10-K

As filed with the Securities and Exchange Commission on March 17, 2006

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

(MARK ONE)

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005

OR

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

FOR THE TRANSITION PERIOD FROM                      TO                     

Commission File Number: 000-50706

ESCHELON TELECOM, INC.

(Exact name of registrant as specified in its charter)

Delaware	41-1843131
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
730 Second Avenue Minneapolis, MN	55402
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (612) 376-4400

Securities Registered Pursuant to Section 12(b) of the Act:
None

Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o     No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o     No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x     No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will 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 amendments to the Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o     No x

As of February 28, 2006, the number of outstanding shares of the registrant’s Common Stock, par value $0.01 per share, was 14,721,287 shares.

DOCUMENTS INCORPORATED BY REFERENCE

A portion of the information required by Part III of the Form 10-K is incorporated by reference from portions of our definitive proxy statement for our 2006 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission.

TABLE OF CONTENTS

	Part I
Item 1.	Business	4
Item 1A.	Risk Factors	24
Item 1B.	Unresolved Staff Comments	33
Item 2.	Properties	34
Item 3.	Legal Proceedings	34
Item 4.	Submission of Matters to a Vote of Security Holders	35
	Part II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	36
Item 6.	Selected Financial Data	37
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	41
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	54
Item 8.	Financial Statements and Supplementary Data	54
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	54
Item 9A.	Controls and Procedures	54
Item 9B.	Other Information	54
	Part III
Item 10.	Directors and Executive Officers of the Registrant	55
Item 11.	Executive Compensation	55
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	55
Item 13.	Certain Relationships and Related Transactions	55
Item 14.	Principal Accounting Fees and Services	55
	Part IV
Item 15.	Exhibits, Financial Statement Schedules	56

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FORWARD-LOOKING STATEMENTS

This annual report includes forward-looking statements within the meaning of, and which have been made pursuant to, the U.S. Private Securities Litigation Reform Act of 1995. We make “forward-looking statements” throughout this annual report. Whenever you read a statement that is not solely a statement of historical fact (such as when we state that we “may,” “will” or “plan to” perform in a certain manner or that we “intend,” “believe,” “expect,” “anticipate,” “estimate” or “project” that an event will occur, or the negative thereof, and other similar statements), you should understand that our expectations may not be correct, although we believe that they are reasonable. You should also understand that our plans may change. The forward- looking information contained is generally located in the sections of this annual report entitled “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” but may be found in other locations as well. These forward-looking statements generally relate to our strategies, plans and objectives for future operations and are based upon management’s current plans and beliefs or estimates of future results or trends.

Forward-looking statements, such as those regarding management’s present plans or expectations for new product offerings, capital expenditures, cost-saving strategies and growth are not guarantees of future performance. They involve risks and uncertainties relative to return expectations and related allocation of resources, and changing economic or competitive conditions, as well as the negotiation of agreements with third parties and the factors discussed in the section entitled “Risk Factors” and elsewhere herein, which could cause actual results to differ from present plans or expectations, and such differences could be material. Similarly, forward-looking statements regarding management’s present expectations for operating results and cash flow involve risks and uncertainties relative to these and other factors, such as the ability to increase revenues and/or to achieve cost reductions and other factors discussed in the section entitled “Risk Factors” or elsewhere herein, which also would cause actual results to differ from present plans. Such differences could be material. All forward-looking statements attributable to us or by any persons acting on our behalf are expressly qualified in their entirety by these cautionary statements.

As such, actual results or circumstances may vary materially from such forward-looking statements or expectations. Readers are also cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date these statements were made. Except as required by law, we may not update these forward-looking statements, even if our situation changes in the future.

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PART I

Item 1.Business.

Overview

Eschelon Telecom, Inc. (“we” or “the Company”) is a competitive local exchange carrier (“CLEC”), headquartered in Minneapolis, Minnesota. The Company was incorporated in Delaware in 1996 under the name Advanced Telecommunications, Inc. We are a leading facilities-based provider of integrated voice and data communications services to small and medium-sized businesses in 19 markets in the western United States. Our voice and data services, which we refer to as network services, include local dial tone, long distance, enhanced voice features and Internet access services. We also sell, install and maintain business telephone and data systems and equipment, which we refer to as business telephone systems (“BTS”). We provide these products and services individually or in customized packages to address our customers’ need for a fully-outsourced voice and data network solution. We believe that our high quality, personalized service and customized packages contribute to our low monthly customer line churn, which for 2004 and 2005 averaged 1.48% and 1.34%, respectively. As of December 31, 2005, we provided service through approximately 415,000 total access lines. For 2005, we generated consolidated revenue of $227.7 million.

Our network is designed to meet the voice and data communications needs of our customers. The Eschelon voice and data traffic is switched through six Nortel DMS 500 voice switches, six Lucent 5ESS voice switches, six Cisco BPX data switches and seven Nortel Passport ATM switches. We have physical colocations in 127 incumbent local exchange carrier (“ILEC”) central offices through which we provide voice services over unbundled network elements (“loops”) or integrated voice and data services over T1 lines. We also provide service via commercial agreements, formally known as Unbundled Network Element Platform (“UNE-P”), typically for multi-location customers who need additional access lines in locations where we do not own facilities. As of December 31, 2004, approximately 81% of our total access lines in service were served on our network, which we refer to as “on-net”, compared to 86% as of December 31, 2005. In addition, for 2004 and for 2005, new access lines installed on-net represented 92% and 97%, respectively, of our total new access lines installed.

We acquired Advanced TelCom, Inc. (“ATI”) on December 31, 2004 for an aggregate purchase price of $45.5 million. ATI was also a facilities-based CLEC with operations primarily in 12 markets in four western states. Eschelon was already operating in five of ATI’s markets and six were adjacent to our markets. ATI expanded and strengthened our presence in the western United States and we believe that we have benefited from operating synergies from consolidating ATI’s operations into our business.

On January 27, 2006, we announced that a definitive agreement had been signed to acquire Oregon Telecom, Inc. (“OTI”), a privately-held competitive services provider based in Salem, Oregon. We will pay approximately $20 million in cash to acquire OTI. The acquisition is expected to close early in the second quarter of 2006.

Industry Overview

According to the Federal Communications Commission (“FCC”), the domestic communications service market represents a $300 billion annual revenue opportunity from more than 180 million switched access lines nationwide. The FCC estimates that for 2002, the most recent year for which complete data is available, the communications services market in the states where we provide service represents nearly $30 billion. Competitive service providers such as us continue to gain market share from the Regional Bell Operating Companies (“RBOCs”). According to the FCC, as of December 31, 2005 CLECs served 32.9 million, or 18.5%, of the switched access lines in the United States, an increase of 11.1% over the prior year.

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Our Markets

We operate in 19 markets in the western United States. According to the U.S. Census Bureau, population growth from 1990 to 2000 across our markets averaged 27.6%, which was more than double the national average of 13.2%, and annual small and medium-sized business growth from 1997 to 2001 across our markets averaged 1.6%, more than triple the national average of 0.5%. According to Kagan World Media, our markets are expected to remain among the fastest growing markets in the United States, with an average annual population growth rate of 1.9% through 2006, compared to the national average of 1.1%.

Our markets are Minneapolis and St. Paul, MN; Denver and Boulder, CO; Phoenix, AZ; Santa Rosa, CA; Seattle, Tacoma, Everett, Bellingham, Olympia and Yakima, WA; Portland, Salem, Eugene, Bend and Medford, OR; Salt Lake City, UT; and Reno, NV, and are primarily in the region in which Qwest Communications is the incumbent local exchange carrier. Within our markets, we have colocated in RBOC central offices that serve a high concentration of potential small and medium-sized business customers. As of December 31, 2005, our facilities-based network covered approximately 70% of our defined market through only 25% of the total RBOC central offices in each market.

Products and Services

We provide our customers a complete package of voice, data and BTS services. Within our three product lines, we provide a wide range of alternatives and customized service packages allowing us to reach a larger number of potential customers and provide a comprehensive product solution. We sell products and services at competitive prices, but focus on product quality and customer service to attract and maintain customers.

Voice Services.   We provide customized packages of voice services to fulfill all of our customers’ voice communication needs. We offer local telephone services, including basic dial tone services and vertical features such as call forwarding, call waiting and call transfer; advanced call management capabilities such as calling number identification, caller name identification, automatic call back and distinctive ringing; plus enhanced services such as voice mail and direct inward dialing. Our services are provided via analog and digital service platforms. We offer a full range of intra-state, inter-state and international long distance services and calling plans to customers who purchase our local service. Our services include “1+” outbound calling, inbound toll free service and complementary services such as dedicated long distance, operator and directory assistance and calling cards.

Data Services.   Our data offerings are designed to provide a full range of services to our customers. We offer high-speed data transmission services, such as dedicated and broadband Internet access, and we also provide and support e-mail and web-hosting services. Our IDSL product allows us to reach customers beyond the typical distance threshold of a normal DSL product. Our data services are offered at transmission speeds that range from 56Kbps to 6Mbps.

Business Telephone Systems.   We provide telephone equipment systems and voice messaging products. We also procure and install voice and data cable, patch panels, routers and other network hardware. We offer customers multi-year maintenance agreements to maintain and upgrade their systems. Some of our key manufacturers include Mitel, Inter-Tel, NEC, Cisco and Adtran.

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The following table summarizes our product and service offerings:

Voice Services	Data Services	Business Telephone Systems
Local and Long Distance	Broadband Internet Access	Customer Premise Telephone Equipment and Accessories
Vertical Features	Dedicated Internet Access	Data Communications Equipment
Advanced Call Management	Dial-up Internet Access	Voice Mail Systems
Other Enhanced Services	E-Mail	IP Phone Systems
	Web-Hosting	After Market Maintenance and Upgrade Contracts

Sales and Marketing

We employ a direct sales and marketing strategy which allows us to take a consultative approach in selling services to our customers. Our sales force is trained to focus on product differentiation, customized packages and superior customer service. We also offer our customers a competitive price. We carefully manage each sales proposal within pricing parameters that ensure each new customer provides a targeted level of profitability. We centrally manage these pricing parameters based on an extensive cost analysis for each market. We provide incentives to our sales force to focus on selling customized packages that can be serviced on-net. For 2005, 97% of our total new access lines installed were installed on-net.

As of December 31, 2005, our direct sales force consisted of 204 network communications specialists and 39 BTS communications specialists. Our network and BTS communications specialists integrate their efforts through a team approach created by a cross-commission structure that provides incentives for them to cross-sell products and services.

In 2004, we began using third party agents to sell our services and systems to complement the sales of our direct sales force. This agent channel reaches customer segments that are generally not targeted by our direct sales force. We initially launched our agent channel into three markets. During 2005, we expanded the agent channel into our Utah, Oregon and Washington markets. We will continue to analyze the performance of this sales channel for strategic fit. We expect that no more than 10% of our sales volume will be attributable to the agent channel.

As a result of our direct sales approach, we generally have not spent funds on television, radio or multi-media advertising. However, we intend to increase our involvement in local community activities in each of our markets in order to create more publicity and recognition for our company.

Our Customers

Our customers are generally small and medium-sized businesses with fewer than 100 employees and cross a variety of industries including professional services, communications, technology and heavy industry. During 2005, we did not have any customer representing more than 2% of our total revenue. We do not generate any wholesale carrier revenue (other than carrier access and reciprocal compensation revenue) or wholesale Internet service provider revenue. We currently serve over 50,000 customers.

Customer Service and Retention

We provide our customers with superior customer service, which is driven by a highly personalized, integrated team approach. Our local customer service representatives and repair service bureau associates are supported by customer service professionals in our Minneapolis call center. Every new customer order is closely coordinated by a service delivery team until three days following service transition. Each new

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customer is contacted multiple times by our service delivery team during the service initiation process to ensure accuracy and on-time delivery of services ordered.

We segment our customer base to better serve their specific needs. We have national account managers responsible for maintaining relationships with multiple location accounts and local account managers responsible for single market accounts. The local and national account managers coordinate service requests with our centralized call center associates to ensure customer satisfaction.

Our “866-Eschelon” customer service number provides a single contact point for customers to gain quick access to customer service or their account manager. Our associates consistently answer more than 85% of all calls within 20 seconds. Our call center is staffed by trained associates whose performance is closely monitored. Our centrally managed service platform allows us to actively track and analyze call response times, trouble ticket resolution and customer satisfaction for every in-bound call received. Our centralized repair service bureau is complemented by our field service technicians who can readily be deployed to the customer premises. We also regularly survey our customers allowing us to track, analyze and adjust service and processes as necessary.

We have a centralized network operating center through which we monitor our network on a 24x7 basis and are able to detect and troubleshoot many types of network problems before our customers are aware of them.

Our senior director of customer retention is responsible for coordinating our sales force, repair service bureau, national and local account managers, customer service organization and retention team to proactively manage customer retention. All members of these groups are trained to identify at-risk customer accounts, which are then referred to our retention team for specific, personalized care. We analyze our survey, performance and churn data on a monthly basis to better understand our customers and to implement or alter operating procedures to improve our operations and customer retention.

Backlog of customer orders has remained at relatively low levels versus overall lines in service. As such, backlog is not material to our annual revenue and is not a meaningful indicator of potential future revenue.

Network Overview and Deployment

We have constructed our network around owned switching and collocation equipment. Our network is a system of switches and equipment colocated in RBOC central offices or carrier hotels that are interconnected using primarily leased transport and then linked to customers’ premises using leased loops. In almost all cases, we purchase the last mile connection from the RBOC. In addition, with the acquisition of ATI, we acquired active (i.e., working or “lit”) fiber transport connecting ATI’s switches and colocations in a number of ATI’s markets.

Voice and Data Switches.   We have deployed Nortel, Lucent, Tellabs and Cisco equipment in each of our major markets. We use Nortel DMS and Lucent 5ESS switches for local dial tone services, the Tellabs digital crossconnect system (DACS) for terminating, routing and aggregating on DS1/DS3 transport and customer connections, and Cisco BPX and Nortel Passport ATM switches in combination with Cisco core and edge routers for advanced data services. We believe the Nortel DMS 500 and Lucent 5ESS switches are reliable, proven platforms for providing local services. The Cisco BPX and Nortel Passport ATM switches are highly flexible and integrate well with the Cisco IP platforms to provide network services over common network infrastructures.

Colocation Equipment.   We use Zhone Technologies, Inc. Universal Edge 9000, or UE9000, access node equipment and Lucent AnyMediaFast Digital Loop Carriers in each of the 127 RBOC central offices in which we have physically colocated in order to provide local analog line service to our customers. The UE9000 access node and AnyMediaFast enable effective delivery of industry standard voice service

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offerings. We have also deployed Verilink Sechtor 300 devices in our switch rooms and various colocations and, together with the addition of an integrated access device at customer premise locations, we are able to offer network voice and data services over a single T1 line. In select colocations, we also use Nokia’s DSLAMs in order to provide on-net DSL services. The UE9000, AnyMediaFast, Sechtor 300 and Nokia devices are high density voice and data equipment that fit into a single network bay, thereby reducing costly colocation space in RBOC central offices.

Intra-City Transport Deployment.In select markets, we utilize fiber transport in a SONET ring configuration to connect host sites to RBOC colocations. In other markets, we use leased transport with carrier diversity for network reliability. As customer line concentrations increase in a colocation, we are able to take advantage of carrier diversity techniques. Where fiber is not deployed, transport between our switches and our colocations is provided over more than one route in all cases and is purchased from more than one provider in most cases. Using multiple routes and providers gives us a more robust network that maintains functionality should a transport route incur a failure. By diversifying our high capacity circuits across multiple vendors in each market, we maintain higher levels of network reliability and lower network costs.

Inter-City ATM Backbone Network.   Our Cisco BPX and Nortel Passport ATM switches provide data traffic switching in our major markets. These ATM switches are interconnected through leased long-haul transport obtained from multiple wholesale providers. This ATM backbone carries IP data traffic between switch locations. Customer access to the Internet and virtual private networks travel over this network. ATM is a fully redundant, state-of-the-art transmission and switching technology that carries both T1-based and DSL-based IP traffic more efficiently than traditional dedicated circuit networks.

Customer Access Methods.   We have the ability to serve small and medium-sized businesses in our markets by one or more of the following methods:

·T1.   Larger customers can be served with leased high capacity connections directly from our colocation equipment to the customer’s location. We also offer the ability to share a single T1 connection for both voice and data services and to allocate the circuit capacity for voice and data depending upon customer requirements. For 2005, 55% of new access lines installed were installed on T1 circuits.

·Analog UNE-loop.   To provide analog voice services, we colocate our telephone access equipment in the RBOC’s central offices and lease the RBOC’s facilities, known as unbundled network elements, or UNEs, to connect customer locations to our colocation equipment. Smaller customers are most likely to be served with this method. We provide broad facilities-based coverage by colocating in densely-populated areas so that we can access unbundled network elements reaching approximately 70% of the estimated business access lines within our selling areas from approximately 25% of the available RBOC central offices.

·DSL.   We provide dedicated connections to certain customers using conventional “twisted pair” copper wire employing DSL technology. Our customers use DSL lines for data applications such as Internet access, intranets, extranets, telecommuting, e-commerce, e-mail, video conferencing and multimedia. DSL is provided on the same copper wires as voice service or as a dedicated line dependent upon customer situations. DSL is not available to all customers due to copper loop length limitations and RBOC plant configurations.

·ILEC Commercial Agreements.   In January 2005, we signed a three-year agreement with Qwest to purchase its Platform Plus product, which replaced the UNE-P platform. In June 2005, we also signed a three-year agreement with Verizon to purchase its Wholesale Advantage product, which replaced the UNE-P platform in Verizon operating regions.

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·Centrex Resale.   We resell Centrex services in the Eschelon legacy Reno market. Centrex is a value-added business telephone service we purchase from AT&T at wholesale rates and invoice on our own bills.

Competition

The communications industry is highly competitive. Our ability to compete effectively depends upon our continued ability to maintain high quality, market-driven services at prices competitive to those charged by the RBOCs. Many of our current and potential competitors have financial, technical, marketing, personnel and other resources, including brand name recognition, substantially greater than ours, as well as other competitive advantages over us.

RBOCs.   In our existing markets, we compete principally with Qwest. Qwest and other RBOCs have long-standing relationships with their customers, have financial, technical and marketing resources substantially greater than ours, have the potential to subsidize competitive services with revenue from a variety of businesses, and currently benefit from existing regulations that favor RBOCs over us in some respects. As a relatively recent entrant in the communications services industry, we may not achieve a major share of the market for any of our services. While regulatory initiatives based on the Telecommunications Act, which allow competitive service providers such as us to interconnect with Qwest’s facilities, provide increased business opportunities for us, these interconnection opportunities have been, and likely will continue to be, accompanied by increased pricing flexibility for and relaxation of regulatory oversight of Qwest and the other RBOCs. Future regulatory decisions could grant the RBOCs greater pricing flexibility or other regulatory relief. These initiatives could have a material adverse effect on us.

Competitive Service Providers and Other Market Entrants.   We also face competition from other competitive service providers. Consolidation and strategic alliances within the communications industry or the development of new technologies could put us at a competitive disadvantage. The Telecommunications Act radically altered the market opportunity for new competitive service providers. Because the Telecommunications Act requires RBOCs to unbundle their network services, new competitive service providers are able to rapidly enter the market by installing switches and leasing local loops.

In addition to the new competitive service providers, RBOCs and other competitors described above, we may face competition from other market entrants such as cable television companies, wireless service providers and virtual service providers using Voice over Internet Protocol (VoIP) over the public Internet or private networks. Electric utility companies have existing assets and low cost access to capital which could allow them to enter a market and accelerate network development. Cable television companies are entering the communications market by upgrading their networks with hybrid fiber coaxial lines and installing facilities to provide fully interactive transmission of broadband voice, video and data communications. Wireless service providers are developing wireless technology for deployment in the United States, intending to provide a broadband substitute for traditional wireline local telephones. Some companies are delivering voice communications over the Internet.

Long Distance Service.   The long distance communications industry has numerous entities competing for the same customers which has historically created high churn as customers frequently change long distance providers in response to offerings of lower rates or promotional incentives. Prices in the long distance market have declined significantly in recent years and are expected to continue to decline. Our primary competitors for long distance services are interexchange carriers, RBOCs and resellers. We believe that pricing levels are a principal competitive factor in providing long distance service; however, we seek to avoid direct price competition by packaging long distance service, local service and Internet access service together with a simple pricing plan.

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Data/Internet Services.   The Internet services market is highly competitive, and we expect that competition will continue to intensify. Internet service, meaning both Internet access and on-line content services, is provided by Internet services providers, RBOCs, satellite-based companies, long distance providers and cable television companies. Many of these companies provide direct access to the Internet and a variety of supporting services to businesses and individuals. In addition, many of these companies, such as AOL and MSN, offer on-line content services consisting of access to closed, proprietary information networks. Satellite companies are offering broadband access to the Internet from desktop PCs. Cable companies are providing Internet services using cable modems to customers in major markets. Many of these competitors have substantially greater brand recognition and more financial, technological, marketing, personnel and other resources than those available to us.

Business Telephone Systems Sales.   We compete with numerous equipment vendors and installers and communications management companies for business telephone systems and related services. We generally offer our products at prices consistent with other providers and differentiate our service through our product packages and customer service.

Employees

As of February 28, 2006, we had 1,094 full-time equivalent employees. Twenty-seven field service technicians are members of the International Brotherhood of Electrical Workers (IBEW). A new collective bargaining agreement was signed in 2005 with the IBEW and is in effect through February 29, 2008.

We believe that relations with our employees, including members of the labor union, are good. We have not experienced any work stoppage due to labor disputes.

Executive Officers

Our executive officers and directors as of December 31, 2005 are as follows:

Name	Age		Start of Service		Position(s)
Executive Officers:
Clifford D. Williams		58		1996	Chairman of the Board and Founder
Richard A. Smith		55		1998	Director, President and Chief Executive Officer
Geoffrey M. Boyd		38		2000	Chief Financial Officer
Robert E. Pickens		45		1996	Executive Vice President, Marketing
David A. Kunde		46		1999	Executive Vice President, Engineering and Network Operations
Arlin B. Goldberg		49		1996	Executive Vice President, Information Technology
J. Jeffery Oxley		51		1999	Executive Vice President, Law and Policy
Steven K. Wachter		44		1999	Executive Vice President, Sales
Non-Management Directors:
James P. TenBroek		44		2000	Director
Marvin C. Moses		61		1999	Director
Mark E. Nunnelly		47		1999	Director
Ian K. Loring		39		2001	Director
Louis L. Massaro		59		2005	Director

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Regulation

Overview

We are subject to federal, state, local and foreign laws, regulations, and orders affecting the rates, terms, and conditions of certain of our service offerings, our costs, and other aspects of our operations, including our relations with other telecommunications service providers. Regulation varies from jurisdiction to jurisdiction, and may change in response to judicial proceedings, legislative and administrative proposals, government policies, competition, and technological developments. We cannot predict what impact, if any, such changes or proceedings may have on our business or results of operations, and we cannot guarantee that regulatory authorities will not raise material issues regarding our compliance with applicable regulations.

In general, the FCC has jurisdiction over our facilities and services to the extent they are used in the provision of interstate or international communications services. State regulatory commissions, commonly referred to as PUCs (public utility commissions), generally have jurisdiction over facilities and services to the extent they are used in the provision of intrastate services, unless Congress or the FCC has preempted such regulation. Local governments may regulate aspects of our business through zoning requirements, permit or right-of-way procedures, and franchise fees. Foreign laws and regulations apply to communications that originate or terminate in a foreign country. Our operations also are subject to various environmental, building, safety, health, and other governmental laws and regulations. Generally, the FCC and PUCs do not regulate the Internet, video conferencing, or certain data services, although the underlying communications components of such offerings may be regulated.

Federal law generally preempts state statutes and regulations that restrict the provision of competitive local, long distance and enhanced services; consequently, we generally are free to provide the full range of local, long distance and data services in every state. While this federal preemption greatly increases our potential for growth, it also increases the amount of competition to which we may be subject. Enforcing federal preemption against certain state policies and programs may be costly and may involve considerable delay.

Federal Regulation

The Communications Act of 1934, as amended, or (“the Communications Act”), grants the FCC authority to regulate interstate and foreign communications by wire or radio. We are regulated by the FCC as a non-dominant carrier and are subject to less comprehensive regulation than dominant carriers, but we remain subject to numerous requirements of the Communications Act, including certain provisions of Title II, applicable to all common carriers, which require us to offer service upon reasonable request and pursuant to just and reasonable charges and terms, and which prohibit unjust or unreasonable discrimination in charges or terms. The FCC has authority to impose additional requirements on non-dominant carriers.

The Telecommunications Act of 1996, or (“the Telecommunications Act”), amended the Communications Act to eliminate many barriers to competition in the U.S. communications industry. The Telecommunications Act set basic standards for relationships between communications service providers, including relationships between new entrants and RBOCs. In general, the Telecommunications Act requires RBOCs to provide competitors with nondiscriminatory access to and interconnection with RBOC networks, and to provide UNEs at cost-based prices. The FCC and PUCs have adopted rules to implement the Telecommunications Act and to encourage competition.

Long Distance Competition.   Section 271 of the Communications Act, enacted as part of the Telecommunications Act, established a process by which an RBOC could obtain authority to provide long distance service in a state within its region. The process required demonstrating to the FCC that the

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RBOC has adhered to a 14-point competitive checklist and that granting such authority would be in the public interest. All of the RBOCs have received FCC approval to provide in-state long distance service within their respective regions. Receipt of Section 271 authority by the RBOCs has resulted in increased competition in certain markets and services.

The RBOCs have a continuing obligation to comply with the 14-point competitive checklist, and are subject to continuing oversight by the FCC and PUCs. Each RBOC must comply with state-specific Performance Assurance Plans, or PAPs, pursuant to which an RBOC that fails to provide access to its facilities in a timely and commercially sufficient manner must provide to affected CLECs compensation in the form of cash or service credits. We have received PAP payments from Qwest in Arizona, Colorado, Minnesota, Oregon, Utah and Washington. We receive PAP payments from AT&T in Nevada and California. Our ability to obtain adequate interconnection and access to UNEs on a timely basis could be adversely affected by an RBOC’s failure to comply with its Section 271 obligations.

Under Section 272 of the Communications Act, the RBOCs are also required to provide in-region inter-LATA services through separate affiliates and subject to certain other safeguards. The Section 272 requirements, other than the obligation not to discriminate against other providers requesting service, are subject to a statutory sunset three years after an RBOC is authorized under Section 271 to provide in-region inter-LATA services in a given state, unless the FCC extends the three year period by rule or order. In the eight states in which we operate, the RBOC’s Section 272 requirements have sunset for AT&T in California, and for Qwest in Colorado, Utah, and Washington. For Qwest, the Section 272 requirements in the remainder of the states in which it operates will sunset by the end of 2006. The sunset of Section 272 requirements could make it easier for the RBOCs to engage in discrimination, which would adversely affect our ability to compete. In addition, if the FCC granted the RBOCs permission to cease complying with dominant carrier regulations even when they provide local and inter-LATA services on an integrated basis (that is, without structural separation), that also could make it harder to detect discrimination and thus adversely affect our ability to compete.

Interconnection Agreements.   Pursuant to FCC rules implementing the Telecommunications Act, we negotiate interconnection agreements with RBOCs to obtain access to UNEs and services, generally on a state-by-state basis. These agreements typically have three-year terms. We currently have interconnection agreements in effect with Qwest for the states of Arizona, Colorado, Minnesota, Oregon, Utah and Washington, with AT&T for the states of Nevada and California, and with Verizon for the states of Washington and Oregon. If we enter new markets, we expect to establish interconnection agreements with RBOCs on an individual state basis. As discussed below, changes to our agreements based upon recent FCC orders ultimately will be incorporated into our interconnection agreements, but whether these changes will be affected by negotiation or arbitration is uncertain.

We are in the process of renegotiating our interconnection agreements with Qwest for Arizona, Colorado, Minnesota, Oregon, Utah, and Washington. We have had discussions with AT&T for Nevada and California and with Verizon for Oregon and Washington regarding renegotiation of our interconnection agreements. If any negotiation process does not produce, in a timely manner, an interconnection agreement that we find acceptable, we may petition the applicable PUC to arbitrate any disputed issues. Arbitration decisions in turn may be appealed to federal courts. We cannot predict how successful we will be in negotiating terms critical to our provision of local network services, and we may be forced to arbitrate certain provisions of necessary agreements. We are not a party to any current interconnection agreement arbitration proceeding. Other interconnection agreement arbitration proceedings before various state commissions may result in decisions that could affect our business, but we cannot predict the extent of any such impact. As an alternative to negotiating an interconnection agreement, we may adopt, in its entirety, another carrier’s approved agreement.

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Unbundled Network Elements.   The Telecommunications Act requires RBOCs to provide requesting telecommunications carriers with nondiscriminatory access to network elements on an unbundled basis at any technically feasible point on rates, terms and conditions that are just, reasonable and non-discriminatory, in accordance with the other requirements set forth in Sections 251 and 252 of the Telecommunications Act. The Telecommunications Act gives the FCC authority to determine which network elements must be made available to requesting carriers such as us. The FCC is required to determine whether the failure to provide access to such network elements would impair the ability of the carrier seeking access to provide the services it seeks to offer. Based on this standard, the FCC developed an initial list of RBOC network elements that must be unbundled on a national basis, or UNEs, in 1996.

Those initial rules were set aside by the U.S. Supreme Court and the FCC subsequently developed revised unbundling rules, which also were set aside on appeal. In August 2003, in the Triennial Review Order, or TRO, the FCC substantially modified its rules governing access to UNEs. The FCC redefined the “impair” standard, concluding that a requesting carrier is impaired when a lack of access to a UNE poses barriers to entry, including operational and economic barriers that are likely to make entry into a market uneconomic. The FCC limited requesting carrier access to certain aspects of the loop, transport, switching and signaling/databases UNEs but continued to require some unbundling of these elements. In the TRO, the FCC also determined that certain broadband elements, including fiber-to-the-home, or FTTH, loops in greenfield situations, broadband services over FTTH loops in overbuild situations, packet switching, and the packetized portion of hybrid loops, are not subject to unbundling obligations.

On March 2, 2004, the U.S. Court of Appeals for the D.C. Circuit vacated certain portions of the TRO and remanded to the FCC for further proceedings. Specifically, the D.C. Circuit vacated the FCC’s delegation of decision-making authority to state commissions and several of the FCC’s nationwide impairment determinations. The D.C. Circuit also found that the FCC used a flawed methodology when making certain impairment determinations, including those relating to the mass market switching and local transport network elements, and remanded those determinations to the FCC for further analysis and justification. The D.C. Circuit affirmed the FCC’s decision to relieve the RBOCs from unbundling obligations with respect to broadband elements. The D.C. Circuit did not make a formal pronouncement regarding the status of the FCC’s finding regarding enterprise market loops.

In December 2004, the FCC adopted an Order on Remand of the TRO (the “TRRO”). The TRRO became effective on March 11, 2005. The TRRO limits access to certain UNEs in specific situations in which the FCC considers that CLECs are not impaired without access to the UNE: First, unbundled switching will be eliminated after a one-year transition period. During the transition, carriers will pay $1 per line more for unbundled switching and may not order new lines. Second, DS1 transport UNEs will no longer be available between wire centers that contain at least 38,000 business lines or have at least four fiber-based colocators. Third, DS3 transport or dark fiber UNEs will no longer be available between wire centers containing at least 24,000 business lines or at least three fiber-based colocators. Fourth, transport UNEs between RBOC wire centers and CLEC switches will no longer be available. Fifth, DS1 UNE loops will not be available to any building in a wire center containing at least 60,000 business lines and at least four fiber-based colocators. Sixth, DS3 UNE loops will not be available to any building in a wire center containing at least 38,000 business lines and at least four fiber-based colocators. Seventh, dark fiber UNE loops will no longer be available. The Order provides a one-year transition period for DS1 and DS3 transport and loops and an 18-month transition period for dark fiber facilities. Rates for UNEs that are no longer available will increase by 15% during the transition year, and CLECs will not be able to order additional UNEs along routes or to buildings that no longer qualify.

We did not lease material numbers of UNE-P lines from either AT&T or Verizon in 2005. With respect to our UNE-P lines leased from Qwest, we have converted them to an equivalent product under a commercial agreement referred to as Qwest’s Platform Plus (“QPP”). Under QPP, we continue to have access to unbundled switching over a three-and-one-half year period at gradually increasing rates. We have

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also entered into a commercial agreement with Verizon, referred to as the Wholesale Advantage Agreement, under which we continue to have access to unbundled switching from Verizon at gradually increasing rates.

We do not use DS3 UNE loops or dark fiber loops. Consequently, we are unaffected by these portions of the TRRO. However, we do use DS1 loops and transport, DS3 transport, and a de minimis amount of dark fiber transport, and certain of our wire centers and routes will be affected by the TRRO. Our costs for existing UNEs affected by the TRRO will increase an estimated 15% during the year-long transition period provided by the TRRO. Delisted UNEs may have to be replaced with special access, generally at prices significantly higher than UNE rates, unless we can locate alternative suppliers offering more favorable rates.

We have estimated our increased costs due to the TRRO to be approximately $2.3 million in 2006. This includes the increased costs of QPP, the increased cost of transitional UNEs, and the need to replace delisted UNEs. Our estimates are based upon assumptions concerning market demand for our products and our ability to secure alternative suppliers of facilities in certain areas.

The TRRO has been appealed by RBOCs (which argue that the TRRO continues to require unbundled access to more network elements than the law permits) as well as CLECs (which argue that the FCC did not order a sufficient degree of unbundling). Those appeals have been consolidated and transferred to the U.S. Court of Appeals for the D.C. Circuit. Briefs in the consolidated appeals have been filed and oral argument on the appeals has been set for March 21, 2006. RBOC and CLEC parties also have filed petitions with the FCC seeking reconsideration of the TRRO. Comments and replies have been filed in those proceedings. No decision by the FCC on the reconsideration petitions is expected until after a decision is issued by the DC Circuit on the appeals. Eschelon is a party to the appeals and reconsideration petitions that have been filed, but cannot predict the outcome either of the appeals or the petitions for reconsideration.

Following adoption of the TRRO, Qwest informed us that it planned to invoke the “change of law” provisions in our interconnection agreements. These provisions generally provide that when a party to the agreement believes that its obligations under the agreement have changed as a result of a change in applicable law, it may request that the other party enter into negotiations to amend the agreement, and that in the event the parties are unable to agree upon an amendment, the dispute is to be arbitrated either by a neutral arbitrator or by the relevant state commission. We have commenced negotiations with Qwest regarding amendments to our interconnection agreements, but we do not know when such negotiations might conclude or the impact on our business of an amendment to any of our interconnection agreements resulting from such negotiations, apart from the impacts discussed above.

AT&T and Verizon have taken the position that the TRRO is immediately effective, without regard to change of law provisions in their interconnection agreements with us. Our position is that any changes resulting from the TRRO must be effected through the change of law provisions to our interconnection agreements. Proceedings to resolve this dispute are nearing completion before the PUCs in Nevada, California and Washington. We cannot predict the outcome of these proceedings nor their impact upon Eschelon.

FCC rules implementing the local competition provisions of the Telecommunications Act permit CLECs to lease UNEs at rates determined by PUCs employing the FCC’s Total Element Long Run Incremental Cost, or TELRIC, forward-looking, cost-based pricing model. On September 15, 2003, the FCC opened a proceeding reexamining the TELRIC methodology and wholesale pricing rules for communications services made available for resale by RBOCs in accordance with the Telecommunications Act. This proceeding will comprehensively re-examine whether the TELRIC pricing model produces unpredictable pricing inconsistent with appropriate economic signals; fails to adequately reflect the real-world attributes of the routing and topography of an RBOC’s network; and creates disincentives to

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investment in facilities by understating forward-looking costs in pricing RBOC network facilities and overstating efficiency assumptions. We have participated in this proceeding as a member of a consortium of CLECs. To date the FCC has not yet issued revised TELRIC rules. The application and effect of a revised TELRIC pricing model on the communications industry generally and on certain of our business activities cannot be determined at this time.

In orders released in August 2004, the FCC extended unbundling relief to FTTH loops serving predominantly residential multiple dwelling units, or MDUs, and granted the same unbundling relief to fiber-to-the-curb, or FTTC, that it has applied to FTTH. We do not know where Qwest, AT&T or Verizon have replaced their copper facilities with fiber or where they may do so in the future. Consequently, we cannot determine the impact these orders will have upon our business. Because we serve business customers only, we do not believe these orders will substantially affect our business.

On October 27, 2004, the FCC issued an order granting requests by the RBOCs that the FCC forbear from enforcing the independent unbundling requirements of Section 271 of the Communications Act with regard to the broadband elements that the FCC had determined in the TRO are not subject to unbundling obligations (FTTH loops, FTTC loops, the packetized functionality of hybrid loops, and packet switching). The FCC declined to address broader forbearance requests by AT&T and Qwest, who had asked the FCC to forbear from applying Section 271 requirements to any element that the FCC has determined no longer meets the impairment standard. Legal challenges to these orders continue. Several state proceedings on this issue are ongoing. We cannot predict the outcome of these proceedings or the effect of such rulings on our business.

On September 23, 2005, the FCC released an order that largely deregulates “wireline broadband Internet access service.” The FCC refers to “wireline broadband Internet access service” as a service that uses existing or future wireline facilities of the telephone network to provide subscribers with access to the Internet, including by means of both xDSL and next generation fiber-to-the-premises services. This decision by the FCC follows the decision by the United States Supreme Court in the Brand X case, issued June 27, 2005, in which the Court held that cable systems are not legally required to lease access to competing providers of Internet access service. Consistent with the FCC’s previous classification of cable modem service as an information service, the FCC’s decision in this order classifies broadband Internet access service as an information service because it intertwines transmission service with information processing and is not, therefore, a “pure” transmission service such as frame relay or ATM, which remain classified as telecommunications services. Under the terms of the Order, the FCC requires that existing transmission arrangements between broadband Internet access service providers and their customers be made available for a one year period from the effective date of the Order. This Order does not affect CLECs’ ability to obtain UNEs, but does relieve the RBOCs of any duty to offer DSL transmission services subject to regulatory oversight. Internet service providers and our trade association have sought judicial review of this order in the U.S. Court of Appeals for the Third Circuit. Our QPP agreement with Qwest, which runs through mid-2008, provides us the ability to resell Qwest’s DSL product. As a result, we expect no immediate adverse impact from the FCC’s Wireline Broadband Order.

On September 16, 2005, the FCC partially granted Qwest’s petition seeking forbearance from the application of the FCC’s dominant carrier regulation of interstate services, and Section 251(c) requirements throughout the Omaha MSA. The FCC granted Qwest the requested relief in nine (9) of its twenty-four (24) Omaha central offices where it determined that competition from intermodal (cable) service providers was “extensive.” Although the FCC required that Qwest continue to make UNEs available throughout Omaha, in the nine (9) specified central offices, Qwest may do so at non-TELRIC rates. The FCC did not grant Qwest the requested relief regarding its colocation and interconnection obligations. Both CLECs and Qwest have sought judicial review of this order in the U.S. Court of Appeals for the D.C. Circuit. We do not operate in the Omaha MSA, and cannot predict whether

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future such petitions will be filed for markets in which we do operate, nor can we predict what would be the outcome of any such petitions.

On December 20, 2004, Verizon filed a Petition for Forbearance from the application of the FCC’s Computer II and Title II requirements to Verizon’s Broadband service offerings. If granted, Verizon’s petition would permit it to offer DSL, ATM, Frame Relay and T-1 services on a non-common carrier basis, free from unbundling and TELRIC pricing requirements. Verizon’s petition also asks that the FCC forbear from applying these requirements to broadband services provided by other RBOCs. To date, the FCC has not acted on Verizon’s petition, and has extended to March 19, 2006, the deadline for action by the Commission, in the absence of which Verizon’s petition will be deemed granted. As a practical matter, the FCC’s deregulation of RBOC DSL services as a result of its order in the Wireline Broadband proceeding granted Verizon, and the other RBOCs, some of the relief Verizon’s forbearance petition seeks. We cannot predict the effect, if any, of further unbundling and pricing relief that would result from the possible grant of Verizon’s petition, or whether the FCC would in fact extend to all RBOCs any relief it might grant to Verizon.

Colocation.   FCC rules generally require RBOCs to permit competitors to colocate equipment used for interconnection and/or access to UNEs. Changes to those rules, upheld in 2002 by the D.C. Circuit, allow competitors to colocate multifunctional equipment and require RBOCs to provision cross-connects between colocated carriers. We cannot determine the effect, if any, of future changes in the FCC’s colocation rules on our business or operations.

CPNI.FCC rules protect the privacy of certain information about customers that communications carriers, including us, acquire in the course of providing communications services. Such protected information, known as Customer Proprietary Network Information, or CPNI, includes information related to the quantity, technological configuration, type, destination and the amount of use of a communications service. The FCC’s initial CPNI rules initially prevented a carrier from using CPNI to market certain services without the express approval of the affected customer, referred to as an opt-in approach. In July 2002, the FCC revised its opt-in rules in a manner that limits our ability to use the CPNI of our subscribers without first engaging in extensive customer service processes and record keeping. We use our subscribers’ CPNI in accordance with applicable regulatory requirements. However, if a federal or state regulatory body determines that we have implemented those guidelines incorrectly, we could be subject to fines or penalties. In addition, correcting our internal customer systems and CPNI processes could generate significant administrative expenses.

On January 30, 2006, the FCC released a public notice requiring all telecommunications carriers, including wireline and wireless carriers, to submit a compliance certificate regarding maintenance of internal records related to the FCC’s customer proprietary network information (CPNI) rules. Coincident with the issuance of its public notice, the FCC announced that it had begun enforcement proceedings against carriers that allegedly failed to comply with the FCC’s CPNI rules. To date, we are unaware of any material noncompliance on our part with the FCC’s CPNI rules, or our record-keeping and reporting, and have received no notice of any enforcement proceeding directed at us. We cannot predict the outcome of any enforcement proceeding in this regard, or its effect on our business.

On February 14, 2006, the FCC released a Notice of Proposed Rulemaking seeking comment on possible modifications to its CPNI rules. New CPNI requirements could impose additional administrative burdens and costs on us. We cannot predict the outcome of the FCC’s ongoing review of its CPNI rules.

Intercarrier Compensation.   The FCC’s intercarrier compensation rules include rules governing access charges, which govern the payments that IXCs and commercial mobile radio service providers make to local exchange carriers to originate and terminate long distance calls, and reciprocal compensation rules, which generally govern the compensation between telecommunications carriers for the transport and termination of local traffic. We purchase long distance service on a wholesale basis from an IXC who pays

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access fees to local exchange carriers for the origination and termination of our long distance communications traffic. Generally, intrastate access charges are higher than interstate access charges. Therefore, to the degree access charges increase or a greater percentage of our long distance traffic is intrastate, our costs of providing long distance services will increase. As a local exchange provider, we bill long distance providers access charges for the origination and termination of those providers’ long distance calls. Accordingly, in contrast with our long distance operations, our local exchange business benefits from the receipt of intrastate and interstate long distance traffic. As an entity that collects and remits access charges, we must properly track and record the jurisdiction of our communications traffic and remit or collect access charges accordingly. The result of any changes to the existing regulatory scheme for access charges or a determination that we have been improperly recording the jurisdiction of our communications traffic could have a material adverse effect on our business.

Our costs of providing long distance services, and our revenues for providing local services, also are affected by changes in access charge rates imposed on CLECs. Pursuant to the FCC’s 2001 CLEC Access Charge Order, which lowered the rates that CLECs may charge long distance carriers for the origination and termination of calls over local facilities, access rates were reduced during Fiscal 2003 and Fiscal 2004. AT&T and Sprint have appealed the CLEC Access Charge Order to the D.C. Circuit, arguing that the FCC’s benchmark rates are too high.

Over the last several years, the FCC has granted RBOCs significant flexibility in pricing interstate special and switched access services. In August 1999, the FCC granted immediate pricing flexibility to many RBOCs and established a framework for granting greater flexibility in the pricing of all interstate access services once an RBOC market satisfies certain prescribed competitive criteria. In February 2001, the D.C. Circuit upheld the FCC’s prescribed competitive criteria. To date, the FCC has granted pricing flexibility in numerous specific markets to the RBOCs, including Qwest. This pricing flexibility may result in Qwest lowering its prices in high traffic density areas, including areas where we compete or plan to compete. We anticipate that the FCC will continue to grant RBOCs greater pricing flexibility for access services if the number of actual and potential competitors increases in each of these markets.

The FCC has stated that existing intercarrier compensation rules constitute transitional regimes and has promised to reform them. On March 3, 2005, the FCC released a Further Notice of Proposed Rulemaking seeking comment on a variety of proposals to replace the current system of intercarrier payments, under which the compensation rate depends on the type of traffic at issue, the type of carriers involved, and the end points of the communication, with a unified approach for access charges and reciprocal compensation. Because we both make payments to and receive payments from other carriers for the exchange of local and long distance calls, we will be affected by changes in the FCC’s intercarrier compensation rules. We cannot predict the impact that any such changes may have on our business.

Detariffing.   Consistent with other deregulatory measures, the FCC has largely eliminated carriers’ obligations to file with the FCC tariffs containing prices, terms and conditions of service. All carriers, including us, were required to complete this detariffing process for interstate domestic commercial, or customer-specific, services by January 31, 2001, for consumer mass-market services by July 31, 2001, and for international services by January 2002. In lieu of federal tariffs, the FCC requires carriers with corporate web sites to post information relating to the rates, terms, and conditions of services on their web sites. Detariffing precludes our ability to rely on filed rates, terms, and conditions as a means of providing notice to customers of prices, terms and conditions under which we offer services, and requires us instead to rely on individually negotiated agreements with end users. We remain subject to the Communications Act’s requirements that rates, terms and conditions of communications service be just, reasonable, and not discriminatory, and we are subject to the FCC’s jurisdiction over customer complaints regarding our communications services.

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Universal Service.   Section 254 of the Communications Act and the FCC’s implementing rules require all communications carriers providing interstate or international communications services to periodically contribute to the Universal Service Fund, or USF. The USF supports several programs administered by the Universal Service Administrative Company with oversight from the FCC, including: (i) communications and information services for schools and libraries, (ii) communications and information services for rural health care providers, (iii) basic telephone service in regions characterized by high communications costs, (iv) basic telephone services for low-income consumers, and (v) interstate access support. Based on the total funding needs for these programs, the FCC determines a contribution factor, which it applies to each contributor’s interstate and international end user communications revenues. We measure and report our revenues in accordance with rules adopted by the FCC. The contribution rate factors are calculated and revised quarterly and we are billed for our contribution requirements each month based on projected interstate and international end-user communications revenues, subject to periodic true up.

USF contributions may be passed through to consumers on an equitable and nondiscriminatory basis either as a component of the rate charged for communications services or as a separately invoiced line item. Since April 1, 2003, communications carriers have been prohibited from using a separate line item on invoices to identify as a recovery of USF contributions amounts that exceed the rate of actual USF contributions.

A proceeding pending before the FCC has the potential to significantly alter our USF contribution obligations. The FCC is considering changing the basis upon which our USF contributions are determined from a revenue percentage measurement to a connection or telephone number measurement. Adoption of this proposal could have a material adverse affect on our costs, our ability to separately list USF contributions on end-user bills, and our ability to collect these fees from our customers.

The application and effect of changes to the USF contribution requirements and similar state requirements on the communications industry generally and on certain of our business activities cannot be predicted. If our collection procedures result in over collection, we could be required to make reimbursements of such over collection and be subject to penalty, which could have a material adverse affect on our business, financial condition and results of operations. If a federal or state regulatory body determines that we have incorrectly calculated or remitted any USF contribution, we could be subject to the assessment and collection of past due remittances as well as interest and penalties thereon.

Telephone Numbering.   The FCC oversees the administration and the assignment of local telephone numbers, an important asset to voice carriers, by NeuStar, Inc., in its capacity as North American Numbering Plan Administrator. Extensive FCC regulations govern telephone numbering, area code designation, and dialing procedures. Since 1996, the FCC has permitted businesses and residential customers to retain their telephone numbers when changing local telephone companies, referred to as local number portability. The availability of number portability is important to competitive carriers like us, because customers, especially businesses, may be less likely to switch to a competitive carrier if they cannot retain their existing telephone numbers.

Slamming.   A customer’s choice of local or long distance communications company is encoded in the customer’s record, which is used to route the customer’s calls so that the customer is served and billed by the desired company. A customer may change service providers at any time, but the FCC and some states regulate this process and require that specific procedures be followed. Slamming occurs when these specific procedures are not followed, such as when a customer’s service provider is changed without proper authorization or as a result of fraud. The FCC has levied substantial fines for slamming. The risk of financial damage, in the form of fines, penalties and legal fees and costs and to business reputation from slamming is significant. We maintain internal procedures designed to ensure that our new subscribers are switched to us and billed in accordance with federal and state regulations. Because of the volume of service orders that we may process, it is possible that some carrier changes inadvertently may be processed without

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authorization. Therefore, we cannot guarantee that we will not be subject to slamming complaints in the future.

Communications Assistance for Law Enforcement Act.   The Communications Assistance for Law Enforcement Act, or CALEA, requires communications providers to provide law enforcement officials with call content and/or call identifying information under a valid electronic surveillance warrant, and to reserve a sufficient number of circuits for use by law enforcement officials in executing court-authorized electronic surveillance. Because we provide facilities-based services, we incur costs in meeting these requirements. Noncompliance with these requirements could result in substantial fines. Although we attempt to comply with these requirements, we cannot assure that we would not be subject to a fine in the future.

In August 2005, the FCC extended CALEA obligations to facilities-based providers of broadband Internet access service and to interconnected VoIP services. As a broadband Internet access provider, we will be subject to these new requirements once they take effect. The current compliance deadline is set for April 2007, although the FCC is considering requests from industry participants to grant additional time. Several parties have appealed the FCC’s order extending new requirements in the U.S. Court of Appeals for the D.C. Circuit. Unless the decision is overturned on appeal, we could face increased compliance costs, which are uncertain in nature because the specific assistance-capability requirements for providers of broadband Internet access service have not yet been established.

Regulation of Internet Service Providers and VoIP.To date, the FCC has treated Internet service providers, or ISPs, as enhanced service providers, which are generally exempt from federal and state regulations governing common carriers. Nevertheless, regulations governing the disclosure of confidential communications, copyright, excise tax and other requirements may apply to our Internet access services. In addition, the FCC released a Notice of Proposed Rulemaking in September 2005 seeking comment on a broad array of consumer protection regulations for broadband Internet access services, including rules regarding the protection of CPNI, slamming, truth in billing, network outage reporting, service discontinuance notices, and rate-averaging requirements. We cannot predict whether the FCC will adopt new rules regulating broadband Internet access services and, if it does so, how such rules would affect us, except that new obligations could increase the costs of providing DSL service.

Moreover, Congress has passed a number of laws that concern the Internet and Internet users. Generally, these laws limit the potential liability of ISPs and hosting companies that do not knowingly engage in unlawful activity. We expect that Congress will consider this year a variety of bills, some of which, if signed into law, could impose obligations on us to monitor the Internet activities of our customers.

The use of the public Internet and private Internet protocol networks to provide voice communications services, including voice-over-Internet protocol, or VoIP, is a relatively recent market development. The provision of such services until recently was largely unregulated within the United States. To date, the FCC has not imposed regulatory surcharges or most forms of traditional common carrier regulation upon providers of Internet communications services. But the FCC has imposed obligations on providers of two-way interconnected VoIP services to provide E911 service, and it has extended CALEA obligations to such VoIP providers. Both decisions have been appealed in the U.S. Court of Appeals for the D.C. Circuit, although the E911 regulations have already taken effect. To the extent that we choose to provide interconnected VoIP services, we will bear costs as a result of these mandates.

Several additional pending FCC proceedings will affect the regulatory status of Internet telephony. On February 12, 2004, the FCC adopted a notice of proposed rulemaking to address, in a comprehensive manner, the future regulation of services and applications making use of Internet protocol, including VoIP. In the absence of federal legislation, we expect that through this proceeding the FCC will resolve certain

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regulatory issues relating to VoIP services and develop a regulatory framework that is unique to IP telephony providers or that subjects VoIP providers to minimal regulatory requirements. We cannot predict when, or if, the FCC may take such actions. The FCC may determine that certain types of Internet telephony should be regulated like basic interstate communications services, rendering VoIP calls subject to the access charge regime that permits local telephone companies to charge long distance carriers for the use of the local telephone networks to originate and terminate long-distance calls, generally on a per minute basis. The FCC also may conclude that Internet telephony providers should contribute to the USF. The FCC’s pending review of intercarrier compensation policies (discussed above) also may have an adverse impact on enhanced service providers.

In a series of decisions issued in 2004, the FCC clarified that the FCC, not the state PUCs, has jurisdiction to decide the regulatory status of IP-enabled services, including VoIP. Most recently, on November 12, 2004, in response to a request by Vonage Holdings Corp. (Vonage), a VoIP services provider, the FCC issued an order preempting traditional telephone company regulation of VoIP service by the Minnesota PUC, finding that the service cannot be separated into interstate and intrastate communications without negating federal rules and policies. In September 2003, the Minnesota PUC issued an order requiring Vonage to comply with Minnesota laws that regulate telephone companies. That order was appealed to the U.S. District Court for the District of Minnesota, which enjoined enforcement of the order pending action by the FCC on Vonage’s request for preemption. Earlier this year, the U.S. Court of Appeals for the Eighth Circuit upheld the injunction, and that court also is reviewing the merits of the FCC order that preempted the Minnesota PUC’s regulations as applied to VoIP providers.

On October 18, 2002, AT&T filed a petition with the FCC seeking a declaratory ruling that would prevent RBOCs from imposing traditional circuit-switched access charges on phone-to-phone IP services. In April 2004, the FCC issued an order concluding that, under current rules, AT&T’s phone-to-phone IP telephony service is a telecommunications service upon which interstate access charges may be assessed. AT&T’s service consists of an interexchange call initiated by an end user who dials 1 + the called number from a regular telephone. When the call reaches AT&T’s network, AT&T converts it into an IP format and transports it over AT&T’s Internet backbone. AT&T then converts the call back from the IP format and delivers it to the called party through local exchange carrier local business lines. This decision is thus limited to interexchange service that: (1) uses ordinary customer premises equipment with no enhanced functionality; (2) originates and terminates on the public switched telephone network; and (3) undergoes no net protocol conversion and provides no enhanced functionality to end users due to the provider’s use of IP technology. The FCC made no determination regarding retroactive application of its ruling, and stated that the decision does not preclude it from adopting a different approach when it resolves the IP-Enabled Services or Intercarrier Compensation rulemaking proceedings.

Other aspects of VoIP and Internet telephony services, such as regulations relating to the confidentiality of data and communications, copyright issues, taxation of services, and licensing, may be subject to federal or state regulation. Similarly, changes in the legal and regulatory environment relating to the Internet connectivity market, including regulatory changes that affect communications costs or that may increase the likelihood of competition from RBOCs or other communications companies could increase our costs of providing service.

Taxes and Regulatory Fees.   We are subject to numerous local, state and federal taxes and regulatory fees, including but not limited to a three percent federal excise tax on communications service, FCC regulatory fees and public utility commission regulatory fees. We have procedures in place to ensure that we properly collect taxes and fees from our customers and remit such taxes and fees to the appropriate entity pursuant to applicable law and/or regulation. If our collection procedures prove to be insufficient or if a taxing or regulatory authority determines that our remittances were inadequate, we could be required to make additional payments, which could have a material adverse effect on our business.

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Legislation.Congress is considering various measures that would overhaul telecom laws in the United States. Bills introduced in the House of Representatives and the Senate address a wide variety of issues, including the regulation of broadband and VoIP services, network neutrality requirements, video franchising procedures, and municipal broadband services, among others. The prospects and timing of any potential legislation remain unclear, and as such, we cannot predict the outcome of any such legislation upon our business.

RBOC-IXC Mergers.On October 31, 2005, the FCC unanimously approved orders clearing the SBC-AT&T and Verizon-MCI mergers with relatively limited conditions in certain areas, including minimal divestitures and no reduction in special access rates. Although the Department of Justice, in its consent decrees approving the mergers concluded that the mergers would reduce competition in certain markets for special access, primarily for business customers, it concluded that there was no basis for imposing remedies in the mass market or Internet backbone market, and further concluded there was no problem in the overall structure of the resulting market that would justify imposing restrictions on the companies’ dealings with each other. Rather than requiring them to divest lines and other facilities, however, it opted instead for the lighter remedy of requiring them to sell or divest, at market rates, ten-year leases for loops into certain buildings along with leases for dark fiber transport necessary to connect the loops to the facility of the purchaser of the lease. The end result is that Verizon must sell dark fiber leases to 350 buildings and SBC to 383 buildings. The FCC’s conditions took the form of voluntary conditions offered by the merging parties, as follows: 1) SBC and Verizon agreed to freeze certain high-capacity special access rates for existing in-region AT&T and MCI customers for 30 months, and to refrain from providing themselves, their affiliates, or each other with special access services not generally available to other competitors. As Eschelon’s reliance on special access is minimal, we do not expect these conditions to affect us positively or negatively. In addition, as our operations in the Verizon and SBC regions are minimal, we do not expect to see a significant impact as a result of the UNE rate freezes they each agreed to for a two year period from the merger closing date. On the closing of the merger, SBC renamed itself AT&T.

In March 2006, AT&T and Bell South announced they had reached an agreement to merge. This transaction will be subject to significant review by the FCC and the Department of Justice as well as by many state PUCs. We cannot predict whether the merger will be approved, and if so, what conditions may be placed upon the parties. Consequently, we cannot predict the effect of the merger upon our business.

State Regulation

The Communications Act maintains the authority of individual states to impose their own regulation of rates, terms and conditions of intrastate services, so long as such regulation is not inconsistent with the requirements of federal law or has not been preempted. Because we provide communications services that originate and terminate within individual states, including both local service and in-state long distance toll calls, we are subject to the jurisdiction of the PUC and other regulators in each state in which we provide such services. For instance, we must obtain a Certificate of Public Convenience and Necessity, or CPCN, or similar authorization before we may commence the provision of communications services in a state. We have obtained CPCNs to provide facilities-based or resold competitive local and interexchange service in California, Arizona, Colorado, Idaho, Minnesota, Nevada, New Mexico, New York, Oregon, Utah and Washington. There can be no guarantee that we will receive authorizations we may seek in other states in the future. As our local service business expands, we may offer additional intrastate services and may become subject to additional state regulations.

In addition to requiring certification, state regulatory authorities may impose tariff and filing requirements and obligations to contribute to state universal service and other funds. State commissions also have jurisdiction to approve negotiated rates, and to establish rates through arbitration, for

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interconnection, including rates for UNEs. Changes in rates for UNEs could have a material adverse effect on our business.

We also are subject to state laws and regulations regarding slamming, cramming, and other consumer protection and disclosure regulations. These rules could substantially increase the cost of doing business in any particular state. State commissions have issued or proposed substantial fines against CLECs for slamming or cramming. The risk of financial damage, in the form of fines, penalties and legal fees and costs and to business reputation from slamming is significant. A slamming complaint before a state commission could generate substantial litigation expenses. In addition, state law enforcement authorities may use their consumer protection authority against us if we fail to meet applicable state law requirements.

States also retain the right to sanction a service provider or to revoke certification if a service provider violates relevant laws or regulations. If any regulatory agency were to conclude that we are or were providing intrastate services without the appropriate authority, the agency could initiate enforcement actions, which could include the imposition of fines, a requirement to disgorge revenues, or refusal to grant regulatory authority necessary for the future provision of intrastate services.

We may be subject to requirements in some states to obtain prior approval for, or notify the state commission of, any transfers of control, sales of assets, corporate reorganizations, issuance of stock or debt instruments and related transactions. Although we believe such authorizations could be obtained in due course, there can be no assurance that state commissions would grant us authority to complete any of these transactions, or that such authority would be granted on a timely basis.

Rates for intrastate switched access services, which we provide to long-distance companies to originate and terminate in-state toll calls, are subject to the jurisdiction of the state in which the call originated and/or terminated. Such regulation by states could have a material adverse affect on our revenues and business opportunities within that state. PUCs also regulate the rates RBOCs charge for interconnection, access to network elements, and resale of services by competitors. In response to the USTA II decision and the FCC’s ongoing TRO proceedings, some state commissions have continued proceedings to address issues affecting the rates, terms and conditions of intrastate services while other states suspended or terminated their proceedings. The states of Colorado, Minnesota and Arizona may initiate cost cases to reprice UNEs and to establish rates for wholesale services that are no longer required to be provided as UNEs under the FCC’s TRRO orders. Any such proceedings may affect the rates, terms, and conditions contained in our interconnection agreements or in other wholesale agreements with RBOCs. We cannot predict the outcome of these proceedings. The pricing, terms and conditions under which the RBOC in each of the states in which we currently operate offers such services may preclude or reduce our ability to offer a competitively viable and profitable product within these and other states on a going forward basis.

State regulators establish and enforce wholesale service quality standards that RBOCs must meet in providing network elements to CLECs like Eschelon. These plans sometimes require payments from the RBOCs to the CLECs if quality standards are not met. In 2005, the Minnesota Supreme Court ruled that the Minnesota Commission had the authority to establish wholesale service quality standards but that it did not have the legal authority to impose requirements that Qwest make payments to CLECs for Qwest’s failure to comply with those standards. This decision leaves the only payments in Minnesota from Qwest to CLECs for poor wholesale service quality those payments due under Qwest’s Minnesota PAP. The Minnesota PAP payments to Eschelon are less than they would have been under the Minnesota Commission’s plan. Qwest accordingly has less financial incentive to provide good wholesale service and the service quality we experience in Minnesota could decline. Qwest and other RBOCs are asking various other state commissions where we operate to modify the state wholesale quality plans in ways that would reduce or eliminate certain wholesale quality standards. The Colorado Commission has recently changed Qwest’s performance standards in that state and a proceeding has recently commenced in Nevada to change AT&T’s performance standards. Changes in performance standards could result in reduced

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payments and a diminution of the service quality we receive. We cannot predict how state commissions will respond to such requests, nor the ultimate impact of such decisions on the Company.

State governments and regulators may attempt to assert jurisdiction over the provision of intrastate IP communications services. Various state regulatory authorities already have initiated proceedings to examine the regulatory status of Internet telephony services. While most PUCs have not indicated an intention to impose traditional communications regulatory requirements on IP telephony, some PUCs have issued rulings that may be interpreted differently. For instance, a state court in Colorado has ruled that the use of the Internet to provide certain intrastate services does not exempt an entity from paying intrastate access charges. Prior to imposing regulatory burdens on VoIP providers, however, the Colorado PUC opened a docket to investigate whether it has jurisdiction to regulate VoIP services. Any such state proceedings will be affected by the FCC’s IP-Enabled Services rulemaking proceeding, in which the FCC is considering the extent to which conflicting state regulation of IP telephony is preempted.

State legislatures and state PUCs also regulate, to varying degrees, the terms and conditions upon which our competitors conduct their retail businesses. In general, state regulation of RBOC retail offerings is greater than the level of regulation applicable to CLECs. Qwest, AT&T and Verizon either have obtained or are actively seeking some level of increased pricing flexibility or deregulation, either through amendment of state law or through proceedings before state PUCs. Such increased pricing flexibility could have an adverse effect on our competitive position in those states because it could allow the RBOCs to reduce retail rates to customers while wholesale rates that we pay to Qwest stay the same or increase. We cannot predict whether these efforts will materially affect our business.

Local Regulation

In some municipalities where we have installed facilities, we are required to pay license or franchise fees based on a percentage of our revenue generated from within the municipal boundaries. We cannot guarantee that fees will remain at their current levels following the expiration of existing franchises or that other local jurisdictions will not impose similar fees.

Other Domestic Regulation

We are subject to a variety of federal, state, and local environmental, safety and health laws, and regulations governing matters such as the generation, storage, handling, use, and transportation of hazardous materials, the emission and discharge of hazardous materials into the atmosphere, the emission of electromagnetic radiation, the protection of wetlands, historic sites, and endangered species and the health and safety of employees. We also may be subject to laws requiring the investigation and cleanup of contamination at sites it owns or operates or at third-party waste disposal sites. Such laws often impose liability even if the owner or operator did not know of, or was not responsible for, the contamination.

We operate numerous sites in connection with our operations. We are not aware of any liability or alleged liability at any operated sites or third-party waste disposal sites that would be expected to have a material adverse effect on us. Although we monitor our compliance with environmental, safety and health laws and regulations, we cannot give assurances that it has been or will be in complete compliance with these laws and regulations. We may be subject to fines or other sanctions by federal, state and local governmental authorities if we fail to obtain required permits or violate applicable laws and regulations.

Available Information

Copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished to the Securities Exchange Commission pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge through our website (www.eschelon.com) as soon as reasonably practicable after we electronically file the material with, or furnish it to, the Securities Exchange Commission.

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Item 1A.Risk Factors.

Risks Related to Our Industry

The communications industry is subject to government regulation, and changes in current or future regulations could have a material adverse effect on our business, operating results and financial condition and restrict the manner in which we operate our business.   We are subject to varying degrees of federal, state and local regulation. Pursuant to the Communications Act, as amended, or the Telecommunications Act, the FCC exercises jurisdiction over us with respect to interstate and international services. We must comply with various federal regulations, such as the duty to contribute to universal service and other subsidies. Failure to comply with federal reporting and regulatory requirements may result in fines or other penalties, including loss of authority to provide services.

The FCC’s recent Triennial Review Order, or TRO, and its Triennial Review Remand Order, or TRRO, has reduced our ability to obtain unbundled network elements, or UNEs, and certain combinations of UNEs in several ways and have affected our operations. We may no longer purchase the unbundled network element platform, or UNE-P, for new customers and all UNE-P access terminates in March 2006. Because of this, we entered into a commercial agreement with Qwest and Verizon to purchase substitute UNE-P products at higher rates and have converted all of our UNE-P lines to these new products. We may also no longer be able to purchase DS1 UNE loops in four wire centers in the Qwest territory. In addition, we have only limited or no access to DS1 and DS3 transport on certain interoffice routes. Finally, we cannot purchase UNE transport between our switches and Qwest switches. In these instances where we lose access to UNEs, we must either find alternative suppliers or purchase substitute circuits from the RBOC as special access, which would increase our costs.

State regulatory commissions also exercise jurisdiction over us to the extent we provide intrastate services. We are required to obtain regulatory authorization and/or file tariffs with regulators in all of the states in which we operate. We have obtained the necessary certifications to provide service, but each commission retains the authority to revoke our certificate if that commission determines we have violated any condition of our certification or if it finds that doing so would be in the public interest. While we believe we are in compliance with regulatory requirements, our interpretation of our obligations may differ from those of regulatory authorities.

Both federal and state regulators require us to pay various fees and assessments, file periodic reports and comply with various rules regarding the contents of our bills, protection of subscriber privacy, service quality and similar consumer protection matters on an ongoing basis. If we fail to comply with these requirements, we may be subject to fines or potentially be asked to show cause as to why our certificate of authority to provide service should not be revoked.

The communications market in which we operate is highly competitive, and we may not be able to compete effectively against companies that have significantly greater resources than we do, which could cause us to lose customers and impede our ability to attract new customers.   The communications industry is highly competitive and is affected by the introduction of new services and systems by, and the market activities of, major industry participants. In each of our markets we compete principally with the RBOC serving that area. The recent mergers of SBC with AT&T and MCI, Inc. with Verizon may cause these risks to intensify. We have not achieved, and do not expect to achieve, a major share of the local access lines for any of the communications services and systems we offer. Current and potential large competitors in each market have the following advantages over us:

·long-standing relationships and strong reputation with customers;

·financial, technical, marketing, personnel and other resources substantially greater than ours;

·more funds to deploy communications services and systems that compete with ours;

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·larger networks; and

·benefits from existing regulations that favor the RBOCs.

We also face, and expect to continue to face, competition in our markets from other current and potential market entrants, including other competitive communications services providers, competitive local carriers, wireless carriers, resellers, competitive access providers, cable television companies, electric utility companies, microwave carriers and private networks built by large end users. Increasingly, we are subject to competition in the Internet services market from communications companies, online service providers, cable companies and Internet telephone and other IP-based service providers, such as 8 x 8, Inc., Net2Phone, Inc., pulver.com, Inc. and Vonage Holdings Corp. The Internet services providers are currently subject to substantially less regulation than competitive and traditional local telephone companies and are exempt from a number of taxes and regulatory charges that we are required to pay. In addition, the development of new technologies could give rise to significant new competitors in the local market.

In the long distance communications market, we face competition from large carriers such as AT&T, Verizon and Sprint, the RBOCs, wireless carriers, many smaller long distance carriers and IP-based service providers. Long distance prices have decreased substantially in recent years and are expected to continue to decline in the future as a result of increased competition. If this trend continues, we anticipate that revenue from our network services and other service offerings will likely be subject to significant price pressure, which could have a material adverse effect on our business, results of operations and financial condition.

Changes in current or future regulations in the local and long distance industries may hurt our business and results of operations and restrict the manner in which we operate our business.   If current or future regulations change, we cannot assure you that the FCC or state regulators will grant us any required regulatory authorization or refrain from taking action against us if we are found to have provided services without obtaining the necessary authorizations, or to have violated other requirements of their rules and orders. Delays in receiving required regulatory approvals or the enactment of new adverse regulation or regulatory requirements may slow our growth and have a material adverse effect upon our business, results of operations and financial condition. We cannot assure you that changes in current or future regulations adopted by the FCC or state regulators, or other legislative, administrative or judicial initiatives relating to the communications industry, would not be less favorable to competitive communications services providers and more favorable to RBOCs and thus have a material adverse effect on our business, results of operations and financial condition.

The communications industry faces significant regulatory uncertainties and the resolution of these uncertainties could hurt our business, results of operations and financial condition.   The Telecommunications Act requires, among other things, that RBOCs provide access to their networks to us; however, this act remains subject to judicial review and ongoing proceedings before the FCC and state regulators, including proceedings relating to interconnection pricing, access to and pricing for unbundled network elements and other issues that could result in significant changes to our business and business conditions in the communications industry generally. We must lease unbundled network elements from RBOCs at cost-based rates to serve our customers and to connect our telecommunications equipment. We provide our customers with telecommunications services through telephone lines or “loops” we lease from RBOCs. We pay RBOCs to maintain and repair these loops. We also purchase other unbundled network elements from RBOCs, such as transport between RBOC switches. Recent decisions by the FCC have eliminated or reduced our access to some unbundled network elements and increased the rates that we pay for such elements. This has required us to enter into commercial agreements with the RBOCs to obtain the elements at increased prices. Our business would be substantially impaired if the FCC, the courts, state commissions or the Congress eliminated our access to these elements or substantially increased the rates at

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which we pay for access. The TRRO, the most recent FCC order governing our access to network elements, is being appealed and judicial review could result in significant changes to the order. Other proceedings are underway that could potentially further limit our access to UNEs. The FCC has initiated a proceeding that may result in increasing the rates we pay for network elements. A number of states also have proceedings and legislative proposals pending to re-examine and possibly increase our network element rates. In addition, several important federal legislators have announced their intention to substantially revise the Communications Act. We cannot predict the outcome of these proceedings or the effects, if any, that these proposals may have on our business and operations. A brief summary of legal and regulatory developments is discussed in more detail in the section entitled “Regulation.”

The financial difficulties faced by others in our industry could adversely affect our public image and our financial results.Many competitive communications services providers, long distance carriers and other communications providers have experienced substantial financial difficulties over the past few years. To the extent that carriers in financial difficulties purchase access services from us, we may not be paid in full or at all for services we have rendered. Further, the perception of instability of companies in our industry may diminish our ability to obtain further capital and may adversely affect the willingness of potential customers to purchase their communications services from us.

Risks Related to Acquisitions

We may not be able to successfully integrate acquired companies into our business.   During 2005, we completed the acquisition of ATI, which closed on December 31, 2004. While we believe that this acquisition was successfully integrated into the legacy Eschelon operation, there can be no assurance that we will be able to integrate and consolidate subsequent acquisitions into our ongoing business and operations according to management’s plan. As noted in Item 1. Business, Eschelon announced the signing of a definitive agreement to purchase OTI on January 27, 2006. While we believe that we have sufficient financial and management resources to complete the integration of OTI, there can be no assurance in this regard or that we will not experience difficulties with customers, personnel or others resulting from the integration. This process will require management, financial and other resources and may pose risks with respect to production, customer service and market share. It may also require regulatory approvals for some aspects which we cannot assure will be obtained. In addition, although we believe that the OTI acquisition will enhance our competitive position and business prospects, there can be no assurance that such benefits will be fully realized or that the integration of OTI into our business and operations will ultimately be successful.

As we adapt to the current telecom environment and begin to integrate OTI, we may be required to make operational changes, including consolidating certain operations, closing certain facilities, or amending or terminating existing contractual relationships, in order to improve our future profitability. However, there can be no assurance as to the cost required to effect those operational changes, their effectiveness, or the timing or amount of any cost savings that are actually realized as a result of such changes. Management is continuing to assess our overall organization and cost structures and may, as a result of this ongoing process, develop future initiatives to increase operating and administrative efficiency and enhance profitability. If we are unable to effectively and efficiently integrate OTI into our business and operations, our business, financial condition, results of operations and cash flows may suffer.

We will continue to look for opportunities that fit our acquisition filters, in terms of price, services and footprint. There can be no assurance that future acquisitions will be successfully integrated or will not result in significant disruption to on-going operations.

If we acquire another business, we may face difficulties, including:

·integrating that business’ personnel, services, products or technologies into our operations;

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·retaining key personnel of the acquired business;

·failing to adequately identify or assess liabilities of that business;

·failure of that business to achieve the forecasts we used to determine the purchase price; and

·diverting our management’s attention from the normal daily operation of our business.

These difficulties could disrupt our ongoing business and increase our expenses.

In addition, our ability to complete acquisitions will depend, in part, on our ability to finance the acquisitions, including the costs of acquisition and integration. Our ability may be constrained by our cash flow, the level of our indebtedness at the time, restrictive covenants in the agreements governing our indebtedness, conditions in the securities markets and other factors, many of which are not within our control. If we proceed with one or more acquisitions in which the consideration consists of cash, we may use a substantial portion of our available cash to complete the acquisitions. If we finance one or more acquisitions with the proceeds of indebtedness, our interest expense and debt service requirements could increase materially. The financial impact of acquisitions could materially affect our business and could cause substantial fluctuations in our quarterly and yearly operating results.

Risks Related to Our Business

We have a history of operating losses, and we may not be profitable in the future.We have incurred significant operating and net losses in the past and expect to continue to incur losses in the future. For the year ended December 31, 2003, we had an operating loss of $16.1 million, a net loss of $17.2 million and an accumulated deficit of $125.2 million. For the year ended December 31, 2004, we had an operating loss of $5.6 million, net income of $1.1 million and an accumulated deficit of $124.1 million. The net income for the year ended December 31, 2004 was primarily the result of a gain on extinguishment of debt of $18.2 million. For the year ended December 31, 2005, we had an operating loss of $4.3 million, a net loss of $31.0 million and an accumulated deficit of $155.0 million. We cannot assure you that our revenues will continue to grow or that we will achieve profitability in the future.

If the RBOCs with whom we have interconnection agreements engage in anticompetitive practices, our business will be adversely affected.   Our business depends on our ability to interconnect with RBOC networks and to lease from them certain essential network elements. We obtain access to these network elements and services under terms established in interconnection agreements that we have entered into with Qwest, AT&T and Verizon. Like many competitive communications services providers, from time to time, we have experienced difficulties in working with the RBOCs with respect to obtaining information about network facilities, ordering network elements and services, interconnecting with RBOC networks and settling financial disputes. These difficulties can impair our ability to provide local service to customers on a timely and competitive basis. The Telecommunications Act of 1996, or the Telecommunications Act, required RBOCs to cooperate with competitive communication services providers and meet statutory requirements for opening their local markets to competition before they could receive permission to provide in-region long distance services. Now that each RBOC has met those requirements and received authorization to provide long distance services throughout its respective operating region, it may have less incentive to properly maintain the information, ordering and interconnection interfaces that we rely on and may otherwise fail to cooperate with us regarding service provisioning issues.

The RBOCs, including Qwest, AT&T and Verizon, have been fined by or have agreed to make voluntary payments in connection with consent decrees to both federal and state authorities for their failure to comply with the laws and regulations that support local competition. We believe these fines and payments may not substantially reduce the use of anticompetitive practices and illegal and anticompetitive activity may continue to occur in most of our markets. While we consistently undertake legal actions to oppose these anticompetitive actions and enforce our legal right of access to RBOC facilities, regulatory

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and judicial remedies frequently do not preclude further anticompetitive behavior and rarely compensate us for our damages and legal expenses. If an RBOC refuses to cooperate or otherwise fails to support our business needs in retaliation for our efforts to enforce our legal rights or for any other reason, including labor shortages, work stoppages, cost-cutting initiatives or disruption caused by mergers, other organizational changes or terrorist attacks, our ability to offer services on a timely and cost-effective basis will be materially and adversely affected.

Our ability to provide our services and systems at competitive prices is dependent on our ability to negotiate and enforce favorable interconnection agreements.   Our ability to continue to obtain favorable interconnection, unbundling, service provisioning and pricing terms, and the time and expense involved in negotiating interconnection agreements and amendments, can be adversely affected by ongoing legal and regulatory activity. All of our existing interconnection agreements provide either that a party is entitled to demand renegotiation of particular provisions or of the entire agreement based on intervening changes in law resulting from ongoing legal and regulatory activity, or that a change of law is immediately effective in the agreement and set out a dispute resolution process if the parties do not agree upon the change of law. The initial terms of all of our interconnection agreements with the RBOCs have expired; however, each agreement with Qwest and AT&T contains an “evergreen” provision that allows the agreement to continue in effect until a new agreement is in place. Our Verizon agreements are subject to termination on 60 day’s notice. If we were to receive a termination notice from Verizon, we could initiate an arbitration proceeding at the relevant state commission before the expiration of the notice period and our existing agreement would remain in effect until the commission approved a new agreement. We are in the process of renegotiating the terms of our interconnection agreements with Qwest, AT&T and Verizon. We cannot assure you that we will be able to successfully renegotiate the agreements on terms favorable to us. In addition to negotiation and arbitration, the Act gives us the right to opt into any other carrier’s interconnection agreement, provided the agreement is still in effect and provided that we adopt the entire agreement. Any limitation on our ability to colocate telecommunications equipment in RBOC central offices, or on the terms and conditions for interconnecting our network to the RBOCs’ networks, or on the availability of unbundled network elements, especially unbundled local loops or interoffice transmission facilities, resulting from our failure to negotiate favorable interconnection agreements or resulting from federal or state regulatory activity, could increase our costs and otherwise have a material adverse impact on our business, results of operations and financial condition.

The FCC has granted Qwest, AT&T, and Verizon significant flexibility in pricing interstate special access services. This pricing flexibility may result in RBOCs raising their prices. To the extent we are forced to purchase special access circuits because equivalent facilities are no longer available at cost-based rates as unbundled network elements under our interconnection agreements, our costs may significantly increase. We provide a more detailed discussion of current legal and regulatory developments affecting access charges and intercarrier compensation issues in the section entitled “Regulation.”

The regulation of access charges involves uncertainties, and the resolution of these uncertainties could adversely affect our business, results of operations and financial condition.   As a facilities-based competitive communications services provider, we earn access charges by connecting our voice services customers with long distance carriers such as AT&T, Verizon and Sprint Corp. When a network service voice customer of ours originates or receives a long distance call, we are entitled to compensation from these carriers for the cost we incur in originating or terminating the long distance call. In 2005, access charges accounted for $13.3 million, or 5.8% of our total revenue. We have tariffs filed with the FCC for interstate access services and with most states where we provide intrastate access services. Our rates can be higher than those charged by some larger local exchange carriers that have many more customers and, consequently, lower per-unit costs. In the past, we have experienced difficulty in collecting access fees due to us from some carriers. We cannot guarantee that we will be able to successfully resolve future rate disputes with all carriers. Future regulatory proceedings, both at the FCC and in individual states where we operate, could

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result in decreasing our access charges. Such reductions could have a material adverse effect on our business, results of operations and financial condition.

The FCC has commenced a proceeding to revise its compensation rules regarding carrier access charges. Because we receive payments from long distance carriers for the calls their customers make that access our network facilities, we will be affected by any changes to the FCC’s compensation rules. We cannot predict the impact that any such changes would have on our business.

Difficulties we may experience with the RBOCs and long distance providers over payment issues may hurt our financial performance.   We have experienced difficulties with receiving payments due to us for services that we provide to RBOCs and long distance service providers. These balances due to us can be material. We generally have been able to reach mutually acceptable settlements to collect overdue and disputed payments, but we cannot assure you that we will be able to do so in the future. If we are unable to continue to timely receive payments and to create settlement agreements with other carriers, our business, results of operations and financial condition may be materially adversely affected. In addition, certain of our interconnection agreements allow the RBOCs to decrease order processing, disconnect customers and increase our security deposit obligations for delinquent payments. For example, interconnection agreement provisions required by Qwest provide that, in addition to late payment charges, Qwest may discontinue order processing if we fail to pay within 30 days of the payment due date, disconnect customers if we fail to pay within 60 days after the payment due date, and require a deposit if we pay late three times during a 12 month period. The deposit may be up to the estimated total monthly charges for an average two-month period within the first three months from the date of delinquency. If an RBOC makes an enforceable demand for an increased security deposit, we could have less cash available for other expenses, which could have a material adverse effect on our business, results of operations and financial condition.

The level of our outstanding total debt may adversely affect our financial health and prevent us from fulfilling our financial obligations.   As of December 31, 2005, we had approximately $92.1 million of total indebtedness outstanding, excluding capital lease obligations. Our indebtedness could significantly affect our business and our ability to fulfill our financial obligations. For example, a high level of indebtedness could:

·make it more difficult for us to satisfy our current and future debt obligations;

·limit our ability to borrow additional funds or obtain other forms of financing;

·increase our vulnerability to general adverse economic and industry conditions;

·limit our ability to fund working capital, capital expenditures and other general corporate requirements out of future operating cash flows or with additional debt or equity financing;

·limit our flexibility in planning for, or reacting to, changes in our business or our industry;

·place us at a disadvantage to competitors with less debt; and

·make us vulnerable to interest rate fluctuations, if we incur any indebtedness that bears interest at variable rates.

Our outstanding notes contain restrictive covenants that limit our operating flexibility.The indenture governing our outstanding 83¤8% senior second secured notes due 2010 contains covenants that, among other things, limit our ability to take specific actions, even if we believe them to be in our best interest. In addition, we may obtain a credit facility in the future which may include similar or additional covenants. These covenants may include restrictions on our ability to:

·incur additional indebtedness;

·pay dividends or distributions on, or redeem or repurchase, capital stock;

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·create liens with respect to our assets;

·make investments, loans or advances;

·prepay specified indebtedness;

·enter into transactions with affiliates;

·merge, consolidate, reorganize or sell our assets; and

·engage in any business other than activities related or complementary to telecommunications, voice, data or video services.

In addition, a future credit facility may impose financial covenants that require us to comply with specified financial ratios and tests, including minimum quarterly EBITDA, senior debt to total capitalization, maximum capital expenditures, maximum leverage ratios and minimum interest coverage ratios. We cannot assure you that we will be able to meet these requirements or satisfy these covenants in the future. If we fail to do so, our debts could become immediately payable at a time when we are unable to pay them. This could adversely affect our ability to carry out our business plan and would have a negative effect on our financial condition.

If we are unable to retain and attract management and key personnel, we may not be able to execute our business plan.We believe that our success is due, in part, to our experienced management team, including Mr. Richard A. Smith, our president and chief executive officer. Losing the services of one or more members of our management team could adversely affect our business and our expansion efforts, and possibly prevent us from further improving our operational, financial and information management systems and controls. As we continue to grow, we will need to retain and hire qualified sales, marketing, administrative, operating and technical personnel, and to train and manage new personnel.

We believe that there are a limited number of persons with experience comparable to the experience of the members of our management team. Our ability to implement our business plan is dependent on our ability to retain and hire a large number of qualified new employees each year. If we are unable to hire sufficient qualified personnel, our customers could experience inadequate customer service and delays in the installation and maintenance of access lines.

If we choose to grow by expanding to new markets and/or by making acquisitions, we would face additional risks.Although we believe cash resources on hand will be sufficient to fund our current operations, we may need to seek additional funding by issuing new debt or equity, if we choose to expand our geographic service area or to make acquisitions.

The actual amount and timing of our future capital requirements may differ from our current estimates. Competitive developments, changes in technology, changes in the regulatory environment and other events may cause us to alter the currently estimated amount and timing of our expenditures.

These and other factors may also cause our actual revenues and costs to differ from what we currently anticipate, which could affect the amount and timing of our additional financing needs.

Sources of additional financing may include the private or public sale of equity or debt securities, commercial bank debt financing, vendor financing or lease financing. If we meet our funding needs through debt financing, our interest and debt service obligations will increase, and we may become subject to restrictive covenants that could impair our ability to implement our business plan. We cannot assure you that any additional financing we may need will be available to us on favorable terms or at all.

Rapid growth could place a significant strain on our management, operational, financial and information management systems and controls, personnel and other resources. We cannot assure you that we will successfully implement the operational and financial information management systems and

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controls that we anticipate would be necessary to support rapid growth and to manage a competitive business in an evolving industry. Any failure to implement and improve these systems and controls and to maintain our other resources at a pace consistent with industry changes and the growth of our business could cause customers to switch to other competitive service providers, which would have a material adverse effect on us.

We are dependent on effective billing, customer service and information systems.Sophisticated back office information and processing systems are vital to our ability to control and monitor costs, provide outstanding customer service, bill and service customers, initiate, implement and track customer orders and achieve operating efficiencies. We have purchased and implemented our essential information systems consisting of our billing system, our sales order entry system, our customer provisioning system, our electronic bonding system, our mediation system and our switch information systems. The integration of these systems is challenging because all of these systems were developed by different vendors and must be coordinated through custom software and integration processes. Our sales, line count and other core operating and financial data are generated by these systems and the accuracy of this data depends on the quality of manual entry and system integration. Although we have completed some systems integration, the upgrading of these systems and the integration of updated systems is ongoing. In addition, we may experience negative adjustments to our financial and operating data if we encounter difficulties in these projects. We cannot assure you that any such adjustments arising out of our systems integration efforts will not have a material adverse effect in the future. If we are unable to effectively upgrade and integrate our operations and financial systems, our customers could experience delays in connection of service, billing issues and/or lower levels of customer service.

Declining prices for communications services could reduce our revenue and profitability.Prices for network services have decreased in recent years and are expected to continue to decline in the future. In addition, the long distance industry has historically experienced high customer churn, as customers frequently change their chosen long distance providers in response to lower rates or promotional incentives by competitors. This trend may continue.

We depend on a limited number of third party service providers for long distance and other services, and if any of these providers were to experience significant interruptions in its business operations, or were to otherwise cease to provide such services to us, our business could be materially and adversely affected.   We depend on a limited number of third party service providers for long distance, data and other services. If any of these third party providers were to experience significant interruptions in their business operations, terminate their agreements with us or fail to perform the services or meet the standards of quality required under the terms of our agreements with them, our ability to provide these services to our customers would be materially and adversely affected for a period of time that we cannot predict. If we have to migrate the provision of these services to an alternative provider, we cannot assure you that we would be able to timely locate alternative providers of such services, that we could migrate such services in a short period of time without significant customer disruption so as to avoid a material loss of customers or business, or that we could do so at economical rates. If we are unable to locate such alternative providers we may need to seek an alternative that could be costly and disrupt our service or we would lose our transport capacity.

The communications industry is undergoing rapid technological changes, and new technologies may be superior to the technologies we use. Our failure to anticipate and keep up with such changes could have a material adverse effect on our business, results of operations and financial condition.   The communications industry is subject to rapid and significant changes in technology and in customer requirements and preferences. If we fail to anticipate and keep up with such changes we could lose market share which could reduce our revenue. We have developed our business based, in part, on traditional telephone technology. Subsequent technological developments may reduce the competitiveness of our network and require expensive unanticipated upgrades or additional communications products that could be time consuming to integrate into our business and could cause us to lose customers and impede our ability to attract new customers.

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We may be required to select one technology over another at a time when it might be impossible to predict with any certainty which technology will prove to be more economic, efficient or capable of attracting customers. In addition, even if we utilize new technologies, such as VoIP, we may not be able to implement them as effectively as other companies with more experience with those new technologies. Technological advancements and manufacturing economies of scale could make VoIP services delivered over the Internet cost effective to deploy and of sufficient quality to be acceptable to business customers.

A network failure could cause delays or interruptions of service, which could cause us to lose customers and revenue.Our success requires that our network provide competitive reliability, capacity and security. Some of the risks to our network and infrastructure include:

·physical damage to access lines;

·power surges or outages;

·capacity limitations;

·software defects;

·lack of redundancy;

·breaches of security; and

·other disruptions beyond our control.

Such disruptions may cause interruptions in service or reduced capacity for customers, any of which could cause us to lose customers.

We continue to monitor our network from a performance and cost perspective and as a result, our network optimization routines may have an adverse effect on our customers.   Our engineering and operations organizations continually monitor and analyze the utilization of our network. As a result, they may develop projects to modify or eliminate network circuits that are underutilized. This ongoing process may result in limited network outages for a subset of our customers, adversely affecting our relationship with them and may increase our customer disputes and monthly churn.

We will be required to report the effectiveness of the internal controls over financial reporting of our business in our annual report on Form 10-K for 2006.   Section 404 of the Sarbanes-Oxley Act of 2002 and the rules of the Securities and Exchange Commission promulgated thereunder require our annual reports to contain a report of management’s assessment of the effectiveness of internal controls over financial reporting and an attestation of our independent registered public accounting firm as to that management report. Our first management internal controls report, as well as our first auditor attestation of that report, will be required to be included commencing with our annual report on Form 10-K for 2006. The evaluation of our systems and the documentation of such systems that we will need to comply with Section 404 will be both costly and time-consuming. We have recently begun the work necessary to comply with Section 404 and cannot estimate at this time how long this process will take nor how much additional expense we will incur in completing the process. In addition, if we are unable to conclude that our internal controls over financial reporting is effective as of December 31, 2006 (or if our auditors are unable to attest that our management’s report are fairly stated or they are unable to express an opinion on our management’s assessment or on the effectiveness of the internal controls), we could lose investor confidence in the accuracy and completeness of our financial reports, which could, in turn, have an adverse effect on our stock price.

Some of our employees are unionized, and we could face work disruptions due to strikes, slowdowns or other labor disputes.A small percentage of our employees are members of the International Brotherhood of Electrical Workers. Although our management believes that our relationship with our union employees is good, we cannot promise that we will never experience a labor disruption. Such disruptions could occur in

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response to our actions but could also be due to the actions of other union employers. Significant labor disruptions could adversely affect our ability to provide acceptable levels of service to our customers, which could result in customer dissatisfaction and a loss of business.

Terrorist attacks and other acts of violence or war may affect the markets in which we operate, our operations and our profitability.   Terrorist attacks, such as the attacks that occurred in New York and Washington, D.C. on September 11, 2001, and subsequent worldwide terrorist actions may negatively affect our operations. We cannot assure you that there will not be further terrorist attacks that impact our employees, network facilities or support systems. Certain losses resulting from these types of events are uninsurable and others are not likely to be covered by our insurance.

Terrorist attacks may directly impact our business operations through damage or harm to our employees, network facilities or support systems, increased security costs or the general curtailment of voice or data traffic. Any of these events could result in increased volatility in or damage to our business and the United States financial markets and economies.

Item 1B. Unresolved Staff Comments.

None.

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Item 2. Properties.

We are headquartered in Minneapolis, Minnesota and conduct our principal operations in Minnesota, Washington, Oregon, Colorado, Arizona, Utah, Nevada and California.

We do not own any of our facilities. The table below lists our leased facilities as of February 28, 2006.

Location	Lease Expiration	Square Footage	Purpose
Minneapolis, MN	May 31, 2013	118,174	Main Office
Minneapolis, MN	April 15, 2009	17,342	Switch Facility/NOC
Minneapolis, MN	June 30, 2010	3,348	Data Switch Facility
Golden Valley, MN	February 28, 2012	33,246	Office/Warehouse
Phoenix, AZ	May 15, 2010	7,468	Switch Facility/Office
Phoenix, AZ	February 1, 2009	9,391	Office
Santa Rosa, CA	April 30, 2014	8,278	Switch Facility
Santa Rosa, CA	August 1, 2007	4,230	Office
Denver, CO	January 31, 2011	6,000	Switch Facility
Wheatridge, CO	November 30, 2006	18,514	Office/Warehouse
Greenwood Village, CO	January 31, 2009	3,965	Office
Reno, NV	July 31, 2006	1,443	Office
Reno, NV	June 1, 2011	6,053	Switch Facility/Office
Reno, NV	July 31, 2009	8,778	Switch Facility/Office
Portland, OR	December 31, 2009	7,028	Switch Facility
Portland, OR	June 30, 2008	15,033	Office/Warehouse
Salem, OR	April 30, 2009	7,997	Switch Facility/Office
Salem, OR	April 30, 2006(1)	13,695	Office
Salem, OR	July 31, 2007	5,000	Storage
Eugene, OR	December 31, 2006	1,950	Office
Salt Lake City, UT	January 31, 2010	18,669	Switch Facility/Office
Yakima, WA	September 30, 2014	5,750	Switch Facility/Office
Everett, WA	September 15, 2010	16,000	Switch Facility/Office
Seattle, WA	December 31, 2009	12,645	Switch Facility
Tukwila, WA	August 31, 2009	18,803	Office/Warehouse
Tacoma, WA	January 31, 2009	11,373	Switch Facility/Office

(1)Will not be renewed.

We believe that the facilities used in our operations are suitable for their respective uses and adequate to meet our current needs. We continue to take steps to consolidate or downsize office and switch facilities where we have overlap as a result of the ATI acquisition and expect that process to be complete by April 30, 2006.

Item 3.Legal Proceedings.

In November of 2004, a former employee filed a suit against us in federal district court in Minnesota alleging that termination of her employment violated the federal Civil Rights Act and the Family Medical Leave Act (“FMLA”), claiming $225.0 thousand in damages. We are vigorously defending against these claims and have filed a summary judgment motion as to all claims.  We cannot predict the outcome of the lawsuit.

The 8th Circuit Court of Appeals has denied Qwest’s appeal of the Federal District Court’s Order upholding the Minnesota PUC’s UNE Cost Order. This means that the rates set by the Minnesota

34

Commission for UNEs will remain in place unless and until the matter is overturned by the U.S. Supreme Court or new rates are set by the Commission.

The Minnesota Department of Commerce filed a complaint with the Minnesota PUC concerning agreements that CLECs, including us, have with certain interexchange carriers for pricing access services. They asserted that the agreements are unlawfully discriminatory and are required to be filed. The matter has been settled and new access rates were filed with the Minnesota PUC.

A lawsuit is pending against us and others by a former customer in Utah state court. The suit alleges damages of $1.0 million regarding alleged improper assignment of an “800” number. We are vigorously defending this claim and believe it to be without merit, but we cannot predict the outcome of the lawsuit. The discovery phase and period for making dispositive motions in the case have concluded. We anticipate that the court will dismiss the case due to the plaintiff’s failure to pursue it.

In March 2005, we settled several lawsuits against Qwest on mutually acceptable terms. As a result of the settlement agreement, our suit against Qwest in the United States District Court, Western District of Washington regarding access, the development of an unbundled network element platform, and failing to make DSL available for resale was dismissed and we agreed to withdraw our appeal in the United States District Court, District of Minnesota of the unfavorable decision of the Minnesota PUC denying us service quality credits.

On June 21, 2005, we settled the lawsuit brought against us by Global Crossing. The parties agreed to release each other from all claims related to the dispute and to amend their agreement. The settlement agreement provided for us to pay Global Crossing $5.0 million and for Global Crossing to credit our future bills for approximately $564 thousand over the following six months.

Under the terms of the Global Crossing settlement, the Carrier Services Agreement between the parties, which had provided that Global Crossing was our exclusive provider of voice and data services, subject to certain exceptions, and that we had a purchase commitment of $100.0 million, was amended to shorten the term of the agreement to July 1, 2006, to eliminate the exclusivity, purchase commitment and shortfall provisions and to provide that Global Crossing will be our preferred provider for Internet transit and long haul data private line needs.

We cannot predict the outcome of any of these proceedings or their effect on our business. We are party from time to time to other ordinary course disputes that we do not believe to be material.

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

None.

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Part II

Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

On August 2, 2005, we completed a 0.0738-for-one reverse stock split affecting all outstanding shares of common stock.

We consummated an initial public offering of our common stock on August 9, 2005. Our common stock trades on the NASDAQ National Market under the symbol “ESCH”.

The high and low prices during the two quarters since trading began are as follows:

	High	Low
2005
Third quarter	14.14	11.63
Fourth quarter	14.25	11.50

On February 28, 2006, there were 190 holders of record of our common stock. See Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, for a discussion of the ownership of our company. We have not declared any cash dividends on our common stock and do not intend to pay cash dividends for the foreseeable future. Our outstanding notes restrict our ability to pay dividends on our capital stock.

Upon the exercise of options, 78,457 common shares were issued in 2005. The proceeds were used for general corporate purposes. In March 2005, 8,856 restricted common shares, valued at $2.71 per share, were issued to a member of our Board of Directors as compensation for service on our Board of Directors. In July 2005, 494 restricted common shares, valued at $6.77 per share, were issued to a former member of our Board of Directors as compensation for 494 shares of unvested restricted common stock that was forfeited when membership on our Board of Directors ended. These transactions were exempt under Rule 701 of Section 4(2) of the Securities Act.

As a result of the initial public offering of common stock on August 9, 2005, all of our then-outstanding shares of convertible preferred stock and accumulated dividends were automatically converted to common stock.

On September 15, 2005, we redeemed $50.630 million accreted value ($57.750 million principal amount) of our 8 3/8% senior second secured notes due March 15, 2010 at a redemption price of 112% of the accreted value. Proceeds from the initial public offering of common stock were used to redeem the notes.

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Item 6.Selected Financial Data.

The following tables set forth our selected consolidated financial and other data for the periods indicated. The selected consolidated financial data as of December 31, 2004 and 2005 and for the years ended December 31, 2003, 2004 and 2005 have been derived from the audited consolidated financial statements and notes to consolidated financial statements included elsewhere in this report. The selected consolidated financial data as of December 31, 2001, 2002 and 2003 and for the years ended December 31, 2001 and 2002 were derived from the audited consolidated financial statements and notes to consolidated financial statements not included herein. The following financial information is qualified by reference to and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes to consolidated financial statements included elsewhere in this report. Results for 2004 exclude the results of ATI except for the Balance Sheet Data. All dollar amounts are in thousands of dollars, except per share amounts.

	Year Ended December 31,
	2001			2002			2003			2004			2005
Statements of operations data:
Revenue:
Network services	$	72,773		$	96,209		$	115,482		$	131,780		$	201,835
BTS	25,837			25,659			25,614			26,316			25,908
Total revenue	98,610			121,868			141,096			158,096			227,743
Cost of revenue:
Network services	40,320			39,493			45,037			47,354			85,914
BTS	16,190			16,053			15,784			15,979			16,139
Total cost of revenue	56,510			55,546			60,821			63,333			102,053
Gross profit:
Network services	32,453			56,716			70,445			84,426			115,921
BTS	9,647			9,606			9,830			10,337			9,769
Total gross profit	42,100			66,322			80,275			94,763			125,690
Operating expenses:
Sales, general and administrative	55,960			68,920			66,252			69,255			90,310
Depreciation and amortization	28,307			25,261			30,099			31,105			39,653
Total operating expenses	84,267			94,181			96,351			100,360			129,963
Operating loss	(42,167		)	(27,859		)	(16,076		)	(5,597		)	(4,273		)
Other income (expense)(1)	(11,535		)	48,052			(1,102		)	6,712			(27,369		)
Income (loss) before income taxes(1)	(53,702		)	20,193			(17,178		)	1,115			(31,642		)
Income taxes	(14		)	(50		)	(28		)	(4		)	(4		)
Net income (loss) from continuing operations(1)	(53,716		)	20,143			(17,206		)	1,111			(31,646		)
Income from discontinued operation, net of tax	—			—			—			—			329
Gain on sale of discontinued operation, net of tax	—			—			—			—			326
Net income (loss)(1)	(53,716		)	20,143			(17,206		)	1,111			(30,991		)
Less preferred stock dividends and premium paid on repurchase of preferred stock(2)	(9,890		)	(2,701		)	(3,426		)	(4,292		)	—
Net income (loss) applicable to common stockholders	$	(63,606	)	$	17,442		$	(20,632	)	$	(3,181	)	$	(30,991	)

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	Year Ended December 31,
	2001			2002			2003			2004			2005
Statements of operations data (continued):
Basic income (loss) per common share:
Income (loss) from continuing operations	$	(538.57	)	$	147.68		$	(70.59	)	$	(11.11	)	$	(5.32	)
Income from discontinued operations	—			—			—			—			0.11
Net income (loss)	$	(538.57	)	$	147.68		$	(70.59	)	$	(11.11	)	$	(5.21	)
Diluted income (loss) per common share:
Income (loss) from continuing operations	$	(538.57	)	$	5.83		$	(70.59	)	$	(11.11	)	$	(5.32	)
Income from discontinued operations	—			—			—			—			0.11
Net income (loss)	$	(538.57	)	$	5.83		$	(70.59	)	$	(11.11	)	$	(5.21	)
Other financial data:
Capital expenditures(3)	$	38,684		$	23,175		$	26,466		$	30,771		$	35,905
Cash flows provided by (used in) operating activities	(37,116		)	(2,888		)	16,688			25,393			14,754
Cash flows provided by (used in) investing activities	(36,468		)	(23,020		)	(25,008		)	(78,334		)	(30,967		)
Cash flows provided by (used in) financing activities	30,471			31,593			(2,807		)	70,770			15,570

	As of and for the Year Ended December 31,
	2001		2002		2003		2004		2005
Operating data:
Voice access lines in service(4)	98,922		133,908		156,165		173,492		270,662
Data access lines in service(4)	12,217		24,657		50,256		76,861		144,790
Total access lines in service(4)	111,139		158,565		206,421		250,353		415,452
Markets in operation	12		12		12		12		19
Percent of new access lines installed on-net	61	%	77	%	87	%	92	%	97	%
Percent of total access lines on-net	50	%	63	%	74	%	81	%	86	%
Average monthly churn(5)	2.01	%	1.87	%	1.60	%	1.48	%	1.34	%
Total full-time equivalent employees	934		918		888		924		1,118
Quota-carrying network services sales people	176		164		139		167		204
Quota-carrying BTS sales people	47		35		36		33		39
Total quota-carrying sales people	223		199		175		200		243

	As of December 31,
	2001		2002		2003			2004			2005
Balance sheet data:
Cash, cash equivalents, restricted cash and available-for-sale securities	$	14,048	$	19,733	$	8,606		$	33,351		$	31,818
Property and equipment, net	95,719		91,296		86,777			102,849			126,452
Total assets	170,370		169,133		153,721			237,119			231,546
Total debt, including current portion	140,321		88,625		87,822			142,231			97,519
Net debt(6)	126,273		68,892		79,216			108,880			65,701
Total stockholders’ equity (deficit)	3,332		15,542		(5,071		)	(8,180		)	92,253

(1)In June 2002, we entered into a negotiated debt restructuring, which included the reduction of outstanding debt under our senior secured credit facility from $139,293 to $57,062. In the

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restructuring, certain lenders with outstanding principal and interest due of $65,778 chose to receive $12,229 in cash to cancel all liabilities, as a result of which we recorded a pre-tax gain of $53,549. In accordance with SFAS No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings, a portion of the reduction in the amount outstanding could not be immediately recognized as a gain, but instead would be recognized as a reduction to interest expense over the term of the new credit facility. As of December 31, 2003, $21,871 of excess carrying value had yet to be recognized as a reduction in interest expense. In March 2004, we paid off our senior secured credit facility, which resulted in a pretax gain of $18,195, for the remaining excess carrying value as of the payoff date.

In September 2005, we redeemed $50,630 accreted value ($57,750 principal amount) of our 8 3/8% senior second secured notes due March 15, 2010 at a redemption price of 112% of the accreted value. The $6,076 accreted-value premium was recorded as interest expense. In addition, we wrote off a proportionate amount of the associated debt issuance costs and recorded $2,579 as interest expense.

(2)In December 2004, in connection with our acquisition of ATI, we repurchased 6,780,541 shares of our series A convertible preferred stock for $5,085.

(3)Capital expenditures are the sum total of purchases of property and equipment including equipment purchased under a capital lease, cash paid for customer installation costs and internal capitalized labor.

(4)Each access line and access line equivalent is equal to one 64-kilobit customer line that is active and being billed. Unused capacity on T1 circuits is not included in our line count.

(5)Average monthly churn is the total access line service disconnections for the month as a percentage of total access lines in service at the end of the month.

(6)Net debt consists of total debt less cash, cash equivalents, restricted cash and available-for-sale securities.

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Selected Quarterly Financial Data (Unaudited. In thousands, except per share information)

	2005
	For the Three Months Ended
	March 31				June 30			September 30				December 31				Total Year
Total revenue		$	54,533		$	56,921			$	57,912			$	58,377		$	227,743
Total gross profit		30,902			27,829				33,118				33,841			125,690
Income (loss) before income taxes(1)		(4,768		)	(8,754		)		(12,913		)		(5,207		)	(31,642		)
Net income (loss)(1)		(4,768		)	(8,643		)		(12,453		)		(5,127		)	(30,991		)
Net income (loss) per share—basic and diluted		(18.70		)	(26.32		)		(1.49		)		(0.35		)	(5.21		)

	2004
	For the Three Months Ended
	March 31			June 30			September 30				December 31				Total Year
Total revenue		$	38,196	$	39,151			$	40,562			$	40,187		$	158,096
Total gross profit		22,768		23,741				24,521				23,733			94,763
Income (loss) before income taxes(1)		14,283		(3,377		)		(4,325		)		(5,466		)	1,115
Net income (loss)(1)		14,283		(3,377		)		(4,329		)		(5,466		)	1,111
Net income (loss) per share—basic		50.13		(14.74		)		(17.62		)		(21.14		)	(11.11		)
Net income (loss) per share—diluted		2.57		(14.74		)		(17.62		)		(21.14		)	(11.11		)

(1)In June 2002, we entered into a negotiated debt restructuring, which included the reduction of outstanding debt under our senior secured credit facility from $139,293 to $57,062. In the restructuring, certain lenders with outstanding principal and interest due of $65,778 chose to receive $12,229 in cash to cancel all liabilities, as a result of which we recorded a pre-tax gain of $53,549. In accordance with SFAS No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings, a portion of the reduction in the amount outstanding could not be immediately recognized as a gain, but instead would be recognized as a reduction to interest expense over the term of the new credit facility. As of December 31, 2003, $21,871 of excess carrying value had yet to be recognized as a reduction in interest expense. In March 2004, we paid off our senior secured credit facility, which resulted in a pretax gain of $18,195, for the remaining excess carrying value as of the payoff date.

In September 2005, we redeemed $50,630 accreted value ($57,750 principal amount) of our 8 3/8% senior second secured notes due March 15, 2010 at a redemption price of 112% of the accreted value. The $6,076 accreted-value premium was recorded as interest expense. In addition, we wrote off a proportionate amount of the associated debt issuance costs and recorded $2,579 as interest expense.

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Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the “Selected Financial Data” and the Consolidated Financial Statements and Notes to Consolidated Financial Statements included elsewhere in this annual report. Certain information contained in the discussion and analysis set forth below and elsewhere in this annual report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risk and uncertainties. In evaluating such statements, you should specifically consider the various factors identified in this annual report that could cause results to differ materially from those expressed in such forward-looking statements, including matters set forth in the section entitled “Risk Factors.”

Overview

We are a leading facilities-based provider of integrated voice and data services and business telephone systems in 19 markets in the western United States. As a facilities-based competitive communications services provider, we provide services to our customers primarily through our own network of telecommunications switches and related equipment and primarily leased telecommunications lines, or transport. We target the small and medium-sized business segment and currently serve over 50,000 customers, primarily within the local service territory of Qwest.

Early in our development, we expanded into new markets generally through acquisitions of companies that we augmented with our network services capabilities. We were founded in 1996 and shortly thereafter, we merged with Cady Communications, a business telephone systems company based in Minnesota, and began offering local and long distance voice services. In 1997 and 1998, we acquired three additional business telephone systems companies and launched voice services in five additional markets, including Denver, Phoenix, Portland, Salt Lake City and Seattle. In December 1999, we activated our first switch. In January 2000, we acquired an Internet service provider and began providing advanced data services. In March 2000 we began providing voice and data services over our network, which began our transition to a facilities-based competitive communications services provider. In January 2001, we acquired a business telephone systems company in Salt Lake City. On December 31, 2004, we consummated our eighth acquisition, ATI, whereby we enhanced our presence in Washington, Oregon and Nevada and entered California.

We measure our operational performance using a variety of indicators including revenue growth, the percentage of our revenue that comes from customers that we serve on-switch, gross margin percentage, operating expenses as a percentage of revenue and access line churn rates. We monitor key operating and customer service metrics to improve customer service, maintain the quality of our network and reduce costs.

The telecommunications industry is highly competitive. We believe we compete principally by offering superior customer service, accurate billing, a broad set of services and systems and competitive pricing. We compete with the RBOCs, other competitive communications services providers, and long distance and data service providers. While wireless providers are competing with us, we do not believe they are a competitive threat in the market nor are they likely to be in the near future, because of the different service standards that business customers require.

Key Components of Results of Operations

Revenue.   Network services revenue consists primarily of local dial tone, switched access lines, long distance, access charges, and data service. Revenue from local telephone service consists of charges for basic local service, including dedicated T1 access, and custom-calling features such as call waiting and call forwarding. Revenue from long distance service consists of per-minute-of-use charges for a full range of traditional switched and dedicated long distance, toll-free calling, international, calling card and operator

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services. Carrier access revenue consists primarily of usage charges that we bill long distance carriers to originate and terminate calls to and from our customers. In addition, in some of our markets we currently charge other local exchange carriers and wireless carriers usage charges to originate and terminate local and wireless calls to and from certain customers (otherwise known as reciprocal compensation). Revenue from data services consists primarily of monthly usage fees for Internet access services. We typically commit our customers to contracts ranging from one to three years and provide discounts for longer terms. Network services revenue comprised 88.6% of our total revenue for the year ended December 31, 2005, and represents a predominantly recurring revenue stream.

Monthly recurring network services revenue is recognized in the month the services are used. In the case of local service revenue, monthly recurring local services charges are billed in advance but accrued for and recognized on a prorated basis based on length of service in any given month. Non-recurring revenues associated with line installations are recognized over the average life of the customers. Long distance and access charges are billed in arrears but accrued based on monthly average usage. Prior to 2005, we had not historically received any revenues from reciprocal compensation due to our bill-and-keep arrangement with Qwest. With the acquisition of ATI, which was not under a bill-and-keep arrangement with the RBOCs, and our recent negotiated reciprocal compensation agreements with a few wireless carriers, we recorded approximately $0.5 million of reciprocal compensation revenue in 2005. We do not have any wholesale revenue other than access revenue and this reciprocal compensation mentioned above.

Business telephone systems revenue consists of revenue from the sale of telephone equipment and the servicing of telephone equipment systems. Telephone equipment revenue is recognized upon delivery, completion of the installation and acceptance by the customer. Business telephone service revenue is recognized upon completion of service or, in the case of maintenance agreements, is spread equally over the life of the maintenance contract, which typically ranges from one to two years.

Cost of revenue.   Our network services cost of revenue consists primarily of the cost of operating our network facilities. The network components for our facilities-based business include the cost of:

·leasing local loops and digital T1 lines which connect our customers to our network;

·leasing high capacity digital lines that connect our switching equipment to our colocations;

·leasing high capacity digital lines that interconnect our network with the RBOCs;

·leasing space, power and terminal connections in the RBOC central offices for colocating our equipment;

·signaling system network connectivity;

·leasing our ATM long-haul Internet backbone network; and

·Internet transit and peering, which is the cost of delivering Internet traffic from our customers to the public Internet.

The costs to lease local loops, digital T1 lines and high capacity digital interoffice transport facilities from the RBOCs varies by carrier and by state and are regulated under federal and state laws. In virtually all areas, we lease local loops, T1 lines and interoffice transport capacity from the RBOCs. We lease interoffice facilities from carriers other than the RBOCs where possible in order to lower costs and improve network redundancy; however, in most cases, the RBOCs are our only source for local loops and T1 lines. Historically we purchased, on a wholesale or negotiated basis, unbundled network elements platform, or UNE-P, from Qwest, AT&T and Verizon, and customized network element packages, or UNE-E, from Qwest. We also purchase, on a wholesale or negotiated basis, Centrex services, which are services for the portion of the public telephone switch that is dedicated to a customer, from AT&T. The rates for UNE-P and Centrex were regulated and established by the various state corporation or utility

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commissions. We entered into agreements with Qwest and Verizon for UNE-P replacement products in 2005. As of December 31, 2005, we had approximately 50,000 access lines in service that were formerly categorized as UNE-P access lines and are now provided under commercial agreements. The Qwest UNE-E agreement was terminated with the adoption of Qwest’s commercial UNE-P replacement product, QPP, and all Qwest UNE-E lines were moved to QPP on January 1, 2005. We believe we will incur higher costs in 2006 to obtain access to certain elements of telecommunications platforms as a result of the Triennial Review Remand Order.

Our network services cost of revenue also includes the fees we pay for long distance, data and other services. We have entered into long-term wholesale purchasing agreements for these services. Some of the agreements contain significant termination penalties and/or minimum usage volume commitments. In the event we fail to meet minimum volume commitments, we may be obligated to pay underutilization charges. We do not anticipate having to pay any underutilization charges in the foreseeable future.

We carefully review all of our vendor invoices and frequently dispute inaccurate or inappropriate charges. In cases where we dispute certain charges, we frequently pay only undisputed amounts on vendor invoices in order to pay proper amounts owed. Our single largest vendor is Qwest. We use estimates to determine the level of success in dispute resolution and consider past historical experience, basis of dispute, financial status and current relationship with vendors and aging of prior disputes in quantifying our estimates.

We account for all of our network depreciation in depreciation and amortization expense and do not have any depreciation expense in cost of revenue.

Our most significant business telephone systems costs of revenue are the equipment purchased from manufacturers and labor for service installation. To take advantage of volume purchase discounts, we purchase equipment primarily from three manufacturers pursuant to master purchase agreements we have with these manufacturers. For all business telephone systems installations, our policy is to require a 30% deposit before ordering the equipment so our risk of excess inventory or inventory obsolescence is low. Business telephone systems cost of revenue also includes salaries and benefits of field technicians as well as vehicle and incidental expenses associated with equipment installation, maintenance and service provisioning.

Sales, General and Administrative.   Sales, general and administrative expenses are comprised primarily of salaries and benefits, bonuses, commissions, occupancy costs, sales and marketing expenses, bad debt, billing and professional services.

Determining our allowance for doubtful accounts receivable requires significant estimates. We consider two primary factors in determining the proper level of the allowance, including historical collections experience and the aging of the accounts receivable portfolio. We perform a credit review process on each new customer that involves reviewing the customer’s current service provider bill and payment history, matching customers with the National Telecommunications Data Exchange database for delinquent customers and, in some cases, requesting credit reviews through Dun and Bradstreet. For 2003, 2004 and 2005, our bad debt expense as a percentage of revenue was 0.4%, 0.5%, and 0.5%, respectively.

Depreciation and Amortization.   Our depreciation and amortization expense currently includes depreciation for network related voice and data equipment, back office systems, furniture, fixtures, leasehold improvements, office equipment and computers. All internal costs directly related to the expansion of our network and operating and support systems, including salaries of certain employees, are capitalized and depreciated over the lives of the switches or systems, as the case may be. Capitalized customer installation costs are amortized over the approximate average life of a customer, which is currently 48 months. Detailed time studies are used to determine labor capitalization. These time studies are based on employee time sheets for those engaged in capitalizable activities.

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Results of Operations

The following tables set forth financial data as a percentage of total revenue for the years ended December 31, 2003, 2004 and 2005.

	Year Ended December 31,
	2003		2004		2005
Consolidated financial data:
Revenue:
Network services	81.8	%	83.4	%	88.6	%
BTS	18.2	%	16.6	%	11.4	%
Total revenue	100.0	%	100.0	%	100.0	%
Cost of revenue	43.1	%	40.1	%	44.8	%
Total gross profit	56.9	%	59.9	%	55.2	%
Operating expenses:
Sales, general and administrative	47.0	%	43.8	%	39.7	%
Depreciation and amortization	21.3	%	19.7	%	17.4	%
Total operating expenses	68.3	%	63.5	%	57.1	%
Operating loss	(11.4	)%	(3.6	)%	(1.9	)%
Net income (loss)	(12.2	)%	0.7	%	(13.6	)%
Net income (loss) applicable to common stockholders	(14.6	)%	(2.0	)%	(13.6	)%

The following table sets forth the cost of revenue and the gross profit as percentages of the related revenue for the periods indicated.

	Year Ended December 31,
	2003		2004		2005
Cost of network services revenue	39.0	%	35.9	%	42.6	%
Cost of BTS revenue	61.6	%	60.7	%	62.3	%
Gross profit from network services revenue	61.0	%	64.1	%	57.4	%
Gross profit from BTS revenue	38.4	%	39.3	%	37.7	%

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

Revenue.   Revenue for the years ended December 31, 2004 and 2005 is as follows:

	Year Ended December 31,
	2004			2005			% Change
Revenue (in millions):
Voice and data services		$	98.4		$	153.9		56.6	%
Long distance		21.2			34.6			63.0
Access		12.2			13.3			8.8
Total network services		131.8			201.8			53.2
BTS		26.3			25.9			(1.6	)
Total revenue		$	158.1		$	227.7		44.1	%

Network Services.Network services revenue was $201.8 million for the year ended December 31, 2005, an increase of 53.2% from $131.8 million for the year ended December 31, 2004. The increase in

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revenue is primarily due to the inclusion of ATI, which was acquired on December 31, 2004, and, to a lesser extent, an increase in the average number of voice and data access lines in service. Over the past 12 months the number of voice lines increased by 56.0% to 270,662 lines at December 31, 2005, and the number of data lines increased by 88.4% to 144,790 lines at December 31, 2005. The growth in revenue associated with access line growth was partially offset by declines in pre-subscribed interexchange carrier charge (PICC) revenue, access revenue per minute of use and a decline in data revenue per line. The decline in PICC revenue was related to our dispute with Global Crossing, which was resolved in June 2005. As a result of that dispute, we did not record approximately $0.3 million per month of PICC revenue beginning in November of 2004. Access revenue per minute of use declined as a result of the scheduled FCC reduction of interstate rate levels in June 2004. Data revenue per line declined due to a combination of customers purchasing more bandwidth at discounted prices and general pricing pressures for data services in our markets. We expect all of the above trends in PICC revenue, access revenue and data revenue per line to continue for the foreseeable future. We expect a 10-15 basis point increase in customer line churn in the first quarter of 2006 related to the ATI system integration work in addition to normal seasonality that we typically see between the fourth and first quarters of each year. This increase will most likely negatively impact our line growth in the first quarter by one to two thousand lines. However, we believe any increase in customer line churn will be temporary in nature based on current customer service statistics. We expect to return to historical churn levels in the second quarter of 2006.

As we continue to grow, our size and customer line churn will begin to limit our access line growth rate on both an absolute and a percentage basis unless we increase our sales force and extend our network footprint.

BTS.BTS revenue was $25.9 million for the year ended December 31, 2005, a decrease of 1.6% from $26.3 million for the year ended December 31, 2004 due to a one-time revenue adjustment of $0.5 million made in 2005. We cannot predict future trends in capital spending by small and medium-sized business customers.

Cost of Revenue.Cost of revenue for the years ended December 31, 2004 and 2005 is as follows:

	Year Ended December 31,
	2004			2005			% Change
Cost of revenue (in millions):
Network services		$	47.3		$	85.9		81.4	%
BTS		16.0			16.1			1.0
Total cost of revenue		$	63.3		$	102.0		61.1	%

Network Services.Network services cost of revenue was $85.9 million for the year ended December 31, 2005, an increase of 81.4% from $47.3 million for the year ended December 31, 2004. This increase is primarily due to the inclusion of ATI, which was acquired on December 31, 2004, and recording approximately $4.7 million in costs related to the settlement with Global Crossing in June 2005. As a percentage of related revenue, network services cost of revenue for 2005 increased to 42.6% from 35.9% for 2004. This increase was primarily due to the Global Crossing settlement impact and the inclusion of ATI.

BTS.BTS cost of revenue was $16.0 million and $16.1 million for the years ended December 31, 2004 and 2005, respectively. As a percentage of related revenue, BTS cost of revenue for the year ended December 31, 2005 increased to 62.3% from 60.7% for the year ended December 31, 2004, primarily due to the one-time revenue adjustment discussed above. We do not expect future improvements in BTS cost of revenue as a percentage of related revenue unless we are able to significantly increase BTS revenue and therefore achieve greater volume discounts or economies of scale in our workforce.

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Gross Profit.Gross profit for the years ended December 31, 2004 and 2005 is as follows:

	Year Ended December 31,
	2004			2005			% Change
Gross profit (in millions):
Network services		$	84.5		$	115.9		37.3	%
BTS		10.3			9.8			(5.5	)
Total gross profit		$	94.8		$	125.7		32.6	%

The increase in gross profit for the year ended December 31, 2005 from 2004 is due to the increase in revenue described above.

Sales, General and Administrative.Sales, general and administrative expenses were $90.3 million for the year ended December 31, 2005, an increase of 30.4% from $69.3 million for the year ended December 31, 2004. The increase is primarily due to the inclusion of ATI, including $0.6 million of expenses related to integrating ATI’s operation into ours. As a percentage of revenue, sales, general and administrative expenses for the year ended December 31, 2005 declined to 39.7% from 43.8% for the year ended December 31, 2004 due to the improved efficiency of our existing operations resulting from our fixed cost structure supporting a higher level of revenue.

Depreciation and Amortization.Depreciation and amortization expense was $39.7 million for the year ended December 31, 2005, an increase of 27.5% from $31.1 million for the year ended December 31, 2004. This increase was primarily due to the inclusion of ATI and, to a lesser extent, our network growth and associated capital expenditures. As a result of finalizing our purchase price allocation for ATI, we recorded a one-time $4.3 million adjustment to depreciation and amortization in the fourth quarter of 2005. As a percentage of revenue, depreciation and amortization decreased to 17.4% for the year ended December 31, 2005 from 19.7% for the year ended December 31, 2004.

Interest.Interest expense was $28.1 million for the year ended December 31, 2005, an increase of 145.6% from $11.5 million for the year ended December 31, 2004. In September 2005, we redeemed $50.6 million accreted value ($57.8 million principal amount) of our 8 3/8% senior second secured notes due 2010 at a redemption price of 112% of the accreted value. The $6.1 million accreted-value premium was recorded as interest expense. In addition, we wrote off a proportionate amount of the associated debt issuance costs and recorded $2.6 million as interest expense. The remaining increase is primarily the result of a full year of interest expense on a higher outstanding note balance.

Gain on Extinguishment of Debt.Net income for the year ended December 31, 2004 included a gain on extinguishment of debt of $18.2 million. The gain on the extinguishment of debt was the result of paying off our bank facility. In June 2002, we restructured our bank facility and because the future cash flows could not be calculated with certainty, the gain was deferred. As a result of the repayment, the excess carrying value of $20.9 million and debt issuance costs of $2.7 million resulted in the $18.2 million gain on extinguishment of debt.

Net Income (Loss).Net loss for the year ended December 31, 2005 was $31.0 million compared to net income for the year ended December 31, 2004 of $1.1 million. In 2004, we recorded an $18.2 million gain on extinguishment of debt, whereas in 2005 we recorded both a debt charge-off of $8.7 million and additional depreciation and amortization expense of $4.3 million as mentioned previously.

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Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

Revenue.   Revenue for the years ended December 31, 2003 and 2004 is as follows:

	Year Ended December 31,
	2003			2004			% Change
Revenue (in millions):
Voice and data services		$	84.7		$	98.4		16.1	%
Long distance		18.7			21.2			13.7
Access		12.1			12.2			0.8
Total network services		115.5			131.8			14.1
BTS		25.6			26.3			2.7
Total revenue		$	141.1		$	158.1		12.0	%

Network Services.Network services revenue was $131.8 million for the year ended December 31, 2004, an increase of 14.1% from $115.5 million for the year ended December 31, 2003. The increase in revenue was primarily due to an increase in the average number of voice and data access lines in service. From 2003, the number of voice lines increased by 11.1% to 173,492 lines at December 31, 2004, and the number of data lines increased by 52.9% to 76,861 lines at December 31, 2004. The growth in access lines was partially offset by declines in PICC revenue, access revenue per minute of use and a decline in data revenue per line. The decline in PICC revenue was related to our dispute with Global Crossing. As a result of that dispute, we elected not to record approximately $0.3 million per month of PICC revenue beginning in November of 2004. Access revenue per minute of use declined as a result of the scheduled FCC reduction of interstate rate levels. Data revenue per line declined due to a combination of customers purchasing more bandwidth at discounted prices and general pricing pressures for data services in our markets.

BTS.BTS revenue was $26.3 million for the year ended December 31, 2004, an increase of 2.7% from $25.6 million for the year ended December 31, 2003 due to a higher level of new system sales in 2004.

Cost of Revenue.Cost of revenue for the years ended December 31, 2003 and 2004 is as follows:

	Year Ended December 31,
	2003			2004			% Change
Cost of revenue (in millions):
Network services		$	45.0		$	47.3		5.1	%
BTS		15.8			16.0			1.2
Total cost of revenue		$	60.8		$	63.3		4.1	%

Network Services.Network services cost of revenue was $47.3 million for the year ended December 31, 2004, an increase of 5.1% from $45.0 million for the year ended December 31, 2003. This increase is due to our growth in access lines. As a percentage of related revenue, network services cost of revenue for 2004 declined to 35.9% from 39.0% for 2003. This improvement was due to the increase in our percentage of access lines on-net to 81% as of December 31, 2004 from 74% as of December 31, 2003.

BTS.BTS cost of revenue was $15.8 million and $16.0 million for the years ended December 31, 2003 and 2004, respectively. As a percentage of related revenue, BTS cost of revenue for the year ended December 31, 2004 decreased to 60.7% from 61.6% for the year ended December 31, 2003, due to better labor utilization.

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Gross Profit.Gross profit for the years ended December 31, 2003 and 2004 is as follows:

	Year Ended December 31,
	2003			2004			% Change
Gross profit (in millions):
Network services		$	70.5		$	84.5		19.8	%
BTS		9.8			10.3			5.1
Total gross profit		$	80.3		$	94.8		18.0	%

The increase in gross profit for the year ended December 31, 2004 from 2003 is due to the increase in revenue described above.

Sales, General and Administrative.Sales, general and administrative expenses were $69.3 million for the year ended December 31, 2004, an increase of 4.5% from $66.3 million for the year ended December 31, 2003. The increase is primarily due to higher payroll, legal and operating tax and assessment expenses. As a percentage of revenue, sales, general and administrative expenses for the year ended December 31, 2004 declined to 43.8% from 47.0% for the year ended December 31, 2003 due to the improved efficiency of our existing operations resulting from our fixed cost structure supporting a higher level of revenue.

Depreciation and Amortization.Depreciation and amortization expense was $31.1 million for the year ended December 31, 2004, an increase of 3.3% from $30.1 million for the year ended December 31, 2003. This increase was primarily due to our network growth and associated capital expenditures. As a percentage of revenue, depreciation and amortization decreased to 19.7% for the year ended December 31, 2004 from 21.3% for the year ended December 31, 2003.

Interest.Interest expense was $11.5 million for the year ended December 31, 2004, an increase of 553.1% from $1.8 million for the year ended December 31, 2003. This increase was primarily due to interest expense on our senior second secured notes issued in 2004.

Gain on Extinguishment of Debt.Net income for the year ended December 31, 2004 included a gain on extinguishment of debt of $18.2 million. The gain on the extinguishment of debt was the result of paying off our bank facility. In June 2002, we restructured our bank facility and because the future cash flows could not be calculated with certainty, the gain was deferred. As a result of the repayment, the excess carrying value of $20.9 million and debt issuance costs of $2.7 million resulted in the $18.2 million gain on extinguishment of debt.

Net Income (Loss).Net income for the year ended December 31, 2004 was $1.1 million compared to a net loss for the year ended December 31, 2003 of $17.2 million. The net income in 2004 was primarily due to the gain on extinguishment of debt and the improvement in gross profit discussed above which were partially offset by increased interest expense discussed above.

Liquidity and Capital Resources

Principal Sources and Uses of Liquidity.Our principal sources of liquidity are cash from operations and our cash and cash equivalents and available-for-sale securities. Our principal liquidity requirements consist of debt service, capital expenditures and working capital.

Cash and Cash Equivalents; Available-for-Sale Securities.Cash and cash equivalents was $26.1 million at December 31, 2005, which is a decrease of $0.3 million from December 31, 2004. In 2004, we began investing in available-for-sale securities. The balance at December 31, 2004 and 2005 was $6.2 million and $4.8 million, respectively and in each case represents investments in municipal and United States

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government debt securities with maturities of more than three months but less than one year. The securities represent additional liquidity for us.

Financings.In March 2004, we completed an offering of $100.0 million of 8 3/8% senior second secured notes due 2010 at a discount resulting in gross proceeds of $84.8 million. We used the proceeds from our offering to retire bank debt, pay fees related to the offering and provide additional liquidity to our company. After repayment of our senior secured bank facility and fees related to the issuance of the notes, we received incremental cash of approximately $13.2 million. In November 2004, we completed our offering of $65.0 million of 8 3/8% senior second secured notes due 2010 at a discount resulting in gross proceeds of $51.4 million. On December 30, 2004, our equity sponsors purchased 20.0 million shares of new convertible preferred stock for net cash proceeds of $15.0 million. We used the proceeds from our offerings to complete our acquisition of ATI for $45.5 million, to redeem 6,780,541 shares of our Series A convertible preferred stock for $5.1 million and to pay fees related to the notes offering. On August 9, 2005, we consummated an initial public offering of 5,357,143 of our common stock at $14.00 per share. Net proceeds from the offering, after deducting underwriting discounts and commissions, were $69.8 million. Proceeds were used to redeem $50.6 million accreted value ($57.8 million principal amount) of our 8 3/8% senior second secured notes due 2010; to pay a $6.1 million premium due upon redemption of the notes; and to pay $2.7 million of fees and expenses associated with the offering.

Cash Flows Provided by Operating Activities.Cash provided by operating activities was $14.8 million for 2005 compared to cash provided by operating activities of $25.4 million for 2004. The decrease in cash provided by operating activities was due to an $11.7 million increase in cash interest payments. During 2005, we paid $6.1 million related to the redemption of 35% of our senior second secured notes due 2010 and $5.6 million related to additional interest payments as a result of our $65.0 million senior second secured notes due 2010 issued on November 29, 2004.

Cash provided by operating activities was $25.4 million for 2004 compared to cash provided by operating activities of $16.7 million for 2003. Our improvement in cash provided by operating activities was primarily due to our growth in gross profit accompanied by a smaller increase in our operating expenses. Working capital improved primarily through improvement in our accounts receivable collections and our accounts payable days outstanding.

Cash Flows Used in Investing Activities.Cash used in investing activities was $31.0 million for 2005 compared to $78.3 million for 2004 and $25.0 million for 2003. The decrease in cash used in investing activities from 2004 to 2005 was primarily due to 2004 activity including the acquisition of ATI on December 31, 2004. Also, the activity related to available-for-sale securities was a net use of cash in 2004 of $6.2 million versus $1.8 million of net cash provided in 2005. Cash used for investing in the maintenance and expansion of our network and back office systems and customer installation increased $6.1 million in 2005 versus 2004. The increase in cash used in investing activities from 2003 to 2004 was primarily due to the acquisition of ATI on December 31, 2004. In 2004 we also used cash to invest in available-for-sale securities with maturity dates of six months or less. In 2003, all of our cash used in investing activities was for the maintenance and expansion of our network and back office systems and customer installation.

Cash Flows Provided by (Used in) Financing Activities.Cash provided by financing activities was $15.6 million for 2005. The proceeds from our initial public offering of our common stock, after deducting underwriting discounts and commissions, were $69.8 million. Proceeds were used to redeem $50.6 million accreted value ($49.2 million book value; $57.8 principal amount) of our 8 3/8% senior second secured notes due 2010; to pay a $6.1 million premium due upon redemption of the notes, which is included in interest expense; and to pay $2.7 million of fees and expenses associated with the offering. We also used cash for payments on capital lease obligations. Cash provided by financing activities was $70.8 million for 2004. The net proceeds from the issuance of the senior second secured notes in March 2004 generated approximately $13.2 million, which is net of a $1.6 million prepayment penalty mentioned previously. The

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net cash proceeds from the issuance of senior second secured notes in November 2004 and the Series B preferred stock issuance generated approximately $57.5 million after payment of debt issuance costs and the redemption of Series A preferred stock. We also used cash for payments on capital lease obligations. For 2003, net cash used in financing activities was $2.8 million, primarily for payments on capital lease obligations.

Outstanding Indebtedness.As of December 31, 2005, we had $97.5 million in outstanding indebtedness, consisting of $92.1 million 83¤8% senior second secured notes due 2010, and $5.4 million in capital lease obligations. Interest payments on the notes are required on each March 15 and September 15 the notes are outstanding. We expect to be able to pay the September 15, 2006 cash interest payment of $4.5 million from a combination of cash generated from operations and cash on hand.

The notes will mature on March 15, 2010, and accrue interest at an annual rate of 8 3/8% with cash interest payments made on a semiannual basis on each March 15 and September 15. On or after March 15, 2007 we may redeem some or all of the notes at declining redemption prices, plus accrued and unpaid cash interest, beginning at 106%.

In addition, if any notes are outstanding on September 15, 2009, we will be required to redeem 3.5% of each then outstanding note’s accreted value at a redemption price of 100% of the accreted value of the portion of the notes so redeemed, as well as an additional portion of each note to the extent required to prevent that note from being treated as an “applicable high yield discount obligation” within the meaning of Section 163(i)(1) of the Internal Revenue Code of 1986, as amended.

The indenture for the notes requires us and our subsidiaries to comply with certain restrictive covenants, including limitations and restrictions, subject to certain baskets and carveouts, on the ability of our subsidiaries to pay dividends or distributions, redeem or repurchase equity securities, incur debt, make investments or sell assets and stock of subsidiaries, enter into affiliate transactions, incur liens and security interests, merge, consolidate or sell all or substantially all of our assets, make loans to us or any other restricted subsidiary or enter into any business other than certain permitted businesses. Also, in the event of a change of control as defined in the indenture, we would be required to offer to repurchase all of the outstanding notes at a price equal to 101% of their then-current accreted value.

The notes and the guarantees are secured by a second priority lien on substantially of our existing and future property and assets other than:

·Capital stock and other securities;

·real property leases;

·property or assets owned by any foreign subsidiary; and

·any property in which a lien may not be granted.

Capital Requirements.We expect to spend between $40.0 and $43.0 million on capital expenditures in 2006. In addition, we expect to close on our acquisition of OTI in the second quarter of 2006, for which we will pay approximately $20.0 million. We plan to raise at least $20.0 million of additional financing prior to closing on our acquisition of OTI.

Based on our current level of operations and anticipated growth, however, we believe that our existing cash, cash equivalents and short-term investments will be sufficient to fund our operations. Other than the additional financing planned in connection with the OTI acquisition, we do not currently anticipate the need to raise additional financing to fund capital expenditures or operations for at least the next 12 months.

Any future acquisitions or other significant unplanned costs or cash requirements may require that we raise additional funds through the issuance of debt or equity. We cannot assure you that such financing will

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be available on terms acceptable to us or our stockholders, or at all. Insufficient funds may require us to alter our business plan or take other actions that could have a material adverse effect on our business, results of operations and financial condition. If issuing equity securities raises additional funds, substantial dilution to existing stockholder may result.

Contractual Obligations

	Total		Less Than One Year			1-3 Years		3-5 Years		More Than Five Years
	(Dollars in thousands)
Notes payable	$	147,448		$	8,982	$	17,964	$	120,502		$	—
Capital lease obligations	6,294			3,011		3,256		27			—
Operating lease obligations	24,133			4,929		9,187		5,745			4,272
Purchase obligations	2,544			1,101		1,443		—			—

The contractual obligation for notes payable includes related interest payments and assumes all notes currently outstanding are outstanding prior to the date of mandatory redemption and also assumes the notes are not otherwise required to be redeemed in a greater amount.

Application of Critical Accounting Policies

Our discussion of the financial condition and results of operations are based upon the consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States. The preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of any contingent assets and liabilities at the date of the financial statements. Management regularly reviews its estimates and assumptions, which are based on historical factors and other factors that are believed to be relevant under the circumstances. Actual results may differ from these estimates under different assumptions, estimates or conditions.

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. See Note 1 of the Notes to Consolidated Financial Statements for additional disclosure of the application of these and other accounting policies.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are initially recorded at fair value upon the sale of products or services to customers. Significant estimates are required in determining the allowance for doubtful accounts receivable. We consider two primary factors in determining the proper level of allowance, including historical collections experience and the aging of the accounts receivable portfolio. The allowance for doubtful accounts is based on the best facts available to us and is reevaluated and adjusted as additional information is received. We have a credit policy that helps minimize credit risk. We believe this risk is limited due to the large number and diversity of clients that comprise our customer base.

Valuation of Goodwill and Other Intangible Assets

Goodwill is tested at least annually for impairment at the reporting unit level. If the undiscounted future cash flows of a reporting unit are less than the carrying amount, an impairment charge is recognized. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, management completed its annual impairment test in the fourth quarter of 2004 and 2005 and determined that goodwill had not been impaired.

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Intangibles consist of debt issuance costs, customer installation costs, customer relationships, developed technology, and non-compete agreements. In 2004 and 2005, debt issuance costs were incurred in connection with the issuance of notes payable. These costs are being amortized over the term of the respective debt obligation. The customer installation costs are being amortized over a period of 48 months, which approximates the average life of a customer contract. As a result of finalizing our purchase price allocation with ATI, we recorded $3.8 million for customer relationships and $0.1 million for developed technology. Customer relationships and developed technology are being amortized over four and three years, respectively. Non-compete agreement costs represent costs associated with a non-compete agreement with a former employee. These costs are being amortized over the term of the agreement.

Income Taxes

We account for income taxes under the liability method in accordance with SFAS No. 109, Accounting for Income Taxes. Deferred tax liabilities are recognized for temporary differences that will result in taxable amounts in future years. Deferred tax assets are recognized for deductible temporary differences and tax operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be realized or settled. We assess the likelihood that our deferred tax assets will be recovered from future taxable income and record a valuation allowance to reduce our deferred tax assets to the amounts we believe to be realizable. We concluded that a full valuation allowance against our deferred tax assets was appropriate.

Revenue

Network services revenue consists primarily of local dial tone, switched access lines, long distance, access charges and data service. Revenue from local telephone service consists of charges for basic local service, including dedicated T1 access, and custom-calling features such as call waiting and call forwarding. Revenue from long distance service consists of monthly recurring and per-minute-of-use charges for a full range of traditional switched and dedicated long distance, toll-free calling, international, calling card and operator services. Carrier access revenue consists primarily of usage charges that we bill long distance carriers to originate and terminate calls to and from our customers. Revenue from data services consists primarily of monthly usage fees for Internet access services.

Monthly recurring network services revenue is recognized in the month the services are used. In the case of local service revenue, monthly recurring local services charges are billed in advance but accrued for and recognized on a prorated basis based on length of service in any given month.

Non-recurring revenues from the installation of network services are recognized over the average life of the customers.

Long distance and access charges are billed in arrears but accrued based on monthly average usage. We base our estimates of monthly average usage on historical experience and periodically review our estimates to ensure ongoing accuracy of the usage estimates. Historically, our actual experience has not differed significantly from our estimates.

Business telephone systems revenue consists of revenue from the sale of telephone equipment and the servicing of telephone equipment systems. Telephone equipment revenue is recognized upon delivery, completion of the installation and acceptance by the customer. Business telephone service revenue is recognized upon completion of service or, in the case of maintenance agreements, is spread equally over the life of the maintenance contract, which typically ranges from one to two years.

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Cost of Revenue

We carefully review all of our vendor invoices and frequently dispute inaccurate or inappropriate charges. In cases where we dispute certain charges, we frequently pay only undisputed amounts on vendor invoices in order to pay the proper amounts owed. We record costs net of disputed amounts based on our expected outcome of disputes that are initiated. We use significant estimates to determine the level of success in dispute resolution and consider past historical experience, basis of dispute, financial status of the vendor and current relationship with the vendor and aging of prior disputes in quantifying our estimates. Disputes are common in our industry and we believe our treatment of disputes is consistent with industry practice.

We believe our cost of revenue accrual is sufficient to cover all outstanding disputes that we may lose. In addition, we accrue for expected costs that have not yet been invoiced and we believe our cost of revenue accrual is sufficient to cover these costs as well.

New Accounting Pronouncements

In November 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 151, Inventory Costs. This statement requires that abnormal amounts of idle facility expense, freight, handling costs and spoilage be recognized as current-period charges. This statement also requires that fixed production overhead be allocated to inventory costs incurred by us beginning in fiscal 2006. We do not expect the adoption of this statement will have a material impact on our consolidated financial statements.

In December 2004, as amended on April 14, 2005, the FASB issued SFAS No. 123R, Share-Based Payment: an amendment of FASB Statement No. 123 and FASB Statement No. 95, which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Prior to SFAS No. 123R, only certain pro forma disclosures of fair value were required. SFAS 123R must be adopted no later than the beginning of the first fiscal year beginning after June 15, 2005. We adopted SFAS 123R on January 1, 2006.

We will use the modified prospective method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123R for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123R that remain unvested on the effective date. We are evaluating the potential impact on the financial statements.

In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets. SFAS No. 153 addresses the measurement of exchange of nonmonetary assets. SFAS No. 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, Accounting for Nonmonetary Transactions, and replaces it with an exception for exchanges that do not have commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. We will adopt the provisions of SFAS No. 153 on January 1, 2006. The adoption of this statement will not have a material impact on our consolidated financial statements.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections. SFAS No. 154 replaces Accounting Principles Board Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements, and requires the direct effects of accounting principle changes to be retrospectively applied. The existing guidance with respect to accounting estimate changes and corrections of errors is carried forward in SFAS No. 154. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.

53

Item 7A.Quantitative and Qualitative Disclosure About Market Risk.

We are not exposed to market risks from changes in foreign currency exchange rates or commodity prices. We do not hold any derivative financial instruments nor do we hold any securities for trading or speculative purposes.

We are exposed to changes in interest rates on our investments in cash equivalents and short-term investments. All of our investments have maturities of six months or less which reduces our exposure to long-term interest rate changes. Interest income for the year ended December 31, 2005 was $0.7 million, therefore not exposing us to any meaningful interest income risk had rates dropped. Excluding capital leases, we had approximately $92.1 million in senior second secured notes outstanding as of December 31, 2005. These notes are at a fixed interest rate and are therefore not exposed to any interest rate risk.

Item 8.Financial Statements and Supplementary Data.

Our Consolidated Financial Statements and the report of our independent registered public accounting firm are included in this Annual Report on Form 10-K beginning on page F-1. The index to this report and the financial statements is included in Item 15.

Item 9.Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A.Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by SEC Rule 13a-15(b), an evaluation was performed under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, our management, including our principal executive officer and our principal financial officer, concluded that the design and operation of these disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

During the quarter ended December 31, 2005, there have been no significant changes in our internal controls over financial reporting that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Item 9B.Other Information.

None.

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Part III

Item 10.Directors and Executive Officers of the Registrant.

The disclosure under part I of Item 1 of this Form 10-K entitled “Executive Officers” is incorporated by reference into this Item 10.

The sections entitled “Election of Directors,” “The Board of Directors and Committees” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive proxy statement for our 2006 Annual Meeting of Stockholders, which will be filed with the SEC (the “Proxy Statement”), are incorporated in this Form 10-K by reference.

We adopted a Code of Ethics that applies to all employees, our executive officers and directors. Our Code of Ethics is available on our website at www.eschelon.com.

We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of this Code of Ethics by posting such information on our website at the address specified above.

Item 11.Executive Compensation.

The sections of the Proxy Statement entitled “The Board of Directors and Committees,” “Executive Compensation,” “Employment and Change of Control Agreements,” “Report of the Compensation Committee on Executive Compensation” and “Compensation Committee Interlocks and Insider Participation” are incorporated in this Form 10-K by reference.

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

The section of the Proxy Statement entitled “Security Ownership of Certain Beneficial Owners and Management” is incorporated by reference into this Form 10-K.

Item 13.Certain Relationships and Related Transactions.

The section of the Proxy Statement entitled “Certain Relationships and Related Transactions” is incorporated by reference into this Form 10-K.

Item 14.Principal Accounting Fees and Services.

The section of the Proxy Statement entitled “Ratification of Independent Registered Public Accounting Firm” is incorporated by reference into this Form 10-K.

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PART IV

Item 15.   Exhibits, Financial Statement Schedules.

(a) Documents filed as part of the report:

(1)Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2004 and 2005

Consolidated Statements of Operations for the years ended December 31, 2003, 2004 and 2005

Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2003, 2004 and 2005

Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2004 and 2005

Notes to Consolidated Financial Statements

(2)Schedule II—Valuation of Qualifying Accounts and Reserves

Report of Independent Registered Public Accounting Firm

(3)Exhibits

(b) Exhibits:

The following exhibits are filed or incorporated by reference as stated below:

Exhibit Number	Description
3.1(2)	Seventh Amended and Restated Certificate of Incorporation of Eschelon Telecom, Inc. filed on July 8, 2005.
3.2(2)	Form of Amended and Restated Bylaws of Eschelon Telecom, Inc. filed on July 8, 2005.
4.1*	Fourth Amended and Restated Stockholders Agreement dated June 27, 2002.
4.1.2(1)	Amendment No. 1 to Fourth Amended and Restated Stockholders Agreement dated December 23, 2004 (relating to Exhibit 4.1)
4.2*	Eschelon Telecom, Inc. 2002 Stock Incentive Plan.
4.3*	Form of Incentive Stock Option Grant Agreement Under the Eschelon Telecom, Inc. 2002 Stock Incentive Plan.
4.4*	Form of Nonstatutory Stock Option Grant Agreement Under the Eschelon Telecom, Inc. 2002 Stock Incentive Plan.
4.5*	Form of Restricted Stock Grant Agreement Under the Eschelon Telecom, Inc. 2002 Stock Incentive Plan.
4.6**	Indenture dated March 17, 2004 by and among Eschelon Operating Company; Eschelon Telecom, Inc.; Eschelon Telecom of Minnesota, Inc.; Eschelon Telecom of Washington, Inc.; Eschelon Telecom of Colorado, Inc.; Eschelon Telecom of Nevada, Inc.; Eschelon Telecom of Utah, Inc.; Eschelon Telecom of Oregon, Inc.; Eschelon Telecom of Arizona, Inc.; and The Bank of New York Trust Company, N.A.
4.7**	Registration Rights Agreement dated March 17, 2004 by and among Jefferies & Company, Inc.; Wachovia Capital Markets LLC; Eschelon Operating Company; Eschelon Telecom, Inc.; Eschelon Telecom of Minnesota, Inc.; Eschelon Telecom of Washington, Inc.; Eschelon Telecom of Colorado, Inc.; Eschelon Telecom of Nevada, Inc.; Eschelon Telecom of Utah, Inc.; Eschelon Telecom of Oregon, Inc.; and Eschelon Telecom of Arizona, Inc.

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Exhibit Number	Description
4.8**	Security Agreement dated March 17, 2004 by and among Eschelon Operating Company; Eschelon Telecom, Inc.; Eschelon Telecom of Minnesota, Inc.; Eschelon Telecom of Washington, Inc.; Eschelon Telecom of Colorado, Inc.; Eschelon Telecom of Nevada, Inc.; Eschelon Telecom of Utah, Inc.; Eschelon Telecom of Oregon, Inc.; Eschelon Telecom of Arizona, Inc.; and The Bank of New York Trust Company, N.A. (as Collateral Agent.)
4.9**	Trademark Security Agreement dated March 17, 2004 by and among Eschelon Operating Company; Eschelon Telecom, Inc.; and The Bank of New York Trust Company, N.A. (as Collateral Agent.)
4.10**	Form of Initial 8 3/8% Senior Second Secured Notes due 2010.
4.11**	Form of Guarantee of Initial 8 3/8% Senior Second Secured Notes due 2010.
4.12**	Form of Exchange 8 3/8% Senior Second Secured Notes due 2010.
4.13**	Form of Guarantee of Exchange 8 3/8% Senior Second Secured Notes due 2010.
4.14+	Registration Rights Agreement dated November 29, 2004 by and among Jefferies & Company, Inc.; Eschelon Operating Company; Eschelon Telecom, Inc.; Eschelon Telecom of Minnesota, Inc.; Eschelon Telecom of Washington, Inc.; Eschelon Telecom of Colorado, Inc.; Eschelon Telecom of Nevada, Inc.; Eschelon Telecom of Utah, Inc.; Eschelon Telecom of Oregon, Inc.; and Eschelon Telecom of Arizona, Inc.
4.15+	Supplemental Indenture dated November 29, 2004 by and among Eschelon Operating Company, the guarantors party thereto and The Bank of New York Trust Company, N.A., as Trustee.
4.16+	Supplemental Indenture dated December 31, 2004 by and among Eschelon Operating Company, the guarantors party thereto and The Bank of New York Trust Company, N.A., as Trustee.
4.17+	Supplemental Indenture dated January 20, 2005 by and among Eschelon Operating Company, the guarantors party thereto and The Bank of New York Trust Company, N.A., as trustee.
4.18(1)	Redemption Agreement as of October 13, 2004, by and between NTFC Capital Corporation and Eschelon Telecom, Inc.
10.1(4)	Employment Agreement dated May 23, 2005 by and between Eschelon Telecom, Inc. and Richard A. Smith.
10.2*	Employment Offer Letter dated March 7, 2000 from Eschelon Telecom, Inc. to Geoffrey M. Boyd.
10.2.1*	Severance Pay Letter Agreement dated November 14, 2002 by and between Eschelon Telecom, Inc. and Geoffrey M. Boyd.
10.2.2(3)	Amendment dated April 11, 2005 to Employement Offer Letter dated March 7, 2000 from Eschelon Telecom, Inc. to Geoffrey M. Boyd.
10.3*	Change-in-Control Severance Pay Agreement dated April 21, 1999 by and between Advanced Telecommunications, Inc. and David A. Kunde.
10.4*	Employment Offer Letter dated July 19, 1999 from Advanced Telecommunications, Inc. to Steven K. Wachter.
10.5*	Stock Restriction Agreement dated February 7, 2003 between Eschelon Telecom, Inc. and Marvin C. Moses.
10.6*^	Carrier Global Services Agreement dated July 28, 2000 by and between MCI WorldCom Communications, Inc. and Eschelon Telecom, Inc.
10.6.1*^	First Amendment dated June 20, 2001 to Carrier Global Services Agreement dated July 28, 2000 by and between MCI WorldCom Communications, Inc. and Eschelon Telecom, Inc.

57

Exhibit Number	Description
10.6.2*^	Second Amendment dated April 8, 2002 to Carrier Global Services Agreement dated July 28, 2000 by and between MCI WorldCom Communications, Inc. and Eschelon Telecom, Inc.
10.6.3*^	Third Amendment dated April 1, 2003 to Carrier Global Services Agreement dated July 28, 2000 by and between MCI WorldCom Communications, Inc. and Eschelon Telecom, Inc.
10.6.4*^	WorldCom Internet Dedicated Service Agreement and Service Order Form dated June 12, 2003.
10.6.5*^	WorldCom Internet Dedicated Service Agreement and Service Order Form dated January 23, 2004.
10.6.6*^	WorldCom Internet Dedicated T3 Price-Protected Agreement dated July 26, 2001.
10.6.7*^	WorldCom Wholesale Dedicated Internet Pricing Sheet
10.7*^	Carrier Service Agreement dated August 25, 2000 between Global Crossing Bandwidth, Inc. and Eschelon Telecom, Inc.
10.7.1*^	Amendment #1 dated November 10, 2000 to Carrier Service Agreement dated August 25, 2000 between Global Crossing Bandwidth, Inc. and Eschelon Telecom, Inc.
10.7.2*^	Amendment #2 dated January 2, 2001 to Carrier Service Agreement dated August 25, 2000 between Global Crossing Bandwidth, Inc. and Eschelon Telecom, Inc.
10.7.3*^	Amendment #3 dated June 25, 2001 to Carrier Service Agreement dated August 25, 2000 between Global Crossing Bandwidth, Inc. and Eschelon Telecom, Inc.
10.7.4*^	Amendment #4 dated July 17, 2001 to Carrier Service Agreement dated August 25, 2000 between Global Crossing Bandwidth, Inc. and Eschelon Telecom, Inc.
10.7.5*	Amendment #5 dated April 25, 2002 to Carrier Service Agreement dated August 25, 2000 between Global Crossing Bandwidth, Inc. and Eschelon Telecom, Inc.
10.7.6*^	Amendment #6 dated July 12, 2002 to Carrier Service Agreement dated August 25, 2000 between Global Crossing Bandwidth, Inc. and Eschelon Telecom, Inc.
10.7.7*^	Amendment #7 dated March 26, 2004 to Carrier Service Agreement dated August 25, 2000 between Global Crossing Bandwidth, Inc. and Eschelon Telecom, Inc.
10.7.8(5)^	Amendment #8 dated September 14, 2004 to Carrier Service Agreement dated August 25, 2000 between Global Crossing Bandwidth, Inc. and Eschelon Telecom, Inc.
10.7.9(2)^^	Amendment #9 dated July 1, 2005 to Carrier Service Agreement dated August 25, 2000 between Global Crossing Bandwidth, Inc. and Eschelon Telecom, Inc.
10.11*	Lease of Office Space by and between St. Paul Properties, Inc. and Eschelon Telecom, Inc. dated as of November 18, 2003.
10.11.1	Amendment of Lease dated December 29, 2005 of Lease of Office Space by and between St. Paul Properties, Inc. and Eschelon Telecom, Inc. dated as of November 18, 2003.
10.12*	Lease Agreement by and between Timeshare Systems, Inc. and Advanced Telecommunications, Inc. dated March 3, 1999.
10.13*	Lease For Storage dated July 30, 1996 by and between T.H.S. Northstar Associates Limited Partnership and Fishnet.com, Inc.
10.13.1*	First Amendment dated March 10, 1998 of Lease for Storage dated July 30, 1996 by and between T.H.S. Northstar Associates Limited Partnership and Fishnet.com, Inc.
10.13.2*	Second Amendment dated March 27, 1998 of Lease for Storage dated July 30, 1996 by and between T.H.S. Northstar Associates Limited Partnership and Fishnet.com, Inc.
10.13.3*	Third Amendment dated April 30, 1999 of Lease for Storage dated July 30, 1996 by and between T.H.S. Northstar Associates Limited Partnership and Fishnet.com, Inc.
10.13.4*	Fourth Amendment dated October 3, 2000 of Lease for Storage dated July 30, 1996 by and between T.H.S. Northstar Associates Limited Partnership and Fishnet.com, Inc.

58

Exhibit Number	Description
10.13.5*	Lease For Storage dated March 6, 2000 by and between T.H.S. Northstar Associates Limited Partnership and Fishnet.com, Inc.
10.13.6*	Lease For Storage dated July 11, 1999 by and between T.H.S. Northstar Associates Limited Partnership and Fishnet.com, Inc.
10.13.7	Fifth Amendment dated January 9, 2006 of Lease For Storage dated July 30, 1996 by and between T.H.S. Northstar Associates Limited Partnership and Fishnet.com, Inc.
10.14*	Lease Agreement by and between Duke Realty Limited Partnership and Cady Communications, Inc. dated May 21, 1999.
10.14.1	Amendment dated February 15, 2006 of Lease Agreement by and between Duke Realty Limited Partnership and Cady Communications, Inc. dated May 21, 1999.
10.15*	Lease Agreement between Seattle Telecom LLC and Advanced Telecommunications, Inc. dated December 20, 1999.
10.16*	Office Lease by and between Parkside Salt Lake Corporation and Advanced Telecommunications, Inc. dated December 28, 1999.
10.16.1	Amendment dated April 28, 2005 to Office Lease by and between Parkside Salt Lake Corporation and Advanced Telecommunications, Inc. dated December 28, 1999.
10.17*	Lease by and between Denver Place Associates Limited Partnership and Eschelon Telecom of Colorado, Inc. dated October 24, 2000.
10.18*	Office Lease by and between SOFI-IV SIM Office Investors II, Limited Partnership and Advanced Telecommunications, Inc. dated December 19, 1999.
10.18.1*	First Amendment dated March 17, 2003 to Lease by and between SOFI-IV SIM Office Investors II, Limited Partnership and Eschelon Telecom, Inc. dated December 19, 1999.
10.18.2	Second Amendment dated July 18, 2005 to Lease by and between SOFI-IV SIM Office Investors II, Limited Partnership and Eschelon Telecom, Inc. dated December 19, 1999.
10.19*	Lease by and between Alco Investment Company and Advanced Telecommunications, Inc. dated November 19, 1999.
10.20+	Stock Purchase Agreement dated October 13, 2004, by and between Eschelon Telecom, Inc. and Advanced TelCom Group, Inc.
10.20.1	Amendment to Stock Purchase Agreement dated as of December 30, 2004 (related to Exhibit 10.20)
10.21+	Asset Purchase Agreement dated October 13, 2004 by and between GE Business Productivity Solutions, Inc. and Eschelon Telecom, Inc.
10.22(5)	Lease Agreement by and between Hartmann Limited Partnership & William Ludwig Hartmann Marital Trust and Advanced TelCom, Inc. dated August 18, 2000.
10.23(5)	Lease Agreement by and between Advanced TelCom, Inc. and 200 South Virginia Investments, LLC dated July 16, 1999.
10.23.1(5)	First Amendment to Lease Agreement by and between Advanced TelCom, Inc. and 200 South Virginia Investments, LLC dated January 6, 1999.
10.23.2(5)	Second Amendment to Lease Agreement by and between Advanced TelCom, Inc. and 200 South Virginia Investments, LLC dated August 1, 2001.
10.23.3(5)	Third Amendment to Lease Agreement by and between Advanced TelCom, Inc. and 200 South Virginia Investments, LLC dated April 1, 2004.
10.23.4(5)	Fourth Amendment to Lease Agreement by and between Advanced TelCom, Inc. and 200 South Virginia Investments, LLC dated September 2004.
10.24(5)	Triple-Net Lease Agreement by and between Sunwest Properties II, LLC and Eschelon Telecom, Inc. dated March 11, 2005.
10.25(5)	Standard Industrial/Commercial Single-Tenant Lease—Net by and between Courthouse Square, LLC and Advanced TelCom Group, Inc. dated January 29, 1999.

59

Exhibit Number	Description
10.25.1(5)	First Amendment to Lease by and between Courthouse Square, LLC and Advanced TelCom Group, Inc. dated August 12, 1999.
10.25.2(5)	Second Amendment to Lease by and between Kayares International, LLC and Advanced TelCom Group, Inc. dated November 1, 2002.
10.26(5)	Lease by and between WVB Holdings, LLC and Advanced TelCom, Inc. dated June 10, 2004.
10.27(5)	Office Building Lease by and between Shaub Properties, Inc. and Advanced TelCom Group, Inc. dated March 7, 2000.
10.28(5)	Office Lease by and between Retro, LLC and Advanced TelCom Group, Inc. dated January 19, 1999.
10.28.1(5)	Lease Modification Agreement by and between Retro, LLC and Advanced TelCom Group, Inc. dated April 23, 1999.
10.29(2)	Form of Indemnification Agreement entered into between Eschelon Telecom, Inc. and its directors and officers.
10.30(5)	Lease Agreement-Commercial Premises by and between Avista Communications of Washington and Yesterday’s Village, Inc. dated September 30, 1999.
10.30.1(5)	Amended Lease Agreement by and between Advanced TelCom, Inc. and Yesterday’s Village, Inc. dated March 27, 2003.
10.30.2(5)	Amendment to Lease Agreement by and between Advanced TelCom, Inc. and Yesterday’s Village, Inc. dated 2004.
10.31(5)	Lease by and between U.S. National Bank of Oregon and Shared Communications Services, Inc. dated March 1, 1996.
10.31.1(5)	Lease Extension and Assignment Agreement by and between U.S. Bank, N.A., Shared Communications Services, Inc. and Advanced TelCom, Inc. dated June 6, 2001.
14.1(1)	Eschelon Telecom, Inc. Code of Ethics and Business Conduct
21.1+	Subsidiaries of Eschelon Telecom, Inc.
23.1	Consent of Ernst & Young LLP
31.1	Certification by Richard A. Smith, Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification by Geoffrey M. Boyd, Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification by Richard A. Smith, Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification by Geoffrey M. Boyd, Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*Incorporated herein by reference to Eschelon Telecom, Inc. Registration Statement on Form 10, No. 000-50706 as filed with the Commission on April 26, 2004.

**Incorporated herein by reference to Eschelon Operating Company Registration Statement on Form S-4, No. 333-114437 as filed with the Commission on April 13, 2004.

+Incorporated herein by reference to Eschelon Operating Company Registration Statement on Form S-4, No. 333-122292 as filed with the Commission on January 25, 2005.

^Portions of this Exhibit were omitted and have been filed separately with the Secretary of the Commission pursuant to the Company’s Application Requesting Confidential Treatment under Rule 24b-2 of the Exchange Act, filed on April 26, 2004, as amended on July 7, 2005.

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^^Portions of this Exhibit were omitted and have been filed separately with the Secretary of the Commission pursuant to the Company’s Application Requesting Confidential Treatment under Rule 406 of the Securities Act, filed on July 7, 2005.

(1)Incorporated herein by reference to Eschelon Telecom, Inc. Annual Report on Form 10-K as filed with the Commission on March 31, 2005.

(2)Incorporated herein by reference to Eschelon Telecom, Inc. Registration Statement on Form S-1/A, No. 333-124703 as filed with the Commission on July 8, 2005.

(3)Incorporated herein by reference to Eschelon Telecom, Inc. Current Report on Form 8-K as filed with the Commission on April 18, 2005.

(4)Incorporated herein by reference to Eschelon Telecom, Inc. Current Report on Form 8-K as filed with the Commission on May 27, 2005.

(5)Incorporated herein by reference to Eschelon Telecom, Inc. Registration Statement on Form S-1, No. 333-124703 as filed with the Commission on May 6, 2005.

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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, on March 15, 2006.

ESCHELON TELECOM, INC.
By	/s/ RICHARD A. SMITH
Name:	Richard A. Smith
Title:	President, Chief Executive Officer and Director

Each person whose signature appears below constitutes and appoints Richard A. Smith, Geoffrey M. Boyd and J. Jeffery Oxley and each of them, his true and lawful attorney-in-fact and agent, with full power and substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this annual report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact, agent, or his substitute may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.

	Signature		Title		Date
/s/ RICHARD A. SMITH		President, Chief Executive Officer and Director
Richard A. Smith		(Principal Executive Officer)		March 17, 2006
/s/ GEOFFREY M. BOYD		Chief Financial Officer
Geoffrey M. Boyd		(Principal Financial and Accounting Officer)		March 17, 2006
/s/ CLIFFORD D. WILLIAMS		Chairman of the Board
Clifford D. Williams				March 17, 2006
/s/ MARVIN C. MOSES		Director
Marvin C. Moses				March 17, 2006
/s/ LOUIS L. MASSARO		Director
Louis L. Massaro				March 17, 2006
/s/ MARK E. NUNNELLY		Director
Mark E. Nunnelly				March 17, 2006
/s/ JAMES P. TENBROEK		Director
James P. TenBroek				March 17, 2006
/s/ IAN K. LORING		Director
Ian K. Loring				March 17, 2006

62

Eschelon Telecom, Inc.

Schedule II—Valuation and Qualifying Accounts

Years Ended December 31, 2003, 2004 and 2005

(Dollars in thousands)

	Balance at Beginning of Year			Additions Charged to Costs and Expenses			Less Deductions				Balance Acquired Through Acquisition on December 31, 2004			Balance at End of Year
Allowance for Doubtful Accounts Receivable:
2003		$	2,018		$	1,033		$	(2,312	)		$	—		$	739
2004		739			1,567			(1,894		)		405			817
2005		817			2,338			(2,663		)		—			492

	Balance at Beginning of Year			Additions Charged to Costs and Expenses			Less Deductions			Balance Acquired Through Acquisition on December 31, 2004			Balance at End of Year
Valuation Allowance for Deferred Income Tax Assets:
2003		$	38,482		$	6,279		$	—		$	—		$	44,761
2004		44,761			1,378			—			—			46,139
2005		46,139			11,661			—			—			57,800

63

CONSOLIDATED FINANCIAL STATEMENTS

Eschelon Telecom, Inc.

Years Ended December 31, 2003, 2004 and 2005

Eschelon Telecom, Inc.
Consolidated Financial Statements
Years Ended December 31, 2003, 2004 and 2005

Index

Report of Independent Registered Public Accounting Firm	F-2
Audited Consolidated Financial Statements
Consolidated Balance Sheets	F-3
Consolidated Statements of Operations	F-4
Consolidated Statements of Stockholders’ Equity (Deficit)	F-5
Consolidated Statements of Cash Flows	F-6
Notes to Consolidated Financial Statements	F-7

F-1

Report of Independent Registered Public Accounting Firm

The Board of Directors
Eschelon Telecom, Inc.

We have audited the accompanying consolidated balance sheets of Eschelon Telecom, Inc. as of December 31, 2004 and 2005, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2005. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and 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. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Eschelon Telecom, Inc. at December 31, 2004 and 2005, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with United States generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, 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.

February 17, 2006
Minneapolis, Minnesota

F-2

Eschelon Telecom, Inc.
Consolidated Balance Sheets
(Dollars in Thousands, Except per Share Amounts)

	December 31,
	2004			2005
Assets
Current assets:
Cash and cash equivalents	$	26,435		$	26,062
Restricted cash	722			996
Available-for-sale securities	6,194			4,760
Accounts receivable, net of allowance for doubtful accounts of $817 and $492, respectively	18,941			22,996
Other receivables	2,976			3,052
Inventories	2,873			2,927
Prepaid expenses	2,410			2,294
Total current assets	60,551			63,087
Property and equipment, net	102,849			126,452
Other assets	1,985			1,506
Goodwill	38,776			7,168
Intangible assets, net	32,958			33,333
Total assets	$	237,119		$	231,546
Liabilities and stockholders’ equity (deficit)
Current liabilities:
Accounts payable	$	13,801		$	16,400
Accrued telecommunication costs	2,190			4,227
Accrued office rent	2,336			2,035
Accrued interest expense	4,070			2,646
Other accrued expenses	5,998			5,485
Deferred revenue	7,300			7,921
Accrued compensation expenses	3,588			2,809
Capital lease obligations, current maturities	1,629			2,430
Total current liabilities	40,912			43,953
Long-term liabilities:
Other long-term liabilities	630			251
Capital lease obligations, less current maturities	2,824			2,964
Notes payable	137,778			92,125
Total liabilities	182,144			139,293
Series A convertible preferred stock, $0.01 par value per share; 100,000,000 shares authorized and 77,526,136 shares issued and outstanding on December 31, 2004	48,155			—
Series B convertible preferred stock, $0.01 par value per share; 25,000,000 shares authorized and 20,000,000 shares issued and outstanding on December 31, 2004	15,000			—
Stockholders’ equity (deficit):
Common stock, $0.01 par value per share; 200,000,000 shares authorized; issued and outstanding shares—351,134 shares on December 31, 2004 and 14,634,279 shares on December 31, 2005	4			146
Additional paid-in capital	115,876			248,199
Accumulated other comprehensive income	30			56
Accumulated deficit	(124,056		)	(155,047		)
Deferred compensation	(34		)	(1,101		)
Total stockholders’ equity (deficit)	(8,180		)	92,253
Total liabilities and stockholders’ equity (deficit)	$	237,119		$	231,546

See accompanying notes.

F-3

Eschelon Telecom, Inc.
Consolidated Statements of Operations
(Dollars in Thousands, Except per Share Amounts)

	Year Ended December 31,
	2003			2004			2005
Revenue:
Network services	$	115,482		$	131,780		$	201,835
Business telephone systems	25,614			26,316			25,908
	141,096			158,096			227,743
Cost of revenue:
Network services (exclusive of depreciation and amortization)	45,037			47,354			85,914
Business telephone systems	15,784			15,979			16,139
	60,821			63,333			102,053
Gross profit:
Network services	70,445			84,426			115,921
Business telephone systems	9,830			10,337			9,769
	80,275			94,763			125,690
Operating expenses:
General and administrative	39,297			41,755			56,431
Sales and marketing	26,955			27,500			33,879
Depreciation and amortization	30,099			31,105			39,653
Operating loss	(16,076		)	(5,597		)	(4,273		)
Other income (expense):
Interest income	168			124			691
Interest expense	(1,754		)	(11,452		)	(28,125		)
Gain on extinguishment of debt	—			18,195			—
Other income (expense)	484			(155		)	65
Income (loss) before income taxes	(17,178		)	1,115			(31,642		)
Income taxes	(28		)	(4		)	(4		)
Net income (loss) from continuing operations	(17,206		)	1,111			(31,646		)
Income from discontinued operation, net of tax	—			—			329
Gain on sale of discontinued operation, net of tax	—			—			326
Net income (loss)	(17,206		)	1,111			(30,991		)
Less preferred stock dividends and premium paid on repurchase of preferred stock	(3,426		)	(4,292		)	—
Net income (loss) applicable to common stockholders	$	(20,632	)	$	(3,181	)	$	(30,991	)
Basic and diluted income (loss) per share:
Continuing operations	$	(70.59	)	$	(11.11	)	$	(5.32	)
Discontinued operation	—			—			0.11
Net income (loss)	$	(70.59	)	$	(11.11	)	$	(5.21	)
Weighted average shares outstanding:
Basic and diluted	292,481			287,393			5,949,310

See accompanying notes.

F-4

Eschelon Telecom, Inc.
Consolidated Statements of Stockholders’ Equity (Deficit)
(Dollars in Thousands)

	Common Stock					Additional Paid-In				Accumulated Other Comprehensive			Accumulated				Deferred
	Shares		Amount			Capital				Income			Deficit				Compensation				Total
Balance at December 31, 2002	117,307			$	1		$	123,502			$	—		$	(107,961	)		$	—		$	15,542
Forfeiture of common stock after corporate restructuring	(63	)		—			—				—			—				—			—
Accumulated dividends in connection with preferred stock	—			—			(3,426		)		—			—				—			(3,426		)
Fees associated with 2002 sale of preferred stock	—			—			(70		)		—			—				—			(70		)
Issuance of restricted common stock	183,399			2			122				—			—				(124		)	—
Stock options exercised	28,290			—			19				—			—				—			19
Amortization of deferred compensation	—			—			—				—			—				70			70
Net loss for the year	—			—			—				—			(17,206		)		—			(17,206		)
Balance at December 31, 2003	328,933			3			120,147				—			(125,167		)		(54		)	(5,071		)
Accumulated dividends in connection with preferred stock	—			—			(3,435		)		—			—				—			(3,435		)
Series A convertible preferred stock repurchase	—			—			(857		)		—			—				—			(857		)
Issuance of restricted common stock	10,358			—			14				—			—				—			14
Stock options exercised	11,843			1			7				—			—				—			8
Unrealized gain on available-for-sale securities	—			—			—				30			—				—			30
Amortization of deferred compensation	—			—			—				—			—				20			20
Net income for the year	—			—			—				—			1,111				—			1,111
Balance at December 31, 2004	351,134			4			115,876				30			(124,056		)		(34		)	(8,180		)
Accumulated dividends in connection with preferred stock	—			—			(2,648		)		—			—				—			(2,648		)
Issuance of restricted common stock	9,350			—			27				—			—				—			27
Stock options exercised	78,457			1			59				—			—				—			60
Restricted stock forfeited	(494	)		—			—				—			—				—			—
Deferred compensation related to stock options granted	—			—			2,003				—			—				(2,003		)	—
Amortization of deferred compensation	—			—			—				—			—				936			936
Unrealized gain on available-for-sale securities	—			—			—				26			—				—			26
Convert preferred stock to common stock	8,838,689			88			65,869				—			—				—			65,957
Sale of common stock, net of fees	5,357,143			53			67,013				—			—				—			67,066
Net loss for the year	—			—			—				—			(30,991		)		—			(30,991		)
Balance at December 31, 2005	14,634,279			$	146		$	248,199			$	56		$	(155,047	)		$	(1,101	)	$	92,253

See accompanying notes.

F-5

Eschelon Telecom, Inc.
Consolidated Statements of Cash Flows
(In Thousands)

	Year Ended December 31,
	2003			2004			2005
Operating activities
Net income (loss)	$	(17,206	)	$	1,111		$	(30,991	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization expense	30,099			31,105			39,653
Provision for bad debt expense	500			721			1,090
Noncash interest expense	1,302			2,339			7,288
Value of stock issued to management and directors	70			34			963
Loss (gain) on write-off and sales of assets	(484		)	162			260
Gain on extinguishment of debt	—			(18,195		)	—
Gain on sales of available-for-sale securities	—			(7		)	(326		)
Gain on sale of discontinued operation	—			—			(326		)
Changes in operating assets and liabilities:
Restricted cash	—			(722		)	(274		)
Accounts receivable	(1,520		)	658			(5,145		)
Other receivables	904			(546		)	(76		)
Inventories	(393		)	296			(54		)
Prepaid expenses and other assets	(219		)	(209		)	495
Discontinued assets held for sale, net of liabilities	—			—			222
Accounts payable and accrued expenses	3,450			8,984			2,133
Deferred revenue	(397		)	878			621
Accrued compensation expenses	582			(1,216		)	(779		)
Net cash provided by operating activities	16,688			25,393			14,754
Investing activities
Purchase of subsidiaries, net of cash acquired	—			(45,495		)	(48		)
Purchase of assets held for sale, net of liabilities	—			—			(216		)
Purchases of available-for-sale securities	—			(8,198		)	(30,526		)
Proceeds from sales of available-for-sale securities	—			2,041			32,312
Purchases of property and equipment	(13,367		)	(15,414		)	(19,227		)
Cash paid for customer installation costs	(11,669		)	(11,293		)	(13,551		)
Proceeds from sale of assets	28			25			239
Proceeds from sale of discontinued operation, net of fees	—			—			320
Net cash used in investing activities	(25,008		)	(78,334		)	(30,481		)
Financing activities
Proceeds from issuance of notes payable	—			136,163			—
Payments made on notes and capital lease obligations	(2,697		)	(66,948		)	(51,362		)
Proceeds from (fees associated with) issuance of preferred stock	(70		)	15,000			154
Payment on repurchase of preferred stock	—			(5,085		)	—
Proceeds from issuance of common stock, net of fees	19			8			67,126
Increase in debt issuance costs	(59		)	(8,368		)	(348		)
Net cash provided by (used in) financing activities	(2,807		)	70,770			15,570
Net increase (decrease) in cash and cash equivalents	(11,127		)	17,829			(373		)
Cash and cash equivalents at beginning of year	19,733			8,606			26,435
Cash and cash equivalents at end of year	$	8,606		$	26,435		$	26,062
Supplemental cash flow information
Cash paid for interest	$	452		$	9,114		$	20,837
Supplemental noncash activities
Equipment purchases under capital leases	$	1,430		$	4,064		$	3,127
Value of common stock issued to management and certain members of the board of directors	$	124		$	14		$	27

See accompanying notes.

F-6

Eschelon Telecom, Inc.
Notes to Consolidated Financial Statements
(Dollars in Thousands, Except per Share Amounts)

1.   Summary of Significant Accounting Policies

Organization

Eschelon Telecom, Inc. (the Company) is a competitive local exchange carrier, headquartered in Minneapolis, Minnesota. The Company was incorporated in Delaware in 1996 under the name Advanced Telecommunications, Inc. The Company is a facilities-based provider of integrated voice and data communications services to small and medium-sized businesses in 19 markets in the western United States. The Company offers voice and data services, which are referred to as network services. The Company also sells, installs and maintains business telephone and data systems and equipment referred to as business telephone systems.

The Company offers the following products and services:

Voice Services	Data Services	Business Telephone Systems
Local and Long Distance	Broadband Internet Access	Customer Premise Telephone Equipment and Accessories
Vertical Features	Dedicated Internet Access	Data Communications Equipment
Advanced Call Management	Dial-up Internet Access	Voice Mail Systems
Other Enhanced Services	E-Mail	IP Phone Systems
	Web-Hosting	After Market Maintenance and Upgrade Contracts

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Reclassifications

Certain prior year items have been reclassified to conform to current year presentation.

Cash and Cash Equivalents

The Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents. Cash equivalents are carried at cost which approximates market value. On December 31, 2004 and 2005, the Company had investments in securities of $17,051 and $21,728, respectively, which are included in cash and cash equivalents.

Restricted Cash

In August 2004, a Nevada state court entered a judgment against the Company in the amount of $376 plus costs. The Company appealed the judgment and was required to hold $577 as restricted cash. Also in 2004, the Company held $75 for collateral on bank credit cards and $70 for performance bonds as restricted cash.

F-7

Eschelon Telecom, Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except per Share Amounts)

1.Summary of Significant Accounting Policies (Continued)

In January 2005, the Company settled the Nevada state court judgment agreeing to pay a total of $300 in three annual installments starting in January 2005. As part of the agreement the Company is required to hold the remaining installments in restricted cash. As a result, the Company reduced the amount held in restricted cash from $577 to $200.

In 2005, the Company increased the amount held in restricted cash for performance bonds from $70 to $720 as a result of the ATI acquisition. Also in 2005, the Company reduced the amount held in restricted cash for collateral on bank credit cards from $75 to $55. Restricted cash also includes $6 for interest earned on balances held.

Available-for-Sale Securities

Short-term investments are comprised of municipal and United States government debt securities with maturities of more than three months but less than one year. In accordance with Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities, and based on the Company’s intentions regarding these instruments, all investments in debt securities are classified as available-for-sale and accounted for at fair value. Fair value is determined by quoted market prices, with unrealized gains and losses reported as a separate component of stockholders’ equity (deficit). The Company uses the specific identification of securities sold method to recognize realized gains and losses in earnings.

Property and Equipment

Property and equipment, including leasehold improvements, are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the assets as follows:

Vehicles	5 years
Office furniture and equipment	5-7 years
Computer equipment	5 years
Computer software	3 years
Switching and data equipment	12 years
Switching and data software	5 years

Leasehold improvements are amortized over the shorter of the related lease term or the estimated useful life of the asset.

All internal costs directly related to the construction of the switches and operating and support systems, including compensation of certain employees, are capitalized.

F-8

Eschelon Telecom, Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except per Share Amounts)

1.Summary of Significant Accounting Policies (Continued)

Property and equipment consists of the following:

	December 31,
	2004			2005
Vehicles	$	590		$	1,375
Office furniture and equipment	16,746			18,229
Computer equipment and software	34,534			41,897
Leasehold improvements	19,504			23,765
Switching and data equipment and software	99,736			134,661
	171,110			219,927
Less accumulated depreciation	(68,261		)	(93,475		)
	$	102,849		$	126,452

Total depreciation expense was $19,270, 18,684 and 25,565 for the years ended December 31, 2003, 2004 and 2005, respectively.

The Company reviews all long-lived assets for impairment in accordance with SFAS No. 144, Accounting for the Impairment and Disposal of Long-Lived Assets. Under SFAS No. 144, impairment losses are recorded on long-lived assets used in operations when events and circumstances indicate the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets.

Goodwill and Other Intangible Assets

Goodwill is tested at least annually for impairment at the reporting unit level. If the implied fair value of a reporting unit is less than the carrying amount, an impairment charge is recognized. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, management completed its annual impairment test in the fourth quarter of 2004 and 2005 and determined that goodwill had not been impaired.

On September 15, 2005, the Company redeemed 35% of its outstanding 8 3/8% senior second secured notes due March 15, 2010. In connection with the redemption, the Company wrote off a proportionate amount of the associated debt issuance costs resulting in a net decrease to intangible assets and a corresponding increase to interest expense of $2,579.

The following table represents other intangible assets by category and accumulated amortization as of December 31, 2005 and 2004:

	Gross								Estimated
	Carrying			Accumulated					Life Range
2005	Amount			Amortization			Net		(in Years)
Customer installation costs		$	77,650		$	52,034	$	25,616		4
Debt issuance costs		5,666			1,077		4,589			7
Customer relationships		3,820			955		2,865			4
Non-compete agreements		300			100		200			3
Developed technology		94			31		63			3
Total		87,530			54,197		33,333			4	(1)

F-9

Eschelon Telecom, Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except per Share Amounts)

1.Summary of Significant Accounting Policies (Continued)

	Gross							Estimated
	Carrying		Accumulated					Life Range
2004	Amount		Amortization			Net		(in Years)
Customer installation costs	$	64,087		$	39,019	$	25,068		4
Debt issuance costs	8,368			476		7,890			7
Non-compete agreements	15			15		—			5
Total	72,470			39,512		32,958			4	(1)

(1)   Weighted average life.

Total amortization expense was $11,667, $13,076 and $15,153 for the years ended December 31, 2003, 2004 and 2005, respectively. Estimated amortization expense for each of the five succeeding fiscal years based on current intangible assets is expected to be $12,363, $10,045, $6,978, $2,978 and $969, respectively.

Revenue Recognition

Revenues from network services are recognized in the period in which subscribers use the related services. Revenues from equipment sales and related installation charges are recognized upon delivery, completion of the installation of the related equipment, and acceptance by the customer, at which point legal title passes to the customer. Revenues for carrier interconnection and access are recognized in the period in which the service is provided.

Cost of Revenue

The Company carefully reviews all vendor invoices and frequently disputes inaccurate or inappropriate charges. In cases where the Company disputes certain charges, only undisputed amounts on vendor invoices are paid in order to pay the proper amounts owed. The Company records costs net of disputed amounts based on the expected outcome of disputes that are initiated. The Company uses significant estimates to determine the level of success in dispute resolution and considers past historical experience, basis of dispute, financial status of the vendor and current relationship with the vendor and aging of prior disputes in quantifying estimates.

Deferred Revenue

Deferred revenue consists of voice and data services that are billed in advance and recorded as a liability for services provided in the future, maintenance contracts related to servicing business telephone systems and estimated warranty costs associated with business telephone systems.

Deferred revenue related to voice and data services is recognized over the average customer life. Deferred revenue related to maintenance contracts is recognized over the life of the contract. Deferred revenue related to estimated warranty costs is recognized over the warranty period, which typically ranges from one to two years.

Advertising Costs

Advertising costs are expensed as incurred. For the years ended December 31, 2003, 2004 and 2005, the Company had advertising expense of $479, $464 and $589, respectively.

F-10

Eschelon Telecom, Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except per Share Amounts)

1.   Summary of Significant Accounting Policies (Continued)

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are initially recorded at fair value upon the sale of products or services to customers. Significant estimates are required in determining the allowance for doubtful accounts receivable. The Company considers two primary factors in determining the proper level of allowance, including historical collections experience and the aging of the accounts receivable portfolio. The allowance for doubtful accounts is based on the best facts available to the Company and is reevaluated and adjusted as additional information is received.

Use of Estimates

The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Accumulated Other Comprehensive Income

Accumulated other comprehensive income represents unrealized gains on available-for-sale securities, net of tax. Accumulated other comprehensive income is presented in the consolidated statements of stockholders’ equity (deficit).

The components of accumulated other comprehensive income are as follows:

Balance, December 31, 2003	$	—
Net unrealized gain (loss) on financial instruments	30
Balance, December 31, 2004	30
Net unrealized gain (loss) on financial instruments	26
Balance, December 31, 2005	$	56

Income Taxes

The Company accounts for income taxes under the liability method in accordance with SFAS No. 109, Accounting for Income Taxes. Deferred tax liabilities are recognized for temporary differences that will result in taxable amounts in future years. Deferred tax assets are recognized for deductible temporary differences and tax operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be realized or settled. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and the Company records a valuation allowance to reduce its deferred tax assets to the amounts it believes to be realizable. The Company has concluded that a full valuation allowance against its deferred tax assets was appropriate.

Net Income (Loss) Per Share

Basic earnings per share is computed based on the weighted average number of common shares outstanding. Diluted earnings per share is computed based on the weighted average number of common

F-11

Eschelon Telecom, Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except per Share Amounts)

1.Summary of Significant Accounting Policies (Continued)

shares outstanding adjusted by the number of additional shares that would have been outstanding had the potentially dilutive common shares been issued. Potentially dilutive shares of common stock include unexercised stock options and unvested restricted stock grants. The Company does not have any potentially dilutive shares because net losses were reported in all periods presented.

Stock-Based Compensation

The Company accounts for its stock-based employee compensation under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Under APB No. 25, when the exercise price of stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized in the consolidated statements of operations.

The Company adopted the disclosure provisions of SFAS No. 148, Accounting for Stock-Based Compensation. SFAS No. 148 requires disclosure of how stock compensation expense would be computed under SFAS No. 123, Accounting for Stock-Based Compensation, using the fair value method.

The following table illustrates the effect on net income (loss) per share if the Company had applied the fair value recognition provision of SFAS No. 123 to stock-based employee compensation:

	Year Ended December 31,
	2003			2004			2005
Net loss applicable to common stockholders as reported	$	(20,632	)	$	(3,181	)	$	(30,991	)
Add: Stock-based employee compensation expense included in reported net loss, net of related tax effects	70			20			963
Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards	(133		)	(45		)	(1,303		)
Pro forma net loss applicable to common stockholders	$	(20,695	)	$	(3,206	)	$	(31,331	)
Net income (loss) per share:
Basic and diluted—as reported	$	(70.59	)	$	(11.11	)	$	(5.21	)
Basic and diluted—pro forma	(70.73		)	(11.11		)	(5.27		)

The fair value of these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

	Year Ended December 31,
	2003		2004		2005
Expected dividend yield	—		—		—
Expected stock price volatility	25	%	25	%	25	%
Risk-free interest rate	3.25	%	3.88	%	4.45	%
Expected life of options	5 years		5 years		5 years

New Accounting Pronouncements

In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 151, Inventory Costs. This statement requires that abnormal amounts of idle facility expense, freight, handling

F-12

Eschelon Telecom, Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except per Share Amounts)

1.Summary of Significant Accounting Policies (Continued)

costs and spoilage be recognized as current-period charges. This statement also requires that fixed production overhead be allocated to inventory costs beginning in fiscal 2006. The Company does not expect that the adoption of this statement will have a material impact on its consolidated financial statements.

In December 2004, as amended on April 14, 2005, the FASB issued SFAS No. 123R, Share-Based Payment: an amendment of FASB Statement No. 123 and FASB Statement No. 95, which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Prior to SFAS No. 123R, only certain pro forma disclosures of fair value were required. SFAS 123R must be adopted no later than the beginning of the first fiscal year beginning after June 15, 2005. The Company adopted SFAS 123R on January 1, 2006.

The Company will use the modified prospective method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123R for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123R that remain unvested on the effective date. The Company is evaluating the potential impact on its financial statements.

In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets. SFAS No. 153 addresses the measurement of exchange of nonmonetary assets. SFAS No. 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, Accounting for Nonmonetary Transactions, and replaces it with an exception for exchanges that do not have commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company will adopt the provisions of SFAS No. 153 on January 1, 2006. The adoption of this statement will not have a material impact on the Company’s consolidated financial statements.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections. SFAS No. 154 replaces Accounting Principles Board Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements, and requires the direct effects of accounting principle changes to be retrospectively applied. The existing guidance with respect to accounting estimate changes and corrections of errors is carried forward in SFAS No. 154. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.

2.   Acquisitions

Advanced TelCom, Inc.

On October 13, 2004 the Company entered into an agreement to purchase all of the outstanding common stock of Advanced TelCom, Inc. (ATI) for $45,543, net of cash acquired. The transaction closed on December 31, 2004. The closing of this transaction gives the Company a leading market position among competitive local exchange carriers within the Pacific Northwest, acquiring more than 18,000 business customers that utilize approximately 124,000 access lines. The Company expects to benefit from operating synergies from consolidating ATI’s operations into its existing business.

F-13

Eschelon Telecom, Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except per Share Amounts)

2.Acquisitions (Continued)

The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition:

Cash	$	321
Other current assets	7,958
Property and equipment	42,729
Other assets	29
Other intangible assets	3,913
Total assets acquired	54,950
Current liabilities	6,741
Long-term liabilities	217
Acquisition reserve	2,128
Total liabilities assumed	9,086
Net assets acquired	$	45,864

On December 31, 2004, the Company allocated the purchase price on a preliminary basis using the information then available. During the fourth quarter of 2005, the company completed an independent valuation. Upon the completion of the independent valuation, the Company adjusted its preliminary purchase price allocation by increasing the fair value assigned to fixed assets and other intangible assets by $27,340 and $3,913 respectively with a corresponding $31,253 reduction to goodwill. As a result of increasing the fair values associated with fixed asset and other intangible assets the Company recorded additional depreciation expense and amortization expense of $4,285 in the fourth quarter of 2005. On December 31, 2004, the Company accrued $2,531 in acquisition related expenses, which included severance benefits, relocation costs and contract termination fees. During the fourth quarter of 2005 the Company finalized its liabilities incurred in connection with the acquisition and recorded an adjustment to decrease the recorded liabilities by $403, which was recorded as a reduction to goodwill. As of December 31, 2005, $375 of the acquisition related expenses have yet to be paid.

The following unaudited pro forma financial information was prepared in accordance with SFAS No. 141, Business Combinations, and assumes the acquisition had occurred at the beginning of the periods presented. The unaudited pro forma information is provided for informational purposes only. These pro forma results are based upon the respective historical financial statements of the respective companies, and do not incorporate, nor do they assume any benefits from cost savings or synergies of operations of the combined company. The pro forma results of operations do not necessarily reflect the results that would have occurred had the acquisition occurred at the beginning of the periods presented or the results which may occur in the future.

The pro forma combined results of continuing operations are as follows:

	Year Ended December 31,
	2003			2004
Revenue	$	180,542		$	217,187
Net loss	(19,673		)	(1,559		)
Net loss per share—basic and diluted	(6.06		)	(1.73		)

F-14

Eschelon Telecom, Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except per Share Amounts)

2.Acquisitions (Continued)

ATI’s consolidated financial information included in the 2003 pro forma results represents the period from May 15, 2003 (the date on which ATI emerged from bankruptcy) through December 31, 2003.

General Electric Business Productivity Solutions

On October 13, 2004 the Company entered into an agreement with General Electric Capital Corporation to purchase substantially all other assets of General Electric Business Productivity Solutions, Inc. (GE BPS) for $100. The transaction closed on March 31, 2005 and was be accounted for as a discontinued operation. GE BPS constitutes a group of assets that can be clearly distinguished operationally and for financial reporting purposes from the rest of the Company. Management has determined that the group of assets does not fit the Company’s future business model and committed to sell the net assets with an original carrying value of $216, which approximated the fair value less cost to sell the group of assets. At March 31, 2005 the Company determined that the plan of sale criteria in SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, had been met and classified the assets and liabilities accordingly on the balance sheet.

On October 1, 2005, the Company sold its discontinued operation for $320, net of sales costs incurred. The sale resulted in gain of $326 and is presented in the consolidated statement of operations.

3.   Investments

At December 31, 2005, available-for-sale securities consist of the following:

	Cost Basis			Unrealized Holding Gains			Fair Value
U.S. government agencies		$	1,961		$	26		$	1,987
Corporate obligations		2,743			30			2,773
Total available-for-sale securities		$	4,704		$	56		$	4,760

At December 31, 2004, available-for-sale securities consists of the following:

	Cost Basis			Unrealized Holding Gains			Fair Value
U.S. government agencies		$	2,300		$	11		$	2,311
Corporate obligations		3,864			19			3,883
Total available-for-sale securities		$	6,164		$	30		$	6,194

All debt securities as of December 31, 2004 and 2005, have maturities of six months or less.

4.   Notes Payable

In June 2002, the Company entered into a negotiated debt restructuring, which included the reduction of outstanding debt under its senior secured credit facility from $139,293 to $57,062. In the restructuring, certain lenders with outstanding principal and interest due of $65,778 chose to receive $12,229 in cash to cancel all liabilities, as a result of which the Company recorded a pre-tax gain of $53,549. In accordance

F-15

Eschelon Telecom, Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except per Share Amounts)

4.Notes Payable (Continued)

with SFAS No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings, a portion of the reduction in the amount outstanding could not be immediately recognized as a gain, but instead would be recognized as a reduction to interest expense over the term of the new credit facility. As of December 31, 2003, $21,871 of excess carrying value had yet to be recognized as a reduction in interest expense. For the years ended December 31, 2003 and 2004, the Company recognized, as a reduction to interest expense, $4,470 and $998, respectively, of the excess carrying value.

In March 2004, the Company completed an offering of $100,000 of 8 3/8% senior second secured notes (“notes”) due 2010 at a discount resulting in a 12% yield. Proceeds from the offering were used to retire the Credit Agreement with a principal balance of $65,421 and provide additional liquidity to the Company. The repayment of the Credit Agreement resulted in the Company recording $18,195 as a gain on extinguishment of debt, which represented $20,873 of excess carrying value less the write-off of $2,678 of debt issuance costs associated with the 2002 Exchange Agreement.

In November 2004, the Company completed an offering of $65,000 of 8 3/8% senior second secured notes (“notes”) due 2010 at a discount resulting in a 14% yield. Proceeds from the offering were used to finance the acquisition of Advanced TelCom, Inc.

The notes will mature on March 15, 2010, and accrue interest at an annual rate of 8 3/8% with interest payments made on a semiannual basis on each March 15 and September 15. On or after March 15, 2007, the Company may redeem some or all of the notes at the following redemption prices, expressed as percentages of their accreted value, plus accrued and unpaid interest, if any, to the date of redemption: 1) on or after March 15, 2007, at 106%; 2) on or after March 15, 2008 at 103%; and 3) on or after March 15, 2009 at 100%. Prior to March 15, 2007, up to 35% of the aggregate principal amount at maturity of the notes may be redeemed at the Company’s option with the net proceeds of certain equity offerings at 112.000% of their accreted value, plus accrued and unpaid interest, if any, to the date of redemption, provided that, following such redemption, at least 65% of the aggregate principal amount at maturity of the notes originally issued remains outstanding. In addition, the Company may, at its option upon a change of control, redeem all, but not less than all, of the notes at any time prior to March 15, 2007, at 112.000% of their accreted value, plus accrued and unpaid interest, if any, to the redemption date. On September 15, 2009, if any notes are outstanding, the Company will be required to redeem 3.5% of each then outstanding note’s aggregate accreted value, or the Mandatory Principal Redemption Amount, at a redemption price of 100% of the accreted value of the portion of notes so redeemed; provided, that the Company shall simultaneously be required to redeem an additional portion of each note to the extent required to prevent such note from being treated as an Applicable High Yield Discount Obligation within the meaning of Section 163(i)(1) of the Internal Revenue Code of 1986, as amended. The Mandatory Principal Redemption Amount represents, with respect to each note, an amount approximately equal to (i) the excess of the accreted value of the outstanding notes over the original issue price thereof less (ii) an amount equal to one year’s simple uncompounded interest on the aggregate original issue price of such outstanding notes at a rate per annum equal to the yield to maturity on the outstanding notes.

On September 15, 2005, the Company redeemed $50,630 accreted value ($57,750 principal amount) of the Company’s 8 3/8% senior second secured notes due March 15, 2010 at a redemption price of 112% of the accreted value. The $6,076 accreted-value premium was recorded as interest expense. Proceeds from

F-16

Eschelon Telecom, Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except per Share Amounts)

4.Notes Payable (Continued)

the Company’s initial public offering of the Company common stock (see Note 8) were used to redeem the notes.

The carrying value of the notes is comprised of the following as of December 31:

	2004			2005
Principal amount due	$	165,000		$	107,250
Discount on notes payable	(27,222		)	(15,125		)
	$	137,778		$	92,125

The accreted value of notes payable as of December 31 of the following years is:

2006	$	95,033
2007	98,332
2008	102,076
2009	106,326
March 15, 2010	107,250

The carrying amount, net of discount, of the Company’s debt instruments in the consolidated balance sheets at December 31, 2004 and 2005 approximates fair value.

5.   Commitments and Contingencies

In April 2003, the Company entered into a five-year agreement with MCI to purchase colocation/LIS transport services. The agreement requires that the Company maintain monthly minimums as follows:

April 2005—March 2006	$	88/month
April 2006—March 2007	$	93/month
April 2007—March 2008	$	97/month

The Company will pay an underutilization charge for any amounts billed under the monthly minimum.

In 2000, the Company entered into an amendment of an earlier Master Purchase and Services agreement with Nortel Networks, Inc. (Nortel Networks). Under the amendment, the Company committed to purchase and/or license $100,000 of Nortel Networks’ equipment or services. However, the Company is confident that, due to Nortel Networks’ discontinuance of certain product lines contemplated in the Amended Master Purchase and Services agreement, neither party will be held to the conditions of the contract.

Legal Proceedings

In August 2004, a Nevada state court entered a judgment against the Company for intentionally interfering with a former salesperson’s economic relationship with his new employer in the amount of $376 plus costs. The Company had reason to believe the former employee was violating his non-solicitation agreement with the Company. The Company appealed the judgment because, among other reasons, the

F-17

Eschelon Telecom, Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except per Share Amounts)

5.Commitments and Contingencies (Continued)

jury was not instructed to consider whether the Company was justified in informing the new employer of the agreement and the Company’s intent to enforce it. The Company settled this case in January 2005, agreeing to pay a total of $300 over three annual installments.

In November of 2004, a former employee filed a suit against the Company in federal district court in Minnesota alleging that termination of her employment violated the federal Civil Rights Act and the Family Medical Leave Act, claiming $225 in damages. The Company is vigorously defending against these claims and filed a summary judgment motion as to all claims.

A lawsuit is pending against the Company and others by a former customer in Utah state court. The suit alleges damages of $1,000 regarding alleged improper assignment of an “800” number. The Company is vigorously defending this claim and believes it to be without merit. The discovery phase and period for making dispositive motions in the case have concluded.

In June 2005, the Company settled the lawsuit brought against us by Global Crossing. The parties agreed to release each other from all claims related to the dispute and to amend their agreement. The settlement agreement provided for the Company to pay Global Crossing $5,000 and for Global Crossing to credit the Company’s future bills for approximately $564 over the following six months. Under the terms of the Global Crossing settlement, the Carrier Services Agreement between the parties, which had provided that Global Crossing was the Company’s exclusive provider of voice and data services, subject to certain exceptions, and that the Company had a purchase commitment of $100,000, was amended to shorten the term of the agreement to July 1, 2006, to eliminate the exclusivity, purchase commitment and shortfall provisions and to provide that Global Crossing will be the Company’s preferred provider for Internet transit and long haul data private line needs.

The Company cannot predict the outcome of any of these proceedings or their effect on its business. The Company is party from time to time to other ordinary course matters not believe to be material.

6.   Operating and Capital Leases

The Company leases office space under operating leases. The office leases generally require a base rent plus amounts covering operating expenses and property tax. Rent expense for the years ended December 31, 2003, 2004, and 2005 was $6,007, $5,087, and $7,468, respectively.

F-18

Eschelon Telecom, Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except per Share Amounts)

6.Operating and Capital Leases (Continued)

Future minimum lease payments under operating leases with a term in excess of one year as of December 31, 2005 are as follows:

2006	$	4,929
2007	4,661
2008	4,526
2009	3,590
2010	2,155
Thereafter	4,272
	$	24,133

The Company also leases certain furniture and equipment under capital leases. The cost of furniture and equipment in the accompanying balance sheets includes the following amounts under capital leases:

	December 31,
	2004			2005
Cost	$	6,020		$	9,207
Less accumulated depreciation	(782		)	(2,507		)
	$	5,238		$	6,700

Future minimum lease payments required under capital leases together with the present value of the net future minimum lease payments at December 31, 2005 are as follows:

2006	$	3,011
2007	2,592
2008	664
2009	27
Total minimum lease payments	6,294
Less amount representing interest	(900		)
Present value of net minimum payments	5,394
Less current portion	(2,430		)
Capital lease obligations, net of current portion	$	2,964

7.   Benefit Contribution Plan

The Company has a defined contribution salary deferral plan covering substantially all employees under Section 401(k) of the Internal Revenue Code. The Company contributes an amount equal to 45 cents for each dollar contributed by each employee up to a maximum of 6% of each employee’s compensation. The Company recognized expense for contributions to the plan of $602, $764 and $962 in 2003, 2004 and 2005, respectively.

F-19

Eschelon Telecom, Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except per Share Amounts)

8.   Capital Stock

Initial Public Offering

On August 9, 2005, the Company consummated an initial public offering of 5,357,143 of the Company’s common stock at $14.00 per share. Net proceeds from the offering, after deducting underwriting discounts and commissions, were $69,750. Proceeds were used to redeem $50,630 accreted value ($57,750 principal amount) of the Company’s 83¤8% senior second secured notes due March 15, 2010; to pay a $6,076 premium due upon redemption of the notes; and to pay $2,684 of fees and expenses associated with the offering.

Preferred Stock

In December 2004, in connection with the ATI acquisition, the Company redeemed 6,780,541 shares of its Series A Convertible Preferred Stock held by a lender for $5,085.

In December 2004, the Company issued 20,000,000 shares of its newly authorized Series B Convertible Preferred Stock, resulting in proceeds of $15,000.

Under the terms of the Series A and Series B Convertible Preferred Stock (collectively, Preferred Stock), the holders are entitled to receive, when and if declared by the Board of Directors, cumulative dividends on each share of Preferred Stock at the rate of 8% per year which shall accrue daily and, to the extent not paid, shall accumulate quarterly in arrears. At December 31, 2004, dividends in arrears were $8,777.

As a result of the Company’s initial public offering of common stock on August 9, 2005, all of the Company’s then-outstanding shares of convertible preferred stock and accumulated dividends were automatically converted to common stock.

After the conversion, the Company has 125,000,000 of undesignated preferred shares authorized and no shares of preferred stock outstanding.

Stock Options

In November 2002, the Board of Directors approved the Eschelon Telecom, Inc. Stock Option Plan of 2002 (the 2002 Plan). The 2002 Plan provides for the issuance of incentive and nonqualified stock options to key management staff. Under the 2002 Plan, the exercise price of options granted is determined by the Board of Directors, providing that incentive stock options are granted at exercise prices equal to the fair market value of the Company’s stock on the date of grant and the options are exercisable for a period not to exceed ten years from date of grant. Options are typically subject to vesting over four years, with 20% of the award vested on the grant date, and 20% of the award vesting on each subsequent anniversary of the grant date. A total of 1,632,414 shares of the Company’s common stock have been reserved for issuance under the 2002 Plan.

F-20

Eschelon Telecom, Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except per Share Amounts)

8.Capital Stock (Continued)

The following table summarizes the options to purchase shares of the Company’s common stock under the Eschelon Telecom, Inc. Stock Option Plan of 2002:

	Shares  Available for Grant			Plan  Options Outstanding			Weighted Average Exercise Price
Balance at December 31, 2002		1,041,966			—			$	0.68
Options granted		(786,294	)		786,294			0.68
Restricted stock granted		(183,399	)		—			0.68
Canceled		65,120			(65,120	)		0.68
Exercised		—			(28,290	)		0.68
Balance at December 31, 2003		137,393			692,884			0.68
Options granted		(101,984	)		101,984			1.35
Canceled		35,921			(35,921	)		0.83
Exercised		—			(11,843	)		0.69
Balance at December 31, 2004		71,330			747,104			0.77
Additional shares reserved		590,448			—			—
Options granted		(533,536	)		533,536			8.24
Restricted stock forfeited		494			—			0.68
Restricted stock granted		(9,350	)		—			2.92
Canceled		34,693			(34,693	)		3.18
Exercised		—			(78,457	)		0.76
Balance at December 31, 2005		154,079			1,167,490			$	4.12

The following table contains details of the stock options outstanding as of December 31, 2005:

	Options Outstanding							Options Exercisable
Range of Exercise Prices	Number Outstanding		Weighted-Average Remaining  Contractual Life		Weighted- Average Exercise Price			Number Exercisable		Weighted- Average Exercise Price
$0.00 - $10.84		962,162		7.85 years		$	2.38		521,144		$	1.66
$10.85 - $21.68		205,328		9.56 years		$	12.24		41,261		$	12.23
		1,167,490		8.15 years		$	4.12		562,405		$	2.43

Restricted Common Stock

In 2003, the Company granted 183,399 shares of restricted common stock to certain directors and members of management. The Company records compensation expense as the restrictions are removed from the stock. In 2005, the Company granted 9,350 shares of restricted common stock to certain directors. Total compensation expense related to restricted common stock for the years ended December 31, 2003, 2004 and 2005 was $70, $20 and $39, respectively.

F-21

Eschelon Telecom, Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except per Share Amounts)

9.   Income Taxes

As of December 31, 2005, the Company had $176,780 of net operating loss (NOL) carryforwards. The NOL carryforwards begin to expire in the year 2019. Should the Company incur a change in ownership in the future, Section 382 of the United States Internal Revenue Code may limit the amount of cumulative NOLs available to offset future income.

Components of the deferred tax asset at December 31, 2004 and 2005 are as follows:

	2004			2005
Deferred tax assets:
Net operating loss carryforward	$	53,033		$	69,179
Bad debts	157			186
Compensation accruals	—			174
Inventory obsolescence	91			104
Other temporary differences	121			437
	53,402			70,080
Deferred tax liabilities:
Depreciation	(7,252		)	(12,259		)
Other	(11		)	(21		)
	46,139			57,800
Valuation allowance	(46,139		)	(57,800		)
Net deferred tax asset	$	—		$	—

Income tax expense for the year ended December 31, 2005, is comprised of federal taxes. The reconciliation between the statutory federal income tax rate and the effective rate is as follows:

	Year Ended December 31,
	2003		2004		2005
Federal statutory tax rate	35.00	%	34.00	%	34.00	%
State taxes	5.16		0.25		—
Permanent differences	—		2.74		(0.01	)
Utilization of valuation allowance	(40.00	)	(36.61	)	(34.00	)
Effective tax rate	0.16	%	0.38	%	(0.01	)%

10.Condensed Consolidating Financial Information

The 83¤8% senior second secured notes due 2010 issued by Eschelon Operating Company are fully and unconditionally guaranteed jointly and severally by the Company and all existing subsidiaries and the indenture governing the notes requires that any future subsidiaries that are organized in the United States must also guarantee the notes on the same basis.

Additional information regarding the 83¤8% senior second secured notes due 2010 is included in Note 4, Notes Payable.

F-22

Eschelon Telecom, Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except per Share Amounts)

10.Condensed Consolidating Financial Information (Continued)

The following tables present condensed consolidating balance sheets for the years ended December 31, 2004 and 2005 and condensed consolidating statements of operations for the years ended December 31, 2003, 2004 and 2005.

Condensed Consolidating Balance Sheets
As of December 31, 2004

					Eschelon
	Eschelon				Operating			Guarantor
	Telecom, Inc.				Company			Subsidiaries				Eliminations				Consolidated
Assets
Current assets:
Cash and cash equivalents		$	26,332		$	—			$	103			$	—			$	26,435
Restricted cash		722			—				—				—				722
Available-for-sale securities		6,194			—				—				—				6,194
Accounts receivable		—			—				18,941				—				18,941
Other receivables		—			—				2,976				—				2,976
Inventories		—			—				2,873				—				2,873
Prepaid expenses		1,227			—				1,183				—				2,410
Total current assets		34,475			—				26,076				—				60,551
Property and equipment, net		82,550			—				20,299				—				102,849
Investment in affiliates		58,998			—				—				(58,998		)		—
Other assets		1,042			—				943				—				1,985
Goodwill		—			—				38,776				—				38,776
Intangible assets, net		12,548			7,890				12,520				—				32,958
Total assets		$	189,613		$	7,890			$	98,614			$	(58,998	)		$	237,119
Liabilities and stockholders’ equity (deficit)
Current liabilities:
Accounts payable		$	4,314		$	—			$	9,487			$	—			$	13,801
Accrued telecommunication costs		—			—				2,190				—				2,190
Accrued office rent		1,722			—				614				—				2,336
Accrued interest expense		—			4,069				1				—				4,070
Other accrued expenses		489			—				5,509				—				5,998
Deferred revenue		—			—				7,300				—				7,300
Accrued compensation expenses		2,172			—				1,416				—				3,588
Capital lease obligation, current maturities		1,526			—				103				—				1,629
Total current liabilities		10,223			4,069				26,620				—				40,912
Long-term liabilities:
Other long-term liabilities		76			—				554				—				630
Capital lease obligation, less current maturities		2,607			—				217				—				2,824
Notes payable		—			137,778				—				—				137,778
Due to (from) affiliates		227,721			(174,370		)		(53,351		)		—				—
Total liabilities		240,627			(32,523		)		(25,960		)		—				182,144
Convertible preferred stock		63,155			—				—				—				63,155
Stockholders’ equity (deficit)		(114,169		)	40,413				124,574				(58,998		)		(8,180		)
Total liabilities and stockholders’ equity (deficit)		$	189,613		$	7,890			$	98,614			$	(58,998	)		$	237,119

F-23

Eschelon Telecom, Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except per Share Amounts)

10.Condensed Consolidating Financial Information (Continued)

Condensed Consolidating Balance Sheets
As of December 31, 2005

					Eschelon
	Eschelon				Operating			Guarantor
	Telecom, Inc.				Company			Subsidiaries				Eliminations				Consolidated
Assets
Current assets:
Cash and cash equivalents		$	25,070		$	—			$	992			$	—			$	26,062
Restricted cash		996			—				—				—				996
Available-for-sale securities		4,760			—				—				—				4,760
Accounts receivable		—			—				22,996				—				22,996
Other receivables		—			—				3,052				—				3,052
Inventories		—			—				2,927				—				2,927
Prepaid expenses		1,149			—				1,145				—				2,294
Total current assets		31,975			—				31,112				—				63,087
Property and equipment, net		82,840			—				43,612				—				126,452
Investment in affiliates		59,046			—				—				(59,046		)		—
Other assets		507			—				999				—				1,506
Goodwill		—			—				7,168				—				7,168
Intangible assets, net		13,695			4,588				15,050				—				33,333
Total assets		$	188,063		$	4,588			$	97,941			$	(59,046	)		$	231,546
Liabilities and stockholders’ equity (deficit)
Current liabilities:
Accounts payable		$	14,602		$	—			$	1,798			$	—			$	16,400
Accrued telecommunication costs		—			—				4,227				—				4,227
Accrued office rent		1,485			—				550				—				2,035
Accrued interest expense		—			2,645				1				—				2,646
Other accrued expenses		944			—				4,541				—				5,485
Deferred revenue		—			—				7,921				—				7,921
Accrued compensation expenses		1,623			—				1,186				—				2,809
Capital lease obligation, current maturities		2,320			—				110				—				2,430
Total current liabilities		20,974			2,645				20,334				—				43,953
Long-term liabilities:
Other long-term liabilities		251			—				—				—				251
Capital lease obligation, less current maturities		2,857			—				107				—				2,964
Notes payable		—			92,125				—				—				92,125
Due to (from) affiliates		214,773			(107,148		)		(107,625		)		—				—
Total liabilities		238,855			(12,378		)		(87,184		)		—				139,293
Convertible preferred stock		—			—				—				—				—
Stockholders’ equity (deficit)		(50,792		)	16,966				185,125				(59,046		)		92,253
Total liabilities and stockholders’ equity (deficit)		$	188,063		$	4,588			$	97,941			$	(59,046	)		$	231,546

F-24

Eschelon Telecom, Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except per Share Amounts)

10.Condensed Consolidating Financial Information (Continued)

Condensed Consolidating Statement of Operations
For the Year Ended December 31, 2003

					Eschelon
	Eschelon				Operating				Guarantor
	Telecom, Inc.				Company				Subsidiaries			Consolidated
Revenue:
Network services		$	—			$	—			$	115,482		$	115,482
Business telephone systems		—				—				25,614			25,614
		—				—				141,096			141,096
Cost of revenue:
Network services		—				—				45,037			45,037
Business telephone systems		—				—				15,784			15,784
		—				—				60,821			60,821
Gross profit:
Network services		—				—				70,445			70,445
Business telephone systems		—				—				9,830			9,830
		—				—				80,275			80,275
Operating expenses:
Sales, general and administrative		35,274				—				30,978			66,252
Depreciation and amortization		16,785				—				13,314			30,099
Total operating expenses		52,059				—				44,292			96,351
Operating income (loss)		(52,059		)		—				35,983			(16,076		)
Other income (expense)		(669		)		(440		)		7			(1,102		)
Income (loss) before income taxes		(52,728		)		(440		)		35,990			(17,178		)
Income taxes		(28		)		—				—			(28		)
Net income (loss)		$	(52,756	)		$	(440	)		$	35,990		$	(17,206	)

F-25

Eschelon Telecom, Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except per Share Amounts)

10.Condensed Consolidating Financial Information (Continued)

Condensed Consolidating Statement of Operations
For the Year Ended December 31, 2004

					Eschelon
	Eschelon				Operating			Guarantor
	Telecom, Inc.				Company			Subsidiaries				Consolidated
Revenue:
Network services		$	—			$	—		$	131,780			$	131,780
Business telephone systems		—				—			26,316				26,316
		—				—			158,096				158,096
Cost of revenue:
Network services		—				—			47,354				47,354
Business telephone systems		—				—			15,979				15,979
		—				—			63,333				63,333
Gross profit:
Network services		—				—			84,426				84,426
Business telephone systems		—				—			10,337				10,337
		—				—			94,763				94,763
Operating expenses:
Sales, general and administrative		37,400				—			31,855				69,255
Depreciation and amortization		20,734				—			10,371				31,105
Total operating expenses		58,134				—			42,226				100,360
Operating income (loss)		(58,134		)		—			52,537				(5,597		)
Other income (expense)		(1,079		)		7,811			(20		)		6,712
Income (loss) before income taxes		(59,213		)		7,811			52,517				1,115
Income taxes		(4		)		—			—				(4		)
Net income (loss)		$	(59,217	)		$	7,811		$	52,517			$	1,111

F-26

Eschelon Telecom, Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except per Share Amounts)

10.Condensed Consolidating Financial Information (Continued)

Condensed Consolidating Statement of Operations
For the Year Ended December 31, 2005

					Eschelon
	Eschelon				Operating			Guarantor
	Telecom, Inc.				Company			Subsidiaries			Consolidated
Revenue:
Network services		$	—		$	—			$	201,835		$	201,835
Business telephone systems		—			—				25,908			25,908
		—			—				227,743			227,743
Cost of revenue:
Network services		—			—				85,914			85,914
Business telephone systems		—			—				16,139			16,139
		—			—				102,053			102,053
Gross profit:
Network services		—			—				115,921			115,921
Business telephone systems		—			—				9,769			9,769
		—			—				125,690			125,690
Operating expenses:
Sales, general and administrative		42,551			—				47,759			90,310
Depreciation and amortization		22,160			—				17,493			39,653
Total operating expenses		64,711			—				65,252			129,963
Operating income (loss)		(64,711		)	—				60,438			(4,273		)
Other income (expense)		(3,988		)	(23,447		)		66			(27,369		)
Income (loss) before income taxes		(68,699		)	(23,447		)		60,504			(31,642		)
Income taxes		(4		)	—				—			(4		)
Net income (loss) before discontinued operation		(68,703		)	(23,447		)		60,504			(31,646		)
Income from discontinued operation, net of tax		—			—				655			655
Net income (loss)		$	(68,703	)	$	(23,447	)		$	61,159		$	(30,991	)

11. Reverse Stock Split

The Company completed a 0.0738-for-one reverse stock split affecting all outstanding shares of common stock on August 2, 2005. All share and per share data have been adjusted to reflect the stock split.

12. Subsequent Events

In January 2006, the Company signed a definitive agreement to acquire Oregon Telecom, Inc., a privately-held competitive services provider based in Salem, Oregon. The Company will pay $20,000 in cash to acquire Oregon Telecom. The transaction is expected to close early in the second quarter of 2006.

F-27

EX-10.11.1

EXHIBIT 10.11.1

BAKER CENTER
AMENDMENT OF LEASE

DATE:	December 29, 2005
BETWEEN:	ST. PAUL PROPERTIES, INC. 400 U.S Trust Building 730 Second Avenue South Minneapolis, MN 55402	(“Landlord”)
AND:	ESCHELON TELECOM, INC. 900 U.S. Trust Building 730 Second Avenue South Minneapolis, MN 55402	(“Tenant”)

IN RESPECT OF PREMISES IN: Investors, Roanoke and U.S. Trust Buildings, Minneapolis, Minnesota

LANDLORD AND TENANT hereby agree as follows:

1.In this Amendment of Lease:

(a)“Buildings” means Investors and Roanoke Buildings located in the city of Minneapolis.

(b)“Premises” means the area defined as Premises under Article 1.00 (0) of the Lease.

(c)“Lease” means the lease between Landlord and Tenant dated November 18, 2003; covering the Premises.

(d)“Amendment Date” means the 29^th day of December, 2005.

2.Effective on the Amendment Date, Article 3.01 of the Lease is deleted, and the following is substituted therefor:

3.01“Term. Notwithstanding Articles 3.02 and 3.03, the term of this Lease shall be nine (9) years six (6) months, beginning on the first day of the month of December, 2003 and ending on the last day of the month of May, 2013, unless terminated earlier as provided in this Lease.

3.Effective on the Amendment Date, Article 4.01 of the lease is deleted and the following substituted therefore.

4.01“Annual Rent” Tenant shall pay to Landlord as Annual Rent for the Premises the following:

Term	SF	Rate		Annual Rent		Monthly Rent
12-1-03 – 11-30-04	95,037	$	5.50	$	522,703.50	$	43,558.63
12-1-04 – 11-30-05	95,037	$	7.50	$	712,777.50	$	59,398,13
12-1-05 – 3-31-06	95,037	$	7.75	$	736,536.75	$	61,378.06
04-1-06 – 11-30-06	71,261	$	7.75	$	552,272.75	$	46,022.73
12-1-06 – 11-30-07	71,261	$	8.00	$	570,088.00	$	47,507.33
12-1-07 – 11-30-08	71,261	$	8.25	$	537,903.25	$	48,991.94
12-1-08 – 11-30-09	71,261	$	8.50	$	605,718.50	$	50,476.54
12-1-09 – 11-30-10	71,261	$	8.75	$	623,533.75	$	51,961.15
12-1-10 – 11-30-11	71,261	$	9.00	$	641,349.00	$	53,445.75
12-1-11 – 5-31-13	71.261	$	9.25	$	659,164.25	$	54,930.35

1

Payable in advance and without notice in monthly installments (each equal to one-twelfth of the Annual Rent) on the Commencement Date and on the first day of each calendar month thereafter during the Term.

4.Effective on the Amendment Date, the following is added as Article 32.00:

ARTICLE 32.00 Additional Premises

32.01     “Additional Premises” means the area on the eleventh floors of the Buildings as indicated on Exhibit 1 attached hereto, hereby deemed to contain 46,664 square feet. For the purpose of calculating Occupancy Costs, 31,611 square feet of the Additional Premises is in the Investors Building, shown on Exhibit 2 attached hereto and 15,053 square feet of the Additional Space is in the Roanoke Building, shown on Exhibit 3 attached hereto.

32.02“Term” The Term on the Additional Premises shall commence on the “Additional Premises Commencement Date” which shall be April 1, 2006, subject to the substantial completion of Tenant Improvements set forth in Article 33.00 of this Lease and terminate on the same day of the Premises.

32.03“Rent” Tenant shall pay to Landlord as Annual Rent for the Additional Premises, the following:

Term	SF	Rate		Annual Rent		Monthly Rent
4-1-06 – 3-31-07	46,664	$	9.10	$	424,642.40	$	35,386.87
4-1-07 – 3-31-08	46,664	$	9.25	$	431,642.00	$	35,970.17
4-1-08 – 3-31-09	46,664	$	3.35	$	436,308.40	$	36,359.03
4-1-09 – 3-31-10	46,664	$	9.50	$	443,308.00	$	36,942.33
4-1-10 – 3-31-11	46,664	$	9.65	$	450,307.60	$	37,525.63
4-1-11 – 3-31-12	46,664	$	9.75	$	454,974.00	$	37,914.50
4-1-12 – 11-31-12	46,664	$	9.90	$	461,973.60	$	38,497.80
12-1-12 – 5-31-13	46,664	$	9.25	$	431,642.00	$	35,970.17

Payable in advance and without notice in monthly installments (each equal to one-twelfth of the Annual Rent) on the Additional Premises Commencement Date and on the first day of each calendar month thereafter during the Term.

32.04     “Occupancy Costs” Tenant shall pay to Landlord, at the times and in the manner provided in Article 4.06 of the Lease, the Occupancy Costs for the Additional Premises, determined for the Building in which the Additional Premises are located using Exhibit B-1 for Roanoke portion of Additional Premises and Exhibit B-2 for Investors portion of Additional Premises.

5.Effective on the Amendment Date the following is added as Article 33.00 of the Lease:

ARTICLE 33.00 Landlord Work

33.01 “Landlord Work” Prior to the Additional Premises Commencement Date, Landlord shall construct the Additional Premises in accordance with the plans and specifications prepared by Tenant and approved by Landlord, (“the Plans”) which when approved shall be referenced as Exhibit 4 of this Amendment. Landlord shall contribute an amount equal to $18.00 per square foot leased ($839,952.00) to offset the cost of the tenant improvements below the ceiling and Tenants occupancy of the Additional Premises “Tenant Improvement Allowance”. Landlord, at its expense, will install the ceiling to accommodate the Plans including: a 2x2 ceiling grid, 2x2 acoustic ceiling tiles, HVAC diffusers, sprinkler

2

heads, 2x4 parabolic light fixtures and life, fire and safety equipment in accordance with local building codes per the Plans.

6.Effective on the Amendment Date the following is added as Article 34.00 of the Lease:

ARTICLE 34.00 Rent Abatement

34.01     “Rent Abatement” Provided Tenant is not in default under the Lease, Tenant shall not be responsible for the payment of Annual Rent and Occupancy Costs on 22,888 square feet of the Additional Premises for the initial two months of the Term.

7.Effective on the Amendment Date the following is added as Article 35.00 of the Lease:

ARTICLE 35.00 Partial Surrender of Premises

35.01“Partial Surrender of Premises” Tenant, effective on May 31, 2006 – “Surrender Date” surrenders and yields up that portion of the Premises on the eighth floor of the U.S. Trust Building, containing 23,776 square feet of space “Surrendered Premises” to Landlord from and after the Surrender Date for the unexpired portion of the Term of the Lease, and Landlord hereby accepts this surrender of the Lease and Surrendered Premises from and after the Surrender Date. The “Remaining Premises” means that portion of the Premises containing 71,261 square feet.

35.02Tenant shall promptly quit and surrender possession of the Surrendered Premises to Landlord on the Surrender Date in good order and condition, reasonable wear and tear and damage by fire other casualty excepted. Any property of Tenant not removed from the Surrendered Premises on or before the Surrender Date shall be and become the property of the Landlord absolutely.

35.03The respective rights and obligations of Landlord and Tenant with respect to the Surrendered Premises shall be preserved and shall survive the Surrender Date as to all matters arising or accruing prior to the Surrender Date, but no such rights or obligation will arise or accrue to either of them on or after the Surrender Date.

35.04Tenant covenants with Landlord that Tenant has in itself the absolute right, power and authority to surrender the Surrendered Premises as provided herein, and that Tenant has not taken any action whereby the Surrendered Premises are or may be charged, encumbered or assigned. Landlord hereby indemnifies and holds harmless Tenant against any cost incurred by Tenant as a result of any claim that Landlord does not have in itself the absolute right, power and authority to accept the surrender of the Surrendered Premises as provided herein.

35.05The terms and condition of the Lease are confirmed and continued in full force and effect in respect of the Remaining Premises, provided that from and after the Surrender Date the Annual Rent for the Remaining Premises shall be as set out in Section 3 hereof.

35.06This partial surrender of lease shall be binding on the heirs, administrators, successors and assigns (as the case may be) of the parties hereto.

Except as specifically provided herein, the terms and conditions of this Lease are confirmed and continued in full force and effect.

This Amendment of Lease shall be binding on the heirs, administrators, successors and assigns (as the case may be) of the parties hereto.

3

IN WITNESS OF THIS LEASE Landlord and Tenant have properly executed it as of the date set out on page one.

LANDLORD:		TENANT:
ST. PAUL PROPERTIES, INC.
By:	/s/ R. William Insera	By:	/s/ Michael A. Donahue.
Its:	V.P.	Its:	VP Finance & Treasurer
1-18-06		Michael A. Donahue
Date Executed		Please Print Name
		12/30/05
		Date Executed
		Witness to the signature of Tenant if not incorporated.

4

EXHIBIT 1

5

EXHIBIT 2

6

7

EX-10.13.7

EXHIBIT 10.13.7

5TH AMENDMENT OF LEASE FOR STORAGE

THIS 5th AMENDMENT OF LEASE FOR STORAGE (“5th Amendment”) is made on January 9, 2006, between T.H.S. Northstar Associates Limited Partnership, a Minnesota limited partnership (“Landlord”), whose address 625 Marquette Avenue South, Minneapolis, Minnesota 55402 and Eschelon Telecom of Minnesota, Inc., a Minnesota corporation (f/k/a Cady Communications, Inc., f/k/a Fishnet.com. Inc.) (“Tenant”), whose address is 730 Second Avenue South, Suite 900, Minneapolis, Minnesota 55402.

RECITALS

This 5th Amendment is based upon the following recitals:

A.Landlord and Fishnet.com, Inc., a Minnesota corporation (“Fishnet.com”), entered into a Lease for Storage dated July 30, 1996 (“Lease”), for certain premises known as Suite #SB-52 (“Premises”), containing approximately 840 rentable square feet, at the sub-basement level of the Northstar Center (“NStar Building”), 110 Second Avenue South, Minneapolis, Minnesota 55402.

B.Landlord and Fishnet.com amended the Lease as follows:

(1)1st Amendment of Lease for Storage dated March 10, 1998, which, among other matters, extended the Lease Term to March 31, 2003 (“1st Extension”);

(2)2nd Amendment of Lease for Storage dated March 27, 1998, which, among other matters, expanded the Premises to encompass Suite #SB-50C (“1st Expansion Space”) at the sub-basement level of the Northstar West Building, 625 Marquette Avenue South, Minneapolis, Minnesota 55402 (“NSWest Building”) (incorrectly identified in the 2nd Amendment as being located in the NStar Building), containing approximately 630 rentable square feet; and

(3)3rd Amendment of Lease for Storage dated April 30, 1999, which, among other matters, (a) further extended the Lease Term to June 30, 2005 (“2nd Extension”) and (b) further expanded the Premises to encompass (i) Suite #SB-50 (“2nd Expansion Space”) at the sub-basement level of the NStar Building, containing approximately 942 rentable square feet, and (ii) Suite #SB-50 (“3rd Expansion Space”) at the sub-basement level of the NSWest Building, containing approximately 666 rentable square feet; and

(4)4^th Amendment of Lease for Storage dated October 31, 2000, which further expanded the Premises to encompass (i) Suite #SB-60 (“4th Expansion Space”) at the sub-basement level of the NStar Building, containing approximately 599 rentable square feet, and (ii) Suite #SB-64 (“5th Expansion Space”) at the sub-basement level of the NStar Building, containing approximately 940 rentable square feet (the Lease and the 1st, 2^nd, 3rd and 4^th Amendments, collectively, “Lease as amended”).

C.Tenant is the successor to the tenant’s interest of Fishnet.com under the Lease as amended by operation of law, being the surviving entity of an April 28, 2000, merger between Fishnet.com and Cady Communications, Inc. (n/k/a Eschelon Telecom of Minnesota, Inc.).

D.Landlord and Tenant desire to further amend the Lease as amended to further extend the Term of the Lease, modify the Rent and otherwise amend the Lease as amended accordingly.

1

THEREFORE, in consideration of the mutual covenants and agreements stated in the Lease as amended and below, and for other sufficient consideration received and acknowledged by each party, Landlord and Tenant agree to amend the Lease as amended as follows:

1.RECITALS; CAPITALIZED TERMS.

All Recitals are fully incorporated. Except for those terms expressly defined in this 5th Amendment, all initially capitalized terms will have the meanings ascribed to them in the Lease as amended.

2.EXTENSION OF LEASE TERM.

The Lease Term as it pertains to SB-52, NStar Building, SB-50, SB-50B, SB-50C NSWest Building and SB-50 Nstar Building, totally approximately 3,148 rentable square feet, and shall commence on July 1, 2005 and shall expire on June 30, 2010 (“3^rd Extension Term”), unless earlier terminated as provided in the Lease as amended.

3.RENT.

During the 3^rd Extension Term, Rent for the Premises, shall be as follows:

Period	Annual Rent per RSF		Rent Payable per Month
7/1/2005 to 6/30/2006	$	18.50	$	4,853.17
7/1/2006 to 6/30/2007	$	18.75	$	4,918.76
7/1/2007 to 6/30/2008	$	19.00	$	4,984.33
7/1/2008 to 6/30/2009	$	19.25	$	5,049.92
7/l/2009 to 6/30/2010	$	19.50	$	5,115.50

4.DELIVERY OF AND IMPROVEMENTS TO THE PREMISES.

Tenant currently occupies the Premises shall accept the Premises in “as-is” condition. Any other improvements to the Premises shall require Landlord’s prior written approval.

5.REMAINING LEASE PROVISIONS.

Except as stated in this 5th Amendment, all other viable and applicable provisions of the Lease as amended shall remain unchanged and continue in full force and effect throughout the 3^rd Extension Term.

6.BINDING EFFECT.

Landlord and Tenant ratify and confirm the Lease as amended and agree that this 5th Amendment shall bind and inure to the benefit of the parties, and their respective successors, assigns and representatives as of the date first stated.

AFFIRMING THE ABOVE, the parties have executed this 5th AMENDMENT OF LEASE FOR STORAGE on the date first stated.

2

Witnesses:			Tenant: ESCHELON TELECOM OF MINNESOTA, INC., a Minnesota corporation
By:	/s/ Michele Speranza-di Forza		By:	/s/ Michael A. Donahue
Name:	Michele Speranza-di Forza		Name:	Michael A. Donahue
			Its:	VP Finance & Treasurer
By:			By:
Name:			Name:
			Its:
Witnesses:			Landlord: T.II.S. NORTHSTAR ASSOCIATES LIMITED PARTNERSHIP, a Minnesota limited partnership By: TrizecHahn Northstar LLC, a Delaware limited liability company, as sole general partner
By:		/s/ Jean M. Wilson	By:	/s/ Cynthia K. Yott
Name:		Jean M. Wilson	Name:			Cynthia K. Yott
			Its:			Vice President & Assistant Secretary
By:			By:	/s/ Stephen E. Budorick
Name:			Name:		Stephen E. Budorick
			Its:		Vice President

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EX-10.14.1

EXHIBIT 10.14.1

AMENDMENT TO LEASE

This Amendment to Lease (the “Amendment”) is made as of the 15^th day of February, 2006, by and between FirstCal Industrial 2 Acquisition, LLC, a Delaware LLC, as landlord (“Landlord”) and Eschelon Telecom, Inc., a Delaware corporation, as tenant (“Tenant”).

RECITALS

A.	Landlord is the successor in interest to Duke Realty Limited Partnership, an Indiana limited partnership .
(“Former Owner”)

B.                 Former Owner originally owned the real property commonly known as 6160 Golden Hills Drive, Golden Valley, Minnesota 55416 (the “Property”),and on September 29, 2005, Landlord acquired fee simple title to the Property from the Former Owner.

C.                 Tenant is the successor in interest to Cady Communications, a Minnesota corporation (“Former Tenant”).

D.                Former Owner, as landlord, entered into a certain Lease, dated May 25, 1999, with Former Tenant (the “Original Lease”), and pursuant to the Original Lease, Former Tenant leased from the Former Owner approximately 33,246 rentable square feet in the Property (the “Leased Premises”).

E.                 On September 29, 2005, Former Owner assigned to Landlord Former Owner’s entire right, title and interest in, to and under the Original Lease.

F.                 Former Tenant assigned to Tenant Former Tenant’s interest in and under the Original Lease.

G.                 Landlord and Tenant now desire to modify and amend the Original Lease.

NOW, THEREFORE, in consideration of the terms and provisions of this Amendment, Landlord and Tenant hereby modify and amend the Original Lease, as follows:

1.             Recitals. All of the Recitals set forth above are hereby incorporated into the body of this Amendment, as though separately and specifically set forth herein.

2.             Defined Terms and Conflict. Any capitalized terms used, but not defined, in this Amendment shall be deemed to have the meanings respectively ascribed to those terms in the Original Lease. In the event of any conflict between the terms and provisions of the Original Lease and those of this Amendment, the terms and provisions of this Amendment shall control, in all events.

3.             Extension of Lease Term. The Lease Term is hereby extended for a period of Five (5) year(s) and one (1) month from February 1, 2007, so that the extended Lease Term shall expire on February 29, 2012 (the “Extended Expiration Date”). The period of time from the expiration of the Lease Term described in the Original Lease through the Extended Expiration Date is hereinafter referred to as the “Extended Lease Term.”

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4.             Minimum Annual Rent. During the Extended Lease Term, the Minimum Annual Rent and the Monthly Rental Installments of Base Rent shall be calculated based on the following per annum and per rentable square foot rates:

Base Rental Payments

Lease Period	Per Annum Base Rent Per Rentable Square Foot		Per Annum Base Rent Per Rentable Square Foot If Option A Is Applicable		Per Annum Base Rent Per Rentable Square Foot If Option B Is Applicable
February 1, 2007 – February 28, 2007	$	0.00	$	0.00	$	0.00
February 1, 2007 – January 31, 2009	$	9.80	$	9.80	$	10.05
February 1, 2009 – January 31, 2010	$	10.05	$	10.05	$	10.30
February 1, 2010 – January 31, 2011	$	10.30	$	10.30	$	10.55
February 1, 2011 – February 28, 2012	$	10.55	$	10.55	$	10.80

5.             Basic Lease Provisions and Definitions. (a) During the Extended Lease Term, the following portions of Section 1.01 of the Original Lease are hereby deleted and, in lieu thereof, the following are instead substituted:

Section 1.01B.       The term “Rentable Area” shall mean the number of rentable square feet comprising the Leased Premises as of February 1, 2007, after either (a) Tenant’s delivery of the Commitment Letter (defined below) or (b) implementation of Plan A which shall consist of 19,652 square feet of office and 9,171 square feet of warehouse for a total of 28,823 square feet or Plan B which shall consist of 20,926 square feet of office and 8,069 square feet of warehouse for a total of 28,995, as the case may be (and as each is defined below). Landlord shall use commercially reasonable standards, consistently applied, in determining the Rentable Area and the rentable area of the Building. Landlord’s determination of Rentable Area shall conclusively be deemed correct for all purposes hereunder.

Section 1.01D and E.            The terms “Minimum Annual Rent” and “Monthly Rental Installment” shall be based upon the rates set forth in Section 4 above.

Section 1.01G.  The term “Lease Term” shall mean the “Extended Lease Term” as set forth in Section 3 above.

Section 1.01K.  The term “Broker” shall mean Todd Braufman of Equis Corporation.

(b)           The following parts of the Original Lease are hereby deleted and, the lieu thereof, the following is instead substituted:

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Section 1.01M.               Until further notice, the name and address of Landlord shall be FirstCal Industrial 2 Acquisition, LLC, c/o First Industrial Realty Trust, Inc., 7625 Golden Triangle Drive, Suite T, Eden Prairie, Minnesota 55344.

6.             Tenant’s Insurance. Section 9.02 of the Original Lease is hereby deleted and, in lieu thereof, the following is instead substituted:

6.1 Tenant shall purchase, at its own expense, and keep in force at all times during the Lease Term the policies of insurance set forth below (collectively, “Tenant’s Policies”).All Tenant’s Policies shall (a) be issued by an insurance company with a Best’s rating of A or better and otherwise reasonably acceptable to Landlord and shall be licensed to do business in the state in which the Leased Premises is located; (b) provide that said insurance shall not be canceled or materially modified unless 30 days’ prior written notice shall have been given to Landlord; (c) provide for deductible amounts that are reasonably acceptable to Landlord (and its lender, if applicable) and (d) otherwise be in such form, and include such coverages, as Landlord may reasonably require. The Tenant’s Policies described in (i) and (ii) below shall (1) provide coverage on an occurrence basis; (2) name Landlord (and its lender, if applicable) as additional insured; (3) provide coverage, to the extent insurable, for the indemnity obligations of Tenant under this Lease; (4) contain a separation of insured parties provision; (5) be primary, not contributing with, and not in excess of, coverage that Landlord may carry; and (6) provide coverage with no exclusion for a pollution incident arising from a hostile fire. All Tenant’s Policies (or, at Landlord’s option, Certificates of Insurance and applicable endorsements, including, without limitation, an “Additional Insured-Managers or Landlords of Premises” endorsement) shall be delivered to Landlord prior to the Commencement Date and renewals thereof shall be delivered to Landlord’s corporate and regional notice addresses at least 30 days prior to the applicable expiration date of each Tenant’s Policy. In the event that Tenant fails, at any time or from time to time, to comply with the requirements of the preceding sentence. Landlord may (A) order such insurance and charge the cost thereof to Tenant, which amount shall be payable by Tenant to Landlord upon demand, as Additional Rent or (B) impose on Tenant, as Additional Rent, a monthly delinquency fee, for each month during which Tenant fails to comply with the foregoing obligation, in an amount equal to five percent (5%) of the Monthly Rental Installments then in effect. Tenant shall give prompt notice to Landlord and Agent of any bodily injury, death, personal injury, advertising injury or property damage occurring in and about the Property.

Tenant shall purchase and maintain, throughout the Term, a Tenant’s Policy(ies) of: (i) commercial general or excess liability insurance, including personal injury and property damage, in the amount of not less than $2,000,000.00 per occurrence, and $5,000,000.00 annual general aggregate, per location; (ii) comprehensive automobile liability insurance covering Tenant against any personal injuries or deaths of persons and property damage based upon or arising out of the ownership, use, occupancy or maintenance of a motor vehicle at the Premises and all areas appurtenant thereto in the amount of not less than $1,000,000, combined single limit; (iii) commercial property insurance (including reasonable business interruption limits) covering Tenant’s Property (at its full replacement cost); (iv) workers’ compensation insurance per the applicable state statutes covering all employees of Tenant; and if Tenant handles, stores or utilizes Hazardous Substances in its business operations, (v) pollution legal liability insurance.

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7.             Landlord’s Insurance. The following is hereby added as an additional Section 9.03:

During the Lease Term, Landlord shall maintain the following types of insurance, in the amounts specified below (the cost of which shall be included in Operating Expenses): (a) commercial property insurance policy covering the Building (at its full replacement cost), but excluding Tenant’s personal property; (b) commercial general public liability insurance covering Landlord for claims arising out of liability for bodily injury, death, personal injury, advertising injury and property damage occurring in and about the Building and otherwise resulting from any acts and operations of Landlord, its agents and employees; (c) rent loss insurance; and (d) any other insurance coverage deemed appropriate by Landlord or required by Landlord’s lender. All of the coverages described in (a) through (d) shall be determined from time to time by Landlord, in its sole discretion. All insurance maintained by Landlord shall be in addition to and not in lieu of the insurance required to be maintained by the Tenant.

8.             Waiver of Subrogation. Section 8.02 of the Original Lease is hereby deleted and, in lieu thereof, the following is instead substituted:

Notwithstanding anything to the contrary in this Lease, Landlord and Tenant mutually waive their respective rights of recovery against each other and each other’s officers, directors, constituent partners, members, agents and employees, and Tenant further waives such rights against (a) each lessor under any ground or underlying lease encumbering the Property and (b) each lender under any mortgage or deed of trust or other lien encumbering the Property (or any portion thereof or interest therein), to the extent any loss is insured against or required to be insured against under this Lease, including, but not limited to, losses, deductibles or self-insured retentions covered by Landlord’s or Tenant’s commercial property, general liability, automobile liability or workers’ compensation policies described above. This provision is intended to waive, fully and for the benefit of each party to this Lease, any and all rights and claims that might give rise to a right of subrogation by any insurance carrier. Each party shall cause its respective insurance policy(ies) to be endorsed to evidence compliance with such waiver.

9.             Late Charges and Default Interest. Section 3.04 of the Original Lease is hereby deleted and, in lieu thereof, the following is instead substituted:

Tenant acknowledges that Landlord shall incur certain additional unanticipated administrative and legal costs and expenses if Tenant fails to timely pay any payment required hereunder. Therefore, in addition to the other remedies available to Landlord hereunder, if any payment required to be paid by Tenant to Landlord hereunder shall not be paid within five (5) days of the date such payment was due, Tenant shall pay a late fee equal to five percent (5%) of the delinquent payment. If a payment remains delinquent beyond the expiration of any applicable cure period, the delinquent amount shall bear interest (from the date on which the cure period expires through the date on which the delinquency is paid, in full, inclusive of interest) at the rate of five percent (5%) per annum above the “prime” or “reference” or “base” rate (on a per annum basis) of interest publicly announced as such, from time to time, by JPMorgan Chase Bank N.A. (the “Default Rate”). The various rights, remedies and elections of Landlord reserved, expressed or contained herein are cumulative and no one of them shall be deemed exclusive of the others as of such other rights, remedies, options or elections as are now or may hereafter be conferred upon Landlord by law.

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10.           Financial Information. Section 16.09 of the Original Lease is hereby deleted and, in lieu thereof, the following is hereby substituted:

As of the date of this Amendment, Tenant is a publicly traded entity; therefore, Landlord acknowledges and agrees that, if and to the extent that Landlord desires financial information concerning Tenant, Landlord shall examine and review any and all of the publicly-available information concerning Tenant and Tenant shall not be required to provide any other financial information to Landlord. If, however, at any time during the Lease Term, Tenant is no longer a publicly traded entity, then from time to time during the Lease Term, but not more than once per six (6) month period (except in the event that Tenant is in default under this Lease or in the event that Landlord is pursuing a sale or refinancing of the Property), Tenant shall deliver to Landlord information and documentation describing and concerning Tenant’s financial condition, and in form and substance reasonably acceptable to Landlord, within ten (10) business days following Landlord’s written request therefor. Upon Landlord’s request, Tenant shall provide to landlord the most currently available audited financial statement of Tenant; and if no such audited financial statement is available, then Tenant shall instead deliver to Landlord its most currently available balance sheet and income statement. Furthermore, upon the delivery of any such financial information from time to time during the Lease Term, Tenant shall be deemed to automatically represent and warrant to Landlord that the financial information delivered to Landlord is true, accurate and complete, and that there has been no adverse change in the financial condition of Tenant since the date of the then-applicable financial information.

11.           Hazardous Substances Reporting. The following is hereby added as an additional Section 15.08:

Tenant shall immediately give Landlord written notice of both (a) any suspected or potential breach of Tenant’s obligations under Article 15 upon learning of the presence of or any release of any Hazardous Substances in, on, to or from the Leased Premises or the Property, and (b) Tenant’s receipt of any notices from governmental agencies pertaining to Hazardous Substances which may affect the Premises or the Property. Tenant has delivered to Landlord (or shall deliver to Landlord, on or before the commencement of the Renewal Term), a completed Tenant Operations Inquiry, in the form attached hereto as Exhibit “C” and Tenant hereby warrants the accuracy and completeness of the information set forth therein. Such Tenant Operations Inquiry shall be revised by Tenant and delivered to Landlord from time to time upon Landlord’s written request therefor but not more than once per six (6) month period (except in the event that Tenant is in default under this Lease). The obligations of Tenant hereunder shall survive the expiration of earlier termination, for any reason, of this Lease.

12.           Option to Renew. Section 16.12 of the Original Lease is hereby deleted and, in lieu thereof, the following is instead substituted:

16.12.1 Tenant shall have the option (“Renewal Option”)to renew this Lease with respect only to the entirety of the Leased Premises, as it is comprised and configured on February 1, 2007, for two (2) additional and consecutive terms of five (5) years each (each, a “Renewal Term”),on all the same terms and conditions set forth in this Lease, except that Base Rent during each Renewal Term shall be equal to Fair Market Rent (as defined in Section 16.12.2 below). Tenant shall deliver written notice to Landlord of Tenant’s election to exercise the Renewal Option (“Renewal

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Notice”)not less than six (6) months, nor more than nine (9) months, prior to the expiry date of the original Term (or the first Renewal Term, as the case may be); and if Tenant fails to timely deliver the Renewal Notice to Landlord, then Tenant shall automatically be deemed to have irrevocably waived and relinquished the then-applicable Renewal Option. If Tenant fails to timely exercise the first Renewal Option, then Tenant shall have no further Renewal Option.

16.12.2    “Fair Market Rent” shall be determined by Landlord, in its sole, but good faith, discretion based upon the annual base rental rates then being charged (as of the date on which Tenant delivers the then-applicable Renewal Notice) in the industrial submarket sector of the geographic area where the Building is situated for comparable space and for a lease term commencing on or about the commencement date of the then-applicable Renewal Term and equal in duration to the then-applicable Renewal Term, taking into consideration: the geographic location, quality and age of the building; the location and configuration of the relevant space within the applicable building; the extent of service to be provided to the proposed tenant thereunder; applicable distinctions between “gross” lease and “net” leases; the creditworthiness and quality of Tenant; leasing commissions; free rent; tenant improvements allowances; moving allowances; and any other relevant term or condition in making such evaluation, as reasonably determined by Landlord. Landlord shall notify Tenant of Landlord’s determination of Fair Market Rent for the then-applicable Renewal Term, in writing (the “Base Rent Notice”) within fifteen (15) business days after receiving the Renewal Notice.

16.12.3    Tenant shall then have fifteen (15) business days after Landlord’s delivery of the Base Rent Notice in which to advise Landlord, in writing (the “Base Rent Response Notice”) whether Tenant (i) is prepared to accept the Fair Market Rent established by Landlord in the then-applicable Base Rent Notice and proceed to lease the Premises, during the applicable Renewal Term, at that Fair Market Rent; or (ii) elects to withdraw and revoke its Renewal Notice, whereupon the then-applicable Renewal Option shall automatically be rendered null and void; or (iii) elects to contest Landlord’s determination of Fair Market Rent. In the event that Tenant fails to timely deliver the Base Rent Response Notice, then Tenant shall automatically be deemed to have elected (i) above. Alternatively, if Tenant timely elects (ii), then this Lease shall expire on the original expiry date of the initial Term or the expiry date of the initial Renewal Term, as the case may be. If, however, Tenant timely elects (iii), then the following provisions shall apply:

16.12.3.1 The Fair Market Rent shall be determined by either the Independent Brokers or the Determining Broker, as provided and defined below.

16.12.3.2 Within ten (10) business days after Tenant delivers its Base Rent Response Notice, electing (iii), each of Landlord and Tenant shall advise the other, in writing (the “Arbitration Notice”) of both (i) the identity of the individual that each of Landlord and Tenant, respectively, is designating to act as Landlord’s or Tenant’s, as the case may be, duly authorized representative for purposes of the determination of Fair Market Rent pursuant to this Section 16.12.3 (the “Representatives”);and (ii) a list of three (3) proposed licensed real estate brokers, any of which may serve as one of the Independent Brokers (collectively, the “Broker Candidates”).Each Broker Candidate:

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(A)            shall be duly licensed in the jurisdiction in which the Premises is located;

(B)             shall have at least five (5) years’ experience, on a full-time basis, leasing industrial space (warehouse/distribution/ancillary office) in the same general geographic area as that in which the Premises is located, and at least three (3) of those five (5) years of experience shall have been consecutive and shall have elapsed immediately preceding the date on which Tenant delivers the Renewal Notice; and

(C)             shall be independent and have no then-pending (as of the date Landlord or Tenant designates the broker as a Broker Candidate) brokerage relationship, formal or informal, oral or written, with any or all of Landlord, Tenant, and any affiliates of either or both of Landlord and Tenant (“Brokerage Relationship”), nor may there have been any such Brokerage Relationship at any time during the two (2) year period immediately preceding the broker’s designation, by Landlord or Tenant, as a Broker Candidate.

16.12.3.3.                Within five (5) business days after each of Landlord and Tenant delivers its Arbitration Notice to the other, Landlord and Tenant shall cause their respective Representatives to conduct a telephonic meeting at a mutually convenient time. At that meeting, the two (2) Representatives shall examine the list of six (6) Broker Candidates and shall each eliminate two (2) names from the list on a peremptory basis. In order to eliminate four (4) names, first, the Tenant’s Representative shall eliminate a name from the list and then the Landlord’s Representative shall eliminate a name therefrom. The two (2) Representatives shall alternate in eliminating names from the list of six (6) Broker Candidates in this manner until each of them has eliminated two (2) names. The two (2) Representatives shall immediately contact the remaining two (2) Broker Candidates (the “Independent Brokers”),and engage them, as behalf of Landlord and Tenant, to determine the Fair Market Rent in accordance with the provisions of this Section 16.12.3.

16.12.3.4 The Independent Brokers shall determine the Fair Market Rent within fifteen (15) days of their appointment. Landlord and Tenant shall each make a written submission to the Independent Brokers, advising of the rate and any then-applicable concessions that should be included in Fair Market Rent, including, but not limited to, free rent and a refurbishment allowance, that the submitting party believes should be the Fair Market Rate, together with whatever written evidence or supporting data that the submitting party desires in order to justify its desired rate of Fair Market Rent; provided, in all events, however, that the aggregate maximum length of each party’s submission shall not exceed ten (10) pages (each such submission package, a “FMR Submission”).The Independent Brokers shall be obligated to choose one (1) of the parties’ specific proposed rates of Fair Market Rent, without being permitted to effectuate any compromise position.

16.12.3.5 In the event, however, that the Independent Brokers fail to reach agreement, within twenty (20) days after the date on which both Landlord and Tenant deliver the FMR Submissions to the Independent Brokers (the “Decision Period”), as to which of the two (2) proposed rates of Fair Market Rent should be selected, then, within five (5) days after the expiration of the

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Decision Period, the Independent Brokers shall jointly select a real estate broker who (x) meets all of the qualifications of a Broker Candidate, but was not included in the original list of six (6) Broker Candidates; and (y) is not affiliated with any or all of (A) either or both of the Independent Brokers and (B) the real estate brokerage companies with which either or both of the Independent Brokers is affiliated (the “Determining Broker”). The Independent Brokers shall engage the Determining Broker on behalf of Landlord and Tenant (but without expense to the Independent Brokers), and shall deliver the FMR Submissions to the Determining Broker within five (5) days after the date on which the Independent Brokers select the Determining Broker pursuant to the preceding sentence (the “Submission Period”).

16.12.3.6 The Determining Broker shall make a determination of the Fair Market Rent within fifteen (15) days after the date on which the Submission Period expires. The Determining Broker shall be required to select one of the parties’ specific proposed rates of Fair Market Rent, without being permitted to effectuate any compromise position; provided, however, that in the event that the rates of Fair Market Rent proposed by each of Landlord and Tenant in their respective FMR Submissions differ by no more than five percent (5.0%), then the Determining Broker shall have right, but not the obligation, to average the two (2) proposed rates of Fair Market Rent in order to conclusively determine Fair Market Rent.

16.12.3.7 The decision of the Independent Brokers or the Determining Broker, as the case may be, shall be conclusive and binding on Landlord and Tenant, and neither party shall have any right to contest or appeal such decision. Judgment may be entered, in a court of competent jurisdiction, upon the decision of the Independent Brokers or the Determining Broker, as the case may be.

16.12.3.8 In the event that the initial Term or the first Renewal Term, as the case may be, expires and the then-applicable Renewal Term commences prior to the date on which the Independent Brokers or the Determining Broker, as the case may be, renders their/its decision as to the Fair Market Rent, then from the commencement date of that Renewal Term through the date on which the Fair Market Rent is determined under this Section 16.12 (the “Determination Date”),Tenant shall pay monthly Base Rent to Landlord at the same rate of monthly Base Rent in effect immediately preceding the commencement date of the then-applicable Renewal Term; provided, however, that in the event that the Determination Date does not occur within fifteen (15) days after the date on which the then-applicable Renewal Term commences, then commencing with the sixteenth (16^th ) day of that Renewal Term, Tenant shall pay monthly Base Rent to Landlord at a rate that is 105% of the rate of monthly Base Rent in effect as of the date immediately preceding the date on which then then-applicable Renewal Term commences (the “Temporary Base Rent”); and within ten (10) business days after the Determination Date, Landlord shall pay to Tenant, or Tenant shall pay to Landlord, whatever sum that Landlord or Tenant, as the case may be, owes the other (the “Catch-Up Payment”),based on the Base Rent (including, but not limited to, Temporary Base Rent), actually paid and the Fair Market Rent due (as determined, by the Independent Brokers or the Determining Broker, as the case may be) during that portion of the Renewal Term that elapses before the Catch-Up Payment is paid, in full (together with interest thereon, as provided below). The Catch-Up

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Payment shall bear interest at the Default Rate from the date each monthly component of the Catch-Up Payment would have been due, had the Fair Market Rent been determined prior to the commencement of the Renewal Term, through the date on which the Catch-Up Payment is paid, in full (inclusive of interest thereon).

16.12.3.9 The party whose proposed rate of Fair Market Rent is not selected by the Independent Brokers or the Determining Broker, as the case may be, shall bear all costs of all counsel, experts or other representatives that are retained by both parties, together with all other costs of the arbitration proceeding described in this Section 16.3, including, without limitation, the fees, costs and expenses imposed or incurred by any or all of the Independent Brokers and the Determining Broker, except that, in the event the Determining Broker does not select one of the parties’ specific proposed rates of Fair Market Rent but instead effectuates a compromise position (only as permitted pursuant to Section 16.12.3.6), each party shall pay its own costs of counsel, experts or other representatives, together with its share of the costs of the arbitration proceeding described in this Section 16.3, including, without limitation, the fees, costs and expenses imposed or incurred by the Independent Determining Broker.

16.12.3.10               Unless otherwise expressly agreed in writing, during the period of time that any arbitration proceeding is pending under this Section 16.12.3, Landlord and Tenant shall continue to comply with all those terms and provisions of this Lease that are not the subject of their dispute and arbitration proceeding, most specifically including, but not limited to, Tenant’s monetary obligations under this Lease; and, with respect to the payment of Base Rent during that portion of the Renewal Term that elapses during the pendency of any arbitration proceeding under this Section 16.12.3, the provisions of Section 16.12.3.8 shall apply.

16.12.3.11               During any period of time that an arbitration is pending or proceeding under this Section 16.12.3, Tenant shall have no right to assign this Lease or enter into any sublease for all or any portion of the Premises, notwithstanding any provision to the contrary in this Lease. Furthermore, if this Lease requires that Landlord perform any tenant improvement work in connection with the then-applicable Renewal Term, Landlord shall be relieved of any such obligation during the pendency of any arbitration proceeding under this Section 16.12.3.

16.12.4    The Renewal Option is granted subject to all of the following conditions:

(a)As of the date on which Tenant delivers its Renewal Notice and continuing through the commencement date of the Renewal Term, this Lease shall be in full force and effect and no act or omission shall occur which, with the giving of notice or the passage of time, or both, shall constitute a breach or default by Tenant under this Lease.

(b)There shall be no further right of renewal after the expiration of the second Renewal Term.

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(c)The Renewal Option is personal to Tenant. In the event that Tenant assigns its interest under this Lease or subleases all or any portion of the Premises, whether or not in accordance with the requirements of Article 11, and whether directly or indirectly, the provisions of this Section 16.12.3 shall not be available to, or run to the benefit of, and may not be exercised by, any assignee or sublessee.

(d)Unless Tenant delivers a Commitment Notice pursuant to Section 14 below, then the Tenant’s Renewal Option shall only apply to the Reduced Premises.

13.           Construction of Tenant Improvements. Landlord shall provide an allowance for Tenant Improvements as set forth in this Section 13 as follows:

(a)Landlord shall provide an allowance in a maximum amount of eight dollars ($8.00) per rentable square foot of the Reduced Premises (defined below), unless, prior to the TI Allowance Commencement Date (defined below), Tenant delivers a Commitment Notice to continue to lease the entirety of the currently existing Leased Premises throughout the Extended Lease Term, in which event such allowance shall be based upon the rentable square footage of the entire Leased Premises (the “Allowance”) to be used only for the following purposes: (i) for refurbishment of the Reduced Premises or the Leased Premises, as the case may be, (ii) to reconfigure furniture at the Reduced Premises or the Leased Premises, as the case may be, and (iii) to demise the Reduced Premises from the Relinquished Space or the Additional Space, as the case may be (if applicable);

(b)Tenant acknowledges that Landlord has agreed to perform the Tenant Improvements as set forth in the Work Letter attached hereto as Exhibit C (the “Work Letter”).Except as otherwise specifically provided in either or both of this Lease and the Work Letter, Landlord shall not be obligated to make any repairs, replacement or improvements of any kind or nature to the foregoing in connection with, or in consideration of, this Lease, nor shall Landlord be required to expend any monies pursuant to the Work Letter in excess of the Allowance.

(c)Landlord shall have no obligation to construct any of the Tenant Improvements unless and until the first to occur of (a) February 1, 2007, being the commencement date of the Extended Lease Term or (b) the date on which Landlord and a third party tenant enter into an AS Lease, as defined below, and (c) the date on which Plan A is implemented (whichever of (a), (b) or (c) is applicable, the “TI Allowance Commencement Date”).

(d)All rights of Tenant and obligations of Landlord contained in this Section 13 and the Work Letter shall apply solely if, as of the TI Allowance Commencement Date, this Lease shall be in full force and effect and no act or omission shall occur which, with the giving of notice or the passage of time, or both, shall constitute a breach or default by Tenant under this Lease.

(e)Within thirty (30) days following substantial completion of, and payment in full for, the Tenant Improvements (“Substantial Completion and Payment”), and to the extent that unexpended funds remain available in the Allowance,

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Landlord shall pay to Tenant, as an allowance for Tenant’s purchase of additional personal property to be utilized for Tenant’s business operations in the Leased Premises, including, but not limited to, furniture and equipment, and to otherwise provide Tenant with funds to facilitate the cleaning and redecorating of the Leased Premises, an amount equal to the lesser of (i) the then-remaining and unexpended portion of the Allowance; and (ii) a sum equal to the product of (x) $2.00 and (y) the Rentable Area as of February 1, 2007.

14.           Additional Space and Retained Space. Tenant has advised Landlord that Tenant wishes to relinquish its lease, occupancy and possession of a portion of its existing Leased Premises. Landlord has advised Tenant that a third party that is already an existing tenant in the Building, with leased premises contiguous to a portion of the existing Leased Premises (the “Adjacent Tenant”)may be interested in expanding its own existing leased premises to incorporate a portion of Tenant’s existing Leased Premises, in the manner depicted with diagonal lines on Exhibit “A” attached hereto and incorporated herein by this reference (such expansion by the Adjacent Tenant and corresponding reduction in the Leased Premises, “Plan A”).Landlord shall have the right to pursue negotiations with the Adjacent Tenant to document and implement Plan A at any time prior to February 1, 2007, on whatever terms Landlord deems acceptable, in its sole discretion. If, at any time prior to February 1, 2007, Landlord advises Tenant that Plan A will be implemented (subject to the notice requirement imposed in the following grammatical paragraph), then at Landlord’s direction, Tenant will promptly enter into a further amendment to this Lease in order to irrevocably and unconditionally relinquish any and all right to possession of that portion of the existing Leased Premises depicted with diagonal lines on Exhibit “A” (the “Relinquished Space”), and to appropriately adjust the Rentable Area, the Base Rent and Tenant’s Proportionate Share in order to reflect the reduced rentable square footage comprising the resulting Leased Premises. In the event, however, that Landlord fails to implement Plan A on or before February 1, 2007, then effective of that date, the existing Leased Premises shall automatically be modified so as to reduce the existing Leased Premises by 4,251 rentable square feet (the “Additional Space”), as depicted on Exhibit “B” attached hereto and incorporated herein by this reference (such reduction in the Leased Premises, “Plan B”), and if Plan B is applicable, then Landlord and Tenant shall promptly enter into a further amendment to this Lease in order to memorialize the reduced Rentable Area of the Leased Premises, and corresponding adjustments in the Base Rent and Tenant’s Proportionate Share. (The Leased Premises, as reduced pursuant to Plan A or Plan B, whichever is applicable, is sometimes referred to as the “Reduced Premises”). If,at any time prior to February 1, 2007, Landlord concludes, in its sole, but reasonable, discretion, that Plan A will not be implemented on or before February 1, 2007 (such date on which Landlord makes such determination, the “Plan A Abandonment Date”), then, promptly following the Plan A Abandonment Date, Landlord shall engage an independent leasing broker to market the Additional Space for lease to an independent third party. Landlord shall use reasonable and good faith efforts to lease the Additional Space to such a third party prior to February 1, 2007 and on terms acceptable to Landlord in its sole, but reasonable, discretion. In the event that Landlord elects to enter into a lease with a third party tenant for the Additional Space (the “AS Lease”), then upon execution and delivery of the AS Lease, this Lease shall automatically be amended (effective as of the commencement date of the AS Lease) so as to reduce the rentable square footage of the Leased Premises pursuant to Plan B, and Landlord and Tenant shall promptly thereafter enter into a further amendment to this Lease to reflect the reduction in the Rentable Area and the corresponding adjustment and reduction in the Base Rent and Tenant’s Proportionate Share so as to reflect the Reduced Premises. In the event that Landlord fails, for any reason, to enter into the AS Lease on or before February 1, 2007, then Plan B shall be implemented, as provided above.

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Notwithstanding the foregoing, however, Tenant shall have the unilateral right at any time prior to the first to occur of (i) the implementation of Plan A, (ii) the execution and delivery of the AS Lease by Landlord and the third party tenant; and (ii) February 1, 2007, to deliver written notice to Landlord, advising Landlord that Tenant unconditionally elects to continue to lease the entire Leased Premises, inclusive of the Relinquished Space and the Additional Space, throughout the Lease term, including the Extended Lease Term (the “Commitment Notice”). From and after Tenant’s delivery of the Commitment Notice, Landlord shall have no further right to implement Plan A nor any obligation to market the Additional Space for lease to a third party, and Tenant shall be obligated to reimburse Landlord for all (if any) reasonable, documented out-of-pocket costs and expenses that either or both of Landlord and its leasing broker incurred in connection with the marketing and potential leasing of the Additional Space (the “Leasing Costs”); provided, however, that the maximum aggregate amount of Leasing Costs that Tenant shall be obligated to pay to Landlord is $1,500.00. Tenant shall pay the Leasing Costs to Tenant within ten (10) days after Landlord’s written demand therefor (delivered with reasonable evidence of the Leasing Costs). Landlord shall not enter into either (1) any lease amendment with the Adjacent Tenant to implement Plan A; or (2) the AS Lease without first providing Tenant with at least ten (10) days’ notice of Landlord’s intent to enter into either of (1) or (2), as the case may be, and Tenant shall have the right to deliver a Commitment Notice to Landlord within such ten (10) day period, whereupon Landlord shall not implement Plan A or enter into the AS Lease, as the case may be, but instead, Tenant shall be unconditionally obligated to continue leasing the entire Leased Premises (inclusive of the Relinquished Space and the Additional Space) throughout the Lease term, including the Extended Lease Term, and Tenant shall also be required to reimburse Landlord for the Leasing Costs, as provided above.

15.           Broker. Section 16.06 of the Original Lease is hereby deleted and, in lieu thereof, the following is instead substituted:

Tenant covenants, warrants and represents that TODD BRAUFMAN of Equis Corporation was the only broker to represent Tenant in the negotiation of this Lease (“Tenant’s Broker”). Landlord shall be solely responsible for paying the commission of Tenant’s Broker pursuant to a separate agreement. Each party agrees to and hereby does defend, indemnify and hold the other harmless against and from any brokerage commissions or finder’s fees or claims therefor by a party claiming to have dealt with the indemnifying party and all costs, expenses and liabilities in connection therewith, including, without limitation, reasonable attorneys’ fees and expenses, for any breach of the foregoing. The foregoing indemnification shall survive the termination or expiration of this Lease.

16.           Waiver of Trial by Jury. THE LANDLORD AND THE TENANT, TO THE FULLEST EXTENT THAT THEY MAY LAWFULLY DO SO, HEREBY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING BROUGHT BY ANY PARTY TO THIS LEASE WITH RESPECT TO THIS LEASE, THE LEASED PREMISES, OR ANY OTHER MATTER RELATED TO THIS LEASE OR THE LEASED PREMISES.

17.Miscellaneous.

17.1  Entire Agreement. This Amendment constitutes the entire understanding between the parties with respect to the transaction contemplated herein, and all prior or contemporaneous oral agreements, understandings, representations and statements, and

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all prior written agreements, understandings, letters of intent and proposals are merged into this Amendment. Except as otherwise expressly provided herein, neither this Amendment nor any provisions hereof may be waived, modified, amended, discharged or terminated except by an instrument in writing signed by the party against which the enforcement of such waiver, modification, amendment, discharge or termination is sought, and then only to the extent set forth in such instrument.

17.2             No Recording. Neither this Amendment nor any memorandum thereof shall be recorded and the act of recording by Tenant shall be deemed a default by Tenant hereunder.

17.3             Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of Minnesota.

17.4             Construction of Agreement. In construing this Amendment, all headings and titles are for the convenience of the parties only and shall not be considered a part of this Amendment. Whenever required by the context, the singular shall include the plural and the masculine shall include the feminine and vice versa. This Amendment shall not be construed as if prepared by one of the parties, but rather according to its fair meaning as a whole, as if both parties had prepared it. All (if any) Exhibits attached hereto are incorporated in this Amendment by reference thereto.

17.5             Partial Invalidity. The provisions of this Amendment shall be deemed independent and severable, and the invalidity or partial invalidity or enforceability of any one provision shall not affect the validity of enforceability of any other provision hereof.

17.6             Counterparts; Facsimile. This Amendment may be executed in multiple counterparts and shall be valid and binding with the same force and effect as if all parties had executed the same Amendment. A fully executed facsimile copy of this Amendment shall be effective as an original.

[SIGNATURE PAGE TO FOLLOW]

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IN WITNESS WHEREOF, the parties executed this Amendment as of the                 day of January, 2006.

LANDLORD:
FirstCal Industrial 2 Acquisition, LLC, a Delaware limited liability company
By:	FirstCal 2 Industrial Leasing Manager, LLC, a Delaware limited liability company and its leasing manager
	By:	First Industrial, L.P., a Delaware limited partnership, its sole member
		By:		First Industrial Realty Trust, Inc., a Maryland corporation and its sole general partner
			By:		/s/ Chris William
			Name:		Chris William
			Title:		SR Regional Director

TENANT:
ESCHELON TELECOM, INC., a Delaware corporation
By:	/s/ Michael A. Donahue
Name:	Michael A. Donahue
Title:	VP Finance and Treasurer

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EXHIBIT A

PLAN A

A-1

EXHIBIT B

PLAN B

B-1

EXHIBIT C

TENANT OPERATIONS INQUIRY FORM

1.	Name of Company/Contact		Michele Speranza-diforza
2.	Address/Phone	730 2nd Ave S # 900, Minneapolis, MN 55402
		612.436.6621
3.	Provide a brief description of your business and operations:
	Telecommunications services & Products

4.Will you be required to make filings and notices or obtain permits as required by Federal and/or State regulations for the operations at the proposed facility? Specifically:

a. SARA Title III Section 312 (Tier II) reports	YES	NO
(> 10,000lbs. of hazardous materials STORED at any one time)
b.SARA Title III Section 313 (Tier III) Form R reports	YES	NO
(> 10,000lbs. of hazardous materials USED per year)
c. NPDES or SPDES Stormwater Discharge permit	YES	NO
(answer “No” if “No-Exposure Certification” filed)
d. EPA Hazardous Waste Generator ID Number	YES	NO

5.             Provide a list of chemicals and wastes that will be used and/or generated at the proposed location.

Routine office and cleaning supplies are not included. Make additional copies if required.                  N/A

Chemical/Waste Approximate Annual
Quantity Used or
Generated Storage Container(s)
(i.e. Drums, Cartons, Totes,
Bags, ASTs, USTs, etc)

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EXHIBIT D

WORK LETTER

This Work Letter (this “Work Letter”)is incorporated into and made a part of the Lease. All terms not defined herein shall have the meanings set forth in the Lease. In the event of any conflict between the terms and provisions of the Lease and those of this Work Letter, the terms and provisions of this Work Letter shall control, in all events.

1.                 Performance of Work. Landlord shall cause to be performed, in accordance with the terms of this Work Letter, (a) if Plan A is applicable, those certain Tenant Improvements depicted in the plans, specifications and working drawings described in Schedule 1 attached hereto and made a part hereof (the “Plan A Final Plans”);or (b) if Plan B is applicable, those certain Tenant Improvements depicted in the plans, specifications and working drawings described in Schedule 2 attached hereto and made a part hereof (the “Plan B Final Plans;” references to the Final Plans shall mean the Plan A Final Plans or the Plan B Final Plans, as applicable). All Tenant Improvements shall be performed in a good and workmanlike manner, using new first grade quality materials. Landlord shall be responsible to obtain all necessary governmental and municipal approvals and permits required as a condition precedent to the performance and installation of the Tenant Improvements, and all costs and expenses incurred by Landlord pursuant to this sentence shall be deemed to constitute Work Cost, as defined below. The Final Plans have been prepared by LHB Architects (“Architect”). All work required for the construction and installation of the Tenant Improvements (“Work”)shall be performed only by Landlord’s contractor (the “Contractor”).Landlord shall select the Contractor. Landlord shall obtain bids from three (3) contractors who are able to perform the Work. Tenant shall, in its sole, but reasonable, discretion and with the assistance and approval of Landlord, select the Contractor based on the bid price, quality of service, delivery date and prior working relationship with Tenant. Landlord shall use its good faith efforts to cause the Landlord Improvements to be substantially completed within ninety (90) days after the date on which the Work commences (the “Scheduled Commencement Date”).The costs to construct the Tenant Improvements, including, but not limited to, the cost to prepare the Final Plans (collectively, the “Work Cost”),shall be paid for by Landlord (except as otherwise specifically set forth below): provided, however, that in no event shall Landlord be obligated to pay a Work Cost in excess of the Allowance, and, to the extent the Work Cost exceeds the Allowance, Tenant shall be solely responsible for (and, if necessary, promptly reimburse Landlord for) any such excess amount (“Excess Work Cost”). For purposes of the Lease, any Excess Work Cost shall constitute Additional Rent.

2.                 Change Orders. From time to time after the date of the Amendment, Tenant may notify Landlord of changes that Tenant proposes be made to the Final Plans (a “Change Order”). Promptly upon Tenant’s delivery to Landlord of a Change Order, Landlord shall notify Tenant (“Change Order Notice”)of both: (i) any estimated increase in the Work Cost due to the Change Order, and (ii) any estimated delay (an “Estimated Delay”)in the Scheduled Commencement Date if the Change Order is implemented. Tenant shall notify Landlord of its final approval or disapproval of the Change Order within two (2) business days after Landlord delivers to Tenant the applicable Change Order Notice (“Change Order Response Period”).If Tenant fails to timely notify Landlord of its approval or disapproval of any proposed Change

D-1

Order, Tenant shall be deemed to have automatically disapproved that particular Change Order and Landlord shall not proceed to implement any of the changes specified therein. If Tenant timely notifies Landlord of its approval of the Change Order, then the cost of such Change Order shall be added to the Work Cost and paid for from the Allowance, to the extent that Allowance proceeds are available; however, as provided above, Tenant remains solely responsible for any Excess Work Cost. In such event, any delay in the Scheduled Commencement Date resulting from the performance of the work described in the relevant Change Order shall be deemed a Delay Event (defined below).

3.                 Substitutions. From time to time after the date of the Lease, Landlord may notify Tenant of any proposed substitutions (“Substitutions”)in the materials or designs described in the Final Plans that Landlord determines are reasonably necessary to avoid delays in the Scheduled Commencement Date (a “Substitution Notice”). The Substitutions shall be of substantially the same character and quality as those described in the Final Plans. Any Substitution Notice shall describe in reasonable detail: (i) the nature of the Substitutions, (ii) any estimated increase in the Work Cost, if Tenant approves the Substitutions, and (iii) any estimated delay in the Scheduled Commencement Date if Tenant disapproves the Substitutions. Tenant shall notify Landlord of its approval or disapproval of the Substitutions within three (3) business days after Landlord delivers the relevant Substitution Notice to Tenant (“Substitution Response Period”). If Tenant fails timely to notify Landlord of its approval or disapproval, Tenant shall be deemed to have automatically disapproved the Substitutions described in the relevant Substitution Notice. If Tenant disapproves or is deemed to have disapproved the Substitutions, Landlord shall not implement the Substitutions and any delay in the Scheduled Commencement Date resulting therefrom shall be deemed a Delay Event. If Tenant timely approves a Substitution, then, within three (3) business days of the expiration of the relevant Substitution Response Period, Tenant shall pay Landlord the amount of any increase in the Work Cost (as set forth in the relevant Substitution Notice) in accordance with Paragraph 4 of this Work Letter, and upon receipt of such payment, Landlord shall implement the Substitutions.

4.                 Payment of Additional Work Cost. As provided above, Tenant shall be responsible for the payment of any increase in the Work Cost resulting from an approved Change Order or Substitution if the cost of such Change Order(s) and/or Substitution(s) exceeds the amount of the Allowance and, therefore, constitutes Excess Work Cost.

5.                 Substantial Completion Date and Punch List Items. The Architect shall determine the date on which the construction and installation of the Work Items are substantially completed in substantial accordance with the Final Plans, as such Final Plans may be modified by any Change Orders and Substitutions (“Substantial Completion Date”). The Architect shall certify to Landlord and Tenant, in writing, the Substantial Completion Date (“Substantial Completion Notice”). Within five (5) days after the Architect delivers the Substantial Completion Notice, Tenant and Landlord (and the Architect, if Landlord so desires) shall inspect the Premises to determine those items, if any, that Landlord and Tenant determine to be unfinished, but which do not materially impair Tenant’s use or occupancy of the Premises (the “Punch List Items”). Tenant shall accept possession of the Tenant Improvements and Landlord shall promptly thereafter complete the Punch List Items, it being understood that Landlord shall use reasonable efforts to so complete those Punch List Items within forty-live (45) days after the

D-2

Substantial Completion Date. At Landlord’s request from time to time, Tenant will furnish Landlord with written statements acknowledging the completion of the Punch List Items. Any disputes as to the nature or existence of any Punch List Item or as to the substantial completion of the Landlord Improvements shall be resolved by reasonable and joint decision of the Architect and a duly licensed Minnesota architect selected by Tenant.

6.Delay.

6.1.     Delay Events: The Scheduled Commencement Date may be delayed from time to time due to any or all of the following events (collectively, “Delay Events”):

6.1.1.   Change Orders requested or approved by Tenant;

6.1.2.   Tenant’s disapproval of a Substitution;

6.1.3.   Any act of Tenant or its agents, employees or contractors that interferes with the Work;

6.1.4.   Any delay due to, or in connection with, materials specified by Tenant to be procured from a particular source, including, without limitation, any delivery delays or delays relating to the quality or other characteristics of such materials;

6.1.5.   Any delay of any applicable governmental authority to issue appropriate permits for construction of the Landlord Improvements and a certificate of occupancy (or comparable certification) for the Premises upon substantial completion of the Work Items; and

6.1.6.   A matter arising or occurring under Section 17.4 of the Lease.

7.                 Limit on Landlord’s Liability. Without limitation of Landlord’s limitation of liability set forth in the Lease, Landlord shall not be liable for any damage caused to Tenant due to a delay as a result of a Delay Event in the delivery of the Tenant Improvements to Tenant.

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SCHEDULE 1

FINAL PLANS

Schedule 1

EXHIBIT A

Option A - Preliminary

Initials:
Landlord:		[ILLEGIBLE]
Tenant:	[ILLEGIBLE]

EXHIBIT B

Option B- Preliminary

Initials:
Landlord:		[ILLEGIBLE]
Tenant:	[ILLEGIBLE]

EX-10.16.1

EXHIBIT 10.16.1

AMENDMENT TO LEASE

This Amendment to Lease (“Amendment”) is made effective as of the 28^th day of APRIL, 2005, by and between PARKSIDE SALT LAKE CORPORATION, a Delaware corporation (“Landlord”) and ESCHELON TELECOM, INC., a Delaware corporation (“Tenant”) with reference to the following facts and circumstances.

A.Landlord is the Owner of that certain building located at 215 South State Street, Salt Lake City, Utah 84111 (the “Property”).

B.Landlord’s predecessor-in-interest and Tenant’s predecessor-in-interest entered into a certain Office Lease, dated December 28, 1999, as amended by that certain Landlord’s Waiver and Consent dated August 25, 2000 (collectively, the “Lease”) for certain premises described as Suite 380 (the “Premises”) located in the Property.

C.American Realty Advisors (“Advisor”) is the real estate investment manager to the Landlord.

D.Landlord and Tenant desire to amend the Lease upon terms and conditions hereinafter set forth.

NOW, THEREFORE, in consideration of the foregoing facts and circumstances, the mutual covenants and promises contained herein and after good and valuable consideration, the receipt and sufficiency of which is acknowledged by each of the parties, the parties do hereby agree to the following:

1.Definitions. Each capitalized term used in this Amendment shall have the same meaning as is ascribed to such capitalized term in the Lease, unless otherwise provided for herein.

2.Expansion Premises. Commencing on July 15, 2005 (the “Expansion Date”), the Premises shall be expanded to include an additional 11,925 rentable square feet in Suites 280 and 110, as shown on Exhibit A, attached (the “Expansion Premises”). Following the Expansion Date, the Premises shall consist of 18,669 rentable square feet.

3.Term. The term of the Lease is hereby extended for the period commencing on the Expansion Date and ending on July 14, 2012 (the “Extension Period”). Tenant acknowledges and agrees that, unless expressly provided for in this Amendment, Tenant has no right to renew or extend the term after the Extension Period.

4.Rental. The Basic Annual Rent for the Extension Period shall be as follows:

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Suite Number	Total Rentable Square Feet	Months	Annual Base Rent per Square Foot		Monthly Base Rent		Annual Base Rent
110	1,150	7/15/05-7/14/06	$	12.50	$	1,197.92	$	14,375.00
		7/15/06-7/14/07	$	12.88	$	1,234.33	$	14,812.00
		7/15/07-7/14/08	$	13.27	$	1,271.71	$	15,260.50
		7/15/08-7/14/09	$	13.67	$	1,310.04	$	15,720.50
		7/15/09-7/14/10	$	14.08	$	1,349.33	$	16,192.00
		7/15/10-7/14/11	$	14.50	$	1,389.58	$	16,675.00
		7/15/11-7/14/12	$	14.94	$	1,431.75	$	17,181.00
280	10,775	7/15/05-7/14/06	$	15.75	$	14,142.19	$	169,706.25
		7/15/06-7/14/07	$	16.22	$	14,564.21	$	174,770.50
		7/15/07-7/14/08	$	16.71	$	15,004.19	$	180,050.25
		7/15/08-7/14/09	$	17.21	$	15,453.15	$	185,437.75
		7/15/09-7/14/10	$	17.73	$	15,920.06	$	191,040.75
		7/15/10-7/14/11	$	18.26	$	16,395.96	$	196,751.50
		7/15/11-7/14/12	$	18.81	$	16,889.81	$	202,677.75
380	6,744	7/15/05-7/14/12	$	19.00	$	10,678.00	$	128,136.00

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5.Conditional Rent. Provided that Tenant has faithfully performed all of the terms and conditions of the Lease and this Amendment, Landlord agrees to abate Tenant’s obligation to pay Basic Annual Rent on Suites 105 and 280 for July 15, 2005 through March 14, 2006 (the “Conditional Rent”). Notwithstanding the foregoing, however, during such abatement period. Tenant shall still be responsible for the payment of all Additional Rent payable under this Lease. In the event of a default at any time during the Term, in addition to any other remedies to which Landlord may be entitled, Landlord shall be entitled to recover the Conditional Rent (i.e., the amount of the Conditional Rent shall not be deemed to have been abated, but shall become immediately due and payable as unpaid Rent earned, but due at the time of such default).

6.Additional Rent. Throughout the Extension Period, Tenant’s Share for the calculation of Operating Expenses, payable as Additional Rent subject to the provisions of this Section 6, shall be 9.82%. Additionally, the Base Year throughout the Extension Period shall be the 2005 calendar year and for the purpose of calculating Tenant’s Additional Rent, Controllable Operating Costs shall not increase by more than four percent (4%) per year in the aggregate over the Term. “Controllable Operating Costs” shall mean Operating Expenses other than insurance, utilities and security.

7.Parking. Notwithstanding anything in the Lease to the contrary, during the Extension Period Tenant shall have the right to use four (4) covered reserved parking spaces at a rate of $85.00 per space per month in locations designated by Landlord, twenty (20) covered unreserved parking spaces at a rate of $65.00 per space per month in locations designated by Landlord, fifteen (15) unreserved spaces on the surface lot adjacent to the Building at a rate of $18.00 per space per month, and one (1) reserved space in the Building contractor lot at no charge to Tenant. Notwithstanding the foregoing, Tenant’s obligation to pay rent for the parking spaces shall be abated for July 15, 2005 through July 14, 2006.

8.Automatic Expansion. Provided no default has occurred, Tenant shall, once such space becomes available, expand into approximately 1,000 additional contiguous rentable square feet on the first (l^st) floor of the Building, in a location selected by Landlord from the expansion areas shown on Exhibit A attached hereto (the “Expansion Space”). Tenant shall take the Expansion Space subject to all of the same terms and conditions of the Lease, including, but not limited to, the then current rental rate. Additionally, Landlord hereby agrees to make improvements in the Expansion Space so that the Expansion Space shall be in the same condition as the Premises upon the date Tenant expands into the Expansion Space. Tenant shall expand into the Expansion Space upon substantial completion of Landlord’s improvement work in the Expansion Space and both parties shall execute an amendment to the Lease setting forth the terms of the expansion.

Any termination of the Lease shall terminate all rights of Tenant with respect to the Expansion Space. The rights of Tenant with respect to the Expansion Space shall not be severable from the Lease, nor may such rights be assigned or otherwise conveyed in connection with any permitted assignment of the Lease. Landlord’s consent to any assignment of the Lease shall not be construed as allowing an assignment or a conveyance of such rights to any assignee.

The Lease shall not be void or voidable, nor shall Landlord be liable to Tenant for any loss or damage resulting from any delay in delivering possession of the Expansion Space to Tenant, but abatement of the Basic Annual Rental attributable to the Expansion Space from the

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date of Tenant’s automatic expansion to the date of actual delivery of the Expansion Space, shall constitute full settlement of all claims that Tenant might have against Landlord by reason of the Expansion Space not being delivered upon the date of Tenant’s acceptance of Landlord’s offer.

If the Lease or Tenant’s right to possession of the Premises shall terminate in any manner whatsoever before Tenant shall exercise the right herein provided, or if Tenant shall have subleased the Premises or assigned the Lease with respect to all or any portion of the Premises, then immediately upon such termination, sublease, or assignment, the right herein granted shall simultaneously terminate and become null and void. Such right is personal to Tenant and non-transferable. UNDER NO CIRCUMSTANCES WHATSOEVER SHALL THE ASSIGNEE UNDER A COMPLETE OR PARTIAL ASSIGNMENT OF THE LEASE, OR A SUBTENANT UNDER A SUBLEASE OF THE PREMISES, HAVE ANY RIGHT TO EXERCISE THE RIGHT GRANTED HEREIN.

9.Cancellation Option.Provided no default has occurred and Tenant has given notice on or before December 14, 2009 (the “Notice Deadline”), Tenant shall have the option to cancel its obligations under this Lease effective as of June 14, 2010 by making a payment to Landlord upon the exercise of the cancellation option equal to the sum of (a) Landlord’s unamortized deal costs (i.e. leasehold improvements, commissions, etc.) associated with this Amendment based upon an interest rate of ten percent (10%) per annum, with such amortization commencing after (i) the date any Conditional Rent has ceased (with respect to the initial costs incurred by Landlord); and (ii) the date any such costs are incurred by Landlord (if Tenant has expanded the Premises prior to such termination) plus (b) $57,051.84 (collectively the “Termination Fee”).

10.Renewal Option.

a.Tenant shall have one (1) personal and non-transferable option to renew the term of the Lease for a period of five (5) years. The renewal term shall begin June 15, 2012. Tenant shall have the right to exercise the renewal option conferred herein by giving Landlord notice at least one hundred eighty (180) days, but not more than two hundred seventy (270) days, prior to the expiration of the Extension Period; provided that, at the time of exercise and as of the commencement of the renewal term (i) no default has occurred; and (ii) Tenant has not sublet any portion of the Premises or assigned all or any portion of the Lease.

b.The renewal option shall be subject to all of the terms and conditions contained in the Lease, except that rent during each renewal term shall be Market Rent. “Market Rent” shall be the anticipated rate in effect for the Premises as of the commencement of the renewal term, together with any market rate increases during the renewal term, based upon the rents generally in effect for new leases of space in the area in which the building is located of equivalent quality, size, utility and location, and taking into account the length of the renewal term and the credit standing of Tenant. In no event shall the Market Rent be less than the rent in effect for the immediately preceding term. Landlord shall lease the Premises to Tenant in their then-current condition, and Landlord shall not provide to Tenant any allowances (e.g., moving allowance, construction allowance, free rent or the like) or other tenant inducements, except Landlord shall provide a refurbishment

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allowance of $5.00 per rentable square foot. Inthe event that Tenant shall exercise an option to renew the Lease, then the Market Rent shall be agreed upon in a meeting of the parties hereto held at least ninety (90) days prior to the expiration of the Extension Period. If the parties are able to agree on an amount of rent that is mutually satisfactory, then such agreements shall be placed in writing and shall be signed by the parties hereto and shall thereupon become a part of the Lease.

c.If the parties hereto are unable to agree upon the rent at least thirty (30) days prior to the commencement of the renewal term, then the disagreement shall be promptly submitted to arbitration as provided below.

d.Failure of Tenant properly to exercise any option herein granted shall be construed as a waiver of all options herein granted, and the Lease shall then terminate at the expiration of the Extension Period.

e.If the parties do not agree upon the Market Rent within the stipulated time, no later than five (5) business days following the expiration of the stipulated time, each party shall select an arbitrator having not less than ten (10) years’ actual experience in the commercial real estate brokerage business, and the arbitrators so selected shall immediately meet for the purpose of hearing and deciding the dispute and fixing the relevant rate of rent. If the two arbitrators selected cannot agree on the rental rate within ten (10) business days after appointment (the “Initial Review Period”), but the rental rates differ by less than five percent (5%), the rental rate shall be the average of the two rates. If the rental rates differ by more than five percent (5%), no later than five (5) business days following the expiration of the Initial Review Period, the two arbitrators shall select a third arbitrator with qualifications similar to their own. Within ten (10) business days following appointment, the third arbitrator shall select one of the two rental rates promulgated by the first two arbitrators as the rental rate for the renewal period. If the arbitrators cannot agree on the third arbitrator, they shall petition the presiding judge of the local state court having jurisdiction to appoint such arbitrator to act as an umpire between the arbitrators selected by Landlord and Tenant. The decision of the third arbitrator or presiding judge, as the case may be, shall be binding on both parties. Landlord and Tenant shall each be responsible to pay their respective arbitrators and will share equally the cost of the third arbitrator.

f.Except as expressly set forth herein, Tenant shall have no option to renew the Lease.

11.Signage. Landlord shall pay all costs of fabrication and installation of Building standard letters with Tenant name and suite number at the main entrance to the Premises and one (1) line on the Building directory to display Tenant’s name and location in the Building. Any changes to the signage initially provided by Landlord shall be at Tenant’s expense. Additionally, Tenant may install, at Tenant’s sole cost and expense, Building signage similar to the Building signage presently installed by Fidelity Investments, provided Tenant has obtained Landlord’s prior written consent to such signage.

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12.Building Services. Landlord hereby agrees to provide Tenant, upon Tenant’s written request, with up to twenty (20) hours per month during the Extension Period of HVAC services during hours not listed in Section 9.1 of the Lease at no charge. Any additional HVAC service requested by Tenant beyond the twenty (20) hours listed herein shall be at Landlord’s standard rate for such after-hours service.

13.Tenant Improvements. Landlord hereby agrees to construct the Tenant Improvements enumerated in Exhibit B attached hereto.

14.No Defenses. Tenant and Landlord affirm that, as of the date of execution of this Amendment, no default or breach by Landlord or Tenant exists under the Lease and Tenant and Landlord have no defenses, offsets or counterclaims that could be asserted in an action by Landlord or Tenant to enforce Landlord’s or Tenant’s remedies under the Lease.

15.Broker. Tenant represents to Landlord that except for Strategic Commercial Realty (the “Broker”), Tenant has not dealt with any real estate broker, salesperson or finder in connection with this Amendment, and no other such person initiated or participated in the negotiation of this Amendment or is entitled to any commission in connection herewith. Tenant hereby agrees to indemnify, defend and hold Landlord, its property manager and their respective employees harmless from and against any and all liabilities, claims, demands, actions, damages, costs and expenses (including attorneys fees) arising from either (a) a claim for a fee or commission made by any broker [, other than the Broker,] claiming to have acted by or on behalf of Tenant in connection with this Amendment, or (b) a claim of, or right to lien under the statutes of the state in which the Premises are located (the “State”) relating to real estate broker liens with respect to any such broker retained by Tenant.

16.Submission. Submission of this Amendment by Landlord to Tenant for examination and/or execution shall not in any manner bind Landlord and no obligations on Landlord shall arise under this Amendment unless and until this Amendment is fully signed and delivered by Landlord and Tenant; provided, however, the execution and delivery by Tenant of this Amendment to Landlord shall constitute an irrevocable offer by Tenant of the terms and conditions herein contained, which offer may not be revoked for thirty (30) days after such delivery.

17.Limit of Liability. Neither Landlord nor any principal of Landlord nor any owner of the Property, whether disclosed or undisclosed, shall have any personal liability with respect to any of the provisions of the Lease, as hereby amended, or the Premises, and if Landlord is in breach or default with respect to Landlord’s obligations under the Lease, as hereby amended, or otherwise, Tenant shall look solely to the equity interest of Landlord in the Property for the satisfaction of Tenant’s remedies or judgments.

18.                 Miscellaneous.

a.         Notices. Both parties confirm their notice addresses to be us follows

If to Landlord: Parkside Salt Lake Corporation
	c/o American Realty Advisors 801 North Brand Boulevard, Suite 800

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	Glendale, CA 91203 Attention: Stanley lezman Telecopy: 818-545-8460
If to Tenant:	Eschelon Telecom, Inc. 730 Second Avenue South, Suite 900 Minneapolis, MN 55402 Telecopy: 612.436.6702

b.Time of Essence. Time is of the essence of this Amendment and each and every turn and provision hereof.

c.Modification. A modification of any provision herein contained, or any other amendment to this Amendment, shall be effective only if the modification or amendment is in writing and signed by both Landlord and Tenant.

d.Successors and Assigns. This Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns.

e.Number and Gender. As used in this Amendment, the neuter includes masculine and feminine, and the singular includes the plural.

f.Governing Law. This Amendment shall be governed by, interpreted under and construed and enforced in accordance with the laws of Utah applicable to agreements made and to be performed wholly within Utah.

g.Construction. Headings at the beginning of each Section and subsection are solely for the convenience of the parties and are not a part of this Amendment. Except as otherwise provided in this Amendment, all exhibits referred to herein are attached hereto and are incorporated herein by this reference. Unless otherwise indicated, all references herein to Articles, Section, subsections, paragraphs, subparagraphs or provisions are to those in this Amendment. Any reference to a paragraph or Section herein includes all subparagraphs or subsections thereof. This Amendment shall not be construed as if it had been prepared by only Landlord or Tenant, but rather as if both Landlord and Tenant had prepared the same. In the event any portion of this Amendment shall be declared by any court of competent jurisdiction to be invalid, illegal or unenforceable, such portion shall be deemed severed from this Amendment, and the remaining parts hereof shall remain in full force and effect, as fully as though such invalid, illegal or unenforceable portion had never been part of this Amendment.

h.Integration of Other Agreements. This Amendment, the Lease and prior amendments set forth the entire agreement and understanding of the parties with respect to the matters set forth herein and supersedes all previous written or oral understandings, agreements, contracts, correspondence and documentation with respect thereto. Any oral representation or modifications concerning this Amendment shall be of no force or effect.

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i.Duplicate Originals; Counterparts. This Amendment may be executed in any number of duplicate originals, all of which shall be of equal legal force and effect. Additionally, this Amendment may be executed in counterparts, but shall become effective only after a counterpart hereof has been executed by each party; all said counterparts shall, when taken together, constitute the entire single agreement between parties.

j.Days. The term “days,” as used herein shall mean actual days occurring, including Saturdays, Sundays and holidays. The term “business days” shall mean days other than Saturdays, Sundays and holidays. If any item must be accomplished or delivered hereunder on a day that is not a business day, it shall be deemed to have been timely accomplished or delivered if accomplished or delivered on the next following business day.

k.Further Assurances. Landlord and Tenant each agree to execute any and all other documents and to take any further actions reasonably necessary to consummate the transactions contemplated hereby.

l.Joint and Several liability. If Tenant consists of two (2) or more parties, each of such parties (and each of Tenant’s general partners) shall be liable for Tenant’s obligations under this Amendment, and all documents executed in connection herewith, and the liability of such parties shall be joint and several. Additionally, the obligations and liabilities hereunder of the general partners or other appropriate persons or entities that comprise Tenant, if any, are and shall be joint and several.

m.No Third Party Beneficiaries. Except as otherwise provided herein, no person or entity shall be deemed to be a third party beneficiary hereof, and nothing in this Amendment, (either expressed or implied) is intended to confer upon any person or entity, other than Landlord and/or Tenant (and their respective nominees, successors and assigns), any rights, remedies, obligations or liabilities under or by reason of this Amendment.

n.Full Force and Effect. The Lease, as amended hereby, shall continue in full force and effect, subject to the terms and provisions thereof and hereof. In the event of any conflict between the terms of the Lease and the terms of this Amendment, the terms of this Amendment shall control.

o.ERISA. Tenant has been informed that a specified pension plan may have an interest in the Property. Tenant hereby represents and warrants that it is not a party in interest to such plan, within the meaning of Section 3(14) of the Employee Retirement Income Security Act of 1974, as amended.

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IN WITNESS WHEREOF, this Amendment is executed as of the day and year aforesaid.

LANDLORD:
PARKSIDE SALT LAKE CORPORATION, a Delaware corporation
By:	/s/ David Coor
Printed Name:			David Coor
Title:		Asst. Manager
Date:		4.28.05
TENANT:
ESCHELON TELECOM, INC., a Delaware corporation
By:	/s/ Michael A. Donahue
Printed Name:				Michael A. Donahue
Title:		VP Finance and Treasurer
Date:		4/28/05

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EXHIBIT A

The Expansion Premises

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EXHIBIT B

TENANT IMPROVEMENTS

1.Preparation of Working Drawings.

(a)Landlord shall retain an architect/space planner (“Architect”) to prepare the construction drawings for the Tenant Improvements, along with an engineering consultant (“Engineer”) to prepare all plans and engineering working drawings related to the structural, mechanical, electrical, plumbing, HVAC, life-safety, and sprinkler work for the Tenant Improvements.

(b)Landlord shall prepare a space plan for the Tenant Improvements that includes a layout and designation of all offices, rooms and other partitioning, their intended use, and equipment to be contained therein (the “Space Plan”), and shall deliver the Space Plan to Tenant for Tenant’s approval. Tenant shall notify Landlord whether it approves the Space Plan within three (3) business days after Landlord’s submission thereof. If Tenant disapproves of such Space Plans, then Tenant shall notify Landlord thereof specifying in reasonable detail the reasons for such disapproval. Landlord shall revise such Space Plans in accordance with Tenant’s reasonable objections and submit the revised Space Plans to Tenant for its review and approval. Tenant shall notify Landlord in writing whether it approves of the revised Space Plans within two (2) business days after its receipt thereof. If Tenant fails to notify Landlord that it disapproves of the initial Space Plans within three (3) business days (or, in the case of revised Space Plans, within two (2) business days) after the submission thereof, then Tenant shall be deemed to have approved the Space Plans in question.

(c)Following the date on which the Space Plans are approved (or deemed approved) by Tenant, Landlord shall cause the Architect and Engineer to prepare final working drawings of the Tenant Improvements and deliver the same to Tenant for its review and approval (which approval shall not be unreasonably withheld, delayed or conditioned). Tenant shall notify Landlord whether it approves of the submitted working drawings within three (3) business days after Landlord’s submission thereof. If Tenant disapproves of such working drawings, then Tenant shall notify Landlord thereof specifying in reasonable detail the reasons for such disapproval. Landlord shall revise such working drawings in accordance with Tenant’s objections and submit the revised working drawings to Tenant for its review and approval. Tenant shall notify Landlord in writing whether it approves of the revised working drawings within two (2) business days after its receipt thereof. If Tenant fails to notify Landlord that it disapproves of the initial working drawings within three (3) business days (or, in the case of resubmitted working drawings, within two (2) business days) after the submission thereof, then Tenant shall be deemed to have

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approved the working drawings in question. The approved working drawings arc hereinafter referred to as the “Approved Working Drawings.”

2.Construction. Following approval of the Approved Working Drawings, Landlord shall construct the Tenant Improvements in substantial accordance with the Approved Working Drawings.

3.Warranties. Landlord shall use reasonable efforts to obtain a warranty from Landlord’s contractor against defects in materials and workmanship for one (l) year following substantial completion of the Tenant Improvements. Landlord hereby assigns to Tenant all warranties and guaranties by the contractor, and Tenant hereby waives all claims against Landlord relating to, or arising out of the construction of, the Tenant Improvements.

4.Miscellaneous.

(a)Provided the same will not interfere with the Landlord work, Landlord shall allow Tenant access to the Expansion Premises thirty (30) days prior to the substantial completion of the Tenant Improvements for the purpose of installing Tenant’s equipment or fixtures (including Tenant’s data and telephone equipment) in the Expansion Premises. Additionally, Landlord shall provide Tenant an allowance up to $19,224.00, upon receiving copies of paid receipts, to reimburse Tenant for moving expenses.

(b)Unless otherwise indicated, all references herein to a “number of days” shall mean and refer to calendar days. If any item requiring approval is timely disapproved by Landlord, the procedure for preparation of the document and approval thereof shall be repeated until the document is approved by Landlord.

(c)Notwithstanding any provision to the contrary contained in this Lease, if a default by Tenant has occurred at any time prior to substantial completion of the Tenant Improvements, then (i) in addition to all other rights and remedies granted to Landlord pursuant to this Lease, Landlord shall have the right to cause the contractor to cease the construction of the Expansion Premises (in which case, Tenant shall be responsible for any delay in substantial completion caused by such work stoppage); and (ii) all other obligations of Landlord under the terms of this Exhibit shall be forgiven until such time, if any, as such default may be cured.

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EX-10.18.2

EXHIBIT 10.18.2

SECOND AMENDMENT TO OFFICE LEASE

DATED JULY 18, 2005

BY AND BETWEEN ESCHELON TELECOM, Inc. (TENANT)

AND

ARI CENTRAL, LP AND DANARI CENTRAL, LLC (COLLECTIVELY

LANDLORD)

This Second AMENDMENT TO LEASE (“Second Amendment”) is made and entered into effective July 15, 2005, by and between ARI CENTRAL, LP a Delaware limited partnership and DANARI CENTRAL, LLC a Delaware limited liability company (Collectively “Landlord”), and Eschelon Telecom, Inc., a Delaware Corporation (“Tenant)”).

R E C I T A L S:

A.Landlord and Tenant entered into that certain Office Lease dated as of December 1, 1999, and First Amendment To Lease as of March 17, 2003, pursuant to which Landlord leased to Tenant and Tenant leased from Landlord certain “Premises” as described in the Lease, known as Suite 500 & 550 of the Building located at 2600 N. Central Avenue, Phoenix, AZ 85004.

B.Except as otherwise set forth herein, all capitalized terms used in this Second Amendment shall have the same meaning as such terms in the Lease.

C.Landlord and Tenant desire to add rentable square footage to the Premises.

NOW, THEREFORE, in consideration of the foregoing Recitals and mutual covenants contained herein, and for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1.Rentable Area of Expanded Premises. The Expanded Premises, as built out per Exhibit A attached hereto, shall comprise 1,923 rentable square feet in Suite 620.

2.Target Commencement Date. The parties hereby agree that the Target Commencement Date shall be August 1, 2005. The lease shall commence upon substantial completion of the Tenant Improvements and the Tenant taking occupancy of the premises.

3.Initial Base Rent. Base Rent for the Expanded Premises shall be as follows:

Month	Annual Rate PSF		Monthly Amount		Annual Amount
08/01/05 - 09-30-05	$	0.00	$	0.00	$	0.00
10/01/05-01/31/06	$	16.50	$	2,644.13	$	31,729.50
02/01/06 -04/31/07	$	17.00	$	2,724.25	$	32,691.00
02/01/07-01/31/08	$	17.50	$	2,804.38	$	33,652.5
02/01/08-01/31/09	$	18.00	82,884.50		$	34,614.00
02/01/09- 01/31/10	$	18.50	$	2,964.63	$	35,575.50
02/01/10-05/15/10	$	19.00	$	3,044.75	$	36,537.00

4.Tenant Share of Operating Expenses. Tenant’s share of operating expenses for the Expanded Premises shall be 0.59%.

5.Improvements. Landlord shall deliver to Tenant the Expanded Premises in as-is-where-is condition.

6.No Further Modification. Except as set forth in this First Amendment, all of the terms and provisions of the Lease shall remain in full force and effect.

IN WITNESS WHEREOF, this Second Amendment of Lease has been executed as of the day and year first above written.

“Landlord”

ARI CENTRAL, LP,a Delaware Limited Partnership
DANARI CENTRAL, LLC a Delaware Limited Liability Company

By:	Adler Realty Investments.Inc.
Title:	Manager

Title:	Executive Vice President

“Tenant”

Eschelon Telecom, Inc.

A Delaware Corporation

By:	/s/ Michael A. Donahue
Title:	V P Finance and Treasurer

EXHIBIT ‘A’

FIRST AMENDMENT TO LEASE

This First Amendment to Office Lease (“First Amendment”) is dated for reference purposes this 17^th day of March, 2003, between SOFI IV SIM OFFICE INVESTORS II, L.P., a Delaware limited partnership (“Landlord”) and ESCHELON TELECOM, INC., a Delaware corporation, formerly known as Advanced Telecommunications, Inc., a Delaware corporation (“Tenant”).

RECITALS

Landlord and Tenant entered into that certain Office Lease, dated December 1, 1999 the “Lease”, covering the office space located at the 2600 Tower, located at 2600 North Central Avenue, Phoenix, Arizona, 85004 (the “Project”), identified as Suite 500 consisting of approximately 6,028 square feet, reduced pursuant to this First Amendment to 5,545 square feet (the “Existing Premises”).

Pursuant to this First Amendment, Tenant wishes to lease an additional approximately 9,391 rentable square feet located adjacent to the Existing Premises (the “Additional Premises”) for a period of five (5) years and eight (8) months. Commencing on the Additional Premises Commencement Date (as defined below), all references to the “Premises” in the Lease and this First Amendment shall be deemed to refer collectively to the Existing Premises and the Additional Premises. The Lease and this First Amendment are collectively referred to as the “Lease”. Upon the terms and conditions contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant agree the Lease is amended as follows:

AGREEMENT

1.Effective Date. The effective date of the Lease amendments set out in this First Amendment is March 17, 2003 (the “Effective Date”).

2.Defined Terms. Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Lease.

3.Revised Summary of Basic Terms. Article I “Summary of Basic Terms” of the Lease is hereby amended and restated in its entirety with the amended and restated Article I “Summary of Basic Terms” attached as Schedule 1 attached hereto and incorporated herein by reference.

4.Lease of Additional Premises. Upon and subject to the terms and conditions as set forth in this First Amendment and the Lease, Landlord hereby leases to Tenant and Tenant hereby leases from Landlord those certain premises consisting of approximately 9,391 rentable square feet located on the fifth floor adjacent to the Existing Premises, as depicted on Schedule 2 attached hereto and incorporated by this reference and described herein as the Additional Premises. The term of the Lease, as it applies to the Additional Premises, shall commence upon the earlier of (a) the date of Substantial Completion of the Additional Premises Tenant Improvements, which is currently estimated to be June 1, 2003 (the “Delivery Date”); (b) the date Tenant commences business operations in the Additional Premises; or (c) the date Substantial Completion of the Additional Premises Tenant Improvements would have occurred but for Tenant Delay (the foregoing terms are defined in Exhibit A). If Landlord does not tender

possession of the Additional Premises to Tenant on or before the Delivery Date, subject to Force Majeure and Tenant Delay, Landlord will pay to Tenant an amount equal to $17,897.00 (the “Penalty Fee”) in cash within thirty (30) days of the Delivery Date. If Landlord is unable to tender possession of the Premises to Tenant on or before the Delivery Date, the Lease, as it applies to the Additional Premises, remains in full force and effect and Landlord is not liable to Tenant for any resulting loss or damage, except for the payment of the Penalty Fee; provided, however, that unless the delay is caused by Tenant Delay, Additional Premises Base Rent shall abate on a day-for-day basis for those days (after the Delivery Date) during which Landlord is unable to tender possession of the Additional Premises to Tenant. The expiration date of the Lease, as it applies to the Additional Premises, shall expire on February 1, 2009, unless sooner terminated pursuant to the provisions of the Lease (the “Additional Premises Termination Date”). The “Additional Premises Term” of the Lease shall commence on the Additional Premises Commencement Date and terminate on the Additional Premises Termination Date.

5.Additional Premises Tenant Improvements. Tenant acknowledges, represents and agrees to the following: (i) Tenant shall be responsible for making its own inspection and investigation of the Additional Premises and other portions of the Building, (ii) Tenant shall be responsible for investigating and establishing the suitability of the Additional Premises for Tenant’s intended use thereof, and all zoning and regulatory matters pertinent thereto, (iii) Tenant is leasing the Additional Premises “AS IS” based on its own inspection and investigation after the expiration of the thirty (30) day “punch list” period and not in reliance on any statement, representation, inducement or agreement of Landlord or its agents, employees or representatives, except as expressly set forth elsewhere in the Lease, (iv) the Additional Premises, upon the earlier of Tenant’s possession or Tenant’s entry into the Additional Premises to construct or install improvements, were in good order and satisfactory condition, and (v) no rights to light or air over any property, whether belonging to Landlord or any other person, are granted to Tenant by this Lease.

Landlord shall perform the demolition, remodeling, replacement and/or installation work provided for on Exhibit A attached hereto (“Additional Premises Tenant Improvements”). For the purposes of the Lease, as it applies to the Additional Premises, possession of the Additional Premises shall be deemed delivered or tendered to Tenant, and accepted by Tenant (subject to Landlord’s obligation to complete Punch List items), upon Substantial Completion (as those terms are defined in Exhibit A) and Landlord has given Tenant written notice thereto.

6.Parking. Article 3.9 of the Lease is hereby amended and replaced with the following:

Existing Premises:

#of Spaces	Parking Area	Price per Space	Total Price
Up to 6	open unreserved	@ then current building rates

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Additional Premises:

Landlord shall license vehicle parking spaces to Tenant and Tenant’s business on the following terms and conditions:

Landlord shall provide eight (8) vehicular parking spaces as exclusive parking spaces for Tenant and its employees in the parking garage portion of the Office Complex (“Reserved Covered Spaces”). This license is for Reserved Covered Spaces in the general parking area to be designated and redesignated from time to time by Landlord; provided, however, Landlord may require Tenant to park in a specific location. Landlord shall not be liable to Tenant for the failure of any of its tenants, invitees, employees, agents or customers or any third parties to comply with the designation of the Reserved Covered Spaces.

Landlord shall provide thirty-two (32) vehicular parking spaces on a covered unreserved basis for Tenant and its employees in the unreserved portion of the parking garage portion of the Office Complex (the “Unreserved Covered Spaces”). This license is for Unreserved Covered Spaces in the general parking area to be designated and redesignated from time to time by Landlord; provided, however, Landlord may require Tenant to park in a specific location. Landlord shall not be liable to Tenant for the failure of any of its tenants, invitees, employees, agents or customers or any third parties to comply with the designation of the Unreserved Covered Spaces.

Landlord shall provide ten (10) vehicular parking spaces on an unreserved basis for Tenant and its employees in the surface parking facility serving the Office Complex (“Surface Spaces”). This license is for Surface Spaces in the unreserved portion of the surface parking lot to be designated and redesignated from time to time by Landlord; provided, however, Landlord may require Tenant to park in a specific location. Landlord shall not be liable to Tenant for the failure of any of its tenants, invitees, employees, agents or customers or any third parties to comply with the designation of the Surface Spaces.

The parking fees for the Reserved Covered Spaces, the Unreserved Covered Spaces and the Surface Spaces, as they relate to the Additional Premises, shall be abated for the first forty-one (41) months of the Additional Premises Term hereof; provided, however, that all other charges related to parking (such as charges for parking garage access devices and name plates for reserved spaces) shall be paid for by Tenant upon receipt of invoice from Landlord. Thereafter, Tenant agrees to pay as a monthly fee for such license of parking spaces payable on or before the first day of each month in advance as follows: during the last twenty-four (24)

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months of the Additional Premises Term, $1,000.00 each month for the parking spaces relating to the Additional Premises. Tenant shall be entitled to fifty (50) hours of parking validation each month for the Additional Premises Term at no charge to Tenant. If the Lease, as it relates to the Additional Premises, is terminated for any reason, the Tenant’s license as to the parking spaces relating to the Additional Premises shall be immediately revoked.

Only vehicles designated by Tenant to Landlord may be parked or stored therein; provided, however, that Tenant may change its automobile designations at any time upon written notice to Landlord or for temporary use upon notification given to the garage attendant, if any. No more than one automobile per space licensed hereunder shall be parked or stored under Tenant’s rights hereunder at any one time.

This license is for self-service storage or parking only and does not include the rights to any additional services, which services may be made available by Landlord from time to time at an additional charge.

It is understood that Landlord and its agents and employees shall not be liable for loss or damage to any vehicle parked or stored by Tenant or under Tenant’s rights herein and/or to the contents thereof caused by fire, theft, explosion, freezing of circulation system of any automobile, strikes, riots or by any other causes and Tenant (1) waives any claim against Landlord for and in respect thereto, and (2) hereby agrees to indemnify and defend Landlord against all claims for any loss or damage to any such vehicle or its contents from any cause whatsoever. It is further expressly understood that the relationship between Landlord and Tenant with respect to the parking spaces constitutes a license to use said garage subject to the terms and conditions herein only and that neither such relationship nor the storage or parking of any automobile thereunder shall constitute a bailment nor create the relationship of bailor and bailee.

In the event the garage referenced shall be damaged by fire or other casualty rendering it unusable by Tenant, the fee provided for herein shall be abated (pro rata based on the portion of the Tenant’s stalls which are unusable) from the date ten (10) days after the date the garage becomes unusable until it again becomes usable. Further, if all or any part of the garage is taken by eminent domain proceedings, Landlord shall be entitled to all of the award in the proceedings and may terminate this parking arrangement in the event of a total taking or reduce the number of stalls licensed hereunder in proportion to the extent of any partial taking upon

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written notice to Tenant. If the garage is damaged by fire or other casualty, Landlord will cause it to be repaired with due diligence.

Subject to the abatement provided for in the preceding paragraph, Landlord shall have the right to close any portion of the garage and deny access thereto in connection with any repairs or in an emergency, as it may require, without liability, cost or abatement of fee.

Tenant shall perform, observe and comply with such rules of the Office Complex as may be reasonably adopted by Landlord in respect to the use and operation of said garage.

Tenant shall, when using the parking facilities of said garage, observe and obey all signs regarding fire lanes and no parking zones, and when parking always park between designated lines. Landlord reserves the right to tow away, or otherwise impound, at the expense of the owner or operator, any vehicle which is improperly parked or parked in a no parking zone.

In the event a key or other access device is supplied by Landlord to Tenant in connection with the rights granted herein, Tenant will surrender such key or access device to Landlord upon termination of this Lease.

7.Right to Terminate. Provided that the Lease is then in full force and effect and Tenant is not in default, on the date of exercise of this Option, after notice and the expiration of any applicable grace period, Tenant may terminate the Lease, as it applies to the Additional Premises, as of the last day of the 44^th month following the Additional Premises Commencement Date (the “Early Termination Date”) subject to and in accordance with this Section 7. To exercise such termination right, Tenant must (a) deliver written notice to Landlord that Tenant desires to terminate the Lease, as it applies to the Additional Premises, as of the Early Termination Date at least ninety (90) days prior to the Early Termination Date; and (b) immediately pay Landlord a payment, as each relates to the Additional Premises, equal to Landlord’s then unamortized costs of the Additional Premises Tenant Improvements, moving allowance, leasing commissions and two (2) months Additional Premises Base Rent at the rate then in effect. If Tenant terminates the Lease, as it applies to the Additional Premises, Landlord, at its sole cost and expense, shall restore that portion of the demising wall that separated the Existing Premises from the Additional Premises to its condition existing prior to the construction of the Additional Premises and Tenant agrees to allow Landlord to temporarily occupy the Existing Premises in order to accomplish such construction.

8.Tenant’s Option to Renew the Additional Premises Term.

(A)Provided that the Lease is then in full force and effect and Tenant is not in default, on the date of exercise of this Option, after notice and the expiration of any applicable grace period, Tenant shall have the option to extend the Additional Premises Term of the Lease for one

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(1) period of three (3) years (the “Additional Premises Extension Term”) by notice given to Landlord at least four (4), but no more than twelve (12), months prior to the termination of the Additional Premises Term. The Additional Premises Extension Term shall commence on the first day after the initial Additional Premises Term and shall expire on the third (3^rd) anniversary of such day unless the Additional Premises Extension Term shall sooner end pursuant to the Lease.

(B)The terms and conditions shall be identical to those in the Lease that relate to the Additional Premises except for the rental rate, which shall be determined in accordance with Article 26.13 (1)(A) of the Lease.

9.Tenant’s Option to Renew the Existing Premises Term: Article 26.13(1)(A) of the Lease is hereby amended and replaced with the following:

(A)Provided that the Lease is then in full force and effect and Tenant is not in default, on the date of exercise of this Option, hereunder after notice and the expiration of any applicable grace period, Tenant shall have the option to extend the Term for two (2) additional periods of five (5) years each (the “Extension Term(s)”) by notice given to Landlord at least four (4), but no more than twelve (12), months prior to the termination of the Term. The Extension Term(s) shall commence on the day after the initial Lease term and the prior Extension Term (if any) expires (“Expiration Date(s)”) and shall expire on the fifth (5^th) anniversary of the Expiration Date(s) unless the Extension Term(s) shall sooner end pursuant to this Lease.

10.Signage. Article 14 of the Lease is hereby amended and replaced with the following:

ARTICLE 14. SIGNS

Landlord to provide to Tenant (a) one building standard tenant identification sign adjacent to the entry door of the Premises and (b) standard building directory listings on the directories in the main lobby. In the event Landlord installs an exterior monument sign and provided Tenant, at its sole cost and expense, receives all necessary governmental and quasi-governmental approvals therefore, Landlord will allow Tenant, at Tenant’s sole cost and expense, to install one non-illuminated sign on such exterior monument sign, which sign will be Tenant’s name, “subordinate” to Landlord’s building designation sign, if any. Tenant must pay all governmental and other permit fees at its sole cost and expense, must remove same prior to termination of the Lease, and must repair and restore any damage to the Building caused by such installation and/or removal. Any such sign and the display of Tenant’s name thereon will be subject to the terms of any restrictive covenants applicable thereto and all laws.

11.HVAC. Article 27(A) of the Lease is hereby amended with the addition of the following:

Subject to limitations imposed by governmental rules, regulations and guidelines applicable thereto, Landlord shall provide HVAC when necessary for normal comfort and normal office use in the Premises during Normal Business Hours. If

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Tenant uses HVAC in excess of that supplied by Landlord pursuant to this Article 27(A), Tenant shall pay to Landlord, upon billing, the actual cost of such of such excess consumption, provided, however, that after-hours HVAC usage shall be billed to Tenant based upon rates as reasonably established by Landlord from time to time, which rates are currently estimated to be $8.50 per hour per Zone (as hereinafter defined). A zone covers approximately 1200 square feet (a “Zone”) and each floor contains 13 Zones. Tenant shall be entitled to a credit equal to twenty (20) hours excess HVAC usage each month for the Additional Premises during the Additional Premises Term. Any unused credits for any Zone in any month may not be carried forward or applied to any other Zone or any other month.

12.Moving Expenses. The following is added as a new Article 36:

ARTICLE 36. MOVING EXPENSES

In connection with Tenant’s relocation of the Tenant’s personal property to the Additional Premises, Landlord will pay to Tenant an amount equal to $1.50 per rentable square foot of the Additional Premises. Such moving allowance will be paid by Landlord to Tenant in cash within 30 days of the Additional Premises Commencement Date.

13.Storage.If requested by Tenant and to the extent available, Landlord to provide storage space in the parking facilities portion of the Building, for Tenant’s exclusive use as storage for personal property used in connection with Tenant’s occupancy of the Premises. The location of the storage space will be determined by Landlord in its sole discretion. Tenant will pay Landlord annually $12.00 per square foot of storage space for the storage space, payable monthly in advance, in equal installments at the same time and manner as Existing Premises Base Rent or Additional Premises Base Rent, as applicable.

14.Brokerage. Article 24 of the Lease is hereby amended with the addition of the following:

“Landlord will pay any brokers named in Section 1.16 in accordance with the applicable listing agreement for the Building.”

15.Operating Costs. With respect to the Additional Premises, for each calendar year, Tenant’s obligation to pay Operating Costs shall not increase, on an annual and cumulative basis, by an amount greater than five percent (5.0%) per year following the initial lease year.

16.Existing Premises Rentable Square Footage. The rentable square footage of the Existing Premises is hereby reduced from 6,028 to 5,545.

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IN WITNESS WHEREOF, Landlord and Tenant have executed this First Amendment to the Lease on the date first written above.

Landlord:
SOFI IV-SPM PORTFOLIO XI, L.L.C., a Delaware limited liability company
By:	SOFI IV-SPM Maricopa, L.P., General Manager
	By:	SOFI IV ARIZONA TRUST, General Partner
		By:	/s/ Mark M. Grumley
		Name:		Mark M. Grumley
		Title:		Vice President

Tenant:
ESCHELON TELECOMMUNICATIONS, INC., a Delaware corporation, formerly known as Advanced Telecommunications, Inc., a Delaware corporation
By:	/s/ Michael A. Donahue
Name:	Michael A. Donahue
Its:	V P Finance and Treasurer

SCHEDULE 1

ARTICLE 1 SUMMARY OF BASIC TERMS

1.1The Existing Premises: Suite #500 in the building consisting of approximately 5,545 square feet of rentable area as illustrated on the attached Exhibit A; The Additional Premises: Suite #550 in the Building consisting of approximately 9,391 rentable square feet of rentable area as illustrated on the attached Exhibit A. A floor plan for the floor(s) on which the Premises is located is attached as Exhibit A-l.

1.2The Building: The building is located at 2600 North Central Avenue, Phoenix, Arizona.

1.3“Project” means the Building identified in Section 1.2, and all lands and facilities used in connection with the Building as reasonably determined from time to time by Landlord. The Project consists of approximately 322,000 square feet of rentable area.

1.4Names of Guarantors: None.

1.5Existing Premises Security Deposit: $12,000.00; Additional Premises Security Deposit: $0 (see provisions of Article 4)

1.6The Existing Premises Term: Ten (10) years and four (4) months, beginning on the Commencement Date and ending on the Expiration Date; The Additional Premises Term: Five (5) years and eight (8) months, beginning on the Additional Premises Commencement Date and ending on the Additional Premises Expiration Date.

1.7Existing Premises Commencement and Expiration Dates: January 15, 2000, and May 15, 2010, respectively, subject to the provisions of Exhibit A; Additional Premises Commencement and Expiration Dates: June 1, 2003 and February 1, 2009.

1.8Existing Premises Base Rent:

Lease Year	Annual Base Rent		Base Rent Per Square Foot		Monthly Base Rent
1	$	120,560.00	$	20.00/sq. ft.	$	10,046.67
2	$	124,176.80	$	20.60/sq. ft.	$	10,348.07
3	$	127,914.16	$	21.22/sq. ft.	$	10,659.51
Month 36 – Additional Premises Commencement Date	$	131,772.08	$	21.86/sq. ft.	$	10,981.01
Additional Premises	$	121,213.70	$	21.86/sq. ft.	$	10,101.14

Lease Year	Annual Base Rent		Base Rent Per Square Foot		Monthly Base Rent
Commencement Date – Month 42
5	$	124,873.40	$	22.52/sq. ft.	10,406.12
6	$	128,644.00	$	23.20/sq. ft.	$	10,720.33
7	$	132,525.50	$	23.90/sq. ft.	$	11,043.79
8	$	136,517.90	$	24.62/sq. ft.	$	11,376.49
9	$	140,621.20	$	25.36/sq. ft.	11,718.43
10	$	144,835.40	$	26.12/sq. ft.	$	12,069.62

Additional Premises Base Rent:

Lease Months	Annual Base Rent		Base Rent Per Square Foot		Monthly Base Rent
01-08	$	0	$	0	$	0
09-20	$	154,951.50	$	16.50/sq. ft.	$	12,912.63
21-32	$	159,647.00	$	17.00/sq. ft.	$	13,303.92
33-44	$	164,342.50	$	17.50/sq. ft.	$	13,695.21
45-56	$	169,038.00	$	18.00/sq. ft.	$	14,086.50
57-68	$	173,733.50	$	18.50/sq. ft.	$	14,477.79

1.9Tenant’s Proportionate Share: 1.72% for the Existing Premises and 2.92% for the Additional Premises, consisting of the proportion that the rentable area of the Existing Premises or the Additional Premises, as applicable, bears to the rentable area of the Project.

1.10Existing Premises Base Year: 2000; Additional Premises Base Year: 2003

1.11Description of Tenant’s Business: Executive and general office use, the installation, operation and maintenance of equipment and facilities in connection with Tenant’s telecommunication business, including but not limited to telecommunications switch.

1.12Normal Business Hours: 7:00 a.m. to 6:00 p.m., Monday through Friday, 8:00 a.m. to 1:00 p.m. on Saturday.

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1.13Additional Premises Tenant Improvement Allowance: Landlord to deliver the Additional Premises to Tenant “turnkey” per space plan prepared by Mittelstaedt Cooper & Associates dated January 8, 2003, using building standard materials (“Original Plan”). Notwithstanding anything to the contrary contained herein, Landlord’s obligation relating to the Additional Premises Tenant Improvements shall be limited to costs per Original Plan.

1.14Landlord shall commence construction of the fifth floor common area remodel (“Common Area Improvements”) within thirty (30) days after completion of the Additional Premises Tenant Improvements and shall, at Landlord’s sole expense, complete the Common Area Improvements in a timely manner, subject to Force Majeure and Tenant Delay.

1.15Additional Premises Load Factor: 6%.

1.16Tenant’s Address for Pre-occupancy Notices:

730 2^nd Avenue South, #1200
Minneapolis, MN 55402

1.17Landlord’s Notice Address:

Starwood Asset Management
2525 East Camelback Road
Suite 740
Phoenix, AZ 85016
Attn.: Mark M. Grumley
Phone: (602) 468-0112
Facsimile: (602) 468-1567

Copy to:

Rinaldi, Finkelstein & Franklin, LLC
591 West Putnam Avenue
Greenwich, CT 06830
Attn.: Eric W. Franklin, Esq.
Phone: (203) 422-7768
Facsimile: (203) 422-7868

Copy to:

CB Richard Ellis
2415 East Camelback Road
Ground Floor
Phoenix, AZ 85016
Attn.: Asset Service
Phone: (602) 735-5445

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Facsimile: (602) 735-5113

1.18Existing Premises Landlord’s designated broker: Scottsdale Property Manager 97, L.L.C; Additional Premises Landlord’s designated broker: CB Richard Ellis, Inc.

1.19Existing Premises Tenant’s designated broker: Eric Hamm, TELECOM Real Estate Services; Additional Premises Tenant’s designated broker: CRESA Partners

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SCHEDULE “2”

Floor Plan

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EXHIBIT “A”

CONSTRUCTION OF ADDITIONAL PREMISES TENANT IMPROVEMENTS

1.Additional Premises Tenant Improvements. Landlord will cause to be constructed all Additional Premises Tenant Improvements. The Additional Premises Tenant Improvements will be designed as described in this Exhibit A. The cost of constructing the Additional Premises Tenant Improvements will include all of Landlord’s direct and indirect costs in connection with the design and construction of the Additional Premises Tenant Improvements initially to be constructed in the Additional Premises, plus a percentage (not to exceed five percent [5%]) of the sum of all such direct and indirect costs for Landlord’s overhead and profit. Such costs of Landlord may include, without limitation, space planning costs, construction document preparation costs, design costs, construction drawing costs, general conditions, construction costs and all costs Landlord incurs in connection with obtaining permits for the Additional Premises Tenant Improvements. The Additional Premises Tenant Improvements become the property of Landlord and a part of the Property immediately upon installation. Landlord agrees to use reasonable efforts to competitively bid the work for the construction of the Additional Premises Tenant Improvements.

2.Additional Premises Tenant Improvement Allowance. Landlord will pay an amount equal to the cost to deliver the Additional Premises to Tenant “turnkey” per space plan prepared by Mittelstaedt Cooper & Associates dated January 8, 2003, using building standard materials (“Original Plan”) (the “Additional Premises Improvement Allowance”), for the design and installation of the Additional Premises Tenant Improvements. Landlord is not obligated to pay or incur any amounts that exceed the Additional Premises Improvement Allowance. If the cost of the Additional Premises Tenant Improvements exceeds the Additional Premises Improvement Allowance, then Tenant will pay the excess to Landlord in cash within ten (10) days after demand. Tenant will also pay all of Landlord’s costs (including lost rent) resulting from any Tenant Delay. If Landlord at any time reasonably estimates that the cost of the Additional Premises Tenant Improvements will exceed the Additional Premises Improvement Allowance, Tenant shall immediately deposit with Landlord the amount by which the cost of the Additional Premises Tenant Improvements exceeds the Additional Premises Improvement Allowance.

3.Space Plan. [Intentionally Deleted].

4.Additional Premises Construction Drawings. Landlord will provide Tenant with the Additional Premises Construction Drawings and Specifications. Tenant will approve or disapprove (specifically describing any reasons for disapproval) the Additional Premises Construction Drawings and Specifications in writing within three (3) business days after receiving them. Any failure by Tenant to timely deliver such approval or disapproval is a Tenant Delay until received. If Tenant disapproves the Additional Premises Construction Drawings and Specifications, Landlord will provide appropriately revised Additional Premises Construction Drawings and Specifications to Tenant for approval (or disapproval) on the same basis as set forth above. If the review and approval process is not concluded (with Tenant having approved

the Additional Premises Construction Drawings and Specifications) on or before          , 2003, then such delay is a Tenant Delay until Tenant’s approval is received. After Tenant’s approval, Landlord will submit the Additional Premises Construction Drawings and Specifications for permits and construction bids. Tenant will not withhold any approval except for reasonable cause and will not act in an arbitrary or capricious manner in connection with the review, revision, approval or disapproval of the Additional Premises Construction Drawings and Specifications. Tenant will not specify long lead time items that would delay Substantial Completion of the Additional Premises Tenant Improvements.

5.Change Orders. Tenant will immediately notify Landlord if Tenant desires to make any changes to the Additional Premises Tenant Improvements after Tenant has approved the Additional Premises Construction Drawings and Specifications. If Landlord approves the revisions, Landlord will notify Tenant of the anticipated additional cost and delay in completing the Additional Premises Tenant Improvements that would be caused by such revisions. Tenant will approve or disapprove the increased cost and delay within five (5) business days after such notice. If Tenant approves, Landlord will prepare, and Landlord and Tenant will execute, a Change Order describing the revisions and the anticipated additional cost and delay. Any delay relating to a request for revisions or a Change Order is a Tenant Delay. If the Change Order causes the cost of the Additional Premises Tenant Improvements to exceed the Additional Premises Improvement Allowance (or if the cost of the Additional Premises Tenant Improvements already exceeds the Additional Premises Improvement Allowance), Tenant shall prepay the added costs of the Change Order.

6.Substantial Completion: Punch List. As used in this Lease, “Substantial Completion” means the earlier to occur of the following: (a) the issuance of all final unconditional approvals and green tags by the governmental authority exercising jurisdiction over the Additional Premises Tenant Improvements signifying the final and unconditional acceptance and approval of the Additional Premises Tenant Improvements, (b) the date a Certificate of Occupancy is issued for the Additional Premises, and (c) if a Certificate of Occupancy is not required, the date Tenant is reasonably able to take occupancy of the Additional Premises; provided that if either (a), (b) or (c) is delayed or prevented because of work Tenant is responsible for performing in the Additional Premises, “Substantial Completion” means the date that all of Landlord’s work which is necessary for either (a), (b) or (c) to occur has been performed and Landlord has made the Additional Premises available to Tenant for the performance of Tenant’s work. Within thirty (30) days after Substantial Completion, Landlord and Tenant will inspect the Additional Premises and develop a Punch List. Landlord will cause the items listed on the Punch List to be completed with commercially reasonable diligence and speed, subject to Tenant Delay and Force Majeure. If Tenant refuses to inspect the Additional Premises with Landlord within the 30-day period, Tenant is deemed to have accepted the Additional Premises as delivered. Tenant will not occupy the Additional Premises before Substantial Completion without Landlord’s prior written consent, which consent Landlord may grant, withhold or condition in its sole and absolute discretion. If Landlord consents, during the early occupancy period Tenant may only install Tenant’s furniture, fixtures and equipment in the Additional Premises and must comply with and observe all terms and conditions of this Lease (other than Tenant’s obligation to pay Additional Premises Base Rent).

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7.Force Majeure. As used in this Lease, “Force Majeure” means acts of God; strikes; lockouts; labor troubles; inability to procure materials; inclement weather; governmental laws or regulations; casualty; orders or directives of any legislative, administrative, or judicial body or any governmental department; inability to obtain any governmental licenses, permissions or authorities (despite commercially reasonable pursuit of such licenses, permissions or authorities); and other similar or dissimilar causes beyond Landlord’s reasonable control.

8.Tenant Delay. “Tenant Delay” means any delay caused or contributed to by Tenant, including, without limitation, with respect to the Additional Premises Tenant Improvements, Tenant’s failure to timely prepare or approve the Additional Premises Construction Drawings and Specifications, and any delay from any revisions Tenant proposes to approved Additional Premises Construction Drawings and Specifications. A Tenant Delay excuses Landlord’s performance of any obligation related thereto for a period equal to (a) the duration of the act, occurrence or omission that constitutes the Tenant Delay, or (b) if longer, the period of delay actually caused by such Tenant Delay.

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EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-128319) and in the Registration Statement on Form S-3 (No. 333-131462) of our report dated February 17, 2006, with respect to the consolidated financial statements and schedule of Eschelon Telecom, Inc. includ ed in this Annual Report (Form 10-K) for the year ended December 31, 2005.

/s/ Ernst & Young LLP

Minneapolis, Minnesota

March 13, 2006

EX-31.1

Exhibit 31.1

Certification of Chief Executive Officer

I, Richard A. Smith, certify that:

1.I have reviewed this annual report on Form 10-K of Eschelon Telecom, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact

necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all

material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and

procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of period covered by this report based on such evaluation; and

c)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal controls over

financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors:

a)all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

March 17, 2006
Sign:		/S/        Richard A. Smith
		Richard A. Smith
	President and Chief Executive Officer

EX-31.2

Exhibit 31.2

Certification of Chief Financial Officer

I, Geoffrey M. Boyd, certify that:

1.I have reviewed this quarterly report on Form 10-K of Eschelon Telecom, Inc.,

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact

necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all

material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and

procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of period covered by this report based on such evaluation; and

c)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal controls over

financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors:

a)all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

March 17, 2006
Sign:	/S/       Geoffrey M. Boyd
	Geoffrey M. Boyd
	Chief Financial Officer

EX-32.1

Exhibit 32.1

Certification of Chief Executive Officer
Pursuant to 18 U.S.C. § 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002

Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Eschelon Telecom, Inc. (the “Company”) hereby certifies, to such officer’s knowledge, that:

(i)the accompanying Annual Report on Form 10-K of the Company for the year ended December 31, 2005 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(ii)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Sign:	/S/   Richard A. Smith
Richard A. Smith
President and Chief Executive Officer
March 17, 2006

EX-32.2

Exhibit 32.2

Certification of Chief Financial Officer
Pursuant to 18 U.S.C. § 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002

Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Eschelon Telecom, Inc. (the “Company”) hereby certifies, to such officer’s knowledge, that:

(i)the accompanying Annual Report on Form 10-K of the Company for the year ended December 31, 2005 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(ii)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Sign:	/S/   Geoffrey M. Boyd
Geoffrey M. Boyd
Chief Financial Officer
March 17, 2006