with SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets.” The Company’s
impairment review is based on an undiscounted cash flow analysis at the lowest
level for which identifiable cash flows exist. The analysis requires management
judgment with respect to changes in technology, the continued success of product
and service offerings, and future volume, revenue and expense growth rates. The
Company conducts annual reviews for idle and underutilized equipment, and
reviews business plans for possible impairment implications. Impairment occurs
when the carrying value of the asset exceeds the future undiscounted cash flows.
When an impairment is indicated, the estimated future cash flows are then
discounted, or another appropriate fair value methodology is utilized, to
determine the estimated fair value of the asset and an impairment charge, if
any, is recorded for the difference between the carrying value and the fair
value of the asset.

Carrying
values of indefinite lived intangible assets are reviewed at least annually, for
possible impairment in accordance with SFAS No. 142. The Company’s impairment
review is based on a discounted cash flow approach that requires significant
judgment with respect to future volume, revenue and expense growth rates, and
the selection of an appropriate discount rate. Management uses estimates based
on expected trends in making these assumptions. An impairment charge is recorded
for the difference between the carrying value and the net present value of
estimated cash flows, which represents the estimated fair value of the asset.
The Company uses its judgment in assessing whether assets may have become
impaired between annual valuations. Indicators such as unexpected adverse,
economic factors, unanticipated technological change or competitive activities,
acts by governments and courts, may signal that an asset has become
impaired.

**96**
No
impairment charges were recorded on long-lived assets in 2004 or
2003.

***Concentration
of Suppliers***

The
Company currently leases its transport capacity from a limited number of
suppliers and is dependent upon the availability of collocation space and
transmission facilities owned by the suppliers. The Company is vulnerable to the
risk of renewing favorable supplier contracts, timeliness of the supplier in
processing the Company's orders for customers and is at risk related to
regulatory agreements that govern the rates to be charged to the
Company.

***Use
of Estimates***

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.

***Reclassifications***

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

***Stock-Based
Compensation***

The
Company measures the compensation cost of its stock option plan under the
provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting
for Stock Issued to Employees,” as permitted under SFAS No. 123, “Accounting for
Stock-Based Compensation,” 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 instrument
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 periods ended in 2004, 2003 and 2002 (in
thousands, except per common share amounts):

****
    
    **Reorganized**
      **Mpower
      Holding**
    
    **Predecessor
      Mpower****Holding****2004**
    
    
    **2003**
    
    
    **2002**
    
    
    **2002**Net
      loss applicable to common stockholders, as reported
    
    $
    (5,405
    )
    $
    (21,133
    )
    $
    (16,439
    )
    $
    (81,943
    )Add:
      Stock-based compensation expense included in reported net loss, net of
      related income tax effects
    
    
    91
    
    
    175
    
    
    276
    
    
    442Deduct:
      Total stock-based employee compensation expense to be determined under a
      fair value based method for all awards, net of related income tax
      effects
    
    
    (3,853
    )
    
    (4,603
    )
    
    (1,260
    )
    
    (4,101
    )Pro
      forma net loss applicable to common stockholders
    
    $
    (9,167
    )
    $
    (25,561
    )
    $
    (17,423
    )
    $
    (85,602
    )Basic
      and diluted net loss per common share applicable to common stockholders,
      as reported
    
    $
    (0.07
    )
    $
    (0.31
    )
    $
    (0.25
    )
    $
    (1.38
    )Basic
      and diluted net loss per common share applicable to common stockholders,
      pro forma
    
    $
    (0.12
    )
    $
    (0.37
    )
    $
    (0.27
    )
    $
    (1.44
    )

**97**
Pro forma
amounts for 2003 have been restated from amounts 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 2003, such adjustments increased the pro forma stock-based employee
compensation expense determined under a fair value based method by $3.1 million
and pro forma basic and diluted net loss per common share applicable to common
stockholders by 4 cents.

The
Company utilizes the Black-Scholes method for determining the fair value of its
options for purposes of the pro forma disclosures required by SFAS No. 123. The
assumptions used for the Black-Scholes method were reviewed during 2004. Based
on the review and consideration of the Company’s current financial position
subsequent to its emergence from bankruptcy and the disposal of certain markets,
it was determined that the unadjusted historical stock prices used to calculate
its expected volatility were no longer reflective of future performance. Based
on the review, the Company changed its methodology of determining the expected
volatility and modified its calculation to place more reliance on recent periods
in order to provide a more accurate projection of the future expected volatility
of the Company’s common stock.

For
options granted during the year ended December 31, 2004, the weighted average
fair value of options on the date of grant, estimated using the Black-Scholes
option pricing model, was $0.67, using the following assumptions: dividend yield
of 0%; expected option life of 6.0 years; risk free interest rate ranging from
3.05% to 4.14% and an expected volatility ranging from 56% to 201%.

For
options granted during the year ended December 31, 2003, the weighted average
fair value of options on the date of grant, estimated using the Black-Scholes
option pricing model, was $0.51, using the following assumptions: dividend yield
of 0%; expected option life of 6.0 years; risk free interest rate of 3.06% and
an expected volatility of 200%.

For
options granted during the period July 31, 2002 to December 31, 2002
(“Reorganized Mpower Holding”), the weighted average fair value of options on
the date of grant, estimated using the Black-Scholes option pricing model, was
$0.28, using the following assumptions: dividend yield of 0%; expected option
life of 6.0 years; risk free interest rate of 3.33% and an expected volatility
of 168%.

For
options granted during the period January 1, 2002 to July 30, 2002 (“Predecessor
Mpower Holding”), the weighted average fair value of options on the date of
grant, estimated using the Black-Scholes option pricing model, was $0.26, using
the following assumptions: dividend yield of 0%; expected option life of 6.0
years; risk free interest rate of 4.55% and an expected volatility of
223%.

***Loss
(Income) 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.
Basic earnings per common share excludes the effect of common stock equivalents
and is computed by dividing income (loss) applicable to common stockholders by
the weighted average number of shares of common stock outstanding during the
period. Diluted earnings per common share reflects the potential dilution that
could result if securities or other contracts to issue common stock were
exercised or converted into common stock. Diluted earnings per common share
assumes the exercise of stock options using the treasury stock method and
assumes the conversion of preferred stock using the “if converted”
method.

**98**
**Recent
Accounting Pronouncements**

In
December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment", which replaces SFAS No. 123 and supersedes APB Opinion No. 25. 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, beginning with the first interim or annual period after June
15, 2005, with early adoption encouraged. In addition, SFAS No. 123(R) will
cause unrecognized expense (based on the fair values determined for the pro
forma footnote disclosure, adjusted for estimated forfeitures) related to
options vesting after the date of initial adoption to be recognized as a charge
to results of operations over the remaining vesting period. The Company is
required to adopt SFAS No. 123(R) in its third quarter of 2005, beginning July
1, 2005. Under SFAS No. 123(R), the Company must determine the appropriate fair
value model to be used for valuing share-based payments, the amortization method
for compensation cost and the transition method to be used at the date of
adoption. The transition alternatives include the modified prospective or the
modified retrospective adoption methods. Under the modified retrospective
method, prior periods may be restated either as of the beginning of the year of
adoption or for all periods presented. The modified prospective method requires
that compensation expense be recorded for all unvested stock options and share
awards at the beginning of the first quarter of adoption of SFAS No. 123(R),
while the modified retrospective methods would record compensation expense for
all unvested stock options and share awards beginning with the first period
restated. The Company is evaluating the requirements of SFAS No. 123(R) and
expects that the adoption of SFAS No. 123(R) will have a material impact on its
statements of operations and earnings per share. The Company cannot yet estimate
the effect of adopting SFAS No. 123(R) as it has not yet selected the method of
adoption or an option-pricing model and it has not yet finalized estimates of
its expected forfeitures.

**(2)
Property and Equipment**

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

****
    
    
    **December**
      **31**,
    
    
    **December
      31,****2004**
    
    
    **2003**Buildings
      and property
    
    $
    1,716
    
    $
    1,716Telecommunication
      and switching equipment
    
    
    33,968
    
    
    28,073Leasehold
      improvements
    
    
    6,892
    
    
    6,689Computer
      hardware and software
    
    
    7,638
    
    
    7,119Office
      equipment and other
    
    
    2,722
    
    
    2,486Assets
      held for future use
    
    
    3,296
    
    
    3,43456,232
    
    
    49,517Accumulated
      depreciation and amortization
    
    
    (27,206
    )
    
    (16,425
    )29,026
    
    
    33,092Construction
      in progress
    
    
    3,986
    
    
    670Net
      property and equipment
    
    $
    33,012
    
    $
    33,762

**99**
Depreciation
expense for the periods ended in 2004, 2003 and 2002 were as follows (in
thousands):

****
    
    ****
    
    **Predecessor******
    
    **Reorganized**
      **Mpower** **Holding**
    
    **Mpower
      Holding****2004**
    
    
    **2003**
    
    
    **2002**
    
    
    **2002**Depreciation
      expense
    
    $
    10,952
    
    $
    11,787
    
    $
    6,078
    
    $
    28,620

Assets
held for future use are directly related to the recovery of switch and
collocation equipment from markets cancelled or exited during 2002 and 2001
which are expected to be re-deployed throughout the Company's remaining
operating markets. These assets are continuing to be depreciated and the net
book value at December 31, 2004 and 2003 was $1.4 million and $2.0 million,
respectively.

As of
December 31, 2004, construction in progress included incremental capital
investments of $2.4 million in preparation for the integration of the assets
acquired from ICG (Note 18).

**(3)
Intangible Assets**

The
Company accounts for its 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.

As
discussed in Note 12, in connection with the Company’s adoption of fresh-start
accounting, the Company’s customer relationships and trademark were determined
to have a value of $20.8 million and $1.7 million, respectively. The customer
relationships are amortized using the straight-line method over 3 years. The
trademark was determined to have an indefinite life and is not being
amortized.

In 2002,
as a result of the Asset Sales discussed in Note 13, the Company charged $6.1
million of carrying value of customer relationships to the loss on disposal from
discontinued operations.

Intangible
assets consist of the following (in thousands):

****
    
    
    **December**
      **31**,
    
    
    **December
      31,****2004**
    
    
    **2003**Customer
      relationships
    
    $
    13,745
    
    $
    13,745Less:
      accumulated amortization
    
    
    (11,072
    )
    
    (6,491
    )2,673
    
    
    7,254Trademark
    
    
    1,694
    
    
    1,694Intangibles,
      net
    
    $
    4,367
    
    $
    8,948

**100**
Amortization
expense related to customer relationships for the periods ended in 2004, 2003
and 2002 is as follows (in thousands):

****
    
    
    
    **Predecessor******
    
    **Reorganized**
      **Mpower** **Holding**
    
    **Mpower
      Holding****2004**
    
    
    **2003**
    
    
    **2002**
    
    
    **2002**Amortization
      expense
    
    $
    4,581
    
    $
    4,582
    
    $
    1,909
    
    $
    —

Estimated
amortization expense for the year ending December 31, 2005 is $2,673. The
customer relationships intangible asset will be fully amortized during
2005.

**(4)
Other Long-term Assets**

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

****
    
    
    **December**
      **31**,
    
    
    **December
      31,****2004**
    
    
    **2003**Direct
      acquisition costs
    
    $
    1,110
    
    $
    —Deferred
      installation costs
    
    
    1,101
    
    
    1,383Deposits
      on operating leases
    
    
    1,095
    
    
    1,501Prepaid
      insurance
    
    
    572
    
    
    793Other
    
    
    396
    
    
    104Other
      long-term assets
    
    $
    4,274
    
    $
    3,781

**(5)
Line of Credit**

During
January 2003, the Company reached an agreement with a lending institution to
provide the Company with a three-year 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. An annual purchase
commitment fee of $0.1 million was recognized during 2004 and 2003 and was
amortized to interest expense over the commitment period.

There
were no borrowings under the credit facility during the year ended December 31,
2004. The maximum amount borrowed under the credit facility during the year
ended December 31, 2003 was $7.5 million, and the effective average interest
rate, including the commitment fee, during the period was 10.8%. At December 31,
2004 and 2003, the Company had $7.5 million in availability under this
agreement. Interest expense relating to the borrowings was $0.2 million and $0.5
million for the years ended December 31, 2004 and 2003,
respectively.

**101**
**(6)
Network Optimization Cost**

The
Company has recognized several charges related to the cancellation of certain
markets.

In
February 2002, the Company closed its operations in Charlotte, North Carolina
and eliminated certain other non-performing sales offices. The Company also
cancelled the implementation of a new billing system in February 2002. The
Company recognized a network optimization charge of $19.0 million in the first
quarter of 2002. Included in the charge was $12.5 million for the write down of
its investment in software and assets for a new billing system, $3.7 million for
property and equipment including collocations and switch sites, $0.2 million for
the termination of employment of sales and information technology personnel and
$2.6 million for other costs associated with exiting these markets.

Accrued
network optimization cost details for 2002 activity were as follows (in
thousands):

****
    
    
    **Liability
      at January 1,****2002**
    
    
    **Network
      Optimization****Cost**
    
    
    **Cash
      Paid/Asset****Disposals**
    
    
    **Liability
      at December 31,****2002**Disposal
      of assets
    
    $
    3,613
    
    $
    11,801
    
    $
    15,414
    
    $
    —Employee
      termination costs
    
    
    187
    
    
    109
    
    
    296
    
    
    —Other
      exit costs
    
    
    9,793
    
    
    700
    
    
    9,013
    
    
    1,480$
    13,593
    
    $
    12,610
    
    $
    24,723
    
    $
    1,480

Accrued
network optimization cost details for 2003 activity were as follows (in
thousands):

****
      ****
    
    
    **Liability
      at January 1,****2003**
    
    
    **Network
      Optimization****Cost**
    
    
    **Cash
      Paid/Asset****Disposals**
    
    
    **Liability
      at December 31,****2003**Other
      exit costs
    
    $
    1,480
    
    $
    (591
    )
    $
    646
    
    $
    243$
    1,480
    
    $
    (591
    )
    $
    646
    
    $
    243

Accrued
network optimization cost details for 2004 activity were as follows (in
thousands):

**Liability
      at January 1,****2004**
    
    **Network
      Optimization****Cost**
    
    **Cash
      Paid/Asset****Disposals**
    
    **Liability
      at December 31,****2004**Other
      exit costs
    
    $
    243
    
    $
    —
    
    $
    10
    
    $
    233$
    243
    
    $
    —
    
    $
    10
    
    $
    233

With
respect to the network optimization charges, the total actual charges have been
based on ultimate settlements with the incumbent local exchange carriers,
recovery of costs from subleases, the Company’s ability to sell or re-deploy
network equipment for growth in its existing network and other factors. With the
emergence from the Chapter 11 proceedings in 2002, the Company was able to
conclude settlements with several network carriers and numerous office
landlords. As a result of these settlements, the Company’s future liabilities
were reduced and it was subsequently able to reduce its network optimization
accrual in 2002 by $6.4 million. In addition, during 2003, the Company
recognized a $1.0 million reduction to its network optimization costs primarily
resulting from a final settlement with one of its network carriers, $0.6 million
of which had been included as a component of accrued network optimization
cost.

**102**
At
December 31, 2004, the remaining balance of accrued network optimization cost
primarily represents remaining lease commitments and has been included as a
component of accrued other expenses in the consolidated balance
sheet.

**(7)
Debt**

The
Company had no long-term borrowings at December 31, 2004. Long-term borrowings
at December 31, 2003 consisted of the following (in thousands):

****
    
    
    **December**
      **31**,**2003**Capital
      lease obligations
    
    $
    256Less
      current portion
    
    
    (256
    )$
    —

In
January 2003, the Company repurchased the remaining $2.1 million in carrying
value of its 2004 Notes for $2.2 million in cash, and recognized a loss of $0.1
million on this transaction.

In
November 2002, the Company repurchased $49.2 million in carrying value of its
2004 Notes for $14.2 million in cash. The Company recognized a gain of $35.0
million on this transaction.

Pursuant
to the Company’s Plan of Reorganization, as discussed in Note 12, on July 30,
2002, the Company’s 2010 Notes were cancelled and the indenture governing the
2010 Notes was terminated resulting in a gain of $315.3 million on this
transaction. Pursuant to the Final Plan, holders of the 2010 Notes prior to the
emergence received 55,250,000 shares of the Reorganized Company’s common
stock.

**(8)
Commitments and Contingent Liabilities**

***Lease
Obligations and Purchase Commitments***

The
Company has entered into various operating lease agreements with expirations
through 2011, for its switching facilities and offices (the “Operating Lease
Obligations”). Rent expense from continuing operations for the periods ended in
2004, 2003 and 2002 was as follows (in thousands):

**Predecessor****Reorganized
      Mpower Holding**
    
    **Mpower
      Holding****2004**
    
    **2003**
    
    **2002**
    
    **2002**Rent
      expense
    
    $
    4,977
    
    $
    6,446
    
    $
    2,488
    
    $
    4,281

As
provided in the asset sale agreements for discontinued markets, 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 as described in Note 13. 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 leases. The maximum potential amount of future payments the
Company could be required to make under the guarantee is $9.6
million.

**103**
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 of Others,” the fair value of these obligations is
immaterial and accordingly no liability was recorded on the Company’s
consolidated balance sheets at December 31, 2004 and 2003 related to these
obligations.

The
Company also has various agreements with certain carriers for transport, long
distance and other network services (the “Circuit Lease Obligations”). At
December 31, 2004, the Company's minimum commitment under these agreements is
$16.1 million, which expires through March 2008. Circuit lease expenses for the
periods ended in 2004, 2003 and 2002 are included in cost of operating revenues
in the consolidated statements of operations.

In the
ordinary course of business, the Company enters into purchase agreements with
its vendors. As of December 31, 2004, the Company had total unfulfilled
commitments with vendors of approximately $2.6 million.

As of
December 31, 2004, the Company is obligated to make cash payments in connection
with lease obligations and purchase commitments. All of these obligations
require cash payments to be made by the Company over varying periods of time.
Certain of these arrangements are cancelable on short notice and others require
termination payments as part of any early termination. Included in the table
below are future commitments in effect as of December 31, 2004 (in
thousands):

**2005**
    
    **2006**
    
    **2007**
    
    **2008**
    
    **2009**
    
    **Thereafter**Operating
      Lease Obligations
    
    $
    3,880
    
    $
    3,637
    
    $
    3,522
    
    $
    2,784
    
    $
    2,183
    
    $
    1,384Circuit
      Lease Obligations
    
    
    6,369
    
    
    4,746
    
    
    3,000
    
    
    2,018
    
    
    —
    
    
    —Purchase
      Commitments
    
    
    2,646
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —Total
    
    $
    12,895
    
    $
    8,383
    
    $
    6,522
    
    $
    4,802
    
    $
    2,183
    
    $
    1,384

The lease
obligations and purchase commitments described above do not include any amounts
related to the January 2005 ICG transaction disclosed in Note 18.

***Litigation***

From time
to time, the Company is involved in legal proceedings arising in the ordinary
course of business, including some claims that it has asserted against others,
in which monetary damages are sought. The result of any current or future
litigation is inherently unpredictable; however, the Company believes there is
no litigation asserted or pending against it 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 is party to an equipment lease dispute that has 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 has also filed actions in
the U.S. Bankruptcy Court for the District of Delaware for recovery of claimed
damages. At December 31, 2004 and 2003, the Company has recorded a contingent
liability reserve for this matter in “Accrued Other Expenses” on the
consolidated balance sheets based on the amount of lease payments that were
unpaid when the legal actions commenced. 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.

**104**
***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
which expired in 2004. While the parties negotiate new agreements, these
agreements continue in full force and effect under the existing terms and
conditions. 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 cost 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.

***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 December 31, 2004 and 2003.

**(9)
Risks and Uncertainties**

The
Company’s services are subject to varying degrees of federal, state and local
regulation. These regulations are 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.

**(10)
Stockholders' Equity (Deficit)**

***Common
Stock***

During
May 2004, the Securities and Exchange Commission declared the Company’s shelf
registration statement on Form S-3 effective, registering $250 million of new
securities, which could include shares of the Company’s common stock, preferred
stock, warrants to purchase common stock, or debt securities. The filing of this
shelf registration statement could facilitate the Company’s ability to raise
capital, should the Company decide to do so, in the future. The amounts, prices
and other terms of any new securities will be determined at the time of any
particular transaction.

**105**
During
January 2004, the Company adopted a warrant program under which up to 1,000,000
shares of the Company’s common stock are authorized for issuance. The shares
issuable under the warrant program are covered by the Company’s shelf
registration statement on Form S-3 filed in 2004. The intent of the warrant
program is to make available to independent sales agents hired 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 year ended December 31,
2004, the Company issued warrants to purchase 260,430 shares of common stock
through this program with a weighted average exercise price of $1.38 per common
share. These warrants are exercisable at any time and expire three years from
the issuance date. For the year ended December 31, 2004, $0.1 million of agent
selling expense was recognized as a result of the issuance of these warrants.
Agent selling expense is included as a component of selling, general and
administrative expense 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 2.83% to
3.26% and an expected volatility ranging from 56% to 63%.

During
September 2003, the Company raised approximately $16.0 million, net of selling
costs, through the private placement of 12,940,741 shares of common stock at
$1.35 per common share. The Company also issued warrants to the investors who
participated in the private placement to purchase 2,588,148 shares of common
stock at a price of $1.62 per common share in connection with the transaction.
In addition, pursuant to an exclusive finders agreement between the Company and
the Shemano Group, Inc. (“Shemano”), the Company issued warrants to Shemano and
its affiliates to purchase 349,400 shares of common stock at a price of $1.62
per common share as partial consideration for services rendered in connection
with the private placement. These warrants are exercisable at any time and
expire five years from the issuance date. Additional warrants to purchase up to
83,856 shares of common stock will be issued to Shemano and its affiliates in
the event the warrants held by the investors are exercised. The warrants were
recorded in stockholders’ equity at fair market value using the Black-Scholes
method to calculate the fair market value, with the following assumptions:
divided yield of 0%; expected warrant life of 5 years; risk free interest rate
of 3.18% and an expected volatility of 175%.

Pursuant
to the Company’s Plan of Reorganization, as discussed in Note 12, on July 30,
2002, the authorized, issued and outstanding common stock, par value of $0.001
per common share (the “Old Common Stock”), was cancelled. As of the Effective
Date, the Reorganized Company's certificate of incorporation, as amended and
restated pursuant to the Final Plan, authorized 1,000,000,000 shares of common
stock, $0.001 par value. Pursuant to the Final Plan, holders of the Old Common
Stock prior to the emergence (the “Old Common Stockholders”) received 974,025
shares of the Reorganized Company’s common stock.

During
2002, a principal stockholder purchased and sold shares of the Company’s common
stock, resulting in a short-swing profit under Section 16(b) of the Securities
Exchange Act of 1934. The settlement agreement between the Company and the
principal stockholder required that the Company be reimbursed for the
short-swing profit in the amount of $0.6 million. In March 2002, the Company
received $0.1 million of the settlement, and received the remaining $0.5 million
in April 2002.

***Preferred
Stock***

On July
10, 2003, the Company adopted a Stockholder Rights Plan (the “Rights Plan”). The
Rights Plan is designed to guard against partial tender offers and other abusive
tactics that might be used in an attempt to gain control of the Company without
paying all stockholders a fair price for their shares.

**106**
Pursuant
to the Rights Plan, preferred stock purchase rights were distributed as a
dividend at the rate of one Right for each share of common stock held at the
close of business on July 11, 2003. Each right entitles stockholders to buy one
one-thousandth of a share of Series A Preferred Stock of the Company at an
exercise price of $6.00. The Rights will be exercisable only if a person or
group acquires beneficial ownership of 15% or more of the Company's outstanding
common stock or commences a tender or exchange offer which, upon consummation,
would result in such person or group being the beneficial owner of 15% or more
of the Company's outstanding common stock. A description of the terms of the
Rights are set forth in a Rights Agreement between the Company and Continental
Stock Transfer & Trust Company as Rights Agent (the “Rights
Agreement”).

If any
person becomes the beneficial owner of 15% or more of the Company’s common
stock, or if a holder of 15% or more of the Company’s common stock engages in
certain self-dealing transactions or a merger transaction in which the Company
is the surviving corporation and its common stock remains outstanding, then each
Right not owned by such person (or certain related parties) will entitle its
holder to purchase, at the Right’s then current exercise price, units of the
Company’s Series A Preferred Stock (or in certain circumstances, Company common
stock, cash, property or other securities of the Company) having a market value
equal to twice the then current exercise price of the Right. In addition, if the
Company is involved in a merger or other business combination transactions with
another person after which its common stock does not remain outstanding, or
sells 50% or more of its assets or earning power to another person, each Right
will entitle its holder to purchase, at the Right’s then current exercise price,
shares of common stock of the ultimate parent of such other person having a
market value equal to twice the then current exercise price of the
Right.

The
Company will generally be entitled to redeem the Rights at $0.0001 per Right at
any time until the 10th business day following public announcement that a person
or group has acquired 15% or more of the Company's common
stock.On March
14, 2005, the Company and Continental Stock Transfer & Trust Company
(the “Rights Agent”), the rights agent under the Company’s Rights Agreement
dated July 10, 2003 between the Company and the Rights Agent, agreed and
acknowledged an amendment to the Rights Agreement dated as of December 31, 2004,
to provide that MCCC ICG Holdings, LLC (“MCCC”) would not be deemed an
“Acquiring Person” under the Rights Agreement until such time as MCCC became the
beneficial owner of 17% or more of the Company’s common stock.


Pursuant to the Company's Plan of Reorganization, on July 30, 2002,
the authorized Series E Preferred Stock was cancelled. As of the Effective Date,
the Reorganized Company's certificate of incorporation, as amended and restated
pursuant to the Final Plan, authorized 50,000,000 shares of preferred stock,
$0.001 par value.

***Redeemable
Preferred Stock***

Pursuant
to the Company’s Plan of Reorganization, as discussed in Note 12, on July 30,
2002, the authorized, issued and outstanding Series C Preferred Stock and Series
D Preferred Stock were cancelled. Pursuant to the Final Plan, holders of the
Series C Preferred Stock and Series D Preferred Stock prior to the emergence
(collectively, the "Preferred Stockholders") received 1,862,214 and 6,912,786
shares of the Reorganized Company’s common stock, respectively.

**(11)
Stock Option Plans**

Pursuant
to the Company’s Plan of Reorganization, as discussed in Note 12, the Company
adopted the Mpower Holding Corporation Stock Option Plan I (the “Stock Option
Plan I”) to provide for grants of options to purchase shares of common stock to
employees and non-employee directors of the Company who are eligible to
participate in the Stock Option Plan I. The Amended and Restated Mpower Holding
Corporation Stock Option Plan (the “Old Option Plan”) was cancelled as of the
effective date of the Company’s reorganization. Options granted under the Stock
Option Plan I are non-qualified, have a term of ten years from the date of grant
and are generally granted at a price equal to the fair market value of the
Company’s common stock at the date of the grant. Employees of Reorganized Mpower
received an initial grant of options under the Stock Option Plan I (the “New
Options”) to replace their cancelled options, on a one-for-one basis. The New
Options were subject to the same terms and conditions as the corresponding
cancelled outstanding Employee Options, including such provisions as exercise
price, termination of employment and vesting. The outstanding New Options vested
over a three year period, with one third of the options vested September 29,
2002, 2003 and 2004. All of the New Options were considered to be a new grant of
options from a new reporting entity, and have been accounted for as fixed
awards. Options under Stock Option Plan I are also available for the Company’s
incentive bonus plan and retention purposes. Options granted for incentive
bonuses vest immediately upon grant, whereas options granted for retention
purposes vest evenly over three years. As of December 31, 2004, the Company has
reserved 7,222,222 shares of common stock for issuance pursuant to options
granted or to be granted under the Stock Option Plan I.

**107**
In
December 2002, the Company adopted the Mpower Holding Corporation Stock Option
Plan II (“Stock Option Plan II”) to provide for grants to employees of options
to purchase shares of common stock. Options granted under the Stock Option Plan
II are non-qualified, have a term of ten years and are granted at a price equal
to the fair market value of the Company’s common stock at the date of grant.
Options were granted for special retention arrangements under Stock Option Plan
II and vest one-third immediately upon grant, one-third after one year and the
remaining one-third vesting after two years. Options were also granted under
Stock Option Plan II during 2003 for a salary reduction program in which options
were granted in exchange for a reduction in salary. These options vested over a
six-month period. Generally, all other options were granted for general
retention purposes and vest evenly over three years. Options under Stock Option
Plan II are also available for the Company’s incentive bonus plan and retention
purposes. Options granted for incentive bonuses vest immediately upon grant,
whereas options granted for retention purposes generally vest evenly over three
years. All of the options granted under the Stock Option Plan II would fully
vest upon the employee’s termination without cause or a resignation with good
cause and upon a change of control unrelated to any equity investment in the
Company. All of the options issued under this plan have been accounted for as
fixed awards. As of December 31, 2004, the Company has reserved 16,442,000
shares of common stock for issuance pursuant to options granted or to be granted
under the Stock Option Plan II.

Stock
option transactions during the periods ended in 2004, 2003 and 2002 are as
follows:

**Number
      of****Shares**
    
    **Weighted
      Average Exercise****Price**Outstanding
      at January 1, 2002
    
    
    6,235,651
    
    $
    1.84Granted
    
    
    257,696
    
    $
    0.45Exercised
    
    
    —
    
    $
    —Cancelled
    
    
    (6,493,347
    )
    $
    1.78Outstanding
      at July 30, 2002
    
    
    —
    
    $
    —Granted
    
    
    11,509,644
    
    $
    0.52Exercised
    
    
    —
    
    $
    —Cancelled
    
    
    (405,812
    )
    $
    1.42Outstanding
      at December 31, 2002
    
    
    11,103,832
    
    $
    0.49Granted
    
    
    4,608,981
    
    $
    1.05Exercised
    
    
    (292,976
    )
    $
    0.22Cancelled
    
    
    (815,921
    )
    $
    1.03Outstanding
      at December 31, 2003
    
    
    14,603,916
    
    $
    0.64Granted
    
    
    4,529,939
    
    $
    1.43Exercised
    
    
    (338,030
    )
    $
    0.24Cancelled
    
    
    (199,235
    )
    $
    1.40Outstanding
      at December 31, 2004
    
    
    18,596,590
    
    $
    0.83Exercisable
      at December 31, 2002
    
    
    3,997,935
    
    $
    0.71Exercisable
      at December 31, 2003
    
    
    10,324,577
    
    $
    0.71Exercisable
      at December 31, 2004
    
    
    14,505,115
    
    $
    0.71

**108**
The
following table summarizes information about stock options outstanding and
exercisable at December 31, 2004:

**Range
      of****Exercise Price**
    
    **Shares
      Outstanding at December 31,****2004**
    
    **Weighted
      Average Remaining Contractual****Life**
    
    **Weighted
      Average Exercise****Price**
    
    **Number
      Exercisable at December 31,****2004**
    
    **Weighted
      Average****Exercise****Price**$0.03
      to $6.90
    
    
    18,437,981
    
    
    8.2
      years
    
    $
    0.75
    
    
    14,347,944
    
    $
    0.61$6.91
      to $13.80
    
    
    141,599
    
    
    5.4
      years
    
    $
    8.74
    
    
    140,161
    
    $
    8.74$13.81
      to $20.70
    
    
    13,560
    
    
    4.9
      years
    
    $
    16.47
    
    
    13,560
    
    $
    16.47$20.71
      to $27.60
    
    
    1,200
    
    
    5.9
      years
    
    $
    22.67
    
    
    1,200
    
    $
    22.67$27.61
      to $41.40
    
    
    1,500
    
    
    5.2
      years
    
    $
    38.04
    
    
    1,500
    
    $
    38.04$41.41
      to $47.67
    
    
    750
    
    
    3.0
      years
    
    $
    46.83
    
    
    750
    
    $
    46.83$0.03
      to $47.67
    
    
    18,596,590
    
    
    8.2
      years
    
    $
    0.83
    
    
    14,505,115
    
    $
    0.71

The
Company applies APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
in accounting for its option plans and has elected to adopt the
“disclosure-only” provision of SFAS No. 123, “Accounting for Stock Based
Compensation,” as amended by SFAS No. 148 “Accounting for Stock Based
Compensation - Transition and Disclosure.” Accordingly, no compensation expense
has been recognized for its stock-based compensation plans other than for stock
options issued with an exercise price below fair market value. For the years
ended December 31, 2004 and 2003, the Company recognized stock-based
compensation expense of $0.1 million and $0.2 million, respectively, related to
in-the-money options granted in 2002 under the Stock Option Plan I. During the
period from July 31, 2002 to December 31, 2002, the Company recognized
stock-based compensation expense of $0.2 million related to in-the-money options
granted under the Stock Option Plan I and $0.1 million related to the
establishment of a reserve against an employee note receivable from a
stockholder. During the period from January 1, 2002 through July 30, 2002 the
Company recognized stock-based compensation expense of $0.4 million related to
in-the-money options granted in 1999, 2000 and 2001. Stock-based compensation
expense is included as a component of selling, general and administrative
expense in the consolidated statements of operations.

**(12)
Emergence from Chapter 11 Proceedings**

On April
8, 2002, the Company, Communications and Mpower Lease Corporation (“Mpower
LeaseCorp”), a wholly-owned subsidiary of Communications (collectively, the
“Debtors”), each filed a voluntary petition for relief under Chapter 11 of the
United States Bankruptcy Code in the United States Bankruptcy Court for the
District of Delaware.**On July
17, 2002, the Bankruptcy Court confirmed the Final Plan. Also, on July 17, 2002,
the Bankruptcy Court dismissed the Chapter 11 case of Mpower LeaseCorp,
effective as of July 30, 2002.**The
general unsecured creditors of the Company, except for the holders of the
Company’s 13% Senior Notes due 2010 (the “2010 Notes”) and lessors of certain
Company real estate leases, were unaffected by the Chapter 11 proceedings and
the Plan.

During
the period from April 8, 2002 to July 30, 2002, the Debtors operated as
“debtors-in-possession.” The consolidated financial statements during the period
from April 8, 2002 to July 30, 2002, the effective date of the Plan, were
prepared in accordance with the provisions of Statement of Position (“SOP”)
90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code.” The Debtors adopted the provisions of SOP 90-7 upon commencement of the
Bankruptcy Court proceedings. The consolidated statement of operations for the
period January 1, 2002 to July 30, 2002 discloses expenses related to the
Chapter 11 proceedings as reorganization expenses. Interest expense on the 2010
Notes and the preferred stock dividends on the Series C Preferred Stock and
Series D Preferred Stock ceased to accrue after filing by the Debtors on April
8, 2002. Interest and dividends ceased by operation of law.

**109**
Upon
emergence from bankruptcy, on July 30, 2002, the Company implemented fresh-start
accounting under the provisions of SOP 90-7. The Company determined the
estimated reorganization equity value or fair value of the Reorganized Company
to be $87.3 million. The Company’s reorganization equity value was determined
utilizing several valuation methods including revenue multiples, net property,
plant and equipment multiples of comparable companies, and a discounted cash
flow analysis based on the Company’s business plan. Reorganization equity value
was calculated as the total enterprise value less the Company’s remaining debt
and capital lease obligations. The specifics of these total enterprise value
factors are as follows:

*Relevant
industry information*

•
    Comparable
      data for other companies in the Company’s operating sector was used for
      valuation purposes. The enterprise value of these entities (using stock
      prices at May 15, 2002) was viewed as a multiple of 2001 revenue, 2002
      revenue and net property and equipment at March 31,
  2002.•
    Selected
      precedent transaction analysis for other companies in the Company’s
      operating sector were analyzed and also used in the valuation. Revenue
      streams, existing enterprise values and the impact of new capital raised
      in each of these transactions was
considered.

*Discounted
cash flow of projected operations*

For this
factor, the Company’s projected operating results for the period of 2002 through
2006 were used as well as extrapolating through 2008. Discount rates ranging
from 40% to 44% were then applied. Projected results for 2002 through 2006
(discounted using the above rates) were extrapolated using multiples ranging
from 5 to 7 times. A tax rate of 38% was assumed.

The
Company believes that there have not been any material differences in current
conditions (as compared to anticipated conditions used in the valuation
assumptions) that would materially impact the determined equity value and would
subsequently require disclosure.

*Reorganization
expense:*Reorganization
expense is comprised of charges that were realized or incurred by the Company as
a result of reorganization under Chapter 11 of the Bankruptcy Code.
Reorganization expense for the period January 1, 2002 to July 30, 2002 consisted
of the following (in thousands):

Consent
      fee
    
    $
    19,025Fresh-start
      fair market value adjustments
    
    
    244,669Professional
      fees
    
    
    2,689$
    266,383

During
the periods July 31, 2002 to December 31, 2002 and January 1, 2002 to July 30,
2002, selling, general and administrative expenses included $3.7 million and
$2.5 million, respectively, of professional fees associated with our
recapitalization plan which have been excluded from reorganization expense in
accordance with SOP 90-7.

**(13)
Discontinued Operations**

In
January 2003, the Company announced a series of strategic transactions to
further strengthen the Company financially and focus its operations on its
California, Nevada and Illinois markets. The Company has brought geographic
concentration to its business by selling its customers and assets in Florida,
Georgia, Ohio, Michigan and Texas to other service providers.

**110**
In March
2003, the Company completed the sale of the assets in its Ohio and Michigan
markets to LDMI Telecommunications, Inc. ("LDMI"), pursuant to Asset Purchase
Agreements dated as of February 6, 2003 and January 8, 2003. The purchase price
for the assets in Ohio and Michigan was $3.3 million and $3.8 million,
respectively. As of December 31, 2003, the total purchase price had been
received. In addition, LDMI agreed to assume certain liabilities of the Company
with respect to the Ohio and Michigan assets.

In March
2003, the Company completed a transaction with Xspedius Equipment Leasing, LLC
("XE"), a subsidiary of Xspedius Communications, LLC ("Xspedius"), pursuant to
an Asset Contribution Agreement effective as of December 31, 2002. Under the
terms of the Asset Contribution Agreement, the Company contributed the assets in
its Texas market to XE in exchange for a 14% interest in XE. In April 2003, the
Company sold 92.85% of its interest in XE (13% of XE) to a current member of XE
for $0.5 million. In addition, XE agreed to assume certain liabilities of the
Company with respect to the Texas assets.

In April
2003, the Company completed the sale of the assets in its Florida and Georgia
markets to Florida Digital Networks, Inc. (“FDN”), pursuant to an Asset Purchase
Agreement dated as of January 8, 2003. The purchase price for the assets in
Florida and Georgia was $12.4 million. In addition, FDN agreed to assume certain
liabilities of the Company with respect to the Florida and Georgia assets. As of
December 31, 2004, $10.9 million of the purchase price has been received and the
remaining $1.5 million was being held in escrow. The Company received a
disbursement of $1.0 million from escrow in March 2005 and the Company expects
to receive the remaining $0.5 million, net of expenses chargeable to the
Company, in the first or second quarter of 2005.

Each of
the transactions described above involved transition services and/or management
agreements that were sufficient to transfer the operations of these businesses.
The Company was reimbursed for the cost of specific services provided on behalf
of the buyer. For the year ended December 31, 2003, the Company recognized $3.7
million of reimbursements for transition services and management agreement fees.
The amounts recognized from the transition services and management agreements
have been included as an offset to the operating expenses component of income
(loss) from discontinued operations in the consolidated statements of
operations. The Company ceased providing transition services as of December 31,
2003.

As of
December 31, 2004, the Company has recorded $1.5 million of receivables from the
Asset Sales, transition services and management agreements and pending
reimbursements for expenses paid on behalf of the buyers. These receivables have
been included in other receivables in the consolidated balance sheets. No
allowance for doubtful accounts for these receivables has been established as
the Company expects to collect all Asset Sales receivables.

During
the fourth quarter of 2002, the Company’s board of directors approved the
Company’s commitment to divest these markets and engage in transactions to sell
these markets to other providers. As a result of this decision, the operating
revenue and expense of these markets were classified as discontinued operations
under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets,” for all periods presented. The assets being disposed of were written
down in 2002 to their fair value, net of expected selling expenses. The write
down and results of operations of the discontinuedFlorida,
Georgia, Ohio, Michigan and Texas marketsresulted
in a charge to discontinued operationsfor all
periods presented.Net sales
and operating losses relating to these discontinued markets are as follows for
the periods ended in 2004, 2003 and 2002 (in thousands):

**111**
**Predecessor****Reorganized
      Mpower Holding**
    
    **Mpower
      Holding****2004**
    
    **2003**
    
    **2002**
    
    **2002**Operating
      revenues
    
    $
    4
    
    $
    6,150
    
    $
    36,284
    
    $
    45,282Operating
      (income) expenses (excluding depreciation and amortization shown
      separately below)
    
    
    (584
    )
    
    7,995
    
    
    45,723
    
    
    67,323Depreciation
      and amortization
    
    
    —
    
    
    —
    
    
    3,236
    
    
    12,724(Gain)
      loss on disposal
    
    
    (320
    )
    
    523
    
    
    21,518
    
    
    —Income
      (loss) from discontinued operations
    
    $
    908
    
    $
    (2,368
    )
    $
    (34,193
    )
    $
    (34,765
    )

During
2004, the Company recorded $0.6 million of operating income from discontinued
operations, primarily related to the reversal of sales and property tax
liabilities resulting from the resolution of tax audits and ongoing estimates of
audit exposure in other states, as well as the resolution of certain disputes
with several carriers. During 2003, the Company recorded $8.0 million in
operating expenses from discontinued operations, primarily related to the
ongoing operation of the discontinued markets through the date of sale.
Operating expenses for the year ended December 31, 2003, included exit costs of
$2.4 million, primarily comprised of facility and lease contract termination
costs of $1.8 million and one-time severance termination benefits of $0.6
million.

For the
year ended December 31, 2004, the Company recorded a gain on disposal of $0.3
million to account for an adjustment in the costs to sell the assets. For the
year ended December 31, 2003, the Company recorded a loss on disposal of $0.5
million, which was comprised of a $1.2 million loss on disposal to account for
the resolution of purchase price adjustments and additional costs to sell the
assets, partially offset by a $0.7 million gain resulting from the reversal of
pre-bankruptcy sales tax contingency due to a favorable resolution regarding
this matter.

These
amounts are reflected in income (loss) from discontinued operations in the
Company’s consolidated statements of operations.

**(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 years ended December
31, 2004 and 2003, basic income (loss) per common share for the period from July
31, 2002 to December 31, 2002 and basic and diluted loss per common share for
the period from January 1, 2002 to July 30, 2002 were computed by dividing the
income (loss) applicable to common stockholders by the weighted average number
of shares of common stock outstanding during the period. Diluted income (loss)
per common share for the period from July 31, 2002 to December 31, 2002 was
computed by dividing the income (loss) applicable to common stockholders by the
weighted average number of shares of common stock and potential common stock
outstanding during the period. The inclusion of potential common stock in this
calculation did not result in a change to the basic income (loss) per common
share amounts.

The
Company had options and warrants to purchase common shares, and redeemable
preferred stock which was convertible into common shares, outstanding for the
periods ended during 2004, 2003 and 2002, that were not included in the
calculation of diluted loss per common share because the effect would be
antidilutive, as follows:

**Reorganized
      Mpower Holding**
    
    **Predecessor**
      **Mpower
      Holding****2004**
    
    **2003**
    
    **2002**
    
    **2002**Options
      and warrants
    
    
    21,794,568
    
    
    17,541,464
    
    
    10,855,149
    
    
    6,750,789Redeemable
      preferred stock
    
    
    —
    
    
    —
    
    
    —
    
    
    5,275,931

**112**
**(15)
Income Taxes**

The
Company has had no current federal or state income tax expense in any period
presented in the accompanying consolidated statements of operations. Any state
taxes paid have been properly recorded as part of selling, general, and
administrative expenses. Any deferred income tax expense has been offset by a
valuation allowance.

A
reconciliation of income taxes computed at the federal statutory rate to income
tax expense recorded in the Company’s consolidated statements of operations is
as follows (in thousands):

**Year
      Ended December 31,****2004**
    
    **2003**
    
    **2002**Federal
      benefit at statutory rate
    
    $
    (1,892
    )
    $
    (7,397
    )
    $
    (33,043
    )Change
      in valuation allowance, net of state tax and rate changes
    
    
    435
    
    
    5,759
    
    
    31,952Amortization
      expense for customer relationships
    
    
    1,604
    
    
    1,604
    
    
    1,012Other
    
    
    (147
    )
    
    34
    
    
    79Income
      tax expense
    
    $
    —
    
    $
    —
    
    $
    —

Deferred
income taxes reflect the net tax effect of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
amounts used for income tax purposes. Significant components of the Company’s
deferred income tax assets and liabilities for federal and state income taxes
are as follows (in thousands):

**December
      31,**
    
    **December
      31,****2004**
    
    **2003**Deferred
      income tax asset:Net
      operating loss carryforward
    
    $
    42,186
    
    $
    40,212Other
    
    
    5,293
    
    
    9,03647,479
    
    
    49,248Less:
      valuation allowance
    
    
    (45,075
    )
    
    (44,640
    )Net
      deferred income tax asset
    
    
    2,404
    
    
    4,608Deferred
      income tax liability:Depreciation
      and amortization
    
    
    (1,092
    )
    
    (3,482
    )Other
    
    
    (1,312
    )
    
    (1,126
    )Net
      deferred income tax liability
    
    
    (2,404
    )
    
    (4,608
    )Net
      deferred income taxes
    
    $
    —
    
    $
    —

**113**
Realization
of the Company’s deferred income tax assets is dependent upon the future
earnings of the Company, the timing and amount of which are uncertain.
Accordingly, the Company’s net deferred income tax assets have been fully offset
by a valuation allowance.

As of
December 31, 2004, the Company had net operating loss (“NOL”) carryforwards for
federal income tax purposes of approximately $112.0 million, which will expire
at various times through 2024, if not utilized. Because the Company was a debtor
in bankruptcy at the time that it realized cancellation of indebtedness (“COD”)
income, it was not required to include $315.3 million of COD income in its 2002
federal taxable income. Instead, the Company was required to reduce its federal
NOL carryforwards by the amount of the excluded COD income.

As a
result of the implementation of the Plan in 2002, the Company has determined
that it experienced an ownership change under Section 382 of the Internal
Revenue Code. An ownership change generally occurs when certain persons or
groups increase their aggregate ownership percentage in a corporation’s stock by
more than 50 percentage points during a measurement period. As a result of this
ownership change, Section 382 will apply to limit the Company’s ability to
utilize any remaining NOLs generated before the ownership change as well as
certain subsequently recognized “built-in losses” and deductions existing as of
the date of the ownership change to $4.4 million per year. The Company’s ability
to utilize new NOLs arising after the ownership change will not be affected by
the Section 382 ownership change that resulted from implementation of the Plan.
Of the $112.0 million NOLs existing at December 31, 2004, $78.7 million are
subject to the Section 382 limit and $33.3 million are not.

**(16)
401(k) Plan**

The
Company maintains a defined contribution 401(k) plan (the “401(k) Plan”)
pursuant to Section 401(k) of the Internal Revenue Code (“IRC”). The 401(k) Plan
covers substantially all employees that meet certain service requirements. Under
the 401(k) Plan, eligible employees may voluntarily contribute a percentage of
their compensation, subject to limits under the IRC. The 401(k) Plan provides
for discretionary matching contributions by the Company which were as follows
for the periods ended in 2004, 2003 and 2002 (in thousands):

**Predecessor****Reorganized
      Mpower Holding**
    
    **Mpower
      Holding****2004**
    
    **2003**
    
    **2002**
    
    **2002**401(k)
      contributions
    
    $
    59
    
    $
    184
    
    $
    209
    
    $
    169

**(17)
Related Party Transactions**

On April
22, 2004, Andrew D. Lipman was appointed to serve on the Company’s board of
directors. Mr. Lipman has been designated as a Class III director who will serve
until the third annual meeting after November 12, 2003. Mr. Lipman is a partner
and vice chairman of the Swidler Berlin Shereff Friedman law firm in Washington,
D.C. The Company retained that law firm for legal regulatory counsel in 2004 and
intends to do so in the future.

On
January 1, 2005, the Company acquired ICG Communications, Inc.’s customer base
and certain network assets in California pursuant to an Asset Purchase
Agreement, dated October 22, 2004 (the “Agreement”). Under the terms of the
Agreement, the Company acquired ICG’s California retail and wholesale customer
segments, its statewide self-healing SONET fiber network with fully survivable
metropolitan fiber rings in six major metropolitan markets, and 128 on-net
fiber-lit commercial buildings. The Company purchased these assets for $13.5
million in the form of (i) 10,740,030 shares of its common stock and (ii)
warrants to purchase up to 2,000,000 shares of its common stock. In connection
with the acquisition, MCCC purchased 1,988,894 shares of the Company’s
common stock for an aggregate purchase price of $2.5 million on January 5, 2005.
Mpower Director Peter H.O. Claudy is a director of ICG and a member of the
managing board of MCCC.

**114**
Mr.
Claudy is also a director of an entity that is more than 10% owner of Florida
Digital Networks, Inc. (“FDN”). In April 2003, the Company completed the sale of
its assets in its Florida and Georgia markets to FDN. The purchase price for the
assets in Florida and Georgia was $12.4 million. At December 31, 2004, the
Company has recorded $1.5 million of receivables remaining from the sale of FDN,
with the entire balance owed being held in escrow by a third party escrow agent.
During 2004, the Company received approximately $0.5 million from FDN related to
these receivables. During 2004, the Company received approximately $1.3 million
from BellSouth that was due to FDN. All amounts received were promptly remitted
to FDN in the normal course of business.

Mr.
Claudy did not serve as a director of the Company until after the completion of
the ICG acquisition and the sale of assets to FDN.

**(18)
Subsequent Events**

On
October 22, 2004, the Company entered into a definitive agreement to acquire
certain assets from Denver-based ICG Communications, Inc. ("ICG").

Under the
terms of the agreement, on January 1, 2005, the Company acquired ICG’s retail
and wholesale customers in California; a 1,412 route mile state-wide fiber ring
connecting San Jose, San Francisco, Oakland, Sacramento, Stockton, Fresno,
Bakersfield, San Diego, Anaheim and Los Angeles; and 915 route miles of
metropolitan fiber rings in San Jose, San Francisco, Oakland, Sacramento, San
Diego and Los Angeles which connect 128 commercial buildings (“ICG
California”).

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
is to reimburse ICG for the cost of specific services provided by ICG on the
Company’s behalf. For the year ended December 31, 2004, the Company recognized
direct acquisition costs of $0.7 million for services and fees incurred under
the management service agreement. The ICG definitive agreement also provides
that the operating results of the California operations acquired accrued to the
benefit of the Company between the date the definitive agreement was signed
(October 22, 2004) and final closing (January 1, 2005). The California
operations generated operating income of $0.3 million during the
period which has been recorded as an offset to the gross direct
acquisition costs incurred under the management services agreement. The Company
has recorded additional direct acquisition costs during 2004 of $0.7 million
primarily for legal and consulting fees incurred in connection with the ICG
acquisition. The $1.1 million of net direct acquisition costs described above
have been included in the Company’s accompanying consolidated balance sheets in
other long-term assets at December 31, 2004 and will be considered in the
Company’s purchase accounting calculations in the first quarter of 2005.
Commencing on the transaction closing date, January 1, 2005, certain services
will be provided by ICG to the Company under a transition services agreement.
Such services are expected to be provided through approximately June 30, 2005
and will be included in the Company’s operating results commencing January 1,
2005.

The
Company purchased these assets for (i) $13.5 million in the form of 10,740,030
shares of the Company’s common stock and (ii) warrants to purchase another
2,000,000 shares of the Company’s common stock with a strike price of $1.383 per
share. These shares and warrants were issued to ICG, a privately held company
recently acquired by Columbia Capital and M/C Venture Partners. The Company also
assumed certain of ICG’s capitalized leases in California, including its
long-term leases for its fiber network. These leases have an approximate value
of $24 million. MCCC received one seat on the Company’s board of directors as a
result of this transaction.

**115**
In
connection with the acquisition, in January 2005, Columbia Capital and M/C
Venture Partners, through their ownership of MCCC ICG Holdings, LLC, invested
$2.5 million in cash for an additional 1,988,894 shares of the Company’s common
stock on January 5, 2005.

**(19)
Operating Segments**

*Reportable
Segments*

At
December 31, 2004, the Company operates its business as one segment. The Company
manages its business 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 revenues offered
by Communications into plain old telephone service (“POTS”), T1 based
products and services, long distance and other usage, and switched access
(dollars in thousands):

**Predecessor****Reorganized
      Mpower Holding**
    
    **Mpower
      Holding****2004**
    
    **2003**
    
    **2002**
    
    **2002**Plain
      old telephone service
    
    $
    75,717
    
    $
    82,695
    
    $
    37,124
    
    $
    48,917T1
      based products and services
    
    
    45,005
    
    
    32,119
    
    
    9,015
    
    
    7,992Long
      distance and other usage
    
    
    14,925
    
    
    14,748
    
    
    5,483
    
    
    7,805Switched
      access
    
    
    15,363
    
    
    18,610
    
    
    11,193
    
    
    18,575Total
      operating revenue
    
    $
    151,010
    
    $
    148,172
    
    $
    62,815
    
    $
    83,289


**(20)
Supplemental Quarterly Financial Data (Unaudited)**(in
thousands except per common share amounts):

**First
      Quarter**
    
    **Second
      Quarter**
    
    **Third
      Quarter**
    
    **Fourth****Quarter**Year
      Ended December 31, 2004:Operating
      revenues
    
    $
    37,153
    
    $
    38,496
    
    $
    37,593
    
    $
    37,768Loss
      from continuing operations
    
    
    (504
    )
    
    (1,397
    )
    
    (1,854
    )
    
    (2,558
    )Net
      loss
    
    
    (263
    )
    
    (1,404
    )
    
    (1,346
    )
    
    (2,392
    )Basic
      and diluted loss per common share:Loss
      from continuing operations
    
    
    (0.01
    )
    
    (0.02
    )
    
    (0.02
    )
    
    (0.03
    )Net
      loss
    
    
    (0.00
    )
    
    (0.02
    )
    
    (0.02
    )
    
    (0.03
    )


**116**
**First
      Quarter**
    
    **Second
      Quarter**
    
    **Third
      Quarter**
    
    
    
    **Fourth****Quarter**Year
      Ended December 31, 2003:Operating
      revenues
    
    $
    36,738
    
    $
    37,758
    
    $
    36,797
    
    
    
    
    $
    36,879Loss
      from continuing operations
    
    
    (11,169
    )
    
    (4,756
    )
    
    (2,111
    )
    
    (1
    )
    
    (729
    )
    
    (2
    )Net
      loss
    
    
    (15,150
    )
    
    (4,743
    )
    
    (1,189
    )
    
    
    
    
    (51
    )Basic
      and diluted loss per common share:Loss
      from continuing operations
    
    
    (0.17
    )
    
    (0.07
    )
    
    (0.03
    )
    
    
    
    
    (0.01
    )Net
      loss
    
    
    (0.23
    )
    
    (0.07
    )
    
    (0.02
    )
    
    
    
    
    (0.00
    )

(1)
    Includes
      reversal of a network optimization charge of $1.0 million (See Note
      6)(2)
    Includes
      a $1.4 million gain from the reversal of sales tax (See Note
      1)


**117**