10-K

As filed with the Securities and Exchange Commission on March 12, 2007

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, 2006

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:

Title of each class	Name of each exchange on which registered
Common Stock, par value $0.01 per share	The NASDAQ Global Market

Securities Registered Pursuant to Section 12(g) of the Act:

None

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 not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to the Form 10-K. o

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

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

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 June 30, 2006, the aggregate market value of the common stock held by non-affiliates of the registrant was $160,416,737 based on a closing price of $15.47 on The NASDAQ Global Market on such date.

As of February 28, 2007, the number of outstanding shares of the registrant’s Common Stock, par value $0.01 per share, was 18,065,141 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 2007 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	19
Item 1B.	Unresolved Staff Comments	27
Item 2.	Properties	28
Item 3.	Legal Proceedings	28
Item 4.	Submission of Matters to a Vote of Security Holders	28

Part II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	29
Item 6.	Selected Financial Data	30
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	33
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	43
Item 8.	Financial Statements and Supplementary Data	44
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	44
Item 9A.	Controls and Procedures	44
Item 9B.	Other Information	46

Part III

Item 10.	Directors, Executive Officers and Corporate Governance	47
Item 11.	Executive Compensation	47
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	47
Item 13.	Certain Relationships and Related Transactions, and Director Independence	47
Item 14.	Principal Accounting Fees and Services	47

Part IV

Item 15. Exhibits, Financial Statement Schedules 48

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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 originally incorporated in Minnesota in 1996 under the name Advanced Telecommunications, Inc. and subsequently its state of incorporation was changed to Delaware. We are a leading facilities-based provider of integrated voice and data communications services to small and medium-sized businesses in 45 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 2006 and 2005 averaged 1.28% and 1.34%, respectively. As of December 31, 2006, we provided service through approximately 598,000 total access lines. For the year ended December 31, 2006, we generated consolidated revenue of $274.5 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 eight Nortel DMS 500 voice switches, seven Lucent 5ESS voice switches, 10 Nortel Passport ATM switches and a Cisco IP network. We have physical colocations in 150 unique 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, 2006, approximately 85% of our total access lines in service were served on our network, which we refer to as “on-net”. In addition, for 2006, new access lines installed on-net represented 95% of our total new access lines installed.

On April 1, 2006, we acquired Oregon Telecom, Inc. (“OTI”) a privately-held competitive services provider based in Salem, Oregon for $20.3 million. The acquisition expands our market presence in the Pacific Northwest. On October 1, 2006, we completed the acquisition of OneEighty Communications, Inc. (“OneEighty”), a competitive services provider based in Billings, Montana for $10.2 million. The acquisition of OneEighty establishes a market presence in Montana. On November 1, 2006, we completed the acquisition of Mountain Telecommunications, Inc. (“MTI”), a competitive services provider based in Tempe, Arizona for $37.3 million. MTI provides services in Phoenix, Tucson and markets throughout the state of Arizona expanding our market presence in Arizona. We also have signed an agreement with Tel West Communications, LLC (“TelWest”) whereby we would acquire their access lines for $500 per line as we migrated them to our network. We expect to acquire and migrate approximately 11,000 lines from TelWest by March 31, 2007.

On February 19, 2007, we announced that a definitive agreement had been signed to acquire United Communications, Inc. (“UNICOM”), a privately-held competitive services provider based in Bend, Oregon. We will pay approximately $13.9 million to acquire UNICOM. The acquisition is expected to close in the second quarter of 2007.

Industry Overview

For 2006, IDC, an independent industry research firm, estimated telecommunications spending by business customers would be $330 billion. This spending level is expected to grow to approximately $340 billion by 2009. The compound average growth rate of data services from 2005 to 2009 is expected to be 12.8%, while the rate for voice services over the same period is forecasted to decline 2.2%. In 2005, according to the Federal Communications Commission (“FCC”), there were 178.2 million switched access lines in service to end-users and competitive local exchange carriers served over 34.1 million lines of those lines.

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Our Markets

We operate in 45 markets in the states of Arizona, California, Colorado, Minnesota, Montana, Nevada, Oregon, Utah and Washington. According to the U.S. Census Bureau, the states where we provide service are among the fastest growing in terms of population in the nation. All of our states are among the top 25 fastest growing states, with Nevada and Arizona ranking as the two fastest growing states in the country. From 2000 to 2006, it is estimated that the population in our states grew 9.5%, which is significantly faster than the national average of 6.4%.

Products and Services

We provide our customers a complete package of voice, data and BTS products and services. Within our three product lines, we provide a wide range of alternatives and customized service packages allowing us to reach a large 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. Our services include “1+” outbound calling, inbound toll free service and associated 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, broadband Internet access and DSL, 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.

The following table summarizes our product and service offerings:

Voice Services	Data Services	Business Telephone Systems
Local Analog and Digital Services	Dial-Up, Dedicated and Broadband Internet Access	Customer Premise Telephone Equipment and Accessories
Vertical Features	Point to Point Services	Data Communications Equipment
Long Distance	SPAM Filtering	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 and competitive analysis for each market. We provide incentives to our sales force to focus on selling customized packages that can be serviced on-net. For 2006, 98% of our total access lines sold were on-net.

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As of December 31, 2006, our direct sales force consisted of 265 network communications specialists and 42 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 also sell our services and systems to complement the sales of our direct sales force. This agent channel reaches customer segments that are generally not available to our direct sales force. In 2006 our agent channel accounted for approximately 12% of our access lines sold.

As a result of our direct sales strategy, we generally have not spent funds on television, radio or multi-media advertising. However, we intend to continue our involvement in local community activities in each of our markets in order to create more publicity and name 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 2006, we did not have any end-user customer representing more than 1% of our total revenue. We do not generate a significant amount of wholesale carrier revenue (other than carrier access and reciprocal compensation revenue) or wholesale Internet service provider revenue. We currently serve over 60,000 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 markets and in our call centers. Each new 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 large and multiple location accounts and local account managers responsible for single market accounts. The local and national account managers coordinate service requests with our 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 calls within 20 seconds. Our call centers are 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.

Due to our sales force expansion and recently acquired TelWest lines, our installation backlog has increased. We expect backlog to return to our targeted level over the next 3-4 months.

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Network Overview and Deployment

We have constructed our network around owned switching and colocation equipment. Our network is a system of switches and equipment colocated in Regional Bell Operating Companies (“RBOC”) central offices or carrier hotels that are interconnected using company operated fiber rings and leased transport, which is then linked to customers’ premises using leased loops. In almost all cases, we purchase the last mile connection from the RBOC.

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 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 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 150 unique 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 offerings. We have also deployed Adtran 4303 and Verso 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, Adtran 4303, Sechtor 300 and Nokia devices are high density voice and data equipment that fit into a single network bay, thereby reducing costly colocation space required in RBOC central offices.

Intra-City Transport Deployment.   We utilize fiber transport in a SONET ring configuration to connect host sites to RBOC colocations. We also 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 Backbone Network.   Our Cisco routers and Nortel Passport ATM switches provide data traffic switching in our major markets. These devices are interconnected through leased long-haul transport obtained from multiple wholesale providers. This backbone carries IP data traffic between switch locations. Customer access to the Internet and virtual private networks travel over this network. We utilize 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 2006, 72% 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 the majority of the estimated business access lines within our selling areas.

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·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.   We have commercial agreements in place that replace UNE-P platform in both the Qwest and Verizon territories in which we operate.

·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 of 1996, or (“the Telecom 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 Telecom Act radically altered the market opportunity for new competitive service providers. Because the Telecom 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, 2007, we had 1,390 full-time equivalent employees. Twenty-seven field service technicians are members of the International Brotherhood of Electrical Workers (IBEW). A collective bargaining agreement with the IBEW 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, 2006 are as follows:

Name	Age	Start of Service	Position(s)
Executive Officers:
Clifford D. Williams	59	1996	Chairman of the Board and Founder
Richard A. Smith	56	1998	Director, President and Chief Executive Officer
Geoffrey M. Boyd	39	2000	Chief Financial Officer
Robert E. Pickens	46	1996	Chief Operating Officer
David A. Kunde	47	1999	Executive Vice President, Engineering and Network Operations
Arlin B. Goldberg	50	1996	Executive Vice President, Information Technology
J. Jeffery Oxley	52	1999	Executive Vice President, Law and Policy
Steven K. Wachter	45	1999	Executive Vice President, Sales
William D. Markert	42	1999	Executive Vice President, Network Financial Management
Non-Management Directors:
James P. TenBroek	45	2000	Director
Marvin C. Moses	62	1999	Director
Mark E. Nunnelly	48	1999	Director
Ian K. Loring	40	2001	Director
Louis L. Massaro	60	2005	Director

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

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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 Telecom Act amended the Communications Act to eliminate many barriers to competition in the U.S. communications industry. The Telecom Act set basic standards for relationships between communications service providers, including relationships between new entrants and RBOCs. In general, the Telecom 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 Telecom Act and to encourage competition.

Long Distance Competition.   Section 271 of the Communications Act, enacted as part of the Telecom 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 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 all the states in which we operate, the RBOC’s Section 272 requirements have sunset. The sunset of Section 272 requirements could make it easier for the RBOCs to engage in

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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 Telecom Act, we negotiate interconnection agreements with RBOCs to obtain access to UNEs and services, generally on a state-by-state basis. We currently have interconnection agreements in effect with Qwest for the states of Arizona, Colorado, Minnesota, Montana, 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.

Interconnection agreements typically have three-year terms. At the end of the term the parties can terminate the agreement or, if either party so requests, the agreement goes into an “evergreen” status where it is still in effect until a new agreement is reached. All of our interconnection agreements are in evergreen status. We are in the process of arbitrating our interconnection agreements with Qwest for Arizona, Colorado, Minnesota, Oregon, Utah, and Washington and we are in negotiations with Qwest over our interconnection agreement in Montana. State Commission arbitration decisions in turn may be appealed to federal courts. Neither AT&T in Nevada and California, nor Verizon in Oregon and Washington, has sought to terminate our interconnection agreements or commence negotiations to develop new agreements. We also have the right to opt into any interconnection agreement that is in effect but not in evergreen status between an RBOC and another competitive local service provider or to adopt State Commission reviewed standard agreements called “SGATs” or Statements of Generally Available Terms and Conditions. We cannot predict how successful we will be in arbitrating or negotiating terms critical to our provision of local network services. 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.

Unbundled Network Elements.   The Telecom 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 Telecom Act. The Telecom 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 have been re-examined several times by the FCC as appellate courts directed the FCC to revisit its unbundling decisions. The prolonged litigation concerning UNE rules concluded, at least for the time being, when the D.C. Circuit Court of Appeals upheld the FCC’s revised rules in June 2006. Comparing the list of UNEs available to CLECs in 1999 with the list CLECs currently has access to, reveals that the FCC at the direction of the Courts, has significantly reduced UNE availability. CLECs no longer have access to UNE-P, the Unbundled Network Element Platform, an offering which combined switching, loop, and transport facilities, and they face restrictions as to where high capacity loops and transport are available as UNEs. In general terms, the FCC restricted or limited access to loop and transport UNEs only in wire centers with high concentrations of business lines, reasoning that either competitive alternatives were either actually available in these areas or that competitors could economically deploy such facilities there. 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. In large part, we have adapted to these changes in UNE availability by entering into commercial agreements which provide identical facilities, albeit at a higher price. Further adaptation would be necessary in the event ILECs determined to retire copper facilities which we currently obtain as UNEs. Consequently, Eschelon together with a number of other CLECs, has petitioned the FCC to prevent widespread retirement of copper facilities. We cannot predict the outcome of this proceeding nor can we predict when and where ILECs might decide to replace their copper infrastructure with fiber.

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Changes in UNE rules must be incorporated into interconnection agreements. We have completed this effort with respect to our agreements with AT&T in California and Nevada. Our interconnection agreement arbitrations/negotiations with Qwest will incorporate these changes when concluded. Revisions to our interconnection agreements with Verizon in Oregon and Washington are substantially complete and await only state commission action to take effect.

FCC rules implementing the local competition provisions of the Telecom 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 Telecom 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 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 August 2005, the FCC released an order that largely deregulated “wireline broadband Internet access service” by determining that it was an information service rather than a telecommunications 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 Order did not affect CLECs’ ability to obtain UNEs, but it did relieve the RBOCs of any duty to offer DSL transmission services subject to their competitors. We have been able to enter into commercial agreements to resell Qwest DSL through March, 2009. We cannot guarantee that Qwest will extend these agreements or offer comparable terms and conditions when our current agreements expire.

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 of its 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 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. On December 28, 2006, the FCC granted ACS similar relief from unbundling obligations in five wire centers in Anchorage, Alaska. On September 6, 2006, Verizon filed six separate petitions requesting relief from unbundling in six major eastern cities. On January 24, 2007, Qwest filed a similar petition for Terry, Montana. We do not operate in any of these areas and we cannot predict whether 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. We are not aware of wire centers in any metropolitan area in which we currently offer or plan to offer service that would meet the standard for UNE elimination applied in the Qwest and ACS proceedings. Depending on the future levels of facilities-based deployment in the markets at issue, however, such forbearance petitions could eventually reduce our access to UNE facilities.

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. Verizon subsequently filed a “clarification” of its original petition. Verizon’s petition was deemed granted when the FCC failed to act upon it, raising the question of whether the FCC granted Verizon’s original petition which sought wide relief from unbundling for all broadband services or whether Verizon’s subsequent clarification of its petition was granted. Verizon’s clarification suggested that only packet-based and optical transport services and not Time Dimension Multiplex (TDM) services would receive relief from unbundling and TELRIC pricing requirements. AT&T and Qwest have filed petitions requesting to receive the relief that Verizon received. The grant of forbearance is being appealed. The FCC has not acted upon these petitions yet. 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 have not experienced any significant adverse impact to date. We cannot predict the effect, if any, of further unbundling and pricing relief that would result from the possible grant of AT&T’s and Qwest’s petitions.

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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 believe that 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. Reports indicate that the FCC is preparing to release an order setting out new requirements. These requirements could impose significant compliance costs on us.

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 several IXCs who pay 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. CLECs must now mirror RBOC interstate rates.

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 make payments

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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. In July 2006, a group of carriers including AT&T and many small rural companies proposed a comprehensive plan to reform the access system. Called “The Missoula Plan,” the proposed reforms would likely result in reducing our access revenues and increasing our network costs. The FCC may decide to adopt all, part or none of the Missoula Plan or indeed any of the other proposals that have been made in the proceeding. We cannot predict the impact that any changes the FCC may decide to implement may have on our business.

One of the issues before the FCC in its intercarrier compensation docket concerns the treatment of VoIP traffic. Certain carriers who send us VoIP traffic for termination contend that because such traffic is an “enhanced service,” it should not be subject to access charges as is the case with circuit switched long distance traffic, but should instead be treated as local traffic and be subject to  significantly lower rates for call termination than traditional long distance traffic.  We cannot predict when the FCC will decide this question or how it will decide it. If the FCC determines that VoIP traffic should be exempt from access charges and the VoIP platform is widely adopted, our access revenues will decline.

Special Access.   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. On the other hand, Qwest could also use its pricing flexibility to increase rates as it last did in 2004. 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.

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.

The FCC has recently expanded the obligation to contribute to the USF fund to include VoIP providers who were previously exempt. The FCC is also 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. Congress is also currently considering legislation that would potentially affect our USF obligations.

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.

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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 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 and the order was later upheld on appeal. 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 May 2007. We notified the FCC in February of 2007 that we intend to be compliant with its CALEA requirements. Several parties have appealed the FCC’s order extending new requirements in the U.S. Court of Appeals for the D.C. Circuit. As a result of these new obligations, 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.

Deregulation of Broadband Facilities and Regulation of Internet Access and VoIP Services.   To date, the FCC has treated Internet service providers, or ISPs, as information service providers, which are generally exempt from federal and state regulations governing common carriers. In June 2005, the U.S. Supreme Court upheld the FCC’s finding that broadband cable modem service is an information service. Consequently, cable modem operators are not required to provide other Internet service providers, including us, with access to their cable broadband lines. As mentioned above, in August 2005, the FCC found that wireline broadband service, including DSL internet access by facilities-based telephone companies is an information service, which the companies are not required to make available to competitors, including us. In November 2006, the FCC issued an order classifying Broadband over Power Line Internet access service an information services as well, similarly removing the requirement that such companies make those line available to competitors, including us.

Notwithstanding these rulings limiting our access to broadband facilities, the FCC is also considering regulations governing the disclosure of confidential communications, copyright, excise tax and other requirements that 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. Consequently, our regulatory obligations vis a vis our Internet access services may increase. We cannot predict our costs of compliance and we may be subject to penalties in the event we fail to comply with such new rules.

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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 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, to comply with CALEA and to contribute to the federal universal service support mechanisms. To the extent that we choose to provide interconnected VoIP services, we will bear those 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 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’s pending review of intercarrier compensation policies (discussed above) also may have an adverse impact on enhanced service providers.

In June, 2006, the FCC determined that all “interconnected” VOIP services are required to contribute a percentage of interstate gross revenues to USF. This ruling has been appealed, but remains in effect pending the appeal. 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. While the Company currently does not provide interconnected VoIP services, we are planning to do so and consequently will be affected by these regulations. 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.

Broadband Internet-related and VoIP services are the subject of evolving policies. It is possible such services could be subject to additional regulation in the future. The effect of such regulations on our business could be substantial, but we cannot predict what rules will ultimately apply or their impact on our business.

Taxes and Regulatory Fees.   We are subject to numerous local, state and federal taxes and regulatory fees, 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.

Legislation.   In recent sessions, Congress has considered various measures that would overhaul telecom laws in the United States. Bills introduced in the House of Representatives and the Senate have addressed a wide variety of issues, including the regulation of broadband and VoIP services, network neutrality requirements, universal service, 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.   In October 2005, the FCC 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. SBC and Verizon volunteered 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. SBC and Verizon also 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

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access services not generally available to other competitors. As our 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.

On December 29, 2006, the FCC approved the AT&T and Bell South merger. AT&T agreed to a number of conditions that will remain in effect throughout the entire AT&T-Bell South territory for up to 42 months. These conditions included following net neutrality provisions, freezing certain and reducing other special access rates, freezing UNE rates, recalculating competitive figures for implementing the TRRO, and agreeing not to alter the status of any loop or transport UNE via forbearance or other petitions. In addition, AT&T will expand its broadband offerings to all residences and divest itself of 31 buildings in the Bell South region by selling fiber IRUs. We anticipate little material benefit from these conditions or harm from the merger itself because of our limited operations in AT&T’s territory.

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, Montana, 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 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 FCC’s TRRO proceedings, some state commissions have continued

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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 and Minnesota have initiated cost cases to add new UNE rates and reprice other UNEs. 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, called Performance Assurance Plans, sometimes require payments from the RBOCs to the CLECs if quality standards are not met. A region-wide review of Qwest’s Performance Assurance Plan is currently underway. In addition, the Nevada Commissions has recently revised AT&T’s wholesale performance standards in Nevada. The RBOCs are seeking changes in performance standards that will reduce the payments made to CLECs under the Performance Assurance Plans. If such changes are adopted, we will experience reduced payments and could also experience a diminution of the wholesale 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 we own or operate 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

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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.

Item 1A.Risk Factors.

Risks Related to Our Industry

The communications industry faces significant regulatory uncertainties and the resolution of these uncertainties could hurt our business, results of operations and financial condition.   The Telecom 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 which we pay for access. Although no legislation affecting us was enacted in the last session of Congress, both the House and the Senate considered bills containing provisions that could have adversely affected our access to UNEs at cost based rates. We face the risk of similar provisions being incorporated into future telecommunications bills. The D.C. Circuit Court has upheld the FCC’s Triennial Review Remand Order, or TRRO. The TRRO reduced our ability to obtain unbundled network elements, or UNEs and consequently affected our operations and increased our costs for certain network elements. Where we have lost access to UNEs, we have either been able to obtain replacement circuits from other providers or we have purchased circuits from the RBOCs as special access or private line service, generally at higher prices than UNEs. In addition, the FCC has permitted the RBOCs to detariff their DSL offerings. While we have been able to obtain commercial agreements to resell DSL, our wholesale rates may increase. Other proceedings are underway that could potentially further limit our access to UNEs. The Telecom Act gave the FCC the authority for forbearance from enforcing regulatory provisions, including unbundling requirements. The FCC has recently granted Qwest and ACS relief from unbundling obligations in certain wire centers in Omaha, Nebraska (Qwest) and Anchorage, Alaska (ACS). There is also a petition pending before FCC in which Verizon seeks similar relief from unbundling in a number of major east coast markets. While the FCC’s actions in these forbearance proceedings do not affect us currently, our access to UNEs could be limited by future forbearance proceedings. In future orders, the FCC could eliminate unbundling obligations in markets in which we operate, which would adversely impact our operations and increase our costs. The FCC has initiated proceedings that may result in increasing the rates we pay for network elements or reducing the rates we charge long distance companies to originate and terminate their calls. A number of states also have proceedings and legislative proposals pending to re-examine and possibly increase our network element rates. We cannot predict the outcome of these proceedings or the effects, if any, that these proposals may have on our business and operations. A summary of legal and regulatory developments is discussed in more detail in the section entitled “Regulation.”

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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 Telecom Act, as amended, 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.

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, MCI, Inc. with Verizon, and AT&T with Bell South, 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;

·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.

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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 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 and we may have to incur additional indebtedness.   During 2006, we completed the acquisition of OTI, OneEighty and MTI and we acquired much of the Washington state customer base of TelWest, and in the second quarter of 2007, we expect to complete the acquisition of UNICOM. While we believe that these acquisitions will be successfully integrated into our operations, there can be no assurance that we will be able to integrate and consolidate these or subsequent acquisitions into our ongoing business and operations according to management’s plan. While we believe that we have sufficient financial and management resources to complete the integration of these acquisitions, 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 these acquisitions 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 these acquisitions into our business and operations will ultimately be successful.

As we adapt to the current telecom environment and complete the integration of OTI, OneEighty, MTI, UNICOM and the migration of TelWest’s lines, 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 these acquisitions into our business and operations, our business, financial condition, results of operations and cash flows may suffer.

We intend to 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;

·retaining key personnel of the acquired business;

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

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·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 net losses, and we may not be profitable in the future.   We have incurred net losses in the past and may continue to incur losses in the future. For the year ended December 31, 2006, we had a net loss of $2.8 million and an accumulated deficit of $157.8 million. For the year ended December 31, 2005, we had a net loss of $31.0 million and an accumulated deficit of $155.0 million. For the year ended December 31, 2004, we had 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. 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 Telecom 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, they 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 and judicial remedies frequently do not preclude further anticompetitive behavior and rarely fully 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

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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. Our interconnection agreements with Qwest, AT&T and Verizon are in “evergreen,” a provision that allows the agreement to continue in effect until a new agreement is in place. We are in the process of negotiating our Montana interconnection agreement and arbitrating the remaining disputed provisions of our proposed interconnection agreements within Arizona, Colorado, Minnesota, Oregon, Utah and Washington. We are operating under our AT&T and Verizon agreements in evergreen and neither party has notified the other of an intent to terminate the existing agreements or commence negotiations on new agreements. 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 Telecom 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, and although both AT&T and Verizon have agreed to freeze or reduce special access rates in order to gain approval of their recent mergers, Qwest is under no obligation to freeze or reduce its special access rates. 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 2006, access charges accounted for $16.8 million, or 6.1% 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 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 as has the Minnesota Public Utilities Commission. 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 or Minnesota’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

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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, 2006, we had approximately $147.7 million of total indebtedness outstanding. 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 8 3/8% 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;

·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.

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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 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 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

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long distance providers in response to lower rates or promotional incentives by competitors. These trends 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. 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.

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Some of our employees are unionized, and we could face work disruptions due to strikes, slowdowns or other labor disputes.   Twenty-seven 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 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 economy.

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 Arizona, California, Colorado, Minnesota, Montana, Nevada, Oregon, Utah and Washington.

We do not own any of our facilities. The table below lists our leased facilities as of February 28, 2007.

Location	Lease Expiration	Square Footage	Purpose
Peoria, AZ	January 31, 2011	6,104	Office
Phoenix, AZ	May 15, 2010	7,468	Switch Facility/Office
Phoenix, AZ	February 1, 2009	9,391	Office
Mesa, AZ	July 31, 2011	4,480	Office
Tempe, AZ	February 28, 2010	9,527	Switch Facility/Office
Tempe, AZ	March 31, 2007(1)	9,223	Office
Santa Rosa, CA	April 30, 2014	5,250	Switch Facility
Santa Rosa, CA	August 1, 2007	4,230	Office
Denver, CO	January 31, 2011	6,000	Switch Facility
Denver, CO	April 30, 2012	36,000	Office/Warehouse
Greenwood Village, CO	January 31, 2009	3,965	Office
Minneapolis, MN	May 31, 2013	118,174	Main Office
Minneapolis, MN	March 31, 2009	17,342	Switch Facility/Office
Minneapolis, MN	June 30, 2010	3,348	Data Switch Facility
Minneapolis, MN	November 30, 2012	143	Storage
Golden Valley, MN	February 28, 2012	33,246	Office/Warehouse
Billings, MT	June 30, 2011	4,300	Switch Facility
Billings, MT	June 30, 2009	4,600	Office
Bozeman, MT	May 31, 2007	1,282	Office
Reno, NV	June 1, 2011	6,053	Office
Reno, NV	July 31, 2009	8,778	Switch Facility/Office
Portland, OR	December 31, 2009	7,028	Switch Facility
Portland, OR	September 30, 2011	6,217	Warehouse
Tigard, OR	June 30, 2008	15,033	Office/Warehouse
Salem, OR	April 30, 2009	7,997	Switch Facility/Office
Salem, OR	July 31, 2007	5,000	Storage
Salem, OR	February 17, 2010	14,548	Office
Eugene, OR	October 31, 2011	4,964	Office
Bend, OR	July 31, 2007	1,966	Office
Medford, OR	June 30, 2008	1,568	Office
Salt Lake City, UT	July 14, 2012	22,069	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, 2012	30,503	Office/Warehouse
Tacoma, WA	January 31, 2009	11,373	Switch Facility/Office
Bellingham, WA	December 31, 2007	800	Office
Cody, WY	March 31, 2007(1)	324	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.

Item 3.Legal Proceedings.

We are party from time to time to 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.

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

The following table sets forth the high and low prices during the periods indicated since trading began:

	High	Low
2006
First quarter	15.87	11.63
Second quarter	17.18	15.02
Third quarter	17.04	13.72
Fourth quarter	19.94	16.68
2005
Third quarter	14.14	11.63
Fourth quarter	14.25	11.50

As of March 8, 2007, the closing price of our common stock was $24.97 per share.

On February 28, 2007, there were 230 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. Our outstanding notes restrict our ability to pay dividends on our capital stock.

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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, 2006 and 2005 and for the years ended December 31, 2006, 2005 and 2004 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, 2004, 2003 and 2002 and for the years ended December 31, 2003 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 Advanced TelCom, Inc. (“ATI”) except for the Balance Sheet Data. All dollar amounts are in thousands of dollars, except per share amounts.

	Year Ended December 31,
Statements of operations data:	2006			2005			2004			2003			2002
Revenue:
Network services	$	244,702		$	201,835		$	131,780		$	115,482		$	96,209
BTS	29,824			25,908			26,316			25,614			25,659
Total revenue	274,526			227,743			158,096			141,096			121,868
Cost and expenses:
Network service expenses (excluding depreciation and amortization)	98,664			85,914			47,354			45,037			39,493
BTS cost of revenue	18,427			16,139			15,979			15,784			16,053
Sales, general and administrative	103,569			90,310			69,255			66,252			68,920
Depreciation and amortization	42,247			39,653			31,105			30,099			25,261
Operating income (loss)	11,619			(4,273		)	(5,597		)	(16,076		)	(27,859		)
Other income (expense)(1)	(14,399		)	(27,369		)	6,712			(1,102		)	48,052
Income (loss) before income taxes(1)	(2,780		)	(31,642		)	1,115			(17,178		)	20,193
Income taxes	—			(4		)	(4		)	(28		)	(50		)
Net income (loss) from continuing operations(1)	(2,780		)	(31,646		)	1,111			(17,206		)	20,143
Income from discontinued operation, net of tax	—			329			—			—			—
Gain on sale of discontinued operation, net of tax	—			326			—			—			—
Net income (loss)(1)	(2,780		)	(30,991		)	1,111			(17,206		)	20,143
Less preferred stock dividends and premium paid on repurchase of preferred stock(2)	—			—			(4,292		)	(3,426		)	(2,701		)
Net income (loss) applicable to common stockholders	$	(2,780	)	$	(30,991	)	$	(3,181	)	$	(20,632	)	$	17,442
Basic income (loss) per common share:
Income (loss) from continuing operations	$	(0.17	)	$	(5.32	)	$	(11.11	)	$	(70.59	)	$	147.68
Income from discontinued operation	—			0.11			—			—			—
Net income (loss)	$	(0.17	)	$	(5.21	)	$	(11.11	)	$	(70.59	)	$	147.68
Diluted income (loss) per common share:
Income (loss) from continuing operations	$	(0.17	)	$	(5.32	)	$	(11.11	)	$	(70.59	)	$	5.83
Income from discontinued operation	—			0.11			—			—			—
Net income (loss)	$	(0.17	)	$	(5.21	)	$	(11.11	)	$	(70.59	)	$	5.83
Other financial data:
Capital expenditures(3)	$	54,658		$	35,905		$	30,771		$	26,466		$	23,175
Cash flows provided by (used in) operating activities	45,953			15,028			26,115			16,688			(2,888		)
Cash flows provided by (used in) investing activities	(132,756		)	(30,971		)	(79,056		)	(25,008		)	(23,020		)
Cash flows provided by (used in) financing activities	81,887			15,570			70,770			(2,807		)	31,593

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	As of and for the Year Ended December 31,
Operating data:	2006		2005		2004		2003		2002
Voice access lines in service(4)	363,375		270,662		173,492		156,165		133,908
Data access lines in service(4)	234,954		144,790		76,861		50,256		24,657
Total access lines in service(4)	598,329		415,452		250,353		206,421		158,565
Markets in operation	45		19		12		12		12
Percent of new access lines installed on-net	95	%	97	%	92	%	87	%	77	%
Percent of total access lines on-net	85	%	86	%	81	%	74	%	63	%
Average monthly churn(5)	1.28	%	1.34	%	1.48	%	1.60	%	1.87	%
Total full-time equivalent employees	1,385		1,118		924		888		918
Quota-carrying network services sales people	265		204		167		139		164
Quota-carrying BTS sales people	42		39		33		36		35
Total quota-carrying sales people	307		243		200		175		199

	As of December 31,
Balance sheet data:	2006		2005		2004			2003			2002
Cash, cash equivalents, restricted cash and available-for-sale securities	$	39,467	$	31,818	$	33,351		$	8,606		$	19,733
Property and equipment, net	145,785		126,452		102,849			86,777			91,296
Total assets	330,521		231,546		237,119			153,721			169,133
Total debt, including current portion	147,736		97,519		142,231			87,822			88,625
Net debt(6)	108,269		65,701		108,880			79,216			68,892
Total stockholders’ equity (deficit)	131,450		92,253		(8,180		)	(5,071		)	15,542

(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.

(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)

	2006
	For the Three Months Ended
	March 31				June 30				September 30				December 31			Total Year
Total revenue		$	59,726			$	68,250			$	69,806			$	76,744		$	274,526
Income (loss) before income taxes		(1,583		)		(599		)		(608		)		10			(2,780		)
Net income (loss)		(1,583		)		(599		)		(608		)		10			(2,780		)
Net income (loss) per share—basic		(0.11		)		(0.04		)		(0.03		)		0.00			(0.17		)
Net income (loss) per share—diluted		(0.11		)		(0.04		)		(0.03		)		0.00			(0.17		)

	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
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		(18.70		)		(26.32		)		(1.49		)		(0.35		)		(5.21		)
Net income (loss) per share—diluted		(18.70		)		(26.32		)		(1.49		)		(0.35		)		(5.21		)

(1)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.

2005 includes $4,748 in costs related to the settlement with Global Crossing in June 2005, which is described in our Form 10-K filed with the SEC on March 17, 2006.

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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 45 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 60,000 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. In December 2004, we acquired ATI, whereby we enhanced our presence in Washington, Oregon and Nevada and entered California. During 2006, we acquired OTI, OneEighty and MTI, which enhanced our market presence in Oregon and Arizona and gave us a market presence in Montana.

In February 2007, we announced that we signed a definitive agreement to acquire UNICOM. UNICOM is headquartered in Bend, Oregon. The acquisition is expected to close in the second quarter of 2007 and will enhance our presence in Oregon.

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, costs and 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 and cable providers are competing with us, we do not believe they are a significant competitive threat in the markets we serve 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 telephone service, long distance service, carrier access charges, and data and Internet access services. Revenue from local telephone service consists of charges for basic local dial-tone service, including dedicated T1 access, and custom-calling features such as call waiting and call forwarding. Revenue from long distance service consists of flat rated and per-minute-of-use charges for a full range of traditional switched and dedicated long distance, toll-free calling, international calling, 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. 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

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certain customers (otherwise known as reciprocal compensation). Revenue from data and Internet access services consists primarily of monthly usage fees for DSL and T1 circuits and 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 89.1% of our total revenue for the year ended December 31, 2006, 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 carrier access usage 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 acquisitions of ATI, OneEighty and MTI, which were not under a bill-and-keep arrangement with the RBOCs, and our negotiated reciprocal compensation agreements with a few wireless carriers, we recorded approximately $0.9 million of reciprocal compensation revenue in 2006. We do not have any significant wholesale carrier revenue or wholesale Internet service provider revenue other than carrier access revenue and this reciprocal compensation.

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.

Network Services Expense.   Our network services expense 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 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 vary by carrier and by state and in many cases 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 some cases, the RBOCs are our only source for local loops and T1 lines. Historically we purchased unbundled network elements platform, or UNE-P, from Qwest and Verizon, and customized network element packages, or UNE-E, from Qwest. We also purchase, on a resale 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 commissions. We entered into agreements with Qwest and Verizon for UNE-P replacement products in 2005. As of December 31, 2006, we had approximately 85,000 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 have incurred higher costs in 2006 to obtain access to certain elements of telecommunications platforms as a result of the TRRO. We will continue to migrate QPP lines to our switches as resources permit to help mitigate the increased costs.

34

Our network services expense also includes the fees we pay for long distance, data and other services. We have entered into 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 network services expense.

Business Telephone Systems 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 employee compensation and benefits, commissions, occupancy costs, bad debt, operating taxes, billing expense 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 2006, 2005 and 2004, our bad debt expense as a percentage of revenue was 0.7 %, 0.5%, and 0.5%, respectively.

Depreciation and Amortization.   Our depreciation and amortization expense 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 periods approximating the average life of customers. 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 table sets forth financial data as a percentage of total revenue for the years ended December 31, 2006, 2005 and 2004.

	Year Ended December 31,
	2006		2005		2004
Consolidated financial data:
Revenue:
Network services	89.1	%	88.6	%	83.4	%
BTS	10.9	%	11.4	%	16.6	%
Total revenue	100.0	%	100.0	%	100.0	%
Costs and expenses:
Network services expense (excluding depreciation and amortization)	35.9	%	37.7	%	30.0	%
Business telephone systems cost of revenue	6.7	%	7.1	%	10.1	%
Sales, general and administrative	37.8	%	39.7	%	43.8	%
Depreciation and amortization	15.4	%	17.4	%	19.7	%
Operating income (loss)	4.2	%	(1.9	)%	(3.6	)%
Net income (loss)	(1.0	)%	(13.6	)%	0.7	%
Net income (loss) applicable to common stockholders	(1.0	)%	(13.6	)%	(2.0	)%

The following table sets forth network services expense (excluding depreciation and amortization) and business telephone systems cost of revenue as percentages of the related revenue for the periods indicated.

	Year Ended December 31,
	2006			2005			2004
Network services expense (excluding depreciation and amortization)		40.3	%		42.6	%		35.9	%
BTS cost of revenue		61.8	%		62.3	%		60.7	%

Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

Revenue.   Revenue for the years ended December 31, 2006 and 2005 is as follows:

	Year Ended December 31,				% Change
	2006		2005
Revenue (in millions):
Voice and data services	$	186.3	$	153.9		21.0	%
Long distance	41.6		34.6			20.3
Access	16.8		13.3			26.7
Total network services	244.7		201.8			21.2
BTS	29.8		25.9			15.1
Total revenue	$	274.5	$	227.7		20.5	%

Network Services.   Network services revenue was $244.7 million for the year ended December 31, 2006, an increase of 21.2% from $201.8 million for the year ended December 31, 2005. The increase in revenue is primarily due to the inclusion of OTI, which was acquired on April 1, 2006, OneEighty, which was acquired on October 1, 2006, MTI, which was acquired on November 1, 2006, and organic line growth. During the 12 months of 2006, the number of voice lines in service increased by 34.3% to 363,375 lines at December 31, 2006, and the number of data lines in service increased by 62.3% to 234,954 lines at December 31, 2006. The revenue growth associated with access line growth was partially offset by a decline in data revenue per line due to a combination of customers purchasing more bandwidth at discounted prices and general pricing pressures for data services in our markets. We increased our network sales force to 265 associates at December 31, 2006, from 204 associates at December 31, 2005. We expect to increase the network sales force by an additional 60 associates throughout 2007. We expect this increase in sales associates will favorably impact our lines in service and revenue over the next year.

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BTS.   BTS revenue was $29.8 million for the year ended December 31, 2006, an increase of 15.1% from $25.9 million for the year ended December 31, 2005. The increase in BTS revenue was primarily the result of increases in new systems sales and revenue from change orders.

Network Services Expenses (Excluding Depreciation and Amortization).   Network services expenses were $98.7 million for the year ended December 31, 2006, an increase of 14.8% from $85.9 million for the year ended December 31, 2005. 2005 includes $4.7 million in costs related to the settlement with Global Crossing in June 2005, which is described in our Form 10-K filed with the SEC on March 17, 2006. 2006 includes network expenses associated with OTI, which was acquired on April 1, 2006, OneEighty, which was acquired on October 1, 2006 and MTI, which was acquired on November 1, 2006. We continue to experience improvements in network services expense relative to the growth in network services revenue due to several factors, including 1) our continued focus on selling high margin T1-based products, 2) network grooming and optimization projects to lower monthly network cost, and 3) efficiencies associated with the integration of our acquired companies. These improvements were partially offset by the inclusion of OTI and higher costs associated with TRRO. OTI’s network services expenses are a higher percentage of revenue than ours because they are not facilities based. We plan to migrate a portion of OTI’s lines to our network over the next 24 months in order to lower costs.  As a percentage of related revenue, network services expenses for 2006 decreased to 40.3% from 42.6% for 2005. This decrease was primarily due to the Global Crossing settlement impact in 2005.

BTS Cost of Revenue.   BTS cost of revenue was $18.4 million and $16.1 million for the years ended December 31, 2006 and 2005, respectively. The increase in BTS cost of revenue is due to the increase in materials expense to support the higher level of revenue. As a percentage of related revenue, BTS cost of revenue for the year ended December 31, 2006 decreased to 61.8% from 62.3% for the year ended December 31, 2005. 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 new systems sales and therefore achieve greater volume discounts or economies of scale in our workforce.

Sales, General and Administrative.   Sales, general and administrative expenses were $103.6 million for the year ended December 31, 2006, an increase of 14.7% from $90.3 million for the year ended December 31, 2005. The increase is primarily due to the inclusion of OTI, OneEighty and MTI, and an increase in costs associated with the sales force expansion. As a percentage of revenue, sales, general and administrative expenses for the year ended December 31, 2006 declined to 37.7% from 39.7% for the year ended December 31, 2005 due to the improved efficiency of our existing operations resulting from our fixed cost structure supporting a higher level of revenue. Our sales, general and administrative expenses are largely fixed as they are driven by the 1,385 associates that were employed at December 31, 2006. We expect expenses as a percentage of revenue to continue to decline due to continued efficiency improvements and synergies related to acquisitions.

Depreciation and Amortization.   Depreciation and amortization expense was $42.2 million for the year ended December 31, 2006, an increase of 6.5% from $39.7 million for the year ended December 31, 2005. This increase was primarily due to the amortization related to the $5.8 million of intangible assets purchased in the OTI acquisition and from the depreciation on the $54.7 million of capital expenditures over the past 12 months. As a percentage of revenue, depreciation and amortization decreased to 15.4% for the year ended December 31, 2006 from 17.4% for the year ended December 31, 2005.

Interest.   Interest expense was $17.5 million for the year ended December 31, 2006, a decrease of 37.7% from $28.1 million for the year ended December 31, 2005. The decrease was primarily due to 2005 including $10.2 million of interest expense related to the partial redemption of our notes in September. The decrease was also due to lower interest expense as a result of having a lower average outstanding debt balance for 2006 compared to 2005.

Net Loss.   Net loss for the year ended December 31, 2006 was $2.8 million compared to a net loss for the year ended December 31, 2005 of $31.0 million. This improvement is primarily due to the increase in revenue, lower interest expense and the improvements in costs and expenses as a percentage of revenue.

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

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

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

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.

Network Services Expenses (Excluding Depreciation and Amortization).   Network services expenses were $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 expenses 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 Cost of Revenue.   BTS cost of revenue was $16.1 million and $16.0 million for the years ended December 31, 2005 and 2004, 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.

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. 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

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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 March 15, 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 and additional depreciation and amortization expense as mentioned previously.

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.   Cash and cash equivalents was $21.1 million at December 31, 2006, compared to $26.1 million at December 31, 2005.

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 and auction rate securities. The balance at December 31, 2006 and 2005 was $17.1 million and $4.8 million, respectively. The securities represent additional liquidity for us.

Financings.   On March 29, 2006, we completed a $48.0 million tack-on offering of our senior second secured notes at a discount resulting in a 9.92% yield. After deducting fees and expenses associated with the offering, our net proceeds were $44.3 million. Our acquisition of OTI on April 1, 2006, was financed with $20.3 million of the net proceeds from the offering. Our acquisition of OneEighty on October 1, 2006, was financed with $10.2 million of the net proceeds from the offering. Our acquisition of MTI on November 1, 2006 was partially financed with the remaining proceeds of $13.8 million.

On May 19, 2006, we completed an offering of 2,550,000 shares of our common stock, $0.01 par value per share, at $15.70 per share. After deducting fees and expenses related to the offering, we received net proceeds of $40.0 million. Our acquisition of MTI on November 1, 2006 was partially financed with $23.5 million of the proceeds from the offering. We expect that the remaining proceeds will be used to fund potential future acquisitions or for general corporate purposes.

Cash Provided by Operating Activities.   Cash provided by operating activities was $46.0 million for 2006 compared to cash provided by operating activities of $15.0 million for 2005. The increase was primarily due to revenue growth and the related improvement of our cash operating costs and expenses as a percent of revenue. The increase is also due to lower cash interest expense. During 2005, we paid $6.1 million related to the redemption of 35% of our senior second secured notes.

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Cash provided by operating activities was $15.0 million for 2005 compared to cash provided by operating activities of $26.1 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 and $5.6 million related to additional interest payments as a result of our $65.0 million senior second secured notes issued on November 29, 2004.

Cash Used in Investing Activities.   Cash used in investing activities was $132.8 million for 2006 compared to $31.0 million for 2005 and $79.1 million for 2004. The increase in cash used in investing activities from 2005 to 2006 was due in part to the acquisitions of OTI, OneEighty and MTI during 2006. The increase was also due to increased investments in available-for-sale securities and property and equipment, and cash paid for customer installation costs. 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, net cash provided in 2005 related to available-for-sale securities was $1.8 million versus a net use of cash in 2004 of $6.2 million. 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.

Cash Provided by Financing Activities.   Cash provided by financing activities was $81.9 million for 2006 compared to $15.6 million for 2005. In 2006, the issuance of senior second secured notes in March 2006 generated $45.6 million of proceeds and the issuance of common stock in May 2006 generated $40.4 million of proceeds.

Cash provided by financing activities was $15.6 million for 2005. The proceeds from our initial public offering of our common stock in August 2005, 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 March 15, 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. The 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.

Outstanding Indebtedness.   As of December 31, 2006, we had $147.7 million in outstanding indebtedness, consisting of $141.0 million 8 3/8% senior second secured notes due 2010, $5.3 million in capital lease obligations, and $1.4 million for a loan assumed through the acquisition of MTI. 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 March 15, 2007 and September 15, 2007 cash interest payments 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 83¤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.

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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 $54.0 and $58.0 million on capital expenditures in 2007. In addition, we expect to close on our acquisition of UNICOM in the second quarter of 2007, for which we will pay approximately $13.9 million. We intend to finance the acquisition of UNICOM with debt.

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 UNICOM 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 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 we elect to issue equity securities to raise additional funds, substantial dilution to existing stockholder may result.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

Contractual Obligations

	Total		Less Than One Year			1-3 Years			3-5 Years			More Than Five Years
	(Dollars in thousands)
Notes payable	$	200,437		$	13,002		$	31,345		$	156,090		$	—
Capital lease obligations	6,102			3,622			2,205			275			—
Operating lease obligations	27,254			6,067			11,255			6,868			3,064
Fiber ring payable	2,792			270			463			276			1,783
Purchase obligations	1,443			1,152			291			—			—

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 is based upon our 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.

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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

Goodwill is tested annually for impairment at the reporting unit level. If the undiscounted anticipated future cash flows of a reporting unit are less than the carrying amount, an impairment charge is recognized. In accordance with Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, management completed its annual impairment test in the fourth quarter of 2006 and 2005 and determined that goodwill had not been impaired.

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

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 periods that approximate the average life of 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.

Network Expense

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

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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 network expense 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 network expense accrual is sufficient to cover these costs as well.

Share-Based Compensation

Effective January 1, 2006, we adopted the provisions of SFAS No. 123(R), Shared-Based Payment, which requires the measurement and recognition of compensation expense for all share-based payment awards to employees and directors based on estimated fair values. Prior to the adoption of SFAS No. 123(R), we accounted for our stock-based compensation under the recognition and measurement principles of Accounting Principles Board Opinion No. 25 (APB No. 25), Accounting for Stock Issued to Employees, and related interpretations.

We adopted SFAS No. 123(R) using the modified prospective transition method and the straight-line attribution method for recognizing compensation expense. Under the modified prospective transition method, compensation expense recognized during the year ended December 31, 2006, included:  (a) the prorated portion of compensation expense for all share-based awards granted prior to January 1, 2006, but not yet vested, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) the prorated portion of compensation expense for all share-based awards granted subsequent to adoption of SFAS No. 123(R), based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). In accordance with the modified prospective transition method, our consolidated financial statements for periods prior to the adoption of SFAS No. 123(R) have not been restated to reflect the impact of the provisions of SFAS No. 123(R).

We used the Black-Scholes option-pricing model (“Black-Scholes Model”) for the purposes of determining the estimated fair value of our share-based payment awards at the date of grant. The Black-Scholes Model requires certain assumptions that involve judgment. Our share-based awards have characteristics significantly different from publicly traded options, and because changes in the input assumptions can materially affect the fair value estimate, the existing pricing models may not provide a reliable single measure of the fair value of our share-based payment awards. We will continue to assess the assumptions and methodologies used to calculate estimated fair value of share-based compensation.

Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We have determined the adoption of FIN 48 will not have a material impact on our consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. The standard provides guidance for using fair value to measure assets and liabilities. The standard clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We have not yet determined the impact, if any, that the adoption of SFAS No. 157 will have on our consolidated financial statements.

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.

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We are exposed to changes in interest rates on our investments in cash equivalents and available-for-sale securities. Interest income for the year ended December 31, 2006 was $3.2 million, therefore not exposing us to any meaningful interest income risk had rates dropped. We had $141.0 million in senior second secured notes outstanding as of December 31, 2006. 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 have established disclosure controls and procedures 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 Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our Board of Directors and senior 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.

Based on their evaluation as of December 31, 2006, the principal executive officer and principal financial officer of the Company have concluded that the design and operation of our disclosure controls and procedures were effective to ensure information required to be disclosed in this Form 10-K was processed, recorded, summarized and reported within the time periods specified in the rules and instructions for the Form 10-K.

Management’s Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements prepared for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision and with the participation of management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring

44

Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control—Integrated Framework, management concluded that our internal control over financial reporting was effective as of December 31, 2006.

During the fourth quarter of 2006, we acquired OneEighty Communications, Inc. (OneEighty) and Mountain Telecommunications, Inc. (MTI) in a purchase business combination. In reliance on guidance contained in a “Frequently Asked Questions” interpretive release issued by the staff of the SEC’s Office of Chief Accountant and Division of Corporation Finance in June 2004 (and revised on October 6, 2004), we determined to exclude both OneEighty and MTI from the scope of our assessment of our internal control over financial reporting as of December 31, 2006. The total assets of OneEighty and MTI, excluding goodwill, were 1.6% and 3.7%, respectively, of our consolidated total assets as of December 31, 2006. The total revenues of OneEighty and MTI were 0.7% and 1.3%, respectively, of our total consolidated revenues for the year ended December 31, 2006.

Management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006 has been given an unqualified audit opinion on the Company’s 2006 financial statements by Ernst & Young LLP, an independent registered public accounting firm, as stated in their attestation report which is included herein.

Changes in Internal Controls

During the fourth quarter of 2006, we acquired OneEighty and MTI in a purchase business combination. There have been no other significant changes in our internal control over financial reporting or in factors affecting internal control over financial reporting during the fiscal year ended December 31, 2006, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareowners
Eschelon Telecom, Inc.

We have audited management’s assessment, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting, that Eschelon Telecom, Inc. maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Eschelon Telecom, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

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

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

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls

45

may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of OneEighty Communications, Inc. and Mountain Telecommunications, Inc, which are included in the December 31, 2006 consolidated results of Eschelon Telecom, Inc. and constitute approximately 1.6% and 3.7%, respectively, of the total assets at December 31, 2006, excluding goodwill, and 0.7% and 1.3%, respectively, of the total revenues for the year then ended. Our audit of the internal control over financial reporting of Eschelon Telecom, Inc. also did not include an evaluation of the internal control over financial reporting of OneEighty Communications, Inc. and Mountain Telecommunications, Inc.

In our opinion, management’s assessment that Eschelon Telecom, Inc. maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Eschelon Telecom, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Eschelon Telecom, Inc. as of December 31, 2006 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, 2006, and our report dated March 8, 2007 expressed an unqualified opinion thereon.

Ernst & Young LLP

March 8, 2007
Minneapolis, Minnesota

Item 9B. Other Information.

None.

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Part III

Item 10.Directors, Executive Officers and Corporate Governance.

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 2007 Annual Meeting of Stockholders (the “Proxy Statement”), which will be filed with the SEC within 120 days after December 31, 2006 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 by reference in this Form 10-K from our Proxy Statement, which will be filed with the SEC.

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

The sections of the Proxy Statement entitled “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” and “Approval of the Amendment to the 2002 Plan” are incorporated by reference in this Form 10-K from our Proxy Statement, which will be filed with the SEC.

Item 13.Certain Relationships and Related Transactions, and Director Independence.

The section of the Proxy Statement entitled “Certain Relationships and Related Transactions, and Director Independence” is incorporated by reference in this Form 10-K from our Proxy Statement, which will be filed with the SEC.

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 in this Form 10-K from our Proxy Statement, which will be filed with the SEC.

47

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, 2006 and 2005

Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and 2004

Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2006, 2005 and 2004

Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004

Notes to Consolidated Financial Statements

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

Such schedule should be read in conjunction with the consolidated financial statements. All other supplemental schedules are omitted because of the absence of conditions under which they are required.

(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.
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.
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 83¤8% Senior Second Secured Notes due 2010.
4.11**	Form of Guarantee of Initial 83¤8% Senior Second Secured Notes due 2010.
4.12**	Form of Exchange 83¤8% Senior Second Secured Notes due 2010.
4.13**	Form of Guarantee of Exchange 83¤8% Senior Second Secured Notes due 2010.

48

Exhibit Number	Description
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(7)	Supplemental Indenture dated March 27, 2006, between Eschelon Operating Company, the various Guarantors and Bank of New York Trust Company, N.A., as trustee.
4.19(8)	Supplemental Indenture dated March 28, 2006, between Eschelon Operating Company, the various Guarantors and Bank of New York Trust Company, N.A., as trustee.
4.20(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 Employment Offer Letter dated March 7, 2000 from Eschelon Telecom, Inc. to Geoffrey M. Boyd.
10.2.3	Amendment dated February 19, 2007 to Employment 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.
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.

49

Exhibit Number	Description
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.
10.7.10	Amendment #10 dated August 15, 2005 to Carrier Service Agreement dated August 25, 2000 between Global Crossing Bandwidth, Inc. and Eschelon Telecom, Inc.
10.7.11	Amendment #11 dated December 2, 2005 to Carrier Service Agreement dated August 25, 2000 between Global Crossing Bandwidth, Inc. and Eschelon Telecom, Inc.
10.7.12	Amendment #12 dated February 1, 2006 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(6)	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.
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(6)	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(6)	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(6)	Amendment dated April 28, 2005 to Office Lease by and between Parkside Salt Lake Corporation and Advanced Telecommunications, Inc. dated December 28, 1999.
10.16.2	Amendment dated October 5, 2006 to Office Lease by and between EOS Acquisition I, LLC and Eschelon Telecom, 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(6)	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.

50

Exhibit Number	Description
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.
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.
10.32	Lease Agreement by and between Bruce E. Lee/Table Butte Cattle Company and OneEighty Communications, Inc. dated November 20, 1998.
10.33	Industrial Lease by and between Hardy Commerce Center, LLC and Prism Arizona Operations, LLC dated September 24, 1999.
10.33.1	Amendment dated October 24, 2003 by and between Desert Vista, LLC and Mountain Telecommunications, Inc. to Industrial Lease dated September 24, 1999.
10.34	Right to Use Agreement dated December 6, 2002 by and between Mountain Telecommunications, Inc. and the Salt River Pima-Maricopa Indian Community.
10.35	Qwest Regional Commitment Program Acknowledgement for Eschelon Telecom, Inc. dated February 13, 2007.
10.36	Qwest Regional Commitment Program Acknowledgement for Mountain Telecommunications, Inc. dated March 23, 2006.
10.37	Indefeasible Right of Use Agreement and Master Service Agreement by and between AGL Networks, LLC and Mountain Telecommunications, Inc. dated January 24, 2005.
10.38	Master Terms and Conditions for License Agreements between Arizona Public Service Company and Mountain Telecommunication, Inc. dated February 4, 1999.
10.39	Master Fiber License Agreement by and between Salt River Project Agricultural Improvement and Power District and Mountain Telecommunications, Inc. dated March 15, 2006.
10.40(9)	Severance Pay Agreement dated January 3, 2006, between Eschelon Telecom, Inc. and Steven Wachter.
10.41(10)	Form of Severance Agreement.
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.

51

** 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.

^^ 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 Amendment No. 2 to Form S-1 (File 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.

(6) Incorporated herein by reference to Eschelon Telecom, Inc. Annual Report on Form 10-K as filed with the Commission on March 17, 2007.

(7) Incorporated herein by reference to Eschelon Telecom, Inc. Current Report on Form 8-K as filed with the Commission on March 27, 2006.

(8) Incorporated herein by reference to Eschelon Telecom, Inc. Current Report on Form 8-K as filed with the Commission on March 22, 2006.

(9) Incorporated herein by reference to Eschelon Telecom, Inc. Current Report on Form 8-K as filed with the Commission on January 3, 2006.

(10) Incorporated herein by reference to Eschelon Telecom, Inc. Current Report on Form 8-K as filed with the Commission on October 2, 2006.

52

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 12, 2007.

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. Jeffrey 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 12, 2007
/s/ GEOFFREY M. BOYD		Chief Financial Officer
Geoffrey M. Boyd		(Principal Financial and Accounting Officer)		March 12, 2007
/s/ CLIFFORD D. WILLIAMS		Chairman of the Board
Clifford D. Williams				March 12, 2007
/s/ MARVIN C. MOSES		Director
Marvin C. Moses				March 12, 2007
/s/ LOUIS L. MASSARO		Director
Louis L. Massaro				March 12, 2007
/s/ MARK E. NUNNELLY		Director
Mark E. Nunnelly				March 12, 2007
/s/ JAMES P. TENBROEK		Director
James P. TenBroek				March 12, 2007
/s/ IAN K. LORING		Director
Ian K. Loring				March 12, 2007

53

Eschelon Telecom, Inc.
Schedule II—Valuation and Qualifying Accounts
Years Ended December 31, 2006, 2005 and 2004
(Dollars in thousands)

	Balance at Beginning of Year			Additions Charged to Costs and Expenses			Less Deductions				Balance Acquired Through Acquisitions			Balance at End of Year
Allowance for Doubtful Accounts Receivable:
2006		$	492		$	3,462		$	(3,368	)		$	317		$	903
2005		817			2,338			(2,663		)		—			492
2004		739			1,567			(1,894		)		405			817

	Balance at Beginning of Year			Additions Charged to Costs and Expenses			Less Deductions			Balance Acquired Through Acquisitions			Balance at End of Year
Valuation Allowance for Deferred Income Tax Assets:
2006		$	57,800		$	—		$	1,354		$	—		$	56,446
2005		46,139			11,661			—			—			57,800
2004		44,761			1,378			—			—			46,139

54

Eschelon Telecom, Inc.
Consolidated Financial Statements
Years Ended December 31, 2006, 2005 and 2004

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 and Shareowners
Eschelon Telecom, Inc.

We have audited the accompanying consolidated balance sheets of Eschelon Telecom, Inc. as of December 31, 2006 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, 2006. Our audits also included the financial statement schedule listed in the index at Item 15. These financial statements and the schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and the schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Eschelon Telecom, Inc. at December 31, 2006 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, 2006, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

As discussed in Note 1 to the financial statements, in 2006 the Company adopted Financial Accounting Standards Board Statement No. 123 (revised 2004), Share-Based Payment.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Eschelon Telecom, Inc’s. internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 8, 2007 expressed an unqualified opinion thereon.

Ernst & Young LLP

March 8, 2007
Minneapolis, Minnesota

F-2

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

	December 31,
	2006			2005
Assets
Current assets:
Cash and cash equivalents	$	21,146		$	26,062
Restricted cash	1,224			996
Available-for-sale securities	17,097			4,760
Accounts receivable, net of allowance for doubtful accounts of $903 and $492, respectively	27,592			22,996
Other receivables	4,025			3,052
Inventories	3,552			2,927
Prepaid expenses	2,314			2,294
Total current assets	76,950			63,087
Property and equipment, net	145,785			126,452
Other assets	2,185			1,506
Goodwill	59,670			7,168
Intangible assets, net	45,931			33,333
Total assets	$	330,521		$	231,546
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	17,641		$	16,400
Accrued telecommunication costs	5,730			4,227
Accrued office rent	2,521			2,035
Accrued interest expense	3,829			2,646
Other accrued expenses	7,433			5,485
Deferred revenue	10,109			7,921
Accrued compensation expenses	4,174			2,809
Capital lease obligations, current maturities	3,131			2,430
Total current liabilities	54,568			43,953
Long-term liabilities:
Other long-term liabilities	1,262			251
Capital lease obligations, less current maturities	2,201			2,964
Notes payable	141,040			92,125
Total liabilities	199,071			139,293
Stockholders’ equity:
Common stock, $0.01 par value per share; 200,000,000 shares authorized; issued and outstanding shares—17,997,869 shares and 14,634,279 shares, respectively	176			146
Additional paid-in capital	289,101			248,199
Accumulated other comprehensive income	—			56
Accumulated deficit	(157,827		)	(155,047		)
Deferred compensation	—			(1,101		)
Total stockholders’ equity	131,450			92,253
Total liabilities and stockholders’ equity	$	330,521		$	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,
	2006			2005			2004
Revenue:
Network services	$	244,702		$	201,835		$	131,780
Business telephone systems	29,824			25,908			26,316
	274,526			227,743			158,096
Costs and expenses:
Network services expense (exclusive of depreciation and amortization)	98,664			85,914			47,354
Business telephone systems cost of revenue	18,427			16,139			15,979
General and administrative	65,186			56,431			41,755
Sales and marketing	38,383			33,879			27,500
Depreciation and amortization	42,247			39,653			31,105
Operating income (loss)	11,619			(4,273		)	(5,597		)
Other income (expense):
Interest income	3,165			691			124
Interest expense	(17,532		)	(28,125		)	(11,452		)
Gain on extinguishment of debt	—			—			18,195
Other income (expense)	(32		)	65			(155		)
Income (loss) before income taxes	(2,780		)	(31,642		)	1,115
Income taxes	—			(4		)	(4		)
Net income (loss) from continuing operations	(2,780		)	(31,646		)	1,111
Income from discontinued operation, net of tax	—			329			—
Gain on sale of discontinued operation, net of tax	—			326			—
Net income (loss)	(2,780		)	(30,991		)	1,111
Less preferred stock dividends and premium paid on repurchase of preferred stock	—			—			(4,292		)
Net loss applicable to common stockholders	$	(2,780	)	$	(30,991	)	$	(3,181	)
Basic and diluted income (loss) per share:
Continuing operations	$	(0.17	)	$	(5.32	)	$	(11.11	)
Discontinued operation	—			0.11			—
Net loss	$	(0.17	)	$	(5.21	)	$	(11.11	)
Weighted average shares outstanding:
Basic and diluted	16,467,972			5,949,310			287,393

See accompanying notes.

F-4

Eschelon Telecom, Inc.

Consolidated Statements of Stockholders’ Equity (Deficit)

(Dollars in Thousands)

										Accumulated
						Additional				Other
	Common Stock					Paid-In				Comprehensive				Accumulated				Deferred
	Shares		Amount			Capital				Income				Deficit				Compensation				Total
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
Change in 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
Sale of common stock, net of fees	2,550,000			26			39,929				—				—				—			39,955
Stock options exercised	423,591			4			394				—				—				—			398
Issuance of restricted common stock	390,000			—			—				—				—				—			—
Forfeiture of common stock	(1	)		—			—				—				—				—			—
Deferred compensation related to stock options granted	—			—			(1,101		)		—				—				1,101			—
Share-based compensation	—			—			1,680				—				—				—			1,680
Change in unrealized gain on available-for-sale securities	—			—			—				(56		)		—				—			(56		)
Net loss for the year	—			—			—				—				(2,780		)		—			(2,780		)
Balance at December 31, 2006	17,997,869			$	176		$	289,101			$	—			$	(157,827	)		$	—		$	131,450

See accompanying notes.

F-5

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

	Year Ended December 31,
	2006			2005			2004
Operating activities
Net income (loss)	$	(2,780	)	$	(30,991	)	$	1,111
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization expense	42,247			39,653			31,105
Provision for bad debt expense	1,887			1,090			721
Non-cash interest expense, net of non-cash interest income	4,384			7,288			2,339
Non-cash compensation expense on restricted and unrestricted common stock	682			39			34
Non-cash compensation expense on stock options	998			924			—
Loss on write-off and sales of assets	66			260			162
Gain on extinguishment of debt	—			—			(18,195		)
Gain on sales of available-for-sale securities	(77		)	(326		)	(7		)
Gain on sale of discontinued operation	—			(326		)	—
Changes in operating assets and liabilities:
Accounts receivable	(1,476		)	(5,145		)	658
Other receivables	(634		)	(76		)	(546		)
Inventories	(492		)	(54		)	296
Prepaid expenses and other assets	259			495			(209		)
Discontinued assets held for sale, net of liabilities	—			222			—
Accounts payable and accrued expenses	(374		)	2,133			8,984
Deferred revenue	381			621			878
Accrued compensation expenses	882			(779		)	(1,216		)
Net cash provided by operating activities	45,953			15,028			26,115
Investing activities
Purchase of subsidiaries, net of cash acquired	(67,208		)	(48		)	(45,495		)
Purchase of assets held for sale, net of liabilities	—			(216		)	—
Purchases of available-for-sale securities	(95,765		)	(30,526		)	(8,198		)
Purchases of property and equipment	(34,277		)	(19,227		)	(15,414		)
Cash paid for customer installation costs	(18,914		)	(13,551		)	(11,293		)
Proceeds from sales of available-for-sale securities	83,462			32,312			2,041
Proceeds from sales of assets	174			239			25
Increase in restricted cash	(228		)	(274		)	(722		)
Proceeds from sale of discontinued operation, net of fees	—			320			—
Net cash used in investing activities	(132,756		)	(30,971		)	(79,056		)
Financing activities
Proceeds from issuance of notes payable	45,600			—			136,163
Payments made on notes and capital lease obligations	(2,730		)	(51,362		)	(66,948		)
Proceeds from issuance of preferred stock	—			154			15,000
Payment on repurchase of preferred stock	—			—			(5,085		)
Proceeds from issuance of common stock, net of fees	40,353			67,126			8
Increase in debt issuance costs	(1,336		)	(348		)	(8,368		)
Net cash provided by financing activities	81,887			15,570			70,770
Net increase (decrease) in cash and cash equivalents	(4,916		)	(373		)	17,829
Cash and cash equivalents at beginning of year	26,062			26,435			8,606
Cash and cash equivalents at end of year	$	21,146		$	26,062		$	26,435
Supplemental cash flow information
Cash paid for interest	$	13,113		$	20,837		$	9,114
Supplemental noncash activities
Equipment purchases under capital leases	$	1,467		$	3,127		$	4,064
Value of common stock issued to management and certain members of the board of directors	$	6,045		$	27		$	14

See accompanying notes.

F-6

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

Note 1:   Summary of Significant Accounting Policies

Organization:   Eschelon Telecom, Inc. (the Company) is a competitive communications provider that targets the small and medium-sized business segment and is headquartered in Minneapolis, Minnesota. The Company was incorporated in Delaware in 1996 under the name Advanced Telecommunications, Inc. The Company is a facilities-based competitive communication services provider of voice and data services and business telephone systems in 45 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 Analog and Digital Services	Dial-Up, Dedicated and Broadband Internet Access	Customer Premise Telephone Equipment and Accessories
Vertical Features	Point to Point Services	Data Communications Equipment
Long Distance	SPAM Filtering	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.

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.

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.

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 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.

Cash and Cash Equivalents:   Cash equivalents represent short-term investments in money market instruments with original maturities of three months or less. Cash equivalents are carried at cost which approximates market value. On December 31, 2006 and 2005, the Company had investments in securities of $16,978 and $21,728, respectively, which are included in cash and cash equivalents.

Restricted Cash:   Restricted cash consists primarily of letters of credit to collateralize performance bonds, litigation settlements and a revolving line of credit. The Company expects restricted cash to become available upon the satisfaction of the obligation pursuant to which the letters of credit or guarantees were issued.

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 and auction rate securities. In

F-7

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

Note 1:   Summary of Significant Accounting Policies (Continued)

accordance with 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 and auction rate 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. The Company uses the specific identification of securities sold method to recognize realized gains and losses in earnings.

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.

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	5-15 years
Switching and data software	3-5 years

Leasehold improvements are amortized over the shorter of 5 years or the related lease term. All internal costs directly related to the construction of the switches and operating and support systems, including compensation of certain employees, are capitalized.

Impairment of Long-Lived Assets:   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. The Company completed its annual impairment test during the fourth quarter of 2006 and 2005 and determined long-lived assets were not impaired.

Goodwill and Other Intangible Assets:   The Company tests goodwill annually for impairment in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. Under SFAS No. 144 if the implied fair value of a reporting unit is less than the carrying amount, an impairment charge is recognized. The Company completed its annual impairment test in the fourth quarter of 2006 and 2005 and determined that goodwill had not been impaired.

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.

F-8

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

Note 1:   Summary of Significant Accounting Policies (Continued)

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).

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.

Network Expense:   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.

Advertising Costs:   Advertising costs are expensed as incurred. For the years ended December 31, 2006, 2005 and 2004, the Company had advertising expense of $589, $589 and $464, respectively.

Share-Based Compensation:   The Company accounts for its share-based compensation in accordance with SFAS No. 123(R), Share-Based Payment. Effective January 1, 2006, the Company adopted the provisions of SFAS No. 123(R), which requires the measurement and recognition of compensation expense for all share-based payment awards to employees and directors based on estimated fair values. Prior to the adoption of SFAS No. 123(R), the Company accounted for its stock-based compensation under the recognition and measurement principles of Accounting Principles Board Opinion No. 25 (APB No. 25), Accounting for Stock Issued to Employees, and related interpretations. The Company used the Black-Scholes option-pricing model (“Black-Scholes Model”) for the purposes of determining the estimated fair value of its share-based payment awards at the date of grant. The Black-Scholes Model requires certain assumptions that involve judgment. The Company’s share-based awards have characteristics significantly different from publicly traded options, and because changes in the input assumptions can materially affect the fair value estimate, the existing pricing models may not provide a reliable single measure of the fair value of its share-based payment awards. The Company will continue to assess the assumptions and methodologies used to calculate estimated fair value of share-based compensation.

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.

Recent Accounting Pronouncements:   In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, and prescribes a recognition threshold and measurement attribute for the financial statement recognition and

F-9

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

Note 1:   Summary of Significant Accounting Policies (Continued)

measurement of a tax position taken or expected to be taken in a tax return. The Company has determined the adoption of FIN 48 will not have a material impact on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. The standard provides guidance for using fair value to measure assets and liabilities. The standard clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company has not yet determined the impact, if any, that the adoption of SFAS No. 157 will have on its consolidated financial statements.

Note 2:   Investments

Available-for-sale securities consist of the following:

	December 31, 2006									December 31, 2005
	Amortized			Unrealized			Amortized			Unrealized
	Cost			Holding			Fair			Cost			Holding			Fair
	Basis			Losses			Value			Basis			Gains			Value
U.S. government agencies		$	—		$	—		$	—		$	1,961		$	26	$	1,987
Corporate obligations		1,497			—			1,497			2,743			30		2,773
Auction rate securities		15,600			—			15,600			—			—		—
Total		$	17,097		$	—		$	17,097		$	4,704		$	56	$	4,760

As of December 31, 2006, the available-for-sale securities classified as corporate obligations have remaining maturities of six months.

Note 3:   Property and equipment

Property and equipment consists of the following:

	December 31,
	2006				2005
Vehicles		$	2,312		$	1,375
Office furniture and equipment		26,559			18,229
Computer equipment and software		49,620			41,897
Leasehold improvements		27,272			23,765
Switching and data equipment and software		172,899			134,661
		278,662			219,927
Less accumulated depreciation		(132,877		)	(93,475		)
		$	145,785		$	126,452

Depreciation expense was $27,596, $25,565 and $18,684 for the years ended December 31, 2006, 2005 and 2004, respectively.

F-10

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

Note 4:   Goodwill and Other Intangible Assets

Goodwill:   Goodwill represents the excess cost over the fair value of the net assets acquired. In 2006, the Company recorded $52,502 of goodwill in connection with the acquisitions of Oregon Telecom, Inc. (OTI), OneEighty Communications, Inc. (OneEighty) and Mountain Telecommunications, Inc. (MTI). Goodwill related to the OneEighty and MTI acquisitions is not deductible for tax purposes.

In 2005, the Company completed the purchase price allocation for the acquisition of Advanced TelCom, Inc. (ATI), resulting in a $31,608 reduction in goodwill, primarily consisting of increases in fixed assets and intangible assets.

The changes in the carrying value of goodwill are as follows:

Balance as of December 31, 2004	$	38,776
Purchase accounting adjustments	(31,608		)
Balance as of December 31, 2005	7,168
Goodwill related to the acquisition of OTI	14,635
Goodwill related to the acquisition of OneEighty	5,643
Goodwill related to the acquisition of MTI	32,224
Balance as of December 31, 2006	$	59,670

Other Intangible Assets:   In November 2006, the Company recorded intangible assets of $2,122 in connection with the acquisition of MTI, consisting of several right to use agreements.

In August 2006, the Company entered into an agreement to purchase a selected customer base from Tel West Communications, LLC (TelWest) in exchange for $500 per access line, not to exceed $5,300. As of December 31, 2006, the Company paid Tel West $4,070 and recorded $3,483 of customer installation costs. The customer installation costs are recognized as the Company converts the TelWest customers to its network.

In June 2006, the Company recorded intangible assets of $5,800 in connection with the acquisition of OTI, consisting of customer relationships and non-compete agreements.

In December 2005, the Company recorded intangible assets of $3,913 in connection with the acquisition of ATI, consisting of customer relationships and developed technology.

In September 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.

Intangible assets consist of the following:

			December 31, 2006							December 31, 2005
	Useful Life (years)		Gross Carrying Amount		Accumulated Amortization			Net		Gross Carrying Amount		Accumulated Amortization			Net
Customer installation costs		3-5	$	96,565		$	64,364	$	32,201	$	77,650		$	52,034	$	25,616
Debt issuance costs		4-6	7,001			2,159		4,842		5,666			1,077		4,589
Customer relationships		4	8,520			2,792		5,728		3,820			955		2,865
Right to use agreements		10-20	2,122			29		2,093		—			—		—
Non-compete agreements		3-5	1,400			365		1,035		300			100		200
Developed technology		3	94			62		32		94			31		63
Total			$	115,702		$	69,771	$	45,931	$	87,530		$	54,197	$	33,333

F-11

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

Note 4:   Goodwill and Other Intangible Assets (Continued)

Total amortization expense was $15,733, $15,153 and $13,076 for the years ended December 31, 2006, 2005 and 2004, respectively. Estimated amortization expense for each of the five succeeding fiscal years based on current intangible assets is expected to be as follows:

2007	$	16,426
2008	13,692
2009	9,483
2010	4,401
2011	691
Thereafter	1,238
Total	$	45,931

Note 5:   Accumulated Other Comprehensive Income

The components of accumulated other comprehensive income are as follows:

Balance, December 31, 2004	$	30
Net unrealized gain on available-for-sale securities	26
Balance, December 31, 2005	56
Net unrealized loss on available-for-sale securities	(56		)
Balance, December 31, 2006	$	—

Note 6:   Acquisitions

Mountain Telecommunications, Inc (MTI):   On November 1, 2006, the Company completed the acquisition of MTI, a competitive services provider based in Tempe, Arizona. MTI provides services in Phoenix, Tucson and markets throughout the state of Arizona expanding the Company’s market presence in Arizona. The Company expects to benefit from operating synergies by consolidating MTI’s operation into its existing business. The results of MTI subsequent to November 1, 2006 are included in the results of operations.

In the MTI transaction, the Company acquired all of the outstanding shares of MTI in exchange for $37,256 (net of cash acquired) and certain assumed liabilities. As of December 31, 2006 the purchase price has been allocated on a preliminary basis, resulting in $32,224 of goodwill. None of this goodwill is deductible for tax purposes. The Company accrued $340 of acquisition related expenses, which include severance benefits, relocation and contract termination fees. As of December 31, 2006 no acquisition related expenses have been paid.

OneEighty Communication, Inc (OneEighty):   On October 1, 2006, the Company completed the acquisition of OneEighty, a competitive services provider based in Billings, Montana. The acquisition of OneEighty expands the Company’s market presence into Montana. The Company expects that through market growth, leveraging its size, and existing investments in infrastructure OneEighty can benefit from operating synergies. The results of OneEighty subsequent to October 1, 2006 are included in the results of operations.

In the OneEighty transaction, the Company acquired all of the outstanding shares of OneEighty in exchange for $9,959 (net of cash acquired) and certain assumed liabilities. As of December 31, 2006 the purchase price has been allocated on a preliminary basis, resulting in $5,643 of goodwill. None of this goodwill is deductible for tax purposes. The Company accrued $21 of acquisition related expenses, which relate to severance benefits. As of December 31, 2006 no acquisition related expenses have been paid.

F-12

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

Note 6:   Acquisitions (Continued)

Oregon Telecom, Inc (OTI):   On April 1, 2006, the Company completed the acquisition of OTI, a privately-held competitive services provider based in Salem, Oregon. The acquisition expands the Company’s market presence in the Pacific Northwest. The Company expects to benefit from operating synergies by consolidating OTI’s operation into its existing business. The results of OTI subsequent to April 1, 2006 are included in the results of operations.

In the OTI transaction, the Company acquired all of the outstanding shares of OTI in exchange for $19,993 (net of cash acquired) and certain assumed liabilities. The Company acquired $5,800 of intangible assets, consisting of customer relationships and non-compete agreements and recorded $14,635 of goodwill as a result of the acquisition. The Company accrued $867 of acquisition related expenses, which include severance benefits, relocation and contract termination fees. As of December 31, 2006 $73 of acquisition related expenses have been paid.

Advanced TelCom, Inc. (ATI):On December 31, 2004, the Company completed the acquisition of ATI increasing the Company’s market share among competitive service providers in the Pacific Northwest. The Company expects to benefit from operating synergies by consolidating ATI’s operation into its existing business. The results of ATI subsequent to December 31, 2004 are included in the results of operations.

In the ATI transaction, the Company acquired all of the outstanding shares of ATI in exchange for $45,543 (net of cash acquired) and certain assumed liabilities. During the fourth quarter of 2005, the Company finalized the purchase price allocation 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. 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, 2006 and 2005, $2,128 and $1,753, respectively, of the acquisition related expenses have been paid.

The following table summarizes the allocation of the purchase price to the fair value of the assets acquired and liabilities assumed at the date of each acquisition described above, including any adjustments to the purchase price allocation through December 31, 2006:

	MTI			OneEighty			OTI		ATI
	November 1, 2006			October 1, 2006			April 1, 2006		December 31, 2004
Current Assets		$	2,728		$	761	$	3,297		$	8,279
Property and equipment		6,947			4,152		529			42,729
Other assets		21			348		57			29
Goodwill		32,224			5,643		14,635			—
Intangible assets		2,122			—		5,800			3,913
Total assets acquired		44,042			10,904		24,318			54,950
Current liabilities		4,709			739		4,013			8,869
Long-term liabilities		2,019			—		—			217
Total liabilities assumed		6,728			739		4,013			9,086
Net assets acquired		37,314			10,165		20,305			45,864
Less cash acquired		58			206		312			321
Net cash paid		$	37,256		$	9,959	$	19,993		$	45,543

The OneEighty and MTI purchase price allocation has been allocated on a preliminary basis as of December 31, 2006. The Company is still determining the valuation of separately identifiable intangible assets.

F-13

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

Note 6:   Acquisitions (Continued)

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 unaudited pro forma consolidated results of continuing operations, as though the acquisitions of ATI, OTI, OneEighty and MTI had taken place on January 1, 2004, are as follows:

	Year Ended December 31,
	2006			2005			2004
Revenue	$	303,191		$	276,334		$	261,040
Income (loss) from continuing operations	$	(5,552	)	$	(28,341	)	$	1,858
Net income (loss)	$	(5,552	)	$	(27,686	)	$	1,858
Net loss per share—basic and diluted	$	(0.34	)	$	(4.65	)	$	(8.47	)

Note 7:   Discontinued Operation

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

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.

Note 8:   Operating and Capital Leases

Operating Leases:   The Company leases office space under operating leases. The leases generally require a base rent plus amounts covering operating expenses and property taxes. Rent expense for the years ended December 31, 2006, 2005 and 2004 was $8,267, $7,468 and $5,087, respectively.

F-14

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

Note 8:   Operating and Capital Leases (Continued)

Future minimum lease payments under operating leases with a term in excess of one year as of December 31, 2006 are as follows:

2007	$	6,067
2008	6,031
2009	5,224
2010	3,659
2011	3,209
Thereafter	3,064
Total	$	27,254

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

	December 31,
	2006			2005
Cost	$	7,570		$	9,207
Less accumulated depreciation	(1,891		)	(2,507		)
	$	5,679		$	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, 2006 are as follows:

2007	$	3,622
2008	1,570
2009	635
2010	192
2011	83
Total minimum lease payments	6,102
Less amount representing interest	(770		)
Present value of minimum payments	5,332
Less current portion	(3,131		)
Capital lease obligations, net of current portion	$	2,201

Note 9:   Notes Payable and Other Long-Term Liabilities

Notes Payable:   In March 2006, the Company completed an offering of $48,000 of 83¤8% notes due March 15, 2010 at a discount resulting in a 9.92% yield. The notes were entered into under a supplemental indenture to the original indenture dated March 17, 2004, and have the same terms and conditions of the original indenture. The Company received net proceeds of approximately $44,264 after deducting fees and expenses associated with the offering. The Company’s acquisition of Oregon Telecom, Inc. on April 1, 2006, was financed with $20,305 of the proceeds from the offering. The remaining proceeds were used for general corporate purposes, to fund the acquisition of OneEighty and partially fund the acquisition of MTI.

In September 2005, the Company redeemed 35% of its notes due March 15, 2010 at a redemption price of 112% of the $50,630 accreted value ($57,750 principal amount). The $6,076 accreted-value premium was recorded

F-15

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

Note 9:   Notes Payable and Other Long-Term Liabilities (Continued)

as interest expense. Proceeds from the Company’s initial public offering of common stock (see Note 11, Capital Stock) were used to redeem the notes.

In November 2004, the Company completed an offering of $65,000 of 83¤8% notes due March 15, 2010 at a discount resulting in a 14% yield. The notes were entered into under a supplemental indenture to the original indenture dated March 17, 2004, and have the same terms and conditions of the original indenture. The Company received net proceeds of approximately $47,269 after deducting fees and expenses associated with the offering. The proceeds from the offering were used to finance the acquisition of ATI.

In March 2004, the Company completed an offering of $100,000 of 83¤8% senior second secured notes (“notes”) due March 15, 2010 at a discount resulting in a 12% yield. The Company received net proceeds of approximately $80,178 after deducting fees and expenses associated with the offering. The proceeds from the offering were used to retire a 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 Credit Agreement.

The notes will mature on March 15, 2010, and accrue interest at an annual rate of 83¤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.

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

	2006			2005
Principal amount due	$	155,250		$	107,250
Discount on notes payable	(14,210		)	(15,125		)
	$	141,040		$	92,125

F-16

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

Note 9:   Notes Payable and Other Long-Term Liabilities (Continued)

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

2007	144,896
2008	149,254
2009	154,180
March 15, 2010	155,250

The carrying amount, net of discount, of the Company’s debt instruments in the consolidated balance sheets at December 31, 2006 and 2005 approximates fair value.

Fiber Ring Payable:   As a result of the MTI acquisition, the Company acquired the use of two fiber rings through a right to use agreement. In 2006, two additional service orders were added to the agreement. The combined agreement requires monthly payments of $23 thru May 2009 and $12 per month for the remaining 186 months. The payable can be prepaid at any time. The balance is amortized based on a 10.95% interest rate. The following is a schedule by years of future minimum payments required under this agreement as of December 31, 2006:

2007	$	270
2008	270
2009	193
2010	138
2011	138
Thereafter	1,783
Total minimum lease payments	2,792
Less amount representing interest	(1,428		)
Present value of minimum payments	1,364
Less current portion	(127		)
Capital lease obligations, net of current portion	$	1,237

Note 10:   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 $1,014, $962 and $764 in 2006, 2005 and 2004, respectively.

Note 11:   Capital Stock

Common Stock:   In May 2006, the Company completed an offering of 2,550,000 shares of the Company’s common stock at $15.70 per share. After deducting fees and expenses related to the offering, the Company received net proceeds of approximately $39,955, which was used for general corporate purposes and to partially fund the acquisition of MTI.

In August 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 8 3/8% 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.

F-17

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

Note 11:   Capital Stock (Continued)

Restricted and Unrestricted Common Stock:   In June 2006, the Company granted 390,000 shares of restricted common stock to members of management and is recording compensation expense on a straight-line basis from the date of grant. In March 2005, the Company granted 9,350 shares of unrestricted common stock to certain directors and recorded compensation expense of $27. In February 2003, the Company granted 183,399 shares of restricted common stock to certain directors and members of management. The Company records compensation expense on its restricted common stock as the restrictions are removed from the stock.

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. The Company issued 20,000,000 shares of its newly authorized Series B Convertible Preferred Stock in December 2004, 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 in August 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.

Note 12:   Share-Based Compensation

Stock Options:   A total of 2,632,414 shares of the Company’s common stock have been authorized for issuance under the Eschelon Telecom, Inc. Stock Option Plan of 2002 (the “2002 Plan”). The 2002 Plan provides for grants of incentive stock options, non-statutory stock options, stock appreciation rights, restricted or unrestricted stock awards, phantom stock, performance awards and other stock-based awards to our employees, former employees, officers, directors and consultants. The 2002 Plan is administered by the Compensation Committee of the Board of Directors, which has sole discretion and authority, consistent with the provisions of the 2002 Plan, to determine which eligible participants will receive awards, when awards will be granted, the terms of awards, and the number of shares that will be subject to awards. The purpose of the 2002 Plan is to enable the Company to attract, retain and reward the best-available employees, to provide participants with incentives to improve stockholder value and to contribute to the growth and financial success of the Company through their future services with the Company. All of the Company’s employees, former employees, officers and directors are eligible to participate in the 2002 Plan.

The exercise price of incentive stock options may not be less than the fair market value of the stock on the date of grant and the options are exercisable for a period not to exceed ten years from the date of the grant. Options and restricted stock awards are typically subject to one of the following vesting schedules:  (1) 20% upon the initial grant and 20% per year over four years from the date of grant, (2) 20% per year over five years from the date of grant, or (3) 33 1/3% upon the initial grant and 33 1/3% per year over two years from the date of grant. Awards granted may be subject to other vesting terms as determined by the Compensation Committee.

The Company adopted SFAS No. 123(R) using the modified prospective transition method and the straight-line attribution method for recognizing compensation expense. Under the modified prospective transition method, compensation expense recognized during the year ended December 31, 2006, included:  (a) the prorated portion of compensation expense for all share-based awards granted prior to January 1, 2006, but not yet vested, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) the prorated portion of compensation expense for all share-based awards granted subsequent to adoption of SFAS No. 123(R), based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). In accordance

F-18

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

Note 12:   Share-Based Compensation (Continued)

with the modified prospective transition method, the Company’s consolidated financial statements for periods prior to the adoption of SFAS No. 123(R) have not been restated to reflect the impact of the provisions of SFAS No. 123(R).

The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using assumptions required by SFAS No. 123(R). Due to insufficient history related to options, the Company uses the short-cut method accepted by the SEC to determine the expected life of options. The Company expects to continue using the short-cut method for options granted through December 31, 2007, after which the use of the short-cut method is not permitted by the SEC. Volatility is estimated based on an exchange-traded telecommunications fund using historical data that corresponds to the expected term of the options granted. The risk-free interest rate is based on the Federal Reserve rate for U.S. government securities with a term that corresponds to the expected term of the options granted.  The Company uses historical data and other factors to estimate the expected forfeiture rate.

The following table summarizes the assumptions used to estimate the fair value of options granted using the Black-Scholes Model:

	December 31,
	2006		2005		2004
Expected dividend yield	—		—		—
Expected stock price volatility	24%-26	%	25	%	25	%
Risk-free interest rate	4.45%-4.95	%	3.71%-4.45	%	3.25%-3.88	%
Expected life of options	6-6.5 years		5 years		5 years

The Company recorded stock-based compensation expense under SFAS No. 123(R) for stock option awards of $998 for the year ended December 31, 2006. As a result of adopting SFAS No. 123(R) on January 1, 2006, the Company’s net loss for the year ended December 31, 2006 was $442 greater than if it had continued to account for share-based compensation under APB No. 25. Basic and diluted earnings per share for the year ended December 31, 2006 was $0.03 per share lower than if the Company had continued to account for share-based compensation under APB No. 25.

As of December 31, 2006, there was $934 of unrecognized compensation expense related to unvested options granted under the Company’s share-based payment plans. The expense is expected to be recognized over a weighted-average period of 1.5 years. The total fair value of options that vested during the years ended December 31, 2006, 2005 and 2004 was $923, $817 and $30, respectively.

F-19

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

Note 12:   Share-Based Compensation (Continued)

Pro forma information regarding net loss and net loss per share is required by SFAS No. 123, Accounting for Stock-Based Compensation, and has been determined as if the Company had accounted for its employee stock options under the fair value method of SFAS No. 123. The following table illustrates the effect on net loss per share if the Company had applied the fair value recognition provision of SFAS No. 123 to stock-based employee compensation:

	December 31,
	2005			2004
Net loss applicable to common stockholders, as reported	$	(30,991	)	$	(3,181	)
Add: Stock-based employee compensation expense included in reported net loss	936			20
Deduct: Total stock-based employee compensation expense determined under fair value-based methods for all awards	(422		)	(45		)
Pro forma net loss applicable to common stockholders	$	(30,477	)	$	(3,206	)
Net loss per share:
Basic and diluted - as reported	$	(5.21	)	$	(11.11	)
Basic and diluted - pro forma	$	(5.12	)	$	(11.11	)

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, 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
Additional shares reserved		1,000,000			—			—
Options granted		(125,901	)		125,901			16.07
Restricted stock granted		(390,000	)		—			15.50
Canceled		31,091			(31,091	)		9.07
Exercised		—			(423,591	)		0.94
Balance at December 31, 2006		669,269			838,709			$	7.33

The following table contains details of the stock options outstanding as of December 31, 2006:

	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		530,228		7.46 years		$	3.62		294,358		$	3.91
$10.85 - $21.68		308,481		9.02 years		$	13.71		100,683		$	13.12
		838,709		8.03 years		$	7.33		395,041		$	6.26

F-20

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

Note 12:   Share-Based Compensation (Continued)

As of December 31, 2006, the options exercisable have a weighted-average remaining contractual life of 7.82 years and an intrinsic value of $5,353. The options outstanding as of December 31, 2006 have an intrinsic value of $10,467.

The weighted-average grant-date fair value of options granted during the years ended December 31, 2006, 2005 and 2004, was $5.80, $5.68 and $0.40, respectively. The total intrinsic value for options exercised during the years ended December 31, 2006, 2005 and 2004, was $5,820, $295 and $2, respectively.

Cash received from option exercises for the years ended December 31, 2006, 2005 and 2004, was $398, $60 and $8, respectively.

Restricted and Unrestricted Common Stock:   Total compensation expense related to restricted and unrestricted common stock for the years ended December 31, 2006, 2005 and 2004, was $682, $39 and $34, respectively.

The following table summarizes the restricted and unrestricted common stock under the Eschelon Telecom, Inc. Stock Option Plan of 2002:

	Number of Shares			Weighted Average Grant- Date Fair Value
Unvested at December 31, 2003		80,085			$	0.68
Vested		(29,958	)		0.68
Unvested at December 30, 2004		50,127			0.68
Granted		9,350			2.93
Vested		(27,297	)		1.47
Forfeited		(494	)		0.68
Unvested at December 31, 2005		31,686			0.68
Granted		390,000			15.50
Vested		(15,842	)		0.68
Unvested at December 31, 2006		405,844			$	14.92

Note 13:   Income Taxes

As of December 31, 2006, the Company had $174,314 of net operating loss (NOL) carryforwards, which consist of $170,877 reflected in the deferred tax asset below and $3,437 of excess tax deductions arising from SFAS No. 123(R). These NOL carryforwards, if not utilized to reduce taxable income in future periods will 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.

F-21

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

Note 13:   Income Taxes (Continued)

Components of the deferred tax assets and liabilities at December 31, 2006 and 2005 are as follows:

	2006			2005
Deferred tax assets:
Net operating loss carryforward	$	67,663		$	69,179
Intangible assets	982			371
Bad debts	375			186
Compensation accruals	541			174
Inventory obsolescence	144			104
Other temporary differences	800			66
	70,505			70,080
Deferred tax liabilities:
Depreciation	(13,783		)	(12,259		)
Other	(276		)	(21		)
	56,446			57,800
Valuation allowance	(56,446		)	(57,800		)
Net deferred tax asset	$	—		$	—

Income tax expense 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,
	2006		2005		2004
Federal statutory tax rate	34.00	%	34.00	%	34.00	%
State taxes	3.72		—		0.25
Permanent differences	3.20		(0.01	)	2.74
Utilization of valuation allowance	(40.92	)	(34.00	)	(36.61	)
Effective tax rate	0.00	%	(0.01	)%	0.38	%

Note 14:   Condensed Consolidating Financial Information

The 8 3/8% senior second secured notes due March 15, 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 8 3/8% senior second secured notes due March 15, 2010 is included in Note 9, Notes Payable.

The following tables present condensed consolidating balance sheets for the years ended December 31, 2005 and 2006 and condensed consolidating statements of operations and cash flows for the years ended December 31, 2006, 2005 and 2004.

F-22

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

Note 14:   Condensed Consolidating Financial Information

Condensed Consolidating Balance Sheets
As of December 31, 2006

					Eschelon
	Eschelon				Operating			Guarantor
	Telecom, Inc.				Company			Subsidiaries				Eliminations				Consolidated
Assets
Current assets:
Cash and cash equivalents		$	18,868		$	—			$	2,278			$	—			$	21,146
Restricted cash		1,224			—				—				—				1,224
Available-for-sale securities		17,097			—				—				—				17,097
Accounts receivable		—			—				27,592				—				27,592
Other receivables		304			—				3,721				—				4,025
Inventories		—			—				3,552				—				3,552
Prepaid expenses		893			—				1,421				—				2,314
Total current assets		38,386			—				38,564				—				76,950
Property and equipment, net		97,535			—				48,250				—				145,785
Investment in affiliates		126,830			—				—				(126,830		)		—
Other assets		513			—				1,672				—				2,185
Goodwill		—			—				59,670				—				56,670
Intangible assets, net		16,011			4,842				25,078				—				45,931
Total assets		$	279,275		$	4,842			$	173,234			$	(126,830	)		$	330,521
Liabilities and stockholders’ equity (deficit)
Current liabilities:
Accounts payable		$	14,070		$	—			$	3,571			$	—			$	17,641
Accrued telecommunication costs		—			—				5,730				—				5,730
Accrued office rent		1,768			—				753				—				2,521
Accrued interest expense		—			3,828				1				—				3,829
Other accrued expenses		911			—				6,522				—				7,433
Deferred revenue		—			—				10,109				—				10,109
Accrued compensation expenses		2,597			—				1,577				—				4,174
Capital lease obligation, current maturities		2,616			—				515				—				3,131
Total current liabilities		21,962			3,828				28,778				—				54,568
Long-term liabilities:
Other long-term liabilities		25			—				1,237				—				1,262
Capital lease obligation, less current maturities		1,490			—				711				—				2,201
Notes payable		—			141,040				—				—				141,040
Due to (from) affiliates		336,758			(136,599		)		(200,159		)		—				—
Total liabilities		360,235			8,269				(169,433		)		—				199,071
Convertible preferred stock		—			—				—				—				—
Stockholders’ equity (deficit)		(80,960		)	(3,427		)		342,667				(126,830		)		131,450
Total liabilities and stockholders’ equity (deficit)		$	279,275		$	4,842			$	173,234			$	(126,830	)		$	330,521

F-23

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

Note 14:   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		211,456			(103,502		)		(107,954		)		—				—
Total liabilities		235,538			(8,732		)		(87,513		)		—				139,293
Stockholders’ equity (deficit)		(47,475		)	13,320				185,454				(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 and per Unit Amounts)

Note 14:   Condensed Consolidating Financial Information (Continued)

Condensed Consolidating Statement of Operations
For the Year Ended December 31, 2006

					Eschelon
	Eschelon				Operating				Guarantor
	Telecom, Inc.				Company				Subsidiaries				Consolidated
Revenue:
Network services		$	—			$	—			$	244,702			$	244,702
Business telephone systems		—				—				29,824				29,824
		—				—				274,526				274,526
Cost and expenses:
Network services expense (exclusive of depreciation and amortization)		—				—				98,664				98,664
Business telephone systems		—				—				18,427				18,427
Sales, general and administrative		54,489				—				49,080				103,569
Depreciation and amortization		23,334				—				18,913				42,247
Operating income (loss)		(77,823		)		—				89,442				11,619
Other income (expense)		2,361				(16,747		)		(13		)		(14,399		)
Income (loss) before income taxes		(75,462		)		(16,747		)		89,429				(2,780		)
Income taxes		—				—				—				—
Net income (loss)		$	(75,462	)		$	(16,747	)		$	89,429			$	(2,780	)

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 and expenses:
Network services expense (exclusive of depreciation and amortization)		—				—				85,914			85,914
Business telephone systems		—				—				16,139			16,139
Sales, general and administrative		42,551				—				47,759			90,310
Depreciation and amortization		22,160				—				17,493			39,653
Operating income (loss)		(64,711		)		—				60,438			(4,273		)
Other income (expense)		(342		)		(27,093		)		66			(27,369		)
Income (loss) before income taxes		(65,053		)		(27,093		)		60,504			(31,642		)
Income taxes		(4		)		—				—			(4		)
Net income (loss) before discontinued operation		(65,057		)		(27,093		)		60,504			(31,646		)
Income from discontinued operation, net of tax		—				—				329			329
Gain on sale of discontinued operation, net of tax		326				—				—			326
Net income (loss)		$	(64,731	)		$	(27,093	)		$	60,833		$	(30,991	)

F-25

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

Note 14:   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 and expenses:
Network services expense (exclusive of depreciation and amortization)		—				—			47,354				47,354
Business telephone systems cost of revenue		—				—			15,979				15,979
Sales, general and administrative		37,400				—			31,855				69,255
Depreciation and amortization		20,734				—			10,371				31,105
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 and per Unit Amounts)

Note 14:   Condensed Consolidating Financial Information (Continued)

Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2006

					Eschelon
	Eschelon				Operating				Guarantor
	Telecom, Inc.				Company				Subsidiaries				Consolidated
Operating activities
Net income (loss)		$	(75,462	)		$	(16,747	)		$	89,429			$	(2,780	)
Adjustments to reconcile net income (loss):
Depreciation and amortization expense		23,499				—				18,748				42,247
Non-cash interest expense (interest income)		(13		)		4,397				—				4,384
Non-cash compensation expense		1,680				—				—				1,680
Other non-cash items		(12		)		—				1,888				1,876
Changes in operating assets and liabilities:
Accounts receivable		—				—				(1,476		)		(1,476		)
Accounts payable and accrued expenses		(282		)		1,183				(1,275		)		(374		)
Other operating assets and liabilities		720				—				(324		)		396
Total cash provided by (used in) operating activities		(49,870		)		(11,167		)		106,990				45,953
Investing activities
Purchase of subsidiaries, net of cash acquired		(67,784		)		—				576				(67,208		)
Purchases of available-for-sale securities		(95,765		)		—				—				(95,765		)
Proceeds from sales of available-for-sale securities		83,462				—				—				83,462
Purchases of property and equipment		(30,802		)		—				(3,475		)		(34,277		)
Cash paid for customer installation costs		(8,525		)		—				(10,389		)		(18,914		)
Increase in restricted cash		(228		)		—				—				(228		)
Proceeds from sale of assets		174				—				—				174
Total cash used in investing activities		(119,468		)		—				(13,288		)		(132,756		)
Financing activities
Proceeds from issuance of notes payable		—				45,600				—				45,600
Payments made on notes and capital lease obligations		(2,519		)		—				(211		)		(2,730		)
Proceeds from issuance of stock, net of fees		40,353				—				—				40,353
Increase in debt issuance costs		—				(1,336		)		—				(1,336		)
Change in due to/from affiliates		125,302				(33,097		)		(92,205		)		—
Total cash provided by (used in) financing act		163,136				11,167				(92,416		)		81,887
Increase (decrease) in cash and cash equivalents		(6,202		)		—				1,286				(4,916		)
Cash and cash equivalents at beginning of period		25,070				—				992				26,062
Cash and cash equivalents at end of period		$	18,868			$	—			$	2,278			$	21,146

F-27

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

Note 14:   Condensed Consolidating Financial Information (Continued)

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

					Eschelon
	Eschelon				Operating				Guarantor
	Telecom, Inc.				Company				Subsidiaries				Consolidated
Operating activities
Net income (loss)		$	(64,731	)		$	(27,093	)		$	60,833			$	(30,991	)
Adjustments to reconcile net income (loss):
Depreciation and amortization expense		22,160				—				17,493				39,653
Non-cash interest expense		116				7,172				—				7,288
Non-cash compensation expense		963				—				—				963
Gain on sale of discontinued operation		(326		)		—				—				(326		)
Other non-cash items		(66		)		—				1,090				1,024
Changes in operating assets and liabilities:
Accounts receivable		—				—				(5,145		)		(5,145		)
Accounts payable and accrued expenses		10,392				(1,423		)		(6,836		)		2,133
Discontinued assets, net of liabilities		222				—				—				222
Other operating assets and liabilities		(36		)		—				243				207
Total cash provided by (used in) operating activities		(31,306		)		(21,344		)		67,678				15,028
Investing activities
Purchase of subsidiaries, net of cash acquired		(48		)		—				—				(48		)
Purchase of asset held for sale, net of liabilities		(216		)		—				—				(216		)
Purchases of available-for-sale securities		(30,526		)		—				—				(30,526		)
Proceeds from sales of available-for-sale securities		32,312				—				—				32,312
Purchase of property and equipment		(13,580		)		—				(5,647		)		(19,227		)
Cash paid for customer installation costs		(7,116		)		—				(6,435		)		(13,551		)
Increase in restricted cash		(274		)		—				—				(274		)
Proceeds from sale of assets		239				—				—				239
Purchase of sale of discontinued operation, net of fees		320				—				—				320
Total cash used in investing activities		(18,889		)		—				(12,082		)		(30,971		)
Financing activities
Payments made on notes and capital lease obligations		(2,083		)		(49,176		)		(103		)		(51,362		)
Proceeds from issuance of stock, net of fees		67,280				—				—				67,280
Increase in debt issuance costs		—				(348		)		—				(348		)
Change in due to/from affiliates		(16,264		)		70,868				(54,604		)		—
Total cash provided by (used in) financing act		48,933				21,344				(54,707		)		15,570
Increase (decrease) in cash and cash equivalents		(1,262		)		—				889				(373		)
Cash and cash equivalents at beginning of period		26,332				—				103				26,435
Cash and cash equivalents at end of period		$	25,070			$	—			$	992			$	26,062

F-28

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

Note 14:   Condensed Consolidating Financial Information (Continued)

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

					Eschelon
	Eschelon				Operating			Guarantor
	Telecom, Inc.				Company			Subsidiaries				Consolidated
Operating activities
Net income (loss)		$	(59,217	)	$	7,811			$	52,517			$	1,111
Adjustments to reconcile net income (loss):
Depreciation and amortization expense		20,734			—				10,371				31,105
Non-cash interest expense		—			2,339				—				2,339
Non-cash compensation expense		34			—				—				34
Gain on extinguishment of debt		—			(18,195		)		—				(18,195		)
Other non-cash items		155			—				721				876
Changes in operating assets and liabilities:
Accounts receivable		—			—				658				658
Accounts payable and accrued expenses		3,002			4,070				1,912				8,984
Other operating assets and liabilities		(969		)	—				172				(797		)
Total cash provided by (used in) operating activities		(36,261		)	(3,975		)		66,351				26,115
Investing activities
Purchase of subsidiaries, net of cash acquired		(45,816		)	—				321				(45,495		)
Purchases of available-for-sale securities		(8,198		)	—				—				(8,198		)
Proceeds from sales of available-for-sale securities		2,041			—				—				2,041
Purchase of property and equipment		(13,101		)	—				(2,313		)		(15,414		)
Cash paid for customer installation costs		(7,553		)	—				(3,740		)		(11,293		)
Increase in restricted cash		(722		)	—				—				(722		)
Proceeds from sale of assets		25			—				—				25
Total cash used in investing activities		(73,324		)	—				(5,732		)		(79,056		)
Financing activities
Proceeds from issuance of notes payable		—			136,163				—				136,163
Payments made on notes and capital lease obligations		(1,527		)	(65,421		)		—				(66,948		)
Proceeds from issuance of stock, net of fees		15,008			—				—				15,008
Payment on repurchase of preferred stock		(5,085		)	—				—				(5,085		)
Increase in debt issuance costs		—			(8,368		)		—				(8,368		)
Change in due to/from affiliates		118,635			(58,399		)		(60,236		)		—
Total cash provided by (used in) financing act		127,031			3,975				(60,236		)		70,770
Increase (decrease) in cash and cash equivalents		17,446			—				383				17,829
Cash and cash equivalents at beginning of period		8,886			—				(280		)		8,606
Cash and cash equivalents at end of period		$	26,332		$	—			$	103			$	26,435

Note 15:   Subsequent Events

In February 2007, the Company signed a definitive agreement to acquire United Communications, Inc., (UNICOM), a privately-held competitive services provider based in Bend, Oregon. The Company will pay approximately $13,900 in cash to acquire UNICOM. The transaction is expected to close early in the second quarter of 2007.

F-29

EX-10.2.3

Exhibit 10.2.3

February 19, 2007

Geoffrey Boyd
Chief Financial Officer
Eschelon Telecom, Inc.
730 Second Avenue South
Suite 900
Minneapolis, MN 55402-2456

Dear Mr. Boyd:

Your existing service agreement will expire on April 30, 2007 and we are extending the termination language in that agreement for another two (2) years or through April 30, 2009.

In the event that your employment with Eschelon Telecom, Inc. is terminated without cause anytime before April 30, 2009, the Company will continue your salary and medical payments for a period of one (1) year beyond termination. Additionally, Eschelon will accelerate the vesting of options by more than one (1) year if the Board of Eschelon approves any modifications to option/restricted stock agreements that are more favorable than those in this agreement. The obligations imposed on you as an Officer of Eschelon Telecom, Inc. with respect to confidentiality, non-disclosure, and non-solicitation shall continue notwithstanding the termination of the employment relationship between the parties.

Accepted and Agreed:

By:	/s/ Richard A. Smith      2/21/07		By:	/s/ Cliff D. Williams      2/21/07
		Richard A. Smith		Cliff D. Williams
		President & Chief Executive Officer		Chairman & Founder
Accepted and Agreed:
By:	/s/ Geoffrey M. Boyd      2/21/07
	Geoffrey M. Boyd
	Chief Financial Officer

· 730 Second Avenue South · Suite 900 · Minneapolis, MN 55402 · Phone (612) 376-4400 · Fax (612) 376-4411

EX-10.7.10

Exhibit 10.7.10

Amendment #10

161 Chestnut Street
1 City Centre
Rochester, NY 14604

August 15, 2005

Mr. G. Boyd, Chief Financial Officer
Eschelon Telecom, Inc.
730 2nd Avenue South, Suite 900
Minneapolis, Minnesota 55402

Re: Amendment to Carrier Service Agreement

Dear Mr. Boyd:

Enclosed please find a fully executed copy of the above document.

If you have any questions, please contact your sales manager, Steven Graham.

	Very truly yours,
	/s/ Jacqueline A. LoPresti
	Jacqueline A. LoPresti
	Sr. Contract Administrator
	North American Carrier Services
Enclosure

EXECUTION COPY

AMENDMENT #10 TO CARRIER SERVICE AGREEMENT

ESCHELON TELECOM, INC.

August 3, 2005

This is Amendment #10 to the Carrier Service Agreement between Global Crossing Bandwidth, Inc., on behalf of itself and its affiliates that may provide a portion of the services hereunder (“Global Crossing”) and Eschelon Telecom, Inc. (“Eschelon” or “Purchaser”), dated August 25, 2000, as amended (the “Agreement”).

1.Except as otherwise stated, capitalized terms used herein shall have the same meaning as set forth in the Agreement.

2.Eschelon’s IP Transit Service Rate Schedule, Amended Exhibit P(a) is revised as follows:

Eschelon agrees to a Monthly IP Commitment over all of its OC-n IP circuits of 420 Mbps for a term of two (2) years, commencing with its first full Billing Cycle following the installation of Eschelon’s OC-3 circuit in Denver, Colorado. Until such installation, the Monthly IP Commitment shall be 355 Mbps, commencing with Eschelon’s first full Billing Cycle following execution of this Amendment by Global Crossing.

	Minimum	MRC (Mbps)
Port	Bandwidth	Full Pipe		Less than Full Pipe		Bursted
DS-3	10 Mbps	$	55	$	60	$	60
OC-3	65 Mbps	$	40	$	45	$	50
OC-12	200 Mbps	$	35	$	40	$	50

If Eschelon’s Monthly IP Commitment does not meet 420 mbps, Eschelon shall be billed a shortfall for that month at $45/mbps. (eg if Eschelon’s monthly usage is 400 mbps, Eschelon shall be billed a shortfall of 20 mbps x $45 = $900). Usage in excess of minimum commit levels will be considered burst and will be billed at the applicable bursted rate. Eschelon reserves the right to increase its minimum commit level to a level higher than 420 Mbps through issuance of a documented order to allow Eschelon to maintain best possible rate for usage requirements. Requests to change the committed bandwidth amount must be sent in writing and received by Global Crossing at least fifteen (15) days prior to the beginning of the Billing Cycle in which those changes are to occur.

The Parties agree that Eschelon’s Minneapolis, MN OC-3 port shall be cancelled, without termination penalty, and replaced with an OC-3 port located in Denver, CO, which OC-3 port shall have a two (2) year term, commencing with installation thereof. Any applicable change fees shall be payable.

The balance of Eschelon’s Amended Exhibit P(a) shall remain unchanged.

3.Eschelon requests subscription to Global Crossing’s Mid Span Meet Service, attached to this Amendment as Exhibits V and V(a).

4.The revised IP Transit monthly recurring charges, as mentioned in Item #2 above, will be effective on a go forward basis for all existing and renewed IP circuits and new IP orders placed following the execution of this Amendment #10 by Global Crossing. The rates for any newly subscribed Service shall be effective upon execution of this Amendment by Global Crossing.

5.The balance of the Agreement and any executed amendments or addenda thereto not modified by this Amendment #10 shall remain in full force and effect.

6.This Amendment #10 is effective as of the date signed by Global Crossing below.

Global Crossing Bandwidth, Inc.				Eschelon Telecom, Inc.
By:	/s/ Cody Jenkins			By:	/s/ Geoffrey M. Boyd
	Print Name:		Cody Jenkins		Print Name:			Geoffrey M. Boyd
	Print Title:	Vice President			Print Title:		CFO
	North American Carrier Services
Date:	8/15/05				Date:	8/9/05

2

Exhibit V

MID SPAN MEET ACCESS SERVICE

All Mid Span Meet facilities are pending Global Crossing’s Engineering approval based upon the information provided to Global Crossing by Customer in the Service Inquiry Form. Any approved facilities shall be presented to Customer as an amendment pursuant to Section A, Subsection 2 below.

TERMS AND CONDITIONS

A.Service Overview

1. Global Crossing shall provide Mid Span Meet Access Service (“MSM Access” or “Service”) to Customer, consisting of connectivity between the Global Crossing network Point of Presence (“Global Crossing POP”) and a Network Fiber Distribution Panel (“NFDP”) owned and maintained by Global Crossing on Global Crossing Premises. The connectivity is accomplished by a fiber jumper cable supplied by Global Crossing. The connection at the Global Crossing POP is to circuit(s) previously purchased, or subscribed for, by Customer. MSM Access is available for connections to the Global Crossing network at the optical level (speeds of OC-3 or higher) only.

2.This Exhibit contains the general terms and conditions applicable to MSM Access. Separate MSM Access Schedules (“Schedules”) may be attached hereto from time to time covering each separate site where MSM Access will be established. All Schedules, upon their execution by both Parties, shall be incorporated herein and shall become a part hereof.

3.Connectivity provided by Global Crossing terminates on the Customer side of the NFDP (the “Customer Interface”) in Global Crossing Premises. The demarcation point is the NFDP in Global Crossing’s POP. Customer is responsible for handing off an acceptable interconnecting signal and installing the fiber in accordance with the requirements of this Exhibit.

4.Customer, or Customer’s subcontractor, is responsible for (a) bringing interconnecting fiber to Global Crossing Premises, which shall be identified to Customer by street address, floor and room number (if applicable), and (b) installing the interconnecting fiber at the Customer Interface using appropriate Local Access Interface Equipment.

5.Customer understands and acknowledges that MSM Access is offered by Global Crossing on an “as available” basis.

6.Rates and charges for MSM Access are as set forth in Section C of these Terms and Conditions, unless otherwise modified for a specific site in the Schedule for such site.

7.Initial Capitalized Terms used herein shall have the meaning set forth in Section H hereof.

3

B.Term

The term of a Service with respect to each specific site shall be as set forth in the applicable Schedule and shall commence on the Service Commencement Date (the “Commencement Date”), but shall be immediately terminable by Global Crossing upon the termination, expiration or cancellation for any reason of any (i) underlying agreement between Global Crossing and any other party involving Global Crossing’s continued use of the Facility, (ii) the agreement to which this Exhibit is attached, or (iii) this Exhibit. Following the expiration of the term for a Service as set forth in the Schedule for a Service, the term for such Service shall automatically renew on a month-to-month basis in accordance with the same terms and conditions specified herein, unless terminated by either Party upon sixty (60) days prior notice to the other Party.

Global Crossing shall not be liable to Customer in any way as a result of Global Crossing’s failure (for any reason) to tender possession of the Service on or before the scheduled commencement date listed in the MSM Access Schedule.

C.Charges and Payment

1.The charges for each Service are as follows:

A.A Monthly Recurring Charge of US $200 per fiber pair or two (2) positions on a Fiber Distribution panel will be assessed to Customer’s account upon the Commencement Date.

B.A one-time Non-Recurring Charge of US $2,000 per six (6) pairs of fiber or twelve (12) fiber distribution panel assignments will be assessed to Customer’s account upon the Commencement Date. If additional assignments are needed, the NRC is $1,000 for each additional six (6) pairs or twelve (12) fiber distribution panel assignments.

C.If applicable, Customer shall pay Global Crossing the amount set forth in each MSM Schedule for the cost of engineering or improvements to the Space required to be made by Global Crossing in order to accommodate Customer’s Mid Span Meet into the Space (the “Make-Ready Fee”). The Make-Ready Fee shall be payable to Global Crossing upon the Commencement Date.

D.Fee for Return to Pre-existing Condition: Upon termination or expiration of a Service, Customer shall pay to Global Crossing all reasonable costs and expenses of Global Crossing to return the Premises to its pre-existing condition prior to the grant to Customer of the rights hereunder, reasonable wear and tear excepted.

E.Dispatch Fees: $70 per hour (one-hour minimum) for unmanned sites during business hours (Monday-Friday, 8:00 am to 6:00 pm) and $95 per hour (two-hour minimum), for unmanned sites during non-business hours and nationally recognized holidays.

F.All charges are exclusive of any and all applicable taxes and regulatory surcharges (if any) which Global Crossing is permitted or obliged to pass on to Customer.

2.Cancellation Charges:  Customer acknowledges that Global Crossing shall commence provisioning of Customer’s order for MSM Access in reliance upon Customer’s commitment for the Service. In the event of cancellation of Customer’s Service order for any reason after the scheduled Commencement Date, but before the payment of the non-recurring charge set forth in Section C(l) hereof, Customer shall be liable to pay to Global Crossing, as liquidated damages, the sum of $500.

4

E.Maintenance

Global Crossing provides a coordinated, single point of contact maintenance function for Customer on a 7 day x 24 hour x 365 day basis, which will be identified to Customer. Maintenance support is: (a) between the Global Crossing network POP and the Global Crossing side of the NFDP, and (b) on the NFDP itself. Global Crossing may, in its sole discretion, suspend the provision of a Service (or any part thereof) for reasons of network or equipment modification, or preventive, or emergency maintenance, but will use its best efforts to give Customer advance notice, when practicable, of any such action. Customer shall not make any alterations, changes, additions or improvements to the Facility without Global Crossing’s prior written consent.

F.Insurance, Indemnity and Damage to Facility

1.While this Exhibit or any Service is in effect, Customer shall maintain in force and effect policies of insurance as follows:

(i)Comprehensive General Liability Insurance, including contractual liability and broad property damage, covering personal injury or death and property damage, with a combined single limit of at least $1 million; and

(ii)Worker’s Compensation Insurance with limits required by the laws of the state in which the Facility is located.

The liability insurance shall name Global Crossing as an additional insured and shall be primary insurance, and Global Crossing’s insurance shall not be called upon for contribution towards any such loss. Customer’s insurer shall provide Global Crossing with at least ten (10) days prior written notice of cancellation or change in coverage. All insurance required of Customer shall be evidenced by certificates of insurance provided to Global Crossing.

2.Customer shall be liable for and shall indemnify, defend and hold Global Crossing harmless from and against any and all claims, demands, actions, damages, liability, judgments, expenses and costs (including reasonable attorneys fees) arising from (i) Customer’s use of the Service or (ii) any damage or destruction to the Premises, Global Crossing’s network or to the Facility or any property or equipment therein caused by or due to the acts or omissions, negligent or otherwise of Customer, its employees, agents or representatives, invitees, or subcontractors. Global Crossing shall be liable for and shall indemnify Customer as set out in the Agreement.

3.THE SERVICE IS PROVIDED “AS IS”. GLOBAL CROSSING MAKES NO WARRANTY, EXPRESS OR IMPLIED, UNDER THIS AGREEMENT, AND GLOBAL CROSSING EXPRESSLY DISCLAIMS ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE. Global Crossing’s entire liability and Customer’s exclusive remedies against Global Crossing for any damages arising from any act or omission related to this Exhibit or any Schedule, regardless of the form of action, shall not exceed in any case the NRCs paid by Customer hereunder.

4.If the Facility or the Premises is damaged by fire or other casualty, Global Crossing shall give immediate notice to Customer of such damage. If Global Crossing’s landlord or Global Crossing exercises an option to terminate the lease therefor due to such damage, or Global Crossing’s landlord or Global Crossing decides not to rebuild the Facility or the Premises, the Schedule shall terminate as of the date of such exercise or decision as to the affected Premises. If neither the landlord of the affected Facility nor Global Crossing exercises the right to terminate or not to rebuild, the landlord or Global Crossing, as applicable, shall repair the Facility and/or the Premises to substantially the same condition as prior to the damage, completing the same with reasonable speed. In such event Customer shall also have the option to terminate the MSM Services.

5

G.General Terms

1.Title. Nothing in this Exhibit or in any Schedule shall create or vest in Customer any right, title or interest in the Service or its configuration, or in the Premises, or the Facility, other than the right to use the same during the term of the applicable Schedule under the terms and conditions of this Exhibit.

2.Compliance with Laws and Regulations. Each Party will comply with all applicable laws, regulations, rules, and ordinances. Without limiting the foregoing, Customer shall not utilize the Facility for any unlawful purposes, nor shall Customer assign, mortgage, sublease, encumber or otherwise transfer any right granted hereunder.

H.Definitions

As used in this Agreement, the following Initial-Capitalized terms shall have the meanings ascribed to them:

“Exhibit” means this MSM Access Exhibit between Global Crossing and Customer, attached to and incorporated into the Carrier Service Agreement between Customer and Global Crossing.

“Customer” means the Customer identified on the first page of this Exhibit.

“Customer Interface” means the Customer side of the NFDP.

“Effective Date” means the date on which this Exhibit and the applicable MSM Access Schedule is signed by Global Crossing.

“Facility” means the building where the Premises are located.

“Global Crossing” means Global Crossing Bandwidth, Inc. and any company under common control, directly or indirectly, with Global Crossing which supports it in the provision of the Service.

“Global Crossing POP” means a network Point of Presence maintained by Global Crossing. A Global Crossing POP may also incorporate Telehouse functionality, where Global Crossing determines to establish a Global Crossing POP supporting MSM Access at a Telehouse.

“Local Access Interface Equipment” means a jack or “tie down” for purposes of connecting a circuit at the Customer Interface. This equipment is the responsibility of Customer or its subcontractor.

“Mid Span Meet Access Service” means connectivity between the Global Crossing network Point of Presence and a Network Fiber Distribution Panel (“NFDP”) owned and maintained by Global Crossing on Global Crossing Premises.

“Premises” means the Global Crossing Premises, specified by street address, floor and room (if applicable) at which MSM Access is provided to Customer.

“NFDP” means Network Fiber Distribution Panel supplied by Global Crossing for purposes of interfacing with Customer-provided fiber. Selection of NFDP equipment shall be at the discretion of Global Crossing.

“Party” means either Global Crossing or Customer, and “Parties” means both Global Crossing and Customer.

“Service” means Mid Span Meet Access Service.

“Service Commencement Date” means the date when Customer is notified that the Service ordered is being provided to the Customer Interface.

6

Exhibit V(a)

MSM ACCESS SCHEDULE # 1

1.Rates and Charges

The following Rates and Charges apply to the Service:

Monthly Recurring Charge*	$	200
Non-Recurring Charge*	$	2,000
If applicable, Make Ready Fee	$	TBD

Monthly Recurring Charge and Non-Recurring Charged are waived for one OC-12 port at 511 11th Avenue South Minneapolis MN, so long as Eschelon pulls fiber for said port.

2.Location of the Service:

The location of the Service is Global Crossing’s premises at 511 11th Avenue South, Minneapolis, MN.

3.Initial Term:

The Initial Term of the Service is two (2) years.

4.Scheduled Commencement Date: Upon Installation

7

EX-10.7.11

Exhibit 10.7.11

Execution Copy

AMENDMENT #11 TO CARRIER SERVICE AGREEMENT

ESCHELON TELECOM, INC.

December 2, 2005

This is Amendment #11 to the Carrier Service Agreement between Global Crossing Bandwidth, Inc., on behalf of itself and its affiliates that may provide a portion of the services hereunder (“Global Crossing”) and Eschelon Telecom, Inc. (“Eschelon” or “Customer”), dated August 25, 2000, as amended (the “Agreement”).

1.Except as otherwise stated, capitalized terms used herein shall have the same meaning as set forth in the Agreement.

2.The following is added to Section 3.3 of the Agreement.

In the event Global Crossing deems it necessary to discontinue offering of a particular product provided under the Agreement, then in that event, Global Crossing may terminate the Service upon ninety days prior written notice to Customer.

3.A new Definition shall be added and incorporated into Exhibit A of the Agreement as follows:

“Services” mean the services agreed to be provided by Global Crossing to Customer pursuant to this Agreement.

4.The following Acceptable Use Policy language is added to the Agreement:

Customer shall comply with Global Crossing’s Acceptable Use and Security Policies (collectively the “Policy”) which Policy Global Crossing may modify at any time. The current, complete Policy is available for review at http://www.globalcrossing.com/aup/. (Global Crossing may change the web site address via electronic notice to Customer.) A failure to comply with the Policy shall constitute a material breach of this Agreement not capable of remedy.

5.Eschelon’s Access Direct Dedicated Outbound and Toll Free Service rates have been revised at set out in Amended Exhibits H (b) and I (a) attached to this Amendment.

6.Eschelon’s Access Directsm Switched Toll Free Service rates have been revised at set out below.

Global Crossing Access Direct sm

Switched Toll Free Service

INTERSTATE

	PRICE PER MINUTE
Call Types	Tier A -Tier A		Tier A -Tier B		Tier A -Tier C		Tier B -Tier A		Tier B -Tier B		Tier B -Tier C		Tier C -Tier A		Tier C -Tier B		Tier C -Tier C
**	$	0.0182	$	0.0182	$	0.0238	$	0.0182	$	0.0182	$	0.0267	$	0.0182	$	0.0202	$	0.0279

7.All revised rates attached hereto and made a part hereof shall be effective with Eschelon’s first full Billing Cycle following the execution of this Amendment #11 by Global Crossing. Any rates for newly subscribed products shall be effective on the date of execution of this amendment by Global Crossing.

8.The balance of the Agreement and any executed amendments or addenda thereto not modified by this Amendment #11 shall remain in full force and effect.

9.This Amendment #11 is effective as of the date signed by Global Crossing below.

Global Crossing Bandwidth, Inc.		Eschelon Telecom, Inc.
By:	/s/ Cody Jenkins	By:	/s/ Richard A. Smith
	Cody Jenkins		Richard A.Smith
	VP Global Wholesale Voice Services		President and CEO
Date:	12/14/05	Date:	12-6-2005

2

Amended Exhibit I (a)

Global Crossing Access Directsm
Dedicated Outbound Service

INTERSTATE

	PRICING
Call Types	Term to Tier A		Term to Tier B		Term to Tier C
Continental US	$	0.0088	$	0.0088	$	0.0088

	RATE PER MINUTE
State	Term to Tier A		Term To Tier B		Term To Tier C
INTRASTATE
AL	$	0.0164	$	0.0164	$	0.0164
AR	$	0.0231	$	0.0231	$	0.0231
AZ	$	0.0448	$	0.0448	$	0.0448
CA	$	0.0116	$	0.0116	$	0.0116
CO	$	0.0398	$	0.0398	$	0.0398
CT	$	0.0310	$	0.0310	$	0.0310
DE	$	0.0171	$	0.0171	$	0.0171
FL	$	0.0195	$	0.0195	$	0.0195
GA	$	0.0129	$	0.0129	$	0.0129
IA	$	0.0254	$	0.0254	$	0.0254
ID	$	0.0491	$	0.0491	$	0.0491
IL	$	0.0091	$	0.0091	$	0.0091
IN	$	0.0117	$	0.0117	$	0.0117
KS	$	0.0284	$	0.0284	$	0.0284
KY	$	0.0085	$	0.0085	$	0.0085
LA	$	0.0140	$	0.0140	$	0.0140
MA	$	0.0436	$	0.0436	$	0.0436
MD	$	0.0161	$	0.0161	$	0.0161
ME	$	0.0212	$	0.0212	$	0.0212
MI	$	0.0092	$	0.0092	$	0.0092
MN	$	0.0236	$	0.0236	$	0.0236
MO	$	0.0494	$	0.0494	$	0.0494
MS	$	0.0085	$	0.0085	$	0.0085
MT	$	0.0290	$	0.0290	$	0.0290
NC	$	0.0505	$	0.0505	$	0.0505
ND	$	0.0567	$	0.0567	$	0.0567
NE	$	0.0229	$	0.0229	$	0.0229
NH	$	0.0381	$	0.0381	$	0.0381
NJ	$	0.0244	$	0.0244	$	0.0244
NM	$	0.0651	$	0.0651	$	0.0651
NV	$	0.0254	$	0.0254	$	0.0254
NY	$	0.0361	$	0.0361	$	0.0361
OH	$	0.0107	$	0.0107	$	0.0107
OK	$	0.0264	$	0.0264	$	0.0264
OR	$	0.0334	$	0.0334	$	0.0334
PA	$	0.0315	$	0.0315	$	0.0315

3

Global Crossing Access Directsm
Dedicated Outbound Service

STATE	Term to Tier A		Term To Tier B		Term to Tier C
RI	$	0.0171	$	0.0171	$	0.0171
SC	$	0.0476	$	0.0476	$	0.0476
SD	$	0.0614	$	0.0614	$	0.0614
TN	$	0.0176	$	0.0176	$	0.0176
TX	$	0.0462	$	0.0462	$	0.0462
UT	$	0.0231	$	0.0231	$	0.0231
VA	$	0.0570	$	0.0570	$	0.0570
VT	$	0.0586	$	0.0586	$	0.0586
WA	$	0.0247	$	0.0247	$	0.0247
WI	$	0.0105	$	0.0105	$	0.0105
WV	$	0.0586	$	0.0586	$	0.0586
WY	$	0.0169	$	0.0169	$	0.0169

Tier A= RBOC           Tier B= CITC       Tier C= NECA

4

Amended Exhibit H (b)

Global Crossing Access Directsm
Dedicated Toll-Free Service

	RATE PER MINUTE
State	Orig From Tier A		Orig From Tier B		Orig From Tier C
INTRASTATE
AL	$	0.0172	$	0.0172	$	0.0172
AR	$	0.0257	$	0.0257	$	0.0257
AZ	$	0.0356	$	0.0356	$	0.0356
CA	$	0.0142	$	0.0142	$	0.0142
CO	$	0.0340	$	0.0340	$	0.0340
CT	$	0.0347	$	0.0347	$	0.0347
DE	$	0.0193	$	0.0193	$	0.0193
FL	$	0.0266	$	0.0266	$	0.0266
GA	$	0.0144	$	0.0144	$	0.0144
IA	$	0.0298	$	0.0298	$	0.0298
ID	$	0.0552	$	0.0552	$	0.0552
IL	$	0.0114	$	0.0114	$	0.0114
IN	$	0.0139	$	0.0139	$	0.0139
KS	$	0.0311	$	0.0311	$	0.0311
KY	$	0.0100	$	0.0100	$	0.0100
LA	$	0.0159	$	0.0159	$	0.0159
MA	$	0.0476	$	0.0476	$	0.0476
MD	$	0.0180	$	0.0180	$	0.0180
ME	$	0.0237	$	0.0237	$	0.0237
MI	$	0.0107	$	0.0107	$	0.0107
MN	$	0.0210	$	0.0210	$	0.0210
MO	$	0.0479	$	0.0479	$	0.0479
MS	$	0.0097	$	0.0097	$	0.0097
MT	$	0.0290	$	0.0290	$	0.0290
NC	$	0.0536	$	0.0536	$	0.0536
ND	$	0.0549	$	0.0549	$	0.0549
NE	$	0.0266	$	0.0266	$	0.0266
NH	$	0.0410	$	0.0410	$	0.0410
NJ	$	0.0259	$	0.0259	$	0.0259
NM	$	0.0699	$	0.0699	$	0.0699
NV	$	0.0252	$	0.0252	$	0.0252
NY	$	0.0383	$	0.0383	$	0.0383
OH	$	0.0139	$	0.0139	$	0.0139
OK	$	0.0285	$	0.0285	$	0.0285
OR	$	0.0221	$	0.0221	$	0.0221
PA	$	0.0339	$	0.0339	$	0.0339
RI	$	0.0179	$	0.0179	$	0.0179
SC	$	0.0712	$	0.0712	$	0.0712
SD	$	0.0648	$	0.0648	$	0.0648
TN	$	0.0200	$	0.0200	$	0.0200
TX	$	0.0497	$	0.0497	$	0.0497
UT	$	0.0300	$	0.0300	$	0.0300
VA	$	0.0614	$	0.0614	$	0.0614
VT	$	0.0579	$	0.0579	$	0.0579
WA	$	0.0257	$	0.0257	$	0.0257
WI	$	0.0121	$	0.0121	$	0.0121
WV	$	0.0629	$	0.0629	$	0.0629
WY	$	0.0150	$	0.0150	$	0.0150

Tier A= RBOC           Tier B= CITC       Tier C= NECA

5

December 14, 2005

Eschelon Telecom, Inc.
Attn: Mr. Richard A. Smith
730 Second Avenue South
Suite 1200
Minneapolis, MN 55402

Subject: Amendment #11 to Carrier Service Agreement

Dear Mr. Smith:

Enclosed please find an executed original of the above-mentioned document for your records.

Sincerely,

/s/ Catherine Menarchick

Catherine Menarchick

Contract Administration Assistant

Enclosure:

EX-10.7.12

Exhibit 10.7.12

1120 Pittsford-Victor Road
Pittsford, New York 14534

February 1, 2006

Mr. Richard A. Smith
Eschelon Telecom, Inc.
730 Second Avenue South
Suite 1200
Minneapolis, Minnesota 55402

RE:Amendment #12 to the Carrier Service Agreement between Eschelon Telecom, Inc. and Global Crossing Bandwidth, Inc.

Dear Mr. Smith:

Enclosed please find a fully executed original of the above-referenced document for your records.

Very truly yours,

/s/ Karen L. Markle

Karen L. Markle

Contract Administration

enclosures

EXECUTION COPY

AMENDMENT #12 TO CARRIER SERVICE AGREEMENT

ESCHELON TELECOM, INC.

January 20, 2006

This is Amendment #12 to the Carrier Service Agreement between Global Crossing Bandwidth, Inc., on behalf of itself and its affiliates that may provide a portion of the services hereunder (“Global Crossing”), and Eschelon Telecom, Inc. (“Eschelon” or “Customer”), dated August 25, 2000, as amended (the “Agreement”).

1.Except as otherwise stated, capitalized terms used herein shall have the same meaning as set forth in the Agreement.

2.Global Crossing’s Ancillary Fees Schedule, identified as Exhibit B under the Agreement, has been updated and is attached as Amended Exhibit B.

3.The revised rates attached hereto shall be effective with Eschelon’s first full Billing Cycle following the execution of this Amendment #12 by Global Crossing.

4.The balance of the Agreement and any executed amendments or addenda thereto not modified by this Amendment #12 shall remain in full force and effect.

5.This Amendment #12 is effective as of the date signed by Global Crossing below.

Global Crossing Bandwidth, inc.			Eschelon Telecom, Inc.
By:	/s/ Cody Jenkins		By:	/s/ Richard A. Smith
		Cody Jenkins   Vice President -   Global Wholesale Voice Services			Richard A. Smith   President and CEO
Date:		2/1/06	Date:		1/26/06

1

Amended Exhibit B

SCHEDULE OF ANCILLARY FEES

	NRC		MRC
Electronic Exchange: (“EE”)
Set-up Fee	$	500
Monthly Recurring Charge for Service			$	250
Call Detail Records (excluding EE) if applicable:
Per CD ROM Disk			$	100
Programming charges to change format (per hour, per request)	$	120
Dedicated & Switched Toll Free* Unbillable Call Detail Records:
Set-up Fee	$	500
Monthly Recurring Charge for Service			$	250

* Not including Carrier Toll-Free Transport Services

Toll-Free SMS Database Administration:	NRC		MRC
Global Crossing RespOrg Maintenance Service Charges*	$	0	$	0
Pass-through per active Global Crossing RespOrg Toll-Free No.	$	0	$	0.2600
Directory Assistance Listing Implementation	$	15	$	0
Directory Assistance Listing per Toll-Free Number	$	0	$	15

Voice Services ISDN PRI Signaling Charge:	NRC		MRC
Installation Fee (per d Channel)	$	500
Monthly Service Charge ISDN Configuration (per d Channel)			$	100

Voice Order Change Charge:	NRC
	$	100

* Global Crossing RespOrg Maintenance Service Charges include any special request RespOrg related activities when carriers are their own RespOrg. For Carriers utilizing Global Crossing’s RespOrg ID, this charge is not applicable.

Presubscribed Interexchange Carrier Charges (PICC): (Customer Specific Pricing)

Line Type	Maximum Charge
Residence Primary (per Line or Trunk)	$	0
Residence Non-Primary (per Line or Trunk)	$	0
Single Line Business Subscriber (per individual line or trunk)	$	0
Multi-Line Business Subscriber (per individual line or trunk)	$	2.78
ISDN BRI Subscriber (per facility)	$	0
ISDN PRI, T-l (per facility)	$	0
ISDN BRI Residential	$	0
Centrex Subscriber (per individual station line)	$	2.78

2

Association Charge:

Upon new account set-up, Customer will be provided one (1) unique customer identifier (“Association ID”). Requests for each additional Association ID will be charged a monthly recurring charge (MRC) of $200.

Local Loop Charges:

All local loop monthly recurring and non-recurring (installation) charges shall be on a case-by-case basis, based upon vendor, mileage, location, circuit speed and term.

Local Loop Cancellation Charges:

Prior To Installation: Customer will be charged all applicable installation charges plus any other charges incurred in accordance with Section 4.8 of the Agreement

Post Installation: Customer will be assessed pass-through early termination or cancellation charges from Global Crossing’s underlying access provider.

3

EX-10.16.2

Exhibit 10.16.2

SECOND AMENDMENT TO OFFICE LEASE

This Second Amendment to Office Lease (this “Second Amendment”) is made and entered into by and between EOS ACQUISITION I, LLC, a Delaware limited liability company (“Landlord”) and successor-in-interest to Parkside Salt Lake Corporation, a Delaware corporation (“Original Landlord”), and ESCHELON TELECOM, INC., a Delaware corporation f/k/a Advanced Telecommunications, Inc. (the “Tenant”), effective on and as of the date on which Landlord executes this Second Amendment, as set forth on the signature page hereto (the “Effective Date”).

WITNESSETH

WHEREAS, Landlord (or its predecessor-in-interest) and Tenant entered into that certain Office Lease dated December 28, 1999 (the “Original Lease”), as subsequently amended by that certain Amendment to Lease dated April 28, 2005 (the “First Amendment”) (the Original Lease, as amended by the First Amendment, being hereinafter collectively referred to as the “Lease”) pursuant to which Landlord leases to Tenant certain premises containing approximately 18,669 square feet of Rentable Area designated as Suites 110, 280 and 380 in the building commonly known as the Parkside Tower Building (the “Building”) having an address of 215 South State Street, Salt Lake City, Utah (the “Existing Premises”); and

WHEREAS, Landlord and Tenant desire to further expand the size of the Premises and amend certain terms and provisions of the Lease, all as more particularly provided hereinbelow;

NOW, THEREFORE, pursuant to the foregoing, and in consideration of the mutual covenants and agreements contained in the Lease and herein, the Lease is hereby modified and amended as set out below:

1. Defined Terms. All capitalized terms used herein shall have the same meaning as defined in the Lease, unless otherwise defined in this Second Amendment.

2. Expansion of Premises. Effective on and as of the date (the “Second Expansion Commencement Date”) which is the earlier of (i) the date that the Second Expansion Improvements are Substantially Completed, or (ii) the date the Second Expansion Improvements would have been Substantially Completed except for Tenant Delays, or (iii) the date that Tenant, or any person occupying any of the Second Expansion Premises with Tenant’s permission, commences business operations from any portion of the Second Expansion Premises, or (iv) October 1, 2006, and continuing through the expiration of the term of the Lease (currently scheduled to expire on July 14, 2012), the Premises shall be expanded to include (i) an additional approximately 1,000 square feet of Rentable Area to be added to the portion of the Premises designated as Suite 100 in the Building and more fully shown and described on the floor plan attached hereto as Exhibit A and made a part hereof for all purposes (the “Suite 110 Expansion Space”), and (ii) an additional approximately 2,400 square feet of Rentable Area, designated as Suite 101 in the Building, and more fully shown and described on the floor plan attached hereto as Exhibit B and made a part hereof for all purposes (the “Suite 101 Expansion Space”) (the Suite 110 Expansion Space and the Suite 101 Expansion Space being collectively sometimes referred to herein as the “Second Expansion Premises”). Landlord and Tenant hereby

1

acknowledge and agree that, commencing on the Second Expansion Commencement Date and continuing throughout the remainder of the term of the Lease, the Premises (inclusive of the Existing Premises and the Second Expansion Premises) shall be deemed to consist of approximately 22,069 square feet of Rentable Area in the Building. As used in this Paragraph 2’ the terms “Second Expansion Improvements” and “Substantial Completion” or “Substantially Completed” and “Tenant Delay” are defined in the attached Exhibit C Work Letter. Upon the occurrence of the Second Expansion Commencement Date, Landlord and Tenant agree to execute a written confirmation of the actual date corresponding to the Second Expansion Commencement Date.

Landlord and Tenant understand and agree that the expansion of the Premises to include the Suite 110 Expansion Space satisfies the expansion option granted to Tenant in Paragraph 8 of the First Amendment, and, accordingly, Paragraph 8 of the First Amendment is hereby deleted in its entirety and is of no further force or effect.

3. Basic Annual Rent. Effective on and as of the Second Expansion Commencement Date (“SECD”) and continuing through the remainder of the existing term of the Lease (scheduled to expire on July 14, 2012), the Basic Annual Rent payable with respect to the Suite 110 Expansion Space and the Suite 101 Expansion Space shall be as follows (it being understood and agreed that the Basic Annual Rent payable with respect to the Existing Premises shall remain as set forth in Paragraph 4 of the First Amendment):

Suite Number (or space)	Total Rentable Square Feet	Period	Annual Base Rent per Square Foot		Monthly Base Rent		Annual Base Rent
Suite 110 Expansion Space	1,000	SECD-7/14/07	$	12.88	$	1,073.33	$	12,880.00
		07/15/07-07/14/08	$	13.27	$	1,105.83	$	13,270.00
		07/15/08-07/14/09	$	13.67	$	1,139.17	$	13,670.00
		07/15/09-07/14/10	$	14.08	$	1,173.33	$	14,080.00
		07/15/10-07/14/11	$	14.50	$	1,208.33	$	14,500.00
		07/15/11-07/14/12	$	14.94	$	1,245.00	$	14,940.00

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Suite 101 Expansion Space	2,400	SECD-09/30/07	$	23.00	$	4,600.00	$	55,200.00
		10/01/07-09/30/08	$	23.69	$	4,738.00	$	56,856.00
		10/01/08-09/30/09	$	24.40	$	4,880.00	$	58,560.00
		10/01/09-09/31/10	$	25.13	$	5,026.00	$	60,312.00
		10/01/10-09/30/11	$	25.88	$	5,176.00	$	62,112.00
		10/01/11-07/14/12	$	26.66	$	5,332.00	$	63,984.00

4. Additional Rent. Effective on and as of the Second Expansion Commencement Date, Tenant’s Percentage, to be used in calculating Tenant’s Share of Direct Expenses payable as Additional Rent in accordance with the provisions of Section 3 of the Lease (as heretofore amended), shall be amended and shall be equal to 11.6084% (22,069 rsf/190,112 rsf).

5. Parking. Notwithstanding anything in the Lease to the contrary, commencing on the Second Extension Commencement Date and continuing thereafter through the expiration of 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-six (26) 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.

6. Condition of the Premises. Tenant is currently in possession of the Existing Premises and Tenant agrees to accept the Existing Premises and the Second Expansion Premises in their existing “AS-IS”, “WHERE-AS” and “WITH ALL FAULTS” condition throughout the expiration of the Extension Period and Landlord shall have no obligations whatsoever to perform any improvements or refurbishments thereto throughout the remainder of the Extension Period; provided, however, notwithstanding the foregoing to the contrary, (i) Landlord agrees, at its sole cost and expense, to perform the Suite 110 Expansion Improvement (as defined in Exhibit “C” attached hereto) in the Suite 110 Expansion Space, and (ii) subject to the terms of Exhibit “C” attached hereto, Landlord agrees to provide Tenant with an improvement allowance of up to Thirty-Nine Thousand Two Hundred Twenty and No/100 Dollars ($49,025.00) (the “Second Expansion Allowance”) to be applied to the cost of performing the Suite 101 Expansion

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Improvements (as said term is defined on Exhibit “C” attached hereto) in the Suite 101 Expansion Space in accordance with and subject to the terms of said Exhibit “C”.

7. Termination of Cancellation Option. Landlord and Tenant hereby agree that cancellation option set forth in Paragraph 9 of the First Amendment is hereby terminated, deleted in its entirety and is of no further force or effect.

8. Broker. Tenant warrants that it has had no dealings with any broker or agent other than CB Richard Ellis, Inc. (“Broker”) in connection with the negotiation or execution of this Second Amendment, and Tenant agrees to indemnify Landlord and hold Landlord harmless from and against any and all costs, expenses or liability for commissions or other compensations or charges claimed by any broker or agent, other than Broker, with respect to this Second Amendment or the transactions evidenced hereby.

9. Miscellaneous. With the exception of those terms and conditions specifically modified and amended herein, the herein referenced Lease shall remain in full force and effect in accordance with all its terms and conditions. In the event of any conflict between the terms and provisions of this Second Amendment and the terms and provisions of the Lease, the terms and provisions of this Second Amendment shall supersede and control.

10. Counterparts/Facsimile Signatures. This Second Amendment may be executed in any number of counterparts, each of which shall be deemed an original, and all of such counterparts shall constitute one agreement. To facilitate execution of this Second Amendment, the parties may execute and exchange facsimile counterparts of the signature pages and facsimile counterparts shall serve as originals.

[SIGNATURE PAGE TO FOLLOW]

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SIGNATURE PAGE OF SECOND AMENDMENT TO OFFICE LEASE
BY AND BETWEEN
EOS ACQUISITION I, LLC, AS LANDLORD
AND
ESCHELON TELECOM, INC., AS TENANT

IN WITNESS WHEREOF, the parties hereto have executed this Second Amendment on the respective dates set forth below to be effective for all purposes, however, as of the Effective Date set forth above.

LANDLORD:
EOS ACQUISITION I, LLC, a Delaware limited liability company
By:	KBS Realty Advisors, LLC,
	a Delaware limited liability company as agent
	By:	/s/ David L. Kray
		David L. Kray, Senior Vice President
	Date:		10/5/, 2006

TENANT:
ESCHELON TELECOM, INC., a Delaware corporation
By:	/s/ Michael A Dorchin
Name:	Michael A Dorchin
Title:	VP Finance & Treasurer
Date:	9/29, 2006

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EXHIBIT A

FLOOR PLAN OF THE SUITE 110 EXPANSION SPACE

[ATTACHED]

A-1

EXHIBIT B

FLOOR PLAN OF THE SUITE 101 EXPANSION SPACE

[ATTACHED]

B-1

EXHIBIT C

WORK LETTER

THIS WORK LETTER is attached as Exhibit C to the Second Amendment to Office Lease between EOS ACQUISITION I, LLC, a Delaware limited liability company, as Landlord, and ESCHELON TELECOM, INC., a Delaware corporation, as Tenant, and constitutes the further agreement between Landlord and Tenant as follows:

(a)           Second Expansion Improvements.

                (i)            Landlord agrees to furnish or perform, at Landlord’s sole cost and expense, those items of construction and those improvements to the Suite 110 Expansion Space described and depicted on the plans attached as Schedule 1 to this Exhibit C (the “Suite 110 Expansion Improvements”).

                (ii)           Landlord, at Tenant’s sole cost and expense, agrees to furnish or perform those items of construction and those improvements to the Suite 101 Expansion Space (the “Suite 101 Expansion Improvements”) specified in the Final Plans to be agreed to by Landlord and Tenant as set forth in Paragraph (b) below; provided, however, Landlord shall pay for the cost of such Suite 101 Expansion Improvements up to the extent of Second Expansion Allowance as set forth in Paragraph (e) below.

                (iii)          The Suite 110 Expansion Improvements and the Suite 101 Expansion Improvements are hereinafter sometimes referred collectively as the “Second Expansion Improvements”.

(b)           Space Planner.  Landlord has retained a space planner (the “Space Planner”) to prepare certain plans, drawings and specifications (the “Temporary Plans”) for the construction of Suite 101 Expansion Improvements to be installed in the Suite 101 Expansion Space by a general contractor selected by Landlord pursuant to this Work Letter. Tenant shall deliver to Space Planner within ten (10) days after the execution of this Second Amendment all necessary information required by the Space Planner to complete the Temporary Plans. Tenant shall have five (5) business days after its receipt of the proposed Temporary Plans to review the same and notify Landlord in writing of any comments or required changes, or to otherwise give its approval or disapproval of such proposed Temporary Plans. If Tenant fails to give written comments to or approve the Temporary Plans within such five (5) business day period, then Tenant shall be deemed to have approved the Temporary Plans as submitted. Landlord shall have five (5) business days following its receipt of Tenant’s comments and objections to redraw the proposed Temporary Plans in compliance with Tenant’s request and to resubmit the same for Tenant’s final review and approval or comment within five (5) business days of Tenant’s receipt of such revised plans. Such process shall be repeated twice and if at such time final approval by Tenant of the proposed Temporary Plans has not been obtained, then Landlord shall complete such Temporary Plans, at Tenant’s sole cost and expense, and it shall be deemed that Tenant has approved the Temporary Plans. Once Tenant has approved or has been deemed to have approved the Temporary Plans, then the approved (or deemed approved) Temporary Plans shall

C-1

be thereafter known as the “Final Plans”. The Final Plans shall include the complete and final layout, plans and specifications for the Suite 101 Expansion Space showing all doors, light fixtures, electrical outlets, telephone outlets, wall coverings, plumbing improvements (if any), data systems wiring, floor coverings, wall coverings, painting, any other improvements to the Suite 101 Expansion Space beyond the shell and core improvements provided by Landlord and any demolition of existing improvements in the Suite 101 Expansion Space. The improvements shown in the Final Plans shall (i) utilize Landlord’s building standard materials and methods of construction, (ii) be compatible with the shell and core improvements and the design, construction and equipment of the Suite 101 Expansion Space, and (iii) comply with all applicable laws, rules, regulations, codes and ordinances.

(c)           Bids.  As soon as practicable following the approval of the Final Plans, Landlord shall (i) obtain a written non-binding itemized estimate of the costs of all Suite 101 Expansion Improvements shown in the Final Plans as prepared by a general contractor selected by Landlord, and (ii) if required by applicable law, codes or ordinances, submit the Final Plans to the appropriate governmental agency for the issuance of a building permit or other required governmental approvals prerequisite to commencement of construction of such Suite 101 Expansion Improvements (“Permits”). Tenant acknowledges that any cost estimates are prepared by the general contractor and Landlord shall not be liable to Tenant for any inaccuracy in any such estimate. Within five (5) business days after receipt of the written non-binding cost estimate prepared by the general contractor, Tenant shall either (A) give its written approval thereof and authorization to proceed with construction or (B) immediately request the Space Planner to modify or revise the Plans in any manner desired by Tenant to decrease the cost of the Suite 101 Expansion Improvements. If Tenant is silent during such five (5) business day period, then Tenant shall be deemed to have approved such non-binding cost estimate as set forth in Clause (A) above. If the Final Plans are revised pursuant to Clause (B) above, then Landlord shall request that the general contractor provide a revised cost estimate to Tenant based upon the revisions to the Final Plans. Such modifications and revisions shall be subject to Landlord’s reasonable approval and shall be in accordance with the standards set forth in Paragraph (b) of this Work Letter. Within ten (10) business days after receipt of the general contractor’s original written cost estimate and the description, if any, of any Tenant Delay, Tenant shall give its final approval of the Final Plans to Landlord which shall constitute authorization to commence the construction of the Suite 101 Expansion Improvements in accordance with the Final Plans, as modified or revised. Tenant shall signify its final approval by signing a copy of each sheet or page of the Final Plans and delivering such signed copy to Landlord.

(d)           Construction.  Landlord shall commence construction of the Suite 101 Expansion Improvements within ten (10) days following the later of (i) the approval of the Final Plans, or (ii) Landlord’s receipt of any necessary Permits. Landlord shall diligently pursue completion of construction of the Suite 101 Expansion Improvements and use its commercially reasonable efforts to complete construction of the Suite 101 Expansion Improvements as soon as reasonably practicable. Notwithstanding anything in this Second Amendment or in this Work Letter to the contrary, Second Expansion Allowance, as specified in Paragraph 6 of this Second Amendment, shall be used only for the construction of the Suite 101 Expansion Improvements, and if construction of the Suite 101 Expansion Improvements is not completed within three (3) months following the Effective Date of this Second Amendment (“Construction Termination Date”), then Landlord’s obligation to provide the Second Expansion Allowance, as specified in

C-2

Paragraph 6 of this Second Amendment, shall terminate and become null and void, and Tenant shall be deemed to have waived its rights in and to said Second Expansion Allowance.

(e)           Second Expansion Allowance.  Subject to the terms and provisions of this Work Letter, Landlord shall pay the cost of the Suite 101 Expansion Improvements (“Work”) up to the amount of the Second Expansion Allowance. If the amount of the lowest qualified bid to perform the Work exceeds the Second Expansion Allowance, Tenant shall bear the cost of such excess and shall pay the estimated cost of such excess to Landlord prior to commencement of construction of such Suite 101 Expansion Improvements and a final adjusting payment based upon the actual costs of the Suite 101 Expansion Improvements shall be made when the Second Expansion Improvements are completed. If the cost of the Work is less than such amount, then Tenant shall not receive any credit whatsoever for the difference between the actual cost of the Work and Second Expansion Allowance. All remaining amounts due to Landlord shall be paid upon the earlier of Substantial Completion of the Suite 101 Expansion Improvements or presentation of a written statement of the sums due, which statement may be an estimate of the cost of any component of the Work. The cost of the permits, working drawings, hard construction costs, mechanical and electrical planning, fees, permits, general contract overhead, and a coordination fee payable to Landlord equal to five percent (5%) of the actual costs of construction and such costs or permits, fees, planning and contractor overhead shall be payable out of the Second Expansion Allowance and shall be included in the cost of the Work. The cost of the Work shall not include any other fees payable to Landlord.

(f)            Change Order.  If Tenant shall desire any changes to the Final Plans, Tenant shall so advise Landlord in writing and Landlord shall determine whether such changes can be made in a reasonable and feasible manner. Any and all costs of reviewing any requested changes, and any and all costs of making any changes to the Suite 101 Expansion Improvements which Tenant may request and which Landlord may agree to shall be at Tenant’s sole cost and expense and shall be paid to Landlord upon demand and before execution of the change order. In no event shall Landlord be obligated to perform any Suite 101 Expansion Improvements which would extend the construction period past the Construction Termination Date, unless such extension was mutually agreed to in writing by Landlord and Tenant prior to the commencement of said construction. If Landlord approves Tenant’s requested change, addition, or alteration, the Space Planner, at Tenant’s sole cost and expense, shall complete all working drawings necessary to show the change, addition or alteration being requested by Tenant.

(g)           Substantial Completion.  “Substantial Completion” of construction of the Second Expansion Improvements shall be defined as the date upon which the Space Planner or other consultant engaged by Landlord determines that the Second Expansion Improvements have been substantially completed except for Punch List items (defined below), unless the completion of such improvements was delayed due to any Tenant Delay (defined below), in which case the date of Substantial Completion shall be the date such improvements would have been completed, but for the Tenant Delays. The term “Punch List” items shall mean items that constitute minor defects or adjustments which can be completed after occupancy without causing any material interference with Tenant’s use of the Second Expansion Premises. After the completion of the Second Expansion Improvements, Tenant shall, upon demand, execute and deliver to Landlord a letter of acceptance of improvements performed on the Second Expansion Premises. The term “Tenant Delay” shall include, without limitation, any delay in the completion of construction of

C-3

Second Expansion Improvements resulting from (i) Tenant’s failure to comply with the provisions of this Work Letter, (ii) any additional time as reasonably determined by Landlord required for ordering, receiving, fabricating and/or installing items or materials or other components of the construction of Second Expansion Improvements, including, without limitation, mill work, (iii) delay in work caused by submission by Tenant of a request for any change order (defined below) following Tenant’s approval of the Final Plans, or for the implementation of any change order, or (iv) any delay by Tenant in timely submitting comments or approvals to the Temporary Plans or Final Plans. The failure of Tenant to take possession of or to occupy the Second Expansion Premises (or any portion thereof) shall not serve to relieve Tenant of obligations arising on the Second Expansion Commencement Date or delay the payment of rent or other sums payable by Tenant under and as set forth in the Lease.

C-4

SCHEDULE 1 TO EXHIBIT “C”

DESCRIPTION OF SUITE 110 EXPANSION IMPROVEMENTS

[ATTACHED]

C-1

BROKERAGE SERVICES
Office Buildings July 21, 2006

CBRE
CB RICHARD ELLIS CB Richard Ellis
2755 East Cottonwood Parkway
Suite 100
Salt Lake City, UT 84121
T 801 947 3925
F 801 947 3954
scott.wilmarth@cbre.com Scott Wilmarth
Senior Vice President
Office Buildings/Corporate
Services

Mr. Phil Sparks
Eschelon Telecom, Inc.
7007 SW Cardinal Lane, Suite 135
Portland, OR 97224

RE:         LEASE PROPOSAL FOR ESCHELON TELECOM AT THE PARKSIDE TOWER

Dear Phil:

On behalf of the Parkside office building, we would like to thank you for your patience over the last few months as we have worked through the sale of the building. Eschelon Telecom is a valued tenant of the Parkside Tower and we are excited about the prospect of expanding their presence in the building.

Landlord:	Parkside Salt Lake Corporation
Tenant:	Eschelon Telecom, Inc.
Proposed Premises:	Eschelon Telecom currently occupies Suite 110 (1,150 RSF) on the first floor. This suite will be increased in size by approximately 1,000 RSF. The new total will be 2,150 RSF. This proposal addresses Eschelon Telecom lease of the remaining balance of the first floor, which consists of approximately 2,400 RSF.
Term:	Five (5) years and eleven (11) months.
Commencement:	October 1, 2006 or upon substantial completion of Tenant Improvements. Fidelity Investments currently leases the space through 8/31/06.
Base Rent:	Suite 110; $12.88 per rentable square foot, Full Service. The lease rate will increase annually by 3% on the anniversary of the Master Lease which is August 31st. Suite 101; $23.00 per rentable square foot, Full Service. The lease rate will increase 3% annually.
Tenant Improvement
Allowance:	Per the terms of the Master Lease, the Landlord agrees to deliver the expansion of Suite 110 in the same condition as the original premises.

Lease Proposal
July 21, 2006

	For Suite 101, the Landlord agrees to provide a Tenant Improvement Allowance equal to $20.00/USF ($25 x 1,961 = $49,025.00).
Cancellation of
Termination Right:	Tenant agrees to cancel any termination right as outlined in existing master lease.
Access:	Shall be 24 hours / 7 days.
Parking:	The Tenant shall have the right to increase their parking allocation by up to six (6) unreserved parking stalls at the then current rate for the building.
A.D.A. Compliance:	All tenant, core and shell improvements shall be in full compliance with the American Disabilities Act and the responsibility of the Landlord.
Representation:	CB Richard Ellis represents the Landlord in this transaction.

If this proposal is of interest to you, we are prepared to continue provide professional space planning and interior design services to assess your physical needs, and help you understand how the building can accommodate your requirements.

This letter/proposal is intended solely as a preliminary expression of general intentions and is to be used for discussion purposes only. The parties intend that neither shall have any contractual obligations to the other with respect to the matters referred herein unless and until a definitive agreement has been fully executed and delivered by the parties. The parties agree that this letter/proposal is not intended to create any agreement or obligation by either party to negotiate a definitive lease/purchase and sale agreement and imposes no duty whatsoever on either party to continue negotiations, including without limitation any obligation to negotiate in good faith or in anyway other than at arm’s length. Prior to delivery of a definitive executed agreement, and without any liability to the other party, either party may (1) propose different terms from those summarized herein, (2) enter into negotiations with other parties and/or (3) unilaterally terminate all negotiations with the other party hereto.

Sincerely,

 CB RICHARD ELLIS

/s/ Scott Wilmarth

Scott Wilmarth

Cc:	David Cook
	David Kray
	Peter Mette
	Douglas Rush
	Aaron Jones

Lease Proposal
July 21, 2006

ACCEPTED THIS 15th DAY OF August, 2006.
For:	Eschelon Telecom, Inc.
	TENANT
By:	/s/ Michael A. Dorchin
	Michael A. Dorchin
Its:	VP Finance & Treasurer

EX-10.32

Exhibit 10.32

LEASE AGREEMENT

(Hedden-Empire Building)

THIS LEASE is made and entered into this 20th day of November, 1998, by and between BRUCE E. LEE and TABLE BUTTE CATTLE COMPANY, a Montana corporation, of 208 North 29th Street, Suite 221, P.O. Box 1222, Billings, MT 59103, hereinafter referred to as “Lessor” and ONE EIGHTY COMMUNICATIONS, INC., a Washington corporation, of 118 North Stevens Street, Spokane, WA 99201, and 210 North 29th Street, Billings, MT 59101, hereinafter referred to as “Lessee”.

WITNESSETH

Lessor does lease, let and demise unto Lessee the commercial rental space located at 210 North 29th Street, Billings, MT 59101, more particularly described as follows:

Approximately 4,300 square feet of space in the Hedden-Empire Building (202-212 North 29th Street, Billings, MT) being that portion of that space commonly referred to as 210 North 29th Street, as shown on attached Exhibit “A”.

1.             The parties agree that the term of this lease shall be for a period commencing December 6, 1998, and ending on June 30, 2006.

2.             Lessee covenants and agrees to pay Lessor at its address above a monthly rent of Two Thousand Three Hundred Dollars ($2,300.00) due and payable in advance on the first day of the month. The first month’s rent shall be prorated, and shall be paid upon execution of this lease. Provided, however, that beginning July 1, 2003, Lessee shall pay to Lessor a monthly rent of Two Thousand Four Hundred Ninety Dollars ($2,490.00).

3.             Lessee may, by written notice, delivered to Lessor on or before the expiration of the primary term, extend this lease agreement for an additional five (5) years, which extended term commences on July 1, 2006, and ends on June 30, 2011, upon the same terms, conditions and covenants as set forth herein except that the fixed monthly rent shall be the sum of Two Thousand Five Hundred Ninety Dollars ($2,590.00), provided that said rent as of July 1, 2007, shall be increased by the change in the Consumer Price Index, as published by the United States Government, using July 1, 2004, as the base date. Thereafter, each year during this option term, as of July 1, the monthly rent shall be increased by the change in the Consumer Price Index for the preceding year.

4.             Lessee may, by written notice, delivered to Lessor on or before the expiration of the first option term, provided that Lessee has exercised such first option, extend this lease agreement for an additional five (5) years, which extended term commences on

July 1, 2011, and ends on June 30, 2016, upon the same terms, conditions and covenants as set forth herein except that the fixed monthly rent shall continue to be increased on July 1 of each year, including the beginning date of the option term, by the change in the Consumer Price Index for the preceding year.

5.             Lessee shall not be required to pay Lessor a security deposit.

6.             Lessee shall have shared use of the foyer and restrooms, with Heros or successor tenants.

7.             The property is leased “as is”. Lessee, at its sole and separate expense, shall provide any and all leasehold and/or premises improvements that it shall deem necessary or advisable for its purpose, including without limitation any interior demising walls, ceiling, carpet and other flooring, interior HVAC separation and any desired interior and exterior electrical or plumbing modifications or upgrade. Lessee shall have the option, at its expense, to cut in and install exterior windows to the side alley, provided that this shall be done with Landlord’s prior approval of the design to accommodate a future exterior doorway to the side alley. Any structural alterations or additions shall be first approved by Lessor, which approval shall not be unreasonably withheld.

8.             Lessee shall be entitled to possession of the premises and may actually begin any construction as of December 6, 1998, provided that Lessee shall have access to the premises at all reasonable times after the execution of this lease until such date for the purpose of planning, specifications and bidding.

9.             Lessee shall have the right, at Lessee’s expense, to place reasonable and appropriate exterior signage on the premises in keeping with city codes.

10.           Lessee shall have reasonable access to the remainder of the Hedden-Empire Building for communications linage and cabling, and shall have the right to place a communication antenna on the roof top, and shall have access to the roof top for such purposes. Lessee may place a back-up electric generator on the premises, and may do so in its interior space, provided that as an alternative, the generator may be placed in the basement parking garage or on the roof of the building, or otherwise situated, as the parties may mutually agree. If the generator is to be powered by natural gas, said natural gas shall be separately metered from that natural gas used by the building at large and paid for separately by Lessee.

11.           It is the intent of the parties that Lessee pay for its own electrical and gas usage in the premises, separate and in addition to the rent provided herein, and the parties recognize that the premises are not now separately metered from Hero’s. The existing electrical and gas accounts shall be placed in the separate name of Lessee for which Lessee shall be liable to the

provider. The parties agree to each bear one-half the cost of separate metering. If such separate metering should prove not be feasible in the mutual judgment of the parties, the parties shall rely upon fair estimates and historical usages to determine as practical as possible under the circumstances Lessee’s electric and gas usage including without limitation lighting, kitchen, computer, communications equipment, general duplex and air conditioning and heat usages, and Lessor shall be responsible, on a reimbursement basis, for that used by Hero’s or successor tenants.

12.           Lessee does hereby covenant and agree with Lessor that Lessee shall:

a)             Pay the rent at the time and place in the manner aforesaid;

b)            Use and occupy the leased premises in a careful and proper manner;

c)             Not commit any waste therein;

d)            Not use or occupy the leased premises for any unlawful purpose and will conform to and obey all present and future laws and ordinances and all rules, regulations, requirements and orders of all governmental authorities or agencies respecting the use and occupation of the leased premises;

e)             Maintain the interior of the leased premises including exterior glass in a safe condition and as good condition as the same at the commencement of this lease, reasonable wear and tear excepted;

f)             Permit Lessor to enter on the leased real estate premises at all reasonable times to examine the condition of the same;

g)            Assume all risk of loss as to Lessee’s own fixtures, contents and personal property;

h)            Not assign or sublet, in whole or in part, this lease or the leased premises, without the prior written consent of Lessor, which consent shall not be unreasonably withheld;

i)              Pay all personal property taxes and license fees levied on its personal property and leasehold improvements situated upon the premises;

j)              Provide and use chair mats under all rolling chairs such as to protect the carpet;

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k)             Refrain from posting makeshift and unorthodox signage on or about the exterior door of the leased premises;

l)              Pay all charges for electricity and gas delivered to or used in the premises.

13.           Lessor covenants and agrees with Lessee that Lessor shall:

a)             Pay all charges for water rendered to the leased commercial space;

b)            Pay the real estate property taxes and special assessments on the leased real estate during the duration of this lease agreement;

c)             Provide five-nights-per-week standard janitorial service to the leased premises.

14.           The parties agree that:

a)             Anything in this Lease to the contrary notwithstanding, if the demised premises or the building should be partially or totally damaged or destroyed by fire or other casualty insurable under a standard form policy of fire and extended coverage insurance (including vandalism, malicious mischief, and “all risk” if such coverage is carried by Lessor) then, if this Lease shall not have been canceled in accordance with the provisions hereinafter made in this Lease, Lessor shall with reasonable dispatch after written notice to it of the damage or destruction, repair the damage, and replace, restore, and rebuild the demised premises and building at its sole cost and expense. Lessor will commence such repair, replacement, restoration or rebuilding as soon as practicable after receiving notice from Lessee to do so, but under no circumstances later than ninety (90) days after receipt of such notice. Lessor shall not be required by this paragraph to repair, replace, restore or rebuild any property which Lessee shall, under other provisions of this Lease, be entitled to remove from the demised premises, it being agreed that Lessee shall bear the entire risk of loss, damage, or destruction of such property while it is on the demised premises.

b)            If the demised premises shall be partially damaged or partially destroyed, the rent payable under this Lease shall, to the extent that the demised premises shall have been rendered unfit for use for Lessee’s business purposes, be abated for the period from the date of such damage or destruction to the date that such damage or

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destruction shall be repaired or restored. If the demised premises or a major portion thereof shall be totally or substantially damaged or destroyed or rendered completely or substantially unfit for use for Lessee’s business purposes because of fire or other casualty as provided for in paragraph 13(a), the entire rent shall, as of the date of the damage or destruction, abate until Lessor shall repair, restore, replace and rebuild the building and the demised premises; provided, however that should Lessee reoccupy a portion of the demised premises while the restoration work is taking place and prior to the date that the entire demised premises are again made fit for use for Lessee’s business purposes, rent shall be apportioned and become payable by Lessee in proportion to the part of the demised premises occupied by it for the purpose of conducting its business, effective on the date that the Lessee shall again begin conducting its ordinary business from the demised premises or any portion thereof.

c)             In the event that the demised premises, or a major part thereof, shall be totally or substantially damaged or destroyed, or rendered completely or substantially untenantable as set forth in paragraph 13(b), Lessee may, at its option, exercisable within ninety (90) days of the date of casualty, cancel this Lease by written notice to Lessor, provided Lessor has not commenced to repair the damage in accordance with paragraph 13(a) above.

d)            In the event the damage to the building, without regard to the status of the demised premises, shall in the reasonable opinion of the Lessor have rendered it untenantable, Lessor may, within sixty (60) days of the casualty, by written notice given to Lessee, elect not to repair or rebuild the building. This Lease shall thereupon terminate effective as of the date of casualty. After receipt of such notice, Lessee shall vacate the demised premises as quickly as it is reasonably possible, provided, however, that Lessee shall be entitled to occupy the demised premises or any part thereof without liability to Lessor for as long as it is reasonably necessary to salvage or remove therefrom its personal property as provided in this Lease.

e)             No damages, compensation, or claims shall be payable by Lessor for inconvenience, loss of business, or annoyance arising from any repair or restoration of any portion of the demised premises or of the building required to be made by Lessor under the provisions of this Lease, but this section shall not be construed to limit the abatement of Lessee’s rent in accordance with paragraph 13(b) above. Lessor covenants with Lessee that

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it shall use its best efforts to effect all such repairs promptly and in such manner as not unreasonably to interfere with Lessee’s occupancy if Lessee shall not have vacated the demised premises or the portion thereof to be repaired because the same shall have become untenantable.

f)             Lessee shall insure all personal property and fixtures, not belonging to Lessor, situated on or in the demised premises against damage by fire or other casualty under a standard form policy of fire and extended coverage insurance (including vandalism, malicious mischief and “all risk”) in an amount sufficient to cover replacement or repair.

g)            Lessor shall insure Lessor’s interest in the real estate and Lessor’s personal property situated on or in the demised premises against damage by fire or other casualty under a standard form policy of fire and extended coverage insurance (including vandalism, malicious mischief and “all risk”) in an amount sufficient to cover replacement or repair.

h)            The Lessor and Lessee hereby waive on behalf of themselves and their respective insurers, any claims that either may have against the other for loss or damage resulting from perils covered by the standard form of fire and extended coverage insurance including vandalism and malicious mischief, to the extent of such policies which shall be in effect from time to time, it being expressly understood that this waiver is intended to extend to all such loss or damage whether or not the same is caused by the fault a neglect of either Lessor or Lessee. Each party shall secure from its casualty insurer a waiver of subrogation endorsement to the policy and, upon request, deliver a copy of such endorsement to the other party to this Lease.

15.           Lessee shall keep the demised premises in good condition and repair, and Lessor shall keep the remainder of the building in good condition and repair.

16.           In the event Lessee fails to pay any rent due hereunder or fails to keep or perform any of the other terms or conditions hereof, or otherwise breaches this lease or defaults hereunder, then ten (10) days after written notice of default of the payment of rent, or thirty (30) days after written notice of any other default, Lessor may, if such default has not been corrected, declare Lessee’s right of possession under this lease canceled, whereupon Lessee shall peaceably deliver possession of the premises, and in this regard, it shall be lawful for Lessor to enter upon the leased premises and again have, repossess and enjoy

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the same, as if this lease had not been made, without prejudice, however, to the rights of Lessor to recover from Lessee all rent due under this lease. In cases of any such default and forfeiture of possession, Lessor may relet the leased premises for the remainder of said term to the highest rent reasonably obtainable and may recover from Lessee any deficiency between the amounts obtained and the rent herein reserved. Any specification of remedy herein shall not be exclusive, and Lessor shall have any remedy for breach of this lease allowed by law.

17.           It is agreed and understood that the provisions of this lease shall apply to and bind the heirs, executors, personal representatives, successors and assigns of the respective parties hereto as if in each provision particularly mentioned.

18.           It is agreed that any failure or delay of Lessor to declare a default for breach of this lease, or assert any right hereunder, shall not operate as a bar or waiver to declare such default or assert such right in the future.

19.           Lessee acknowledges that Lessee has personally inspected and examined the property covered by this lease. Lessee is thoroughly familiar with the same and acknowledges that Lessee is entering into this lease based upon Lessee’s own examination and inspection, and that the premises are fit and suitable for Lessee’s intended purposes in all regards.

20.           Any notice to be given hereunder may be served upon the party personally, or by regular first class or certified mail, directed to such party at its address above, or at such other address as notice in writing may be given, similarly served, and notice served by mail shall be deemed complete when deposited in the U.S. mail, postage prepaid.

21.           The parties having substantially equal bargaining power, and equal opportunity for advice of legal counsel with regard to this lease, each party waives any right or rule of construction or interpretation that this lease be most strictly construed against the party furnishing or drafting the same.

22.           In the event that Lessee shall remain in possession of the premises upon expiration of the term of this lease, without said tenancy being terminated or term extended, the tenancy shall be deemed a month-to-month tenancy, upon the same terms as herein contained until changed pursuant to the agreement of the parties or pursuant to law, which month-to-month tenancy may be terminated by either party upon thirty (30) days written notice to the other.

23.           Prior to December 6, 1998, or within ten (10) days thereafter, Lessor shall remove from the premises Lessor’s personal property, which shall include without limitation the large mirrors

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presently attached to the walls, the dance lights, stereo system and the large table and chair storage shelf in the back room.

IN WITNESS WHEREOF, the parties have hereunto executed this lease the day and year first above written.

LESSOR:	LESSEE:
	ONE EIGHTY COMMUNICATIONS, INC.
/s/ Bruce E. Lee	By:	/s/ Gregory Green
BRUCE E. LEE		GREGORY GREEN
		Its:  President

TABLE BUTTE CATTLE COMPANY
By:	/s/ Bruce E. Lee
	BRUCE E. LEE
	Vice President

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[GRAPHIC]

LEASE MODIFICATION AGREEMENT
(Hedden-Empire Building)

The undersigned, BRUCE E. LEE and TABLE BUTTE CATTLE COMPANY, as Lessor, and AVISTA COMMUNICATIONS OF MONTANA, INC. (Successor to One Eighty Communications, Inc.), as Lessee, being the parties to that certain lease agreement dated the 20th day of November, 1998, covering that certain commercial space described therein being a portion of the Hedden-Empire Building situated at 202-212 North 29th Street, Billings, Montana, and agree to modify the lease as follows:

1.             Throughout the duration of the lease, including all option terms and extensions, Lessee’s stated rent shall be reduced by $150.00 per month, i.e. its current rent shall be $2,150.00 per month. The $150.00 reduction shall be taken after CPI adjustments. This paragraph shall be effective with the rent due October 1, 1999.

2.             There is added to Lessee’s leasehold premises for its use, storage bin #27 (approximately 140 sq. ft.) situated in the tenant storage area of the basement of the building.

3.             Lessor shall have no obligation to participate in, or reimburse Lessee for, the exterior or interior electrical service upgrades done by Lessee at its expense specifically including those directly or indirectly benefiting the building at large as opposed to Lessee’s leasehold premises. Any contractor, vendor, or other third party warranties or responsibilities with regard thereto shall inure to the benefit of Lessor as well as Lessee, and are hereby assigned as the parties’ interests may from time to time appear.

DATED this 9th day of September, 1999.

LESSOR:	LESSEE:
	AVISTA COMMUNICATIONS OF
	MONTANA, INC.
/s/ Bruce E. Lee	By:	/s/ [Illegible]
BRUCE E. LEE
		Its:	General Manager

TABLE BUTTE CATTLE COMPANY
By:	/s/ Bruce E. Lee
	BRUCE E. LEE
	Vice President

EX-10.33

Exhibit 10.33

INDUSTRIAL LEASE

1. BASIC PROVISIONS

1.1	Date:	September 24, 1999
1.2	Landlord:	HARDY COMMERCE CENTER, L.L.C., an
		Arizona limited liability company
1.3	Landlord’s Address:	Hardy Commerce Center, L.L.C.
		c/o Victoria Properties, Inc.
		549 South 48th Street, Suite 108
		Tempe, Arizona 85281
		Attention:  Ken Matheson
		with a copy to:
		Mark Dioguardi, Esq.
		Tiffany & Bosco, P.A.
		1850 N. Central, Suite 500
		Phoenix, Arizona 85004
1.4	Tenant:	Prism Arizona Operations, LLC, a Delaware limited
		liability company
1.5	Tenant’s Address:
	(a)           Prior to Commencement	11 Beach Street. 2nd Floor
	Date:	New York, New York 10013
	(b)           Subsequent to
	Commencement Date:	Desert Vista Commerce Center
		7810-7890 South Hardy Drive
		Tempe, Arizona 85284
1.6	Property:	The approximate 98,464 square foot industrial/office facility located at 7810-7890 South Hardy Drive in Tempe, Maricopa County, Arizona, depicted on the Site Plan attached hereto as Exhibit “A” and incorporated herein by this reference, together with the buildings now or hereafter situated thereon, the landscaping, parking facilities and all other improvements and appurtenances thereto.
1.7	Building:	That certain industrial/office building known as Desert Vista Commerce Center (Building B) located at 7850 South Hardy Drive, Suite to be established, Tempe, Maricopa County, Arizona 85284, and situated on the Property.
1.8	Leased Premises:	Approximately 5,067 rentable square feet of space located on the 1st floor of the Building and commonly known as Suite to be established, as outlined on the Floor Plan attached hereto as Exhibit “B”.
1.9	Permitted Use:	Telecommunication transmissions, switch operation
		and general office administration.

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1.10	Lease Term:	Ten (10) years
1.11	Scheduled Commencement Date Expiration Date:	Scheduled Commencement Dale is six (6) full months after full execution of the lease. Expiration Date to be One hundred twenty (120) full months after the Commencement Date.
1.12	Annual Basic Rent:	Year	Rent Detail Annual (PSF)*
		1	$10.20 NNN
		2-3	$10.80 NNN
		4	$11.40 NNN
		5-6	$11.76 NNN
		7-8	$12.12 NNN
		9-10	$12.72 NNN
		* Excludes applicable rental tax
1.13	Security Deposit:	Subject to review of financials, security shall waived.
1.14	Building Hours:	24 hours - seven (7) days a week
1.15	Parking Spaces:	Up to eight (8) unreserved spaces and zero (0)
		covered reserved spaces.
1.16	Parking Charge:	N/A
1.17	Guarantors:	Prism Communication Services, Inc., a
		Corporation
1.18	Broker:	Insignia/ESG Staubach
1.19	Exhibits:	A = Site Plan B = Floor Plan C = Memorandum of Commencement Date D = Reserved Covered Parking License E = Work Letter F = Rules and Regulations G = Guaranty of Lease
1.20	Riders:

2. LEASED PREMISES; ADJUSTMENTS

2.1     Leased Premises. Landlord hereby leases to Tenant, and Tenant hereby leases and accepts from Landlord, the Leased Premises, upon the terms and conditions set forth in this Lease and any modifications, supplements or addenda hereto (the “Lease”), including the Basic Provisions of Article 1 which are incorporated herein by this reference, together with the nonexclusive right to use, in common with Landlord and others, the Building Common Areas (defined below). For the purposes of this Lease, the term “Building Common Areas” means common hallways, corridors, walkways and footpaths, foyers and lobbies, parking lots, driveways, landscaped areas, and such other areas within or adjacent to the Building which are subject to or are designed or intended solely for the common enjoyment, use and/or benefits of the tenants of the Property.

2.2.     Adjustments. The Annual Basic Rent at the Commencement Date (as hereinafter defined) is based on the Leased Premises containing the rentable square footage set forth in Article

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1.8 above. If the actual rentable square footage of the Leased Premises is more or less than the square footage set forth in Article 1.8 above (to be computed, at Landlord’s or Tenant’s option, after completion of the Leased Premises, by an architect designated by Landlord and licensed to practice in the State of Arizona), the Annual Basic Rent shall be increased or decreased in accordance with the rental rate set forth in Article 1.12 above. Tenant and Landlord agree that for purposes of this lease the rentable square feet is as defined in Article 1.8 or adjusted per Article 2.2. For the purpose of this Lease, Landlord and Tenant agree that the RU ratio shall be 1.0455.

3. LEASE TERM, COMMENCEMENT DATE

3.1     Lease Term. The Lease Term shall begin on the Commencement Date and shall be for the period set forth in Article 1.10 above, plus any period of less than one (1) month between the Commencement Date and the first day of the next succeeding calendar month, unless sooner terminated in accordance with the further provisions of this Lease.

3.2     Commencement Date. The Commencement Date shall mean the earlier of (a) the date of substantial completion of Tenant’s improvements; i.e., Tenant has completed construction of the Tenant’s improvements in accordance with Tenant’s final plans and specification and all permits for lawful occupancy issued or (b) six (6) months after the landlord made the leased Premises available to Tenant for construction. Landlord shall make the premises available to the Tenant for Construction of the Tenant Improvements within five (5) days of full execution of the lease (the “Scheduled Date”).

3.3     Memorandum of Commencement Date. Landlord and Tenant shall, within ten (10) days after the Commencement Date, execute a declaration in the form of Exhibit “C” attached hereto specifying the Commencement Date.

3.4     Delay in Commencement Date. In the event Landlord shall be unable, for any reason, to deliver possession of the Leased Premises to Tenant on the Scheduled Date, Landlord shall not be liable for any loss or damage occasioned thereby, nor shall such inability affect the validity of this Lease or the obligations of Tenant. In such event, Tenant shall not be obligated to pay Annual Basic Rent or Additional Rent until the Commencement Date. In the event Landlord shall not have delivered possession of the Leased Premises to Tenant as of the Scheduled Date then the Commencement Date as defined in Article 3.2 will be extended by an equal number of days that the Leased Premises were delayed in being available to Tenant up to a maximum of Thirty (30) days, and if such failure to deliver possession was (a) caused solely by the fault or neglect of Landlord, and (b) not caused by any fault or neglect of Tenant or due to additional time required to plan for and install other work for Tenant beyond the amount of time which would have been required if only building standard improvements had been installed, then, as its sole and exclusive remedy for Landlord’s failure to deliver possession of the Leased Premises in a timely manner, Tenant shall have the right to terminate this Lease by delivering written notice of termination to Landlord at any time within thirty (30) days after the expiration of such thirty (30) day period. Such termination shall be effective thirty (30) days after receipt by Landlord of Tenant’s notice of termination unless Landlord shall, prior to the expiration of such thirty (30) day period, deliver possession of the Leased Premises to Tenant. In addition, if the Commencement Date does not occur within twelve (12) months after the Date of this Lease as set forth in Article 1.1, other than as a result of the breach or default by Landlord. Landlord may elect, by delivering written notice to Tenant, to terminate this Lease, which termination shall be effective upon delivery of written notice of such termination by Landlord to Tenant. Upon a termination of this Lease pursuant to the provisions of this Article 3.4, the parties shall have no further obligations or liabilities, to the other and Landlord shall promptly return any monies previously deposited or paid by Tenant.

4. SECURITY DEPOSIT

Tenant shall pay to Landlord, upon the execution of this Lease, the Security Deposit set forth in Article 1.13 above as security for the performance by Tenant of its obligations under this Lease, which amount shall be returned to Tenant after the expiration or earlier termination of this Lease, provided that Tenant shall have fully performed all of its obligations contained in this Lease. The

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Security Deposit, at the election of Landlord, may be retained by Landlord as and for its full damages or may be applied in reduction of any loss and/or damage sustained by Landlord by reason of the occurrence of any breach, nonperformance or default by Tenant under this Lease without the waiver of any other right or remedy available to Landlord at law, in equity or under the terms of this Lease. If any portion of the Security Deposit is so used or applied, Tenant shall, within five (5) days alter written notice from Landlord, deposit with Landlord immediately available funds in an amount sufficient to restore the Security Deposit to its original amount, and Tenant’s failure to do so shall be a breach of this Lease. Tenant acknowledges and agrees that in the event Tenant shall file a voluntary petition pursuant to the Bankruptcy Code or any successor thereto, or if an involuntary petition is filed against Tenant pursuant to the Bankruptcy Code or any successor thereto, then Landlord may apply the Security Deposit towards those obligations of Tenant to Landlord which accrued prior to the filing of such petition. Tenant acknowledges further that the Security Deposit may be commingled with Landlord’s other funds and that Landlord shall be entitled to retain any interest earnings thereon. In the event of termination of Landlord’s interest in this Lease, Landlord shall transfer the Security Deposit to Landlord’s successor in interest, whereupon Landlord shall be released from liability by Tenant for the return of such deposit or the accounting therefore.

5. RENT; RENT TAX; ADDITIONAL RENT

5.1     Payment of Rent. Tenant shall pay to Landlord the Annual Basic Rent set forth in Article 1.12 above, subject to adjustment as provided herein. The Annual Basic Rent shall be paid in equal monthly installments, on or before the first day of each and every calendar month during the Lease Term, in advance, without notice or demand and without abatement, deduction or set-off. If the Commencement Date is other than the first day of a calendar month, the payment for the partial month following the Commencement Date shall be prorated and shall be payable on the first day of the first full calendar month of the Lease Term. The Annual Basic Rent for the first full month of the Lease Term shall be paid upon the execution of this Lease. All payments requiring proration shall be prorated on the basis of a thirty (30) day month. In addition, all payments to be made under this Lease shall be paid in lawful money of the United States of America to Landlord or its agent at the address set forth in Article 1.3 above, or to such other person or at such other place as Landlord may from time to time designate in writing.

5.2     Rent Tax. In addition to the Annual Basic Rent and Additional Rent, Tenant shall pay to Landlord, together with the monthly installments of Annual Basic Rent and payments of Additional Rent, an amount equal to any governmental taxes, including, without limitation, any sales, rental, occupancy, excise, use or transactional privilege taxes assessed or levied upon Landlord with respect to any and all amounts paid by Tenant to Landlord hereunder, as well as all taxes assessed or imposed upon Landlord’s gross receipts or gross income from leasing the Leased Premises to Tenant, including, without limitation, transaction privilege taxes, education excise taxes, any tax now or hereafter imposed by the City of Tempe, the State of Arizona, any other governmental body, and any taxes assessed or imposed in lieu of or in substitution of any of the foregoing taxes. Such taxes shall not, however, include any franchise, gift, estate, inheritance, conveyance, transfer or net income tax assessed against Landlord.

5.3     Additional Rent. In addition to Annual Basic Rent, all other amounts to be paid by Tenant to Landlord pursuant to this Lease (including amounts to be paid by Tenant pursuant to Article 6 below [and parking charges to be paid by Tenant pursuant to Exhibit “D”], if any, shall be deemed to be Additional Rent, whether or not designated as such, and shall be due and payable within five (5) days after receipt by Tenant of Landlord’s statement or together with the next succeeding installment of Basic Rent, whichever shall first occur. Landlord shall have the same remedies for the failure to pay Additional Rent as for the nonpayment of Basic Rent.

6. OPERATING COSTS

6.1     Tenant’s Obligation for Costs. The Annual Basic Rent does not include amounts attributable to Tenant’s share of Taxes (defined below) or the cost of the use, management, repair, service, insurance, condition, operation and maintenance of the Building and the Property. Tenant shall pay to Landlord, in addition to the Annual Basic Rent, in accordance wilh the further provisions

4

of this Article 6, an amount per rentable square foot of the Leased Premises equal to the total Operating Costs (as hereinafter defined) multiplied by Tenant’s Pro Rata Share set forth in Article 6.7.

6.2     Landlord’s Estimate. Landlord shall furnish Tenant an estimate of Tenant’s Pro Rata Share of the Operating Costs for each calendar year commencing with the Commencement Date. In addition, Landlord may, from time to time, furnish Tenant a revised estimate of Operating Costs should Landlord anticipate any increase in Operating Costs from that set forth in a prior estimate. Commencing with the first month to which an estimate applies, Tenant shall pay, in addition to the monthly installments of Annual Basic Rent, an amount equal to one-twelfth (1/12th) of Landlord’s estimate of Tenant’s Pro Rata Share of the Property’s annual Operating Costs. Within sixty (60) days after the expiration of each calendar year or such longer period of time as may be necessary to compile such statement, Landlord shall deliver to Tenant a statement of the actual Operating Costs for such calendar year. If the actual Operating Costs for such calendar year are more or less than the estimated Operating Costs, a proper adjustment shall be made. Any excess amounts paid by Tenant shall be refunded to Tenant with such statement or, at Landlord’s option, may be applied to any amounts then payable by Tenant to Landlord or to the next maturing monthly installment of Annual Basic Rent of Additional Rent. Any deficiency between the estimated and actual Pro Rata Share of Operating Costs shall be paid by Tenant to Landlord concurrently with the monthly installment of Annual Basic Rent next due. Any amount owing for a fractional calendar year in the first or final year of the Lease Term shall be prorated.

6.3     Operating Costs - Defined. Tenant shall pay to Landlord during the term hereof, in additional to the annual basic rent Tenant’s Share (as specified in Article 6.7) of all Operating Costs, as hereinafter defined, during each calendar year of the term of this Lease, in accordance with the following provisions:

(a)     For the purposes of this Lease, “Operating Costs” shall mean all costs and expenses accrued, paid or incurred by Landlord, or on Landlord’s behalf, in accordance with generally accepted accounting principles, in respect of the use, management, repair, service, insurance, condition, operation and maintenance of the Building and the Property, including but not limited to the following:

(i)The operation, repair and maintenance, in neat, clean, good order and condition, of the following:

(aa)     The Common Areas, including parking areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveways, landscaped areas, striping, bumpers, irrigation systems, Common Area lighting facilities, fences and gates, elevators and roof,

(bb)     Exterior signs and any tenant directories.

(cc)     Fire detection and sprinkler systems.

(ii)The cost of water, gas, electricity, telephone and any other utilities required to service the Common Areas.

(iii)Trash disposal, property management fees, security services and the costs of any environmental inspections.

(iv)Reserves set aside for maintenance and repair of Common Areas.

(v)Taxes (as defined in Article 6.5) to be paid by Landlord for the Building and the Common Areas under Article 6 hereof.

(vi)The cost of the premiums for the insurance policies maintained by Landlord under Article 9 hereof.

(vii)Any deductible portion of an insured loss concerning the Building or the Common Areas.

(viii)Any other services to be provided by Landlord that are stated elsewhere in this Lease to be a Common Area Operating Expense.

(b)     Any Operating Costs and Taxes that are specifically attributable to the Building or to any other building in the Property or to the operation, repair and maintenance thereof, shall be allocated entirely to the Building or to such other building. However, any Operating Costs

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and Taxes that are not specifically attributable to the Building or to any other buildings or to the operation, repair and maintenance thereof, shall be equitably allocated by Landlord to all buildings in the Property.

(c)     The inclusion of the improvements, facilities and services set forth in Article 6.3(a) shall not be deemed to impose an obligation upon Landlord to either have said improvements or facilities or to provide those services unless the Project already has the same, Landlord already provides the services, or Landlord has agreed elsewhere in this Lease to provide the same or some of them.

6.4     Operating Costs - Exclusions. Excluded from Operating Costs shall be the following: (a) depreciation, except to the extent expressly included pursuant to Article 6.3 above; (b) interest on and amortization of debts, except to the extent expressly included pursuant to Article 6.3 above; (c) leasehold improvements, including redecorating made for tenants of the Building; (d) brokerage commissions and advertising expenses for procuring tenants for the Building or the Property; (e) refinancing costs; (f) the cost of any repair, replacement or addition which would be required to be capitalized under general accepted accounting principles, except to the extent expressly included pursuant to Article 6.3 above; and (g) the cost of any item included in Operating Costs under Article 6.3 above to the extent that such cost is reimbursed or paid directly by an insurance company, condemnor, a tenant of the Building or any other party.

6.5     Taxes - - Defined. For the purposes of this Lease, “Taxes” shall mean and include all real property taxes general and special assessments, assessments under any covenants, conditions and restrictions encumbering the Property, foreseen as well as unforeseen, which are levied or assessed upon or with respect to the Property, any improvements, fixtures, equipment and other property of Landlord, located on the Property and used in connection with the operation of all or any portion of the Property, as well as any tax, surcharge or assessment which shall be levied or assessed in addition to or in lieu of such real or personal property taxes and assessments. Taxes shall also include any expenses incurred by Landlord in contesting the amount or validity of any real or personal property taxes and assessments. Taxes shall not, however, include any franchise, gift, estate, inheritance, conveyance, transfer or income tax assessed against Landlord. The Taxes shall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring, or changes in Applicable Law taking effect, during the term of this Lease, including but not limited to a change in the ownership of the Property or in the improvements thereon, the execution of this Lease, or any modification, amendment or transfer thereof, and whether or not contemplated by the Parties. In calculating Taxes for any calendar year, the Taxes for any real estate tax year shall be included in the calculation of Taxes for such calendar year based upon the number of days which such calendar year and tax year have in common.

6.6     No Waiver. The failure by Landlord to furnish Tenant with a statement of Operating Costs shall not constitute a waiver by Landlord of its right to require Tenant to pay excess Operating Costs per rentable square foot.

6.7     Tenant’s Pro Rata Share Defined. Tenant’s Pro Rata Share shall mean the ratio that the gross leasable floor area of the Leased Premises bears to the total gross leasable floor area of all completed buildings on the Property. Tenants Pro Rata share is defined as 5.15%.

6.8     Landlord shall supply a reconciliation statement of the operating expenses for the prior year on or before April 1 of each year with Tenant having the right to audit the statement and Landlord to pay the cost of the audit if the audit is in error by more than five percent (5%).

7. CONDITION, REPAIRS AND ALTERATIONS

7.1     Alterations and Improvements. Tenant may place partitions and fixtures and may make improvements and other alterations to the interior of the Leased Premises at Tenant’s expense, provided, however, that prior to commencing any such work, Tenant shall first obtain the written consent of Landlord to the proposed work, including the plans, specifications, the proposed architect

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and/or contractor(s) for such alterations and/or improvements and the materials used in connection with such alterations, including, without limitation, paint, carpeting, wall or window coverings and the use of carpet glues and other chemicals for installation of such materials, such consent not to be unreasonably withheld. At least ten (10) days prior to the commencement of any construction in the Leased Premises, Tenant shall deliver to Landlord copies of the plans and specifications for the contemplated work and shall identify the contractor(s) selected by Tenant to perform such work. Landlord may require that the work be done by Landlord’s own employees, its construction contractors, or under Landlord’s direction, but at the expense of Tenant, and Landlord may, as a condition to consenting to such work, require that Tenant provide security adequate in Landlord’s judgment so that the improvements or other alterations to the Leased Premises will be completed in a good, workmanlike and lien free manner. Landlord may also require that any work done to the interior of the Leased Premises be subject to the supervision of Landlord or its designee, and Tenant shall pay to Landlord, upon completion of such work, a supervision fee in an amount equal to zero percent (0%) of the cost of such work. All such improvements or alterations must conform to and be in substantial accordance in quality and appearance with the quality and appearance of improvements in a first-class, Class A, institutional grade office building. All such improvements shall be the property of Landlord. In the event Landlord consents to the use by Tenant of its own architect and/or contractor for the installation of any such alterations or improvements, prior to the commencement of such work, Tenant shall provide Landlord with evidence that Tenant’s contractor has procured worker’s compensation, liability and property damage insurance (naming Landlord as an additional insured) in a form and in an amount approved by Landlord, and evidence that Tenant’s architect and/or contractor has procured the necessary permits, certificates and approvals from the appropriate governmental authorities. Tenant acknowledges and agrees that any review by Landlord of Tenant’s plans and specifications and/or right of approval exercised by Landlord with respect to Tenant’s architect and/or contractor is for Landlord’s benefit only and Landlord shall not, by virtue of such review or right of approval, be deemed to make any representation, warranty or acknowledgment to Tenant or to any other person or entity as to the adequacy of Tenant’s plans and specifications or as to the ability, capability or reputation of Tenant’s architect and/or contractor.

7.2     Tenant’s Obligations. Tenant shall, at Tenant’s sole cost and expense, maintain the Leased Premises in a clean, neat and sanitary condition and shall keep the Leased Premises and every part thereof in good condition and repair except where the same is required to be done by Landlord. Tenant shall be responsible for maintaining, repairing, and replacing (as necessary) the HVAC for the Premises. Tenant shall be responsible for maintaining the electrical, plumbing, lighting, and other mechanical systems within the Premises. Tenant shall be responsible for its own separately metered water, electricity, phone and other utilities, and Tenant’s trash collection, janitorial service and lighting. Tenant hereby waives all rights to make repairs at the expense of Landlord as provided by any law, statute or ordinance now or hereafter in effect. All of Tenant’s alterations and/or improvements are the property of the Landlord, and Tenant shall, upon the expiration or earlier termination of the Lease Term, surrender the Leased Premises, including Tenant’s alterations and/or improvements, to Landlord, janitorial clean and in the same condition as when received, ordinary wear and tear and damage by casualty excepted. Except as set forth in Article 7.3 below, Landlord has no obligation to construct, remodel, improve, repair, decorate or paint the Leased Premises or any improvement thereon or part thereof. Tenant shall pay for the cost of all repairs to the Leased Premises not required to be made by Landlord and shall be responsible for any redecorating, remodeling, alteration and painting during the Lease Term as Tenant deems necessary. Tenant shall pay for any repairs to the Leased Premises, the Building and the Property made necessary by any negligence or carelessness of Tenant, its employees or invitees.

7.3     Landlord’s Obligations. Landlord shall (a) make all necessary repairs to the exterior walls, exterior doors, roofs, windows and corridors of the Building, (b) maintain, repair and replace (as necessary) the HVAC for the premises, and (c) keep the Building and the Building Common Areas in a clean, neat and attractive condition, but Landlord shall not be liable or responsible for breakdowns or interruptions in service when reasonable efforts are made to restore such service. The cost of all such maintenance and repair shall be Operating Costs for which Tenant will be liable for its Pro Rata Share.

7.4     Removal of Alterations. Upon the expiration or earlier termination of this Lease,

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Tenant shall remove from the Leased Premises all movable trade fixtures and other movable personal property, and shall promptly repair any damage to the Leased Premises, the Building and/or the Property caused by such removal. All such removal and repair shall be entirely at Tenant’s sole cost and expense. At any time within fifteen (15) days prior to the scheduled expiration of the Lease Term or immediately upon any termination of this Lease, Landlord may require that Tenant remove from the Leased Premises any alterations, additions, improvements (as to such items only to the extent specified at the time of approval of such items), trade fixtures, equipment, shelving, cabinet units or movable furniture (and other personal property) designated by Landlord to be removed. In such event, Tenant shall, in accordance with the provisions of Article 7.2 above, complete such removal (including the repair of any damage caused thereby) entirely at its own expense and within fifteen (15) days after notice from Landlord. All repairs required of Tenant pursuant to the provisions of this Article 7.5 shall be performed in a manner satisfactory to Landlord, and shall include, but not be limited to, repairing plumbing, electrical wiring and holes in walls, restoring damaged floor and/or ceiling tiles, repairing any other cosmetic damage, and cleaning the Leased Premises. Tenant may remove its equipment at any time.

7.5     No Abatement. Except as provided herein, Landlord shall have no liability to Tenant, nor shall Tenant’s covenants and obligations under this Lease, including without limitation, Tenant’s obligation to pay Annual Basic Rent and Additional Rent, be reduced or abated in any manner whatsoever by reason of any inconvenience, annoyance, interruption or injury to business arising from Landlord’s making any repairs or changes which Landlord is required or permitted to make pursuant to the terms of this Lease or by any other tenant’s Lease or are required by law to be made in and to any portion of the Leased Premises, the Building or the Property. Landlord shall, nevertheless, use reasonable efforts to minimize any interference with Tenant’s business in the Leased Premises.

8. SERVICES

Landlord does not warrant that any services which Landlord may supply will be free from interruption. Tenant acknowledges that any one or more of such services may be suspended by reason of accident, repairs, inspections, alterations or improvements necessary to be made, or by strikes or lockouts, or by reason of operation of law, or by causes beyond the reasonable control of Landlord. Landlord shall not be liable for and Tenant shall not be entitled to any abatement or reduction of Annual Basic Rent or Additional Rent by reason of any disruption of the services to be provided by Landlord pursuant to this Lease.

9. LIABILITY AND PROPERTY INSURANCE

9.1     Liability Insurance. Tenant shall, during the Lease Term, keep in full force and effect, a policy or policies of commercial general liability insurance for personal injury (including wrongful death) and damage to property covering (a) any occurrence in the Leased Premises, (b) any act or omission by Tenant, by any subtenant of Tenant, or by any of their respective invitees, agents, servants or employees anywhere in the Leased Premises and the Property, (c) the business operated by Tenant and by any subtenant of Tenant in the Leased Premises, and (d) the contractual liability of Tenant to Landlord pursuant to the indemnification provisions of Article 16.1 below, which coverage shall not be less than One Million and No/100 Dollars ($1,000,000.00) per occurrence and One Million and No/100 Dollars ($1,000,000.00) combined single limit. If Landlord shall so request, Tenant shall increase the amount of such liability insurance to the amount then customary for premises and uses similar to the Leased Premises and Tenant’s use thereof. The liability policy or policies shall contain an endorsement naming Landlord, its partners, members or shareholders (as applicable), Landlord’s lender and management agent and any persons, firms or corporations designated by Landlord as additional insureds, and shall provide that the insurance carrier shall have the duty to defend and/or settle any legal proceeding filed against Landlord seeking damages based upon bodily injury or property damage liability even if any of the allegations of such legal proceedings are groundless, false or fraudulent.

9.2     Property Insurance. Tenant shall, during the Lease Term, keep in full force and effect, a policy or policies of insurance with “Special Form Coverage,” including coverage for

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vandalism or malicious mischief, insuring the Tenant Improvements as defined on Exhibit “E” hereto and Tenant’s alterations and/or improvements made pursuant to Article 7.2 above and Tenant’s stock in trade, furniture, personal property, fixtures, equipment and other items in the Leased Premises, with coverage in an amount equal to the full replacement cost thereof.

9.3     Worker’s Compensation Insurance. Tenant shall, during the Lease Term, keep in full force and effect, a policy or policies of worker’s compensation insurance with an insurance carrier and in amounts approved by the Industrial Commission of the State of Arizona.

9.4     Business Interruption Insurance. Tenant shall, during the Lease Term, keep in full force and effect, a policy or policies of business interruption insurance in an amount equal to twelve (12) monthly installments of Annual Basic Rent and Additional Rent payable to Landlord, together with the taxes thereon, insuring Tenant against losses sustained by Tenant as a result of any cessation or interruption of Tenant’s business in the Leased Premises for any reason.

9.5     Insurance Requirements. Each insurance policy and certificate thereof obtained by Tenant pursuant to this Lease shall contain a clause that the insurer will provide Landlord, its members, partners and any persons, firms or corporations designated by Landlord with at least thirty (30) days prior written notice of any material change, non-renewal or cancellation of the policy. Each such insurance policy shall be with an insurance company authorized to do business in the State of Arizona and rated not less than A VIII in the then most current edition of “Best’s Key Rating Guide”. Certified copies of all insurance policies evidencing the coverage under each such policy, as well as a certified copy of the required additional insured endorsement(s) shall be delivered to Landlord prior to commencement of the Lease Term. Each such policy shall provide that any loss payable thereunder shall be payable notwithstanding (a) any act, omission or neglect by Tenant or by any subtenant of Tenant, or (b) any occupation or use of the Leased Premises or any portion thereof by Tenant or by any subtenant of Tenant for purposes more hazardous than permitted by the terms of such policy or policies, or (c) any foreclosure or other action or proceeding taken by any mortgagee or trustee pursuant to any provision of any mortgage or deed of trust covering the Leased Premises, the Building or the Property, or (d) any change in title or ownership of the Property. All insurance policies required pursuant to this Article 9 shall be written as primary policies, not contributing with or in excess of any coverage which Landlord may carry. Tenant shall procure and maintain all policies entirely at its own expense and shall, at least twenty (20) days prior to the expiration of such policies, furnish Landlord with certified copies of replacement policies or renewal certificates for existing policies in conformance with Accord Form No. 27 (March 1993). Tenant shall not do or permit to be done anything which shall invalidate the insurance polices maintained by Landlord or the insurance policies required pursuant to this Article 9 or the coverage thereunder. If Tenant or any subtenant of Tenant does or permits to be done anything which shall increase the cost of any insurance policies maintained by Landlord, then Tenant shall reimburse Landlord for any additional premiums attributable to any act or omission or operation of Tenant or any subtenant of Tenant causing such increase in the cost of insurance. Any such amount shall be payable as Additional Rent within five (5) days after receipt by Tenant of a bill from Landlord. All policies of insurance (other than the policy of property insurance described in Article 9.2) shall name both Landlord and Tenant (and/or such other party or parties as Landlord may require) as insureds and shall be endorsed to indicate that the coverage provided shall not be invalid due to any act or omission on the part of Landlord. In addition, the policy of property insurance described in Article 9.2 shall name Landlord (and Landlord’s Lender, if Landlord shall so require) as a co-loss payee.

9.6     Co-Insurance. If on account of the failure of Tenant to comply with the provisions of this Article 9, Landlord is deemed a co-insurer by its insurance carrier, then any loss or damage which Landlord shall sustain by reason thereof shall be borne by Tenant, and shall be paid by Tenant within five (5) days after receipt of a bill therefor.

9.7     Adequacy of Insurance. Landlord makes no representation or warranty to Tenant that the amount of insurance to be carried by Tenant under the terms of this Lease is adequate to fully protect Tenant’s interests. If Tenant believes that the amount of any such insurance is insufficient, Tenant is encouraged to obtain, at its sole cost and expense, such additional insurance as Tenant may deem desirable or adequate. Tenant acknowledges that Landlord shall not, by the fact of approving, disapproving, waiving, accepting, or obtaining any insurance, incur any liability for or with respect

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to the amount of insurance carried, the form or legal sufficiency of such insurance, the solvency of any insurance companies or the payment or defense of any lawsuit in connection with such insurance coverage, and Tenant hereby expressly assumes full responsibility therefor and all liability, if any, with respect thereto.

9.8     Landlord Insurance. Landlord shall maintain liability and casualty insurance on the Building, reimbursable by Tenant as part of operating costs as defined in Article 6.3, in commercially reasonable amounts.

10. RECONSTRUCTION

10.1    Insured Damage. In the event the Leased Premises are damaged during the Lease Term by fire or other perils covered by Landlord’s insurance, Landlord shall:

(a)     Within a period of one hundred twenty (120) days after the casualty, and provided there is not then in existence of an Event of Default, commence repair, reconstruction and restoration of the Leased Premises and prosecute the same diligently to completion, in which event this Lease shall continue in full force and effect.

(b)     In the event of a partial or total destruction of either the Leased Premises, the Building, or the Property during the last two (2) years of the Lease Term, Landlord shall have the option to terminate this Lease upon giving written notice to Tenant within sixty (60) days after such destruction. For purposes of this Article 10, “partial destruction” shall be deemed destruction to an extent of at least thirty-three and one-third percent (33.33%) of the then full replacement cost of the Leased Premises, the Building, or the Property as of the date of destruction.

(c)     In the event that Superior Mortgages shall require that insurance proceeds be applied against the principal balance due on the Superior Mortgage (defined below), then Landlord may, at Landlord’s option and upon sixty (60) days written notice to Tenant, elect to terminate this Lease.

10.2    Uninsured Damage. In the event the Leased Premises, the Building or the Property shall be damaged as a result of any casualty not covered by Landlord’s insurance, to any extent whatsoever, Landlord may, subject to Force Majeure, within one hundred twenty (120) days following the date of the casualty, commence repair, reconstruction or restoration of the Leased Premises, in which event this Lease shall continue in full force and effect, or within ninety (90) days following the casualty elect not to so repair, reconstruct or restore the Leased Premises, the Building or the Property, as the case may be, in which event this Lease shall cease and terminate. In either event, Landlord shall give Tenant written notice of Landlord’s intention within such ninety (90) day period.

10.3    Reconstruction. In the event of any reconstruction of the Leased Premises, the Building or the Property pursuant to this Article 10, such reconstruction shall be in conformity with all city, county, state and federal ordinances, rules and regulations then in existence, as the same may be interpreted and enforced. Notwithstanding that all reconstruction work shall be performed by Landlord’s contractor unless Landlord shall otherwise agree in writing, Landlord’s obligation to reconstruct the Leased Premises shall be only to the comparable condition of the Leased Premises immediately prior to the Commencement Date. Landlord’s obligation to repair and reconstruct the Leased Premises shall be limited to the amount of net proceeds of insurance received by Landlord, subject to reduction pursuant to Article 10.1(c) above. Any extra expenses incurred by Landlord in the reconstruction of the Leased Premises, the Building or any other portion of the Property as a result of the violation by Tenant of the terms and conditions set forth in Article 34 below shall be borne by Tenant. Tenant, at Tenant’s sole cost and expense, shall be responsible for the repair and restoration of all items of the Tenant Improvements or Tenant’s improvements and/or alterations installed pursuant to Article 7.2 and the replacement of Tenant’s stock in trade, trade fixtures, furniture furnishings and equipment. Tenant shall commence the installation of fixtures, equipment and merchandise promptly upon delivery to Tenant of possession of the Leased Premises and shall diligently prosecute such installation to completion.

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10.4    Termination. Upon any termination of this Lease under any of the provisions of this Article 10, Landlord and Tenant each shall be released without further obligations to the other coincident with the surrender of possession of the Leased Premises to Landlord, except for items which have previously accrued and remain unpaid. In the event of termination, all proceeds from Tenant’s property insurance coverage and covering the Tenant Improvements or Tenant’s improvements and/or alterations installed pursuant to Article 7.2, but excluding proceeds for trade fixtures, merchandise, signs and other removable personal property, shall be disbursed and paid to Landlord.

10.5    Abatement. In the event of repair, reconstruction and restoration of the Leased Premises, the Minimum Annual Rental and Additional Rent shall be abated proportionately with the degree to which Tenant’s use of the Leased Premises is impaired commencing from the date of destruction and continuing during the period of such repair, reconstruction or restoration. Tenant shall continue the operation of Tenant’s business at the Leased Premises during any such period to the extent reasonably practicable from the standpoint of prudent business management. Tenant shall not be entitled to any compensation or damages from Landlord for loss of the use of the whole or any part of the Leased Premises, or the building of which the Leased Premises are a part, Tenant’s personal property or for any inconvenience or annoyance occasioned by such damage, repair, reconstruction or restoration.

10.6    Waiver. Tenant hereby waives any statutory and common law rights of termination which may arise by reason of any partial or total destruction of the Leased Premises which Landlord is obligated to restore or may restore under any of the provisions of this Lease, including the provisions of A.R.S. 33-343 except as otherwise provided herein.

10.7    Termination. If Landlord cannot complete repairs within one hundred eighty (180) days after the casualty or Landlord elects to notify Tenant in writing within sixty (60) days of said casualty of Landlord’s intent to not complete said repairs then Tenant may terminate this lease by providing Landlord thirty (30) days notice after receipt of Landlords notice to not proceed with said repairs or after Landlord fails to complete said repairs within the stated timeframe, whichever applies.

11. WAIVER OF SUBROGATION

Landlord and Tenant hereby waives their rights and the subrogation rights of their insurer against the other and any other tenants of space in the Building or the Property, as well as their respective members, officers, employees, agents, authorized representatives and invitees, with respect to any claims including, but not limited to, claims for injury to any persons, and/or damage to the Leased Premises and/or any fixtures, equipment, personal property, furniture, improvements and/or alterations in or to the Leased Premises, which are caused by or result from (a) risks or damages required to be insured against under this Lease, or (b) risks and damages which are insured against by insurance policies maintained by Tenant or Landlord (as applicable) from time to time. Each shall obtain for the other from its insurers under each policy required by this Lease a waiver of all rights of subrogation which such insurers of Each might otherwise have against the other party.

12. LANDLORD’S RIGHT TO PERFORM TENANT OBLIGATIONS

All covenants and agreements to be performed by Tenant under any of the terms of this Lease shall be performed by Tenant at Tenant’s sole cost and expense and without any abatement of Annual Basic Rent or Additional Rent. If Tenant shall fail to pay any sum of money, other than Annual Basic Rent, required to be paid by it hereunder, or shall fail to perform any other act on its part to be performed hereunder, and such failure shall continue for five (5) days after notice thereof by Landlord (or such shorter period of time as may be reasonable following oral notice to Tenant’s personnel in the Leased Premises), Landlord may (but shall not be obligated to do so) without waiving or releasing Tenant from any of Tenant’s obligations, make any such payment or perform any such other act on behalf of Tenant. All sums so paid by Landlord and all necessary incidental costs, together with interest thereon at the greater of (a) fifteen percent (15%) per annum or (b) the

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rate of interest per annum publicly announced, quoted or published, from time to time, by Bank of America, at its Phoenix, Arizona office as its “reference rate” plus four (4) percentage points, from the date of such payment by Landlord until reimbursement in full by Tenant (the “Default Rate”), shall be payable to Landlord as Additional Rent with the next monthly installment of Annual Basic Rent; provided, however, in no event shall the Default Rate exceed the maximum rate (if any) permitted by applicable law.

13. DEFAULT AND REMEDIES

13.1    Event of Default. The occurrence of any one or more of the following events will constitute an “Event of Default” on the part of Tenant:

(a)     Failure to pay any installment of Annual Basic Rent, any Additional Rent or any other sum required to be paid by Tenant under this Lease, and such failure shall continue for five (5) days;

(b)     Failure to perform any of the other covenants or conditions which Tenant is required to observe and perform (except failure in the payment of Annual Basic Rent, Additional Rent or any other monetary obligation contained in this Lease) and such failure shall continue for fifteen (15) days (or such shorter period of time as may be specified by Landlord in the event of an emergency) after written notice thereof by Landlord to Tenant, provided that if such default is other than the payment of money and cannot be cured within such fifteen (15) day period, then an Event of Default shall not have occurred if Tenant, within such fifteen (15) day period, commences to cure such failure and diligently in good faith prosecutes the same to completion and furnishes evidence thereof to Landlord within thirty (30) days thereafter;

(c)     If any warranty, representation or statement made by Tenant to Landlord in connection with this Lease is or was materially false or misleading when made - -or furnished;

(d)     Intentionally Omitted.

(e)     Intentionally Omitted.

(f)     Intentionally Omitted.

(g)     The levy of a writ of attachment or execution or other judicial seizure of substantially all of Tenant’s assets or its interest in this Lease, such attachment, execution or other seizure remaining undismissed or discharged for a period of thirty (30) days after the levy thereof;

(h)     The filing of any petition by or against Tenant or any Guarantor to declare Tenant or any Guarantor a bankrupt or to delay, reduce or modify Tenant’s or any Guarantor’s debts or obligations, which petition is not discharged within forty five (45) days after the date of filing;

(i)     The filing of any petition or other action taken to reorganize or modify Tenant’s or any Guarantor’s capital structure, which petition is not discharged within forty five (45) days after the date of filing;

(j)     If Tenant or any Guarantor shall be declared insolvent according to law;

(k)     A general assignment by Tenant or any Guarantor for the benefit of creditors;

(l)     The appointment of a receiver or trustee for Tenant or any Guarantor or all or any of their respective property, which appointment is not discharged within forty five (45) days after the date of filing;

(m)     The filing by Tenant or any Guarantor of a voluntary petition pursuant to the Bankruptcy Code or any successor thereto or the filing of an involuntary petition against Tenant or any Guarantor pursuant to the Bankruptcy Code or any successor legislation, which petition is not discharged within forty five (45) days after the date of filing; or

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13.2    Remedies. Upon the occurrence of an Event of Default under this Lease by Tenant, Landlord may, without prejudice to any other rights and remedies available to a landlord at law, in equity or by statute, Landlord may exercise one or more of the following remedies, all of which shall be construed and held to be cumulative and non-exclusive: (a) Terminate this Lease and re-enter and take possession of the Leased Premises, in which event, Landlord is authorized to make such repairs, redecorating, refurbishments or improvements to the Leased Premises as may be necessary in the reasonable opinion of Landlord acting in good faith for the purposes of reletting the Leased Premises and the costs and expenses incurred in respect of such repairs, redecorating and refurbishments and the expenses of such reletting (including brokerage commissions) shall be paid by Tenant to Landlord within five (5) days after receipt of Landlord’s statement; or (b) Without terminating this Lease, re-enter and take possession of the Leased Premises; or (c) Without such re-entry, recover possession of the Leased Premises in the manner prescribed by any statute relating to summary process, and any demand for Annual Basic Rent, re-entry for condition broken, and any and all notices to quit, or other formalities of any nature to which Tenant may be entitled, are hereby specifically waived to the extent permitted by law; or (d) Without terminating this Lease, Landlord may relet the Leased Premises as Landlord may see fit without thereby avoiding or terminating this Lease, and for the purposes of such reletting, Landlord is authorized to make such repairs, redecorating, refurbishments or improvements to the Leased Premises as may be necessary in the reasonable opinion of Landlord acting in good faith for the purpose of such reletting, and if a sufficient sum is not realized from such reletting (after payment of all costs and expenses of such repairs, redecorating and refurbishments and expenses of such reletting (including brokerage commissions) and the collection of rent accruing therefrom) each month to equal the Annual Basic Rent and Additional Rent payable hereunder, then Tenant shall pay such deficiency each month within five (5) days after receipt of Landlord’s statement; or (e) Landlord may declare immediately due and payable all the remaining installments of Annual Basic Rent and Additional Rent, and such amount; less the amount Tenant proves, if any, could reasonably expect to be recovered by Landlord through the releasing of the Leased Premises for the remainder of the Lease Term, shall be paid by Tenant within five (5) days after receipt of Landlord’s statement. Landlord shall not by re-entry or any other act, be deemed to have terminated this Lease, or the liability of Tenant for the total Annual Basic Rent and Additional Rent reserved hereunder or for any installment thereof then due or thereafter accruing, or for damages, unless Landlord notifies Tenant in writing that Landlord has so elected to terminate this Lease. After the occurrence of an Event of Default, the acceptance of Annual Basic Rent or Additional Rent, or the failure to re-enter by Landlord shall not be deemed to be a waiver of Landlord’s right to thereafter terminate this Lease and exercise any other rights and remedies available to it, and Landlord may re-enter and take possession of the Leased Premises as if no Annual Basic Rent or Additional Rent had been accepted after the occurrence of an Event of Default. Upon an Event of Default, Tenant shall also pay to Landlord all costs and expenses incurred by Landlord, including court costs and attorneys’ fees, in retaking or otherwise obtaining possession of the Leased Premises, removing and storing all equipment, fixtures and personal property on the Leased Premises and otherwise enforcing any of Landlord’s rights, remedies or recourses arising as a result of an Event of Default.

13.3    Additional Remedies. All of the remedies given to Landlord in this Lease in the event Tenant commits an Event of Default are in addition to all other rights or remedies available to a landlord at law, in equity or by statute, including, without limitation, the right to seize and sell all goods, equipment and personal property of Tenant located in the Leased Premises and apply the proceeds thereof to all due and unpaid Annual Basic Rent, Additional Rent and other amounts owing under the Lease. All rights, options and remedies available to Landlord shall be construed and held to be cumulative, and no one of them shall be exclusive of the other. Upon the occurrence of an Event of Default, all rights, privileges and contingencies which may be exercised by Tenant under the Lease, including, without limitation, options to renew, extend and expand, as well as relocation rights, contraction rights and any other rights which may be exercised by Tenant during the Lease Term, shall be void and of no further force and effect.

13.4    Interest on Past Due Amounts. In addition to the late charge described in Article 14 below, if any installment of Annual Basic Rent or Additional Rent is not paid promptly when due,

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it shall bear interest at the Default Rate; provided, however, this provision shall not relieve Tenant from any default in the making of any payment at the time and in the manner required by this Lease; and provided, further, in no event shall the Default Rate exceed the maximum rate (if any) permitted by applicable law.

13.5    Landlord Default. In the event Landlord should neglect or fail to perform or observe any of the covenants, provisions or conditions contained in this Lease on its part to be performed or observed, and such failure continues for thirty (30) days after written notice of default (or if more than thirty (30) days shall be required because of the nature of the default, if Landlord shall fail to commence the curing of such default within such thirty (30) day period and proceed diligently thereafter) or for any commercially unreasonable time if an emergency situation occurs, then Landlord shall be responsible to Tenant for any actual damages sustained by Tenant as a result of Landlord’s breach, but not special or consequential damages. Should Tenant give written notice to Landlord to correct any default, Tenant shall give similar notice to the holder of any mortgages or deeds of trust against the Building or the lessor of any ground lease, and prior to any cancellation of this Lease, the holder of such mortgage or deed of trust and/or the lessor under such ground lease shall be given a reasonable period of time to correct or remedy such default. If and when such holder of such mortgage or deed of trust and/or the lessor under any such ground lease has made performance on behalf of Landlord, the default of Landlord shall be deemed cured. Notwithstanding any other provisions in this Lease, any claim which Tenant may have against Landlord for failure to perform or observe any of the covenants, provisions or conditions contained in this Lease shall be deemed waived unless such claim is asserted by written notice thereof to Landlord within ten (10) days of commencement of the alleged default or occurrence of the cause of action and unless suit be brought thereon within six (6) months subsequent to the occurrence of such cause of action.

14. LATE PAYMENTS

Tenant hereby acknowledges that the late payment by Tenant to Landlord of any monthly installment of Annual Basic Rent, any Additional Rent or any other sums due hereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult and impracticable to ascertain. Such costs include but are not limited to processing, administrative and accounting costs. Accordingly, if any monthly installment of Annual Basic Rent, any Additional Rent or any other sum due from Tenant shall not be received by Landlord within five (5) days after the date when due, Tenant shall pay to Landlord a late charge equal to five percent (5%) of such overdue amount or Two Hundred and No/100 Dollars ($200.00), whichever is greater. Tenant acknowledges that such late charge represents a fair and reasonable estimate of the costs Landlord will incur by reason of late payments by Tenant. Neither assessment nor acceptance of a late charge by Landlord shall constitute a waiver of Tenant’s default with respect to such overdue amount, nor prevent Landlord from exercising any of the other rights and remedies available to Landlord. Nothing contained in this Article 14 shall be deemed to condone, authorize, sanction or grant to Tenant an option for the late payment of Annual Basic Rent, Additional Rent or any other sum due hereunder.

15. ABANDONMENT AND SURRENDER

15.1    Surrender. No act or thing done by Landlord or by any agent or employee of Landlord during the Lease Term shall be deemed an acceptance of a surrender of the Leased Premises unless such acceptance is expressed in writing and duly executed by Landlord. Unless Landlord so agrees in writing, the delivery of the key to the Leased Premises to any employee or agent of Landlord shall not operate as a termination of this Lease or as a surrender of the Leased Premises.

15.2    Surrender. Tenant shall, upon the expiration or earlier termination of this Lease, peaceably surrender the Leased Premises, including any Tenant Improvements and Tenant’s improvements and/or alterations installed pursuant to Article 7.1, in a janitorial clean condition and otherwise in as good condition as when Tenant took possession, except for (i) reasonable wear and tear subsequent to the last repair, replacement, restoration, alteration or renewal; (ii) loss by fire or other casually, and (iii) loss by condemnation. If Tenant shall abandon, vacate or surrender the

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Leased Premises, or be dispossessed by process of law or otherwise, any personal property and fixtures belonging to Tenant and left in the Leased Premises shall be deemed abandoned and, at Landlord’s option, title shall pass to Landlord under this Lease as by a bill of sale. Landlord may, however, if it so elects, remove all or any part of such personal property from the Leased Premises and the costs incurred by Landlord in connection with such removal, including storage costs and the cost of repairing any damage to the Leased Premises, the Building and/or the Property caused by such removal shall be paid by Tenant within five (5) days after receipt of Landlord’s statement. Upon the expiration or earlier termination of this Lease, Tenant shall surrender to Landlord all keys to the Leased Premises and shall inform Landlord of the combination of any vaults, locks and safes left on the Leased Premises. The obligations of Tenant under this Article 15.2 shall survive the expiration or earlier termination of this Lease. Tenant shall indemnify Landlord against any loss or liability resulting from delay by Tenant in so surrendering the Premises, including, without limitation, any claims made by any succeeding Tenant founded on such delay. Tenant shall give written notice to Landlord at least thirty (30) days prior to vacating the Leased Premises for the express purpose of arranging a meeting with Landlord for a joint inspection of the Leased Premises. In the event of Tenant’s failure to give such notice or to participate in such joint inspection, Landlord’s inspection at or after Tenant’s vacation of the Leased Premises shall be conclusively deemed correct, unless erroneous, for purposes of determining Tenant’s liability for repairs and restoration hereunder.

16. INDEMNIFICATION AND EXCULPATION

16.1    Indemnification. Tenant shall indemnify, protect, defend and hold Landlord harmless from and against, and shall be responsible for, all claims, damages, losses, costs, liens, encumbrances, liabilities and expenses, including reasonable attorneys’, accountants’ and investigators’ fees and court costs (collectively, the “Claims”), however caused, arising in whole or in part from Tenant’s use of all or any part of the Leased Premises, the Building and/or the Property or the conduct of Tenant’s business or from any activity, work or thing done, permitted or suffered by Tenant or by any invitee, servant, agent, employee or subtenant of Tenant in the Leased Premises, the Building and/or the Property, and shall further indemnify, protect, defend and hold Landlord harmless from and against, and shall be responsible for, all Claims arising in whole or in part from any breach or default in the performance of any obligation on Tenant’s part to be performed under the terms of this Lease or arising in whole or in part from any act, neglect, fault or omission by Tenant or by any invitee, servant, agent, employee or subtenant of Tenant anywhere in the Leased Premises, the Building and/or the Property. In case any action or proceeding is brought against Landlord to which this indemnification shall be applicable, Tenant shall pay all Claims resulting therefrom and shall defend such action or proceeding, if Landlord shall so request, at Tenant’s sole cost and expense, by counsel reasonably satisfactory to Landlord. The obligations of Tenant under this Article 16.1 shall survive the expiration or earlier termination of this Lease.

16.2    Exculpation. Tenant, as a material part of the consideration to Landlord, hereby assumes all risk of damage to property, injury and death to persons and all claims of any other nature resulting from Tenant’s use of all or any part of the Leased Premises, the Building and/or the Property, and Tenant hereby waives all claims in respect thereof against Landlord. Neither Landlord nor its agents or employees shall be liable for any damaged property of Tenant entrusted to any employee or agent of Landlord or for loss of or damage to any property of Tenant by theft or otherwise. Landlord shall not be liable for any injury or damage to persons or property resulting from any cause, including, but not limited to, fire, explosion, falling plaster, steam, gas, electricity, sewage, odor, noise, water or rain which may leak from any part of the Building or from the pipes, appliances or plumbing works therein, or from the roof of any structure on the Property, or from any streets or subsurfaces on or adjacent to the Building or the Property, or from any other place or resulting from dampness or any other causes whatsoever, unless caused solely by the gross negligence or willful misconduct of Landlord. Neither Landlord nor its employees or agents shall be liable for any defects in the Leased Premises, the Building and/or the Property, nor shall Landlord be liable for the negligence or misconduct, including, but not limited to, criminal acts, by maintenance or other personnel or contractors serving the Leased Premises, the Building and/or the Property, other tenants or third parties, unless Landlord is grossly negligent or guilty of willful misconduct. All property of Tenant kept or stored on the Property shall be so kept or stored at the

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risk of Tenant only, and Tenant shall indemnify, defend and hold Landlord harmless from and against, and shall be responsible for, any Claims arising out of damage to the same, including subrogation claims by Tenant’s insurance carriers, unless such damage shall be caused by the willful act or gross neglect of Landlord and through no fault of Tenant. None of the events or conditions set forth in this Article 16 shall be deemed a constructive or actual eviction or result in a termination of this Lease, nor shall Tenant be entitled to any abatement or reduction of Annual Basic Rent or Additional Rent by reason thereof. Tenant shall give prompt notice to Landlord with respect to any defects, fires or accidents which Tenant observes in the Leased Premises, the Building and/or the Property.

17. ENTRY BY LANDLORD

Landlord reserves and shall at any and all reasonable times upon reasonable notice, or reasonable attempt to notify in case of an emergency, have the right to enter the Leased Premises, to inspect the same, to supply janitorial service and other services to be provided by Landlord to Tenant hereunder, to submit the Leased Premises to prospective purchasers or tenants, to post notices of non-responsibility, and to alter, improve or repair the Leased Premises and any portion of the Building of which the Leased Premises are a part, without abatement of Annual Basic Rent or Additional Rent, and may for that purpose erect scaffolding and other necessary structures where reasonably required by the character of the work to be performed, always providing that access into the Leased Premises shall not be blocked thereby, and further providing that the business of Tenant shall not be interfered with unreasonably. Tenant hereby waives any claim for damages for any injury or inconvenience to or interference with Tenant’s business, any loss of occupancy or quiet enjoyment of the Leased Premises or any loss occasioned thereby. For each of the aforesaid purposes, Landlord shall at all times have and retain a key with which to unlock all the doors in, upon or about the Leased Premises, excluding Tenant’s vaults and safes, and Landlord shall have the right to use any and all means which Landlord may deem proper to open such doors in an emergency in order to obtain entry to the Leased Premises, and any entry to the Leased Premises obtained by Landlord by any such means or otherwise shall not under any circumstances be construed or deemed to be a forcible or unlawful entry into, or a detainer of, the Leased Premises or an eviction of Tenant from all or any portion of the Leased Premises. Nothing in this Article 17 shall be construed as obligating Landlord to perform any repairs, alterations or maintenance except as otherwise expressly required elsewhere in this Lease.

18. SUBSTITUTE PREMISES

19. ASSIGNMENT AND SUBLETTING

19.1     Consent of Landlord Required. Tenant shall not transfer or assign this Lease or any right or interest hereunder, or sublet the Leased Premises or any part thereof, without first obtaining Landlord’s prior written consent, which consent Landlord may not withhold unreasonably. No transfer or assignment (whether voluntary or involuntary, by operation of law or otherwise) or subletting shall be valid or effective without such prior written consent. Should Tenant attempt to make or allow to be made any such transfer, assignment or subletting, except as aforesaid, or should any of Tenant’s rights under this Lease be sold or otherwise transferred by or under court order or legal process or otherwise, then, and in any of the foregoing events Landlord may, at its option, treat such act as an Event of Default by Tenant. Should Landlord consent to a transfer, assignment or subletting, such consent shall not constitute a waiver of any of the restrictions or prohibitions of this Article 19, and such restrictions or prohibitions shall apply to each successive transfer, assignment or subletting hereunder, if any.

19.2     Intentionally Omitted.

19.3     Delivery of Information. If Tenant wishes at any time to assign this Lease or sublet the Leased Premises or any portion thereof, it shall first notify Landlord of its desire to do so and shall submit in writing to Landlord (a) the name of the proposed subtenant or assignee, (b) the nature of the proposed subtenant’s or assignee’s business to be carried on in the Leased Premises; (c) the terms and the provisions of the proposed sublease or assignment; and (d) such financial information

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as Landlord may reasonably request concerning the proposed subtenant or assignee. Tenant’s failure to comply with the provisions of this Article 19.3 shall entitle Landlord to withhold its consent to the proposed assignment or subletting.

19.4     Adjustment to Rental. In the event Tenant assigns its interest in this Lease or Sublets the Leased Premises, Landlord and Tenant shall divide any rent received by Tenant in excess of the Annual Basic Rent set forth in Article 1.12 above, as adjusted in accordance with the following ratio: Tenant - 70%, Landlord - 30%. Notwithstanding the foregoing, in no event shall the Annual Basic Rent due from Tenant after any such assignment or subletting be less than the Annual Basic Rent specified in Article 1.12 above, as adjusted.

19.6     No Release from Liability. Landlord may collect Annual Basic Rent and Additional Rent from the assignee, subtenant, occupant or other transferee, and apply the amount so collected, first to the monthly installments of Annual Basic Rent, then to any Additional Rent and other sums due and payable to Landlord, and the balance, if any, to Landlord, but no such assignment, subletting, occupancy, transfer or collection shall be deemed a waiver of Landlord’s, rights under this Article 19, or the acceptance of the proposed assignee, subtenant, occupant or transferee. Notwithstanding any assignment, sublease or other transfer (with or without the consent of Landlord), Tenant shall remain primarily liable under this Lease and shall not be released from performance of any of the terms, covenants and conditions of this Lease.

19.7     Landlord’s Expenses. If Landlord consents to an assignment, sublease or other transfer by Tenant of all or any portion of Tenant’s interest under this Lease, Tenant shall pay or cause to be paid to Landlord, a transfer fee in an amount not less than Five Hundred and No/100 Dollars ($500.00) to reimburse Landlord for administrative expenses and for legal, accounting and other out of pocket expenses actually incurred by Landlord.

19.8     Assumption Agreement. If Landlord consents to an assignment, sublease or other transfer by Tenant of all or any portion of Tenant’s interest under this Lease, Tenant shall execute and deliver to Landlord, and cause the transferee to execute and deliver to Landlord, an instrument in the form and substance acceptable to Landlord in which (a) the transferee adopts this Lease and assumes and agrees to perform, jointly and severally with Tenant, all of the obligations of Tenant hereunder, (b) Tenant acknowledges that it remains primarily liable for the payment of Annual Basic Rent, Additional Rent and other obligations under this Lease, (e) Tenant subordinates to Landlord’s statutory lien, contract lien and security interest, any liens, security interests or other rights which Tenant may claim with respect to any property of transferee and (d) the transferee agrees to use and occupy the Leased Premises solely for the purpose specified in Article 20 and otherwise in strict accordance with this Lease.

20. USE OF LEASED PREMISES AND RUBBISH REMOVAL

20.1     Use. The Leased Premises are leased to Tenant solely for the Permitted Use set forth in Article 1.9 above and for no other purpose whatsoever. Tenant shall not use or occupy or permit the Leased Premises to be used or occupied, nor shall Tenant do or permit anything to be done in or about the Leased Premises nor bring or keep anything therein which will in any way increase the existing rate of or affect any casualty or other insurance on the Building or the Property, or any of their respective contents, or make void or voidable or cause a cancellation of any insurance policy covering the Building or the Property, or any part thereof or any of their respective contents. Tenant shall not do or permit anything to be done in or about the Leased Premises, the Building and/or the Property which will in any way obstruct or interfere with the rights of other tenants or occupants of the Building or the Property or injure or annoy them. Tenant shall not use or allow the Leased Premises to be used for any improper, immoral, unlawful or objectionable purpose, nor shall Tenant cause, maintain or permit any nuisance in, on or about the Leased Premises, the Building and/or the Property. In addition, Tenant shall not commit or suffer to be committed any waste in or upon the Leased Premises, the Building and/or the Property. Tenant shall not use the Leased Premises, the Building and/or the Property or permit anything to be done in or about the Leased Premises, the Building and/or the Property which will in any way conflict with any matters of record, or any law, statute, ordinance or governmental rule or regulation now in force or which may hereafter be enacted

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or promulgated, and shall, at its sole cost and expense, promptly comply with all matters of record and all laws, statutes, ordinances and governmental rules, regulations and requirements now in force or which may hereafter be in force and with the requirements of any Board of Fire Underwriters or other similar body now or hereafter constituted, foreseen or unforeseen, ordinary as well as extraordinary, relating to or affecting the condition, use or occupancy of the Property, excluding structural changes not relating to or affected by Tenant’s improvements or acts. The judgment of any court of competent jurisdiction or the admission by Tenant in any action against Tenant, whether Landlord be a party thereto or not, that Tenant has violated any matters of record, or any law, statute, ordinance or governmental rule, regulation or requirement, shall be conclusive of that fact between Landlord and Tenant. In addition, Tenant shall not place a load upon any floor of the Leased Premises which exceeds the load per square foot which the floor was designed to carry, nor shall Tenant install business machines or other mechanical equipment in the Leased Premises which cause noise or vibration that may be transmitted to the structure of the Building.

20.2   Rubbish Removal. Tenant shall keep the Leased Premises clean, both inside and outside, subject, however, to Landlord’s obligation as set forth in Article 7.3 above. Tenant shall not burn any materials or rubbish of any description upon the Leased Premises. Tenant shall keep all accumulated rubbish in covered containers. In the event Tenant fails to keep the Leased Premises in the proper condition, Landlord may cause the same to be done for Tenant and Tenant shall pay the expenses incurred by Landlord on demand, together with interest at the Default Rate, as Additional Rent. Tenant shall, at its sole cost and expense, comply with all present and future laws, orders and regulations of all state, county, federal, municipal governments, departments, commissions and boards regarding the collection, sorting, separation, and recycling of waste products, garbage, refuse and trash. Tenant shall sort and separate such waste products, garbage, refuse and trash into such categories as provided by law. Each separately sorted category of waste products, garbage, refuse and trash shall be placed in separate receptacles reasonably approved by Landlord. Such separate receptacles may, at Landlord’s option, be removed from the Leased Premises in accordance with a collection schedule prescribed by law. Landlord reserves the right to refuse to collect or accept from Tenant any waste products, garbage, refuse or trash that is not separated and sorted as required by law, and to require Tenant to arrange for such collection at Tenant’s sole cost and expense using a contractor satisfactory to Landlord. Tenant shall pay all costs, expenses, fines, penalties or damages that may be imposed on Landlord or Tenant by reason of Tenant’s failure to comply with the provisions of this Article 20.2, and, at Tenant’s sole cost and expense, Tenant shall indemnify, defend and hold Landlord and Landlord’s agents and employees harmless (including legal fees and expenses) from and against, and shall be responsible for, all actions, claims, liabilities and suits arising from such noncompliance, utilizing counsel reasonably satisfactory to Landlord.

21. SUBORDINATION AND ATTORNMENT

21.1   Subordination. This Lease and all rights of Tenant hereunder shall be, at the option of Landlord, subordinate to (a) all matters of record, (b) all ground leases, overriding leases and underlying leases (collectively referred to as the “leases”) of the Building or the Property now or hereafter existing, (c) all mortgages and deeds of trust (collectively referred to as the “mortgages”) which may now or hereafter encumber or affect the Building or the Property, and (d) all renewals, modifications, amendments, replacements and extensions of leases and mortgages and to spreaders and consolidations of the mortgages, whether or not leases or mortgages shall also cover other lands, buildings or leases. The provisions of this Article 21.1 shall be self-operative and no further instruments of subordination shall be required. In confirmation of such subordination, Tenant shall promptly execute, acknowledge and deliver any instrument that Landlord, the lessor under any lease or the holder of any mortgage or any of their respective assigns or successors in interest may reasonably request to evidence such subordination. Any lease to which this Lease is subject and subordinate is called a “Superior Lease” and the lessor under a Superior Lease or its assigns or successors in interest is called a “Superior Lessor”. Any mortgage to which this Lease is subject and subordinate is called a “Superior Mortgage” and the holder of a Superior Mortgage is called a “Superior Mortgagee”. If Landlord, a Superior Lessor or a Superior Mortgagee requires that such instruments be executed by Tenant, Tenant’s failure to do so within ten (10) days after request therefor shall be deemed an Event of Default under this Lease. Tenant waives any right to terminate

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this Lease because of any foreclosure proceedings. Tenant hereby irrevocably constitutes and appoints Landlord (and any successor Landlord) as Tenant’s attorney-in-fact, with full power of substitution coupled with an interest, to execute and deliver to any Superior Lessor or Superior Mortgagee any documents required to be executed by Tenant for and on behalf of Tenant if Tenant shall have failed to do so within ten (10) days after request therefore.

21.2   Attornment. If any Superior Lessor or Superior Mortgagee (or any purchaser at a foreclosure sale) succeeds to the rights of Landlord under this Lease, whether through possession or foreclosure action, or the delivery of a new lease or deed (a “Successor Landlord”), Tenant shall attorn to and recognize such Successor Landlord as Tenant’s landlord under this Lease and shall promptly execute and deliver any instrument that such Successor Landlord may reasonably request to evidence such attornment.

22. ESTOPPEL CERTIFICATE

Tenant shall, whenever requested by Landlord, within ten (10) days after written request by Landlord, execute, acknowledge and deliver to Landlord a statement in writing certifying: (a) that this Lease is unmodified and in full force and effect, (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect); (b) the dates to which Annual Basic Rent, Additional Rent and other charges are paid in advance, if any; (c) that there are not, to Tenant’s knowledge, any uncured defaults on the part of Landlord hereunder or specifying such defaults if any are claimed; (d) that Tenant has paid Landlord the Security Deposit, (e) the Commencement Date and the scheduled expiration date of the Lease Term, (f) the rights (if any) of Tenant to extend or renew this Lease or to expand the Leased Premises and (g) the amount of Annual Basic Rent, Additional Rent and other charges currently payable under this Lease. In addition, such statement shall provide such other information and facts Landlord may reasonably require. Any such statement may be relied upon by any prospective or existing purchaser, ground lessee or mortgagee of all or any portion of the Property, as well as by any other assignee of Landlord’s interest in this Lease. Tenant’s failure to deliver such statement within such time shall be conclusive upon Tenant (i) that this Lease is in full force and effect, without modification except as may be represented by Landlord; (ii) that there are no uncured defaults in Landlord’s performance hereunder; (iii) that Tenant has paid to Landlord the Security Deposit; (iv) that not more than one month’s installment of Annual Basic Rent or Additional Rent has been paid in advance; (v) that the Commencement Date and the scheduled expiration date of the Lease Term are as stated therein, (vi) that Tenant has no rights to extend or renew this Lease or to expand the Leased Premises, (vii) that the Annual Basic Rent, Additional Rent and other charges are as set forth therein and (viii) that the other information and facts set forth therein are true and correct.

23. SIGNS

Landlord shall retain absolute control over the exterior appearance of the Building and the exterior appearance of the Leased Premises as viewed from the public halls. Tenant shall not install, or permit to be installed, any drapes, shutters, signs, lettering, advertising, or any items that will in any way, in the sole opinion of Landlord, adversely alter the exterior appearance of the Building or the exterior appearance of the Leased Premises as viewed from the public halls or the exterior of the Building. In no event may Tenant utilize trucks, automobiles or other vehicles on the Property for signage purposes. Notwithstanding the foregoing, Landlord shall install, at Tenant’s sole cost and expense, letters or numerals at or near the entryway to the Leased Premises provided Tenant obtains Landlord’s prior written consent as to size, color, design and location. All such letters or numerals shall be in accordance with the criteria established by Landlord for the Building. In addition, Landlord shall, at its cost, install Tenant’s name and suite number on the Building directory, if any; provided, however, any additions, deletions or other modifications to the Building directory shall be at Tenant’s sole cost and expense.

24. PARKING

24.1   Parking Facility. Landlord shall provide, operate and maintain parking accommodations (the “Parking Accommodations”), together with necessary access, having a

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capacity adequate in Landlord’s opinion to accommodate the requirements of the Building and the Property. No storage of vehicles or parking for more than twenty-four (24) hours shall be allowed without Landlord’s prior written consent. Tenant acknowledges and agrees that Landlord shall not be liable for damage, loss or theft of property or injury to persons in, upon or about the Parking Accommodations from any cause whatsoever unless caused by the gross negligence or willful misconduct of Landlord or its agents or employees Landlord shall have the right to establish, and from time to time change, alter and amend, and to enforce against all users of the Parking Accommodations, such reasonable requirements and restrictions as Landlord deems necessary and advisable for the proper operation and maintenance of the Parking Accommodations, including, without limitation, designation of particular areas for reserved, visitor and/or employee parking, as a part of the Rules and Regulations of the Building referenced in Article 31 hereof. Parking shall be free of charge, except for reserved, covered parking. Tenant shall have the right to non-exclusive use of a minimum of 1.5 spaces per 1,000 square feet of rentable space, or the minimum required by governmental requirements, whichever is greater.

24.2   Parking Passes. Tenant is hereby allocated the number of unreserved parking passes designated in Article 1.15 hereof, entitling holders to park in unreserved parking spaces, located in the Parking Accommodations as designated by Landlord from time to time for use by Tenant, its employees and licensees, and for which Tenant shall pay the monthly charges set forth in Article 1.16 hereof.

25. LIENS

Tenant shall keep the Leased Premises free and clear of all mechanic’s and materialmen’s liens. If, because of any act or omission (or alleged act or omission) of Tenant, any mechanics’, materialmen’s or other lien, charge or order for the payment of money shall be filed or recorded against the Leased Premises, the Property or the Building, or against any other property of Landlord (whether or not such lien, charge or order is valid or enforceable as such), Tenant shall, at its own expense, cause the same to be canceled or discharged of record within thirty (30) days after Tenant shall have received written notice of the filing thereof, or Tenant may, within such thirty (30) day period, furnish to Landlord, a bond pursuant to A.R.S. 33-1004 (or any successor statute) and satisfactory to Landlord and all Superior Lessors and Superior Mortgagees against the lien, charge or order, in which case Tenant shall have the right to contest, in good faith, the validity or amount thereof.

26. HOLDING OVER

It is agreed that the date of termination of this Lease and the right of Landlord to recover immediate possession of the Leased Premises thereupon is an important and material matter affecting the parties hereto and the rights of third parties, all of which have been specifically considered by Landlord and Tenant and that Tenant shall have no right to continue to occupy the premises without the express written consent of the Landlord. In the event of any continued occupancy or holding over of the Leased Premises with the express written consent of Landlord beyond the expiration or earlier termination of this Lease or of Tenants right to occupy the Leased Premises, whether in whole or in part, shall be deemed a monthly tenancy and Tenant shall pay one and one-half (1.5) times the Annual Basic Rent then in effect for the first thirty (30) days and two hundred percent (200%) thereafter plus any Additional Rent or other charges or payments contemplated in this Lease, and any other costs, expenses, damages, liabilities and attorneys’ fees incurred by Landlord on account of Tenant’s holding over. The preceding provision of this paragraph shall not be construed as Landlord’s consent for Tenant to holdover and no holdover shall operate to extend the terms of the Lease.

27. ATTORNEYS’ FEES

Tenant shall pay to Landlord all amounts for costs (including reasonable attorneys’ fees) incurred by Landlord in connection with any breach or default by Tenant under this Lease or incurred in order to enforce the terms or provisions of this Lease. Such amounts shall be payable within five (5) days after receipt by Tenant of Landlord’s statement. In addition, if any action shall be instituted by either of the parties hereto for the enforcement of any of their respective rights or

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remedies in or under this Lease, the prevailing party shall be entitled to recover from the losing party all costs incurred by the prevailing party in such action and any appeal therefrom, including reasonable attorneys’ fees to be fixed by the court. Further, should Landlord be made a party to any litigation between Tenant and any third party, then Tenant shall pay all costs and attorneys’ fees incurred by or imposed upon Landlord in connection with such litigation.

28. RESERVED RIGHTS OF LANDLORD

Landlord reserves the following rights, exercisable without liability to Tenant for damage or injury to property, persons or business and without effecting an eviction, constructive or actual, or disturbance of Tenant’s use or possession or giving rise to any claim:

(a)       To name the Building and the Property and to change the name or street address of the Building or the Property;

(b)       To install and maintain all signs on the exterior and interior of the Building and the Properly;

(c)       To designate all sources furnishing sign painting and lettering;

(d)       During the last ninety (90) days of the Lease Term, if Tenant has vacated the Leased Premises, to decorate, remodel, repair, alter or otherwise prepare the Leased Premises for re-occupancy, without affecting Tenant’s obligation to pay Annual Basic Rent;

(e)       To have pass keys to the Leased Premises and all doors therein, excluding Tenant’s vaults and safes;

(f)        On reasonable prior notice to Tenant, to exhibit at reasonable times the Leased Premises to any prospective purchaser, mortgagee, or assignee of any mortgage on the Building or the Property and to others having interest therein at any time during the Lease Term, and to prospective Tenants during the last six (6) months of the Lease Term;

(g)       To take any and all measures, including entering the Leased Premises for the purposes of making inspections, repairs, alterations, additions and improvements to the Leased Premises or to the Building (including, for the purposes of checking, calibrating, adjusting and balancing controls and other parts of the Building systems) as may be necessary or desirable for the operation, improvement, safety, protection or preservation of the Leased Premises or the Building, or in order to comply with all laws, orders and requirements of governmental or other authorities, or as may otherwise be permitted or required by this Lease; provided, however, that Landlord shall endeavor (except in an emergency) to minimize interference with Tenant’s business in the Leased Premises;

(h)       To relocate various facilities within the Building and on the Property if Landlord shall determine such relocation to be in the best interest of the development of the Building and the Property, provided, that such relocation shall not materially restrict access to the Leased Premises;

(i)        To change the nature, extent, arrangement, use and location of the Building Common Areas, provided that such change does not materially restrict Tenant’s use of the Leased Premises, the Building and the Property;

(j)        To make alterations or additions to and to build additional stories on the Building and to build additional buildings or improvements on the Property; and

(k)       To install vending machines of all kinds in the Leased Premises and the Building, and to receive all of the revenue derived therefrom, provided, however, that no vending machines shail be installed by Landlord in the Leased Premises unless Tenant so requests.

Landlord further reserves the exclusive right to the roof of the Building. No casement for light, air,

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or view is included in the leasing of the Leased Premises to Tenant. Accordingly, any diminution or shutting off of light, air or view by any structure which may be erected on the Property or other properties in the vicinity of the Building shall in no way affect this Lease or impose any liability upon Landlord.

29. EMINENT DOMAIN

29.1   Taking. If the whole of the Building is lawfully and permanently taken by condemnation or any other manner for any public or quasi-public purpose, or by deed in lieu thereof, this Lease shall terminate as of the date of vesting of title in such condemning authority and the Annual Basic Rent and Additional Rent shall be pro rated to such date. If any part of the Building or Property is so taken, or if the whole of the Building is taken, but not permanently, then this Lease shall be unaffected thereby, except that (a) Landlord may terminate this Lease by notice to Tenant within ninety (90) days after the date of vesting of title in the condemning authority, and (b) if twenty percent (20%) or more of the Leased Premises shall be permanently taken and the remaining portion of the Leased Premises shall not be reasonably sufficient for Tenant to continue operation of its business, Tenant may terminate this Lease by notice to Landlord within ninety (90) days after the date of vesting of title in such condemning authority. This Lease shall terminate on the date of taking. The Annual Basic Rent and Additional Rent shall be pro rated to the earlier of the termination of this Lease or such date as Tenant is required to vacate the Leased Premises by reason of the taking. If this Lease is not terminated as a result of a partial taking of the Leased Premises, the Annual Basic Rent and Additional Rent shall be equitably adjusted according to the rentable area of the Leased Premises and Building remaining.

29.2   Award. In the event of a taking of all or any part of the Building or the Property, all of the proceeds or the award, judgment, settlement or damages payable by the condemning authority shall be and remain the sole and exclusive property of Landlord, and Tenant hereby assigns all of its right, title and interest in and to any such award, judgment, settlement or damages to Landlord. Tenant shall, however, have the right, to the extent that the same shall not reduce or prejudice amounts available to Landlord, to claim from the condemning authority, but not from Landlord, such compensation as may be recoverable by Tenant in its own right for relocation benefits, moving expenses, and damage to Tenant’s personal property and trade fixtures.

30. NOTICES

Any notice or communication given under the terms of this Lease shall be in writing and shall be delivered in person, sent by any public or private express delivery service or deposited with the United States Postal Service or a successor agency, certified or registered mail, return receipt requested, postage pre-paid, addressed as set forth in the Basic Provisions, or at such other address as a party may from time to time designate by notice hereunder. Notice shall be effective upon delivery. The inability to deliver a notice because of a changed address of which no notice was given or a rejection or other refusal to accept any notice shall be deemed to be the receipt of the notice as of the date of such inability to deliver or rejection or refusal to accept. Any notice to be given by Landlord may be given by the legal counsel and/or the authorized agent of Landlord.

31. RULES AND REGULATIONS

Tenant shall abide by all rules and regulations (the “Rules and Regulations”) of the Building and the Property imposed by Landlord, as attached hereto as Exhibit “F” or as may hereafter be issued by Landlord. Such Rules and Regulations are imposed to enhance the cleanliness, appearance, maintenance, order and use of the Leased Premises, the Building and the Property, and the proper enjoyment of the Building and the Property by all tenants and their clients, customers and employees. The Rules and Regulations may be changed from time to time upon ten (10) days notice to Tenant. Breach of the Rules and Regulations, by Tenant shall constitute an Event of Default if such breach is not fully cured within ten (10) days after written notice to Tenant by Landlord. Landlord shall not be responsible to Tenant for nonperformance by any other tenant, occupant or invitee of the Building or the Property of any Rules or Regulations.

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32. ACCORD AND SATISFACTION

No payment by Tenant or receipt by Landlord of a lesser amount than the monthly installment of Annual Base Rent and Additional Rent (jointly called “Rent” in this Article 32), shall be deemed to be other than on account of the earliest stipulated Rent due and not yet paid, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as Rent be deemed an accord and satisfaction. Landlord may accept such check or payment without prejudice to Landlord’s right to recover the balance of such Rent or to pursue any other remedy in this Lease.

33. BANKRUPTCY OF TENANT

33.1   Chapter 7. If a petition is filed by, or an order for relief is entered against Tenant under Chapter 7 of the Bankruptcy Code and the trustee of Tenant elects to assume this Lease for the purpose of assigning it, the election or assignment, or both, may be made only if all of the terms and conditions of Articles 33.2 and 33.4 below are satisfied. If the trustee fails to elect to assume this Lease for the purpose of assigning it within sixty (60) days after appointment, this Lease will be deemed to have been rejected. To be effective, an election to assume this Lease must be in writing and addressed to Landlord and, in Landlord’s business judgment, all of the conditions hereinafter stated, which Landlord and Tenant acknowledge to be commercially reasonable, must have been satisfied. Landlord shall then immediately be entitled to possession of the Premises without further obligation to Tenant or the trustee, and this Lease will be terminated. Landlord’s right to be compensated for damages in the bankruptcy proceeding, however, shall survive.

33.2   Chapters 11 and 13. If Tenant files a petition for reorganization under Chapters 11 or 13 of the Bankruptcy Code or a proceeding that is filed by or against Tenant under any other chapter of the Bankruptcy Code is converted to a Chapter 11 or 13 proceeding and Tenant’s trustee or Tenant as a debtor-in-possession fails to assume this Lease within sixty (60) days from the date of the filing of the petition or the conversion, the trustee or the debtor-in-possession will be deemed to have rejected this Lease. To be effective, an election to assume this Lease must be in writing and addressed to Landlord and, in Landlord’s business judgment, all of the following conditions, which Landlord and Tenant acknowledge to be commercially reasonable, must have been satisfied:

(a)       The trustee or the debtor-in-possession has cured or has provided to Landlord adequate assurance, as defined in this Article 33.2, that;

(1)       The trustee will cure all monetary defaults under this Lease within ten (10) days from the date of the assumption; and

(2)       The trustee will cure all non-monetary defaults under this Lease within thirty (30) days from the date of the assumption.

(b)       The trustee or the debtor-in-possession has compensated Landlord, or has provided to Landlord adequate assurance, as defined in this Article 33.2, that within ten (10) days from the date of the assumption Landlord will be compensated for any pecuniary loss it incurred arising from the default of Tenant, the trustee, or the debtor-in-possession as recited in Landlord’s written statement of pecuniary loss sent to the trustee or the debtor-in-possession. For purposes of this Lease, pecuniary loss shall include all attorneys’ fees and court costs incurred by Landlord in connection with any bankruptcy proceeding filed by or against Tenant.

(c)       The trustee or the debtor-in-possession has provided Landlord with adequate assurance of the future performance of each of Tenant’s obligations under the Lease; provided, however, that:

(1)       The trustee or debtor-in-possession will also deposit with Landlord as security for the timely payment of Annual Basic Rent and Additional Rent, an amount equal to three months Annual Basic Rent and Additional Rent accruing under this Lease.

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(2)       If not otherwise required by the terms of this Lease, the trustee or the debtor-in-possession will also pay in advance, on each day that the Annual Basic Rent is payable, one twelfth of Tenant’s estimated annual obligations under the Lease for the Additional Rent.

(3)       From and after the date of the assumption of this Lease, the trustee or the debtor-in-possession will pay the Annual Basic Rent and Additional Rent as provided in Article 1.12 above.

(4)       The obligations imposed upon the trustee or the debtor-in-possession will continue for Tenant after the completion of bankruptcy proceedings.

(d)       Landlord has determined that the assumption of the Lease will not:

(1)       Breach any provisions in any other lease, mortgage, financing agreement, or other agreement by which Landlord is bound relating to the Property; or

(2)       Disrupt, in Landlord’s judgment, the tenant mix of the Building or any other attempt by Landlord to provide a specific variety of Tenants in the Building that, in Landlord’s judgment, would be most beneficial to all of the tenants of the Building and would enhance the image, reputation, and profitability of the Building.

(e)       For purposes of this Article 33.2 “adequate assurance” means that:

(1)       Landlord will determine that the trustee or the debtor-in-possession has, and will continue to have, sufficient unencumbered assets after the payment of all secured obligations and administrative expenses to assure Landlord that the trustee or the debtor-in-possession will have sufficient, funds to fulfill Tenant’s obligations under this Lease and to keep the Leased Premises properly staffed with sufficient employees to conduct a fully operational, actively promoted business on the Leased Premises; and

(2)       An order will have been entered segregating sufficient cash payable to Landlord and/or a valid and perfected first lien and security interest will have been granted in property of Tenant, trustee, or debtor-in-possession that is acceptable for value and kind to Landlord, to secure to Landlord the obligation of the trustee or debtor-in-possession to cure the monetary or non-monetary defaults under this Lease within the time periods set forth above.

33.3     Landlord’s Right to Terminate. In the event that this Lease is assumed by a trustee appointed for Tenant or by Tenant as debtor-in-possession under the provisions of Article 33.2 above and, thereafter, Tenant is either adjudicated a bankrupt or files a subsequent petition for arrangement under chapter 11 of the Bankruptcy Code, then Landlord may terminate, at its option, this Lease and all Tenant’s rights under it, by giving written notice of Landlord’s election to terminate.

33.4     Assignment by Trustee. If the trustee or the debtor-in-possession has assumed the Lease, under the terms of Article 33.1 or 33.2 above, and elects to assign Tenant’s interest under this Lease or the estate created by that interest to any other person, that interest or estate may be assigned only if Landlord acknowledges in writing that the intended assignee has provided adequate assurance, as defined in this Article 33.4, of future performance of all of the terms, covenants, and conditions of this Lease to be performed by Tenant.

33.5     Adequate Assurance. For the purposes of this Article 33 “adequate assurance of future performance” means that Landlord has ascertained that each of the following conditions has been satisfied:

(1)       The assignee has submitted a current financial statement, audited by a certified public accountant, that shows a net worth and working capital in amounts determined by Landlord to be sufficient to assure the future performance by the assignee of Tenant’s obligations under this Lease,

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(2)       If requested by Landlord, the assignee will obtain guarantees, in form and substance satisfactory to Landlord from one or more persons who satisfy Landlord’s standards of creditworthiness;

(3)       Landlord has obtained all consents or waivers from any third party required under any lease, mortgage, financing arrangement or other agreement by which Landlord is bound, to enable Landlord to permit the assignment;

(4)       When, pursuant to the Bankruptcy Code, the trustee or the debtor-in-possession is obligated to pay reasonable use and occupancy charges for the use of all or part of the Leased Premises, the charges will not be less than the Annual Basic Rent and Additional Rent.

33.6     Consent of Landlord. Neither Tenant’s interest in the Lease nor any estate of Tenant created in the Lease will pass to any trustee, receiver, assignee for the benefit of creditors, or any other person or entity, or otherwise by operation of law under the laws of any state having jurisdiction of the person or property of Tenant unless Landlord consents in writing to the transfer. Landlord’s acceptance of Annual Basic Rent or Additional Rent or any other payments from any trustee, receiver, assignee, person, or other entity will not be deemed to have waived, or waive, the need to obtain Landlord’s consent or Landlord’s right to terminate this Lease for any transfer of Tenant’s interest under this Lease without that consent.

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34. HAZARDOUS MATERIALS

34.1     Hazardous Materials Laws. “Hazardous Materials Laws” means any and all federal, stale or local laws, ordinances, rules, decrees, orders, regulations or court decisions (including the so-called “common-law”) relating to hazardous substances, hazardous materials, hazardous waste, toxic substances, environmental conditions on, under or about the Premises, or soil and ground water conditions, including, but not limited to, the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”), as amended, 42 U.S.C. 9601, et seq., the Resource Conversation and Recovery Act (“RCRA”), 42 U.S.C. 6901, et seq., the Hazardous Materials Transportation Act, 49 U.S.C. 1801, et seq., any amendments to the foregoing, and any similar federal, state or local laws, ordinances, rules, decrees, orders or regulations.

34.2     Hazardous Materials. “Hazardous Materials”, means any chemical, compound, material, substance or other matter that: (i) is a flammable explosive, asbestos, radioactive material, nuclear medicine material, drug, vaccine, bacteria, virus, hazardous waste, toxic substance, petroleum product, or related injurious or potentially injurious material, whether injurious or potentially injurious by itself or in combination with other materials; (ii) is controlled, designated in or governed by any Hazardous Materials Law; (iii) gives rise to any reporting, notice or publication requirements under any Hazardous Materials Law; or (iv) gives rise to any liability, responsibility or duty on the part of Tenant or Landlord with respect to any third person under any Hazardous Materials Law.

34.3     Use. Tenant shall not allow any Hazardous Material to be used, generated, released, stored or disposed of on, under or about, or transported from, the Leased Premises, the Building or the Property, unless: (i) such use is specifically disclosed to and approved by Landlord in writing prior to such use, and (ii) such use is conducted in compliance with the provisions of this Article 34. Landlord may approve such use subject to reasonable conditions to protect the Leased Premises, the Building or the Property, and Landlord’s interests. Landlord may withhold approval if Landlord determines that such proposed use involves a material risk of a release or discharge of Hazardous Materials or a violation of any Hazardous Materials Laws or that Tenant has not provided reasonable assurances of its ability to remedy such a violation and fulfill its obligations under this Article 34.

34.4     Compliance With Laws. Tenant shall strictly comply with, and shall maintain the Leased Premises in compliance with, all Hazardous Materials Laws. Tenant shall obtain and maintain in full force and effect all permits, licenses and other governmental approvals required for Tenant’s operations on the Leased Premises under any Hazardous Materials Laws and shall comply with all terms and conditions thereof. At Landlord’s request, Tenant shall deliver copies of, or allow Landlord to inspect, all such permits, licenses and approvals. Tenant shall perform any monitoring, investigation, clean-up, removal and other remedial work (collectively, “Remedial Work”) required as a result of any release or discharge of Hazardous Materials affecting the Leased Premises, the Building or the Property, or any violation of Hazardous Materials Laws by Tenant or any assignee or sublessee of Tenant or their respective agents, contractors, employees, licensees, or invitees. Landlord shall have the right to intervene in any governmental action or proceeding involving any Remedial Work, and to approve performance of the work, in order to protect Landlord’s interests.

34.5     Compliance With Insurance Requirements. Tenant shall comply with the requirements of Landlord’s and Tenant’s respective insurers regarding Hazardous Materials and with such insurers’ recommendations based upon prudent industry practices regarding management of Hazardous Materials.

34.6     Notice; Reporting. Tenant shall notify Landlord, in writing, as soon as reasonably possible, but in no event later than two (2) days after any of the following: (a) a release or discharge of any Hazardous Material, whether or not the release or discharge is in quantities that would otherwise be reportable to a public agency; (b) Tenant’s receipt of any order of a governmental agency requiring any Remedial Work pursuant to any Hazardous Materials Laws; (c) Tenant’s receipt of any warning, notice of inspection, notice of violation or alleged violation, or Tenant’s receipt of notice or knowledge of any proceeding, investigation of enforcement action, pursuant to any Hazardous Materials Laws; or (d) Tenant’s receipt of notice or knowledge of any claims made

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or threatened by any third party against Tenant or the Leased Premises, the Building or the Property, relating to any loss or injury resulting from Hazardous Materials. Tenant shall deliver to Landlord copies of all test results, reports and business or management plans required to be filed with any governmental agency pursuant to any Hazardous Materials Laws.

34.7     Termination: Expiration. Upon the termination or expiration of this Lease, Tenant shall remove any equipment, improvements or storage facilities utilized in connection with any Hazardous Materials and shall, clean up, detoxify, repair and otherwise restore the Leased Premises to a condition free of Hazardous Materials for which Tenant is responsible.

34.8     Indemnity. Tenant shall protect, indemnify, defend and hold Landlord harmless from and against, and shall be responsible for, any and all claims, costs, expenses, suits, judgments, actions, investigations, proceedings and liabilities arising out of or in connection with any breach of any provisions of this Article 34 or directly or indirectly arising out of the use, generation, storage, release, disposal or transportation of Hazardous Materials by Tenant or any sublessee or assignee of Tenant, or their respective agents, contractors, employees, licensees, or invitees, on, under or about the Leased Premises, the Building or the Property during the Lease Term or Tenant’s occupancy of the Leased Premises, including, but not limited to, all foreseeable and unforeseeable consequential damages and the cost of any Remedial Work. Neither the consent by Landlord to the use, generation, storage, release, disposal or transportation of Hazardous Materials nor the strict compliance with all Hazardous Material Laws shall excuse Tenant from Tenant’s indemnification obligations pursuant to this Article 34. The foregoing indemnity shall be in addition to and not a limitation of the indemnification provisions of Article 16 of this Lease. Tenant’s obligations pursuant to this Article 34 shall survive the termination or expiration of this Lease.

34.9     Assignment; Subletting. If Landlord’s consent is required for an assignment of this Lease or a subletting of the Leased Premises. Landlord shall have the right to refuse such consent if the possibility of a release of Hazardous Materials is materially increased as a result of the assignment or sublease or if Landlord does not receive reasonable assurances that the new tenant has the experience and the financial ability to remedy a violation of the Hazardous Materials Laws and fulfill its obligations under this Article 34.

34.10   Entry and Inspection; Cure. Landlord and its agents, employees and contractors, shall have the right, but not the obligation, to enter the Leased Premises at all reasonable times to inspect the Leased Premises and Tenant’s compliance with the terms and conditions of this Article 34, or to conduct investigations and tests. No prior notice to Tenant shall be required in the event of an emergency, or if Landlord has reasonable cause to believe that violations of this Article 34 have occurred, or if Tenant consents at the time of entry. In all other cases, Landlord shall give at least twenty-four (24) hours prior notice to Tenant. Landlord shall have the right, but not the obligation, to remedy any violation by Tenant of the provisions of this Article 34 or to perform any Remedial Work which is necessary or appropriate as a result of any governmental order, investigation or proceeding. Tenant shall pay, upon demand, as Additional Rent, all costs incurred by Landlord in remedying such violations or performing all Remedial Work, plus interest thereon at the Default Rate from the date of demand until the date received by Landlord.

34.11   Event of Default. The release or discharge of any Hazardous Material or the violation of any Hazardous Materials Law shall constitute an Event of Default by Tenant under this Lease. In addition to and not in lieu of the remedies available under this Lease as a result of such Event of Default, Landlord shall have the right, without terminating this Lease, to require Tenant to suspend its operations and activities on the Leased Premises until Landlord is satisfied that appropriate Remedial Work has been or is being adequately performed and Landlord’s election of this remedy shall not constitute a waiver of Landlord’s right thereafter to pursue the other remedies set forth in this Lease.

34.12   Landlord Representation. Landlord will supply at its expense a copy of Landlord’s existing environmental report showing that there are no hazardous substances in the Premises and shall have no obligation to update said report.

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35. RESTRICTIONS

Tenant and all persons in possession or holding under Tenant shall conform to and shall not violate the terms of any matters of record. No use or operation will be made, conducted or permitted by Tenant on or with respect to all or any part of the Property which is obnoxious to or out of harmony with the development or operation of similar properties, including, without limitation, the following: (a) any public or private nuisance; (b) any noise or sound that is objectionable due to intermittency, beat, frequency, shrillness or loudness; (c) any obnoxious odor, (d) any noxious, toxic, caustic or corrosive fuel or gas; (e) any dust, dirt or fly ash in excessive quantities; (f) any unusual fire, explosion or other damaging or dangerous hazard; (g) the conduct of any sexually oriented business, or a so-called “head” shop of businesses featuring, as a principal portion of a business, the sale or presentation of so-called “adult” products, sexually explicit products, or drug paraphernalia; (h) any activity outside the ordinary course of business which physically and substantially interferes with the business of any other tenant or any other individual or entity using any portion of the Property; (i) the violation of any law, ordinance, or rule or regulation of any governmental authority having jurisdiction over the Property; or (j) for any other unreasonable use of the Property not compatible with the operation of a first-class industrial office development, including, without limitation, advertising media which can be heard or experienced in an annoying manner from the exterior of the Building, the Premises or the Property, or other improvement from which it emanates, such a searchlights, loud speakers, phonographs, radios or television.

36. MISCELLANEOUS

36.1     Entire Agreement, Amendments. This Lease and any Exhibits and Riders attached hereto and forming a part hereof, set forth all of the covenants, promises, agreements, conditions and understandings between Landlord and Tenant concerning the Leased Premises and there are no covenants, promises, agreements, representations, warranties, conditions or understandings either oral or written between them other than as contained in this Lease. Except as otherwise provided in this Lease, no subsequent alteration, amendment, change or addition to this Lease shall be binding unless it is in writing and signed by both Landlord and Tenant.

36.2     Time of the Essence. Time is of the essence of each and every term, covenant and condition of this Lease.

36.3     Binding Effect. The covenants and conditions of this Lease shall, subject to the restrictions on assignment and subletting, apply to and bind the heirs, executors, administrators, personal representatives, successors and assigns of the parties hereto.

36.4     Recordation. Neither this Lease nor any memorandum hereof shall be recorded by Tenant. At the sole option of Landlord, Tenant and Landlord shall execute, and Landlord may record, a short form memorandum of this Lease in form and substance satisfactory to Landlord.

36.5     Governing Law. This Lease and all the terms and conditions thereof shall be governed by and construed in accordance with the laws of the State of Arizona.

36.6     Defined Terms and Paragraph Headings. The words “Landlord” and “Tenant” as used in this Lease shall include the plural as well as the singular. Words used in masculine gender include the feminine and neuter. If there is more than one Tenant, the obligations in this Lease imposed upon Tenant shall be joint and several. The paragraph headings and titles to the paragraphs of this Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part hereof.

36.7     Representations and Warranties of Tenant. Tenant represents and warrants to Landlord as follows:

(a)       Tenant has been duly organized, is validly existing, and is in good standing under the laws of its state of incorporation and is registered to transact business in Arizona. All necessary action on the part of Tenant has been taken to authorize the execution, delivery and performance of this Lease and of the other documents, instruments and agreements, if any, provided

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for herein. The persons who have executed this Lease on behalf of Tenant are duly authorized to do so;

(b)       This Lease constitutes the legal, valid and binding obligation of Tenant, enforceable against Tenant in accordance with its terms, subject, however, to bankruptcy, insolvency, reorganization, arrangement, moratorium or other similar laws relating to or affecting the rights of creditors generally, general principles of equity, whether enforceability is considered in a proceeding in equity or at law, and to the qualification that certain waivers, procedures, remedies and other provisions of this Lease may be unenforceable under or limited by applicable law, however, none of the foregoing shall prevent the practical realization to Landlord of the benefits intended by this Lease;

(c)       To the best of its knowledge, there are no suits, actions, proceedings or investigations pending, or to the best of its knowledge, threatened against or involving Tenant before any court, arbitrator or administrative or governmental body which might reasonably result in any material adverse change in the contemplated business, condition or operations of Tenant;

(d)       To the best of its knowledge, Tenant is not, and the execution, delivery and performance of this Lease and the documents, instruments and agreements, if any, provided for herein will not result in any breach of or default under any other document, instrument or agreement to which Tenant is a party or by which Tenant is subject or bound;

(e)       To the best of its knowledge, Tenant has obtained all required licenses and permits, both governmental and private, to use and operate the Leased Premises in the manner intended by this Lease; and

(f)        All financial statements, tax returns and other financial information delivered by Tenant to Landlord prior to the execution of this Lease is true, correct and complete in all material respects and all financial statements, tax returns or other financial information to be delivered by Tenant to Landlord subsequent to the execution of this Lease shall be true, correct and complete in all material respects.

36.8     No Waiver. The failure of either party to insist in any one or more instances upon the strict performance of any one or more of the obligations of this Lease, or to exercise any election herein contained, shall not be construed as a waiver or relinquishment for the future of the performance of such one or more obligations of this Lease or the right to exercise such election, but the same shall continue and remain in full force and effect with respect to any subsequent breach, act or omission.

36.9     Severability. If any clause or provision of this Lease is or becomes illegal or unenforceable because of any present or future law or regulation of any governmental body or entity effective during the Lease Term, the intention of the parties is that the remaining provisions of this Lease shall not be affected thereby.

36.10   Exhibits. If any provision contained in an Exhibit, Rider or Addenda to this Lease is inconsistent with any other provision of this Lease, the provision contained in this Lease shall supersede the provisions contained in such Exhibit, Rider or Addenda, unless otherwise provided.

36.11   Fair Meaning. The language of this Lease shall be construed to its normal and usual meaning and not strictly for or against either Landlord or Tenant. Landlord and Tenant acknowledge and agree that each party has reviewed and revised this Lease and that any rule of construction to the effect that ambiguities are to be resolved against the drafting party shall not apply to the interpretation of this Lease, or any Exhibits, Riders or amendments hereto.

36.12   No Merger. The voluntary or other surrender of this Lease by Tenant or a mutual cancellation of this Lease shall not work as a merger and shall, at Landlord’s option, either terminate any or all existing subleases or subtenancies, or operate as an assignment to Landlord of any or all of such subleases or subtenancies.

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36.13   Force Majeure. Any prevention, delay or stoppage due to strikes, lockouts, labor disputes, acts of God, inability to obtain labor or materials for reasonable substitutes therefor, governmental restrictions, regulations or controls, judicial orders, enemy or hostile government actions, civil commotion, fire or other casualty and other causes beyond the reasonable control of either party (as applicable) shall excuse such party’s (as applicable) performance hereunder for the period of any such prevention, delay, or stoppage.

36.14   Government Energy or Utility Controls. In the event of the imposition of federal, state or local governmental controls, rules, regulations or restrictions on the use or consumption of energy or other utilities during the Lease Term, both Landlord and Tenant shall be bound thereby.

36.15   Shoring. If any excavation or construction is made adjacent to, upon or within the Building, or any part thereof, Tenant shall afford to any and all persons causing or authorized to cause such excavation or construction license to enter onto the Leased Premises for the purpose of doing such work as such persons shall deem necessary to preserve the Building or any portion thereof from injury or damage and to support the same by proper foundations, braces and supports without any claim for damages, indemnity or abatement of Annual Basic Rent or Additional Rent or for a constructive or actual eviction of Tenant.

36.16   Transfer of Landlord’s Interest. The term “Landlord”as used in this Lease, insofar as the covenants or agreements on the part of the Landlord are concerned, shall be limited to mean and include only the owner or owners of Landlord’s interest in this Lease at the time in question. Upon any transfer or transfers of such interest, the Landlord herein named (and in the case of any subsequent transfer, the then transferor) shall thereafter be relieved of all liability for the performance of any covenants or agreements on the part of the Landlord contained in this Lease.

36.17   Limitation on Landlord’s Liability. If Landlord becomes obligated to pay Tenant any judgment arising out of any failure by the Landlord to perform or observe any of the terms, covenants, conditions or provisions to be performed or observed by Landlord under this Lease, Tenant shall be limited in the satisfaction of such judgment solely to Landlord’s interest in the Building and the Property or any proceeds arising from the sale thereof and insurance proceeds and no other property or assets of Landlord or the individual partners, directors, officers or shareholders of Landlord or its constituent partners shall be subject to levy, execution or other enforcement procedure whatsoever for the satisfaction of any such money judgment.

36.18   Brokerage Fees. Tenant warrants and represents that it has not dealt with any Realtor, broker or agent in connection with this Lease except the Broker identified in Article 1.18 above. Tenant shall indemnify, defend and hold Landlord harmless from and against, and shall be responsible for, any cost, expense or liability (including the cost of suit and reasonable attorneys’ fees) for any compensation, commission or charges claimed by any other Realtor, broker or agent in connection with this Lease or by reason of any act of Tenant.

36.19   Guaranty. Concurrently with the execution of this Lease, Tenant shall cause the Guarantors to execute, have acknowledged and deliver to Landlord, the Guaranty of Lease attached hereto as Exhibit “G”, whereby Guarantors unconditionally guaranty to Landlord each and every obligation of Tenant under this Lease.

36.20   Continuing Obligations. All obligations of Tenant and Landlord hereunder not fully performed as of the expiration or earlier termination of this Lease shall survive the expiration or earlier termination of this Lease, including, without limitation, all payment obligations with respect to Annual Basic Rent, Additional Rent and all obligations concerning the condition of the Premises.

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IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the date and year first above written.

LANDLORD:
HARDY COMMERCE CENTER, L.L.C., an Arizona limited liability company
By:	Victoria Properties Management, L.L.C., an
	Arizona Limited Liability Company
Its:	Manager
	By:		/s/ Ken Matheson
	Name:			Ken Matheson
	Its:	Managing Member

TENANT:
Prism Arizona-Operations, LLC, a Delaware limited liability company
	By:		/s/ Bob van Dyke
	Name:			Bob van Dyke
	Its:	Vice President Switch Operations

Witness for purposes of Power of Attorney:
		By:		/s/ Bob van Dyke
Witness		Name:			Bob van Dyke
Name:	Daniel Pugh	Its:	Secretary

If Tenant is a CORPORATION, the authorized officers must sign on behalf of the corporation and indicate the capacity in which they are signing. The Lease must be executed by the president or vice-president and the secretary or assistant secretary, unless the bylaws or a resolution of the board of directors shall otherwise provide, in which event, the bylaws or a certified copy of the resolution, as the case may be, must be attached to this Lease.

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EXHIBIT “A”

SITE PLAN

The Leased Premises are part of the Property located at 7810-7890 South Hardy Drive in Tempe,

Arizona which consists of approximately 98,464 rentable square feet detailed as:

[GRAPHIC]

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EXHIBIT “B”

FLOOR PLAN

The Leased Premises are located in the Building at 7850 South Hardy Drive, Suite to be established, Tempe, Arizona 85284, which is detailed below:

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EXHIBIT “D”

RESERVED COVERED PARKING LICENSE

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EXHIBIT “E”

WORK LETTER

In order to induce Tenant to enter into the Lease (which is incorporated herein by reference to the extent that the provisions of this Work Letter may apply thereto) and in consideration of the mutual covenants hereinafter contained, Landlord and Tenant agree as follows:

1. Completion Schedule. Attached to this Work Letter is a schedule (the “Work Schedule”) setting forth the time table for the planning and completion of the installation of the tenant improvements to be constructed in the Leased Premises (the “Tenant Improvements”). The Work Schedule sets forth each of the various items of work to be done in connection with the completion of the Tenant Improvements and shall become the basis for completing the Tenant Improvements. Landlord and Tenant acknowledge and agree that time is of the essence with respect to their respective obligations as set forth in this Work Letter.

2. Tenant Improvements. The Tenant Improvements shall include the work described on Annex I to this Exhibit “E”, which work shall be done in the Leased Premises pursuant to the Tenant Improvements Plans described in Paragraph 3 below.

3. Tenant Improvement Plans. Tenant shall meet with Landlord’s architect and/or space planner for the purposes of preparing a space plan for the layout of the Premises. Based upon such space plan, Landlord’s architect shall prepare final working drawings and specifications for the Tenant Improvements. Such final working drawings and specifications are referred to in this Work Letter as the “Tenant Improvement Plans.”

4. Preparation of Tenant Improvement Plans and Final Pricing. After the preparation of the space plan and after Tenant’s approval thereof in accordance with the Work Schedule, Landlord shall cause its architect to prepare and submit to Tenant the Tenant Improvement Plans. Promptly after the approval of the Tenant Improvement Plans by Landlord and Tenant in accordance with the Work Schedule, the Tenant Improvement Plans shall be submitted to the appropriate governmental body for plan checking and building permits. Landlord, with Tenant’s cooperation, shall cause to be made such changes in the Tenant Improvement Plans necessary to obtain required permits. Tenant acknowledges that after final approval of the Tenant Improvement Plans, no further changes to the Tenant Improvement Plans may be made without the prior written consent of Landlord, which consent shall not be unreasonably withheld but may be conditioned on the agreement by Tenant to pay all additional costs and expenses resulting from such requested changes that exceed the Allowance (defined below).

5. Construction of Tenant Improvements. After the Tenant Improvement Plans have been prepared and approved, and building permits for the Tenant Improvements have been issued, Landlord shall enter into a construction contract with its contractor for the installation of the Tenant Improvements in accordance with the Tenant Improvement Plans. The Tenant Improvements shall be constructed in a good, workmanlike and lien free manner, and in conformance with applicable building codes. Landlord shall supervise the completion of the Tenant Improvements and shall endeavor in good faith to secure the completion of the Tenant Improvements in accordance with the Work Schedule. The cost of the Tenant Improvements shall be paid as provided in Paragraph 6 below. Tenant shall accept the Tenant Improvements upon substantial completion thereof, as reasonably determined by Landlord’s architect.

6. Payment of the Cost of the Tenant Improvements.

a. Tenant Improvement Allowance. Landlord hereby grants to Tenant a Tenant Improvement allowance (the “Allowance”) based upon a calculation of Twenty-five and 0/100 Dollars ($25.00) per usable square foot of the Leased Premises. Landlord and Tenant agree that the usable square Footage of the Leased Premises is 4846 usable square feet. The Allowance shall be used only for:

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(i) Payment of the cost of preparing the space plan and the final working drawings and specifications, including mechanical, electrical and structural drawings and of all other aspects of the Tenant Improvement Plans, including the charges of Landlord’s space planner and Landlord’s architect.

(ii) The payment of permit and license fees relating to construction of the Tenant Improvements; and Construction of the Tenant Improvements, including without limitation the following:

(1) Installation within the Leased Premises of all partitioning, doors, floor coverings, finishes, ceilings, wall coverings and paintings, millwork and similar items;

(2) All electrical wiring, lighting fixtures, outlets and switches, and other electrical work to be installed within the Leased Premises;

(3) The furnishing and installation of all duct work, terminal boxes, defusers and accessories required for the completion of the heating, ventilation and air conditioning systems within the Leased Premises.

(4) Any additional Tenant requirements including, but not limited to odor control, special heating, ventilation and air conditioning, noise or vibration control or other special systems;

(5) All fire and life safety control systems such as fire walls, sprinklers, halon, fire alarms, including piping, wiring and accessories installed within the Leased Premises; and

(6) All plumbing, fixtures, pipes and accessories to be installed within the Leased Premises; and

(7) All monument and directory signage.

b. Additional Costs. The cost of each of the items set forth in Paragraph 6(a) above shall be charged against the Allowance. In the event the anticipated cost of installing the Tenant Improvements, as established by Landlord’s final pricing schedule, shall exceed the Allowance, or in the event any of the Tenant Improvements are not to be paid for from the Allowance, the excess shall be paid by Tenant to Landlord prior to the commencement of construction of the Tenant improvements.

c. Chances to Tenant Improvement Plans. In the event that Tenant shall request any changes or substitutions to the Tenant Improvement Plans, after the Tenant Improvement Plans have been prepared and the final pricing established by Landlord, any additional costs attributable thereto shall be paid by Tenant to Landlord prior to the commencement of the work represented by such changes, unless covered under the Allowance.

d. Unused Allowance. No portion of the Allowance may be credited toward Annual Basic Rent or Additional Rent.

7. Early Entry. Landlord shall permit Tenant and Tenant’s agents to enter the Leased Premises prior to the Commencement Date in order that Tenant may do such work as may be required by Tenant to make the Leased Premises ready for Tenant’s use and occupancy. If Landlord permits such entry prior to the Commencement Date, such permission is conditioned upon Tenant and its agents, contractors, employees and invitees working in harmony and not interfering with Landlord and its agents, contractors and employees in the installation of the Tenant Improvements or in the performance of work for other tenants and occupants of the Building. If at any time such entry shall cause or threaten to cause disharmony or interference, Landlord shall have the right to withdraw such permission upon twenty-four (24) hours notice to Tenant. Any entry into the Leased Premises by Tenant prior to the Commencement Date shall be subject to all of the terms, covenants, conditions and provisions of the Lease, other than with

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respect to Tenant’s obligation to pay Annual Basic Rent. Tenant acknowledges and agrees that Landlord shall not be liable in any way for any injury, loss or damage which may occur to Tenant, its agents, contractors and employees or to Tenant’s work and installations made in the Leased Premises or to property placed therein prior to the Commencement Date, all of the same being at Tenant’s sole risk, provided, however, that Landlord shall be liable to Tenant for the gross negligence of Landlord, its agents, contractors and employees.

8. Punch List Procedure. Not later than the day prior to the Commencement Date, Tenant shall prepare a list (the “Punch List”) of any deficiencies or incompleted work regarding any Tenant Improvements. Provided that such items are Landlord’s responsibility pursuant to the Tenant Improvement Plans, Landlord shall correct such deficiencies or incompleted work within a reasonable period of time, but in no event later than sixty (60) days after receipt of the Punch List, after which Landlord shall have no further obligation to alter, change, decorate or improve the Leased Premises, whether to adapt the same for the use for which it is leased or for any other purpose. The existence of such deficiencies or incompleted work shall not effect Tenant’s obligation to accept the Leased Premises as otherwise required hereunder.

9. Assignment of Warranties. Landlord shall assign to Tenant the non-exclusive right to enforce any and all warranties which Landlord may receive from any contractor, supplier or other person or entity involved with construction of the Tenant Improvements, which assignment shall continue until the expiration or sooner termination of the Lease or the expiration of the warranty, whichever occurs first.

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ANNEX I

TO

EXHIBIT “E”

TENANT IMPROVEMENTS

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EXHIBIT “F”

RULES AND REGULATIONS

1. Unless otherwise specifically defined herein, all capitalized terms in these Rules and Regulations shall have the meaning set forth in the Lease to which these Rules and Regulations are attached.

2. The sidewalks, driveways, entrances, passages, courts, vestibules, stairways, corridors or halls of the Building and the Property shall not be obstructed or encumbered or used for any purpose other than ingress and egress to and from the premises demised to any tenant or occupant. The halls, passages, exits, entrances, stairways, balconies and roof are not for the use of the general public, and the Landlord shall in all cases retain the right to control and prevent access thereto by all persons whose presence in the judgment of Landlord shall be prejudicial to the safety, character, reputation and interests of the Building and its tenants.

3. No awnings or other projection shall be attached to the outside walls or windows of the Building. No curtains, blinds, shades, or screens shall be attached to or hung in, or used in connection with, any window or door of the premises demised to any tenant or occupant, without the prior written consent of Landlord. All electrical fixtures hung in any premises demised to any tenant or occupant must be of a type, quality, design, color, size and general appearance approved by Landlord.

4. No tenant shall place objects against glass partitions, doors or windows which would be in sight from the Building corridors or from the exterior of the Building and such tenant will promptly remove any such objects when requested to do so by Landlord.

5. The windows and doors that reflect or admit light and air into the halls, passageways or other public places in the Building shall not be covered or obstructed, nor shall any bottles, parcels, or other articles be placed on any window sills.

6. No show cases or other articles shall be put in front of or affixed to any part of the exterior of the Building or the other buildings in the Property, nor placed in the halls, corridors, walkways, landscaped areas, vestibules or other public parts of the Building or the Property.

7. The restrooms, water and wash closets and other plumbing fixtures shall not be used for any purposes other than those for which they were constructed, and no sweepings, rubbish, rags or other substances shall be thrown therein. The reasonable costs incurred by Landlord (a) for extra cleaning in any restroom, water or wash closet required because of any misuse of such restroom, water or wash closet, and/or (b) to repair any damage resulting from any misuse of the fixtures will be borne by the tenant who, or whose employees, agents, visitors or licensees, caused the same. No tenant shall bring or keep, or permit to be brought or kept, any flammable, combustible, explosive or hazardous fluid, material, chemical or substance in or about the premises demised to such tenant or the Property.

8. No tenant or occupant shall mark, paint, drill into, or in any way deface any part of the Property, the Building or the premises demised to such tenant or occupant. No boring, cutting or strings of wires shall be permitted, except with the prior consent of Landlord, and as Landlord may direct. No tenant or occupant shall install any resilient tile or similar floor covering in the premises demised to such tenant or occupant except in a manner approved by Landlord,

9. Any carpeting cemented down by a tenant shall be installed with a releasable adhesive. In the event of a violation of the foregoing by a tenant, Landlord may charge the expense incurred in such removal to such tenant.

10. No bicycles, vehicles or animals of any kind (except seeing eye dogs) shall be brought into or kept in or about the premises demised to any tenant. No cooking shall be done or permitted in the Building by any tenant without the written approval of Landlord. No tenant

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shall cause or permit any unusual or objectionable odors to emanate from the premises demised to such tenant.

11. No space in the Building or the Property shall be used for manufacturing, for the storage of merchandise, or for the sale of merchandise, goods or properly of any kind at auction.

12. No tenant and no employee, visitor, agent, or licensee of any Tenant shall make, or permit to be made, any unseemly or disturbing noises or vibrations or disturb or interfere with other tenants or occupants of the Building or neighboring buildings or premises whether by the use of any musical instrument, radio, television set, broadcasting equipment or other audio device, noise, whistling, singing, yelling or screaming, or in any other way. Nothing shall be thrown out of any doors. No tenant and no employee, visitor, agent, or licensee of any Tenant shall conduct itself in any manner that is inconsistent with the character of the Building as a first quality building or that will impair the comfort, convenience or safety of other tenants in the Building.

13. No additional locks or bolts of any kind shall be placed upon any of the doors, nor shall any changes be made in locks or the mechanism thereof. Each tenant must, upon the termination of its tenancy, return to Landlord all keys of stores, offices and toilet rooms, either furnished to, or otherwise procured by, such Tenant.

14. All removals from the Building, or the carrying in or out of the Building or from the premises demised to any tenant, of any safes, freight, furniture or bulky matter of any description must take place at such time and in such manner as Landlord or its agents may determine, from time to time. Landlord reserves the right to inspect all freight to be brought into the Building and to exclude from the Building all freight which violates any of the Rules and Regulations or the provisions of such tenant’s lease.

15. No tenant or occupant shall engage or pay any employees in the Building or the Property, except those actually working for such tenant or occupant in the Building or the Property, nor advertise for day laborers giving an address at the Building or the Property.

16. Landlord shall have the right to prohibit any advertising by any tenant or occupant which, in Landlord’s opinion, tends to impair the reputation of the Building or the Property or its desirability as a building for offices, and upon notice from Landlord, such tenant or occupant shall refrain from or discontinue such advertising.

17. Each tenant shall, at its expense, provide artificial light in the premises demised to such tenant for Landlord’s agents, contractors and employees while performing janitorial or other cleaning services and making repairs or alterations in said premises.

18. No premises shall be used, or permitted to be used for lodging or sleeping, or for any immoral or illegal purposes or in any matter that, in Landlord’s reasonable business judgment, threatens the safety of the Building or the tenants of the Building and their employees and invitees. In addition, each tenant shall maintain its furniture, fixtures and equipment within its premises in a manner that presents a pleasant appearance both in daylight and nighttime from the surrounding streets and roadways.

19. The requirements of tenants will be attended to only upon application at the management office of Landlord. Building employees shall not be required to perform, and shall not be requested by any tenant or occupant to perform, and work outside of their regular duties, unless under specific instructions from the office of Landlord.

20. Canvassing, soliciting and peddling in the Building or the Property are prohibited and each tenant and occupant shall cooperate in seeking their prevention.

21. There shall not be used in the Building, either by any tenant or occupant or by their agents or contractors, in the delivery or receipt of merchandise, freight or other matter, any hand

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trucks or other means of conveyance except those equipped with rubber tires, rubber side guards and such other safeguards as Landlord may require.

22. If the premises demised to any tenant become infested with vermin, such tenant, at its sole cost and expense, shall cause its premises to be exterminated, from time to time, to the satisfaction of Landlord, and shall employ such exterminators therefor as shall be approved in writing by Landlord.

23. No premises shall be used, or permitted to be used, at any time, as a store for the sale or display of goods, wares or merchandise of any kind, or as a restaurant, shop, booth, bootblack or other stand, or for the conduct of any business or occupation which predominantly involves direct patronage of the general public in the premises demised to such tenant, or for manufacturing or for other similar purposes.

24. No tenant shall clean any window of the Building from the outside.

25. No tenant shall move, or permit to be moved, into or out of the Building or the premises demised to such tenant, any heavy or bulky matter, without the specific approval of Landlord. If any such matter requires special handling, only a qualified person shall be employed to perform such special handling. No tenant shall place or permit to be placed, on any part of the floor or floors of the premises demised to such tenant, a load exceeding the floor load per square foot which such floor was designed to carry and which is allowed by law. Landlord reserves the right to prescribe the weight and position of safes and other heavy objects, which must be placed so as to distribute the weight.

26. With respect to work being performed by a tenant in its premises with the approval of Landlord, the tenant shall refer all contractors, contractors’ representatives and installation technicians to Landlord for its supervision, approval and control prior to the performance of any work or services. This provision shall apply to all work performed in the Building and the Property including installation of telephones, telegraph equipment, electrical devices and attachments, and installations of every nature affecting floors, walls, woodwork, trim, ceilings, equipment and any other physical portion of the Building and the Property.

27. Landlord shall not be responsible for lost or stolen personal property, equipment, money, or jewelry from the premises of tenants or public rooms whether or not such loss occurs when the Building or the premises are locked against entry.

28. Landlord may permit entrance to the premises of tenants by use of pass keys controlled by Landlord employees, contractors, or service personnel directly supervised by Landlord and employees of the United States Postal Service.

29. Each tenant and all of tenant’s representatives, shall observe and comply with the directional and parking signs on the property surrounding the Building, and Landlord shall not be responsible for any damage to any vehicle towed because of non-compliance with parking regulations.

30. No tenant shall install any radio, telephone, television, microwave or satellite antenna, loudspeaker, music system or other device on the roof or exterior walls of the Building or on common walls with adjacent tenants or in the Common Areas.

31. Each tenant shall store all trash and garbage within its premises. No material shall be placed in the trash boxes or receptacles in the Building or the Property unless such material may be disposed of in the ordinary and customary manner of removing and disposing of trash and garbage and will not result in a violation of any law or ordinance governing such disposal. All garbage and refuse disposal shall be made only through entryways and elevators provided for such purposes and at such limes as Landlord shall designate.

32. Each tenant shall give prompt notice to landlord of any accidents to or defects in plumbing, electrical or heating apparatus so that same may be attended to properly.

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33. No tenant shall bring onto the Property or into the Building any pollutants, contaminants, inflammable, gasolines, kerosene or hazardous substances (as now or later defined under State or Federal law).

34. All tenants and tenants’ servants, employees, agents, visitors, invitees and licensees shall observe faithfully and comply strictly with the foregoing Rules and Regulations and such other and further appropriate Rules and Regulations as Landlord or Landlord’s agent from time to time adopt. Each tenant shall at all times keep the premises leased to such tenant, its employees, agents and invitees under its control so as to prevent the performance of any act that would damage the Building or its reputation or the premises leased to such tenant or could injure, annoy, or threaten the security of the other tenants in the Building or their respective employees, agents or invitees or the public.

35. Landlord may deny entrance to the Building and may remove from the Building any person or persons who appear to be or are intoxicated, or who appear to be or are under the influence of liquor or drugs, or who are in any manner violating any of the Building Rules and Regulations, or who present a hazard or nuisance to any other person. The reasonable costs incurred by Landlord for security services or other costs reasonably incurred by Landlord to remove any such persons shall be borne by the tenant whose employees, agents and/or invitees are so removed.

36. Landlord shall furnish each tenant, at Landlord’s expense, with two (2) keys to unlock the entry level doors to each tenant’s premises and, at such tenant’s expense, with such additional keys as such tenant may request. No tenant shall install or permit to be installed any additional lock on any door into or inside of the premises demised to that tenant or make or permit to be made any duplicate of keys to the entry level doors or the doors to such premises. Landlord shall be entitled at all times to possession of a duplicate of all keys to all doors into or inside of the premises demised to tenants of the Building. All keys shall remain the property of Landlord. Each tenant shall deliver to Landlord a deposit in the amount established by Landlord. Any lost key shall be subject to a replacement charge as established by Landlord from time to time. Upon the expiration of the Lease Term, each tenant shall surrender all such keys to Landlord and shall deliver to Landlord the combination to all locks on all safes, cabinets and vaults which will remain in the premises demised to that tenant. Landlord shall be entitled to install, operate and maintain security systems in or about the Property which monitor, by computer, close circuit television or otherwise, persons entering or leaving the Property, the Building and/or the premises demised to any tenant. For the purposes of this rule the term “keys” shall mean traditional metallic keys, plastic or other key cards and other lock opening devices.

37. Each person using the Parking Accommodations or other areas designated by Landlord where parking will be permitted shall comply with all Rules and Regulations adopted by Landlord with respect to the Parking Accommodations or other areas, including any employee or visitor parking restrictions, and any sticker or other identification system established by Landlord. Landlord may refuse to permit any person who violates any parking rule or regulation to park in the Parking Accommodations or other areas, and may remove any vehicle which is parked in the Parking Accommodations or ether areas in violation of the parking Rules and Regulations. The Rules and Regulations applicable to the Parking Accommodations and the outside parking areas are as follows:

(a) The maximum speed limit within the Parking Accommodations shall be 5 miles per hour, the maximum speed limit in other parking areas shall be 15 miles per hour.

(b) All directional signs and arrows must be strictly observed.

(c) All vehicles must be parked entirely within painted stall lines.

(d) No intermediate or full-size car may be parked in any parking space reserved for a compact car; no bicycle, motorcycle or other two or three wheeled vehicle, and no truck, van or other oversized vehicle, may be parked in any area not specifically designated for use thereby.

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(e) No vehicle may be parked (i) in an area not striped for parking, (ii) in a space which has been reserved for visitors or for another person or firm, (iii) in an aisle or on a ramp, (iv) where a “no parking” sign is posted or which has otherwise designated as a no parking area, (v) in a cross hatched area, (vi) in an area bearing a “handicapped parking only” or similar designation unless the vehicle bears an appropriate handicapped designation, (vii) in an area bearing a “loading zone” or similar designation unless the vehicle is then engaged in a loading or unloading function and (viii) in an area with a posted height limitation if the vehicle exceeds the limitation.

(f) Parking passes, stickers or other identification devices that may be supplied by Landlord shall remain the property of Landlord and shall not be transferable. Landlord may require a deposit for each such pass, sticker or other identification device. In addition, a replacement charge determined by Landlord will be payable by each tenant for loss of any magnetic parking card or parking pass or sticker.

(g) Each operator shall be required to park and lock his or her own vehicle, shall use the Parking Facilities at his or her own risk and shall bear full responsibility for all damage to or loss of his or her vehicle, and for all injury to persons and damage to property caused by his or her operation of the vehicle.

(h) Landlord reserves the right to tow away, at the expense of the owner, any vehicle which is inappropriately parked or parked in violation of these Rules and Regulations.

38. Landlord reserves the right at any time and from time to time to rescind, alter or waive, in whole or in part, any of the Building Rules and Regulations when it is deemed necessary, desirable or proper, in Landlord’s judgment for its best interest or of the best interests of the tenants of the Property.

39. Landlord has designated the Building a “non-smoking” building in accordance with the Smoking Pollution Control Ordinance adopted by the City of Tempe, Arizona as set forth in the City of Tempe Municipal Code. Accordingly, smoking of tobacco or any other weed plant is prohibited in the Building Common Areas, including the Building Lobby, the Building entrances and exits, including the portions of the Property adjacent thereto, public corridors, lavatories, elevators and other public areas. Further, smoking of tobacco or any other weed plant is prohibited on the Property, except in areas that may be designated, from time to time, by Landlord.

40. Bicycles, motorcycles and other two or three-wheeled vehicles may only be stored or parked in areas designated, from time to time, by Landlord.

Tenant hereby acknowledges receipt of the Building Rules and Regulations.

TENANT:
Prism Arizona Operations, LLC
a Delaware limited liability company
By:		/s/ Bob van Dyke
Name:			Bob van Dyke
Its:	Vice President Switch Operations
Date:

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RIDER

Rider to Lease dated September 24, 1999 between HARDY COMMERCE CENTER, L.L.C., an Arizona Limited Liability Company (“Landlord”) and Prism Communication Services, Inc., a Delaware Corporation, (“Tenant”).

Right of First Refusal:	Tenant shall have a single right of first refusal to lease any contiguous space in the building subject to existing options. Tenant shall exercise its right within ten (10) calendar days of Tenant’s receipt of notice that Landlord has received a bona fide offer from another tenant prospect. After the contiguous space is leased. Landlord will grant an ongoing right of first refusal to Tenant for contiguous space. The contiguous space will be leased on the same terms and conditions as applicable to the offer to lease, including commissions.
Electrical:	Tenant will rely for its entire supply of electric current on the public utility by direct meter and Landlord shall identify the point of connection within the existing electrical distribution system for the requested service. If direct metering is not possible, the Premises shall be sub-metered with direct pass through of electrical costs without additional Landlord charge.
	Landlord shall provide space within the Building (at no additional rental) for the installation of an additional transformer if such transformer is necessary to satisfy Tenant’s electrical requirements. Such location shall be acceptable to the public utility, Tenant and Landlord.
Utilities During Construction:	Landlord shall provide, at Tenant’s expense, power, water and sewer during Tenant’s construction of its improvements.
Options to Renew:	With 12 months prior written notice for each renewal, Prism Communication Services shall have two options to renew for 5 years each. Each renewal shall be at 95% of the then fair market value rental rate for space taking into account all relevant current market factors, including but not limited to base rent, existing tenant improvements, escalations (current base year), construction period, free rent, brokerage commissions, etc. The fair market value determination shall be based on similar buildings in the same market. Within thirty (30) days after receipt of the notice of the exercise of the renewal option, Landlord shall notify Tenant of the proposed rent for the renewal term. If the parties cannot agree on the rent for the renewal term within thirty (30) days after Tenant’s receipt of Landlord’s notice, Tenant shall have the right to terminate the exercise of the option or elect to proceed to arbitration. If Tenant elects to proceed to arbitration, then each party shall appoint, and bear the expense of the arbitrator so appointed, an arbitrator with at least ten (10) years experience in office and industrial real estate in the Phoenix, Arizona market area who shall each decide the fair market rate. If the appointed arbitrators do not agree, each arbitrator shall designate its proposed fair market rate and mutually appoint a third arbitrator who shall pick the rate that third arbitrator believes is closest to the fair market rate. The parties shall each pay one-half the cost of the third arbitrator.
Standby Generator Installation:	The Landlord will provide Tenant appropriate space outside the Building and the right to install, operate, maintain, and test

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	(weekly) a dedicated stand by generator system of approximately 750K capacity, including fuel storage cable and piping routing and exhaust routing for the generator. The operation and testing of the standby generator (i.e. running of the generator other than during power failures) shall be scheduled so as not to disrupt the use of the building by other tenants in Landlord’s sole discretion. Generator installation in the rear of the Building is acceptable. Landlord shall allow any and all conduits to be run between the generator and Tenant’s space at no cost to the Landlord. The installation and location will be subject to Landlord’s review and approval in its sole discretion.
Accommodation Space:	Subject to Landlord’s written approval, Tenant shall have the right, throughout the term, to utilize or create additional space within the Project (at no additional rental) to accommodate Tenant’s equipment and facilities (e.g., the construction of a structural platform to support a HVAC cooling tower or an enclosure for an emergency backup generator) subject to Landlord’s consent, which shall be in Landlord’s sole discretion.
Communications Services:	Tenant shall have the right to provide communications services to other tenants in the Building and/or any other buildings owned by Landlord or its affiliates and to utilize existing building risers for such purposes provided that no installation of equipment will be mounted on the exterior of any buildings or require the installation by Landlord of any facilities. Such right will not be deemed to be an exclusive right to provide such services and any tenant will be free to chose any communications provider and will not interfere with any other tenant’s rights.
	Tenant shall have the right to access the Leased Premises grade level loading dock.
Other Providers:	Landlord will permit other telecommunication providers access to the Building to connect to Tenant’s equipment and facilities, provided that said access does not disrupt any tenants occupancy or require construction of any additional facilities.
Sublease & Assignment:
	(a)	Any direct or indirect assignment of the Lease by virtue of the merger or consolidation of Tenant or by virtue of the sale of all or substantially all of Tenant’s assets would be permitted without Landlord’s consent.
	(b)	Any assignment of the Lease or sublease of all or any portion of the Premises to an affiliate is permitted without Landlord’s consent provided that in the event of an assignment, the Tenant remains liable for the obligations of the Lease.
	(c)	Any assignment of the Lease or sublease of the Premises to unaffiliated third parties is  subject to Landlord’s consent, which consent is not to be unreasonably withheld or delayed.
	(d)	Landlord will not have any right of recapture; subleasing profits would be shared equally between Tenant and Landlord; all such rights would pass to all permitted assignees and/or subtenants.

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Signage:	Tenant shall have the right to install exterior signage on the Building (subject to applicable building and signage codes and Landlord’s approval, not to be unreasonably withheld). Tenant shall be entitled to a listing in the Building directory and to install signage at the entrance to the Premises if such signage is available by the Landlord.
Non-Disturbance:	Landlord shall use its best efforts to obtain for Tenant non-disturbance agreements from all existing and future mortgagees/ground lessors.
Relocation:	Landlord shall have no right to relocate Tenant to other premises within the Building or to otherwise relocate any equipment or facilities of Tenant’s.

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EX-10.33.1

Exhibit 10.33.1

SECOND AMENDMENT

This Second Amendment to Lease is made and entered into as of this 24th day of October 2003 by and between Desert Vista, LLC an Arizona limited liability company (“Landlord”) and Mountain Telecommunications, Inc. the (“Tenant”) having a place of business at 7850 South Hardy Drive, Suite 107 and 110, Tempe, Arizona 85281.

RECITALS

A.Landlord and Tenant have hereto entered into that certain Lease Agreement dated September 24, 1999 and as amended by that certain First Amendment to Lease dated September 2, 2003 herein collectively called (the “Lease”) for the rental of certain premises described as Desert Vista Commerce Center, 7850 South Hardy, Suite 107 and 110, Tempe, Arizona 85281 (the “Premises”) consisting of approximately 9,527 square feet and as more particularly described in the Lease upon the terms, covenants, provisions and conditions set forth in the said Lease, and

B.Landlord and Tenant desire to modify the terms of the Lease subject to the terms and conditions set forth in this Agreement.

AGREEMENT

NOW, THEREFORE, FOR VALUE RECEIVED AND HEREBY ACKNOWLEDGED, in consideration of the mutual covenants herein contained, Landlord and Tenant hereby agree as follows:

1.This Second Amendment to Lease shall be deemed to be effective as of January 1, 2004 (the “Effective Date”).

2.The term of the Lease shall be and hereby is amended for a period of six (6) years and two (2) months such that the term of the Lease shall expire on February 28, 2010 (the “Term Expiration Date”). Any provision of the Lease providing for the expiration of the Lease on a date earlier than the Term Expiration Date are hereby amended and superseded by this paragraph.

3.As of the Effective Date, the Monthly Rent that the Tenant shall pay for the remainder of the Term, (i.e., commencing with and after the Effective Date) is as follows:

1/1/04 — 12/31/04 - $8,383.76 ($. 88 NNNpsf) per month + applicable tax

1/1/05 — 12/31/05 - $8,669.57 ($. 91 NNNpsf) per month + applicable tax

1/1/06 — 12/31/06 - $8,955.38 ($. 94 NNNpsf) per month + applicable tax

1/1/07 — 12/31/07 - $9,241.19 ($. 97 NNNpsf) per month + applicable tax

1/1/08 — 12/31/08 - $9,527.00 ($1.00 NNNpsf) per month + applicable tax

1/1/09 — 02/28/10 - $9,812.81 ($1.02 NNNpsf) per month + applicable tax

4.Landlord shall provide at his sole cost the improvements outlined on the attached proposal. Any additional tenant improvements shall be the responsibility of the Tenant.

5.Parking is allocated on the basis of 4/1000.

EXCEPT as amended herein, the terms and conditions of the Lease shall in all respects remain in full force and effect without modifications.

IN WITNESS WHEREOF, the parties hereto have signed this Second Amendment on the date previously written.

LANDLORD		TENANT
Desert Vista, LLC		Mountain Telecommunications, Inc.
An Arizona limited liability company By: Victoria Properties Management, LLC As Agent for Owner
By:	/s/ Kenneth R. Matheson	By:	/s/ Wilmont Wickramasuria
	Kenneth R. Matheson		Wilmont Wickramasuria
Its:	Member, Manager	Its:	President

EX-10.34

Exhibit 10.34

RIGHT TO USE AGREEMENT

THIS RIGHT TO USE AGREEMENT, including the attached appendices (collectively, the “Agreement”), is entered into as of the 6th day of December, 2002 (the “Effective Date”) by and between Mountain Telecommunications, Inc., an Arizona corporation with principal place of business at 1430 West Broadway, Suite A-200, Tempe, Arizona, 85282 (“MTI’) and the Salt River Pima-Maricopa Indian Community (“SRPMIC”), on behalf of itself and Saddleback Communications Company (“Saddleback”), a division of SRPMIC with its principal place of business at 10190 East McKellips Road, Scottsdale, Arizona, 85256. MTI and SRPMIC are sometimes referred to herein individually as a “Party” and collectively as “Parties.” As used herein, the term “SRPMIC” shall include Saddleback.

WITNESSETH:

WHEREAS, MTI and SRPMIC are parties to that certain Class A Convertible Stock Purchase Agreement (the “Stock Purchase Agreement”) of even date herewith, pursuant to which SRPMIC is acquiring shares of MTI’s Class A Convertible Common Stock (the “Stock”); and

WHEREAS, in consideration for receiving the Stock, and other consideration hereinafter described, SRPMIC shall grant to MTI the irrevocable right to use the Switch Capacity during the Term of this Agreement, and the irrevocable right to use the Fiber Capacity during the Term of this Agreement, and the Parties desire to enter into this Agreement to define the terms and conditions of such rights.

NOW, THEREFORE, in consideration of the premises and the mutual covenants, agreements, undertakings, representations, and warranties set forth herein, and subject to the terms and conditions hereof, the Parties hereby agree as follows:

ARTICLE I

DEFINITIONS

1.1“Confidential Information” means proprietary information or material that has been created, discovered, developed, or otherwise become known to a receiving party which is treated and designated by the disclosing party as confidential, including any engineering design, manufacturing processes, or source code, non-public financial information regarding the disclosing party, information relating to research and development, new product pricing and marketing plans of the disclosing party, and non-public information relating to the disclosing party’s operations, revenue, trade secrets, or management practices.

1.2“Conversion Event” shall have the same meaning as defined in MTI’s Amended and Restated Articles of Incorporation adopted as of December 6, 2002.

1.3“Fiber” means the fiber optic cables or conduits owned or controlled by SRPMIC and installed as of the Effective Date, or installed after the Effective Date in order to facilitate redundant diverse paths in accordance with Article 3.3 of this Agreement. Nothing contained in this Agreement shall prohibit the Parties from contracting for the use of fiber installed by

SRPMIC after the Effective Date upon terms and conditions mutually agreeable to the Parties, and subject to the requirements of Article 13.10.

1.4“Fiber Capacity” means the total capacity of all lit Fiber which traverses paths between the Premises and locations within or to the exterior boundaries of the SRPMIC.

1.5“Premises” means the structure located at 10190 East McKellips Road, Scottsdale, Arizona 85256, where the Switch Facilities are housed.

1.6“Switch” means the DMS-500 telecommunications switch located at the Premises.

1.7“Switch Capacity” means the available capacity of any of the various applications of the Switch, as listed on Appendix A which is attached hereto and incorporated herein by this reference.

1.8“Switch Facilities” means the Switch and all peripheral equipment attached to the Switch, irrespective of whether such equipment is owned by SRPMIC, MTI or other entities.

ARTICLE II

SWITCH CAPACITY

2.1Grant of Right to Use Switch Capacity. Subject to the terms and conditions of this Agreement, SRPMIC hereby grants to MTI and MTI hereby accepts from SRPMIC the right to use the Switch Capacity as specified in Appendix A, except for that certain Switch Capacity reserved for the sole and exclusive use of SRPMIC as specified in Appendix B which is attached hereto and incorporated herein by this reference (the “Switch Capacity Reservation”). During the Term of this Agreement, MTI’s right to use the Switch Capacity shall be irrevocable. It is understood and agreed that MTI’s right to use the Switch Capacity pursuant to this Agreement shall not include the right to use any telecommunications facilities, equipment or software purchased or installed by SRPMIC after the Effective Date, excluding Fiber installed after the Effective Date in order to facilitate redundant diverse paths in accordance with Article 3.3 or necessary upgrades of the Switch in accordance with Article 4.2. Further, MTI’s right to use the Switch Capacity pursuant to this Agreement shall not include the right to use any telecommunications facilities, equipment or software owned or controlled by any division of SRPMIC other than Saddleback.

2.2Temporary Switch Capacity for SRPMIC.

(a)Upon written notice from SRPMIC to MTI that SRPMIC has exhausted or is approaching exhaust of its Switch Capacity Reservation for any frame application subject to this Agreement, MTI shall make available to SRPMIC, at the earliest practicable date, and on a temporary basis only, up to twenty-five percent (25%) of the available Switch Capacity of an equivalent frame application (the “Temporary Switch Capacity”) in order to defer SRPMIC’s need to develop new Switch Capacity. MTI’s determination regarding the availability of Temporary Switch Capacity shall be conclusive.

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(b)SRPMIC shall pay MTI for any Temporary Switch Capacity at the monthly wholesale rate for the same or substantially similar service (i) as contained in that certain Interconnection Agreement between Qwest Corporation (“Qwest”), or any successor or assignee thereto, and MTI dated [INSERT DATE] (the “Interconnection Agreement”), if the Interconnection Agreement contains such a monthly wholesale rate, and so long as such Interconnection Agreement or a successor agreement shall remain in effect; or (ii) as contained in Qwest’s Statement of Generally Available Terms (“SGAT”) on file with the Arizona Corporation Commission (“ACC”) if the Interconnection Agreement does not contain such a monthly wholesale rate, or if the Interconnection Agreement or a successor agreement is no longer in effect.

(c)MTI shall not be required to provide Temporary Switch Capacity beyond the date which is the earlier of: (i) one hundred eighty (180) days from the date SRPMIC reaches exhaust on the applicable frame application; or (ii) two hundred seventy (270) days from the date SRPMIC projected the need for Temporary Switch Capacity as communicated to MTI in the notice required under Article 2.2(a). Within ten (10) days from the date SRPMIC exhausts its Switch Capacity Reservation for a particular frame application, MTI shall provide written notice to SRPMIC (x) that SRPMIC has exhausted its Switch Capacity Reservation; (y) the date SRPMIC exhausted its Switch Capacity Reservation; and (z) the date after which MTI will have no further obligation under this Article 2.2 to provide Temporary Switch Capacity to SRPMIC.

2.3Management, Operation and Maintenance of the Switch. MTI shall manage, operate and maintain the Switch in accordance with that certain Management Agreement (the “Management Agreement”) of even date herewith between Saddleback and MTI. The Management Agreement terminates and supersedes that certain Management Agreement between SRPMIC and MTI dated December 18, 1997 (the “1997 Management Agreement”), which is of no further force or effect whatsoever.

2.4Reconfiguration of the Switch. As MTI adds and loses customers from its customer base during the Term of this Agreement, MTI shall reconfigure the Switch in a manner which segregates, to the extent practicable, the customers of MTI from the customers of SRPMIC.

2.5Use of Switch Capacity. MTI may use the Switch Capacity for the provision of any telecommunications services authorized by the Federal Communications Commission (“FCC”), the ACC, or other regulatory authority of competent jurisdiction, or for any other lawful purpose. SRPMIC covenants and agrees that MTI may peaceably and quietly enjoy the use of the Switch Capacity, subject at all times to the terms and conditions of this Agreement.

ARTICLE II

FIBER

3.1Grant of Right to Use Fiber. SRPMIC hereby grants to MTI and MTI hereby accepts from SRPMIC the right to use the Fiber, subject to SRPMIC’s right to obtain Fiber Capacity from MTI under Article 3.2 of this Agreement (the “Fiber Capacity Reservation”). During the Term of this Agreement, MTI’s right to use the Fiber shall be irrevocable. It is

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understood and agreed that MTI’s right to use the Fiber pursuant to this Agreement shall not include the right to use any additional fiber purchased or installed by SRPMIC after the Effective Date, excluding Fiber installed after the Effective Date in order to facilitate redundant diverse paths in accordance with Article 3.3 of this Agreement. Nothing contained in this Agreement shall prohibit the Parties from contracting for the use of fiber installed by SRPMIC after the Effective Date upon terms and conditions mutually agreeable to the Parties. The Parties agree that MTI’s right to use the Fiber granted hereunder shall be separate and apart from MTI’s right to use the Switch Capacity.

3.2Fiber Capacity Reservation: Additional Consideration. SRPMIC shall allow MTI to utilize up to and including forty-eight (48) Fibers (the “Tier 1 Fiber”) subject to Articles 3.2(a) and 3.3, and may allow MTI to utilize additional Fiber (the “Tier 2 Fiber”) subject to Article 3.2(b) below if SRPMIC determines in its sole discretion that it does not require the Tier 2 Fiber for SRPMIC’s own use, which use includes, but is not limited to, the right of SRPMIC to sell rights to use Tier 2 Fiber to persons or entities other than MTI.

(a)Tier 1 Fiber. Certain of the Tier 1 Fiber has been equipped as of the Effective Date with electronics to enable the Tier 1 Fiber to transport telecommunications traffic (the “Lit Tier 1 Fiber”) from points within the SRPMIC to one or more central office locations outside the exterior boundary of the SRPMIC. The remainder of the Tier 1 Fiber (the “Dark Tier 1 Fiber”) has not been equipped with electronics as of the Effective Date. Subject to the rights of SRPMIC to the Fiber Capacity Reservation described in subarticles (i) and (ii) of this Article 3.2(a), MTI may use Lit Tier 1 Fiber and, in its sole discretion and at its sole expense, may attach the electronics necessary to light Dark Tier 1 Fiber. MTI shall notify SRPMIC in writing of its intent to use any Lit Tier 1 Fiber or Dark Tier 1 Fiber. MTI’s written notice shall specify the number of Fibers requested, and the date MTI requires the Fibers. As additional consideration to SRPMIC for MTI’s use of Tier 1 Fiber under this Agreement, SRPMIC shall have the option and the right, in its sole discretion, to one of the following: (i) the use of up to and including ten percent (10%) of the Fiber Capacity of any Lit Tier 1 Fiber requested by MTI under this Article 3.2(a), without payment of any recurring or non-recurring charges to MTI; (ii) the use of up to and including ten percent (10%) of the Fiber Capacity of any Dark Tier 1 Fiber requested, lit and placed in service by MTI under this Article 3.2(a), without payment of any recurring or non-recurring charges to MTI; or (iii) payment from MTI for any Lit Tier 1 Fiber or any Dark Tier 1 Fiber requested by MTI under this Article 3.2(a) at a monthly charge equal to the applicable Qwest monthly recurring charge for unbundled dark fiber, inter-office facility (“UDF-IOF”), as set forth in the Interconnection Agreement, so long as such Interconnection Agreement or a successor agreement shall remain in effect, or as set forth in Qwest’s SGAT, if the Interconnection Agreement or a successor agreement are no longer in effect or if the Interconnection Agreement does not contain a UDF-IOF rate.

(b)Tier 2 Fiber. If at any time during the Term of this Agreement MTI desires to use Tier 2 Fiber, MTI shall notify SRPMIC in writing that it desires to use Tier 2 Fiber. Within thirty (30) days of SRPMIC’s receipt of such written notice from MTI, SRPMIC shall respond to MTI in writing stating whether SRPMIC has Tier 2 Fiber available for the use of MTI. SRPMIC’s determination regarding the availability of the Tier 2 Fiber shall be conclusive, and nothing contained herein shall preclude SRPMIC from providing Tier 2 Fiber to persons or entities other than MTI, subject to the limitations of Article 13.6. In the event SRPMIC makes

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Tier 2 Fiber available to MTI, SRPMIC shall have the option and the right, in its sole discretion, to one of the following: (i) the use of up to and including ten percent (10%) of the Fiber Capacity of any Tier 2 Fiber that is lit and placed in service by MTI (the “Lit Tier 2 Fiber”), without payment of any recurring or non-recurring charges to MTI (“Option 1”): or (ii) payment from MTI for any Tier 2 Fiber requested by MTI under this Article 3.2(b), whether such Tier 2 Fiber is lit or dark, at a monthly charge equal to the applicable Qwest monthly recurring charge for UDF-IOF, as set forth in the Interconnection Agreement, so long as such Interconnection Agreement or a successor agreement shall remain in effect, or as set forth in Qwest’s SGAT, if the Interconnection Agreement or a successor agreement are no longer in effect or if the Interconnection Agreement does not contain a UDF-IOF rate (“Option 2”). If SRPMIC selects Option I, and desires Fiber Capacity on the Lit Tier 2 Fiber in excess of ten percent (10%), then MTI shall make such additional Fiber Capacity available to SRPMIC if MTI determines, in MTI’s sole discretion, that MTI has additional Fiber Capacity available on the Lit Tier 2 Fiber. In such event, SRPMIC shall pay MTI for the use of the additional Fiber Capacity (i.e., in excess of 10%) at a monthly charge equal to the applicable Qwest monthly recurring charge for UDF-IOF, as set forth in the Interconnection Agreement, so long as such Interconnection Agreement or a successor agreement shall remain in effect, or as set forth in Qwest’s SGAT, if the Interconnection Agreement or a successor agreement are no longer in effect or if the Interconnection Agreement does not contain a UDF-IOF rate. Alternatively, If SRPMIC selects Option 2, then the monthly charge payable by MTI to SRPMIC hereunder shall continue so long as this Agreement shall remain in effect, and shall apply regardless of whether MTI lights any Tier 2 Fiber or leaves the Tier 2 Fiber dark.

(c)Nothing contained in this Article 3.2 or this Agreement shall be construed as requiring SRPMIC to pay any costs or expenses incurred by MTI in lighting Tier 1 Fiber or Tier 2 Fiber.

3.3Redundant and Diverse Paths. The Parties acknowledge that whenever technically and economically feasible, as determined in MTI’s reasonable discretion, MTI shall provision Fiber with redundant and diverse paths. Subject to the preceding sentence, MTI shall be solely responsible for the costs of any fiber and/or facilities that must be installed, constructed, purchased or leased outside of the exterior boundary of the SRPMIC in order to provide redundant and diverse paths from the Premises to one or more central offices outside of the exterior boundary of the SRPMIC.

3.4Use of Fiber Capacity and Fiber Capacity Reservation. MTI may use the Fiber Capacity for the provision of any telecommunications services authorized by the FCC, the ACC, or other regulatory authority of competent jurisdiction, or for any other lawful purpose. SRPMIC may use its Fiber Capacity Reservation for the provision of any telecommunications services authorized by the FCC or other regulatory authority of competent jurisdiction, or for any other lawful purpose. SRPMIC covenants and agrees that MTI may peaceably and quietly enjoy the use of the Fiber Capacity, subject at all times to the terms and conditions of this Agreement.

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ARTICLE IV

EQUIPMENT AND OPERATION

4.1Ownership of the Switch and Fiber. Subject to Article 4.3. SRPMIC or Saddleback shall own the Switch and the Fiber at all times during the Term. SRPMIC shall maintain the Premises in its capacity as a landlord pursuant to that certain Telecommunications Space Lease between the Parties of even date herewith. Without the prior written consent of MTI, which consent shall not be unreasonably withheld, SRPMIC shall not transfer title to the Switch or the Fiber during the Term to any entity other than a division of the SRPMIC, or an entity which is wholly-owned by the SRPMIC.

4.2Shared Costs of Switch and Software Upgrades. In accordance with the allocation mechanism contained in Appendix C which is attached hereto and incorporated herein by this reference, the Parties shall allocate the costs associated with any upgrades of the Switch and related software required in order to (i) maintain in effect any manufacturer’s or vendor’s maintenance agreements regarding the Switch and/or Switch software; and (ii) comply with applicable statutes or laws and any regulatory requirements of the FCC, the ACC, or other governmental entity with authority over either of the Parties. Without limiting the generality of the foregoing, SRPMIC shall not be required to share in the cost of any upgrade of the Switch that is necessary in order to provision a feature solely for the benefit of MTI.

4.3Abandonment of Equipment.

(a)Notification. SRPMIC shall notify MTI in writing of SRPMIC’s intention to abandon and dispose of any equipment subject to this Agreement because such equipment is no longer useful in SRPMIC’s telecommunications network. Within thirty (30) days from the date of SRPMIC’s written notice, MTI shall respond in writing stating whether MTI will agree to purchase such equipment from SRPMIC as provided herein and assume sole responsibility for the maintenance, upkeep, removal and proper disposal of the equipment. In the event MTI fails to timely respond to SRPMIC’s written notice as provided herein, then such failure shall be deemed an acknowledgement by MTI that the equipment is not needed by MTI, and SRPMIC may thereafter abandon and dispose of the equipment without further notice to MTI.

(b)Purchase Price. In the event MTI timely notifies SRPMIC that it desires to purchase the equipment to be abandoned, the Parties shall mutually agree upon the purchase price for such equipment. In the event SRPMIC receives a bona fide offer from any person or entity to purchase the equipment, then SRPMIC shall notify MTI in writing of such offer, and MTI shall have a first right of refusal to match the terms and conditions of the offer. In the event MTI declines to match the offer within five (5) business days from the date of SRPMIC’s notice to MTI, then SRPMIC may sell the equipment to the person or entity making the offer notwithstanding the fact that MTI maybe using the equipment; provided, however, that SRPMIC shall allow MTI a reasonable period of time not to exceed thirty (30) days to prepare for the removal of the equipment.

(c)Bill of Sale. In the event SRPMIC and MTI agree upon a purchase price, SRPMIC shall transfer title to the equipment via bill of sale in a form reasonably satisfactory to

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MTI, and MTI shall assume sole responsibility for the maintenance, upkeep, removal and proper disposal of the equipment as of the date of execution of the bill of sale.

ARTICLE V

CONSIDERATION; TAXES

5.1Consideration. In consideration for the rights to use the Switch Capacity and the Fiber granted by SRPMIC under this Agreement, the release by SRPMIC and Saddleback of claims to amounts they allege are owed by MTI arising out of that certain Sales Agreement between MTI and SRPMIC dated January 5, 1998, and amended March 2, 1999 (the “Sales Agreement”), the execution of the Management Agreement, and other consideration, the receipt and sufficiency of which is hereby acknowledged, MTI shall issue to SRPMIC the Stock pursuant to the terms and conditions of the Stock Purchase Agreement.

5.2Taxes. Each Party shall be responsible for the payment of any and all ad valorem, property, gross receipts, sales, use, and other taxes applicable to property owned by it and for taxes on its net income. SRPMIC shall not impose any tax or fee upon MTI which is not generally applicable to a class of businesses existing or as may exist within the exterior boundaries of the SRPMIC.

ARTICLE VI

ADDITIONAL OBLIGATIONS OF THE PARTIES

6.1Obligations of SRPMIC.

(a)During the Term of this Agreement, SRPMIC shall (a) maintain in full force and effect all federal regulatory authorizations pertaining to the use of the Fiber and the Switch Facilities within the exterior boundary of the SRPMIC; (b) timely file all requests for renewals or replacements thereof; (c) supply all information reasonably requested by federal agencies, subject at all times to the confidentiality provisions of this Agreement; (d) provide to MTI all information reasonably requested under this Agreement; and (e) execute any and all documents necessary to accomplish the same. SRPMIC must take all reasonable steps to comply with the Communications Act of 1934, as amended, and the rules and regulations of the FCC, and must timely file all reports, schedules, and/or forms required by the FCC.

(b)SRPMIC shall take all actions reasonably necessary to secure and preserve its authorizations to use the Switch Facilities and the Fiber, and to permit MTI’s use of the Switch Capacity and the Fiber authorized by this Agreement. SRPMIC shall not take any action which could reasonably be expected to cause the FCC or any other federal governmental agency or department of competent authority to impair, restrict, revoke, cancel, suspend, or refuse to renew the Licenses, as hereinafter defined, for the use of the Switch Facilities or the Fiber.

(c)SRPMIC shall obtain and maintain in full force and effect all easements and rights-of-way necessary to utilize the Fiber and to operate the Switch.

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(d)So long as this Agreement shall remain in effect, SRPMIC shall maintain and have in full force and effect comprehensive general liability insurance coverage written on an occurrence form with respect to the Switch in amounts and types that are customary in the industry for similar assets, including coverage for disaster recovery.

(e)SRPMIC shall be responsible for payment of all applicable federal regulatory fees imposed upon SRPMIC in connection with services provided by SRPMIC using the Switch Facilities and the Fiber. Such fees include, but are not limited to, federal universal service fees, federal regulatory assessment fees, and fees to support the Telecommunications Relay Service.

6.2Obligations of MTI.

(a)During the Term of this Agreement, MTI shall (a) maintain in full force and effect all necessary federal, state, and local regulatory authorizations and easements and rights-of-way pertaining to the use of the Fiber and the Switch Facilities; (b) timely file all requests for renewals or replacements thereof; (c) supply all such agencies with all information lawfully required which relates to the operation of the Switch Facilities, subject at all times to the confidentiality provisions of this Agreement; (d) provide to SRPMIC all information reasonably requested under this Agreement; and (e) execute any and all documents necessary to accomplish the same. MTI must take all reasonable steps to comply with the Communications Act of 1934, as amended, and the rules and regulations of the FCC, as well as any applicable laws of the State of Arizona and applicable rules and regulations of the ACC, and must timely file all reports, schedules, and/or forms required by the FCC and/or the ACC.

(b)So long as this Agreement shall remain in effect, MTI shall maintain and have in full force and effect comprehensive general liability insurance coverage written on an occurrence form with respect to any claims made against MTI arising out of its use of the Switch Facilities and/or the Fiber. MTI shall add SRPMIC, its council members, officers, employees, and agents, and Saddleback, its directors, officers, employees and agents, as additional insured parties (collectively, the “SRPMIC Insured Parties”) on MTI’s insurance policy or policies, and such policy or policies shall provide for the defense of and coverage for the SRPMIC Insured Parties.

(c)MTI shall be responsible for payment of all applicable federal, state, and local regulatory fees imposed upon it in connection with services provided by MTI using the Switch Facilities and the Fiber. Such fees include, but are not limited to, federal and state Universal Service fees, regulatory assessment fees, fees to support the Telecommunications Relay Service, and local franchise fees.

ARTICLE VII

REPRESENTATIONS AND WARRANTIES

7.1Mutual Representations. Each Party represents and warrants to the other that:

(a)it has the requisite power and authority to enter into this Agreement and to carry out the transactions contemplated by the Agreement;

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(b)the execution, delivery, and performance of the Agreement have been duly authorized by the requisite action on the part of such Party;

(c)the Agreement has been duly executed and delivered, and creates lawful, valid, and legally binding obligations in accordance with their respective terms; and

(d)the execution and delivery of this Agreement is not prohibited by, does not violate or conflict with any provision of, and does not constitute a default under or a breach of: (i) any contract, agreement, or other instrument to which it is a party or by which any of the assets that are the subject hereof are bound; or (ii) to the Party’s knowledge, any order, writ, injunction, decree, or judgment of any court or governmental agency.

7.2Representations of SRPMIC. SRPMIC hereby represents and warrants to MTI that SRPMIC has all requisite authorizations, approvals and/or licenses to operate the Switch, to provide telecommunications service, and to install and use the Fiber (each a “License” and collectively, the “Licenses”). Each License was validly issued, is in full force and effect, and is unimpaired by any act or omission by SRPMIC. There is no complaint, inquiry, investigation, or proceeding pending before any government authority or, to the best knowledge of SRPMIC, threatened, which could result in the revocation, modification, restriction, cancellation, termination, non-renewal, or other action adversely affecting any License and SRPMIC knows of no facts that, if brought to the attention of any government authority, could result in the revocation, modification, restriction, cancellation, termination, non-renewal, or other action adversely affecting any License. SRPMIC has not entered into any agreement to permit any third party to utilize, whether or not for compensation, any portion of the Switch Capacity.

7.3Representations of MTI.

(a)MTI hereby represents and warrants to SRPMIC that MTI has all requisite authorizations, approvals and/or licenses to utilize the Switch Capacity and the Fiber as provided herein and to provide telecommunications service pursuant to a certificate of convenience and necessity issued by the Arizona Corporation Commission (each a “License” and collectively, the “Licenses”). Each License was validly issued, is in full force and effect, and is unimpaired by any act or omission by MTI. There is no complaint, inquiry, investigation, or proceeding pending before any government authority or, to the best knowledge of MTI, threatened which could result in the revocation, modification, restriction, cancellation, termination, non-renewal, or other action adversely affecting any License and MTI knows of no facts that, if brought to the attention of any government authority, could result in the revocation, modification, restriction, cancellation, termination, non-renewal, or other action adversely affecting any License.

(b)MTI hereby represents and warrants to SRPMIC that: (i) MTI has the financial wherewithal to perform this Agreement; (ii) there is no complaint, inquiry, investigation, or proceeding pending before any government authority or, to the best knowledge of MTI, threatened, which could adversely affect MTI’s ability to perform this Agreement; and (iii) MTI has no present plan to file for protection under the bankruptcy laws of the United States, nor has MTI consulted with any attorney regarding the filing of a petition in bankruptcy.

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ARTICLE VIII

TERM, TERMINATION AND EXPIRATION

8.1Term. The term of this Agreement shall commence on the Effective Date and shall continue in full force and effect until its termination or expiration in accordance with this Article VIII (the “Term”). Nothing contained in this Agreement shall prohibit the Parties from modifying the Term based upon their mutual agreement, in accordance with Article 13.10.

8.2Loss of Licenses or Authority. Without further liability to MTI, MTI may terminate this Agreement if: (i) SRPMIC’s Licenses are terminated by the FCC or any other governmental agency or department of competent jurisdiction; provided, however, that SRPMIC shall be required to use its commercially reasonable best efforts in order to retain all such Licenses and its ability to provide the Switch Capacity and the Fiber pursuant to the terms of this Agreement; or (ii) MTI’s authority to use the Switch Capacity and the Fiber as provided herein is terminated by the FCC or the ACC. Termination of this Agreement under this Article 8.2 shall not effect the validity or enforceability of the Stock Purchase Agreement or the Management Agreement, which shall remain in full force and effect according to their respective terms.

8.3Mutual Agreement. This Agreement may be terminated at any time by mutual agreement of the Parties without liability to the Parties. Any such termination must be in writing and signed by each of the Parties; provided, however, that such termination shall not relieve the Parties of liabilities accrued hereunder prior to such termination. Termination of this Agreement under this Article 8.3 shall not affect the validity or enforceability of the Stock Purchase Agreement or the Management Agreement, which shall remain in full force and effect according to their respective terms.

8.4Bankruptcy. This Agreement shall automatically terminate, without further action by the Parties, on the thirtieth (30th) day following the date that (i) MTI files a petition in bankruptcy; or (ii) any creditor of MTI or any other entity files a petition seeking to place MTI in bankruptcy.

8.5Conversion Event; Expiration: First Renewal Term; Additional Renewal Terms; No Automatic Renewal.

(a)Expiration. Upon the occurrence of a Conversion Event, this Agreement shall continue in full force and effect and shall automatically expire on the tenth anniversary of the Conversion Event (the “Initial Expiration Date”) unless terminated earlier in accordance with this Article VIII, or unless extended in accordance with this Article 8.5.

(b)Renewal Term. On or before the fifth anniversary of the Conversion Event, SRPMIC shall notify MTI in writing of SRPMIC’s willingness to renew this Agreement for an additional five (5) year term (the “First Renewal Term”) on the same terms or on such different terms as SRPMIC may specify in its written notification. Within ninety (90) days following the date of SRPMIC’s written notification, MTI shall notify SRPMIC in writing that MTI: (i) agrees to the extension of the Agreement for the First Renewal Term on the terms specified in SRPMIC’s written notification; (ii) MTI desires to extend the Agreement for the

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First Renewal Term but upon terms different than those proposed by SRPMIC in its written notification; or (iii) declines the extension of the Agreement, in which case the Agreement shall automatically expire on the Initial Expiration Date without any further action by either Party. In the event SRPMIC and MTI agree to extend the Agreement for the First Renewal Term on terms different than those contained in this Agreement, then the Parties shall execute an amendment to this Agreement consistent with such modified terms within one (1) year from the date of SRPMIC’s written notification under this Article 8.5(b). In the event either Party desires to extend this Agreement for the First Renewal Term but on terms different than those contained in this Agreement, and the Parties are unable to agree upon new terms within one (1) year from the date of SRPMIC’s written notification under this Article 8.5(b), then this Agreement shall automatically expire on the Initial Expiration Date without further action by either Party.

(c)Additional Renewal Terms. On or before the first day of the First Renewal Term, if applicable, SRPMIC shall notify MTI in writing of SRPMIC’s willingness to renew this Agreement for one or more five (5) year renewal terms following the First Renewal Term (an “Additional Renewal Term”) on the same terms or on such different terms as SRPMIC may specify in its written notification. Within ninety (90) days following the date of SRPMIC’s written notification, MTI shall notify SRPMIC in writing that MTI: (i) agrees to the extension of the Agreement for the Additional Renewal Term on the terms specified in SRPMIC’s written notification; (ii) desires to extend the Agreement for an Additional Renewal Term but upon terms different than those proposed by SRPMIC in its written notification; or (iii) declines the extension of the Agreement, in which case the Agreement shall automatically expire at the end of the First Renewal Term without any further action by either Party. In the event SRPMIC and MTI agree to extend the Agreement for an Additional Renewal Term on terms different than those contained in this Agreement, then the Parties shall execute an amendment to this Agreement consistent with such modified terms within one (1) year from the date of SRPMIC’s written notification under this Article 8.5(c). In the event either Party desires to extend this Agreement for an Additional Renewal Term but on terms different than those contained in this Agreement, and the Parties are unable to agree upon new terms within one (1) year from the date of SRPMIC’s written notification under this Article 8.5(c), then this Agreement shall automatically expire at the end of the First Renewal Term without any further action by either Party. This Agreement may be renewed for subsequent and successive Additional Renewal Terms according to the process outlined in this Article 8.5(c).

(d)No Automatic Renewal. Neither SRPMIC nor MTI shall be obligated to agree to an extension of this Agreement beyond the Initial Expiration Date, the First Renewal Term, if applicable, or any Additional Renewal Term, if applicable. In the event that either SRPMIC or MTI elects not to renew this Agreement beyond the Initial Expiration Date, the First Renewal Term, if applicable, or any Additional Renewal Term, if applicable, then this Agreement shall expire on the tenth anniversary of the Conversion Event, in the case of the initial term, or at the end of the First Renewal Term or any Additional Renewal Term, if applicable, without further notice or action on the part of either Party. In the event that SRPMIC fails to provide written notification as provided in this Article 8.5, then such failure shall be deemed notice to MTI that SRPMIC elects not to renew this Agreement beyond the Initial Expiration Date, the First Renewal Term or any Additional Renewal Terms, if applicable. Nothing set forth in this Agreement shall be construed as providing for the automatic renewal of this Agreement.

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ARTICLE IX

REMEDIES FOR BREACH OF AGREEMENT

9.1General. Subject to Article 9.2 of this Agreement, disputes regarding the interpretation, breach, or enforcement of this Agreement shall be resolved through binding arbitration conducted in accordance with Article X of this Agreement. The arbitrators shall have the authority to resolve all such disputes, but neither Party shall be entitled to an award of monetary damages, nor shall any Party be entitled to an award of attorneys’ fees and costs.

9.2Injunctive Relief: Specific Performance. Where either Party has a reasonable, good-faith belief that a material breach of this Agreement by the other Party is imminent, and that such breach will cause substantial and irreparable harm to the non-breaching party, then the non-breaching party shall be entitled to seek injunctive relief in the United States District Court in Phoenix, Arizona, or if such court lacks jurisdiction, in the Maricopa County Superior Court for the State of Arizona. In the event the court determines that a material breach of this Agreement has occurred or is imminent, and that such breach or imminent breach will cause substantial and irreparable harm, then the non-breaching Party shall be entitled to temporary and/or permanent injunctive relief, including specific performance of this Agreement, upon a showing of actual damage, or the reasonable likelihood of actual damage. Under no circumstances shall the court have the authority to award monetary damages, nor shall the court have authority to award attorneys’ fees and costs.

9.3Limitation of Liability for Breach of Agreement. Neither Party shall be liable to the other Party for monetary damages of any kind arising out of the breach of this Agreement. The sole and exclusive remedy of either Party for a material breach or threatened material breach of this Agreement shall be injunctive relief and/or specific performance, enforced through the courts in accordance with Article 9.2 or through the arbitration mechanism of Article X. Neither Party shall be entitled to an award of attorneys’ fees and costs for any breach or threatened breach of this Agreement.

ARTICLE X

ARBITRATION

10.1Informal Dispute Resolution. The Parties shall make good faith efforts to resolve any dispute arising out of or relating to the interpretation, performance, nonperformance or enforcement of this Agreement through amicable settlement discussions to be commenced by the giving of a written notice of dispute by the Party claiming to be aggrieved. The notice of dispute must state with specificity the matter or matters in dispute, the position of the Party giving the notice of dispute and the rationale for that position. If the Parties fail to resolve the dispute by amicable settlement within five (5) business days from the date the notice of dispute is given, either Party may then request the final settlement of such dispute through binding arbitration at a location to be mutually agreed upon by the Parties under the Commercial Arbitration Rules (the “Rules”) of the American Arbitration Association (the “AAA”) by notifying the other Party and the AAA in accordance with the Rules.

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10.2Binding Arbitration. In the event the Parties are unable to informally resolve any dispute arising under this Agreement, the Parties shall submit the matter or matters to binding arbitration, which shall be the Parties’ exclusive mechanism for dispute resolution, except as provided in Article 9.2 of this Agreement. The arbitration shall be conducted by a panel of three (3) arbitrators appointed in accordance with the Rules and knowledgeable in the telecommunications industry. The arbitration shall be conducted pursuant to expedited and accelerated procedures established by the arbitrators. Discovery may be conducted either upon mutual consent of the Parties or by order of the arbitrators upon good cause being shown. In ruling on motions pertaining to discovery, the arbitrators shall consider that the purpose of arbitration is to provide for the efficient and inexpensive resolution of disputes, and the arbitrators shall limit discovery whenever appropriate to insure that this purpose is preserved. The dispute between the Parties shall be submitted for determination within sixty (60) calendar days after the arbitrators have been selected. The arbitrators shall conduct all proceedings pursuant to the then existing Rules of the AAA, to the extent such Rules are not inconsistent with the provisions of this Article X. The decision of the arbitrators shall be rendered within thirty (30) calendar days after the conclusion of the arbitration hearing. The decision of the arbitrators shall be in writing and shall specify the factual and legal basis for the decision. Upon stipulation of the Parties, or upon a showing of good cause by either party, the arbitrators may lengthen or shorten the time periods set forth herein for conducting the hearing or for rendering a decision. The decision of the arbitrators shall be final and binding upon the Parties. Each Party shall bear its own attorneys’ fees and costs in connection with the arbitration, and the parties shall share equally the costs of the arbitrators.

10.3Enforcement of Right to Arbitrate: Entry of Arbitrators’ Final Decision. The right of each Party to arbitration under this Agreement shall be enforced in the United States District Court in Phoenix, Arizona, or if such court lacks jurisdiction, in the Maricopa County Superior Court for the State of Arizona. Judgment to enforce the final decision of the arbitrators may be entered in the United States District Court in Phoenix, Arizona, or if such court lacks jurisdiction, in the Maricopa County Superior Court for the State of Arizona.

10.4Preservation of Status Quo. The Parties shall make commercially reasonable efforts to preserve the status quo between written notice of dispute under Article 10.1 and the earlier of a settlement of the dispute or the issuance of a final decision by the arbitrators.

10.5Finality of Arbitration Award. The Parties agree that the award of the arbitrators will be final and waive any right to challenge the arbitrators’ award on appeal. Anything in this Agreement to the contrary notwithstanding, in no event may the arbitrators award monetary damages or attorneys’ fees to either Party.

10.6Cooperation. The Parties shall facilitate the arbitration by (i) making available to one another and to the arbitrators for examination, inspection and extraction, all documents, books, records and personnel under their control if determined by the arbitrators to be relevant to the dispute and not otherwise privileged from disclosure, subject to written agreement by the arbitrators to hold all confidential information so disclosed in confidence, and (ii) observing strictly the time periods established by the Rules or by the arbitrators for submission of evidence or briefs. The Parties acknowledge and agree that time is of the essence in resolving any dispute submitted to arbitration.

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ARTICLE XI

ASSIGNMENT

11.1Assignment.

(a)SRPMIC shall not assign its rights and obligations under this Agreement without the prior written consent of MTI, which consent shall not be unreasonably withheld; provided, however, that SRPMIC may assign its rights and obligations under this Agreement without such consent to any division of SRPMIC, or to any entity which is wholly-owned by SRPMIC.

(b)MTI shall not assign its rights and obligations under this Agreement or pledge, hypothecate or grant a security interest in its rights under this Agreement as collateral or security for any financing arrangements it makes without the prior written consent of SRPMIC, which consent shall not be unreasonably withheld or delayed; provided, however, that MTI may assign its rights and obligations under this Agreement without such consent to any entity which controls, is controlled by, or is under common control with MTI.

ARTICLE XII

LIMITED WAIVER OF SOVEREIGN IMMUNITY

12.1SRPMIC hereby waives its sovereign immunity from suit for the limited and sole purposes of (i) permitting MTI to enforce any of the provisions of this Agreement through binding arbitration in accordance with Article X, including the enforcement of MTI’s rights to arbitration under Article X and the enforcement of any decision rendered by the arbitrators under Article X; and (ii) permitting MTI to seek injunctive relief and/or specific performance of this Agreement in accordance with Article 9.2 where MTI has a reasonable, good-faith belief that a material breach of this Agreement by SRPMIC is imminent, and that such breach will cause substantial and irreparable harm to MTI. For purposes of this Article 12.1, SRPMIC consents to the jurisdiction of the United States District Court in Phoenix, Arizona, the Ninth Circuit Court of Appeals and the U.S. Supreme Court, or if the federal courts lack jurisdiction, in the state courts for the State of Arizona, with venue in Maricopa County, Arizona. SRPMIC hereby waives any requirement of exhaustion of tribal remedies, and agrees that it will not present any affirmative defense based on any alleged failure to exhaust such remedies in any judicial proceeding or arbitration brought pursuant to this Agreement in accordance with this Article 12.1. SRPMIC covenants that it will not attempt or take any action to revoke this grant of limited waiver of immunity. SRPMIC’s waiver of sovereign immunity is expressly limited as provided in this Article 12.1.

ARTICLE XIII

MISCELLANEOUS

13.1Right of Cancellation. Contemporaneous with the execution of this Agreement, the Parties have executed the Stock Purchase Agreement. Pursuant to A.R.S. §40-301 et seq., the issuance of stock as provided in the Stock Purchase Agreement must be approved by the

14

Arizona Corporation Commission before the Stock Purchase Agreement is effective. In the event the ACC does not approve the issuance of stock as provided in the Stock Purchase Agreement by the earlier of: (i) twelve (12) months after the date of submission of an application with the ACC seeking approval of the issuance of stock as provided in the Stock Purchase Agreement; or (ii) twelve (12) months after the Effective Date of this Agreement, then either Party may unilaterally terminate this Agreement thirty (30) days after giving written notice to the other Party that it is exercising its right to terminate under this Article 13.1.

13.2Relationship of the Parties. This Agreement does not render MTI or SRPMIC joint venturers, partners or employees of the other or an agent or representative of the other. MTI on the one hand, and SRPMIC on the other hand, shall have no right, power, or authority, nor shall they hold themselves out as having the right, power, or authority, to create any contract or obligation, express or implied, binding the other Party.

13.3Relationship between SRPMIC and Saddleback. The Parties acknowledge that Saddleback is a division of SRPMIC with responsibility for operating and maintaining the Switch, Fiber and Premises. Accordingly, the Parties agree that all or part of the obligations and duties imposed upon SRPMIC under this Agreement may be fulfilled or performed by Saddleback as a division of SRPMIC.

13.4Confidentiality. Each Party acknowledges that Confidential Information of the other Party may be disclosed to it in the course of the performance of this Agreement. Accordingly, except as may be required for the performance of this Agreement, or for compliance with applicable law or order of a court or governmental entity having jurisdiction, during the Term and for a period of five (5) years thereafter neither Party nor any of its employees, representatives, agents, or affiliates will make use of, disseminate, or in any way disclose any Confidential Information to any third person, firm, corporation, or other entity for any reason whatsoever, said undertaking to be enforceable by injunctive relief or specific performance pursuant to Article 9.2 hereof to prevent any violation or threatened violation thereof. Each Party must exercise reasonable care to protect the Confidential Information of the other Party and will disclose such Confidential Information only to those of its employees, representatives, agents or affiliates who need to know such information. A Party who received Confidential Information (“Receiving Party”) may disclose Confidential Information if required by any judicial or governmental request, requirement or order, provided that such Party will take reasonable steps to give the Party which disclosed the information (“Disclosing Party”) sufficient prior notice in order to contest such request, requirement or order by notifying the Disclosing Party of such request. Confidential Information does not include information which (i) is or becomes generally available to the public, other than as a result of an unauthorized disclosure by the Receiving Party or any of its employees, representatives, agents or affiliates; (ii) was available to the Receiving Party on a non-confidential basis prior to its disclosure to the Receiving Party; or (iii) becomes available to the Receiving Party on a non-confidential basis from a source other than the Disclosing Party, provided that such source is not bound by a confidentiality agreement with the Disclosing Party or is not otherwise prohibited from transmitting the information to the Receiving Party.

13.5No Publicity Without Consent. Neither Party shall issue or permit the issuance of any press release or publicity regarding the other or this Agreement without prior coordination

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with and advance written approval by the other Party, which may be granted or withheld at the other Party’s sole discretion.

13.6Covenant Not To Compete. SRPMIC recognizes that, during the term of this Agreement, SRPMIC’s cooperation with MTI is essential to the success of MTI’s commercial venture, and that such cooperation may be impaired by conflicts of interest. SRPMIC also recognizes that, during the Term of this Agreement, SRPMIC will become privy to Confidential Information concerning MTI’s business practices, technology, subscriber growth rates, business plans, and other information which, if revealed to a competitor, could be used in a manner harmful to MTI. Therefore, during the Term of this Agreement, without the consent of MTI, SRPMIC will not, directly or indirectly, acting alone, through an affiliate, or as a member of a partnership or association, or other business entity (i) offer, provide, or deliver, utilizing the Switch, any local exchange carrier telecommunications services or long distance services which compete with any similar service offered by MTI as of the Effective Date outside of the exterior boundary of the SRPMIC (a “Competing Service”) or (ii) lease or license any part of the Switch Capacity to a third party that offers, provides, or delivers a Competing Service, as defined above. Nothing in this Article 13.6 shall prohibit SRPMIC from providing Fiber to persons or entities other than MTI in accordance with Article 3.2(b).

13.7Governing Law. This Agreement and all questions relating to its validity, interpretation, performance, and enforcement shall be governed by and construed in accordance with the laws of the State of Arizona, to the extent such laws do not conflict with the Laws of the Salt River Pima-Maricopa Indian Community as duly enacted in writing by the SRPMIC Council, in which case the laws of the Salt River Pima-Maricopa Indian Community shall control with regard to the conflict.

13.8Notices. All notices and other communications given or made pursuant to this Agreement must be in writing and will be deemed duly delivered and received (a) if mailed by registered or certified mail, three business days after deposit in the United States mail, postage prepaid, return receipt requested; (b) upon confirmation of a receipt of a facsimile transmission; (c) if hand-delivered, upon delivery against receipt or upon refusal to accept the notice; or (d) if delivered by a standard overnight courier, one business day after deposit with such courier, postage prepaid, in each case, addressed to such party at the address set forth below:

If to SRPMIC:

Saddleback Communications Company
10190 E. McKellips Road
Scottsdale, Arizona 85256
Attention: General Manager
Phone: (480) 850-7000
Fax: (480) 850-7010

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With a copy given in the manner prescribed above to:

Snell & Wilmer, LLP
One Arizona Center
Phoenix, Arizona 85004
Attention: Jeffrey W. Crockett
Phone: (602) 382-6234
Fax: (602) 382-6070

If to MTI:

Mountain Telecommunications, Inc.
1430 W. Broadway, Suite A-200
Tempe, Arizona 85282
Attention: Jack Pleiter
Phone: (480) 850-9500
Fax: (480) 850-9599

With a copy given in the manner prescribed above to:

Greenberg Traurig, LLP
2375 E. Camelback, Road, Suite 700
Phoenix, Arizona 85016
Attention: Robert S. Kant
Phone: (602) 445-8000
Fax: (602) 445-8100

13.9Interpretation and Construction. The headings and captions of this Agreement are inserted for convenience and identification only and are in no way intended to define, limit, or expand the scope and intent of this Agreement or any provision hereof. Where the context so requires, the singular shall include the plural. The references contained in this Agreement to “Articles” are to articles of this Agreement unless the context clearly requires otherwise.

13.10Amendment and Waiver. Unless otherwise provided herein, this Agreement may be amended or terminated only by an instrument in writing duly executed by both Parties. Any waiver by any Party of any breach of or failure to comply with any provision of this Agreement by the other Party shall not be construed as or constitute a continuing waiver of such provision, or a waiver of any other provision hereof.

13.11Third Parties. This Agreement shall be binding upon and inure to the benefit of the Parties hereto and their respective successors and assigns, as permitted hereunder. It is not the intent of the Parties that there be any third party beneficiaries of this Agreement, and this Agreement is exclusively for the benefit of the Parties hereto and their respective successors and assigns, as permitted hereunder.

13.12Entire Understanding. THIS AGREEMENT SETS FORTH THE ENTIRE UNDERSTANDING OF THE PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF AND SUPERSEDES ALL PRIOR AGREEMENTS INCLUDING THE SALES

17

AGREEMENT AND THE 1997 MANAGEMENT AGREEMENT, AND COLLATERAL COVENANTS, ARRANGEMENTS, COMMUNICATIONS, REPRESENTATIONS, AND WARRANTER WHETHER ORAL OR WRITTEN, BY ANY PARTY (OR ANY OWNER, MEMBER, OFFICER, DIRECTOR, PARTNER, EMPLOYEE, OR REPRESENTATIVE OF EITHER PARTY) WITH RESPECT TO THE SUBJECT MATTER HEREOF.

13.13Severability. If any provision or provisions of this Agreement are determined to be invalid or contrary to any existing or future law, statute or ordinance of any governmental entity having jurisdiction, or any order, rule or regulation of a court or regulatory or other governmental authority of competent jurisdiction, such invalidity shall not impair the operation of or affect those provisions in any other jurisdiction or any other provisions hereof which are valid, and the invalid provisions shall be construed in such manner as shall be as similar in terms to such invalid provisions as may be possible, consistent with applicable law; provided, however, that if a provision cannot be severed without substantially diminishing the economic value of this Agreement to a Party, that Party, notwithstanding anything to the contrary herein, may terminate this Agreement on ninety (90) days’ written notice to the other Party.

13.14Further Assistance. From time to time after the Effective Date, the Parties shall utilize their best efforts, consistent with sound business practice, to take such further action and execute such further documents, assurances and certificates as either Party may reasonably request of the other in order to effectuate the purpose of this Agreement. In addition, each Party agrees that it will not take any action which would adversely affect the rights granted by it to the other Party hereunder.

13.15Force Majeure. If either Party is rendered unable, wholly or in part, by force majeure to carry out its obligations under this Agreement, other than the obligation of a Party to make payments of amounts due hereunder, then the obligations of both Parties, so far as they are affected by such force majeure, shall be suspended during the continuance of any inability so caused, but for no longer period, and such cause shall so far as possible be remedied within a reasonable time. The term “force majeure” as used in this Agreement shall mean acts of God, strikes, lockouts, or other industrial disturbances, acts of public enemies including acts of terrorism, wars, blockades, insurrections, riots, epidemics, landslides, lightning, earthquakes, fires, storms, floods, washouts, interruptions by government not due to the fault of the Parties, civil disturbances, explosions, or unforeseeable action or inaction by governmental bodies in approving the applications for approvals or permits or any material change in circumstances arising out of legislation, regulation or litigation.

13.16Counterparts. This Agreement may be signed in any number of counterparts, each of which shall be an original for all purposes, but all of which together shall constitute one agreement.

13.17Word Meanings. As used in this Agreement, the term “including” is deemed to mean “including, without limiting the generality of the foregoing.” All pronouns and any variations therefor are deemed to refer to the masculine, feminine, neuter, singular or plural as the context may require.

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13.18 Survival of Obligations. All obligations of MTI or SRPMIC which by their nature involve performance, in any particular, after the end of the Term, or which cannot be ascertained to have been fully performed until after the end of the Term, will survive the expiration or sooner termination of the Term.

13.19 Time of the Essence. Time is of the essence for every provision of this Agreement for which time is a factor.

IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed as of the day and year first above written.

SALT RIVER PIMA-MARICOPA INDIAN COMMUNITY		MOUNTAIN TELECOMMUNICATIONS, INC.
By:	/s/ Ivan Makil	By:	/s/ Jack O. Pleiter
Name:		Name:	Jack O. Pleiter
Title:		Title:	Chief Executive Officer
		By:	/s/ Wilmot Wickramasuriya
		Name:	Wilmot Wickramasuriya
		Title:	President and Chief Financial Officer

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APPENDIX “A”

SWITCH CAPACITY

DMS-500 Front End:

·Lineups “A” and “B” of the DMS, consisting of the following frames:

Lineup “A”

One (1) DPCC with six (6) 96MB memory cards and two (2) BRISC70 processors
One (1) LIM with eight (8) SS7 LIU and four (4) Ethernet EIU Interfaces
Two (2) ENC
Two (2) CMSS (empty spares cabinets)

Lineup “B”

Two (2) MIS with miscellaneous modems
Two (2) ISME
Two (2) IOE with one (1) 9-track tape drive
One (1) PDF (power distribution frame)

DMS Port Frames:

·Eleven (11) DTEI Frames pack filled as follows:

8,640 DTC Ports (18 shelves)
2,400 DTCI Ports (5 shelves)
480 LTCI Ports (1 shelf)

·Two (2) MVIE Frames pack filled as follows:

1,440 ESMA Ports (3 SMA2 shelves) with BRI “D” channel controllers

Excluding the ports already utilized, there is a potential balance of up to 78,000 ports remaining. MTI will have the option of adding 39,000 ports and Saddleback will have the option of adding 39,000 ports. Either Party may add ports to the specified limits without the approval of the other Party. Expansion beyond these limits will require the approval of the both Parties, which shall not be unreasonably withheld.

A-1

Ancillary Equipment:

One (1) Alcatel 1631 SMC DCS (4 frames) populated with 24 DS3s and 672 DS1s

One (1) Alcatel 1630 CSX DCS (1 frame) populated with 112 DS1s

One (1) ETC VRU with 24 voice ports (1 DS1)

One (1) Telecom Solutions Stratum 1 clock

Two (2) Nortel Smartbank Channel banks (SS7 connections)

One (1) Nortel Passport 7480 with:

One (l)16-slot shelf
Three (3) DC power supplies
Two (2) CP cards
One (1) 3-port DS3 ATM UNI card
One (1) 6-port l0baseT Ethernet card
Two (2) 4-port DS1c Frame Relay cards
Three (3) 8-port DS1 Frame Relay cards

One (1) Centigram 640 Voicemail system with 48 analogue ports, 480 hours of message space (two (2) 4GB disks)

One (1) Nortel HDT with 20 voice module or 28 DS1 capacity

One (1) Nortel OC-48 Classic with OC-48 Linear optics (1310ns), 24 DS3 and 1 OC-3 ports.

Note: The DSX panels and connectivity are utilized in association with the attached hardware.

A-2

APPENDIX “B”

SWITCH CAPACITY RESERVATION

DMS-500 Front End:

Excluding the ports already utilized, there is a potential balance of up to 78,000 ports remaining. MTI will have the option of adding 39,000 ports and Saddleback will have the option of adding 39,000 ports. Either Party may add ports to the specified limits without the approval of the other Party. Expansion beyond these limits will require the approval of both Parties, which shall not be unreasonably withheld.

DMS Ports:

DTC Ports reserved: 960 (2 shelves)

DTCI Ports reserved: 480 (1 shelf)

LTCI Ports reserved: 480 (1 shelf)

SMA Ports reserved: 960 (2 shelves)

Ancillary Equipment:

Alcatel 1631 SMC DCS: Eight (8) DS3s with 224 DSls

ETC VRU: As required to capacity

Stratum 1 Clock: As required to capacity

Smartbank Channel banks: As required to capacity

Passport: Six (6) slots in the Passport Network

Centigram: As required to capacity

HDT:75% of current capacity

Note: The DSX panels and connectivity are utilized in association with the attached hardware.

B-1

APPENDIX “C”

UPGRADE REQUIREMENTS—COST ALLOCATION

DMS:

The upgrades to the switch will be broken into several categories:

1)Hardware: 100% to owner

2)Software upgrades requiring switch hardware upgrades:

a.Mandated (regulatory or vendor):

i.Software: 100% to owner

ii.Frames impacted: 100% to frame user

b.Feature Upgrade desired by one party:

i.Software: 100% to desiring party

ii.Frames impacted: 100% to desiring party

c.Feature Upgrade desired by both parties:

i.Software: 50% to each party

ii.Frames impacted: 100% to frame user

Note: If a material impact can be achieved by Saddleback purchasing upgrades, Saddleback has the right to pay 100% of a given upgrade.

Ports:

1)Hardware: 100% by user

2)Software upgrades requiring frame upgrades

a.Mandated (regulatory or vendor): User of frame

b.Feature upgrade desired by one party: 100% by desiring party

c.Feature upgrade desired by both parties: User of frame

Ancillary Equipment:

Passport: Due to the integrated nature of the Passport Network the following allocation applies to the Network and each node in it:

1)Mandated upgrades: 100% to owner of Node

2)Feature upgrade desired by one party:

a.Software/Hardware: 100% all nodes to desiring party

3)Feature upgrade desired by both parties:

a.Software: 100% to owner of node

b.Hardware: 100% to owner

2

EX-10.35

Exhibit 10.35

RENEGOTIATED AND COMBINED
QWEST REGIONAL COMMITMENT PROGRAM
FOR INTERSTATE DS1 AND DS3 SERVICE
DUE TO A MERGER/ACQUISITION OR TRANSFER OF USE
ACKNOWLEDGEMENT

Eschelon Telecom, Inc.

Customer’s Legal Name (“Customer”)

Customer either: (a) merged with or acquired another Qwest Regional Commitment Program (“RCP”) customer under Section 7.1.3.B.2.f(1) of Qwest Corporation’s (“Qwest’s”) Interstate F.C.C. No. 1 Access Tariff (“FCC1 Tariff”), or (b) hereby assumes all of another customer’s Interstate DS1 and DS3 Service (“Service”) under a transfer of use in Sections 7.1.3.B.2.f(2) and 2.1.2 of the FCC1 Tariff. The other customers are: OneEighty Communications Inc.

Customer hereby renegotiates and combines the RCP under Section 7.1.3.B.2.f(1) or (2) to the current RCP terms for Service under the following ACNAs: AYD, SHD, DVN, ORO.OEY. Customer understands and agrees that Qwest provides Service solely under the regulations, rates, and charges of the FCC1 Tariff. In the event of a conflict between the FCC1 Tariff and this Acknowledgment, the FCC1 Tariff prevails.

Service Requested

(A) At the time of signature of this renegotiated and combined RCP, the commitment levels of the existing RCPs of entities and ACNAs referenced above are 73 DS1 circuits and NA DS3 circuits.

(B) If applicable, Customer acknowledges that Qwest provides a total of 333 DS1 circuits and NA DS3 circuits to entities and ACNAs listed above that are currently not under RCP. Customer commits to a 90% minimum quantity level of the circuits identified in this subsection (B) and those commitment levels are: 300 DS1 circuits and NA DS3 circuits.

The initial commitment level under this renegotiated and combined RCP is determined by combining the commitment levels in (A) and (B) above. Those combined amounts are 373 DS1 circuits and NA DS3 circuits. The commitment level may be adjusted as provided in the FCC1 Tariff.

The effective date of the renegotiated and combined RCP is the 1st day of March, 2007 (“Effective Date”). (Note: Qwest must receive Customer’s signed Acknowledgement by the close of business on the 15th of the month for an Effective Date on the 1st day of the following month). The term of Customer’s RCP will expire 48 months after the Effective Date (“Term”).

Adjusting the Commitment Level

Customer hereby selects the following commitment level adjustment option:

o Monthly option. Customer authorizes Qwest to automatically increase the circuit commitment level each month that the in-service circuits increase in quantity except as specified in the FCC1 Tariff. If the number of DS1/DS3 circuits has decreased from the previous month’s commitment level, the commitment level will not decrease.

x Annual option. Customer authorizes Qwest to validate the commitment level annually. At the time of the annual review, the commitment level will be changed by Qwest to reflect 90% of the current in-service DS1/DS3 circuits if the number of Qwest-provided circuits has increased from the previous year except as specified in the FCC1 Tariff. If the number of DS1/DS3 circuits has decreased from the previous year, the commitment level will remain the same for the next 12 months.

Customer authorizes Qwest to use Qwest records as the basis for determining Customer’s commitment level.

Rate Plan

Customer hereby selects the following rate plan option:

x Rate stabilized. Customer’s RCP DS1 and DS3 rates are stabilized. Rate stabilized means rates are set at the then current month-to-month rates on the date the RCP becomes effective and Customer will not receive rate increases or decreases during the Term of its RCP.

RCP Copyright © 2007 Qwest. All Rights Reserved.

1

CONFIDENTIAL

EX-10.36

Exhibit 10.36

QWEST REGIONAL COMMITMENT PROGRAM
FOR INTERSTATE DS1 AND/OR DS3 SERVICE
ACKNOWLEDGMENT

Mountain Telecommunications, Inc.
Customer’s Legal Name (“Customer”)

Customer hereby orders from Qwest Corporation (“Qwest”) the Qwest Regional Commitment Program (“RCP”) for Interstate DS1 and/or DS3 Service (“Service”). Customer understands and agrees that Qwest provides Service solely under the regulations, rates, and charges of Qwest’s Interstate F.C.C. No. 1 Access Tariff (“FCC1 Tariff”) which governs Service. In the event of a conflict between the FCC1 Tariff and this Acknowledgment, the FCC1 Tariff prevails.

Service Requested

At the time of signature, Customer acknowledges that Qwest provides a total of 182 DS1 circuits and/or 3 DS3 circuits to Customer under the FCC1 Tariff. Customer initially commits to a 90% minimum quantity level of those circuits. The initial commitment level for DS1 circuits is 164 and for DS3 circuits is 2. The commitment level may be adjusted as provided in the FCC1 Tariff.

The effective date of this RCP is the 1st day of April, 2006 (“Effective Date”). The term of Customer’s RCP will expire 48 months after the Effective Date.

Adjusting the Commitment Level

Customer hereby selects the following commitment level adjustment option:

o Monthly option. Customer authorizes Qwest to automatically increase the circuit commitment level each month that the in-service circuits increase in quantity except as specified in the FCC1 Tariff. If the number of DS1/DS3 circuits has decreased from the previous month’s commitment level, the commitment level will not decrease.

x Annual option. Customer authorizes Qwest to validate the commitment level annually. At the time of the annual review, the commitment level will be changed by Qwest to reflect 90% of the current in-service DS1/DS3 circuits if the number of Qwest-provided circuits has increased from the previous year except as specified in the FCC1 Tariff. If the number of DS1/DS3 circuits has decreased from the previous year, the commitment level will remain the same for the next 12 months.

Customer authorizes Qwest to use Qwest records as the basis for determining Customer’s commitment level.

Rate Plan

Customer hereby selects the following rate plan option:

x Rate stabilized. Customer’s RCP DS1 and/or DS3 rates are stabilized. Rate stabilized means rates are set at the then current month-to-month rates on the date the RCP becomes effective and Customer will not receive rate increases or decreases during the Term of its RCP.

o Non-Rate stabilized. Customer’s RCP DS1 and/or DS3 rates are not stabilized. Non-rate stabilized means Customer will receive rate increases and decreases if the month-to-month rates change during the Term of its RCP.

This Acknowledgment may be assigned only with the consent of Qwest.

	Qwest Corporation
/s/ Jose Crespo	/s/ M M Schaefer
Authorized Signature	Authorized Signature
Jose Crespo	M M Schaefer
Name Typed or Printed	Name Typed or Printed
President
Title	Title
3/23/06	3/23/06
Date	Date
Address for notices:

Attach List of ACNAs, as necessary
MIX

RCP Copyright © 2006 Qwest. All Rights Reserved.

1

EX-10.37

Exhibit 10.37

INDEFEASIBLE RIGHT OF USE AGREEMENT AND MASTER SERVICE
AGREEMENT
DARK FIBERS

By and Between

AGL NETWORKS, LLC

and

Mountain Telecommunications, Inc.

DATED: January 24, 2005

INDEFEASIBLE RIGHT OF USE AGREEMENT
DARK FIBERS

THIS INDEFEASIBLE RIGHT OF USE AGREEMENT (this “Agreement”) is made and entered into as of January 24, 2004, (“Effective Date”) by and between AGL Networks, LLC, a Delaware limited liability company (“AGLN”), and Mountain Telecommunications, Inc., an Arizona corporation (“User”).

WHEREAS, AGLN owns or acquired a fiber optic communication system which includes the User Dark Fibers and Optional Dark Fibers; and

WHEREAS, User desires to receive from AGLN, and AGLN desires to grant to User, certain indefeasible rights of use in the User Dark Fibers and Optional Dark Fibers, all upon and subject to the terms and conditions contained in this Agreement.

NOW, THEREFORE, in consideration of the premises and mutual promises and covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:

1.             Definitions.

1.1          In addition to the terms defined elsewhere in this Agreement, the following capitalized terms and derivatives thereof shall have the meanings respectively ascribed to them in this Section 1.1.

“Acceptance Date” is defined in Section 6.2.

“Affiliate” shall mean, with respect to any Person, any other Person, who directly or indirectly controls, is controlled by, or is under common control with that Person. As used in this definition, “control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether by way of equity ownership, contract or otherwise.

“AGLN System” shall mean the integrated multi-conduit, multi-ring fiber optic communication system comprised of Innerducts and other conduit tubing, Manholes, Handholes and the Cable located therein. As used in this Agreement, the term “AGLN System” refers only to the multi-conduit, multi-ring fiber optic communication system owned by AGLN and does not include (i) the telecommunications equipment and facilities of AGLN or any other Person located within such system and (ii) Lateral Spurs.

“Agreement” shall mean this Indefeasible Right of Use Agreement, as amended, supplemented or modified from time to time.

“As-Built Drawings” shall mean drawings in accordance with the specifications set forth in Exhibit C.

“Associated Property” shall mean, with respect to each Segment, the following described tangible and intangible property necessary for the use of the User Dark Fibers for the purposes

described in this Agreement; (a) AGLN’s rights in all Underlying Rights, subject to the terms, conditions and limitations thereof, and (b) User Handholes, if any. As used in this Agreement, the term “Associated Property” does not include (i) any Cable or other telecommunications equipment of AGLN or any other Person, (ii) Handholes other than the User Handholes, (iii) Manholes, (iv) the Innerduct in which the User Dark Fibers are housed or (v) any Lateral Spurs.

“Cable” shall mean fiber optic cable, the fiber optic strands contained therein (including the User Dark Fibers), and any other communications transmission media which may be included in the AGLN System and in any Lateral Spurs, and associated splicing connections and splice boxes located in the AGLN System and in any Lateral Spurs.

“Committed Delivery Dates” shall mean subject to Events of Force Majeure and any other extensions of time provided for in this Agreement, the dates set forth in Exhibit C, or in an applicable Service Order.

“Confidential Information” shall mean, subject to Section 18.1(d), any data or information, other than Trade Secrets, that is of value to a Party and is not generally known to competitors of such Party. To the extent consistent with the foregoing, Confidential Information includes information that (i) concerns the operations, facilities, plans, affairs and businesses of a Party, the financial affairs of a Party, and the relations of a Party with its customers, employees and service providers, or (ii) is marked confidential, restricted, proprietary or with a similar designation. Confidential Information also includes any information which a Party obtains from a third Person which such Person treats as proprietary or designates as confidential information, whether or not owned or developed by such Person.

“Costs” shall mean actual, direct reasonable costs paid or payable in accordance with the established accounting procedures generally used by AGLN and which AGLN utilizes in billing third parties for reimbursable projects, including the following: (i) internal labor costs (including wages, salaries and benefits) and overhead allocable to such labor costs equal to thirty percent (30%) of such labor costs, and (ii) other direct costs and out-of-pocket expenses on a pass-through basis (e.g., equipment, materials, supplies, contract services, etc.).

“Demarcation Point” shall mean a boundary point at the splice point or patch point at each end of the User Dark Fibers where a cable from the Customer System is joined to the User Dark Fibers. The side of the Demarcation Point on which the AGLN System is located shall be called the “Network Side.” The other side shall be called the “Premise Side.”

“Dollars” or “$” shall mean U.S. Dollars.

“Estimated Route Miles” shall mean the Parties’ best estimate of total linear miles for the User Route, as set forth in Exhibit A.

“Handhole” shall mean a structure similar in function to a Manhole, but which is too small for personnel to enter. As used in this Agreement, the term “Handhole” refers only to handhole structures owned by AGLN and located on the System Route and does not include Cable or other telecommunications equipment or facilities of AGLN or any other Person located within such handhole structures.

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“Impositions” shall mean all taxes, fees, levies, imposts, duties, charges or withholdings of any nature (including ad valorem, real property, gross receipts, franchise, license and permit fees), together with any penalties, fines or interest thereon arising out of the transactions contemplated by this Agreement and/or imposed upon the AGLN System, or any part thereof, or upon the User Dark Fibers, the User Equipment or any other property or facilities of User, or any part thereof, by any federal, state or local government or other public taxing authority.

“Innerduct” shall mean a single, enclosed HDPE tube and space within that tube used to enclose and carry Cable.

“Interest Rate” shall mean the lower of (i) the highest rate permitted by law, or (ii) one and one-half percent (1.5%) per month, compounded monthly.

“Lateral Spur” shall mean a discrete fiber optic communication system segment, span or spur that branches off from the AGLN System and that contains less than all of the ducts and Innerducts and Cable included in the AGLN System.

“Manhole” shall mean a below ground level enclosure entered through a hole on the surface covered with a cast iron, cast aluminum, steel or concrete manhole cover, which personnel may enter and use for the purpose of installing, operating and maintaining facilities associated with a fiber optic communications system. As used in this Agreement, the term “Manhole” refers only to manhole structures owned by AGLN and located on the System Route and does not include Cable or other telecommunications equipment and facilities of AGLN or any other Person located within such manhole structures.

“Party” shall mean each of AGLN and User and “Parties” shall mean AGLN and User.

“Person” shall mean any individual, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity.

“Ring” shall mean a contiguous assembly of the AGLN System that starts and ends at the same location as generally identified in Exhibit B.

“Route Miles” shall mean, with respect to each Service Order, the number of linear route miles (to the nearest thousandth of a mile) as constructed and based upon the As-Built Drawings of such Service Order.

“Segment” shall mean one of the discrete segments, spans or portions of a Ring as generally identified in Exhibit B.

“Service Order” is defined in Section 3.5.

“System Route” shall mean actual route of the AGLN System as generally identified in Exhibit B.

“Trade Secret” shall mean any information of a Party, without regard to form, including technical or non-technical data, a formula, a pattern, a compilation, a program, a device, a method, a

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technique, a drawing, a process, financial data, financial plans, product plans, business plans, software programs (including the object and source code thereto) or a list (whether in written form or otherwise) of actual or potential customers or suppliers, which is not commonly known by or available to the public and which information (i) derives economic value, actual or potential, from not being generally known to and not being readily ascertainable by proper means by other Persons who can obtain economic value from its disclosure or use and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. Trade Secrets also include any information described in this paragraph which a Party obtains from a third Person which such Person treats as proprietary or designates as trade secrets, whether or not owned or developed by such Person.

“Underlying Rights” shall mean all deeds, leases, easements, rights-of-way agreements, licenses, franchises, permits, grants and other rights, titles and interests that are necessary for the construction, installation, maintenance, operation, use or repair of the AGLN System, Innerducts, Lateral Spurs, User Equipment, Cable or User Dark Fibers, as applicable.

“User Equipment” shall mean any optronic, electronic, optical, or power equipment, and any other facilities, material or equipment owned, possessed or utilized by User, or any other Person in connection with the operation of the User Dark Fibers, including all Innerducts (and other conduit tubing) and Cable in any Lateral Spur owned by User and connecting to any of the User Dark Fibers.

“User Handhole” shall mean any Handhole that serves as a Connecting Point to any of the User Dark Fibers and that is constructed by AGLN for User pursuant to the provisions of Section 9.3.

“User Route” is the route of the User Dark Fibers in the System Route particularly described or depicted in Exhibit B or in a Service Order along which the User Dark Fibers are or will be located.

1.2          The following terms have the respective meanings ascribed to them in the Section indicated in the table below:

Term	Section
Connecting Points	9.1
Connecting Services	9.2
Events of Force Majeure	21.1
Fiber Acceptance Testing	6.1
Final Payment	4.1(c)
Finally Determined Taxes and Fees	16.5(b)
Initial Payment	4.1(a)
IRU	3.1
IRU Effective Date	8.1
IRU Fee	4.1
Optional User Dark Fibers	3.1
Routine Maintenance	10.1
Acceptance Date	6.2
Completion Notice	6.1
Service Affecting Condition	10.2
Term	8.1
User Dark Fibers	3.1
User Media	9.1
Underlying Rights Requirements	12.1
User Maintenance Fee	Exhibit D

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2.             The AGLN System

2.1          The AGLN System generally will follow the route and will connect the Segments as generally identified in Exhibit B to form the Rings as generally identified in Exhibit B. AGLN shall use commercially reasonable efforts to deliver to User the User Dark Fibers for each Service Order on or before the respective Committed Delivery Date set forth in Exhibit C or the applicable Service Order.

2.2          The specific route and location of each Ring of the AGLN System, including the specific location of Manholes and Handholes, is subject to the Underlying Rights and AGLN’s absolute discretion; provided, however, that the AGLN System will connect each Segment to form an integrated multi-conduit Ring as generally identified in Exhibit B. At the end of each Segment, AGLN will terminate the User Dark Fibers at a fiber distribution panel, fiber splice kit or other appropriate terminal apparatus as determined by AGLN.

2.3          Notwithstanding anything to the contrary contained in this Agreement, AGLN may elect to acquire any portion of the AGLN System from third parties (whether by lease, sublease, indefeasible right of use or otherwise) in lieu of constructing and installing the AGLN System with respect to such portion.

2.4          Notwithstanding anything to the contrary contained in this Agreement, AGLN may assign or subcontract to a third Person any or all of AGLN’s duties or obligations to User under this Agreement (including AGLN’s duties or obligations under Sections 5, 6, 9 and 10 herein), provided that AGLN shall remain obligated to User under the terms of this Agreement for any such duties.

3.             Grant of Rights in the AGLN System

3.1          As of the Acceptance Date for the initial User Dark Fibers and for the User Dark Fibers in each Service Order, AGLN grants to User and User receives from AGLN (a) an exclusive indefeasible right of use in the fiber optic strands of the Cable which will be specifically identified by AGLN in the AGLN System (the “User Dark Fibers”), and (b) the associated and nonexclusive right to use the Associated Property, all such rights upon and subject to the terms and conditions set forth in this Agreement (collectively, the “IRU”).

3.2          Except as expressly set forth herein, the IRU does not include the right of User to own, control, maintain, modify or revise the User Dark Fibers or the Associated Property, the right of physical access to the AGLN System, the right to encumber the AGLN System in any manner, or the right to use the AGLN System.

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3.3User acknowledges and agrees that during the Term technological advances in optical fiber are likely to occur. Notwithstanding anything to the contrary contained in this Agreement, AGLN shall have the right to, upon not less than one hundred twenty (120) days written notice to User, substitute an equal number of dark fibers for the User Dark Fibers within any Segment or portion thereof (which alternative dark fibers shall thereupon constitute User Dark Fibers), provided that in such event, such substitution (a) shall be effected at the sole cost of AGLN, (b) shall be performed in accordance with the specifications and procedures set forth in Exhibit C, (c) shall incorporate fiber optic strands meeting or exceeding the specifications set forth in Exhibit C and shall be tested in accordance with the Fiber Acceptance Testing, (d) shall not change the Connecting Points, and  AGLN shall use commercially reasonable efforts to minimize any interruption or interface with the operation of the User Dark Fibers. Neither this Agreement nor the IRU granted hereby conveys any form or type of title in any real or personal property, including the AGLN System, any Segment, the User Dark Fibers or any portion of any of the foregoing. The Parties intend that this Agreement constitutes a true lease of the User Dark Fibers and not a sale of the User Dark Fibers.

3.4          Each of AGLN and User represents and covenants with the other that it will report, for both federal and all state income taxation purposes, income and deductions in accordance with Section 467 of the Internal Revenue Code of 1986, as amended, and with the applicable, final regulations that were issued by the Treasury Department on May 17, 1999, as amended or modified from time to time. If either AGLN or User, or both, fails to report income and deductions in accordance with the Internal Revenue Code, such failure shall constitute a breach or failure to fully and punctually observe the covenants of this Agreement and will entitle the non-performing Party to exercise its rights under Sections 13 and 19 herein.

3.5          From time to time, User may order additional services from AGLN. If AGLN accepts a request, the Parties will execute a service order (a “Service Order”) setting forth, without limitation, the number of User Dark Fibers, Demarcation Points, Committed Delivery Date, estimated installation charges, if any, and all fees and any other relevant terms agreed upon by the Parties. Upon execution by AGL and User, each new Service Order is automatically incorporated into and subject to the terms of this Agreement.

4.             Payment

4.1          In consideration of the grant of the IRU hereunder by AGLN to User, User agrees to pay to AGLN for the Dark Fiber in each Service Order any non recurring charges and monthly recurring fees as specified in the applicable Service Order (the “IRU Fee”).

4.2All payments made by User hereunder in excess of $50,000 shall be made by wire transfer of immediately available funds in accordance with wire instructions to be provided by AGLN. Payments of all other amounts by User hereunder may be made by wire transfer or by company check of immediately available funds payable to AGLN.

4.3If User fails to make any payment under this Agreement when due, then, in addition to such sum and to any other rights and remedies that AGLN may have, User shall pay interest on such unpaid amount at the Interest Rate, which shall accrue during the time such payment remains

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outstanding. Notwithstanding the foregoing, no interest shall accrue on any payment that is disputed in good faith by User while such dispute is pending. If such dispute is later resolved in favor of AGLN, such amount shall bear interest from the date when due until paid at the Interest Rate.

4.4In addition to the amounts payable under Section 4.1, User shall be responsible to pay directly or reimburse AGLN, as requested by AGLN, for all other sums, costs, fees and expenses that are required to be paid under this Agreement, including the User Maintenance Fee for Routine Maintenance. Except for the IRU Fee and the User Maintenance Fee (which are payable on the due dates set forth in Section 4.1 and Exhibit D, respectively), AGLN will invoice User for all sums, costs, fees and expenses owed by User to AGLN, and User shall pay such invoices within thirty (30) days of the invoice date. The User Maintenance Fee shall be paid at the time or times and in the manner set forth in Exhibit D. AGLN reserves the right to direct payment of the IRU Fee, the User Maintenance Fee and any other fees or charges to AGLN or to any other party.

4.5All payments made by User under this Article 4 shall be made without any deduction or withholding for or on account of any Imposition. If User makes any deduction or withholding from any payment due to AGLN, then, notwithstanding anything to the contrary contained in this Agreement, the gross amount payable by User to AGLN shall be increased so that after any such deduction or withholding for such Impositions or any additional deduction or withholding on account of any Imposition caused by such additional gross-up payment, the net amount received by AGLN will not be less than what AGLN would have received had no deduction or withholding been required. User may prepay, without penalty, any portion of the IRU Fee set forth in the applicable Service Order prior to such payment’s due date.

5.             Inspection of the AGLN System

5.1                 User shall have the right, upon written request, to inspect the installation, splicing and testing of the User Dark Fibers; provided that User shall not enter a Manhole or access a Handhole. On User’s written request, AGLN shall make available for inspection by User, at AGLN’s offices during AGLN’s normal business hours, copies of all information, documents, agreements, reports, permits, drawings and specifications that are material to the grant of the IRU to User, to the extent that their terms or other legal restrictions permit disclosure. AGLN may redact confidential or proprietary business terms.

5.2AGLN shall have full and complete control and responsibility for determining any routing configurations of the AGLN System and the location and configurations of all Manholes and Handholes. User shall have full and complete control and sole responsibility for selecting, purchasing and installing telecommunications equipment, for determining network and service configurations or designs, for regrooming, rearrangement or consolidation of channels or circuits and for all related functions with regard to the use of the User Dark Fibers and the Associated Property; provided, that User shall not enter a Manhole or access a Handhole.

5.3User acknowledges and agrees that AGLN is not supplying nor is AGLN obligated to supply to User any optronics or electronics or optical or electrical equipment, or other equipment, or

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any electrical power or power equipment, all of which are solely the responsibility of User, nor is AGLN responsible for performing any work other than as expressly specified in this Agreement.

6.                    Testing and Acceptance of User Dark Fibers

6.1                 AGLN shall test the User Dark Fibers in accordance with the procedures specified in Exhibit C (“Fiber Acceptance Testing”). AGLN shall provide User reasonable advance notice of the date and time of each Fiber Acceptance Testing such that User shall have the opportunity to have User personnel present to observe the Fiber Acceptance Testing. When AGLN has determined that the results of the Fiber Acceptance Testing show that the User Dark Fibers, with respect to all Segments included within a Service Order, have been installed and are operating in conformity with the applicable specifications set forth in Exhibit C, AGLN shall promptly provide User written notice of the same (a “Completion Notice”) and a copy of such test results.

6.2Within ten (10) days of receipt of a Completion Notice, User shall provide AGLN with a written notice accepting or rejecting the User Dark Fibers with respect to such Service Order, specifying in reasonable detail, if rejected, the defect or failure in the Fiber Acceptance Testing. If User fails to notify AGLN of its acceptance or rejection of the Completion Notice within ten (10) days following User’s receipt of the same, User shall be deemed to have accepted the User Dark Fibers with respect to such Service Order. The date of such notice of acceptance or deemed acceptance of the User Dark Fibers with respect to an entire Service Order shall be the “Acceptance Date.” In the event of any good faith rejection by User, AGLN shall take such action as reasonably necessary, and as expeditiously as practicable, to correct or cure such defect or failure, and the process of Fiber Acceptance Testing, notice to User and acceptance shall be repeated with respect to such rejected User Dark Fibers. The foregoing notwithstanding, if User uses any portion of any Dark Fiber to carry traffic prior to acceptance, such use shall constitute acceptance of such portion of such Dark Fiber.

6.3As soon as reasonably practicable after the Acceptance Date for each Service Order, AGLN shall provide User with the As-Built Drawings for such Service Order  and technical specifications of the User Dark Fibers and associated splices located within such Segment.

7.                    Installation of User Equipment.

7.1                 The installation, use, repair, maintenance and replacement of User Equipment shall be the sole responsibility of User, and AGLN shall have no obligation or liability under this Agreement or otherwise to install, maintain, repair or replace any User Equipment.

7.2User represents, warrants and covenants that it will use and operate the User Dark Fibers and use, operate, maintain, repair and replace the User Equipment in compliance with and subject to the Underlying Rights Requirements and all applicable codes, ordinances, laws, rules and regulations. Notwithstanding anything to the contrary contained herein, User shall secure, prior to the IRU Effective Date with respect to each Service Order, and shall maintain in full force and effect during the Term, any and all necessary approvals, consents, rights-of-way, permits, franchises, licenses, Underlying Rights or similar approvals from all governmental and other authorities or Persons which are necessary or required to be obtained for the (i) installation, use, operation, maintenance, repair and replacement of the User Equipment on the Premise Side of the Demarcation

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Points, and (ii) the use and operation of the User Dark Fibers by User on the Premise Side of the Demarcation Points.

7.3          User shall not use its facilities, including without limitation the User Dark Fibers and the User Equipment, in a way that interferes in any way with or adversely affects the use of the AGLN System or any Cable therein or other equipment and facilities of any Person (including AGLN) using the AGLN System. User’s facilities, including without limitation the User Dark Fibers and the User Equipment, shall not endanger or damage the AGLN System and shall not create an unreasonable risk of damage to property or injury or death to any individual or to the public. User acknowledges that the AGLN System includes or will include other participants, including AGLN and other owners and users of telecommunications systems.

7.4          AGLN shall have the right, but not the duty, to make periodic or spot inspections at any time of User’s facilities placed within the AGLN System, including the User Equipment, all at reasonable times during regular business hours, and the right, but not the duty, to be present at and to monitor all work by User relating to the AGLN System, including any access to any User Handholes. Such inspections and monitoring may be conducted for the purpose of determining whether facilities placed in the AGLN System and work relating to the AGLN System are in compliance with the terms of this Agreement. AGLN may charge User for the Costs of inspection and monitoring only if the inspection or monitoring reflects that User is in substantial noncompliance with the terms of this Agreement. If AGLN reasonably determines that any User Equipment is not in compliance with the terms of this Agreement, User shall, upon written notice from AGLN, bring its facilities into material compliance within forty-eight (48) hours of such written notice or, at a minimum, commence curative measures within twenty-four (24) hours and exercise reasonable diligence to complete such measures as soon as possible thereafter. If User fails to take curative action within forty-eight (48) hours or if the non-compliance is of a character which poses an immediate and substantial threat of damage to property, injury or death to any Person, or interference/impairment of the AGLN System or any use of the AGLN System by AGLN or any other Person using the AGLN System, then AGLN may take such action as it deems appropriate to correct the violation, including the interruption of electrical power to any User Equipment, directing User or any contractor of User to immediately suspend work relating to the AGLN System, and limiting, terminating or refusing access to any part of the AGLN System. In addition, should AGLN, in its sole discretion, determine that conditions exist that jeopardize the health or safety of persons or property, or that a violation exists of any of the Underlying Rights Requirements, including Arizona Department of Transportation regulations or Occupational Safety & Health Administration regulations, then AGLN may direct that all work or use by User or others relating to the AGLN System be immediately and temporarily suspended until such time as the Parties may resolve the violation or condition. Such temporary suspension shall not entitle either Party to any damages from the other Party for delay in performance. AGLN will endeavor, but is not required, to provide notice to User prior to taking such action and shall have no liability to User for any damages arising from such action, except to the extent that such action by AGLN constitutes willful misconduct. If User undertakes the curative measures, upon completion of the work, User shall provide to the AGLN record documents, to include As-Built Drawings, indicating all work performed. If AGLN performs the curative measure, AGLN shall provide to the User record documents, to include As-Built Drawings, regarding the curative measures taken to bring User’s facilities into compliance. All work shall be performed in accordance with Exhibits C, D and E, as applicable. User shall pay and reimburse AGLN for one hundred percent (100%) of all Costs incurred by AGLN in taking such action plus a management fee equal to fifteen percent (15%) of such Costs, within thirty (30) days of User’s receipt of AGLN’s invoice therefor.

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8              Term and Renewal

8.1          The IRU with respect to the User Dark Fibers shall become effective on the relevant Acceptance Date for the User Dark Fibers in such Service Order (the “IRU Effective Date”). Subject to Sections 8.2, 8.3 and 8.4 and Articles 11 and 19, the IRU shall extend for the period thereafter that is set forth in the applicable Service Order (the “Term”).

8.2          User may extend the Term with respect to the User Dark Fibers in each Segment that is part of a Ring (as delineated in Exhibit B) so that the Term of the IRUs granted with respect to the User Dark Fibers in all Segments within such Ring expire contemporaneously with the Term of the IRU with respect to the User Dark Fibers in the last Segment comprising such Ring. In the event that User desires so to extend the Term of the IRU with respect to the User Dark Fibers in any Service Order, User shall deliver to AGLN, at least six (6) months but no more than twelve (12) months prior to the expiration of the Term respecting such IRU, written notice of its election to so extend the Term for such IRU together with an additional IRU Fee (pro rated for the duration of the extension allowed) to compensate for the extension of the Term. For example, if the Term of an IRU for the User Dark Fibers in a Service Order is twenty (20) years, and is extended by one year, then the additional annual IRU Fee would be l/20th of the amount of the IRU Fee for the User Dark Fibers in that Service Order.

8.3          If at any time User in its absolute discretion determines that, with respect to any Segment, the User Dark Fibers located in such Segment have reached the end of their useful life, or User otherwise desires not to retain the IRU with respect to the User Dark Fibers in such Segment, User shall have the right to abandon such IRU by written notice to AGLN. In the case of abandonment, this Agreement shall terminate as to the User Dark Fibers in such Segment, and User shall not be entitled to a refund of any of the consideration paid. Upon such termination, all fees, costs, and other expenses with respect to the User Dark Fibers in such Segment shall be immediately due and payable to AGLN by User.

8.4          Subject to the Parties reaching agreement on the amount of the additional payment to be made by User to AGLN upon any such extension, User shall have the option to extend the Term of the IRU granted hereunder for two (2) consecutive ten-year periods. To exercise such extension option, User must notify AGLN in writing at least twelve (12) months but not more than eighteen (18) months prior to the expiration date of the initial or previously extended Term, specifying in reasonable detail the Segment(s) of the User Route to which such extension notice applies. Such additional payment by User shall be due on the date of commencement of such extension period, and shall be ratably allocated to each year of such extension period commencing on such commencement date. Unless the Parties reach agreement on the amount of the additional payment to be made by User, User shall not have the right to extend the Term past the expiration date of the Initial Term or the expiration date of the then-current extension period (if any), and in no event shall User have the right to extend the Term past the expiration date of the second ten-year extension period (if any).

9.             Manholes and Connection Services

9.1          AGLN agrees that it will connect User’s fiber optic cable, fiber optic strands or other compatible transmission media (“User Media”) with the User Dark Fibers at the Manholes and

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Handholes requested by User in accordance with Section 9.2 and, subject to Section 9.3 at other technically feasible connecting points along the User Route (collectively, the “Connecting Points”), at a fiber distribution panel, fiber splice kit or other appropriate terminal apparatus as determined by AGLN.

9.2          Notwithstanding anything contained in this Agreement to the contrary, any and all work with respect to the User Dark Fibers, any Connecting Point and the AGLN System shall be performed by AGLN. If User desires that AGLN perform any additional work (other than as set forth in Sections 9.1 — 9.3 hereof), with respect to the User Dark Fibers, any Connecting Point or the AGLN System, User shall notify AGLN in writing of such request. AGLN, in its absolute discretion, shall determine if such requested work (i) is feasible from a technical standpoint and with respect to the Underlying Rights Requirements and (ii) will not delay the construction of, or otherwise interfere with, the AGLN System. If AGLN determines that such work can proceed, AGLN shall submit to User in writing an estimate of the Costs to be incurred in connection with such work and an estimate of the time required to perform such work. If User elects to proceed with such work, then User and AGLN shall amend the Agreement to reflect the Costs associated with the completion of the additional work.

10.          Maintenance and Repair of the AGLN System

10.1        From and after the IRU Effective Date with respect to each Segment, the maintenance of the AGLN System and Cable shall be provided in accordance with the maintenance requirements and procedures set forth in Exhibit D, and in accordance with the fiber specifications set forth in Exhibit C. User agrees to pay the User Maintenance Fee for Routine Maintenance and to reimburse AGLN for non-Routine Maintenance in accordance with the provisions of this Section 10 and Exhibit D.

(a)           Routine Maintenance. During the Term, AGLN shall provide, or cause to be provided by contractors selected by AGLN, all required Routine Maintenance of the AGLN System and the User Dark Fibers in accordance with the provisions set forth in Exhibit D. “Routine Maintenance” means the work specifically identified as Routine Maintenance in Exhibit D, provided that Routine Maintenance excludes (i) work for which User is obligated to reimburse AGLN pursuant to other Sections of this Agreement (including Article 9), (ii) work necessitated by User’s negligence or willful misconduct, or (iii) User’s elective maintenance or repair requests.

(b)           Non-Routine Maintenance. Except as provided in the last sentence of this Section 10.1(b), User shall pay and reimburse AGLN for User’s proportionate share of all Costs incurred by AGLN in connection with non-Routine Maintenance of the AGLN System and the User Dark Fibers (including repairs required as a result of Cable cuts or natural or man-made disasters), within thirty (30) days of User’s receipt of AGLN’s invoice therefor. User’s proportionate share of such Costs shall be determined and allocated as follows: (a) if the affected portion of the AGLN System includes any Innerduct other than the Innerduct housing the User Dark Fibers, the total Costs first shall be allocated equally among all of the affected Innerducts and the Innerducts housing other dark fiber; and then the Costs allocated to the Innerduct housing the User Dark Fibers shall be allocated based on the ratio to which the number of User Dark Fibers bears to the total number of fibers in such Innerduct; or (b) if the affected portion of the AGLN System does not consist of any Innerduct other than the Innerduct housing the User Dark Fibers, the Costs shall be allocated based on the ratio to which the number of User Dark Fibers bears to the total number of-fibers within the

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affected portion of the AGLN System. Notwithstanding the first sentence of this Section 10.1(b), to the extent such non-Routine Maintenance relates to (i) work necessitated by User’s negligence or willful misconduct or (ii) User’s elective maintenance or repair requests, User shall pay and reimburse AGLN for one hundred percent (100%) of all Costs incurred by AGLN in connection with such non-Routine Maintenance plus a management fee for such work equal to fifteen percent (15%) of such Costs, within thirty (30) days of User’s receipt of AGLN’s invoice therefor.

10.2        From and after the IRU Effective Date with respect to each Segment, in the event that all or any part of the AGLN System within such Segment is damaged or destroyed such that a Service Affecting Condition exists regarding a Dark Fiber, AGLN shall use commercially reasonable efforts to resolve such Service Affecting Condition utilizing the procedures described in Exhibit D. Notwithstanding anything contained herein to the contrary, AGLN shall not incur any liability to User by reason of a Service Affecting Condition, except its obligation to resolve such Service Affecting Condition as set forth in this Section 10.2, and User shall not be entitled to any credits for IRU Fees or for any other payment paid or to be paid by User pursuant to this Agreement by reason of such Service Affecting Condition. For purposes of this Section 10.2, “Service Affecting Condition” shall be as defined in Section 5 of Exhibit D, except where the condition is caused by a deficiency in the User Equipment, in which event it shall not be a Service Affecting Condition.

10.3        User shall have no right to physically access the AGLN System, or the Cable or to maintain, adjust, align or attempt to repair the User Dark Fibers or AGLN System. In no event whatsoever shall User physically access the AGLN System to maintain, adjust, align, cut, repair or replace the AGLN System or attempt to do any of the foregoing.

11.           Permits; Underlying Rights; Relocation

11.1        Subject to the terms and provisions of this Agreement, AGLN agrees to obtain and maintain during the Term all Underlying Rights necessary for its construction, installation, maintenance and repair of the AGLN System. The IRU is subject to the terms of the Underlying Rights, and subject to the terms under which the Underlying Rights are owned or held by the grantor of the Underlying Rights, including covenants, conditions, restrictions, easements, reversionary and other interests, bonds, mortgages and indentures, and other matters, whether or not of record, and to the rights of tenants and licensees in possession. The IRU granted hereunder is further subject and subordinate to the prior right of the grantor of the Underlying Rights to use the right of way for other activities, including railroad operations, telecommunications uses, pipeline operations or any other purposes, and to the prior right of AGLN to use its rights granted under the Underlying Rights. The rights granted to User herein, if any, are made expressly subject to each and every limitation, restriction, condition or reservation in or affecting the Underlying Rights. Nothing herein shall be construed to be a representation, warranty or covenant of AGLN’s right, title or interest with respect to any of the Underlying Rights or with respect to User’s right to benefit from any of the Underlying Rights.

11.2        Upon the expiration, non-recognition or other termination of an Underlying Right that is necessary in order to grant, continue or maintain an IRU granted hereunder in accordance with the terms and conditions hereof, AGLN shall use commercially reasonable efforts to obtain an alternate right of way for the affected portion of the AGLN System. The Parties shall share the Costs of obtaining an alternate right of way in the manner described in Section 11.4.

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11.3        If, after the Acceptance Date with respect to any Segment, AGLN is required by a third Person with legal authority to so require (including the grantor of an Underlying Right) or by the occurrence of an Event of Force Majeure, or if User agrees to relocate any portion of the AGLN System, with respect to such Segment, including any of the facilities used or required in providing the IRU, AGLN shall have the right either to proceed with such relocation, including the right, in good faith, to reasonably determine the extent of, the timing of, and methods to be used for such relocation, or (if applicable) to pay such amounts to the Person requiring such relocation as are necessary to avoid the need for such relocation; provided that any such relocation shall be constructed and tested in accordance with the specifications and drawings set forth in Exhibit C, and incorporate materials meeting or exceeding the specifications set forth in Exhibit C. In the event of any such relocation, AGLN shall use commercially reasonable efforts to minimize any service interruptions. The Parties shall share the Costs of relocating the affected portion of the AGLN System, or the amounts paid to the Person requiring such relocation to avoid relocation, in the manner described in Section 11.4.

11.4        The Costs of obtaining alternate right of way as described in Section 11.2 and the Costs of relocating the affected portion of the AGLN System (or the amounts paid to the Person requiring relocation to avoid relocation) as described in Section 11.3 shall be allocated between the Parties as follows: (a) if the affected portion of the AGLN System includes any Innerduct other than the Innerduct housing the User Dark Fibers, the total Costs first shall be allocated equally among all of the affected Innerducts and the Innerducts housing other dark fiber; and then the Costs allocated to the Innerduct housing the User Dark Fibers shall be allocated based on the ratio to which the number of User Dark Fibers bears to the total number of-fibers in such Innerduct; or (b) if the affected portion of the AGLN System does not consist of any Innerduct other than the Innerduct housing the User Dark Fibers, the Costs shall be allocated based on the ratio to which the number of User Dark Fibers bears to the total number of fibers within the affected portion of the AGLN System.

11.5        AGLN shall deliver to User updated As-Built Drawings with respect to the relocated portions of the AGLN System as soon as reasonably practicable following the completion of such relocation.

12.           Operation and Use of the AGLN System

12.1        User represents and warrants that it will use the User Dark Fibers and Optional Dark Fibers, the User Equipment, the Lateral Spurs (if any) and the Associated Property in compliance with and subject to the Underlying Rights Requirements and any other applicable government codes, ordinances, laws, rules and regulations. Notwithstanding anything to the contrary contained herein, it shall be User’s sole responsibility to secure, or cause to be secured, prior to the IRU Effective Date, and maintain in full force and effect during the Term, any and all Underlying Rights and approvals, consents, rights of way, permits, franchises, licenses or similar approvals from all governmental and other authorities and any other Person which are necessary or required to be obtained by User for AGLN to grant the IRU to User and for the use and operation of the User Dark Fibers and Optional Dark Fibers, the User Equipment and the Associated Property by User. Upon request of AGLN, User will deliver to AGLN copies of such approvals, consents, rights-of-way, permits, franchises, licenses or similar approvals.

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12.2        AGLN agrees and acknowledges that it has no right to use the User Dark Fibers and Optional Dark Fibers during the Term hereof and that, from and after the IRU Effective Date and subject to Section 23.3, AGLN shall keep the User Dark Fibers and Optional Dark Fibers free from (i) any liens or encumbrances of any third Person attributable to AGLN and (ii) any other rights or claims of any third Person attributable to AGLN, which in either case are superior to the rights of User.

12.3        Subject to the limitations set forth in this Agreement and to the restrictions set forth in the Underlying Rights, User shall use the User Dark Fibers and Optional Dark Fibers and the Associated Property solely for the purpose of lawfully providing Telecommunications Service, as defined by the Communications Act of 1934, as amended by the Telecommunications Act of 1996. User agrees and acknowledges that it has no right to use any of the Cable that is part of the AGLN System, other than the User Dark Fibers and Optional Dark Fibers. User shall keep any and all of the AGLN System free from any liens, rights or claims of any third Person attributable to User, except that User may encumber the IRU in the User Dark Fibers and Optional Dark Fibers granted to User, on the condition that User shall provide to AGLN an agreement from any such lien holder that the interest of any lien holder is subordinate to the interest of AGLN and other interests and rights in and to the User Dark Fibers and Optional Dark Fibers and the Associated Property.

12.4        User and AGLN shall promptly notify each other of any matters pertaining to, or the occurrence (or impending occurrence) of, any event which would be reasonably likely to give rise to any damage or impending damage to or loss of the AGLN System that are known to such Party.

12.5        User and AGLN each agrees to cooperate with and support the other in complying with any requirements applicable to their respective rights and obligations hereunder. Without limiting the generality of the foregoing, User agrees to provide to AGLN, promptly upon request by AGLN, a detailed description of its uses of the User Dark Fibers and Optional Dark Fibers and Associated Property and any other information regarding its use of the User Dark Fibers and Optional Dark Fibers and the Associated Property reasonably requested by AGLN in order to enable AGLN to comply with any reporting requirements imposed on AGLN under any of the Underlying Rights.

13.          Indemnity

13.1        Subject to the provisions of Article 14, AGLN hereby agrees to indemnify, defend, protect and hold harmless User and its Affiliates, and their employees, officers, directors and agents (the “User Indemnified Persons”), from and against, and assumes liability for all suits, actions, damages, claims, losses, fines, judgments, costs and expenses (including reasonable attorneys’, accountants’ and experts’ fees and disbursements) of any character (“Claims”) (a) suffered or incurred by the User Indemnified Persons or any of them because of the death of any Person, or any injuries or damage received or sustained by any Persons or property which in whole or in part arise on account of the negligent acts or omissions of AGLN in the construction of the AGLN System and/or in the performance or non-performance of its repair and maintenance obligations or exercise of its rights under this Agreement, including any material violation by AGLN of any regulation, rule, statute or court order of any governmental authority applicable thereto; or (b) under the workers compensation laws asserted by any employee of AGLN or its agents, contractors, customers or any other Person providing goods or services for or on behalf of any of the foregoing in connection with this

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Agreement suffered or incurred by the User Indemnified Persons or any of them. AGLN’s indemnification obligations hereunder shall not be applicable to any Claims to the extent caused by, arising out of or in connection with the negligence, intentional acts or omissions or misconduct of the User Indemnified Persons or any of them.

13.2        User hereby agrees to indemnify, defend, protect and hold harmless AGLN and its Affiliates, and their employees, officers, directors and agents (the “AGLN Indemnified Persons”), from and against, and assumes liability for all Claims (as defined in Section 13.1) (a) suffered or incurred by the AGLN Indemnified Persons or any of them because of the death of any Person, or any injuries or damage received or sustained by any Persons or property (including without limitation, the AGLN System) which in whole or in part arise on account of the negligent acts or omissions, negligent or otherwise, of User in the performance or non-performance of its obligations or exercise of its rights under this Agreement, including any material violation by User of any Underlying Right Requirements or any regulation, rule, statute or court order of any governmental authority applicable thereto (b) under the workers compensation laws asserted by any employee of User or its agents, contractors, customers or any other Person providing goods or services to any of the foregoing in connection with this Agreement, and suffered or incurred by the AGLN Indemnified Persons or any of them; (c) suffered or incurred by the AGLN Indemnified Persons or any of them and arising out of or resulting from User’s (i) use or operation of the User Dark Fibers or the Associated Property, or the use, operation, installation, repair, maintenance or replacement of the User Equipment, (ii) the conduct of User’s business, including without limit, the provision of any services or the content of any video, voice or data carried through the User Dark Fibers or (iii) the violation of any Underlying Rights Requirements applicable to User; or (d) suffered or incurred by AGLN Indemnified Persons or any of them and arising out of, caused by, related to or based upon a contractual or other relationship between such claiming party and User as it relates to the User Dark Fibers, the User Equipment, the Underlying Rights Requirements or this Agreement, including any claim for interruption of service or in respect of service quality. User’s indemnification obligations hereunder shall not be applicable to any Claims to the extent caused by the negligence, intentional acts or omissions or misconduct of AGLN Indemnified Persons or any of them.

13.3        Any Party seeking indemnification hereunder (“Indemnitee”) shall promptly notify User or AGLN, as appropriate, of the nature and amount of such claim and the method and means proposed by the Indemnitee for defending or satisfying such claim. The Parties shall consult and cooperate with each other respecting the defense and satisfaction of such claim, including the selection of and direction to legal counsel, and neither Party shall pay or settle any such claim without the prior written consent of the other Party, which consent shall not be unreasonably withheld, conditioned or delayed.

13.4        Subject to Sections 13.5 and 14, nothing contained herein shall operate as a limitation on the right of either Party hereto to bring an action for damages against any third Person, including indirect, special or consequential damages, based on any acts or omissions of such third Person as such acts or omissions may affect the construction, operation or use of the User Dark Fibers or the AGLN System, except as may be limited by Underlying Rights Requirements; provided, however, that each Party hereto shall assign such rights or claims, execute such documents and do whatever else may be reasonably necessary to enable the other Party to pursue any such action against such third Person.

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13.5        Notwithstanding the foregoing provisions of this Article 13, to the extent AGLN is required under the terms and provisions of any Underlying Rights to indemnify the grantor or provider thereof from and against any and all claims, demands, suits, judgments, liabilities, losses or expenses arising out of or related to such Underlying Rights, regardless of the cause and regardless of whether such claims, demands, suits, judgments, liabilities, losses or expenses arise from the sole or partial negligence, actions or inaction of such grantor or provider and its employees, servants, agents, contractors, subcontractors or other Persons using the property covered by such Underlying Right, User hereby releases such grantor or provider from the same, regardless of whether such claims, suits, judgments, liabilities, losses or expenses arise from the sole or partial negligence, willful misconduct or other action or inaction, of such grantor or provider or its employees, servants, agents, contractors, subcontractors or other Persons using the property covered by such Underlying Right.

14.           Limitation of Liability

14.1        NOTWITHSTANDING ANY PROVISION OF THIS AGREEMENT TO THE CONTRARY, EXCEPT TO THE EXTENT CAUSED BY ITS GROSS NEGLIGENCE OR WILLFUL MISCONDUCT, NEITHER AGLN OR ITS AFFILIATES OR USER OR ITS AFFILIATES SHALL BE LIABLE OR RESPONSIBLE TO THE OTHER PARTY OR CUSTOMERS FOR ANY SPECIAL, INCIDENTAL, INDIRECT, PUNITIVE OR CONSEQUENTIAL COSTS, LIABILITIES OR DAMAGES, WHETHER FORESEEABLE OR NOT, INCLUDING WITHOUT LIMITATION, ECONOMIC LOSS OR LOST BUSINESS OR PROFITS, DAMAGES ARISING FROM THE USE OR PERFORMANCE OF THE AGLN SYSTEM, THE USER DARK FIBERS, EQUIPMENT OR SOFTWARE OR DAMAGE TO OR LOSS OF USE THEREOF, ANY INTERRUPTION OF SERVICE, OR ANY DELAY, ERROR OR LOSS OF DATA OR INFORMATION ARISING IN ANY MANNER OUT OF, OR IN CONNECTION WITH, THIS AGREEMENT AND SUCH PARTY’S PERFORMANCE OR NONPERFORMANCE OF ITS OBLIGATIONS UNDER THIS AGREEMENT, REGARDLESS OF THE FORM OF ACTION, WHETHER IN CONTRACT OR TORT (INCLUDING STRICT LIABILITY), ALL CLAIMS FOR WHICH ARE HEREBY SPECIFICALLY WAIVED.

14.2        The Parties acknowledge and agree that on and after the relevant Acceptance Date, User’s sole rights and remedies with respect to any defect in or failure of the User Dark Fibers and the Associated Property to perform in accordance with the applicable vendor’s or manufacturer’s specifications for such User Dark Fibers and Associated Property shall be limited to User’s exercise of rights pursuant to the particular vendor’s or manufacturer’s warranty with respect thereto. Each such warranty, to the extent permitted by the terms thereof shall be assigned to User upon its request; provided such assignment is without detriment to AGLN’s rights under or with respect to such warranties. AGLN makes no warranty and shall have no obligations as to such User Dark Fibers and the Associated Property following the relevant Acceptance Date.

14.3.       The Parties expressly agree that no claim for losses or damages whatsoever in connection with this Agreement shall be made more than two (2) years after the date that the event giving rise to such claim is known or reasonably should have been known to the Party making such claim, and no claim for indemnity under the provisions of Article 13 shall be made more than two (2) years after the first notice of any claim received by the Party claiming under such indemnity provision.

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14.4        Notwithstanding any provision of this Agreement to the contrary, the maximum liability to User if any, of AGLN or its Affiliates in connection with this Agreement shall be limited, in the aggregate, to a provable amount which shall be no greater than the aggregate unamortized amount of the IRU Fees that have been paid by User to AGLN for the User Dark Fibers in the affected Service Order of the AGLN System for which the Claim is based and at the time the Claim is made; provided, however, that this limitation of maximum liability shall not apply to damages arising from the willful misconduct of AGLN or its Affiliates; and provided further, that this limitation shall not restrict either Party’s right to proceed for injunctive relief.

15.          Insurance

15.1        During the Term, each Party shall obtain and maintain for itself and its contractors and subcontractors not less than the insurance set forth below:

(a)           Commercial general liability insurance for bodily injury (including death) and property damage which provides limits of not less than ten million dollars ($10,000,000) per occurrence and ten million dollars ($10,000,000) annual aggregate as respects products/completed operations, independent contractor’s and contractual liability and contractually assumed risks, if applicable; Coverage shall be endorsed to include the insurer’s waiver of subrogation in favor of the other Party;

(b)           Automobile insurance for bodily injury (including death) and property damage that provides total limits of not less than ten million dollars ($10,000,000) per accident to all owned, non-owned and hired vehicles; Coverage shall be endorsed to include the insurer’s waiver of subrogation in favor of the other Party; and

(c)           Workers’ Compensation and employers’ liability insurance of not less than Arizona statutory limits. The policy shall include broad form all-states/other states coverage. Coverage shall be endorsed to include the insurer’s waiver of subrogation in favor of the other Party.

The above minimum requirements as to insurance coverage shall not limit the liability of either Party under this Agreement. The above limits may be satisfied using a combination of primary and excess coverage. Additionally, AGLN shall be deemed to have satisfied the conditions of this Article if it maintains a self-insurance program with retention limits no greater than one million dollars ($1,000,000), together with excess liability insurance for the remaining limits.

15.2        Each Party shall obtain and maintain the insurance policies required above with insurance companies authorized to do business in the State of Arizona, and having an A.M. Best Rating of A or better. The other Party, its Affiliates, and their officers, directors and employees, and any other Person entitled to indemnification hereunder, shall be named as additional insureds to the extent of such indemnification. Each Party shall provide the other Party with a certificate or certificates of insurance together with declaration pages in a form satisfactory to such other Party showing that the Party has complied with the insurance requirements of this Section. Upon request, User shall furnish AGLN with a certified copy of each policy, including the provisions establishing premiums. Certain deductible clauses of either Party’s insurance which are not considered excessive, overly broad, or harmful to the interest of the other Party will be allowed. Each insurance policy

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shall contain a provision providing the other Party with thirty (30) days advanced notice of any cancellation or material change in coverage.

15.3        All proof of insurance submitted by User to AGLN shall clearly set forth all exclusions and deductible clauses. Standard exclusions in User’s policies will be allowed provided they are not inconsistent with the requirements of this Article 15. Allowance of any additional exclusions will be in the sole discretion of AGLN. Regardless of the allowance of exclusions or deductions by AGLN, User shall be responsible for the deductible limit of the policy and all exclusions consistent with the risks User assumes under this Agreement and as imposed by law.

16.          Taxes, Fees and Other Governmental Impositions

16.1        The Parties acknowledge and agree that it is their mutual objective and intent to (a) minimize the aggregate Impositions payable with respect to the AGLN System, and (b) share such Impositions according to their respective interests in the AGLN System or as otherwise allocated in this Article. They agree to cooperate with each other and coordinate their efforts to achieve such objectives in accordance with the provisions of this Article.

16.2        AGLN shall be responsible for and shall timely pay any and all Impositions with respect to the construction or operation of the AGLN System which Impositions are (a) imposed or assessed with respect to a particular Segment prior to the relevant Segment Acceptance Date; or (b) imposed or assessed in exchange for the approval of the original construction of the AGLN System; or (c) that were assessed in return for the original right to install the AGLN System on public property or in public right of way. User shall be liable and shall reimburse AGLN for payments of any and all federal, state and local sales, use or similar Impositions, as applicable, with respect to the grant of the IRU, the use of the User Dark Fibers, and the other transactions under this Agreement, and with respect to the User Equipment, User Media and other property or facilities of User.

16.3        Except as to Impositions described in Section 16.2, User shall be responsible for and shall pay or promptly reimburse AGLN for all Impositions (a) imposed on, based on, or otherwise measured by the gross revenues, gross receipts, gross income, net revenues, net receipts or net income received by or accrued to User with respect to the ownership or use of the User Dark Fibers; (b) measured by (i) volume or amount of space occupied by the length of the AGLN System in the User route; (ii) paid by AGLN to the grantor or provider of any of the Underlying Rights to the extent imposed on, based on, or otherwise measured by the gross revenues, gross receipts, gross income, net revenues, net receipts or net income received by or accrued to AGLN with respect to the IRU Fee, the User Maintenance Fee or any other amounts payable by User to AGLN under this Agreement; or (c) which have been separately assessed, allocated to, or imposed on the User Dark Fibers, the User Equipment or other facilities of User. If the User Dark Fibers are the only fibers from the point where the User Dark Fibers leave the AGLN System to a User facility, User shall be solely responsible for any and all Impositions imposed on or with respect to such fibers and all User Equipment associated with such fibers. To the extent such Impositions are not separately assessed, allocated to or imposed on the User Dark Fibers, the User Equipment or other facilities of User, AGLN will pay all such Impositions. AGLN shall notify User of such Imposition, and User shall promptly reimburse AGLN for User’s appropriate share of such Impositions. To the extent such Impositions arise pursuant to Section 16.5(b), AGLN will pay such Impositions and shall notify User of such Imposition, and User shall promptly reimburse AGLN in the amount of such Imposition.

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16.4        AGLN shall have the right to contest any Imposition (including by nonpayment of such Imposition). The out-of-pocket costs and expenses (including reasonable attorneys’ fees) incurred by AGLN in any such contest shall be shared by AGLN and User in the same proportion as to which the parties would have shared in such Impositions as they were assessed. Any refunds or credits resulting from a contest brought pursuant to this Section 16.4 shall be divided between AGLN and User in the same proportion as separately determined or as originally assessed. In any such event, AGLN shall provide timely notice of such challenge to User.

16.5        User shall have the right to protest by appropriate proceedings any Imposition. In such event, User shall indemnify and hold AGLN harmless from any expense, legal action or cost, including reasonable attorneys’ fees, resulting from User’s exercise of its rights hereunder.

(a)           The foregoing notwithstanding, AGLN, at its option and at its own expense, shall have the right to direct and manage any contest regarding an Imposition that relates to the AGLN System that affects the interest of AGLN; subject, however, to reasonable and appropriate consultation with User. User agrees to cooperate with AGLN in any such contest.

(b)           If User has exhausted all its rights of appeal in protesting any Imposition and has failed to obtain the relief sought in such proceedings or appeals (“Finally Determined Taxes and Fees”), User and AGLN may agree to relocate a portion of the AGLN System to avoid the jurisdiction that imposes or assesses such Finally Determined Taxes and Fees (subject to the consent and participation of the other interest holders in the affected portion of the AGLN System). If User and AGLN do not determine to relocate the affected portion of the AGLN System, User shall have the right to terminate its use of the User Dark Fibers in the affected portion of the AGLN System. Such termination shall be effective on the date specified by User in a notice of termination, but not earlier than ninety (90) days after the notice. Upon such termination, the IRU in the affected portion of the AGLN System shall immediately terminate, and the User Dark Fibers in the affected portion of the AGLN System shall thereupon revert to AGLN without reimbursement of any of the IRU Fee or other payments previously made or due with respect thereto.

16.6        AGLN and User agree to cooperate fully in the preparation of any returns or reports relating to the Impositions. AGLN and User further acknowledge and agree that the provisions of this Article are intended to allocate the Impositions on procedures and methods of computation that are in effect on the date of this Agreement. Material changes in such procedures and methods could significantly alter the fundamental economic assumptions of the Parties underlying this Agreement. Accordingly, the Parties agree that, if such procedures or methods of computation change materially, the Parties will negotiate in good faith an amendment to this Article 16 to preserve, to the extent reasonably practicable, the economic intent and effect of this Article.

16.7        Within ninety (90) days after the Acceptance Date for the first User Dark Fibers to be accepted by User, User shall provide AGLN a reseller certificate for the State of Arizona. User shall, upon AGLN’s reasonable written request no more than twice in any one (1) year period, provide AGLN additional reseller certificates or similar documentation for the State of Arizona to assist AGLN in avoiding charging User sales, use, excise, or other taxes on the User Dark Fibers or any other product or service AGLN provides under this Agreement.

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17.          Notices

17.1        Notices. All notices, statements, demands, requests, consents, approvals, authorizations, offers, agreements, appointments, designations, or other direction or communication hereunder by any party to another shall be (a) in writing, (b) effective on the first business day following the date of receipt, and (c) delivered by one of the following means: (i) by personal delivery; (ii) by prepaid, overnight package delivery or courier service; (iii) by the United States Postal Service, first class, certified mail, return receipt requested, postage prepaid; (iv) by computer email or (v) by prepaid telecopier, telex, or other similar means of electronic communication (followed by confirmation on the same or following day by overnight delivery or by mail as aforesaid). All notices given under this Agreement shall be addressed as follows:

	USER:	Mountain Telecommunications, Inc.
		1430 W. Broadway, Suite A-200
		Attn: Wilmot Wickramasuriya
		Facsimile: (602) 850-9599
	With a copy to:	Greenberg Traurig, LLP
		2375 E. Camelback Road, Suite 700
		Phoenix, Arizona 85016
		Attn: Robert S. Kant
		Facsimile: (602) 445-8100
	AGLN:	AGL Networks, LLC
		2 Allen Center
		1200 Smith Street, Suite 900
		Houston, TX 77002
		Attn: Contract Management
		Facsimile: 832-397-1722
With a copy to:		Associate General Counsel
		AGL Resources, Inc.
		10 Peachtree Place
		15th Floor
		Atlanta, Georgia 30308
		Facsimile: 404-584-3714

or to such other postal addresses, email addresses, or telecopier numbers of which the parties have been advised in writing by any of the above-described means. Personal delivery to a party or to any officer, partner, agent, or employee of such party at its address herein shall constitute receipt. A Party’s rejection or other refusal to accept notice shall also constitute receipt. Each party agrees to promptly give the other party notice of any change in its above listed, respective postal addresses, email addresses, telecopier numbers or contact persons.

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18.          Confidentiality

18.1        (a)           Unless by mutual agreement of the Parties, or except to the extent directed by a court of competent jurisdiction or required by applicable law, AGLN and User shall not disclose this Agreement or the terms hereof to any Person other than such Party’s Affiliates or such Party’s officers, employees, and consultants, who are similarly bound hereby.

(b)           Each Party acknowledges that it (the “Receiving Party”) may be furnished with, receive or otherwise have access to Trade Secrets or Confidential Information of the other Party (the “Disclosing Party”). The Receiving Party shall not, except as expressly authorized or directed by the Disclosing Party, use, copy, or disclose, or permit any unauthorized Person access to, any Trade Secrets belonging to the Disclosing Party or any third Person; except that the Receiving Party may disclose Trade Secrets of the Disclosing Party to its consultants and financial and legal advisors (hereinafter “Consultants”), provided such Consultants have a need to know and have executed nondisclosure agreements obligating such Consultants to keep the Trade Secrets of the Disclosing Party confidential, or are otherwise bound by similar confidentiality obligations.

(c)           During the Term and for a period of two (2) years after the expiration or termination of this Agreement, whether such termination is at the instance of either Party, the Receiving Party will not use, copy, or disclose, or permit any unauthorized Person access to, any Confidential Information belonging to the Disclosing Party or any third Person; except that the Receiving Party may disclose Confidential Information of the Disclosing Party to its Consultants provided such Consultants have a need to know and have executed nondisclosure agreements obligating such Consultants to keep the Confidential Information of the Disclosing Party confidential, or are otherwise bound by similar confidentiality obligations.

(d)           For purposes of this Agreement, the terms “Trade Secrets” and “Confidential Information” shall not include any materials or information to the extent that such materials or information: (i) are or become publicly known or generally utilized by others engaged in the same business or activities in which the Disclosing Party utilized, developed or otherwise acquired such information; or (ii) are known to the Receiving Party prior to the receipt of such materials or information from the Disclosing Party; or (iii) are furnished to others by the Disclosing Party with no restriction on disclosure. Failure to mark any of the Trade Secrets or Confidential Information as confidential shall not affect its status as Trade Secrets or Confidential Information under this Agreement.

(e)           Because of the unique nature of the Trade Secrets and Confidential Information, each Party understands and agrees that the Disclosing Party will suffer irreparable harm in the event that a Party fails to comply with any of its obligations under this Section and that monetary damages will be inadequate to compensate the Disclosing Party for such breach. Accordingly, the Parties agree that the Disclosing Party will, in addition to any other remedies available to it at law or in equity, be entitled, without requirement to post bond, to injunctive relief to enforce the terms of this Article 18.

(f)            Either Party may make disclosure as required by a court order or as otherwise required by law or in any legal or arbitration proceeding relating to this Agreement. If either Party is required by law or by interrogatories, requests for information or documents, subpoena, civil investigative demand or similar process to disclose the Confidential Information, it will provide the

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other Party with prompt prior written notice of such request or requirement so that such Party may seek an appropriate protective order and/or waive compliance with this Section. The Party whose consent to disclose information is requested shall respond to such request, in writing, within five (5) working days of the request by either authorizing the disclosure or advising of its election to seek a protective order, or if such Party fails to respond within the prescribed period the disclosure shall be deemed approved.

18.2        Nothing herein shall be construed as granting any right or license under any copyrights, inventions, or patents now or hereafter owned or controlled by AGLN.

18.3        Upon termination of this Agreement for any reason or upon request of AGLN, User shall return all Confidential Information, together with any copies of same, to AGLN. The requirements of confidentiality set forth herein shall survive the return of such Confidential Information.

18.4        User shall not, without first obtaining the written consent of AGLN, use any trademark or trade name of AGLN or refer to the subject matter of this Agreement or AGLN in any promotional activity or otherwise, nor disclose to others any specific information about the subject matter of this Agreement. Neither Party shall issue any publication or press release relating directly or indirectly to this Agreement without the prior written consent of both Parties.

18.5        The provisions of this Article 18 shall survive expiration or other termination of this Agreement.

19.          Default

19.1        A default shall be deemed to have occurred under this Agreement if:

(a)           in the case of a failure to pay any amount when due under this Agreement, a Party fails to pay such amount within ten (10) days after the date such payment is due; or

(b)           in the case of any other material breach of a Party’s obligations, warranties or covenants under this Agreement, the breaching Party fails to cure such breach within thirty (30) days after receiving notice from the non-breaching Party specifying such breach, provided that if the breach is of a nature that is curable but that cannot be cured within thirty (30) days, a default shall not have occurred so long as the breaching Party in good faith has commenced to cure within said time period and thereafter diligently pursues such cure to completion; or

(c)           in the case of repetitious or persistent non-material breaches of this Agreement occurring within any consecutive twelve-month period, the breaching Party fails to prevent a further similar breach of this Agreement from occurring during the six-month period immediately following the date of occurrence of the latest such breach, provided that written notice had been given by the non-breaching Party to the breaching Party of its belief that such breaches have occurred or are occurring and specifying the dates that such breaches are believe to have occurred, and provided that the breaching Party had a reasonable period of time to adopt suitable controls or to take other appropriate action to prevent such further breach; or

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(d)           in the case of any material misrepresentation by a Party; or

(e)           in the case a Party: (i) applies for or consents to the appointment of, or the taking of possession by a receiver, custodian, trustee, or liquidator of itself or of all or a substantial part of its property, (ii) makes a general assignment for the benefit of its creditors, (iii) commences a voluntary proceeding under the Federal Bankruptcy Code or under any other law relating to relief from creditors generally, or (iv) fails to contest in a timely or appropriate manner, or acquiesces in writing to, any petition filed against it in an involuntary proceeding under the Bankruptcy Code or under any other law relating to relief from creditors generally, or any application for the appointment of a receiver, custodian, trustee, or liquidator of itself or of all or a substantial part of its property, or its liquidation, reorganization, dissolution, or winding-up.

19.2        In the event of a default:

(a)           if the default consists of a failure of User to pay to AGLN any part of the IRU Fee or a failure of User to pay to AGLN any other amount(s) totaling more than one hundred thousand dollars ($100,000), then AGLN may, in addition to any other remedies that it may have under this Agreement or at law or in equity, in its sole discretion, (i) immediately terminate this Agreement with respect to the Segment(s) for which such part of the IRU Fee or other amount(s) relate and (ii) apply any and all amounts held by AGLN for User toward the payment of amounts then or thereafter payable by User hereunder.

(b)           In the event of any other default hereunder, the non-defaulting Party may avail itself of one or more of the following remedies: (i) take such actions, at the sole cost and expense of the defaulting party, as it determines, in its sole discretion, are necessary to correct the default; (ii) pursue any remedies it may have under applicable law or principles of equity, including specific performance; and (iii) terminate this Agreement, by giving the defaulting party written notice of termination.

19.3        Notwithstanding anything to the contained in this Agreement to the contrary, User’s sole and exclusive remedy for any failure by AGLN to deliver the User Dark Fibers by the Committed Delivery Date shall be limited to those contained in this Section 19.3.

(a)           In the event AGLN shall have failed to deliver the User Dark Fibers in any Segment within one hundred eighty (180) days after the Committed Delivery Date for the User Dark Fibers in such Service Order (as such date may be extended by Events of Force Majeure or otherwise under the terms of this Agreement), then User shall have the right, at its option, either (i) to cancel this Agreement solely with respect to such Service Order and receive a refund of the portion of the Initial Payment allocable to the User Dark Fibers in such Service Order, or (ii) to keep the User Dark Fibers in such Service Order. If User elects to so cancel, neither Party shall have any further duties, liabilities or obligations to the other Party (except for AGLN’s obligation to so refund the appropriate portion of the IRU Fee) under this Agreement with respect to such canceled Service Order.

(b)           In the event AGLN shall have failed to deliver the User Dark Fibers in any Service Order within twelve (12) months after the Committed Delivery Date for the User Dark Fibers in such Service Order (as such date may be extended by Events of Force Majeure or otherwise under the terms of this Agreement), and User has not exercised its rights under Section 19.3(a), then this Agreement shall automatically terminate solely with respect to such Service Order and AGLN shall

23

refund to User the portion of the Initial Payment allocable to the User Dark Fibers in such Service Order, and AGLN shall have no further duties, liabilities or obligations hereunder with respect to such Service Order.

19.4        This Agreement may be terminated by either Party, upon ten (10) days written notice to the other Party, if such Party receives final notification from any governmental agency that its performance under this Agreement is a violation of the terms of the Communications Act of 1934, as amended by the Telecommunications Act of 1996 (the “Act”), provided that, with respect to such notice being given to a Party, such Party must:

(i)            modify its performance under the Agreement, if possible, so that such Party’s performance under the Agreement is no longer in violation of the Act; and

(ii)           enter into good faith negotiations with the other Party for a minimum period of three (3) months following such notice to restructure the terms and conditions of the Agreement so that such party’s performance under the Agreement is no longer in violation of the Act.

The termination rights under this Section 19.5 may be exercised only to the extent the modifications described in Subsections 19.5(i) and (ii) above cannot be made.

20.          Termination

20.1        This Agreement shall automatically terminate on the expiration or termination of the Term with respect to User Dark Fibers in each Service Order, or earlier as provided in this Agreement. Upon the expiration of the Term or other termination of this Agreement, the IRU with respect to User Dark Fibers in each such Service Order shall immediately terminate, all rights of User to use the AGLN System, the User Dark Fibers in and any User Handholes within such Service Order shall cease, all rights to the use of the User Route and the User Dark Fibers shall revert to AGLN, and AGLN shall owe User no further duties, obligations or consideration.

20.2        Except as otherwise provided in Section 8.3, User shall, within thirty (30) days of such termination, remove all User Equipment and User Media used in connection with the User Dark Fibers. User shall accomplish such removal at User’s sole expense, under AGLN’s supervision and in a manner that does not damage the AGLN System. User shall be responsible for and shall indemnify AGLN from and against any damage, loss, cost or expense caused by such removal. If User fails to remove its property within such period, the property shall be deemed abandoned and AGLN may dispose of the same in any manner it deems reasonably appropriate, at User’s expense.

20.3        Termination of this Agreement shall not affect the rights or obligations of either Party that have arisen before the date of termination or expiration.

21.          Force Majeure

21.1        AGLN shall not be in default under this Agreement if and to the extent that any failure or delay in AGLN’s performance of one or more of its obligations hereunder is caused by any of the following conditions, and AGLN’s performance of such obligation or obligations shall be excused and extended for and during the period of any such delay: act of God or nature, including an

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earthquake, flood or hurricane; fire; lack of or delay in transportation; government codes, ordinances, actions, laws, rules, regulations or restrictions; acts of terrorism, war or civil disorder; strikes or other labor disputes; failure of a third Person to grant or to recognize an Underlying Right (provided that AGLN has made timely and reasonable commercial efforts to obtain the same); inability of AGLN to obtain access to the AGLN System; or any other cause beyond the reasonable control of AGLN (collectively, “Events of Force Majeure”). AGLN shall notify the User in writing of the existence of the event relied on and the cessation or termination of said Event of Force Majeure, and AGLN shall exercise reasonable commercial efforts to minimize the time of any such delay.

22.          Dispute Resolution

22.1        Except as otherwise provided in Sections 18.1(e) and 25.4(c), and this Article 22, any dispute, controversy or claim between the parties relating to, arising out of or in connection with this Agreement (or any subsequent agreements or amendments thereto), including as to its existence, enforceability, validity, interpretation, performance or breach or as to indemnification or damages, including claims in tort, whether arising before or after the termination of this Agreement (any such dispute, controversy or claim being herein referred to as a “Dispute”) shall be settled without litigation and only by use of the following alternative dispute resolution procedure:

(a)           At the written request of a Party, each Party shall appoint a knowledgeable, responsible representative to meet and negotiate in good faith to resolve any Dispute. The discussions shall be left to the discretion of the representatives. Upon failure to reach agreement, the representatives may utilize other alternative dispute resolution procedures such as mediation to assist in the negotiations. Discussions and correspondence among the Parties’ representatives for purposes of these negotiations shall be treated as confidential information developed for the purposes of settlement, exempt from discovery and production, and without the concurrence of both parties shall not be admissible in the arbitration described below, or in any lawsuit. Documents identified in or provided with such communications, which are not prepared for purposes of the negotiations, are not so exempted and may, if otherwise admissible, be admitted in the arbitration.

(b)           If negotiations between the representatives of the Parties do not resolve the Dispute within 60 days of the initial written request, the Dispute shall be submitted to binding arbitration by a single arbitrator pursuant to the Commercial Arbitration Rules, as then amended and in effect, of the American Arbitration Association (the “Rules”). Either Party may demand such arbitration in accordance with the procedures set out in the Rules. The arbitration shall take place in Phoenix, Arizona. The arbitration hearing shall be commenced within 60 days of such Party’s demand for arbitration. The arbitrator shall have the power to and will instruct each Party to produce evidence through discovery (i) that is reasonably requested by the other Party to the arbitration in order to prepare and substantiate its case and (ii) the production of which will not materially delay the expeditious resolution of the dispute being arbitrated; each Party hereto agrees to be bound by any such discovery order. The arbitrator shall control the scheduling (so as to process the matter expeditiously) and any discovery. The Parties may submit written briefs. At the arbitration hearing, each Party may make written and oral presentations to the arbitrator, present testimony and written evidence and examine witnesses. No Party shall be eligible to receive, and the arbitrator shall not have the authority to award, exemplary or punitive damages. The arbitrator shall rule on the Dispute by issuing a written opinion within 30 days after the close of hearings. The arbitrator’s decision shall be binding and final. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction.

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(c)           Each Party will bear its own costs and expenses in submitting and presenting its position with respect to any Dispute to the arbitrator; provided, however, that if the arbitrator determines that the position taken in the Dispute by the nonprevailing Party taken as a whole is unreasonable, the arbitrator may order the nonprevailing Party to bear such fees and expenses, and reimburse the prevailing Party for all or such portion of its reasonable costs and expenses in submitting and presenting its position, as the arbitrator shall reasonably determine to be fair under the circumstances. Each Party to the arbitration shall pay one-half of the fees and expenses of the arbitrator and the American Arbitration Association.

(d)           Notwithstanding any other provision of this Agreement, (i) either Party may commence an action to compel compliance with this Section 22.1 and (ii) if any Party, as part of a Dispute, seeks injunctive relief or any other equitable remedy, including specific enforcement, then such Party shall be permitted, without requirement to post bond, to seek such injunctive or equitable relief in any federal or state court or competent jurisdiction before, during or after the pendency of a mediation or arbitration proceeding under this Article 22.

22.2        If any Party files a judicial or administrative action asserting claims subject to arbitration as prescribed herein, and the other Party successfully stays such action or compels arbitration of said claims, the Party filing said action shall pay the other Party’s costs and expenses incurred in seeking such stay or compelling arbitration, including reasonable attorneys’ fees.

23.          Assignment and Transfer Restrictions

23.1        Except as provided below in this Section 23.1 and as provided in Section 23.2, User may not transfer or assign all or any part of this Agreement or of its interest under this Agreement, or delegate any duties, burdens, or obligations arising hereunder, without AGLN’s prior express written consent, which consent may not be unreasonably withheld. In no event whatsoever shall User transfer, sell, assign, condo, swap, exchange, lease, sublease, license, sublicense or grant indefeasible or other rights of use in or to any one or more of the User Dark Fibers or User’s interest therein, or enter into any other arrangement with any Person for such Person’s use of any one or more of the User Dark Fibers. A transfer, assignment or other action in violation of this Article 23 shall constitute a material breach of this Agreement and shall be null and void. If any such consent is given, User nevertheless shall remain fully and primarily liable for all obligations of User under this Agreement. Nothing in this section shall be construed to restrict the sale of Telecommunications Services by User.

23.2        User may transfer and assign this Agreement in whole, but not in part, to a Permitted Assignee. As used herein, the term “Permitted Assignee” shall mean (a) any Affiliate of User, (b) any Person that purchases all or substantially all of the assets of User, or any other Person formed by or surviving the merger or consolidation of User and any other Person or (c) any Person that purchases all or substantially all of the assets of User that are used in the provision of telecommunications services in the Phoenix metropolitan area, including User’s rights hereunder to the User Dark Fibers and all of the User Equipment. Upon any assignment to a Permitted Assignee, the assignor shall remain responsible for performance under this Agreement. Any Permitted Assignee shall expressly assume in writing all obligations and liabilities with respect to the Agreement which arise after the effective date of assignment or transfer, prior to or upon the effectiveness of such assignment. Any and all increased payments to grantors or providers of any

26

Underlying Right and any other additional fees, charges, costs or expenses which result under the Underlying Rights or otherwise as a result of any Permitted Assignment or transfer of this Agreement by User shall be paid by User.

23.3        Nothing shall be deemed or construed to prohibit AGLN from assigning or otherwise transferring this Agreement, or any of its rights or interests herein, in whole or in part, or from selling, transferring, leasing, licensing, granting indefeasible rights of use in or entering into similar agreements or arrangements with other Persons respecting any Innerducts or other conduit tubing, Cable, fibers (other than the User Dark Fibers), or Associated Property constituting a part of the AGLN System. If in connection with any assignment of this Agreement by AGLN, AGLN causes such assignee to contemporaneously therewith agree in writing to perform all of AGLN’s obligations under this Agreement, then AGLN shall be released from liability hereunder. AGLN may encumber the AGLN System provided any such encumbrance created after the date of this Agreement shall be subject to the rights of User hereunder. AGLN may pledge or assign its rights under this Agreement to its Lender(s) for the purpose of securing financing for its construction, maintenance, or extension of the AGLN System.

24.          Representations, Warranties and Acknowledgments

24.1        By execution of this Agreement, each Party represents and warrants to the other:

(a)           That the representing Party has full right and authority to enter into and perform this Agreement in accordance with the terms hereof and thereof, and that by entering into or performing this Agreement, the representing Party is not in violation of its charter or bylaws, or any law, regulation or agreement by which it is bound or to which it is subject;

(b)           That the execution, delivery and performance of this Agreement by such Party has been duly authorized by all requisite corporate action, that the signatories for such Party hereto are authorized to sign this Agreement, and that the joinder or consent of any other Party, including a court or trustee or referee, is not necessary to make valid and effective the execution, delivery and performance of this Agreement by such Party.

24.2        EXCEPT AS EXPRESSLY PROVIDED HEREIN, AGLN MAKES NO WARRANTY, EXPRESS OR IMPLIED, WITH RESPECT TO THE USER DARK FIBERS, THE AGLN SYSTEM, THE ASSOCIATED PROPERTY, OR ANY WORK PERFORMED OR TO BE PERFORMED UNDER THIS AGREEMENT, INCLUDING ANY AND ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR PARTICULAR PURPOSE OR USE, AND ALL SUCH WARRANTIES ARE HEREBY EXPRESSLY DISCLAIMED. THE WARRANTIES SET FORTH IN THIS AGREEMENT CONSTITUTE THE ONLY WARRANTIES MADE BY AGLN TO USER WITH RESPECT TO THIS AGREEMENT AND ARE MADE IN LIEU OF ALL OTHER WARRANTIES, WRITTEN OR ORAL, STATUTORY, EXPRESS OR IMPLIED.

25.          General

25.1        Binding Effect. This Agreement and each of the Parties’ respective rights and obligations under this Agreement, shall be binding on and shall inure to the benefit of the Parties hereto and each of their respective permitted successors and assigns.

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25.2        Waiver. The failure of either Party hereto to enforce any of the provisions of this Agreement, or the waiver thereof in any instance, shall not be construed as a general waiver or relinquishment on its part of any such provision, but the same shall nevertheless be and remain in full force and effect.

25.3        Governing Law. This Agreement shall be governed by and construed in accordance with the domestic laws of the State of Arizona, without giving effect to its principles of conflicts of laws. Any litigation based hereon, or arising out of or in connection with a default by either Party in the performance of its obligations hereunder, shall be brought and maintained exclusively in the courts of the State of Arizona or in the United States District Court in Phoenix, Arizona within Maricopa County, and each Party hereby irrevocably submits to the jurisdiction of such courts for the purpose of any such litigation and irrevocably agrees to be bound by any judgment rendered thereby in connection with such litigation and waives any right to claim that such court or courts are inconvenient.

25.4        Rules of Construction.

(a)           The captions or headings in this Agreement are strictly for convenience and shall not be considered in interpreting this Agreement or as amplifying or limiting any of its content. Words in this Agreement which import the singular connotation shall be interpreted as plural, and words which import the plural connotation shall be interpreted as singular, as the identity of the parties or objects referred to may require. The words “include,” “includes,” and “including,” shall be deemed to be followed by the phrase “without limitation.” The words “hereof,” “herein,” and “hereunder” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. Unless otherwise expressly provided herein, any agreement, instrument or statute defined or referred to herein or in any agreement or instrument that is referred to herein means such agreement, instrument or statute as from time to time amended, modified or supplemented, including (in the case of agreements or instruments) by waiver or consent and (in the case of statutes) by succession of comparable successor statutes and references to all attachments thereto and instruments incorporated therein. All accounting terms not otherwise defined in this Agreement will have the meanings subscribed to them under generally accepted accounting principles as in effect from time to time in the United States.

(b)           Unless expressly defined herein, words having well known technical or trade meanings shall be so construed. All listing of items shall not be taken to be exclusive, but shall include other items, whether similar or dissimilar to those listed, as the context reasonably requires.

(c)           The Parties hereby agree that the rights and remedies set forth in this Agreement shall be each Party’s sole and exclusive rights and remedies against the other Party for any claims arising under this Agreement and relating to any breaches of the representations, warranties or covenants contained in this Agreement. Notwithstanding the foregoing, the Parties agree that if any breach or threatened breach of the representations, warranties or covenants of this Agreement would cause irreparable injury to a Party and money damages would not provide an adequate remedy to such Party, then, in addition to the rights and remedies available to such Party pursuant to this Agreement, such Party shall have the right to obtain equitable relief in the form of a temporary or permanent injunction or order for a specific performance, without the requirement of posting of bond.

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(d)           Except as set forth in Section 25.6, nothing in this Agreement is intended to provide any legal rights to anyone not an executing party of this Agreement.

(e)           This Agreement has been fully negotiated between and jointly drafted by the Parties.

(f)            All actions, activities, consents, approvals and other undertakings of the Parties shall be performed in a reasonable and timely manner, it being expressly acknowledged and understood that time is of the essence in the performance of obligations required to be performed by a date expressly specified herein. Except as specifically set forth herein, for the purpose of this Agreement the standards and practices of performance within the telecommunications industry in the relevant market shall be the measure of a Party’s performance.

25.5        Entire Agreement. This Agreement constitutes the entire and final agreement and understanding between the Parties with respect to the subject matter hereof and supersedes all prior agreements relating to the subject matter hereof, which are of no further force or effect. The Exhibits, Schedules and Attachments referred to herein are integral parts hereof and are hereby made a part of this Agreement. To the extent that any of the provisions of any Exhibit hereto are inconsistent with the express terms of this Agreement, the terms of this Agreement shall prevail. This Agreement may only be modified or supplemented by an instrument in writing executed by each Party and delivered to the Party relying on the writing.

25.6        No Personal Liability. No Party shall seek to impose any liability relating to, or arising from, this Agreement against any employee, officer or director of the other Party. Each of such Persons is an intended beneficiary of the mutual promises set forth in this Section and shall be entitled to enforce the obligations of this Section.

25.7        Relationship of the Parties. The relationship between User and AGLN shall not be that of partners, agents, or joint venturers for one another, and nothing contained in this Agreement shall be deemed to constitute a partnership or agency agreement between them for any purposes, including federal income tax purposes. User and AGLN, in performing any of their obligations hereunder, shall be independent contractors or independent parties and shall discharge their contractual obligations at their own risk subject, however, to the terms and conditions hereof. Neither Party shall have the authority to bind the other Party by contract or otherwise or to make any representations or guarantees on behalf of the other Party.

25.8        Severability. If any section, subsection, sentence, clause, phrase, or other portion of this Agreement is, for any reason, declared invalid, in whole or in part, by any court, agency, commission, legislative body, or other authority of competent jurisdiction, such portion shall be deemed a separate, distinct, and independent portion. Such declaration shall not affect the validity of the remaining portions hereof, which other portions shall continue in full force and effect.

25.9        Remedies. Unless otherwise expressly limited or excluded herein, all remedies provided in this Agreement are cumulative and non-exclusive, and are in addition to all other remedies available at law or in equity, including without limitation any actions for damages.

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25.10      Counterparts. This Agreement may be executed in one or more counterparts, all of which taken together shall constitute one and the same instrument.

Remainder of Page Intentionally Blank

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In confirmation of their consent and agreement to the terms and conditions contained in this Agreement and intending to be legally bound hereby, the parties have executed this Agreement as of the date first above written.

AGLN:	AGL NETWORKS, LLC
	By:	/s/ Richard P. Fehl
	Name: Richard P. Fehl
	Title: EVP and COO
	Date: 1/30/05
USER:	MOUNTAIN TELECOMMUNICATIONS, INC.,
	an Arizona corporation
	By:	/s/ Wilmot Wickramasuriya
	Name: Wilmot Wickramasuriya
	Title: President
	Date: 26 January 2005

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EXHIBIT A
Service Order Form
To
INDEFEASIBLE RIGHT OF USE AGREEMENT AND MASTER SERVICE
AGREEMENT
By and Between
AGL NETWORKS, LLC
And
MOUNTAIN COMMUNICATIONS, INC.
DATED: January 24, 2005

Service Order Number: One (1)
Date: January 24, 2005

This Service Order 1 is for the installation and utilization of Dark Fiber, pursuant to the Indefeasible Right of User Agreement dated January 24, 2005, between AGL Networks, LLC (“AGLN”) and Mountain Telecommunications, Inc. (“User”).

Grant of Rights:

Pursuant to the Agreement and as of the date of this Service Order 1, AGLN grants to User and User receives from AGLN (i) an exclusive indefeasible right of use in six (6) fiber optic strands of the Cable in Ring A, as indicted in Attachment 1 to this Service Order 1, and six (6) fiber optic strands in Ring B, as indicted in Attachment 2 to this Service Order 1 which will be specifically identified by AGLN, in the AGLN System (the “User Dark Fibers”) and the associated and nonexclusive right to use the Associated Property, all such rights upon and subject to the terms and conditions set forth in this Service Order 1 and the Agreement (collectively, the “IRU”).

Description of Dark Fiber:

Ring A. 6 fibers over 21.8 route miles (131 fiber miles) connecting 4 Lateral Spurs, as further described in Attachment 1 to this Service Order 1 at the following locations:

PHNXAZEA - 2946 E Van Buren St
PHNXAZMA - 211 W Monroe St
PHNXAZNE - 3640 E Indian School
PHNXAZNO - 215 E Indian School

Ring B. 6 fibers over 33.5 route miles (201 fiber miles) connecting 2 Lateral Spurs, as further described in Attachment 2 to this Service Order 1 at the following locations:

MTI CO - 7850 S. Hardy Drive, Tempe
TEMPAZMA - 25 W. 5th Street, Tempe

IRU Fee and Payment Terms:

Subject to the terms and conditions of Section 4 of the Agreement, User agrees to pay to AGLN for the Dark Fiber a fee in the amount specified below:

(a)	$65,000 nonrecurring charge payable as follows:
		$30,000 upon Execution of this Service Order 1
		$35,000 upon Acceptance of User Dark Fibers
(b)	Monthly IRU Fee months 1-48 of the Term:		$21,000
(c)	Monthly IRU Fee months 49-240 of the Term:		$10,000
(d)	Monthly IRU Fee includes Routine Maintenance.

The parties understand and agree that User may pay off the remaining IRU fee balance at any time during the Term. The amount due shall be the Early Pay Off Amount as calculated using the IRU Payoff Schedule attached and incorporated herein as Attachment 3 to this Service Order 1.

Completion Date:	Ring A: 120 Days after execution of this Service Order 1.
	Ring B: 120 Days after execution of this Service Order 1.

Service Order 1 IRU Term: 20 Years

Special Requirements: User shall be responsible for securing the necessary access agreements and coordination at any Bell (QWEST) central office location to ensure that the completion Date can be met. In the event that all other Lateral Spur locations are completed and User has not secured the necessary access to Bell (QWEST) central office locations in time to allow AGLN to complete work at this location, AGLN may continue with the test acceptance and turnover procedures to the degree that they can be completed based on User provided access to the Lateral Spur locations and invoice for the services under this Service Order Number One as if all locations were completed by the Completion date.

AGREED AND ACCEPTED:

AGL Networks, LLC

By:	/s/ Richard P. Fehl
Name:			Richard P. Fehl
Title:		E.V.P. - C.O.O.
Date:		1/30/05
Address:				Houston, TX
USER
By:	/s/ Michael Charel
Name:			Michael Charel
Title:		Vice President
Date:		26 Jan 05

Attachment 1
To
 Service Order 1

Ring A

Ring A: 4 Nodes, 6 Fibers including laterals — 21.8 Route Miles

Ring A Lateral Drawings

211 W. Monroe St, Phoenix, AZ: Six (6) Fibers with dual entry into Qwest CLEC Express manholes. AGLN will provide diverse paths to the Qwest CLEC Express manholes as shown below. The Demarcation Point will be in AGLN’s negative-one manhole for the diverse entry laterals. Qwest will provide the required cable length information from the User termination point inside the building to the Qwest CLEC Express manholes, install the termination panels, and provide hand-off instructions as required by Qwest. Micro cables might need to be used to save space. AGLN will hand-off the cables per User’s instructions. AGLN will install the cables as identified by Qwest and provide enough slack for either AGLN/ILEC or User to pull from the CLEC Express manholes and on into the Central Office.

215 W. Indian School Rd, Phoenix, AZ: Six (6) Fibers with dual entry into Qwest CLEC Express manholes. AGLN will provide diverse paths to the Qwest CLEC Express manholes as shown below. The Demarcation Point will be in AGLN’s negative-one manhole for the diverse entry laterals. Qwest will provide the required cable length information from the User termination point inside the building to the Qwest CLEC Express manholes, install the termination panels, and provide hand-off instructions as required by Qwest. Micro cables might need to be used to save space. AGLN will hand-off the cables per User’s instructions. AGLN will install the cables as identified by Qwest and provide enough slack for either AGLN/ILEC or User to pull from the CLEC Express manholes and on into the Central Office.

3640 E. Indian School Rd, Phoenix, AZ: Six (6) Fibers with dual entry into Qwest CLEC Express manholes. AGLN will provide diverse paths to the Qwest CLEC Express manholes as shown below. The Demarcation Point will be in AGLN’s negative-one manhole for the diverse entry laterals. Qwest will provide the required cable length information from the User termination point inside the building to the Qwest CLEC Express manholes, install the termination panels, and provide hand-off instructions as required by Qwest. Micro cables might need to be used to save space. AGLN will hand-off the cables per User’s instructions. AGLN will install the cables as identified by Qwest and provide enough slack for either AGLN/ILEC or User to pull from the CLEC Express manholes and on into the Central Office.

2946 E. Van Buren St, Phoenix, AZ: Six (6) Fibers with dual entry into Qwest CLEC Express manholes. AGLN will provide diverse paths to the Qwest CLEC Express manholes as shown below. The Demarcation Point will be in AGLN’s negative-one manhole for the diverse entry laterals. Qwest will provide the required cable length information from the User termination point inside the building to the Qwest CLEC Express manholes, install the termination panels, and provide hand-off instructions as required by Qwest. Micro cables might need to be used to save space. AGLN will hand-off the cables per User’s instructions. AGLN will install the cables as identified by Qwest and provide enough slack for either AGLN/ILEC or User to pull from the CLEC Express manholes and on into the Central Office.

Attachment 2
To
Service Order 1

Ring B

Ring B: 2 Nodes, 6 Fibers including laterals — 33.5 Route Miles

Ring B Lateral Drawings

25 W. 5th, Tempe, AZ: Six (6) Fibers with dual entry into Qwest CLEC Express manholes. AGLN will provide diverse paths to the Qwest CLEC Express manholes as shown below. The Demarcation Point will be in AGLN’s negative-one manhole for the diverse entry laterals. Qwest will provide the required cable length information from the User termination point inside the building to the Qwest CLEC Express manholes, install the termination panels, and provide hand-off instructions as required by Qwest. Micro cables might need to be used to save space. AGLN will hand-off the cables per User’s instructions. AGLN will install the cables as identified by Qwest and provide enough slack for either AGLN/ILEC or User to pull from the CLEC Express manholes and on into the Central Office.

7850 S. Hardy Drive, Tempe AZ: Six (6) Fibers with dual entry into User Switch site via existing building Junction Boxes. AGLN will provide diverse paths to the User building as shown below. The Demarcation Point will be at AGLN’s FDP for the diverse entry laterals. User will provide the required cable length information from the User termination point (FDP) inside the building to the existing junction boxes, install any required fiber termination panels, and provide hand-off instructions as required. AGLN will hand-off the cables per User’s instructions. AGLN will install the cables and provide enough storage slack for as mutually agreed upon between parties

Attachment 3
To
Service Order 1

IRU Payoff Schedule

Payment Month (1st of month)	Monthly IRU Fee		Early Payoff Amount
1	$	21,000	$	1,400,000.00
2	$	21,000	$	1,391,645.25
3	$	21,000	$	1,383,213.90
4	$	21,000	$	1,374,705.22
5	$	21,000	$	1,366,118.53
6	$	21,000	$	1,357,453.09
7	$	21,000	$	1,348,708.20
8	$	21,000	$	1,339,883.11
9	$	21,000	$	1,330,977.10
10	$	21,000	$	1,321,989.42
11	$	21,000	$	1,312,919.33
12	$	21,000	$	1,303,766.07
13	$	21,000	$	1,294,528.87
14	$	21,000	$	1,285,206.97
15	$	21,000	$	1,275,799.58
16	$	21,000	$	1,266,305.93
17	$	21,000	$	1,256,725.23
18	$	21,000	$	1,247,056.67
19	$	21,000	$	1,237,299.46
20	$	21,000	$	1,227,452.77
21	$	21,000	$	1,217,515.78
22	$	21,000	$	1,207,487.68
23	$	21,000	$	1,197,367.62
24	$	21,000	$	1,187,154.76
25	$	21,000	$	1,176,848.25
26	$	21,000	$	1,166,447.23
27	$	21,000	$	1,155,950.84
28	$	21,000	$	1,145,358.19
29	$	21,000	$	1,134,668.42
30	$	21,000	$	1,123,880.61
31	$	21,000	$	1,112,993.89
32	$	21,000	$	1,102,007.33
33	$	21,000	$	1,090,920.03
34	$	21,000	$	1,079,731.06
35	$	21,000	$	1,068,439.49
36	$	21,000	$	1,057,044.38
37	$	21,000	$	1,045,544.77
38	$	21,000	$	1,033,939.72

39	$	21,000	$	1,022,228.24
40	$	21,000	$	1,010,409.38
41	$	21,000	$	998,482.14
42	$	21,000	$	986,445.52
43	$	21,000	$	974,298.54
44	$	21,000	$	962,040.16
45	$	21,000	$	949,669.38
46	$	21,000	$	937,185.16
47	$	21,000	$	924,586.46
48	$	21,000	$	911,872.23
49	$	10,000	$	899,041.42
50	$	10,000	$	897,193.81
51	$	10,000	$	895,329.27
52	$	10,000	$	893,447.62
53	$	10,000	$	891,548.73
54	$	10,000	$	889,632.42
55	$	10,000	$	887,698.53
56	$	10,000	$	885,746.92
57	$	10,000	$	883,777.40
58	$	10,000	$	881,789.83
59	$	10,000	$	879,784.03
60	$	10,000	$	877,759.84
61	$	10,000	$	875,717.09
62	$	10,000	$	873,655.60
63	$	10,000	$	871,575.21
64	$	10,000	$	869,475.75
65	$	10,000	$	867,357.03
66	$	10,000	$	865,218.89
67	$	10,000	$	863,061.13
68	$	10,000	$	860,883.60
69	$	10,000	$	858,686.09
70	$	10,000	$	856,468.43
71	$	10,000	$	854,230.44
72	$	10,000	$	851,971.93
73	$	10,000	$	849,692.70
74	$	10,000	$	847,392.58
75	$	10,000	$	845,071.36
76	$	10,000	$	842,728.86
77	$	10,000	$	840,364.87
78	$	10,000	$	837,979.21
79	$	10,000	$	835,571.68
80	$	10,000	$	833,142.06
81	$	10,000	$	830,690.17
82	$	10,000	$	828,215.80
83	$	10,000	$	825,718.73
84	$	10,000	$	823,198.77
85	$	10,000	$	820,655.70
86	$	10,000	$	818,089.31
87	$	10,000	$	815,499.38
88	$	10,000	$	812,885.71
89	$	10,000	$	810,248.07
90	$	10,000	$	807,586.24

91	$	10,000	$	804,900.00
92	$	10,000	$	802,189.14
93	$	10,000	$	799,453.41
94	$	10,000	$	796,692.60
95	$	10,000	$	793,906.47
96	$	10,000	$	791,094.79
97	$	10,000	$	788,257.33
98	$	10,000	$	785,393.85
99	$	10,000	$	782,504.11
100	$	10,000	$	779,587.88
101	$	10,000	$	776,644.90
102	$	10,000	$	773,674.93
103	$	10,000	$	770,677.74
104	$	10,000	$	767,653.05
105	$	10,000	$	764,600.64
106	$	10,000	$	761,520.23
107	$	10,000	$	758,411.57
108	$	10,000	$	755,274.41
109	$	10,000	$	752,108.48
110	$	10,000	$	748,913.52
111	$	10,000	$	745,689.26
112	$	10,000	$	742,435.44
113	$	10,000	$	739,151.78
114	$	10,000	$	735,838.01
115	$	10,000	$	732,493.85
116	$	10,000	$	729,119.03
117	$	10,000	$	725,713.26
118	$	10,000	$	722,276.26
119	$	10,000	$	718,807.74
120	$	10,000	$	715,307.42
121	$	10,000	$	711,774.99
122	$	10,000	$	708,210.18
123	$	10,000	$	704,612.68
124	$	10,000	$	700,982.19
125	$	10,000	$	697,318.41
126	$	10,000	$	693,621.03
127	$	10,000	$	689,889.75
128	$	10,000	$	686,124.25
129	$	10,000	$	682,324.22
130	$	10,000	$	678,489.35
131	$	10,000	$	674,619.31
132	$	10,000	$	670,713.79
133	$	10,000	$	666,772.45
134	$	10,000	$	662,794.97
135	$	10,000	$	658,781.01
136	$	10,000	$	654,730.25
137	$	10,000	$	650,642.35
138	$	10,000	$	646,516.96
139	$	10,000	$	642,353.73
140	$	10,000	$	638,152.34
141	$	10,000	$	633,912.41
142	$	10,000	$	629,633.61

143	$	10,000	$	625,315.57
144	$	10,000	$	620,957.94
145	$	10,000	$	616,560.34
146	$	10,000	$	612,122.43
147	$	10,000	$	607,643.81
148	$	10,000	$	603,124.13
149	$	10,000	$	598,563.00
150	$	10,000	$	593,960.05
151	$	10,000	$	589,314.89
152	$	10,000	$	584,627.13
153	$	10,000	$	579,896.39
154	$	10,000	$	575,122.27
155	$	10,000	$	570,304.37
156	$	10,000	$	565,442.28
157	$	10,000	$	560,535.62
158	$	10,000	$	555,583.96
159	$	10,000	$	550,586.90
160	$	10,000	$	545,544.01
161	$	10,000	$	540,454.88
162	$	10,000	$	535,319.08
163	$	10,000	$	530,136.19
164	$	10,000	$	524,905.77
165	$	10,000	$	519,627.39
166	$	10,000	$	514,300.61
167	$	10,000	$	508,924.99
168	$	10,000	$	503,500.06
169	$	10,000	$	498,025.40
170	$	10,000	$	492,500.53
171	$	10,000	$	486,924.99
172	$	10,000	$	481,298.34
173	$	10,000	$	475,620.08
174	$	10,000	$	469,889.76
175	$	10,000	$	464,106.89
176	$	10,000	$	458,270.99
177	$	10,000	$	452,381.58
178	$	10,000	$	446,438.16
179	$	10,000	$	440,440.24
180	$	10,000	$	434,387.33
181	$	10,000	$	428,278.90
182	$	10,000	$	422,114.47
183	$	10,000	$	415,893.50
184	$	10,000	$	409,615.50
185	$	10,000	$	403,279.92
186	$	10,000	$	396,886.25
187	$	10,000	$	390,433.94
188	$	10,000	$	383,922.47
189	$	10,000	$	377,351.30
190	$	10,000	$	370,719.86
191	$	10,000	$	364,027.62
192	$	10,000	$	357,274.00
193	$	10,000	$	350,458.46
194	$	10,000	$	343,580.42

195	$	10,000	$	336,639.31
196	$	10,000	$	329,634.55
197	$	10,000	$	322,565.56
198	$	10,000	$	315,431.75
199	$	10,000	$	308,232.52
200	$	10,000	$	300,967.27
201	$	10,000	$	293,635.40
202	$	10,000	$	286,236.30
203	$	10,000	$	278,769.36
204	$	10,000	$	271,233.94
205	$	10,000	$	263,629.42
206	$	10,000	$	255,955.17
207	$	10,000	$	248,210.55
208	$	10,000	$	240,394.91
209	$	10,000	$	232,507.60
210	$	10,000	$	224,547.96
211	$	10,000	$	216,515.34
212	$	10,000	$	208,409.06
213	$	10,000	$	200,228.45
214	$	10,000	$	191,972.82
215	$	10,000	$	183,641.49
216	$	10,000	$	175,233.76
217	$	10,000	$	166,748.93
218	$	10,000	$	158,186.30
219	$	10,000	$	149,545.14
220	$	10,000	$	140,824.76
221	$	10,000	$	132,024.40
222	$	10,000	$	123,143.35
223	$	10,000	$	114,180.86
224	$	10,000	$	105,136.19
225	$	10,000	$	96,008.57
226	$	10,000	$	86,797.26
227	$	10,000	$	77,501.48
228	$	10,000	$	68,120.46
229	$	10,000	$	58,653.42
230	$	10,000	$	49,099.56
231	$	10,000	$	39,458.10
232	$	10,000	$	29,728.23
233	$	10,000	$	19,909.13
234	$	10,000	$	10,000.00

EXHIBIT B
AGLN ROUTE MAP

EXHIBIT C
Construction

1.GENERAL

The intent of this document is to outline the specifications for construction of a conduit network system. Deviations from the specifications may occur in those circumstances where either (i) strict compliance is impractical due to physical (including environmental) field conditions, Underlying Right issues or code restrictions, or (ii) AGLN has acquired a portion of the Segment from a third party. In all cases, the standards contained in this document or the standards of the federal, state, local or private agency having jurisdiction, whichever is stricter, shall be followed. Aerial systems are not acceptable alternatives and are not addressed in these specifications and standards.

2.COMPLIANCE

All work will be done in strict accordance with federal, state, local, and applicable private rules and laws regarding safety and environmental issues, including those set forth by OSHA and the EPA. In addition, all work and the resulting conduit system will comply with the current requirements of all governing entities (FCC, NEC, DEC, and other national, state, and local codes).

3.MATERIAL

The conduit shall be HDPE with a minimum of SDR-11. Steel or PVC conduit shall be minimum Schedule 40 wall thickness. Steel conduit will be joined with threaded collars or welding. Microduct shall be HDPE 12mm OD by 10 mm ID with microribs inside.

Any exposed steel conduit, brackets, or hardware shall be hot-dipped galvanized after fabrication.

Manholes shall have a minimum H-20 loading rating. All manholes will have locking lids (pentahead or similar). Dimensions will typically be 4 by 8 by 6 feet or 4 by 4 by 4 feet (W by L by H).

Handholes shall have a minimum load rating of H-20. Dimensions will typically be 30 by 48 by 36 inches (W by L by H), or sufficient in size to hold cable slack for laterals. EMS markers will be fabricated in the lids of handholes. All handholes will have locking lids (pentahead or similar).

4. MINIMUM DEPTHS

On backbone segments the minimum cover required in the placement of conduit shall be forty-two inches

(42”). Additional depth will be required in ditches, forty-eight inches (48”) and across streams, washes, culvert outfalls, and other waterways, sixty inches (60”). For laterals, direct bury, and other non backbone applications the minimum depth shall be twenty-four (24”).

At locations where conduit crosses other subsurface utilities or other structures, the conduit shall be installed to provide a minimum of twelve inches (12”) vertical clearance and the applicable minimum depth can be maintained; otherwise, the conduit will be installed under the existing utility or other structure. If, however, adequate clearance cannot be obtained and the conduit must be placed above, steel conduit shall be used.

On backbone segments in rock, the conduit depth shall be 36 to 42 inches in HDPE, 24 to 36 inches in steel conduit, 18 to 24 inches in HDPE or PVC or steel conduit and concrete encased. PVC or HDPE conduit will be backfilled with six inches (6”) inches of select materials (padding) in rock areas. Polyurethane channel (Fiber-Rockgard or equivalent) may be used as protective cover in lieu of select material padding.

In the case of the use/conversion of existing steel pipelines or existing conduit systems as a casing pipe, the existing depth shall be considered adequate.

5.CONDUIT CONSTRUCTION

Conduits may be placed by means of trenching, plowing, jack and bore, micro-trenching, or directional bore. Network facilities will generally be placed on a level grade parallel to the surface, with only gradual changes in grade elevation.

Crossings of roads maintained by government bodies and railroad crossings will be encased in HDPE conduit, or as required by the permitting authority.

All galvanized steel conduits placed on bridges shall have expansion joints placed at each structural (bridge) expansion joint or at least every three hundred feet (300’), whichever is the shorter distance. For bridges under one hundred feet (100’), with no bridge expansion joint, no conduit expansion joint is required. For bridges greater than one hundred feet (100’), at least one conduit expansion joint will be placed, even if there is no bridge expansion joint.

6. INNERDUCT INSTALLATION

No cable will be placed directly in any split/solid steel or PVC conduit without innerduct. Innerduct(s) shall extend beyond the end of all conduits a minimum of twelve inches (12”). The innerducts shall be sealed with foam sealant and/or duct plugs after installation. Innerducts containing microducts shall be sealed with foam sealant and/or plugs after installation. The microducts will also the sealed with foam sealant and/or plugs after installation.

7.CABLE INSTALLATION

7.1The fiber optic cable shall be installed using a powered pulling winch and hydraulic-powered assist pulling wheels or by cable blowing methods. The maximum pulling force to be applied to the fiber optic cable shall not exceed manufacturer’s recommendations (typically 600 lbs.). The cable shall be lubricated during placement and a breakaway swivel utilized at all times.

7.2Thirty meters (30m) of slack will be left in all intermediate manholes. Thirty meters (30m) of slack (off each cable end) will be left in all splice point manholes. Sufficient slack will be left at facilities to reach the FDP and provide for ten meters (10m) of slack at the site.

7.3For direct buried cable applications, cables may be placed by means of trenching, plowing, jack and bore, micro-trenching, or directional bore.

8.MANHOLES/HANDHOLES

Manholes in urban areas will typically be installed at 500 ft to 1,000 ft intervals. Handholes will typically be used in the construction of laterals or as pull points.

9.CABLE MARKERS (WARNING SIGNS)

Cable markers shall be installed at sufficient frequency to mark the location of the cable. Markers shall be positioned so that they can be seen from the location of the cable and generally set facing perpendicular to the cable running line. In rural areas, markers shall be placed a minimum of every one thousand feet (1,000’). In urban areas, markers shall be placed a minimum of every five hundred feet (500’). Changes in running line, handholes, both sides of government-maintained roads, railroads, and major waterway crossings will be marked with warning signs or pavement marker.

10.DEVIATIONS FROM SPECIFICATIONS

AGL Networks may deviate from these specifications, when field conditions dictate.

11.AS-BUILT DRAWINGS

As-built drawings will be delivered within ninety (90) days after the Segment Acceptance Date. For conduit purchases or leases as-built drawings will contain a minimum of the following:

a)Information showing the location of running line, relative to permanent landmarks, including but not limited to, railroad mileposts, boundary crossings and utility crossings.

b)Manhole/handhole locations.

c)Conduit information (type, length, expansion joints, etc.).

d)Notation of all deviations from specifications (depth, etc.).

e)Right of way detail (type, centerline distances, boundaries, waterways, road crossings, known utilities and obstacles, etc.).

f)Cable marker locations and stationing.

g)Construction of facilities will be documented on the sitework/facility as-builds and maintained on file at the facility.

h)As-builds will be provided in both hard copy and electronic format (Auto-CAD Release 13.0 or later).

For fiber purchases or leases test records shall include one CD RAM with all traces and power meter readings. An industry excepted naming convention shall be utilized. An electronic route map will be provided in an agreeable format.

12.ACCEPTANCE TESTING

All splicing and testing shall be performed with industry accepted equipment. Company shall perform two stages of testing during construction of a new fiber cable route. Industry accepted Optical Time Domain Reflectometer (OTDR) and power meter tests shall be performed.

12.1         Splicing Standards are as follows for standard single mode fiber:

Splices shall be qualified during the initial construction with an OTDR from only one direction. Connector (pigtail) splices shall be qualified with a 1-km launch reel minimum. Unidirectional acceptance parameters are .2 dB loss.

After end-to-end (site-to-site) connectivity on the fibers, bi-directional span testing shall be done. These measurements must be made after the splice manholes or handholes are closed in order to check for macro-bending problems. Connectors shall be cleaned as necessary to ensure accurate measurements are taken.

Installed loss measurement at 1310nm and 1550nm shall be recorded using an industry-accepted laser source and power meter. Continuity testing shall be done on all fibers concurrently. Bi-directional acceptance parameters are as follows: .15 dB with a total of three attempts being made and documented if the loss is above .15dB. Two additional attempts shall be made if the loss is above .3 dB. If after three attempts the loss is above .4 dB the splice shall be marked as Out-of-Spec (OOS) on the data sheet. Each splicing attempt shall be documented on the data sheet.

The objective loss value of the connector and its associated splice shall be 0.50dB or less. This value does not include the insertion loss from its connection to the FDP. Connectors shall be Ultra SC-PC with conventional single mode glass.

The dB/km acceptance standard for each fiber shall be an average bi-directional installed loss of 0.30dB/km at 1550nm or .40dB/km at 1310nm or less across each span.

12.2         All splices shall be protected with heat shrinks. An industry-accepted non-encapsulated splice enclosure shall be used on all splices (like Alcatel WTC2, PLP Coyote, Lucent 2600 or 3M 2178.

12.4         The entire fiber optic system shall be properly protected from foreign voltage and grounded with an industry-accepted system.

EXHIBIT D

Monitoring and Maintenance Specifications and Procedures

1. GENERAL

This Exhibit describes the policies and procedures that will be utilized to monitor and maintain the AGLN System. AGLN shall ensure that the System is maintained according to the Monitoring and Maintenance Specifications and Procedures specified herein, through application of commercially reasonable and accepted industry standards, and in accordance with manufacturers’ specifications. The purpose and result of monitoring and maintenance shall be to assure (in the case of routine maintenance), or restore (in the case of non-routine maintenance) the functionality of the AGLN System. AGLN reserves the right to modify procedures as appropriate to ensure that performance specifications are achieved.

2.             ADMINISTRATION

AGLN shall maintain a comprehensive database (Conduit System Database) of all relevant information associated with the AGLN System to ensure prompt identification and appropriate response to routine and corrective maintenance situations. The Database shall identify and document the AGLN System and all facilities installed in AGLN System, including but not limited to: Users’ fiber optic cable type, number and color coding of fiber strands, origin and destination of each fiber strand, identification of in-use cables, technical requirements and specifications.

3. AGLN RESOURCES

AGLN will perform cable and conduit maintenance and repair around the clock, on a twenty-four (24) hour per day, seven (7) days per week basis (24x7). AGLN shall be available during normal business hours (7:00 a.m. to 5:00 p.m.) and during off-hours (before 7:00 a.m., after 5:00 p.m., weekends and holidays).

AGLN shall establish an AGLN System Maintenance Center and assign a dedicated maintenance manager to oversee and coordinate day-to-day maintenance activities. The Maintenance Center shall be equipped to receive AGLN System alarms twenty-four (24) hours per day, seven (7) days per week, three-hundred-sixty-five (365) days per year. The maintenance manager shall be responsible for ensuring that preventative, corrective, and emergency maintenance activities are carried out in a timely fashion and that maintenance activities are coordinated with Users.

AGLN shall provide qualified personnel, office services, vehicles, and all tools and materials required for the safe and proper performance of maintenance procedures. Specifically, AGLN shall retain and maintain all appropriate equipment necessary for routine and preventative maintenance as well as corrective maintenance and emergency restoration. AGLN shall have an Optical Time Domain Reflectomoter (OTDR) and fusion splicing equipment with valid and current certification, and all other equipment shall be in proper working order with current calibration at all times.

4. ROUTINE MAINTENANCE

AGLN shall perform routine and preventative maintenance of the system, including the following:

·AGLN shall patrol the AGLN System Route on a regularly scheduled basis. During these patrols, AGLN will ensure that “Call-Before-You-Dig” (CBYD) right-of-way marker signs are in place and undamaged. Damaged and/or missing signs will be replaced.

·AGLN shall establish membership in the local CBYD program, and perform all cable and conduit locate activities required to protect the AGLN System.

5. NON-ROUTINE MAINTENANCE

AGLN shall provide telephone number(s) to the User for the purpose of reporting problems to the AGLN. When reporting a problem, the User shall provide the following information to the AGLN:

·Type/nature of problem

·Classification of the problem (as defined below)

·Location of the problem

·Any other pertinent information that may help in identifying and resolving the problem in an expedient manner.

When AGLN identifies or is notified of a problem via System alarm, User, or third party notification, AGLN will initiate repair/response activities as appropriate and necessary for the type of problem being reported. Problems shall be classified according to the following definitions:

Major: A major failure is defined as a failure of the AGLN System resulting in an outage condition for multiple

Users (e.g., cable cut). AGLN shall have its first maintenance technician on site within two (2) hours after the time AGLN becomes aware of a major failure (whether same occurs within normal business hours or after-hours, weekend or holiday), unless delayed by circumstances beyond its reasonable control.

Minor/Service Affecting: A minor/service affecting failure is defined as a failure of the AGLN System affecting some, but not all, of the services provided.

Minor/Non-Service Affecting: A minor/non-service affecting failure is any failure that is not currently affecting the ability of the AGLN System to provide service. AGLN shall commence repair of minor/non-service affecting failures within three (3) business days (i.e., within seventy-two (72) hours, excluding Saturdays, Sundays and holidays), unless delayed by circumstances beyond its reasonable control.

When reporting a problem to the AGLN, User shall identify the classification of the failure (i.e. major, minor/service affecting or minor/non-service affecting) and provide any other pertinent information to ensure the appropriate response is initiated. AGLN will provide effective follow-up information to User on the maintenance action until the issue has been resolved.

6.             FIBER OPTIC CABLE REPAIR AND RESTORATION

When undertaking repairs of major fiber optic cable failures, AGLN shall work to restore all traffic as quickly as possible. Immediately upon arriving on the site of the cut, AGLN will determine the course of action to be taken to restore the cable and/or conduit and begin restoration efforts. AGLN shall use reasonable efforts to effect repairs of major failures within eight (8) hours after maintenance staff arrives at the site of the problem. Such repairs may be temporary.

Within one (1) business day after completing any temporary repair or restoration, AGLN shall commence planning permanent repair. AGLN shall notify User of its permanent repair plans and implement such repairs within an appropriate time thereafter. AGLN shall strive to repair “in-use” fibers first and repair those fibers not currently in-use during permanent restoration activities. AGLN shall perform permanent repair and restoration of the AGLN System in accordance with the procedures detailed in Exhibit C.

Should a cable failure affect multiple Users, it is understood that the restoration sequence will occur in a logical order and will not disfavor any party, and that in-use fibers will be restored prior to inactive fibers. User is responsible for notifying AGLN which fibers are in-

use and which are not in-use. This information should be contained in the Conduit System Database, with updates provided by User as necessary.

7. COOPERATION

Both AGLN and User shall cooperate fully to resolve failures of and/or impairments to the AGLN System in an expedient and efficient manner. Such cooperation shall include, but not be limited to, notification of the other party after becoming aware of the need for either scheduled or unscheduled maintenance activities that may affect User’s ability to provide service over the AGLN System and sharing of information relevant to the operation, maintenance and repair of the AGLN System. AGLN shall notify User ten (10) days prior to any scheduled Maintenance activity that may affect User’s ability to provide service over the AGLN System. User shall notify AGLN as soon as reasonably possible of any request for scheduled Maintenance it may have. In the event that a scheduled Maintenance activity is canceled or delayed, the scheduling party shall inform the other party so that the Maintenance activity may be rescheduled. AGLN shall notify User as soon as reasonably possible after becoming aware of the need to perform unscheduled Maintenance that may affect User’s ability to provide service over the AGLN System.

8.             OTHER

Unless expressly provided elsewhere in this document, AGLN shall not be responsible for maintenance and/or repair of Users’ electronic, optronic, and other equipment utilized in conjunction with operation of its individual system.

9.             USER MAINTENANCE FEES AND COSTS

The fees payable for any and all Routine Maintenance hereunder shall be determined in accordance with the following provisions and detailed in the Service Order. During any time after the Acceptance Date, AGLN shall provide Routine Maintenance at a per conduit route mile per year, subject to the CPI adjustment described below (the “User Maintenance Fee”).

A quarter of the first such User Maintenance Fee will be due and payable thirty (30) days after the Acceptance Date. Thereafter, one quarter of such fee shall be due quarterly. User shall pay all fees within thirty (30) days of receipt of invoice therefor.

The User Maintenance Fee shall be increased annually, beginning with the first anniversary of the relevant Acceptance Date, by the greater of four percent (4%) or the increase, if any, in the Consumer Price Index, All Urban Consumers (CPI-U), U.S. City Average, published by United States Department of Labor, Bureau of Labor Statistics (1982-84=100) for the twelve (12) month period ending three months prior to such anniversary of the effective date (the “CPI Adjustment”). In the event the Bureau of Labor Statistics (or any successor organization) no longer publishes the CPI-U, AGLN may, in its discretion, designate the statistical index it deems most appropriate for collection of adjustments to a fee and, from the

date the CPI-U ceased to be published, such index shall be used to make adjustments in a fee under this provision.

11.           TERM

The Term of the Maintenance Agreement shall coincide with the Term of User’s IRU Agreement with AGLN.

EX-10.38

Exhibit 10.38

MASTER TERMS AND CONDITIONS FOR LICENSE AGREEMENTS

BETWEEN

ARIZONA PUBLIC SERVICE COMPANY

AND

MOUNTAIN TELECOMMUNICATIONS, INC.

FOR

FIBER OPTIC CABLE ATTACHMENTS

AGREEMENT NO. CE-99001 COPY NO. 1/3

Agreement No. CE-99001

MASTER TERMS AND CONDITIONS FOR LICENSE AGREEMENT
BETWEEN
ARIZONA PUBLIC SERVICE COMPANY
AND
MOUNTAIN TELECOMMUNICATIONS, INC.
FOR
FIBER OPTIC CABLE ATTACHMENTS

TABLE OF CONTENTS

SECTION	TITLE	PAGE
1.	PARTIES	1
2.	DEFINITIONS	1
3.	GENERAL	2
4.	INDEMNITY	4
5.	LEGAL REQUIREMENTS	5
6.	LIMITATION OF LIABILITY	5
7.	STANDARDS	6
8.	ASSIGNMENT	7
9.	TERM AND TERMINATION	7
10.	SERVICE OF NOTICE	8
11.	DISPUTES	8
12.	ENTIRE AGREEMENT	9
13.	NON-WAIVER	9
14.	SEVERABILITY	10
15.	GOVERNING LAW AND VENUE	10

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16. EXECUTION AND EFFECTIVE DATE 11

APPENDICES AND EXHIBITS

APPENDIX A   -SCHEDULE OF FEES AND CHARGES

APPENDIX B   -INSURANCE

APPENDIX C   -LICENSE PROCESS

EXHIBIT A    -FORM OF LICENSE

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MASTER TERMS AND CONDITIONS FOR LICENSE AGREEMENTS
BETWEEN
ARIZONA PUBLIC SERVICE COMPANY
AND
MOUNTAIN TELECOMMUNICATIONS, INC.
FOR
FIBER OPTIC ATTACHMENT TO APS FACILITIES

1..PARTIES:

The parties to these Master Terms and Conditions are MOUNTAIN TELECOMMUNICATIONS, INC., an Arizona corporation, hereinafter referred to as “MTI”, and ARIZONA PUBLIC SERVICE COMPANY, an Arizona corporation, hereinafter referred to as “APS”.

2.DEFINITIONS:

When initially capitalized in this Agreement, or amendments hereto, the following words or phrases shall have the meanings specified:

APS Aerial Facilities - Shall mean Distribution Facilities and Transmission facilities owned wholly by APS.

APS Conduit Facilities - Shall mean the ducts, conduits, manholes, handholes and vaults which are owned wholly by APS.

APS Facilities - Shall mean APS Aerial Facilities and APS Conduit Facilities

Cable - Shall mean the optical fiber cable and associated hardware installed by MTI pursuant to any License granted hereunder.

Communication Space - Shall mean that space on APS distribution facilities designated by APS for use for telecommunications purposes.

Distribution Facilities - Shall mean the poles and associated facilities used for the distribution of electricity at levels up to 12 kilovolts.

License - Shall mean a revocable, nonexclusive written authorization to attach Cable to or route Cable through APS Facilities and, in the case where APS will own the installed Cable, for the use by MTI of designated fibers within the Cable.

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License Fee - Shall mean the fee set forth in Appendix A, SCHEDULE OF FEES AND CHARGES, assessed annually with respect to any License granted by APS hereunder.

Make-Ready Work - Shall mean any modification, replacement or other work which APS determines, in its reasonable discretion, is necessary to facilitate the attachment, routing or rearrangement of Cable on APS Facilities.

Reciprocal License - Shall mean any license granted to APS by MTI for the use of fiber within the Cable as part consideration for any License granted hereunder.

Sub-Transmission Facilities - Poles, towers and other facilities used for the transmission of electric energy 69 kilovolts.

Transmission Facilities - Poles, towers and other associated facilities used for the transmission of electric energy at levels greater than 69 kilovolts.

3.GENERAL:

3.1Purpose - - These Master Terms and Conditions prescribe the process by which Licenses may be secured by MTI from APS from time to time and constitute the terms and conditions to which each such License shall be subject. The Licenses granted hereunder are for the routing, attachment, installation, use and maintenance of Cables used solely for the provision of telecommunications services by MTI.

3.2Scope - - These Master Terms and Conditions and any License granted hereunder shall only apply with respect to Cable installed (i) on APS Transmission Facilities, (ii) on APS Distribution Facilities outside of the Communication Space and (iii) within APS Conduit.

3.3License Application - Prior to using APS Facilities for the purpose of installing or using any Cable, MTI shall secure a License pursuant to Appendix C, LICENSE PROCESS. The granting of such License shall be in the sole discretion of APS.

3.4Cable Ownership - Cable installed by MTI pursuant to any License shall be owned by MTI. However, APS may, as a condition to granting any License, require that title to the Cable be conveyed to APS. In such case the parties shall execute any documents and take any steps reasonably necessary to reflect ownership of the Cable by APS.

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3.5License to Use APS Cable - In the event title to any Cable is conveyed to APS pursuant to Section 3.4 above, APS shall grant to MTI a license to use that portion of the Cable agreed upon by the parties. Any such license shall be governed by these Terms and Conditions.

3.6Other Rights Reserved

3.6.1Except as provided in Section 3.5 above, nothing contained in these Master Terms and Conditions shall be construed to create any license or to constitute any obligation on the part of APS to grant any license to MTI.

3.6.2Neither these Master Terms and Conditions nor any License shall create or vest in MTI any ownership or property rights in APS Facilities or constitute an assignment of any of APS’ rights of way, easements, franchises or other rights to use the public or private property on which APS Facilities are located.

3.6.3Neither these Master Terms and Conditions nor any License shall be construed to compel APS to construct, retain, extend, place, or maintain any facilities not needed for APS’ own service requirements.

3.6.4Neither these Master Terms and Conditions nor any License shall be construed as a limitation, restriction, or prohibition against APS with respect to any agreement and/or arrangement which APS has previously entered into or may in the future enter into with other parties regarding the use of APS Facilities.

3.6.5No License shall extend to any APS Facilities where the placement of Cable would result in a termination of the rights granted to APS to occupy the property on which APS Facilities are located.

3.7Fees and Charges - With respect to each License, MTI shall pay APS the fees and charges as specified in and in accordance with Appendix A, SCHEDULE OF FEES AND CHARGES, which shall be subject to adjustment by APS as provided therein or as identified in the specific Attachment for each License.

3.8Insurance - - MTI shall provide and maintain the insurance coverages and shall comply with the insurance requirements set forth in Appendix B, INSURANCE.

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4.INDEMNITY

4.1MTI shall indemnify, defend, and save harmless APS and all of its employees, agents, representatives, and insurers (each hereinafter referred to as “Indemnitee”) from any and all claims, demands, suits, actions, proceedings, loss, cost, and damages of every kind and description, including but not limited to reasonable attorneys’ fees and/or litigation expenses, which may be brought or made against or incurred by any Indemnitee i) on account of loss of or damage to any property or for injury to or death of any person, caused by, arising out of, or contributed to, in whole or in part, by reasons of any alleged act, omission, fault, mistake, or negligence of MTI, its employees, agents, representatives, contractors or subcontractors, their employees, agents, or representatives.

4.2In all cases of death or injury to employees, officers or agents of either MTI or its contractors or subcontractors, whether or not caused by MTI, each Indemnitee shall be defended and indemnified by MTI for any and all liability except where such death or injury results from the sole negligence of an Indemnitee.

4.3MTI shall defend each Indemnitee against all claims, demands, suits, actions, and proceedings for which MTI has, or potentially has, indemnification responsibility under this Section 4. Each Indemnitee shall have the right, at its sole cost and discretion, to provide for its own defense to whatever extent such Indemnitee deems necessary to protect its own interest or that of other Indemnitees, and MTI shall cooperate fully with such Indemnitee in any such participation.

4.4If requested by APS, MTI shall furnish a bond or other adequate evidence of financial security or assurance of performance, in a form satisfactory to APS and in such amount as APS from time to time may require, to guarantee the performance of all of MTI’s obligations hereunder. The amount of the bond or financial security shall not operate as a limitation upon the liability of the MTI hereunder.

4.5If requested by APS, MTI shall furnish a bond or other adequate evidence of financial security or assurance of performance, in a form reasonably satisfactory to APS and in an amount not to exceed fifty percent (50%) of the amount of the construction to be performed on MTI’s behalf, to guarantee the performance of all of MTI’s obligations hereunder. The

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bond, if requested, shall only be in effect during the time MTI is constructing on or in APS facilities. The amount of the bond or financial security shall not operate as a limitation upon the liability of the MTI hereunder.

4.6The indemnification obligations of MTI contained in this Section 4 are not limited in any respect by the insurance coverage required under Appendix B.

4.7In no event shall APS or MTI be liable for any consequential, incidental or special damages incurred or alleged to have been incurred by anyone.

5.LEGAL REQUIREMENTS

5.1Laws and Regulations - MTI shall at all times observe and comply with all applicable laws, ordinances, statutes, rules or regulations which in any manner relate to the rights and obligations of MTI under any License.

5.2Permits - - MTI shall obtain from the appropriate public and/or private authority any required authorizations, licenses, or permits to construct, operate, and/or maintain the Cable on public and private property at the location of APS Facilities. MTI shall submit to APS such evidence of compliance with the foregoing requirements, as APS may require.

5.3Authorized Personnel - Only “Authorized Persons”, as defined in Arizona Revised Statutes Section 40-360.41, shall install, maintain, repair, transfer, or otherwise engage in activities on or near APS Facilities.

6.LIMITATION OF LIABILITY:

6.lAPS shall not be liable to MTI, its customers or any user of its facilities for any incidental, indirect, or consequential loss or damage arising in any manner out of the use of APS Facilities or APS’ acts or omissions in connection therewith, and MTI shall indemnify and save harmless APS from and against any and all claims, demands, causes of action, cost, and fees or expenses of whatever kind resulting from any such loss or damage. APS reserves to itself, its successors and assigns, the right to locate, maintain and operate its facilities in such a manner as will best enable APS to fulfill its service requirements without liability to MTI, its customers or any user of its facilities.

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6.2Except to the extent of MTI’s gross negligence or willful misconduct, MTI shall not be liable to APS, its customers or any user of its facilities for any incidental, indirect, or consequential loss or damage arising in any manner out of the use of APS Facilities or MTI’s acts or omissions in connection therewith.

7.STANDARDS:

7.1Licensing

7.1.1Any License granted hereunder shall be conditioned upon compliance by MTI with the standards set forth herein and in Appendix C.

7.1.2MTI shall at all times bear full responsibility for the integrity and safety of its system. APS reserves the right, but shall not be obligated, to review MTI’s engineering plans and completed construction. Any such review by APS shall not relieve MTI from or be deemed a waiver of APS’ right to insist on strict compliance of MTI’s obligations under this Agreement, including Section 7.2.

7.1.3APS reserves the right to make immediate corrections of safety hazards caused by MTI and MTI will bear the full cost of these corrections.

7.2Standards

7.2.1MTI shall construct, install, operate, and maintain the Cable in accordance with the requirements and standards of the latest editions of the National Electrical Safety Code (NESC) and the Occupational Safety and Health Act (OSHA), the rules and regulations of any governing authority having jurisdiction over the subject matter of these Terms and Conditions or License granted hereunder, any requirements APS may from time to time prescribe, and these Terms and Conditions. Where a difference in standards may exist, the more stringent shall apply.

7.2.2If any part of the Cable is placed or maintained, or causes the facilities of others to be in violation of the standards prescribed

6

in Section 7.2.1 and MTI has not corrected the violation within fifteen (15) days from the date of written notice thereof, APS may, in addition to any other remedies it may have hereunder, remove or have removed the Cable from any or all of APS Poles or perform or have performed such other work and take such other action in connection with the Cable that APS deems necessary or advisable to comply with the applicable standards, at MTI’s cost and expense and without any liability on the part of APS; provided, however, that when in the sole judgment of APS such a condition may endanger the safety of any person or any property, or interfere with the performance of any service obligations of APS, APS may take such action without prior notice to MTI.

8.ASSIGNMENT:

MTI shall not assign or transfer the rights, nor delegate the duties, or otherwise dispose of any right, title, or interest in all or any part of any License without the prior written consent of APS. However, MTI may assign or transfer a License without such consent to an entity that controls, is controlled by or is under common control of MTI. In no event will an assignment or transfer a release of MTI with respect to any liabilities or obligations under any License unless such release is expressly granted by APS in writing.

9.TERM AND TERMINATION:

9.1Term - - These Terms and Conditions shall be effective with respect to any License granted as of the date specified in Section 16, EXECUTION AND EFFECTIVE DATE.

9.2Termination by APS - In the event that APS determines, in its reasonable discretion, that any of the space on within APS Facilities which has been licensed hereunder is necessary for its use in serving any of its customers or in meeting any of its regulatory obligations, it may terminate any License issued hereunder by giving MTI at least six (6) months prior written notice thereof.

9.3Termination for Default - If MTI defaults in any of its obligations under any License, and fails within thirty (30) days after the date of written notice from APS to correct such default, APS may, at its option and in addition to any other rights or remedies it may have, immediately terminate such License.

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9.4Termination by MTI - MTI may terminate any License hereunder by providing thirty (30) days notice of such termination to APS. Any such termination shall not terminate any Reciprocal License or other right held by APS with respect to the use of any Cable.

9.5Removal and Ownership of Cable Upon Termination - Upon termination of any License hereunder APS may request that MTI remove such Cable from APS Facilities. If MTI fails to remove any Cable within 90 days after APS has requested removal, APS may retain the Cable for its use, the use of others or may remove, sell or otherwise dispose of such Cable. MTI may remove any Cable affected such termination, provided, MTI shall not remove any Cable with respect to which APS holds a Reciprocal License or which is owned by APS.

9.6Survival of Obligations - Termination of any License issued hereunder, in whole or in part, for any reason shall not affect MTI’s liabilities and obligations under such License which arise prior to the effective date of such termination.

10.SERVICE OF NOTICE:

Any notice required or provided for hereunder shall be in writing and shall be delivered personally to the corporate representatives of APS and MTI designated below, or shall be mailed thereto by certified mail, postage prepaid, return receipt requested. Notice shall be effective on the date delivered.

To APS:	To MTI:
Arizona Public Service Co.		Mountain Telecommunications, Inc.
P. O. Box 53999		10190 E. McKellips
Phoenix, AZ 85072-3999		Scottsdale, AZ 85243
Attn: Telecommunications Network		Attn: Mike Hazel
Engineering Mail Station 3864

11.DISPUTES:

11.1General - - Any controversy or claim (except any claim for damages because of bodily injury including death at any time resulting therefrom, sustained by any person or persons, and except any claim for damages because of damage to or destruction of property) arising out of, or relating to any License or its breach which may arise between MTI and APS, and which is not resolved by the authorized representatives of the parties, shall be noticed in writing by the complaining party as provided in Section 10,

8

SERVICE OF NOTICE. Such controversy or claim shall subsequently be reviewed and discussed between the appropriate executive officers of APS and MTI as a condition precedent to any litigation or submittal to any other authority.

11.2Fee Disputes - In addition to the requirements of Section 11.1, any controversy or claim regarding the fees and charges established under this Agreement shall be settled by arbitration in Phoenix, Arizona, in accordance with the rules then in effect of the American Arbitration Association, and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. MTI shall continue payment of all fees and charges when due and performance of all obligations under this Agreement, during any such period of controversy or claim.

11.3Expenses - - The prevailing party in any controversy or claim between APS and MTI shall be entitled to recover from the other party, in addition to any other recovery awarded, any reasonable attorney’s fees, litigation expenses, and/or arbitration expenses incurred by such prevailing party in connection with or incident to the controversy or claim; provided, however, that in the event APS brings an action for declaratory relief to resolve a dispute involving MTI, APS shall be entitled to recover its attorney’s fees and litigation expenses.

12.ENTIRE AGREEMENT:

These Terms and Conditions, and any License granted hereunder, shall constitute the entire understanding between APS and MTI and shall supersede all prior contracts, representations, negotiations, or letters pertaining to the subject matter of these Terms and Conditions, whether written or oral. The parties shall not be bound by or be liable for any statement, representation, promise, inducement, or understanding of any kind not set forth herein and in any License. These Terms and Conditions shall be deemed incorporated in each License granted hereunder. These Terms and Conditions and any License shall only be modified by an amendment signed by both parties.

13.NON-WAIVER:

13.1The failure of APS to enforce or insist upon strict compliance with any of these Terms and Conditions or of any License provision, or to exercise or delay the exercise of any rights or remedies provided therein, shall not release MTI from any of its duties or obligations imposed by law or by

9

these Terms and Conditions and shall not be deemed a general waiver or relinquishment of any rights or remedies of APS.

13.2Nothing contained in these Terms and Conditions shall be construed in any way to fulfill, limit, restrict, substitute, or waive, in whole or in part, any of MTI’s obligations under Article 6.4, HIGH VOLTAGE POWER LINES AND SAFETY RESTRICTIONS, of Section 1, Title 40, Chapter 2 of the Arizona Revised Statutes, or any other laws, regulations, codes, standards, or industry practices pertaining to activities near overhead electric lines.

14.SEVERABILITY:

Should any provision of these Terms and Conditions or any License be determined to be unenforceable or illegal, then said provisions shall be severed from these Terms and Conditions and the remainder shall remain in full force and effect.

15.GOVERNING LAW AND VENUE:

These Terms and Conditions and any License shall be interpreted in accordance with the substantive laws of the State of Arizona. Any action at law or judicial proceeding shall be instituted only in the state or federal courts of the State of Arizona.

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16.EXECUTION AND EFFECTIVE DATE:

These Terms and Conditions, have been approved and accepted by the duly authorized representatives of the parties as of the 4th day of FEB, 1999

ARIZONA PUBLIC SERVICE COMPANY
SIGNATURE		/s/ Don Tellis
NAME	Don Tellis
TITLE	Manager Communication Systems
	“APS”

MOUNTAIN TELECOMMUNICATIONS, INC.
SIGNATURE		/s/ Michael L. Kreel
NAME	Michael L. Kreel
TITLE	Vice President Networks
	“MTI”

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APPENDIX A

SCHEDULE OF FEES AND CHARGES

MASTER TERMS AND CONDITIONS FOR LICENSE AGREEMENTS
FOR
FIBER OPTIC CABLE ATTACHMENT TO APS FACILITIES

1.ANNUAL LICENSE FEE

1.1MTI shall pay an Annual License Fee for each License as follows:

For Cable installed on APS Aerial Facilities (not in the communications zone), $2,000 per Route mile.

For Cable installed on APS Aerial Facilities (not in the communications zone) and with respect to which APS is granted a license from MTI to use up to 12 fibers, $500 per route mile.

For Cable installed in APS Conduit, $3.00 per linear foot.

For building entrances, $500 per building entrance including the first 50 feet of duct between the building and the first manhole, additional duct at $3.00 per linear foot.

1.2The Annual License Fee shall be increased effective January 1 of each year. The amount of the increase will be calculated utilizing the average of the monthly Consumer Price Index figures for the preceding calendar year.

1.2.1The annual February release of the Economic Indicators Prepared for the Joint Economic Committee by the Council of Economic Advisers and specifically the index category “All Items, Not Seasonally Adjusted (NSA)” shall be used in computing each of the Annual License Fee increases.

1.2.2The percentage of any increase in the annual average index numbers will be applied to the previous year’s Annual License Fee to determine the current year’s Annual License Fee.

A-1

1.2.3APS will provide the MTI sixty (60) days notice of the increased Annual Attachment Fee prior to the issue of an annual billing.

1.4The Annual License Fee for any License that is effective for less than a full year shall be adjusted on a pro rata basis for the number of full or partial months that such License is effective during the year.

2.CHARGES

2.1General - - MTI shall advance funds to APS for all field surveys, engineering, and other Make-Ready Work to be performed by APS, including, without limitation, inspections, supervision, removal, rearrangement, transfer, or other modifications of MTI’s facilities and any other work performed for MTI, based upon the full cost and expense to APS for performing such work or for having such work performed. MTI shall advance funds to APS for other construction as mutually agreed.

2.2New Construction - When APS plans to install any facilities for its use, and MTI requests that such installation be modified to accommodate its Cable, MTI shall be responsible for the difference in the costs between the facilities needed to meet APS needs and the facilities needed to accommodate MTI’s Cable. In the event of road widening projects, knocked down poles, or occurrences that require APS to replace poles, MTI shall bear the responsibility of reattaching its Cable to the new poles. Should APS be required to move an MTI cable, MTI shall reimburse APS a reasonable amount for the work.

2.3Facility Replacements - MTI shall reimburse APS for replacement of any facilities required to accommodate MTI’s Cable, based on APS’ fully installed costs, plus overhead, less salvage value of the replaced facilities, if any, plus the cost of removal of the existing facilities.

2.4Taxes - - MTI shall pay any and all sales tax, transaction privilege tax or other tax assessed or assessable as the result of its occupancy or use of APS Facilities, including any such tax payable by APS, when due.

A-2

3.TERMS OF PAYMENT

3.1Annual Attachment Fee - The initial Annual Attachment Fee shall be payable as of the effective date of the License, as appropriate. Thereafter, the Annual Attachment Fee shall be payable in advance, as of the first day of January of the applicable year. Annual Attachment Fees are not fully or partially refundable due to an early termination of a License.

3.2Payment Date - All fees and charges, except taxes, shall be paid within thirty (30) days after the date of an invoice therefor or by any payment date indicated in the invoice.

3.3Late Payment - Amounts past due shall incur a late charge (which is subject to change from time to time at APS’ discretion) equal to the prime rate plus three percent (3%) (per annum) charged by the CitiBank, N.A., New York, New York, on the first day of the month in which the unpaid amount became delinquent. Payment or acceptance of such late charge, however, shall not constitute a waiver of any rights or remedies granted hereunder.

(END APPENDIX A)

A-3

APPENDIX B

INSURANCE

MASTER LICENSE AGREEMENT
FOR
FIBER OPTIC ATTACHMENT TO APS POLES

1.MTI shall provide and maintain, during the term of and until all obligations under these Master Terms and Conditions and any License granted hereunder are satisfied, with forms and insurers acceptable to APS, the following insurance coverages:

1.1Worker’s Compensation insurance to cover obligations imposed by federal and state statutes having jurisdiction of its employees engaged in the performance of the work, and Employer’s Liability insurance with a minimum limit of FIVE HUNDRED THOUSAND DOLLARS ($500,000).

1.2Commercial General Liability insurance with a minimum combined single limit of FIVE MILLION DOLLARS ($5,000,000) each occurrence. The policy shall include coverage for bodily injury liability, broad form property damage liability (including Completed Operations), personal injury liability (including coverage for contractual and employee acts), blanket contractual and products and completed operations. Said policy shall contain a severability of interests provision. On “occurrence” form policies the products and completed operation coverage shall extend for two (2) years past termination of any License granted under these Master Terms and Conditions.

1.3Comprehensive Automobile Liability insurance with a combined single limit for bodily injury and property damage of not less than ONE MILLION DOLLARS ($1,000,000) each occurrence with respect to MTI’s vehicles whether owned, hired, or non-owned, assigned to or used by MTI.

1.4If applicable, Aircraft Public Liability insurance covering fixed wing and rotorcraft aircraft whether owned, hired, or non-owned with a combined single limit for bodily injury and property damage of not less than TWO

B-1

MILLION DOLLARS ($2,000,000), including passenger liability coverage.

2.The policies required by Sections 1.2, 1.3, and 1.4 herein shall be endorsed to include APS, its officers and employees as additional insureds and shall stipulate that the insurance afforded for APS, its officers and employees shall be primary insurance and that any insurance carried by APS, its officers or employees shall be excess and not contributory insurance.

3.MTI and its insurers providing the required coverages shall waive all rights of recovery against APS and their directors, officers, employees, and agents.

4.Prior to the issuance of any License under these Master Terms and Conditions, MTI shall furnish APS with Certificates of Insurance as evidence that policies providing the required coverages, conditions, and limits are in full force and effect. The certificates shall identify the number of these Master Terms and Conditions and License, and provide that not less than thirty (30) days’ advance notice of cancellation, termination, or alteration shall be sent directly to APS addressed as follows:

Arizona Public Service Company
P.O. Box 53999
Phoenix, AZ 85072-3999
Attn:              Don Tellis
                      Communications Systems, Mail Station 3874

5.APS reserves the right to request and receive certified copies of any or all of the above policies and/or endorsements.

6.APS shall not, however, be obligated to review any of MTI’s certificates of insurance, insurance policies, and/or endorsements or to advise MTI of any deficiencies in such documents, and any receipt of copies or review by APS of such documents shall not relieve MTI from or be deemed a waiver of APS’ right to insist on strict fulfillment of MTI’s obligations under this Appendix B.

7.The stipulation of insurance coverages in this Appendix B shall not be construed to limit or waive any liabilities or other obligations of MTI to APS, or any other parties, in connection with these Master Terms and Conditions or License granted hereunder.

B-2

(END APPENDIX B)

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APPENDIX C

LICENSE PROCESS

MASTER TERMS AND CONDITIONS FOR LICENSE AGREEMENT
FOR
FIBER OPTIC ATTACHMENT

1.License Requests and Make Ready Work

1.1License Requests - All requests for a License shall be in writing to the APS Communications Systems Department and shall include a description of the route over which MTI desires to run Cable. When a request is submitted by MTI, APS may require that a field survey be conducted, at MTI’s expense, for the entire Cable route.

1.2Field Surveys - The field survey shall be performed jointly by representatives of APS and MTI. MTI shall furnish to APS data necessary to perform the field survey, in a format specified by APS and according to standards of accuracy and completeness satisfactory to APS.

1.3Engineering and Make Ready Work - As soon as practicable after completion of the field survey, or after submission of a request for a License if APS does not require a field survey, APS shall provide MTI with a written description of any Make Ready Work required to accommodate any of the Cable. At such time APS shall also specify whether it desires to reserve or receive a license from MTI for the use of any fibers within the Cable. Within thirty (30) days after receipt of such description, MTI shall notify APS whether it intends to proceed with the Cable installation and whether APS should proceed with the detailed engineering work. MTI shall also notify APS whether it desires to perform the Make Ready Work, however, APS reserves the right to perform any or all of the Make Ready Work.

1.3.1MTI will be responsible for all engineering costs expended by APS as a direct result of work approved by MTI on this estimate. After response to the estimate is received, APS will complete the engineering for the approved work and submit an invoice to the MTI, payable in accordance with Appendix A, SCHEDULE OF FEES AND CHARGES. Costs reflected on the invoice will include costs for the field survey, engineering,

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and, if APS is to perform the Make Ready Work, the cost of proposed construction.

1.3.2If MTI delays approval of the estimate or payment of the invoice, and said delay causes the time elapsed from the date of the initial field survey to exceed 120 days, a second field survey may be required, at MTI’s expense, to determine any changes in the field that would impact Make-Ready Work requirements.

1.3.3If during the course of this process, APS receives a request from another person for use of the same facilities, APS will send written notification of such request to MTI. MTI shall have 15 days from the date of the notification to submit payment for either the invoice for Make-Ready Work, if issued, or for the estimated charges, if prior to billing.

1.4Make Ready Work Performed by APS - Any Make-Ready Work to be completed by APS shall begin following receipt of payment from MTI for such Make-Ready Work, and shall be performed in accordance with APS’ normal work load schedule. APS shall provide MTI with an estimated schedule of the Make-Ready Work. However, APS may adjust the schedule at any time to satisfy its own service requirements, and APS shall not be liable to MTI or any of its customers for any delays caused by such adjustment. MTI shall not be entitled to reimbursement of any amounts paid to APS for pole replacements or for rearrangement of facilities by reason of the use by APS of any additional capacity resulting from such replacement or rearrangement.

1.5Make Ready Work Performed by MTI - All Make Ready Work performed by MTI shall be performed by MTI in accordance with the standards set forth in herein.

1.6Completion of Installation - All Cable authorized by a License for attachment to APS Facilities shall be installed and ready for use within one hundred twenty (120) days from the date of APS’ authorization for attachments provided. If construction is not completed within one hundred twenty (120) days, APS may require an additional field survey, at MTI’s expense, to determine any changes in the field that would impact Make Ready Work requirements.

1.7Notice of Completion - MTI shall notify APS, in writing, within thirty (30) days after completion of the installation of Cable.

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1.8Third Party Requests Prior to Payment by MTI - In the event APS receives a request for a license from a third party for attachment to the same facilities for which MTI has submitted a request for a License, but for which APS has not received payment from MTI of the Annual Attachment Fees and Make-Ready Work costs, APS may allocate the costs of Make Ready Work between MTI and such other applicant in a manner which reflects to degree of Make Ready work necessitated by each applicants attachments.

1.9Third Party Requests Pending Construction of Cable - If, prior to completion of the installation of the Cable authorized by a License, APS receives a request from a third party for attachment to the same APS Facilities, APS shall verbally notify MTI within twenty-four (24) hours thereof, followed by written confirmation. Thereafter MTI shall complete the installation of the Cable during the remainder of its one hundred twenty (120) day installation period, if any, or within fifteen (15) days of receipt of such verbal notice, whichever is greater. Should MTI fail to complete the installation of the said Cable within the allowed period, APS may deem the License for such attachment abandoned and may terminate such License. In such case MTI shall not be entitled to reimbursement for any Annual Attachment Fees paid by MTI.

2.Construction Standards:

2.1Use of Contractors - Any contractors and subcontractors retained by MTI for the construction, installation, maintenance and repair of any Cable shall be experienced and qualified to work on such electrical facilities. In addition, any contractor or subcontractor retained to work on or near any Transmission or Sub-Transmission Facilities shall be chosen from a list of contractors approved by APS, or otherwise approved by APS in writing.

2.2Work Schedules and Notices - Prior to any work commencing near any APS Facilities, MTI and APS shall agree upon a work schedule and shall designate representatives responsible for receiving notice of work to be performed. MTI shall not permit any work to commence near APS facilities until authorization has been received from APS pursuant to Section 6 of this Appendix C.

2.3Engineering - - MTI, at its sole cost, shall prepare all engineering, design and installation specifications for the Cable to be installed under any License. APS may provide assistance to the engineering process if desired by APS. MTI shall not commence construction under this agreement until APS has given final

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approval of the engineering and design specifications, construction methods and construction schedule.

2.4 Cable Type - MTI will determine the type and fiber capacity of cable to be used. Where any portion of the Cable is to be licensed for APS’ use, or where the Cable is to be attached to Transmission Facilities or Sub-Transmission Facilities, APS may specify strength characteristics, specifications, lengths, type and count of attachment hardware, splice enclosures and hardware.

2.5 Drawings - - Prior to construction, MTI will provide drawings that will contain cable information, splice locations, landowner information and any other information as APS may reasonably require. Such drawings will be updated with actual field data during and after construction. The scale of such drawings covering metropolitan areas shall not exceed 1” = 200’ and for those covering rural areas shall not exceed 1” = 500’. Information to be provided by MTI to APS shall include sag/tension charts, cable diameter, cable weight and loading data.

2.6 Connection Points - MTI and APS will jointly determine the location of all connection points involving fibers used by APS. Such connection points will typically be remote splice enclosures.

3. Maintenance and Repair of Cable

3.1Maintenance - - Throughout the term of any License, maintenance and repair of any Cable, including those fibers licensed or reserved for APS’ use, shall be performed by MTI at its sole cost. APS shall also have the right to perform maintenance, repair or modification on that portion of the Cable containing fibers reserved or licensed for APS’ use.

3.2Replacement - - Any attachment hardware to be replaced shall be of the same kind and quality as required by the design specification or as expressly approved by APS.

3.3Alternate Source of Electricity - If MTI, at any time, intends to use an alternate source of electricity to energize any part of its facilities, the electrical connection for such alternate source of electricity shall be made utilizing a single pole, double throw switch. All such contemplated installations must be approved in writing by an authorized representative of APS, prior to any such installation.

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4.Inspections

4.1Inspection of Work - APS shall have the right, but not the obligation, to inspect the work performed and the manner in which it is performed by MTI and any of its contractors or subcontractors. If, in APS’ sole discretion, any work on or around APS Facilities is being performed in an unsafe manner or in a manner which does not conform to the NESC or APS standards, APS may order that the work cease until corrective action is taken.

4.2Final Cable Inspection - After MTI has completed installation of Cable, APS will perform an inspection of the attachments. MTI shall provide a representative to participate in this inspection and shall reimburse APS all costs of performing such inspection. Any such corrective work shall also be subject to inspection by APS.

4.3Periodic Cable Inspection - APS may make periodic inspections of any part of the Cable, and MTI shall reimburse APS for one (1) inspection of the entire MTI fiber system on or in APS Facilities every twenty-four (24) months; for any such inspection resulting from a serious safety violation or a series of three or more violations of the standards set forth in these Terms and Conditions, during a twelve (12) month period; or for inspections made in connection with any unauthorized attachment to poles or anchors of APS. Such reimbursement shall be as set forth in Appendix A, SCHEDULE OF FEES AND CHARGES. If any attachments are found to be in violation of any provision of these Terms and Conditions or License granted hereunder, MTI shall be responsible for correcting all such violations and shall reimburse APS the cost of any additional Make-Ready Work that may be required for such corrections. The making of periodic inspections, or the failure to do so, shall not operate to relieve MTI of any responsibility, obligation or liability assumed under any License. Should five (5) safety violations occur on a License which MTI has failed to cure pursuant to Paragraph 9.3, within a twenty-four (24) month period, APS shall void the License and paragraph 9.5 of this Agreement shall apply. APS reserves the right to terminate the Agreement if three or more individual events of unauthorized attachments are made my MTI and are not cured pursuant to paragraph 9.3 herein.

5. Modification or Relocation of Cable:

5.1 Modification or Relocation Requested by MTI - In the event MTI desires to modify or relocate existing Cable, MTI shall notify APS and provide complete and accurate data necessary to perform the field survey of proposed modifications or relocation. MTI will bear full costs of the relocation including any costs incurred to re-install to its original function any fibers dedicated to APS’s use. All

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requests MTI for relocation shall be treated in the same manner as new construction and Make Ready Work, as described above.

5.3Relocations Requested by Third Parties - In the event that APS is required by any third party to relocate APS Facilities on which Cable utilized by its electric distribution and transmission lines on which any Cable is attached or runs, the cost of Cable relocation shall be apportioned equitably between MTI and APS based on the numbers of fibers allocated. The cost of relocation of the cable solely at the request and convenience of APS or MTI shall be borne by the requesting party. MTI shall not be required to pay any amount which APS is legally entitled to receive and does in fact receive from a third party as reimbursement for the cost of relocating cable. Other than with respect to the allocation of costs, APS shall not charge MTI for placement of Cable on relocated facilities.

6. Notices and Safety

6.1 Outage Scheduling - MTI shall not permit any employee, contractor or subcontractor or any employee of any contractor of subcontractor, to commence any construction, maintenance, repair or relocation of work until satisfactory arrangements, including coordination of work, construction schedules and outages, have been made with APS. When APS determines in its sole discretion that it is necessary to de-energize any of its facilities in order for work to commence, MTI shall not permit work to commence until such facilities have been de-energized.

6.2 Safety - - Nothing contained in this the Terms and Conditions or in any License granted hereunder shall be construed in any way to fulfill, limit, restrict, substitute, or waive, in whole or in part, obligations of any party under Article 6.4, HIGH VOLTAGE POWER LINES AND SAFETY RESTRICTIONS, of Section 1, Title 40, Chapter 2 of the Arizona Revised Statutes, or any other laws, regulations, codes, standards, or industry practices pertaining to activity near overhead electric lines. Neither Terms and Conditions nor any License shall not constitute authorization to conduct any activity around such facilities as that term is used in such statutes. MTI, its contractors or subcontractors shall obtain specific authorization on a case-by-case basis from APS as set forth in such statutes prior to commencing any work.

6.3 Emergencies - - In the event of an emergency requiring repair or relocation of MTI’s cable or facilities, MTI shall give APS notice as soon as practicable and

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shall coordinate such work to be performed with APS. MTI shall not commence any work in or on APS Facilities without prior verbal permission from an authorized APS representative. Prior to accessing the cable for maintenance purposes, MTI personnel must contact the APS-ECC at (602) 250-1080.

6.4 APS Accident Prevention Manual - Any employee, contractor, subcontractor and employees of contractors and subcontractors of MTI which is or will perform construction, maintenance, repair or relocation work on or around APS’ electric conductors, including transmission and distribution facilities and facilities located at ground level, shall be provided with a copy of the APS Accident Prevention Manual, copies of which are available from APS. MTI shall distribute copies of this manual to all employees, contractors and subcontractors, and MTI shall ensure that all work performed around electric facilities by such persons is performed in conformance with the APS Accident Prevention Manual.

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Agreement No.        -               

Exhibit A

LICENSE FOR ATTACHMENT OF FIBER OPTIC CABLE
TO APS FACILITIES

Licensee:	MTI Company
		Date:

Terms and Conditions Reference No.                   

Township Range Quarter Section

Annual License Fee                      

This License is hereby granted for the attachment of Licensee’s Fiber Optic cable and appurtenant facilities to APS overhead and underground facilities identified on the attached drawings and specifications. This License is granted conditioned upon and subject to the provisions of the Master Terms and Conditions for License Agreements referenced above, which are expressly incorporated herein by this reference. This License shall be for the purpose of allowing MTI to install, operate, maintain and repair its Cable on APS Facilities in accordance with such Master Terms and Conditions.

		Arizona Public Service Company
Date	By
		Its
		MTI Company
Date		By
		Its

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Agreement No.        -               

Exhibit B

RECIPROCAL LICENSE FOR USE OF FIBER WITHIN FIBER OPTIC CABLE
LOCATED ON APS FACILITIES

Licensee:	MTI Company
		Date:

Terms and Conditions Reference No.                   

Township Range Quarter Section

This license is hereby granted to APS by MTI for the use of    pairs of fibers located in Cable belonging to MTI and which has been or will be installed by MTI on the route designated in the attached diagram. This license is granted in consideration for the License granted by APS to MTI for the attachment of MTI’s Fiber Optic cable and appurtenant facilities to APS overhead and underground facilities, dated             . This license is granted for the purpose of allowing APS the use of such fiber and shall be perpetual in duration.

		Arizona Public Service Company
Date	By
		Its
		MTI Company
Date		By
		Its

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Attachment 1

LICENSE FOR USE OF APS DARK FIBER

Licensee: Mountain Telecommunications, Inc. Date: May 10, 1999

Terms and Conditions Reference No.

This License is hereby granted to Mountain Telecommunications, Inc. (MTI) for the use of dark fibers from the Ocotillo-Pinnacle Peak 230 kV transmission line pole number 22/2 southwest of Alma School and McKellips Road, approximately 550 feet south of the MTI Scottsdale Office; to APS’ 502 building and from APS’ 502 building to US West’s Phoenix Point of Presence (Phoenix Main) for the express purpose of collocating in the US West facility. This collocation shall provide APS with a choice of Internet Service Providers. This License is granted conditioned upon and subject to the provisions of the Master Terms and Conditions for License Agreements referenced above, which are expressly incorporated herein by this reference. This License shall be for the purpose of allowing MTI the full use of agreed upon fibers as stipulated in this Attachment in accordance with such Master Terms and Conditions.

MTI shall be granted the use of four (4) fibers on the route specified above. MTI shall provide a non-metallic fiber optic cable from their office to the existing splice on the transmission line pole, and provide for any fiber optic splicing required at this location. The four MTI fibers shall be delivered to MTI in the transformer room in the basement of Phoenix Main. MTI shall be responsible for any conduit, cable, construction, patch panels, splice cases, splices, etc. necessary to utilize the four fibers. In addition, MTI shall be granted the use of one rack space in the APS 502 building to install a fiber optic node. APS shall supply 48 VDC power to the node.

In consideration, MTI shall provide to APS in their Scottsdale Office collocation facility space, rack space and power for APS and APS affiliates network components, which shall include floor space and 48 VDC power for 2 racks of equipment. MTI shall provide to APS a minimum of eight (8) fibers in the cable from the above referenced Transmission line pole into the MTI Scottsdale Office, for APS’ sole use. MTI shall provide fiber optic patchpanel connections in the proximity of the collocation area for these fibers. In addition, MTI shall provide to APS one clear channel DS3 delivered from Phoenix Main to the APS demarc at the 502 Building. This DS3 will provide APS with a redundant path to a second Tier 1 Internet Service Provider of which MTI shall have access through their collocation at Phoenix Main. MTI will provide two additional DS3’s for APS use when required.

Attachment No. 1 Revision 0

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Prior to this attachment going into effect, MTI shall obtain the rights from the Salt River Indian Community allowing MTI, APS and any other carrier to carry traffic on the APS fiber crossing the reservation.

The terms of this agreement shall be for five (5) years, renewable in additional five (5) year increments. Each party shall have the right to terminate the agreement at the end of any term by giving a minimum of 60 days notice to the other party.

The effective date of this agreement shall be July 1, 1999. This agreement shall expire June 30, 2004.

		Arizona Public Service Company
Date	6/14/99	By		/s/ Don Tellis
		Name			Don Tellis
		Its	Manager Communication System

		Mountain Telecommunications, Inc.
Date	6/23/99	By		/s/ Michael L Kreel
		Name			Michael L Kreel
		Its	VP-Network

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EX-10.39

Exhibit 10.39

[GRAPHIC]

MASTER FIBER LICENSE AGREEMENT

This Master Fiber Agreement (this “Agreement”) is entered into by and between Salt River Project Agricultural Improvement and Power District, an agricultural improvement district organized and existing under the laws of the State of Arizona (“SRP”), and Mountain Telecommunications of Arizona, Inc., an Arizona corporation. (“Licensee”) (each a “Party”; jointly, the “Parties”).

RECITALS

A.    SRP’s Business. SRP is a supplier of water and electric power in portions of Maricopa County, Pinal County and Gila County, Arizona.

B.    SRP Telecom. SRP’s Telecom Department provides communications infrastructure, including parts of SRP’s fiber optic cable network, and related services to the extent that SRP has excess capacity on its network and its water and electric operations are not adversely affected.

C.    Licensee’s Business. Licensee is a provider of telecommunications services in the Phoenix, Arizona metropolitan area.

D.    This Agreement. Licensee desires to obtain a license to use fiber from SRP, and SRP is willing to license fiber to Licensee, on the terms and conditions herein. This Agreement is a Master Agreement, containing terms and conditions that will apply to multiple fiber segments. Specific terms and conditions applicable to any given segment will be stated in Product Orders executed by the Parties from time to time.

AGREEMENT

In consideration of the mutual promises and covenants herein, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows.

ARTICLE 1. DEFINITIONS

As used in this Agreement, the following terms shall have the meanings specified below:

“Accept” or “Acceptance” means the issuance by Licensee of written notice to SRP in the form of a signed Acceptance Package stating that Licensee approves the Fibers as being in compliance with the executed Product Order and/or this Agreement.

“Acceptance Package” means the document delivered by SRP to Licensee that demonstrates compliance with the Specifications and Product Order(s) as set forth in Exhibit A (Fiber, Specifications, Demarcation, Maintenance, Acceptance and Acceptance Testing).

“Administration Charge” means a charge payable to SRP for the costs of activities associated with SRP’s preparation of a Formal Price Quote.

“Affected Portion” means the portion of any Segment that is or may; (i) be affected by a Taking; (ii) become the subject of a lien or transfer; or (iii) be damaged or destroyed as the result of the occurrence of an event of casualty.

“Affiliate” means, with respect to either Licensee or SRP, any corporation that controls such Party, is controlled by such Party, or is with such Party under common control of another entity.

“Agreement” means this Master Fiber License Agreement.

“Approvals” means all permits, approvals and licenses from all government authorities or other Parties having jurisdiction or approval rights respecting; (i) the use and occupation of any Right of Way where Facilities are located or to be constructed; (ii) the use of Facilities; and (iii) “Blue Stake” clearances.

“Building Entrance” means that portion of the Fiber which runs from a connection point on the Fiber System to the point-of-presence inside a customer’s building, including all Rights of Way, conduit, Fiber, fiber optic patch panel and other Facilities necessary to establish the connection from a connection point on the Fiber to the customer’s building.

“Building Entrance Fee” means cost associated with the securing of access rights to a building.

“Commencement Date” means the date the license of Fibers under a Product Order commences, as established in an Acceptance Package executed by the Parties pursuant to Section 5.3 (Acceptance of Fiber) and Exhibit A (Fiber, Specifications, Demarcation, Maintenance, Acceptance and Acceptance Testing).

“Completion Interval” has the meaning as set forth in Exhibit A (Fiber, Specifications, Demarcation, Maintenance, Acceptance and Acceptance Testing).

“Connection Charge” means a one-time charge payable for Make Ready Work.

“Deficiency Notice” means written notice that the Fibers as Delivered do not conform to the Specifications or Product Order and as further set forth in Exhibit A (Fiber, Specifications, Demarcation, Maintenance, Acceptance and Acceptance Testing).

“Deliver” or “Delivery” means SRP’s delivery of an Acceptance Package to Licensee demonstrating compliance with the Product Order and Specifications.

“Delivery Date” means the date specified in a Product Order by which SRP is obligated to Deliver the Fibers to Licensee in compliance with the Product Order.

“Demarcation Point” means the point that defines where ownership and maintenance obligations begin and end as generally defined in Exhibit A (Fiber, Specifications, Demarcation, Maintenance, Acceptance and Acceptance Testing) and as specifically defined in any Product Order(s).

“Discovery” means detection of a discontinuity of signal transmitted over Fiber, or other evidence of a service interruption and as further set forth in Exhibit B (Service Interruption Credits).

“Electric Services” means electric power generation, transmission and distribution services and other services relating to the generation, transmission and distribution of electric power.

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“Facilities” means manholes, conduit, innerduct, risers, collocation equipment and space, switching facilities, fiber termination equipment, splice cases, interconnection equipment, racks, or other equipment associated with Fiber.

“Fiber(s)” means fiber optic cable provided without electronics or optronics.

“Force Majeure” has the meaning given in Article 10 (Force Majeure).

“Installation Charge” means a one-time charge payable for the construction and installation of a Lateral Connection, Building Entrance or Facilities.

“Lateral Connection” means the Segments of Fiber and Facilities that connect from SRP Fiber to an off-network location.

“License Fee” means (i) the periodic recurring charges under Product Orders (excluding Maintenance Charges), or (ii) where the Parties have agreed that Licensee will pay all or any part of such recurring charges in a lump-sum payment payable on the Commencement Date, the up-front lump sum payments (excluding Installation Charges, Administration Charges and Connection Charges) and any periodic recurring charges (excluding Maintenance Charges) under Product Orders.

“LEC” means a Local Exchange Company (e.g., Qwest, and competitive local exchange companies or other carriers).

“Make Ready Work” means the Services, including but not limited to pre-design, design, splicing, testing and other related services, generally associated with reconfiguring or rerouting Fiber, interconnecting Fiber with Lateral Connections, and otherwise putting Fiber into service.

“Maintenance Charge” means a periodic recurring charge or a lump sum charge payable for maintenance of the Fibers.

“Method of Procedure (MOP)” means a standard operating procedure for conducting Scheduled Maintenance between and among SRP, Licensee and the LEC (if applicable) to be prepared by both Parties using the form (A-2) and procedures as referenced in Exhibit A (Fiber, Specifications, Demarcation, Maintenance, Acceptance and Acceptance Testing).

“Point-Of-Interconnection (POI)” means the location and Facilities where the Licensee Fiber System and SRP Fiber System meet and as further defined in Exhibit A (Fiber, Specifications, Demarcation, Maintenance, Acceptance and Acceptance Testing), and as specifically defined in an executed Product Order.

“Product Order” means an order for (i) Fibers, (ii) Lateral Connections, (iii) Make Ready Work, or (iv) other Services, executed from time to time by both Parties.

“Pro Rata Share” means a proportion equal to a fraction, the numerator of which is the number of Fibers and the denominator of which is all Fibers in the affected portion of a Segment. If this fraction varies over a particular Segment, then the Pro Rata Share shall be equal to the weighted average (weighted by length as set forth in SRP’s installation records) of the relevant portions. For example, if the fraction for one hundred (100) feet of the affected Segment is 0.1 and the fraction

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for the remaining fifty (50) feet of the affected Segment is 0.07, the weighted average for the entire Route would be 0.09.

“Right-Of-Way (ROW)” means SRP owned or controlled right of ways, easements, licenses or rights to use or occupy real property owned, licensed, or licensed by others, including corporations, railroads, individuals, or other entities, including a LEC.

“Scheduled Maintenance” means planned outages that may occur for the purpose of maintaining, repairing, or enhancing SRP’s electrical system or for Licensee defined maintenance work. Scheduled Maintenance will occur according to a mutually approved Method-of-Procedure and as further set forth in Exhibit A (Fiber, Specifications, Demarcation, Maintenance, Acceptance and Acceptance Testing).

“Segment” means Fiber delineated by specific end points (“Demarcation Points”).

“Services” means the provision of maintenance and repair of the Fibers, Make Ready Work, the construction of Lateral Connections, acquisition of Approvals, and other ancillary services provided or to be provided under Product Orders.

“Service-Affecting Condition” means a discontinuity on both paths of a diversely routed physical fiber ring causing loss of internal or external traffic, except that SRP Scheduled Maintenance or Force Majeure events that cause a loss of such traffic shall not constitute a Service Affecting Condition.

“Service Interruption Credit” has the meaning set forth in Exhibit B (Service Interruption Credits).

“Single Point of Failure” means any point where a single fiber cut would cause a Service-Affecting Condition.

“Specifications” means the Fiber specifications as set forth in Exhibit A (Fiber, Specifications, Demarcation, Maintenance, Acceptance and Acceptance Testing).

“Splice Point” means a point where the Licensee’s fiber network interconnects with SRP’s Fiber System.

“Taking” means the exercise of the power of eminent domain by any public or quasi-public authority, other than an exercise by SRP in accordance with statutory authority.

“Telecommunications Services” means all services delivered by Licensee including, without limitation, the two-way transmission of signals, messages, images, sounds, data and other information of any nature transmitted to customers, excluding the license of Fiber.

“Term” means the Initial Term and any renewal term of this Agreement as specified in Article 3.

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ARTICLE 2. LICENSE; SCOPE OF AGREEMENT

2.1          Fiber. On the terms and conditions herein and in each Product Order, SRP licenses to Licensee, and Licensee licenses from SRP, the right to use the Fiber specifically described in each Product Order (the “Fiber”) and any equipment described in the Product Order as being licensed to Licensee. All right, title and interest in the Fiber and any Equipment shall at all times remain exclusively with SRP (or with any third party from whom SRP obtains the rights to the Fiber), except for the rights granted to Licensee to use the Fiber and Equipment under this Agreement and the applicable Product Order. Licensee may use the Fiber solely for providing Telecommunications Services, in accordance with applicable laws, rules, regulations, orders and other regulatory requirements, now or later in effect, of any governmental authority having jurisdiction over Licensee, the Fiber or the use thereof. This Agreement and the license granted hereunder are subject to termination or expiration as provided herein, and shall have no force or effect thereafter, except as provided in Section 2.3 (Product Orders) with respect to any Product Order that may continue to remain effective.

2.2          Agreement and Exhibits. This Agreement consists of the body of this Agreement, all executed Product Orders, and the following attached Exhibits:

Exhibit A	Fiber, Specifications, Demarcation, Maintenance, Acceptance & Acceptance Testing
Exhibit B	Service Interruption Credits
Exhibit C	Product Order Process
Exhibit D	Fee and Charges Schedule
Exhibit E	SRP Representative Costs & Loadings
Exhibit F	Telecom Canal Bank License

2.3          Product Orders. From time to time during the term of this Agreement, the Parties may execute Product Orders under which SRP will license Fibers to Licensee and SRP will provide such other Services related to the Fibers as may be specified in the Product Order. The term of a given Product Order may extend beyond the term of this Agreement, in which case the provisions of this Agreement shall continue to apply for the remaining term of any Product Order. The Parties shall generally follow the Product Order Process set forth in Exhibit C (Product Order Process) when requesting, or responding to requests for quotations for the purposes of licensing Fiber or related Services under this Agreement. The execution of this Agreement does not obligate either Party to execute a Product Order.

2.4          Conflicts Between Product Order, Agreement, or Exhibits. If there is an inconsistency or conflict between the terms contained in this Agreement or any Exhibit to this Agreement and the terms contained in a Product Order, the terms in this Agreement or the Exhibit will govern unless (a) the Product Order clearly identifies the specific provision of the Agreement that the Parties intend to amend or modify, and (b) the Product Order sets forth the specific amendment or modification. If there is an inconsistency or conflict between the body of this Agreement and the terms contained in an Exhibit, the terms in the body of this Agreement will govern.

2.5          Property of the United States. Licensee acknowledges that SRP manages certain properties owned by the United States of America, such as SRP canal banks. Notwithstanding anything to the contrary in this Agreement, if any Segment of Fiber is located on U.S.A. property,

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the license grant under this Agreement and any Product Order executed hereunder is, with respect to such Segment, subject to the paramount rights of the U.S.A., federal reclamation law and all existing and future agreements concerning such properties among the U.S.A., SRP and the Salt River Valley Water Users’ Association. In addition, Licensee shall be required to execute a separate license agreement in substantially the form approved by the U.S.A. for each Segment of Fiber located on U.S.A. Property. If there is any conflict or inconsistency between the provisions of this Agreement and the provisions of the U.S.A. -approved license, the latter shall govern and prevail with respect to any Segment of Fiber located on U.S.A. Property.

ARTICLE 3. TERM

This Agreement becomes effective as of the date on which it has been signed by both Parties (the “Effective Date”) and shall continue for a term of two (2) years (the “Initial Term”), unless sooner terminated under this Agreement. After the Initial Term, this Agreement shall be automatically renewed for successive one year periods unless either Party provides written notice of non-renewal to the other Party not more than sixty (60) days and not less than thirty (30) days before the expiration of the Initial term or the then-current renewal term. If at any time this Agreement is not renewed, the terms of this Agreement (as were most recently in effect) shall remain effective with respect to and so long as any Product Order remains effective.

ARTICLE 4. FEES, CHARGES, PAYMENT TERMS AND CREDITS

4.1          Fees and Charges. SRP shall invoice Licensee, and Licensee shall pay as applicable the License Fees, Administration Charges, Installation Charges, Connection Charges, Maintenance Charges and any other charges payable by Licensee and listed in each Product Order in accordance with the terms and conditions of this Article 4, the applicable Product Order and as described in Exhibit D (Fees and Charges Schedule). SRP shall issue invoices at the times stated in this Agreement or the applicable Product Order. Licensee shall pay each invoice within thirty (30) days after the date of the invoice. Payment of all fees and other payments required herein shall include the remittance invoice, or reference to the SRP invoice number.

SRP shall send invoice to Licensee at the following address:

Mountain Telecommunications of Arizona, Inc.
1430 W. Broadway, Ste. A206
Tempe, Arizona 85282

All payments shall be sent to one of the following addresses:

If by U. S. Postal Service:	If by other means of delivery, the physical address is:
SRP 9	SRP Telecom Department
Attn: MARS	PAB 353
P. O. Box 52019	1600 N. Priest Drive
Phoenix, AZ 85072-201	Tempe AZ 85281

4.2          Late Payment Fees. Any payment required hereunder shall be delinquent if it is not paid in full by the due date, except to the extent Licensee disputes the invoice in accordance with Section 4.3. If any payment is delinquent, Licensee shall pay SRP a monthly late payment fee equal to One and One-Half Percent (11/2%) of any delinquent amount or the highest interest rate

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permitted by law, whichever is less. The monthly late payment fee shall be due and payable on the first day of delinquency and on the same day of each month thereafter until all delinquent amounts (including late payment fees) are paid in full.

4.3          Payment Disputes. In the event of a billing dispute, the disputing Party shall promptly give written notice of the dispute to the other Party. The Parties shall first attempt to resolve the dispute within ten (10) calendar days after such notice through meetings between the respective representatives of the Parties and any other representatives of a Party deemed necessary by that Party for these discussions. If such first attempt is unsuccessful in resolving the dispute, the Parties agree to escalate negotiations to the next level according to each Party’s chain of command. This will be accomplished upon written notice from one Party to the other, and upon the determination of a reasonable mutually agreed schedule and timetable for such negotiation. If unsuccessful, or if thirty (30) calendar days have passed since the initial notice of the dispute, the Parties may jointly agree to submit the matter to non-binding mediation upon mutually agreeable terms. The mediator will be requested to conclude such mediation no later than thirty (30) days following the mediator’s appointment. If the Parties are unable to agree to mediate the dispute within sixty (60) days after the initial notice of the dispute, either may exercise any rights or remedies available under this Agreement or otherwise available at law or in equity. During dispute resolution proceedings, the Parties shall continue to perform their obligations under this Agreement except for those obligations directly related to the pending dispute.

In the event that a dispute is resolved against Licensee and Licensee has withheld payment, Licensee shall pay such amounts plus interest equal to one and one-half percent (11¤2%) monthly beginning from the date first due until paid in full. In the event that the dispute is resolved in favor of Licensee and Licensee has made payment, SRP shall credit such amounts plus interest equal to one and one-half percent (11¤2%) monthly.

4.4          Security Deposits. In the event a Product Order contains recurring charges (monthly or annual), then at any time during the term of such Product Order, SRP may, in its reasonable discretion, require Licensee to pay a security deposit (“Deposit”) to SRP, to secure timely payment of amounts due and full performance of other Licensee obligations under this Agreement or any Product Order. If required, the Deposit shall be in an amount equal to the total recurring amounts payable by Licensee under this Agreement and all Product Orders pro-rated to cover a three-month period. SRP shall give written notice to Licensee of a Deposit requirement, and Licensee shall remit the Deposit amount to SRP within ten (10) days of Licensee’s receipt of the notice, or by such later date as may be stated in the notice. Licensee acknowledges that SRP uses a proprietary credit scoring system to evaluate the creditworthiness of its customers, and periodically reviews such credit ratings (currently semi-annually). If, after a Deposit is required, Licensee’s credit rating score improves to the point that it meets SRP’s requirements, SRP will eliminate the Deposit requirement and refund to Licensee any Deposit and accrued interest. SRP may reinstate the Deposit requirement at any time the Licensee fails to meet SRP’s credit requirements. If SRP applies all or any part of the Deposit to Licensee’s obligations, Licensee shall restore the Deposit to its original amount within ten (10) days after SRP notifies Licensee of such application. The Deposit shall earn interest at the standard rate established by SRP for deposits held for its electric customers. The interest rate is based on CD rates at local banks, and is adjusted each December 31. The rate for calendar year 2005 is 0.77%. All accrued interest shall be credited to Licensee as of December 31 of each year or upon refund of the deposit, whichever occurs first. If not returned sooner, SRP will return the Deposit to Licensee upon expiration or termination of the applicable Product Order after first applying the Deposit and accrued interest to any remaining amounts owed to SRP under this Agreement, the applicable Product Orders, or both.

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4.5          Taxes, Charges and Expenses. If Licensee claims an exemption from any sales tax, transfer tax,. use tax, gross receipts tax, excise tax, business and occupation tax, or other similar Federal, state and local taxes or charges, including any charge for the use of city or federal property or any franchise or other similar fee, (but excluding taxes imposed on SRP’s net income) imposed by any governmental authority upon SRP or Licensee in connection with any payments due from Licensee to SRP under this Agreement or under any Product Order, or as a result of this Agreement or any Product Order, or imposed upon or with respect to the Fiber (collectively, “Taxes”), Licensee shall provide a written notice of such claim of exemption to SRP. If no exemption applies, or if any claim of exemption made by Licensee is disallowed, Licensee shall pay or reimburse SRP, as applicable, for any and all Taxes, which shall include any and all interest related to Taxes assessed SRP due to disallowance of Licensee’s claimed exemption.

4.6          Service Interruption Credits. SRP agrees to provide Service Interruption Credits to Licensee according to the provisions in Exhibit B (Service Interruption Credits).

ARTICLE 5. MAINTENANCE, REPAIR AND OPERATIONS

5.1.         General. SRP will perform all maintenance and repairs of Fibers in accordance with the standards and terms of Exhibit A (Fiber, Specifications, Demarcation, Maintenance, Acceptance and Acceptance Testing).

5.2          Demarcation Points. Demarcation Points define the respective ownership and maintenance responsibilities and obligations of the Parties. The Parties’ obligations with respect to Demarcation Points are generally set forth in Exhibit A (Fiber, Specifications, Demarcation, Maintenance, Acceptance and Acceptance Testing), and specifically defined in attachments to each Product Order.

5.3          Acceptance of Fiber. Acceptance of Fiber will occur according to Product Orders and the provisions of Exhibit A (Fiber, Specifications, Demarcation, Maintenance, Acceptance and Acceptance Testing)

5.4          Services. The Parties contemplate adding Lateral Connections, modifying network topologies and other Services, from time to time, to make use of Fiber. All Services shall be specified in an executed Product Order. Licensee acknowledges that due to electric safety concerns, only SRP can perform Make Ready Work. SRP will provide such Services according to an executed Product Order.

5.5          Lateral Connections. If an executed Product Order specifies that Licensee shall provide a Lateral Connection to SRP Fiber, Licensee shall comply with the following:

(a)           Licensee shall provide the appropriate Demarcation Points and Facilities in either public ROW, or in a private easement obtained by Licensee, at the closest available location to the SRP Splice Point designated by SRP.

(b)           SRP shall provide interconnection Services and Facilities (e.g., fiber termination cabinet, conduit, fiber, fiber splicing) on its ROW between the SRP Splice Point and the Demarcation Point at its Installation Charge as specified in the applicable Product Order.

(c)           Licensee shall be solely responsible for obtaining all Approvals applicable to such Lateral Connections, and this provision shall not be construed as a grant by SRP or an undertaking or

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agreement by SRP to grant any easement, license or other right of way on lands owned or controlled by SRP.

5.6          Substitution. Upon not less than sixty (60) days written notice from SRP to Licensee, SRP may, at its option, substitute for the Fibers within any Segment or Segments or Route, or any portions thereof, an equal number of alternative Fibers within such Segment or Segments or Route, or any portions thereof, provided that in such event, such substitution; (i) shall be at the sole cost of SRP; (ii) shall use Fiber meeting or exceeding the Specifications, and be tested in accordance with the Acceptance provisions; (iii) shall not change any Demarcation Points; (iv) shall not cause a Service Affecting Condition, and (v) shall be effected according to Scheduled Maintenance standards and procedures and to an approved MOP, Licensee’s approval of which will not be unreasonably withheld.

At any time during the Term, Licensee may submit a Request for Quote pursuant to Exhibit C (Product Order Process) requesting SRP to replace a Segment of Fiber under an existing Product Order with a different Segment or additional Fiber strands on an existing Segment (“Replacement Fiber”). SRP shall be under no obligation to enter into a Product Order to provide Replacement Fiber. If Licensee notifies SRP in writing that the Request for Quote is being submitted because of an early termination of service by Licensee’s customer, SRP will use commercially reasonable efforts to accommodate Licensee’s request for Replacement Fiber, provided that (i) SRP has excess fiber available, (ii) the Replacement Fiber is substantially equivalent to the replaced Fiber in terms of total route miles, strand miles, configuration and Facilities, and (iii) Licensee shall pay for any necessary and appropriate Services required to be performed by SRP in connection with the decommissioning of the replaced Fiber and the commissioning of the Replacement Fiber, as specified in the Product Order. Licensee shall continue to pay the related portion of the License Fee (the “Original License Fee”) until the earlier of (i) the date that SRP delivers the Replacement Fiber; or (ii) the Delivery Date agreed to by the Parties for the Replacement Fiber. Upon the date that SRP delivers the Replacement Fiber, Licensee shall begin paying the related License Fee for the Replacement Fiber as specified in the Product Order.

5.7          Best Interest of SRP’s Electric System. Notwithstanding any provision of this Agreement, SRP reserves the right to act in the best interest of its primary function as an electrical utility provider. As such, electrical utility events may dictate emergency Fiber outages. SRP will work with Licensee to minimize any Service Affecting Conditions. Licensee acknowledges that for safety reasons, normal electrical utility line work occurs during daylight and normal business hours. This Section 5.7 shall not be construed to (i) relieve SRP of its obligations to provide Service Interruption Credits under Article 4 (Fees, Charges, Payment Terms and Credits) or (ii) to permit SRP to unilaterally amend or terminate this Agreement or any Product Order hereunder.

ARTICLE 6. ACCESS TO FACILITIES

6.1          Installation Rights. To the extent that any Product Order provides for SRP to do any installation of Fiber or Facilities or to perform Services on the property of an owner other than Licensee (an “Owner”), Licensee and/or SRP will need to secure access for SRP to the Owner’s property identified in the Product Order (the “Property”) and any buildings on the Property (the “Buildings”). If new easements or rights of way are necessary for the installation, Licensee shall make reasonable efforts to obtain and grant an access easement, license or right of way, and/or will cooperate with SRP in obtaining same from any necessary other Party or governmental authority, on terms satisfactory to Owner, Licensee and SRP in their reasonable discretion. If SRP elects not to secure access, Licensee shall make reasonable efforts to secure the access, and

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SRP shall not be responsible for any inability to obtain or any delay in obtaining such access. Upon obtaining access to the Property and Buildings, Licensee and its successors and assigns shall be obligated to (i) provide SRP with the documentation showing the terms and conditions of the access grant, and (ii) grant to SRP and its agents and third party contractors the non-exclusive right to conduct such installation on the Property, in the Buildings, and on or within any like Facilities or property of Licensee. SRP shall have no obligation to perform an installation unless all necessary rights are granted by Owner and/or Licensee and any other Party as SRP deems necessary, and, if access rights have been secured by Licensee, it has provided SRP with the documentation of the access grant.

6.2          Access to Property, Buildings and Facilities. Upon execution of a Product Order that provides for an installation of Fiber or Facilities or to perform Services, Licensee shall, as described in Section 6.1 above, provide SRP with access to the Property, Buildings and Facilities (“Access”) for purposes of planning the installation. Throughout the term of this Agreement and upon reasonable notice under the circumstances, Licensee shall provide Access from time to time to SRP and its agents and third party contractors, employees, officers, lessees and authorized vendors, in connection with the construction, installation, modification, operation, maintenance, repair, update, disconnection, replacement and removal of the installation and equipment. Licensee shall cooperate with SRP to secure Access for SRP (at no charge) to the Property, Buildings, Facilities and the equipment, Facilities and buildings of Licensee’s customers, and space therein for SRP racks and other equipment as necessary for SRP to perform its obligations under this Agreement.

6.3          Scope and Design. To the extent that a Product Order provides for SRP to do any installation, SRP shall provide Owner and Licensee with technical drawings showing the planned path for installation of conduit and fiber optic cable, connection points and the other initial Equipment to be installed on the Property and in the Buildings or other Facilities (the “Preliminary Drawings”). The final drawings shall be satisfactory to Owner and Licensee, in their reasonable discretion (the “Approved Drawings”). The Preliminary Drawings and the Approved Drawings shall be added as Exhibits to the Product Order. Conduit shall generally be installed in rights of way on the Property. Upon completion of the Installation, SRP shall provide Owner and Licensee “field installation record” drawings of the Installation, and on request will provide them with updated drawings to show subsequent changes made.

6.4          Installation on Site and in Buildings. To the extent that a Product Order provides for SRP to do any installation, the installation shall be performed at no cost to Owner and shall substantially conform to the specifications in the Approved Drawings. No material alterations to the Approved Drawings and no material alterations to the Buildings shall be made without the prior written consent of Owner and Licensee, in their reasonable discretion. SRP shall seek to minimize, and shall give two (2) business days prior notice of interference with other construction activities and normal business operations of building owners and tenants. Owner and Licensee will also seek to minimize, and shall give two (2) business days prior notice of interference with SRP’s Installation.

ARTICLE 7. PROPERTY RIGHTS AND OBLIGATIONS

7.1          Encumbrances. Licensee shall not create or grant any lien, encumbrance, security interest or other property interest against any of the Fiber.

7.2          Maintain Property Rights. Subject to the provisions of Section 8.2 (Relocation), the Parties shall timely perform all of their respective obligations pertaining to the use of such Fiber, in

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accordance with all applicable terms and conditions of the grants and property conveyances by which it holds a property interest therein, and shall take such other actions as may reasonably be necessary to prevent the lapse, forfeiture or termination of any such property interests.

7.3          Defense of Property Interest. Should the right of either Party to use, in accordance with the terms and conditions of this Agreement, any Fiber be challenged by the holder or alleged holder of a property interest in such Right of Way or Building Entrance, excluding property owned by the United States, the Parties shall defend the right to so use the Fiber. The Parties shall take all actions and execute such additional documents as are deemed reasonably necessary in connection with the establishment or defense of the challenged rights. Neither Party makes a warranty to the other regarding the adequacy of any property rights that support the installation or use of any Fiber.

7.4          Franchise Rights and Licensing Costs. Each Party shall each be responsible for all franchises and licenses as may be necessary for its operations.

7.5          Liens. In the event any of the Fiber becomes subject to any mechanics’, artisans’ or materialmen’s lien, the responsible Party shall promptly cause the same to be discharged and released of record (by payment, posting of bond, court deposit or other means) without cost to the other. The responsible Party shall indemnify the other against all costs and expenses (including reasonable attorney fees) reasonably incurred in discharging and releasing such lien. If any such lien is not so discharged and released within ninety (90) days after notice thereof by the responsible Party, then one Party may pay or secure the release or discharge thereof at the expense of the responsible Party. Nothing in this Agreement shall preclude either Party from contesting any lien described above or the contract or action upon which the same arose after the same shall have been bonded or otherwise released of record, as provided above.

ARTICLE 8. CONDEMNATION AND RELOCATION

8.1          Taking. Should any portion of the Fiber be made the subject of a Taking, the License granted to Licensee under the terms of this Agreement with respect to the Affected Portion, to the extent appropriated by such Taking, shall terminate. SRP shall notify Licensee immediately of any Taking threatened or filed against any portion of the Fiber. In addition, SRP agrees not to sell or convey any portion of the Fiber to such acquiring authority in lieu of condemnation without giving prior notice to and the opportunity to Licensee to participate in the negotiations with respect to such conveyance. In the proceeding for any such Taking (or an involuntary discontinuance of the use of a Segment in anticipation of a Taking), the interests of Licensee and SRP in and to the Affected Portion of the Segment shall be severed. Any awards resulting from the proceeding shall be allocated between and payable in accordance with the respective interests of Licensee and SRP (both physical and occupational, including any incremental value of the Right of Way by virtue of the installation therein of the Fiber).

8.2          Relocation. SRP may relocate all or any portion of the Fiber: (i) if a third party with legal authority to do so orders such relocation or exercises its power of eminent domain (e.g., through filing or threatening to file a condemnation suit), or (ii) in order to comply with applicable laws, or (iii) if SRP determines that relocation is necessary or desirable for the operation of its business. Any relocation or portion thereof made pursuant to clause (ii), which is necessary to comply with laws that were in effect at the time of Fiber Acceptance, or any relocation or portion thereof made pursuant to clause (iii), shall be considered a “Voluntary Relocation”.

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In the case of a Voluntary Relocation, SRP will reimburse Licensee for any reasonable direct costs incurred by Licensee as a result of the relocation, provided that, upon request by SRP, Licensee shall provide supporting documentation of such costs. SRP shall have the right to direct such relocation or Voluntary Relocation, including, but not limited to, the right to determine the extent of, the timing of, and methods to be used for such relocation provided that any such relocation: (a) shall be constructed in accordance with the specifications and requirements set forth in this Agreement; and (b) shall not unreasonably interrupt service or use of Licensee’s Fiber. SRP shall deliver to Licensee updated route and access point maps and ring diagrams with respect to a relocated portion of the Fiber not later than one hundred eighty (180) days following the completion of such relocation. Voluntary Relocation of the Licensed Fiber will be at SRP’s sole expense and SRP will give Licensee at least one hundred eighty (180) days prior written notice of any such Voluntary Relocation.

For relocations other than Voluntary Relocations, SRP will give Licensee at least one hundred eighty (180) days (or such lesser period of notice that SRP may have received) prior written notice of any such relocation and such notice shall include an estimate of the costs which are likely to be incurred in connection with such relocation. Licensee will have the option, exercisable in writing within fifteen (15) days after receipt of written notice of such relocation from SRP, to participate in the relocation with respect to the affected Segment. In the event that Licensee chooses not to participate in the relocation, then Licensee will be permitted (at Licensee’s cost) to connect into the remaining Segments at mutually agreeable Splice Points. If Licensee chooses to participate in the relocation, Licensee shall reimburse SRP (to the extent SRP has not been reimbursed by third Parties requiring said relocation) for a Pro Rata Share of the costs incurred by SRP for relocating the Fiber and any amounts that SRP is contractually required to pay any third party Facility Owner (provided such third party costs were identified in SRP’s cost estimate), provided that, upon request by Licensee, SRP shall provide supporting documentation of all such costs and amounts.

ARTICLE 9. CONFIDENTIALITY

All information furnished by the Parties to each other, or by or to their respective representatives, whether or not reduced to writing or specifically identified as non-public, confidential, or proprietary, and all analyses, compilations, data, studies, or other documents prepared by the Parties containing, or based in whole or in part on, any such furnished information, or reflecting review of, or interest in, all or part of such information, and the existence and terms of this Agreement, are hereinafter collectively referred to as the “Information.” As used in this Agreement, a “representative” of the Party shall mean any and all directors, officers, employees, agents or representatives, including, without limitation, attorneys, accountants, consultants and financial advisors of a Party. In consideration of being furnished with the Information, the recipient of such Information agrees that:

(a)           Nondisclosure. The Information will be kept confidential and will not, without the prior written consent of the Party providing the information, be disclosed by the other Party or any of its representatives, in any manner whatsoever, in whole or in part, and will not be used by a Party or any of its representatives directly or indirectly for any purpose other than activities contemplated by this Agreement. Moreover, the recipient will transmit the Information only to those representatives who need to know the Information for the purpose of performing or exercising such Party’s obligations and rights under this Agreement, who have been informed of the confidential nature of the Information, and who have agreed to be bound by the terms of this Agreement.

(b)           Authorized Disclosure. Without the prior written consent of the other Party, neither Party or its representatives will disclose to any other person the fact that the Information has been made

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available, or any of the terms, conditions or other facts with respect to this Agreement, except as required by law and then only with prior written notice given, as soon as possible, to the other Party and in compliance with the provisions of Section 17.3 (Notices) of this Agreement. The term “person” as used in this Agreement shall be interpreted broadly to include, without limitation, any corporation, company, group, partnership or individual.

(c)           Nonconfidential Information. This Article (Confidentiality) shall be inoperative as to any portion of the Information which: (1) is or becomes generally available to the public other than as a result of a disclosure by the recipient or its representatives; (2) becomes available to a Party in good faith from a third-party not subject to a confidentiality obligation to the disclosing Party; or (3) was known to a Party on a nonconfidential basis prior to its disclosure by the other Party or one of its representatives.

(d)           Compelled Disclosure. In the event that either Party or anyone to whom the Party transmits the Information relating to this Agreement is requested or becomes legally compelled (by oral questions, interrogatories, requests for information or documents, subpoena, civil investigative demand, or any similar process) to disclose any of the Information, the Party so compelled will provide prompt written notice of such event to the other Party so that the notified Party may seek a protective order or other appropriate remedy, waive compliance with the provisions of this Agreement or both. In the event that such protective order or other remedy is not obtained or that the notified Party waives compliance with the provisions of this Agreement, the legally compelled Party will furnish only that portion of the Information which is legally required and will exercise its best efforts to obtain reliable assurance that confidential treatment will be accorded the Information.

(e)           Public Records Law. Licensee understands that SRP is or may be subject to in the future, public records disclosure laws, and that these laws will govern the disclosure responsibilities of SRP notwithstanding the terms of this Agreement. SRP agrees that to the extent reasonably practical, it will notify the Licensee of any public records requests of any part of the Information, and will give the other Party a reasonable opportunity to contest the public records request.

(f)            Equitable Relief. A Party shall be entitled to equitable relief, including injunctive relief and specific performance, in the event of any breach or threatened breach of the provisions of this Agreement. Such remedies shall not be deemed to be the exclusive remedies for a breach of this Agreement by a Party or its representatives, but shall be in addition to all other remedies available by law or equity. For purposes of equitable relief, the Parties agree that breach of the provisions of this Agreement may subject the disclosing Party to irreparable harm and injury.

(g)           Ownership of Information. The Information acquired from the disclosing Party or any of its representatives shall be and shall remain the exclusive property of the disclosing Party. Neither the disclosure of Information, nor the execution of this Agreement shall be construed as a license or other authorization to the Party receiving Information to make use of or sell the Information or products derived from the Information, or to make use of it in any way that damages or competitively disadvantages the disclosing Party.

ARTICLE 10. FORCE MAJEURE

Notwithstanding anything in this Agreement to the contrary, neither SRP nor Licensee shall be liable or responsible for a delay or failure in performing or carrying out any of its obligations (other than obligations to make payments) under this Agreement caused by force majeure. For purposes of this Agreement force majeure shall mean any cause beyond the reasonable control of SRP or

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Licensee, as applicable, or beyond the reasonable control of any of their respective contractors, subcontractors, suppliers or vendors, including without limitation:

A.            Acts of God, including, but not necessarily limited to, lightning, earthquakes, adverse weather of greater duration or intensity than normally expected for the job area and time of year, fires, explosions, floods, wind, other natural catastrophes;

B.            Sabotage, acts of a public enemy, acts of government or regulatory agencies, wars, blockades, embargoes, insurrections, riots, or civil disturbances;

C.            Labor disputes, including, but not necessarily limited to, strikes, work slowdowns, work stoppages, or labor disruptions, labor or material shortages, or delays or disruptions of transportation;

D.            Orders and judgments of any federal, state or local court, administrative agency or governmental body;

E.             The adoption of or change in any federal, state or local laws, rules, regulations, ordinances, permits or licenses, or changes in the interpretation of such laws, rules, regulations, ordinances, permits or licenses, by a court or public agency having appropriate jurisdiction after the date of the execution of this Agreement; or

F.             Any suspension, termination, interruption, denial or failure to issue or renew by any governmental authority or other Party having approval rights of any approval required or necessary hereunder for construction, installation or operation of any Fiber and equipment or for either Party to perform its obligations hereunder, except when such suspension, termination, interruption, denial or failure to issue or renew results from the negligence or failure to act of the Party claiming the occurrence of an event of force majeure.

If either SRP or Licensee is rendered unable to fulfill any of its obligations under this Agreement by reason of force majeure, such Party shall promptly notify the other and shall exercise due diligence to remove such inability with all reasonable dispatch; provided, that nothing contained in this paragraph shall be construed as requiring SRP or Licensee to settle any strike, work stoppage or other labor dispute in which it may be involved, or to accept any permit, certificate, license or other approval on terms deemed unacceptable to such Party, or to enter into any contract or other undertaking on terms which the Party deems to be unduly burdensome or costly.

11. LICENSEE WARRANTY OF LAWFUL RIGHT TO USE

Licensee hereby warrants and represents to SRP that it is, and shall remain at all times during the term of this Agreement and any Product Order, fully licensed by all governmental entities with jurisdiction over its activities, shall have all permits or authorizing documentation required thereby, and that its use of the Fiber and any related equipment as provided herein shall be lawful in all respects.

ARTICLE 12. LIMITATION OF LIABILITY; WARRANTY DISCLAIMERS

Except to the extent specifically provided elsewhere in this Agreement, including without limitation Exhibit A attached hereto, SRP shall not be liable for any service interruption in SRP’s Fiber Network, the Fiber, another provider’s network being used to provide Fiber (a “Service Interruption”) caused because of reasonable maintenance of SRP’s Fiber Network or its

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communications or electric systems in the ordinary course of business, unless the Service Interruption is caused as a result of a material deviation from the MOP, SRP’s failure to obtain a MOP when required under this Agreement, or SRP’s negligence or intentional wrongful conduct. If a Service Interruption is caused as a result of a material deviation from the MOP, SRP’s failure to obtain a MOP when required under this Agreement, or SRP’s negligence or intentional wrongful conduct, SRP’s liability shall be limited to providing Service Interruption Credits. Except for a breach of a Party’s confidentiality obligations or in the case of personal injury or death, in no event will either Party have liability to the other or its customers for consequential, exemplary, special, incidental, indirect and/or punitive damages, even if such Party has been advised of the possibility of such damages, including without limitation, loss of actual or anticipated profits or revenue, loss by reason of shut-down, loss of use or Interest, non-operation or increased expense of manufacturing or operation, or any costs, labor or materials required for reconstruction or repairs. The liability and damages limitations in this Section apply to all causes of action, including without limitation breach of contract, warranty, negligence, strict liability, misrepresentation and any torts. SRP EXPRESSLY DISCLAIMS ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING WITHOUT LIMITATION WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.

ARTICLE 13. INDEMNIFICATION

13.1        By Licensee. To the fullest extent permitted by law, Licensee shall indemnify, hold harmless, and defend SRP and the Salt River Valley Water Users’ Association, members of their governing bodies, directors, officers and employees, for, from and against all claims, damages, losses, and expenses (including, but not limited to, attorneys’ fees) arising out of or resulting from the use of the Fiber and any Equipment, or any condition created in or about the Property, Buildings and Facilities, including without limitation any accident, injury, or damage whatsoever occurring on or in the Property, Buildings and the Facilities, to the extent that any such claim, damage, loss, or expense is caused by any act or omission of Licensee, or its employees and agents. The agreement whereby Licensee agrees to hold SRP and the Association harmless shall include latent defects

In addition, Licensee shall indemnify, hold harmless, and defend SRP and the Salt River Valley Water Users’ Association, members of their governing bodies, directors, officers and employees for, from and against all claims, damages, losses, and expenses (including, but not limited to, attorneys’ fees) arising out of or relating to the following:

(a) The use or provision of services or the content of any transmission; or

(b) Any claim for interruption of service or in respect of service quality.

Licensee shall have charge of all such proceedings and shall reimburse to SRP any amount that SRP is required to pay for any such damage, injury or claim, including, but not limited to costs, attorney’s fees and other expenses incurred in connection with any such damage, injury or claim, the investigation thereof, or defense. The obligation of indemnity by Licensee shall not apply to claims by SRP employees that are covered by workers’ compensation insurance.

13.2        By SRP. Subject to the limitations of Article 12 (Limitation of Liability; Warranty Disclaimers), to the fullest extent permitted by law, SRP shall indemnify, hold harmless, and defend Licensee and its directors, officers and employees, for, from and against all claims, damages, losses, and expenses including, but not limited to, attorneys’ fees arising out of or resulting from

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the use of the Fiber and Equipment, or any condition created in or about the Property, Buildings and Facilities, or any accident, injury, or damage whatsoever occurring on or in the Property, Buildings and Facilities, provided that any such claim, damage, loss, or expense is caused solely by any act or omission of SRP, or its employees and agents. The agreement whereby SRP agrees to hold Licensee harmless shall include latent defects. SRP shall have charge of all such proceedings and shall reimburse to Licensee any amount that Licensee is required to pay for any such damage, injury or claim, including, but not limited to costs, attorney’s fees and other expenses incurred in connection with any such damage, injury or claim, the investigation thereof, or defense. The obligation of indemnity by SRP shall not apply to claims by Licensee employees that are covered by workers’ compensation insurance.

13.3        Mutual Indemnification. SRP and Licensee agree to defend, indemnify and hold harmless the other and the other’s directors, officers, employees, agents and affiliates against and from any claim, loss, liability, demand, lawsuit, action of any kind, and costs (including reasonable attorneys’ fees and costs) arising from any breach by the indemnifying Party of any representation, warranty or agreement contained in this Agreement.

ARTICLE 14. DEFAULT

In the event that either Party fails to comply with any provision of this Agreement, which default shall not have been cured by the defaulting Party within thirty (30) days of receipt of written notice from the other Party specifying the nature of such default, then the non-defaulting Party may at any time thereafter pursue any available remedy at law or in equity; provided however, in the case of default which cannot reasonably be cured within thirty (30) days, the defaulting Party shall be granted such additional time as is reasonably necessary to cure such default in the sole judgment of the non-defaulting Party (not to exceed sixty (60) days after receipt of the written notice of default). Without limiting the generality of the foregoing, in the event Licensee fails to cure a material default within the cure period set forth above, SRP shall, prior to exercising any remedy pursuant to this Agreement or at law other than injunctive relief or specific performance, initiate the dispute resolution provisions provided in Section 17.11 of this Agreement. In the event the dispute is not resolved to both parties’ satisfaction within 90 calendar days following SRP’s written notice of the dispute, SRP may (1) terminate this Agreement and/or any or all of the Product Orders; or (2) suspend SRP’s performance and/or exclude Licensee from use of the Fiber and any Equipment under any or all of the Product Orders. SRP shall have no liability of any kind to Licensee or to any third parties for any claims, charges, fees, assessments, or penalties of any kind for any loss or damage suffered as a result of such action, and Licensee agrees to indemnify and hold harmless SRP for, from, and against any claim of any kind by any person, entity or governmental agency for damages, penalties, fees, assessments, levies, or other damages of any kind (including, without limitation, attorneys’ fees) arising directly or indirectly out of SRP’s exclusion of Licensee from the use of the Fiber and any Equipment pursuant to this Article. Any remedies set forth in this Agreement are cumulative and are in addition to any other rights or remedies available at law or in equity. Failure by a Party not in default to pursue a remedy shall not be deemed a waiver thereof.

ARTICLE 15. OTHER TERMINATION EVENTS

15.1        Regulatory Status. SRP shall provide Licensee with as much prior written notice as is reasonably practicable under the circumstances in the event of any change in SRP’s legal or regulatory status or the legal interpretation thereof by a court of competent jurisdiction that prohibits, restricts or otherwise prevents SRP from performing its obligations under this Agreement (“Regulatory Notice.”) After receipt of the Regulatory Notice, the Parties will negotiate in good faith to modify the terms of this Agreement to conform to such change so as to provide Licensee as far

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as is practicable with the benefits of this Agreement. If after ninety (90) days, the negotiations fail, SRP or Licensee may in its sole discretion terminate this Agreement and/or any affected Product Order(s) without further liability to either Party except as provided for under this Article 15.

15.2        Underlying Rights. In the event of any changes in underlying rights of way, permits or rights to use fiber optic cable and/or equipment or Facilities pursuant to agreements between SRP and third parties, resulting in SRP’s loss of rights which it deems necessary to provide the License hereunder, either party may in its sole discretion terminate this Agreement and/or any affected Product Orders; provided, however, that SRP shall promptly give Licensee written notice of any event, action or proceeding that SRP believes may result in SRP’s loss of rights which it deems necessary to provide the License hereunder.

15.3        Conditional Release. In the event of termination under Sections 15.1 or 15.2, Licensee will be released from any future obligations under this Agreement, if terminated, or under any Product Order, if terminated, provided however, that Licensee shall remain obligated for all obligations that arose prior to such termination.

ARTICLE16.ASSIGNMENTANDOTHERTRANSFERS

16.1        Assignment and Sublicensing. This Agreement and the rights granted under this Agreement are being granted in reliance on the financial standing and business or technical experience of Licensee and are thus granted personally to Licensee by SRP. Neither Party may assign or sublicense any right under this Agreement, whether in whole or in part, without the prior written consent of the other Party. Notwithstanding the foregoing, either Party may assign its rights in this Agreement in whole or in part without the consent of the other Party to an Affiliate or to any entity into which a Party may be merged or consolidated or which purchases all or substantially all of the assets of such Party; provided that the assignee agrees in writing to assume and be bound by all of the terms and conditions of this Agreement and the applicable Product Order(s) from and after the date of the assignment; and provided further that such assignment shall not relieve the assigning Party of any of its obligations under this Agreement. Any attempted transfer, assignment or sublicense in violation of the foregoing shall be null and void.

In addition, Licensee agrees to notify SRP when a material change in the Licensee owned optical equipment, supported by the Fiber, occurs. Such notification shall be for informational purposes only, and the Parties expressly agree that Licensee’s failure so to notify SRP shall not constitute an Event of Default under this Agreement or give rise to any rights or remedies in favor of SRP against Licensee.

16.2        Mergers and Acquisitions. Notwithstanding any provision of this Agreement to the contrary, neither Party shall be restricted or prohibited by this Agreement from participating in or completing any mergers with or acquisitions of businesses similar to or comparable in nature with the business in which they are now engaged (including without limitation bulk sale or purchase of assets), provided that the successor by merger or purchase to the Party shall be subject to the terms, covenants and conditions of this Agreement and shall assume or by operation of law be deemed to have assumed all obligations of the Party hereunder.

ARTICLE17.GENERALPROVISIONS

17.1        Attorneys’ Fees. If it becomes necessary for either SRP or Licensee to employ an attorney to enforce compliance with any term or condition of this Agreement, the prevailing Party shall be

17

entitled to reimbursement from the other Party for reasonable attorneys’ fees, as determined by the court, and reasonable costs and expenses incurred in such enforcement.

17.2        Successors. The provisions hereof shall extend to and bind the successors and permitted assigns of the Parties hereto.

17.3        Notices. Unless otherwise provided in this Agreement, all notices, requests, demands and other communications required or permitted under this Agreement shall be in writing and shall be deemed duly given and received (i) if personally delivered, on the date of delivery, (ii) if mailed, three (3) days after deposit in the United States mail, registered or certified, return receipt requested, postage prepaid and addressed as provided below, (iii) if by courier delivery service providing overnight or next-day delivery, on the next business day after deposit with such service, or (iv) upon confirmation of receipt of a facsimile transmission or e-mail, addressed as follows:

If to SRP:

Salt River Project Agricultural Improvement and Power District
1600 North Priest Drive
Tempe, Arizona 85281
Attn: Corporate Secretary
Telecopy Number (602) 236-2188
Telephone Number (602) 236-5005

And to:

Salt River Project Agricultural Improvement and Power District
1600 North Priest Drive
Tempe, Arizona 85281
Attn: Manager SRP Telecom
Telecopy Number (602) 236-3407
Telephone Number (602) 236-6699

And to:

Salt River Project Agricultural Improvement and Power District
1600 North Priest Drive
Tempe, Arizona 85281
Attn: Legal Department
Telecopy Number (602) 236-5397
Telephone Number (602) 236-7249

If to Licensee:

Mountain Telecommunications of Arizona, Inc.
1430 W. Broadway, Ste. A206
Tempe, Arizona 85282
Attn: Jose Crespo, President
Telecopy Number (480) 850-9599
Telephone Number (480) 850-7590

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And to:

Greenberg & Traurig, LLP
2375 East Camelback Road, Suite 700
Phoenix, Arizona 85016
Attn: Scott K. Weiss, Partner
Telecopy Number (602) 445-8632
Telephone Number (480) 445-8318

And to:

Mountain Telecommunications of Arizona, Inc.
1430 W. Broadway Rd., Ste. A206
Tempe, Arizona 85282
Attn: Jackie Manogian, Corporate Secretary

Either Party may change its address or the person designated to receive notices by giving written notice of the change in the manner provided above.

17.4        Governing Law. The Parties agree that this Agreement shall be governed and interpreted in accordance with the laws of the State of Arizona. Any action for enforcement of this License shall be taken exclusively in a state or federal court, as appropriate, located in Maricopa County, Arizona. Both Parties waive any and all rights to a jury.

17.5        No Third Party Beneficiaries. Nothing herein shall be construed or interpreted to give any person other than Licensee, SRP and the Association any legal or equitable right, remedy, claim, or defense under or in respect of this Agreement. There are no intended third party beneficiaries of this Agreement, except as expressly stated herein.

17.6        Waiver. A waiver by either Party of a default by the other Party and/or the performance of the other Party’s obligations contained in this Agreement shall not be deemed a waiver of the performance of any other obligations or of any subsequent default in the performance of the same or any other obligation contained in this Agreement.

17.7        Headings and Expressions. Titles and headings used in this Agreement are for reference only and are not a part of this Agreement. Words and expressions used in this Agreement shall be applicable according to the context and without regard to the number or gender of such words or expressions (with the exception of numbers indicating price, quantity, or technical specifications).

17.8        Entire Agreement; Changes and Modifications. This Agreement, including any attached Exhibits and Product Orders executed hereunder, constitutes the entire agreement of the Parties with respect to the subject matter hereof and supersedes all prior and contemporaneous writings, understandings, agreements and representations, express or implied. This Agreement may be amended or modified only by written documents duly authorized, executed, and delivered by SRP and Licensee.

17.9        No Joint Venture. No agency, employment agreement, joint venture, or partnership is created between the Parties to this Agreement, and neither Party shall be deemed to be an agent of the other, nor shall either Party have the right, power or authority to act for the other in any manner to create any obligations, contracts, or debt binding upon the other Party.

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17.10      Audit Rights. Each Party shall have the right to designate its own employee representative(s) or its contracted representatives to audit and to examine at its own expense any cost, payment, settlement, or supporting documentation resulting from any items set forth in this Agreement. Any such audit(s) shall be undertaken by either Party or its representative(s) at reasonable times and appropriate locations and in conformance with generally accepted auditing standards. The Party being audited agrees to fully cooperate with any such audit(s). This right to audit shall extend for a period of three (3) years following the date of each payment under this Agreement. The Parties agree to retain all necessary records/documentation during this audit period or until any dispute in connection with an audit is resolved, whichever is longer.

The other Party shall be notified in writing of any exception taken as a result of an audit and shall respond in writing to such notification within thirty (30) days. Upon resolution of any exception, the owing Party shall directly refund the amount of any exception to the other Party within (30) days, with monthly, compounded interest calculated from the date of the original billing to the date of payment by owing Party. Interest rate to be used is the most recently available interest rate on commercial paper published in the Federal Reserve Statistical Release H-15 or the maximum legal rate, whichever is less.

17.11      Dispute Resolution. If either Party (the “Aggrieved Party”) believes that the other Party is not performing its obligations under Contract Documents, or if there is any dispute between the parties that arises out of or relates to this Agreement (other than billing disputes that are to be resolved under Section 4.3) (collectively, a “dispute”), the Aggrieved Party shall promptly give written notice of the dispute to the other Party. The parties shall first attempt in good faith to resolve the dispute within ten (10) calendar days after such notice through negotiations between such representatives of the parties as each Party deems necessary. If such first attempt is unsuccessful in resolving the dispute, the parties agree to escalate negotiations to the executive management level according to each Party’s chain of command. This will be accomplished upon written notice from one Party to the other, and upon the determination of a reasonable mutually agreed schedule and timetable for such negotiations. If the dispute is not resolved to both parties’ satisfaction within ninety (90) calendar days after the Aggrieved Party first gave written notice of the dispute, either may exercise any rights or remedies available under this Agreement or otherwise available at law or in equity. All negotiations pursuant to this provision are confidential and shall be treated as compromise and settlement negotiations for purposes of applicable rules of evidence. During dispute resolution proceedings, the Parties shall continue to perform their obligations under this Agreement.

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Salt River Project Agricultural				Mountain Telecommunications
Improvement and Power District				of Arizona, Inc.
By:	/s/ Michael Sherman			By:	/s/ Jose Crespo
Print Name:			Michael Sherman	Print Name:			Jose Crespo
Title:		Manager, SRP		Title:		President
Date:		3-13-06		Date:		3/15/06

Reviewed by SRP Legal Services Dept.
/s/ Leo Miller
(Signature)
Leo Miller
(Print Name)
Date:	3/13/2006

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CONFIDENTIAL – Master Fiber License Agreement

EXHIBIT A
Fiber Specifications, Demarcation, Maintenance, Acceptance & Acceptance
Testing

Section 1 – Fiber Specifications

1.0          Fiber Types. Generally, SRP will use single mode (SMF28) fiber. The Fiber is packaged in an Optical Ground Wire (OPGW), Dielectic Self Supported Fiber (ADSS), and Sky Wrap in predominantly aerial fiber configurations.

1.1          Fiber Performance Specifications. In the metropolitan segments, single mode optical cable will be used. SRP may substitute alternative fibers if and only if such alternative fibers have performance specifications which are at least equal to the specifications set forth below:

(a)Optical Cable with Single Mode Fiber

ii.      Attenuation at 1310 nm = 0.5 dB/mi max

iii.      Attenuation at 1550 nm = 0.4 dB/mi max

1.2          Other Fiber-related Standards

(b)All Fiber(s) will be fusion spliced.

(c)Any pigtail connectors located in a Facility will be fusion spliced.

(d)Any optical interface, such as pigtail connectors and adapters will be SC/UPC.

(e)All Fibers will consist of all single mode fiber (SMF 28). Any riser rated cable must be a cable that is flame-retardant UV-stabilized (OFNR and FT-4), fully water-blocked for use in any application, and suitable for installation in duct, aerial, and risers. All Fiber(s) will meet the UL-1666 OFNR specifications and will consist of loose buffer tube construction.

(f)Fiber(s) will be constructed in accordance with sound commercial practices. The National Electric Safety Code will be followed in every case except where local regulations are more stringent, in which case local regulations will govern.

(g)Fiber labeling scheme in a manhole environment where the parties meet will be determined in the Product Order.

Section 2 – Demarcation Points

2.0          General. Demarcation Points define the respective ownership and maintenance responsibilities and obligations of the parties. Demarcation Points for Fiber and Lateral Connections will be specified in each executed Product Order. Generally, Demarcation Points will be located in public utility easements or rights of way. SRP is not obligated to provide locations for Demarcation Points on SRP’s own Right-of-Way.

SRP will provide Facilities such as manhole, splice case, or fiber optic distribution unit (FODU) that will terminate the Fiber and be the Demarcation Point between SRP’s

ownership and maintenance responsibilities and Licensee’s ownership and maintenance responsibilities. SRP shall be responsible for maintenance of all SRP Fibers on the SRP side of the Demarcation Point, as well as any SRP Facilities within Demarcation Points. Licensee shall be responsible for maintenance of all Fibers on the Licensee’s side of the Demarcation Point, as well as any Licensee Facilities within Demarcation Points.

Licensee will provide the location that will be the Demarcation Point, including any permits, licenses, easements or other rights necessary to enable both SRP and Licensee to access the Demarcation Point.

The parties will work cooperatively under an approved Method of Procedure (MOP) or construction plan to cross-connect and test the Fibers at and through the Demarcation Points for the purposes of Acceptance testing.

Licensee may physically monitor any or all testing associated with preparation of an Acceptance Package upon seventy-two (72) hours notice prior to commencement by SRP.

2.1          Access. In instances where the Demarcation Point is within an end-user or other third-party location (e.g. multi-tenant commercial building, carrier “hotel,” etc.), not under an active Building Entrance Agreement, the Licensee must arrange for its own collocation space and Facilities to connect the respective Fibers to Facilities, unless otherwise specified in an executed Product Order.

2.2          Lateral Connections. In the event Licensee constructs a Lateral Connection that connects with the SRP Fiber, Licensee shall be responsible for the creation of the Demarcation Point, unless otherwise specified in an executed Product Order. Licensee shall construct necessary Facilities to connect SRP Fiber from Licensee’s Splice Point to the Demarcation Point in accordance to the documentation in the executed Product Order.

Section 3 – Maintenance and Repair General

3.0          Responsibilities. SRP shall be responsible for maintenance and repair of Fiber. IN NO EVENT WILL LICENSEE PERSONNEL, TECHNICIANS OR CONTRACTORS HANDLE OR OTHERWISE COME INTO CONTACT WITH THE CABLE OR ANY CONDUCTORS UNLESS AUTHORIZED BY SRP.

3.1          Contacts and Escalation Information. The parties will, at the beginning of each quarter, provide one another with an updated contact and escalation list to aid in trouble reporting and resolution, if changes have occurred since the previous quarter. The current list is attached as Exhibit A-1 and may be revised by either party from time to time by written Notice. Inaccurate contact and escalation information may prevent or delay SRP from performing notification or other obligations.

3.2          Fiber Restoration Standards and Priority. In the event of a fiber cut caused by either Scheduled Maintenance or a Service Affecting Condition event, any splicing of the Fibers by SRP, or SRP’s approved contractors will be done in a systematic manner with Fibers having equal priority with other third party fibers within the cable. Because SRP’s fiber is principally used for the management of SRP’s electrical system, all fiber used for control of electrical system communications will be restored as the highest priority.

The Licensee reserves the right, at its sole cost, to have representatives present to monitor the progress of SRP’s restoration efforts.

3.3          Re-Testing. Licensee, at its sole cost and expense, may re-test the Fibers at any time during the term of this Agreement from and to its own equipment.

If it is reasonably determined that the Fibers to not comply with the specifications, SRP will correct the deficiencies at its expense, unless the deficiencies are caused by the act or omission of Licensee or by Licensee’s Facilities, in which event Licensee will reimburse SRP for all Fully Loaded Costs, as represented in Exhibit E (SRP Representative Costs and Loadings) plus a 30% mark-up to correct the deficiencies. After correcting the deficiencies, SRP shall re-test the Fibers according to Section 4 Acceptance and Acceptance Testing of this Exhibit.

If SRP is unable to correct the deficiencies within thirty (30) days of the re-test, Licensee may request that SRP provide substitute Fibers and SRP shall provide such substitute Fibers if available.

3.4          Use of Subcontractors. SRP may outsource to third-party service providers or suppliers any Services it is obligated to provide under this Agreement. Upon request, SRP will send to Licensee a current list of SRP’s third-party service providers.

3.5          Coordination of Maintenance with LEC. Licensee shall be responsible for coordinating Scheduled Maintenance and Service Affecting Condition response and repair involving the LEC, including preparation, review and approval of MOPs between and among Licensee, SRP and the LEC.

Section 3 – Maintenance & Repair Scheduled Maintenance

3.6          General. Scheduled Maintenance may occur for the purpose of maintaining or enhancing SRP’s electrical system or for Licensee business needs. Maintenance of Fiber, particularly SRP Optical Ground Wire (OPGW) fiber located in the static position on high voltage transmission lines, typically requires an outage on a portion of SRP’s electric system. SRP will make commercially reasonable efforts to perform Scheduled Maintenance in a manner as to avoid a Service Affecting Condition. Subject to other terms of this Exhibit, SRP has the right to perform Scheduled Maintenance without prior approval of the Licensee, if the Scheduled Maintenance does not cause a Service Affecting Condition.

3.7          Single-Point-of-Failure. In the instance of a Single-Point-of-Failure on a Fiber Segment, Scheduled Maintenance may cause a Service Affecting Condition. Such events are not subject to the terms of Exhibit C (Service Interruption Credits), unless specifically provided for otherwise in an executed Product Order.

3.8          Access. Licensee will grant timely access to SRP at any Licensee Facilities that affect Fiber. A delay in the provision of access by Licensee shall relieve SRP from its obligations under Exhibit C (Service Interruption Credits), for the period of time access was delayed by the action or inaction of Licensee.

3.9          Method of Procedure (“MOP”). The MOP is used for coordinating Scheduled Maintenance operations between SRP and Licensee using the form included as Attachment A-2. Both parties can revise the MOP form upon mutual agreement. All Scheduled Maintenance will be performed in accordance with the MOP and conducted according to the MOP process. The party receiving the completed MOP form will review the MOP to correct deficiencies detected before or during the actual performance of Scheduled Maintenance, and request appropriate changes. Any MOP will be accepted via electronic mail or fax.

3.10        Scheduled Maintenance Notification. The parties will make reasonable efforts to notify one another with five (5) days prior notice when possible, but not less than three (3) days prior notice, of any anticipated Scheduled Maintenance. For all Scheduled Maintenance, the notification will include:

(a)An assigned technician, by name and contact number.

(b)A description of the work to be performed.

(c)Identification of what Fiber Systems or Fiber will be affected.

(d)A date and time when the Scheduled Maintenance will take place, and an estimated completion time. For multiple-day requests, each day’s activity and impact will be detailed.

(e)A list of all locations to be impacted by the Scheduled Maintenance for each site.

3.11        Review of Notification. When one party receives a request for Scheduled Maintenance, it will verify the date, time, location and activity to ensure no conflicts exist with either on-going or previously scheduled work and will respond to the other party within forty-eight (48) hours of receipt of such request.

If a conflict exists regarding Scheduled Maintenance, Licensee and SRP will coordinate to establish a new date if possible. SRP has sole discretion in scheduling SRP Scheduled Maintenance involving its electric system.

3.12        SRP Scheduled Maintenance Windows. To the extent possible without conflicting with SRP electric system operations and standards, SRP will attempt to conduct its Scheduled Maintenance at a time that will least affect Licensee’s use of the Fiber. Generally, SRP will perform Scheduled Maintenance during daylight hours, particularly when Scheduled Maintenance involves Optical Ground Wire (“OPGW”) Fiber. Standard SRP Scheduled Maintenance windows are during normal SRP business hours of 6:00a.m. – 5:00 p.m., Monday through Friday.

Licensee may request “off-hour” maintenance windows, which must be the result of a mutually approved MOP and coordinated through their respective Network Operations Centers (NOCs). These “off-hours” maintenance windows are normally between the hours of 11:00 p.m. – 6:00 a.m., or as mutually agreed to between the parties.

3.13        Event Management. The Licensee will be permitted to witness all Service Affecting Condition scheduled events such as switch loads, system overbuilds and upgrades. In addition to a completed MOP form, SRP must notify Licensee immediately prior to commencement of work. SRP will provide sufficient information to allow Licensee to, at their own cost:

(a)Maintain direct involvement with the Scheduled Maintenance to ensure the prevention of unnecessary switching and other activities, which may result in a Service Affecting Condition.

(b)Coordinate directly with one another and communicate any additional preventative steps or measures not foreseen during initial planning.

(c)Ensure that work efforts or unforeseen problems do not affect other work activities that are in progress.

3.14        Status Notifications.

(a)Progress Reports. SRP will notify Licensee on progress or anticipated delays due to unusual circumstances, or when the maintenance windows deviate from original estimates in the MOP. Communication of status will occur every four (4) hours or immediately if unanticipated delays, events, or significant deviation from the approved MOP occur, and may be accomplished by telephone, including a voice mail message if during off-hours, or e-mail.

(b)Closing Notification. When the Scheduled Maintenance is considered complete, and all components are operationally ready, SRP will notify Licensee to verify that any related alarm conditions have been cleared. Notification may be by telephone, voice-mail or e-mail. The notification will include the date and time the work was completed and the alarms were cleared. The Licensee may request an extension to the MOP if equipment or other problems preclude proper ring switching. In this event, the Licensee must make commercially reasonable efforts to resolve the problem and allow SRP to complete the MOP.

3.15        Scheduled Maintenance During Force Majeure Events. Scheduled Maintenance that occurs or coincides with unexpected events such as a storm, disaster, accident, or as otherwise described in Article 10 of the Master Fiber License Agreement, may prevent SRP from meeting Scheduled Maintenance intervals. In such events, Scheduled Maintenance will be re-scheduled to another available time, according to a MOP.

Section 3 – Maintenance & Repair Service Affecting Conditions Response & Repair

3.16        Response and Repair Intervals. Upon receipt of notification of Discovery during Standard SRP Scheduled Maintenance windows as described in section 3.12 of this Exhibit, SRP will dispatch properly equipped and trained personnel to a Service Affecting Condition and will make repairs and restore the affected Fiber within four (4) hours (“Completion Interval”) or Service Interruption Credits will apply. Upon receipt of notification of Discovery outside of Standard SRP Scheduled Maintenance windows, SRP will dispatch properly equipped and trained personnel to a Service Affecting Condition and will make repairs and restore affected Fiber within six (6) hours (“Completion Interval”) or Service Interruption Credits will apply. Any exceptions to these standard Service Affecting Condition response and repair intervals or any priority treatment of Fiber must be mutually agreed to and incorporated in an executed Product Order.

3.17        Trouble Notification by Licensee. Network outages that are Discovered by Licensee will be reported immediately to the SRP NOC or as otherwise indicated in Exhibit A-1 or the executed Product Order. After response to the Service Affecting Condition, SRP will promptly notify Licensee regarding the nature of the trouble and whether Fiber caused the trouble.

3.18        Trouble Notification by SRP. SRP’s network management system does not monitor dark fiber. However, a degradation of performance on SRP internal network services that might indicate a fiber cut will result in a trouble notification to the SRP NOC. If SRP Discovers a network problem causing a Service Affecting Condition, SRP will promptly attempt to notify Licensee according to Exhibit A-1 regarding the nature of the trouble and whether the Fiber caused the trouble.

3.19        Permanent Restoration. Permanent restoration will be scheduled and performed as soon as practical. This restoration schedule will be mutually developed and approved prior to proceeding. Permanent repairs to the Fiber will return it to the Specifications, and will be performed by SRP. After final repairs have been completed, Licensee may test the Fibers from an access point designated by SRP, to ensure integrity of the splices and provide SRP with a copy of the test results. If requested by SRP, Licensee will provide access to the Licensees Facilities to allow testing from fiber patch panel to fiber patch panel. SRP will remove all temporary Facilities.

3.20        Trouble Ticketing Process and Procedures. A mutually acceptable trouble ticketing process, conducted between Licensee and the SRP NOC will be developed between the parties as needed. Generally, upon Discovery, the SRP NOC will acknowledge the Discovery, record the time and other information, and open a trouble ticket.

3.21        Status Notification.

(a)Progress Reports. In addition to the initial notification, SRP will use commercially reasonably efforts to provide a progress report by telephone, including a voice mail message if during off-hours, or e-mail, every four (4) hours during a Service Affecting Condition. SRP will immediately notify the Licensee if unanticipated delays or events occur.

(b)Closing Notification. When Service Affecting Condition repair is considered complete and all components are operationally ready, SRP will notify the Licensee to verify that all related alarm conditions have been cleared. Notification may be by telephone, voice-mail or e-mail. Once notification is made, the open trouble ticket will be closed. When alarms have been verified and the activity is considered complete, SRP will coordinate final event closure with the Licensee. If contingency plans were implemented to protect the network during the performance of scheduled activities, SRP will direct activities necessary to return the network to its normal configuration. SRP will submit a Fiber Outage Report to the Licensee in accordance with Exhibit A-3.

3.22        Licensee-Caused Service Outage. If an SRP technician is dispatched to respond to a service outage after a Licensee Discovery and Notification, and the trouble

is on the Licensee side of the Demarcation Point, Licensee will be billed for SRP’s Fully Loaded Cost, as represented in Exhibit E (SRP Representative Costs and Loadings), plus a 30% mark-up.

Attachment A-1 Contact/Escalation List Form

SRP NOC Contact/Escalation List

SRP’s Network Operations Center (“NOC”) is available twenty-four (24) hours/day, seven (7) days/week.

Local Area: (602) 236-2199

Toll Free: No toll free number at this time

FAX: (602) 236-8516

Field Operations

SRP Communications Construction & Maintenance and Communications Engineering – Outside Plant groups are responsible for Licensed Fiber Scheduled Maintenance and Emergency Response & Repair.

For routine inquiries please contact the following personnel;

Communications Construction & Maintenance	Carrie Hutchinson Supervisor	Phone: (602) 236-8500 Fax: (602) 236-8516
		Papago Buttes Facility (PBF) 101 W. Operations Drive Tempe, AZ 85281-1298
Communications Engineering –Outside Plant	Greg Denton Project Leader	Phone: (602) 236-8912 Fax: (602) 629-8344
		Papago Buttes Facility (PBF) 101 W. Operations Drive Tempe, AZ 85281-1298

Escalation

In the event of emergencies or problem resolution regarding maintenance matters, use the following contact table;

Level	Contact Name	Title	Tel. #	Cell Phone	Email Address
1	Carrie Hutchinson	Supervisor Division Electronics Systems	(602) 236-8500	(602) 809-7152	clhutch@srpnet.com
2	Greg Denton	Outside Plant Project Leader	(602) 236-8912	(602) 818-2772	tgdenton@srpnet.com
3	Rick Hillis	Manager Communications Engineering	(602) 236-8911	(602) 818-2678	rbhillis@srpnet.com
4	Nina Mullins	Manager Electronic Systems	(602) 236-8920	(602) 809-0701	nimullin@srpnet.com

Licensee Field Operations

(Group/Department)	Name/Title	(Phone number)
		(Fax Number)
		(Address)
(Group/Department)	Name/Title	(Phone number)
		(Fax Number)
		(Address)

Escalation

In the event of emergencies or problem resolution regarding maintenance matters, use the following contact table;

Level	Contact Name	Title	Tel. #	Cell Phone	Email Address
1
2
3
4

MOP Coordination

(Group/Department)	Name/Title	(Phone number)
		(Fax Number)
		(Address)

Attachment A-2: Scheduled Maintenance Procedure Form

SRP Method-Of-Procedure

Fiber Optic Scheduled Maintenance Outage Notification

SRP MOP Number:
From Node:	To Node:			Date Originated:
Originator:		Phone Mobile:
Responsible Technician:			Mobile:		Pager:
Job Location:			City:		State: AZ
Brief Job Description:
Access required?
Where?

*************ACTIVITY CLASSIFICATION*************

Scheduled Maintenance o		Emergency Maintenance o
Date of Outage:	Time of Day Requested:
Expected Duration of Scheduled Maintenance:
Completion Date/Time:
Maintenance Window:

Circuit Level: Optical

Circuits, Customer(s) and/or End-users affected by Scheduled Maintenance:

If expected outage is > 50 mS switch hit, expected outage duration is:

***************APPROVALS***************

Operations Supervisor:                                                                                                 Date:                                

********GENERAL SPLICE DESCRIPTION********

Number of Fiber Splices:

**********PRE SPLICE ACTIVITY***********

Description:

**********POST SPLICE ACTIVITY**********

*****THIS CONCLUDES THIS MOP*****

Originator:                                                                                  Department:

Attachment A-3: Fiber Outage Report

1.Name of person responsible for cut:                                                                                                       

a.Employed by                                                                                                                          

b.Contractor? (yes) (no)

(If yes Contractor Name)                                                                                                      

2.Cause of cut (e.g. wind storm, dig in, vehicular accident, etc.)

3.Duration of the fiber cut:

4.If buried fiber, did the person or employer responsible contact Blue Stake for approval

(yes)(no)

Was the cable marked? (yes) (no)

5.Does the person or employer responsible for the cut have insurance? (yes) (no)

If yes, name of insurance carrier (if known):

6.Location of cut (lat/long or street address):

Prepared by:                                                       Department:                                     

Date submitted:                                                     

Section 4 – Acceptance & Acceptance Testing

4.0          General. SRP will perform fiber testing as described below and in accordance with the Fiber Specifications as described in Section 1 (Fiber Specifications) of this Exhibit. SRP will test all Fibers at installation to assure operating characteristics are consistent with the Specifications. SRP will perform Fiber re-test upon Licensee request following Scheduled Maintenance or Emergency Maintenance events.

4.1          Testing Methods. SRP will perform end-to-end connectivity testing of the Fibers, and any necessary bi-directional span testing. Loss measurements will be recorded using an industry-accepted laser source and a power meter.

(a)OTDR Testing. Optical Time-Domain Reflectometry (OTDR) traces will be taken and splice loss measurements recorded and summarized on data sheets. For any span, OTDR testing will be performed where the fiber is terminated with a connector. OTDR testing will be conducted at both 1310nm and 1550nm wavelengths. OTDR testing will be conducted on a bi-directional basis for each Fiber(s) in each Segment at the appropriate wavelengths described above. The Acceptance Package will contain the actual traces that detail the testing parameters.

(b)   Insertion Loss Testing. This end-to-end loss measurement will be conducted from both directions for each Fiber(s) in a Segment. The bi-directional average will be used to determine the end-to-end loss of the Fiber(s) in a given Segment at each appropriate wavelength. This test will be conducted at both 1310nm and 1550nm. This insertion loss testing will ensure fiber continuity and the absence of crossed fibers in the Segment. All terminated Fiber(s) will be tested from the FODU, or other end points as specified in an executed Product Order, for each Segment. Insertion loss test results for Fiber(s) in a Segment must conform to the limitations identified in Limitations and Specifications section of this Exhibit, Bi-directional OTDR Testing.

4.2          Loss Measurements. This measured end-to-end loss value should have an attenuation rating equal to, but no less than or the Fiber under test loss standards. If after three (3) testing attempts, the SRP technician is not able to produce a loss value within ranges stated below, the route will be brought into tolerance. OTDR events close in proximity to a test launch (connectors or splices in a building) will not be identified as events within the testing documentation. Rather, such events will be accounted for in the end-to-end loss budgets and documented. In addition, events based upon fiber-specific circumstances may cause fibers to be considered acceptable. In these instances, SRP will provide background regarding the circumstances for the anomalous fibers.

(a)   The loss characteristics for Single Mode Fiber (SMF28) are described below:

i.at 1310nm: 0.5 dB loss per mile; 0.15 dB loss per fusion splice average

ii.at 1550nm: 0.4 dB loss per mile; 0.15 dB loss per fusion splice average

(b)   Connector(s) and/or Jumper(s) Test Results

i.         Connectors that terminate Fiber(s) in a Facility must be SC/UPC.

ii.All Fiber protection for fan-out and terminating fiber jumpers at Facilities will have 900-µm tight buffer tube, a Kevlar strength member, and a cable jacket with an overall diameter 2.9-mm.

4.3          Fiber Splicing. Average loss value of 0.15dB or less when bi-directionally measured with an OTDR, at 1310nm and 1550nm. Fiber splices not meeting the 0.15dB or less average specification will be identified as Out of Specification (OOS) and documented accordingly. All SRP field splices are fusion splice connection with accordance to accepted industry or Licensee standards as agreed to by SRP Communication Engineering.

4.4          Test Results and Acceptance Documentation. Test data will be placed in electronic format, such as a Microsoft Excel spreadsheet format to document the test results. All test results will be attached as documentation in support of the specific Acceptance Test Package for the Fibers under test for each Product Order. If splicing was involved before testing, a confirmation sheet or splice location sheet shall also be filled out and kept in the SRP records.

4.5          Testing Beyond the SRP Demarcation Points. SRP may require access for testing of fibers beyond the SRP designated Demarcation Point specifically described in an executed Product Order. Any testing beyond the Fiber end point shall be performed in a coordinated fashion with Licensee. In the event that the entire tested portion does not satisfy the testing criteria set forth herein, SRP and Licensee shall work together in good faith to pinpoint the cause of the problem and each party shall be responsible for the timely performance of such repairs on the fibers owned by it, so that SRP shall only be responsible for repairs needed to bring the Licensee Fiber(s) into compliance with this Exhibit. SRP may in the event of a dispute regarding testing and acceptance of the Licensee Fibers within any such Fiber, arrange to have the Fiber(s) tested only to the Demarcation Point(s) and, if such Fibers meet the testing criteria set forth herein, Licensee shall accept such Fibers.

4.6          Fiber Acceptance and Acceptance Package. The Fiber is considered Accepted under the following conditions;

(a)Receipt by SRP of a copy of the Acceptance Package signed by Licensee, or

(b)upon five (5) days past the scheduled due date for the Licensee’s notifying SRP of its Acceptance, if no such notice has been provided, or

(c)in the event of an Expedited Product Order, the scheduled due date for the Licensee’s notifying SRP of its Acceptance if no such notice has been provided.

EXHIBIT B
Service Interruption Credits

1.0      General. For a Service Affecting Condition, the Licensee will be entitled to Service Interruption Credits for the affected Product Order according to the following terms. Licensee must request a credit in writing within thirty (30) days after the delivery of an invoice respecting the affected Fiber, or within thirty (30) days after the Discovery of the Service Affecting Condition, whichever is later, or any claim is waived. Request must provide necessary information describing the Service Affecting Condition event including:

(a)Discovery date and time

(b)Duration of event.

(c)Product Order reference information

(d)Licensed Fiber or other Facilities affected

(e)Other information as requested by the other Party.

2.0      Performance Interval. The Service Interruption Credit time period begins after the Completion Interval referenced in Exhibit A (Fiber Specifications, Demarcation, Maintenance, Acceptance and Acceptance Testing), and ends when the Service Affecting Condition has been remedied.

(a)If the start and/or end time of a Service Affecting Condition is in dispute, then it will be deemed that in all events a Service Affecting Condition begins at the time of Discovery notification by Licensee and, if such notice is not in writing, when SRP acknowledges receipt of the notice, and ends upon SRP giving the Licensee notice that restoration of the affected Licensed Fibers has been completed.

(b)Outage credits will not be credited or payable for any period of time during which SRP personnel or contractors are denied access to Facilities or other locations where access is the responsibility of the Licensee.

3.0      Credit Dispute and Payment. The Service Interruption Credit shall be in the amount of one day’s equivalent License Fee for any part of the 24-hour period following the Completion Interval.

(a)If the Service Affecting Condition event exceeds twenty-four (24) hours past Completion Interval, the    credit shall be one days equivalent License Fee for each subsequent 24- hour period, up to a maximum of thirty (30) days equivalent License Fee.

(b)All Service Interruption Credits for License Fees will be credited on, or added to, the next monthly invoice after receipt of Licensee’s written request for credit unless the request is disputed.  Disputed Service Interruption Credits will be subject to the terms set forth in Article 4.3 of the Agreement (“Payment Disputes”).

(c)If there are no monthly invoices, or in the event the License Fee is annual or Lump Sum, the credit will be paid within thirty (30) days of receipt of Licensee’s written request for credit unless the request is disputed.   Disputed Service Interruption Credits will be subject to the terms set forth under Article 4.3 of the Agreement (“Payment Disputes”).

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4.0      Service Interruption Credits Exceptions. Service Interruption Credits do not apply to Service Affecting Conditions:

(a)Caused by the negligence or acts of the Licensee, its agents or its customers

(b)Due to power failure

(c)Due to the failure or malfunction of non-SRP equipment or systems

(d)Caused by a Force Majeure event

(e)During any period in which SRP is not given access to the Licensee’s Facilities or other locations for which it is responsible for providing access

(f)When Scheduled Maintenance is performed according to an approved MOP

(g)When Schedule Maintenance is performed on a single or unprotected Licensed Fiber path and an exception was not approved in a Product Order.

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Exhibit C Product Order Process

1.0      General. The following outlines a process which the Parties agree to generally use, for the development of quotes and Product Orders. This process is not binding and neither Party shall be considered in breach of this Agreement for its failure to follow this particular process.

(a)Request For Quote & Quote Response Process. At any time during the term of this Agreement, the Licensee may request from SRP quotations in the form of an Initial Quote or a Formal Quote with respect to the License of Fibers.

(i)A request for Initial Quote or Formal Quote shall take the form of a completed Customer Quote Request, which may be submitted by e-mail, fax or regular mail.

(ii)Each such Customer Quote Request shall indicate the type of quote (e.g. Initial or Formal), and shall include information sufficient to prepare an Quote Response.

2.0      Initial Quote. An Initial Quote shall provide an estimated non-binding, budgetary price for License Fees, Maintenance Charges, Installation Charges, Connection Charges, Administration Charges and any other applicable fees, the amount of and description of Fiber available for license, and will indicate an estimated Delivery interval.

(a)SRP shall acknowledge receipt of a Customer Quote Request by the end of the next business day and identify whether or not SRP intends to provide an Initial Quote.

(b)If SRP intends to provide an Initial Quote, SRP shall exercise reasonable efforts to provide an Initial Quote within fifteen (15) business days after receipt of such request. Once provided, an Initial Quote shall be valid for thirty (30) calendar days.  If Licensee provides insufficient or inaccurate Information on the Customer Quote Request for an Initial Quote, the interval for the preparation of an Initial Quote shall be extended as necessary.

(c)The Initial Quote shall identify the applicable Administration Charge for the preparation of a Formal Quote.

3.0      Formal Quote. Upon receipt of the Initial Quote, Licensee may request a Formal Quote by providing a completed Customer Quote Request. Each such Customer Quote Request shall indicate the request is for a Formal Quote and shall include information sufficient to prepare a Formal Quote Response.

(a)A Formal Quote Response shall provide the firm-fixed price to be charged for Fiber License fees, Maintenance Charges, Installation Charges, Connection Charges, and other applicable fees, if any, Fiber availability and Delivery interval.

(b)A completed Customer Quote Request for a Formal Quote submitted by Licensee shall obligate Licensee to pay the Administration Charge as identified in the Initial Quote, subject to terms in Article 4.1 (Fees and Charges) of the Agreement.

(c)SRP shall reasonably attempt to acknowledge receipt of a Customer Quote Request for Formal Quote by the end of the next business day and identify whether or not SRP intends to provide a Formal Quote.  Should SRP decide to not provide a Formal Quote Response, Licensee is relieved of any payment obligation of the Administration Charge. If SRP intends to provide Formal Quotes SRP will respond within forty-five (45) calendar

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days after receipt of a Customer Quote Request for a Formal Quote. Once offered, a Formal Quote will be valid for thirty (30) calendar days.

(d)If SRP intends to provide a Formal Quote, SRP will respond within forty-five (45) calendar days after receipt of a Customer Quote Request for a Formal Quote. Once offered, a Formal Quote will be valid for a period of thirty (3) calendar days. If Licensee provides insufficient or inaccurate information on the Customer Quote Request for a Formal Quote, the interval for the preparation of a Formal Quote shall be extended accordingly.

4.0      Product Order. Upon receipt of a Formal Quote, Licensee may request via e-mail, fax or regular mail that SRP prepare a Product Order. The Product Order shall reflect the terms of the Formal Quote, as applicable. If any changes from the Formal Quote Response are requested, the pricing, availability, and Delivery intervals may change at SRP’s discretion.

(a)Each Product Order will set forth, as applicable;

i.the number of Fiber strand miles and location of the Licensed Fibers;

ii.the location of Facilities;

iii.the installation and construction services, if any, to be provided with respect to any Lateral Connection;

iv.the Delivery Date;

v.the architecture and design of the Licensed Fibers, including a diagram;

vi.the Demarcation Points;

vii.the amounts of any Installation Charges, Connection Charges, License Fees, Maintenance Charges, or any other charges;

viii.the length of the term of the Product Order,

ix.Security Deposit amount pursuant to Article 4.4 (Security Deposits), if any, and

x.any exceptions to standards set forth in any Article and Exhibit specifying the applicable Article and Exhibit for each exception.

(b)A Product Order will only be effective upon execution by both Parties.  Nothing in this Agreement or in any of the communication leading up to the preparation of a Product Order shall be construed to require either Party to enter into any Product Order.

(c)Prior to Delivery, the Parties may modify the architecture or configuration of the Licensed Fibers, Lateral Connections, Demarcation Points or other elements listed in a fully executed Product Order, provided that such modification shall be in the form of a modified Product Order and shall be signed by authorized representatives of both Parties.

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CONFIDENTIAL – Master Fiber License Agreement 3/13/06

Exhibit D - Fees and Charges Schedule

Fee/Charge Name	Fee/Charge Type	Fee/Charge Description	When Invested	When Due	Comments
Administration Charge	NRC	A fee paid for services including engineering, design, and analysis of requested customer project at the Formal Quote stage.	Upon formal notification by customer that they wish to proceed to Formal Quote (as stated in the Initial Quote Response).	30 days from date of invoice	SRP reserves the right to hold the Formal Quote Response until payment of Administration Charge is received.
Connection Charge	NRC	One time charge for make-ready work	Execution of Product Order	30 days from date of invoice
Installation Charge	NRC	If applicable. one-time charge for construction and installation of a Lateral Connection.	Payment schedule will be specified in the Product Order.	30 days from date of invoice	Depending on the scope of the project, a percentage of the Installation Charge may be required a1 Product Order execution, at Acceptance, and possibly during the construction phase. Payment schedule will be specified in the executed Product Order. Licensee will be advised at the Initial Quote stage of Installation Charge if applicable.
Building Entrance Access Fee	NRC or RC	If applicable. one-time or recurring charge for cost and/or services associated with the securing of access rights to a building.	Upon Acceptance and periodically thereafter if RC.	30 days from date of invoice	Licensee will be advised at the Initial Quote stage of associated Building Entry Fees if applicable.
License Fee	RC	Periodic recurring charge payable for the license of Fibers.	Upon Acceptance and periodically thereafter.	30 days from date of invoice
License Fee (Lump Sum)	NRC	One-time lump-sum fee payable for the license of Fibers.	Upon Acceptance.	30 days from date of invoice
Maintenance Charge	RC	Periodic recurring charge payable for maintenance of licensed Fibers.	Upon Acceptance and periodically thereafter.	30 days from date of invoice
Maintenance Charge (Lump Sum)	NRC	One-time lump-sum fee payable for the maintenance of licensed Fibers.	Upon Acceptance.	30 days from date of invoice
Security Deposit	Deposit	A Deposit may be required to secure timely payment of amounts due and full performance of other Licensee obligations	Upon determination by SRP that Licensee does not meet SRP’s credit requirements	30 days from date of invoice

Definitions:

NRC = Non-Recurring Cost
RC = Periodic ( i.e. length of term of Product Order) Recurring Cost

CONFIDENTIAL –Master Fiber License Agreement

Exhibit E
SRP Representative Costs and Loadings

The following rates are representative of what will be used to determine applicable “Fully Loaded Costs”:

Service	Labor/Hour		SVHL		Benefits		Payroll Taxes		Dept O/H		Vehicle Expense		Total/Hour
Design & Project Admin	$	38.01	$	6.51	$	18.82	$	2.63	$	9.58	$	2.95	$	77.50
Make Ready: Engineering	$	38.81	$	6.51	$	18.82	$	2.63	$	13.94	$	3.66	$	84.37
Make Ready: Construction	$	35.19	$	6.51	$	18.82	$	2.63	$	13.94	$	3.66	$	82.90
Building Access	$	34.02	$	6.51	$	18.82	$	2.63	$	12.78	$	2.59	$	79.43
Field Operations	$	33.91	$	6.51	$	18.82	$	2.63	$	19.07	$	3.46	$	86.47

Footnotes:

Materials and Purchases	5% of the value of the material used; primarily applies to Make Ready, Field Operations.
Contracted Services	9.55% of the Contract Services invoice amount plus $15.25 per contracted labor hour for Departmental Overhead.
Administrative & General	4.25% of fully loaded project costs.
SVHL	Means Sick, Vacation and Holiday Leave.

Information representative of data valid for Fiscal-Year 2005.

EXHIBIT F

SALT RIVER PROJECT
CANAL BANK LICENSE

Salt River Project License No.:                           
Salt River Project File No.:                           
Effective Date:                           
Agent:                           

WHEREAS, Salt River Project Agricultural Improvement and Power District (“SRP” or “Licensor”) and                                                                                                                         (“Licensee”) have entered into Master Fiber License Agreement having an effective date of                 , 200      (the “Master Fiber License Agreement”); and

WHEREAS, Licensee desires to enter into a Product Order under the Master Fiber License Agreement to obtain a license to use certain optical fiber that is located on property belonging to the United States of America (“U.S.A”); and

WHEREAS, it is understood by the parties hereto that SRP manages the such property pursuant to contracts with the United States, which assign to SRP the responsibility and authority for the care, operation, maintenance and management of the Salt River Reclamation Project (“Reclamation Project”), of which the Licensed Property (as defined below) is a part; and

WHEREAS, SRP is willing to consent to Licensee’s use of the Licensed Property in a manner that does not in any way compromise the contractual obligation or authority of Licensor to manage the Reclamation Project.

1.        License Granted

For valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Licensor hereby grants Licensee a revocable license conveying the nonexclusive right and privilege to enter upon and use certain real property as defined in Exhibit “A” attached hereto (the “Licensed Property”) under the following terms and conditions (the “License”).

2.        Purpose

Licensee shall use the Licensed Property only for the purposes of and in accordance with the Licensee’s rights and obligations under the Master Fiber License Agreement. Licensee shall not use the Licensed Property for any other purpose without the prior written approval of Licensor. The Licensed Property shall remain available for use by the general public.

3.        Compensation

Licensee shall be responsible for the payment of taxes with respect to Licensee’s operations, as set forth in the Master Fiber License Agreement. Payment and default terms shall be as stated in the Master Fiber License Agreement. There shall be no additional payment obligations imposed by this License Agreement.

4.        Term

The term of this License shall be coincident with the Term of the Product Order.

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5.        Rights of the United States of America

This License is subject to the paramount rights of the U.S.A. in and to the Licensed Property, federal reclamation law, and all agreements existing and to be made between and among the U.S.A., the Salt River Valley Water Users’ Association (“Association”) and Licensor regarding the management, care, operation and maintenance of the Reclamation Project.

6.        Assignment and Sublicensing

Licensee shall not assign or sublicense any rights under this License except to the extent permitted under the Master Fiber License Agreement.

7.        Termination of the License

7.1       Except as otherwise specifically stated in this License, the termination provisions of the Master Fiber License Agreement shall apply to this License.

7.2       In addition to the termination provisions provided in the Master Fiber License Agreement, Licensor may terminate this License upon not less than 360 days prior written notice to Licensee.

7.3       In the event either party terminates this License, Licensee shall remove, at Licensee’s cost, within ninety (90) calendar days after written notice of such termination, any improvements placed on the Licensed Property by Licensee, its directors, officers, employees, or agents, and shall restore the Licensed Property to the condition in which it existed on the date this License was executed, subject to improvements to the Licensed Property made by parties other than Licensee. If Licensee fails to remove any of the improvements that it is required to move or fails to restore the Licensed Property within such ninety (90) day period, Licensee shall reimburse Licensor for the reasonable costs incurred by Licensor for the removal or storage of Licensee’s improvements and restoration of the Licensed Property. Licensee shall release Licensor, Association and U.S.A. from all damages resulting to Licensee as a result of such removal, storage, or restoration. The provisions of this Section 7.3 shall survive termination of this License.

8.        Maintenance of Licensed Property & Interface with Licensor’s Use of Licensed Property

8.1       To the extent Licensee is authorized under the Master Fiber License Agreement to perform maintenance, the Licensee, at its own expense, shall maintain all of the Licensed Property in a reasonably good, sanitary and safe condition. Subject to the conditions set forth herein, Licensor reserves to itself, Association and the U.S.A., a right of access to the Licensed Property for the construction, use, operation, maintenance, relocation and removal of any existing and future electric or water distribution or transmission facilities. Any such construction, use, operation, maintenance, relocation or removal shall be performed in a manner designed to avoid, to the extent feasible, disturbance to Licensee’s improvements and Licensee’s use and enjoyment of the Licensed Property. Licensor shall give Licensee at least ninety (90) days prior written notice of any such construction, use, operation, maintenance, relocation or removal that will materially disrupt Licensee’s use and enjoyment of the Licensed Property or the Licensee’s improvements; provided, however, that such notice may be given in such shorter period as Licensor determines to be reasonable under prevailing circumstances, or with no notice in the

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event of an emergency where no notice is feasible. Nothing in this License shall be construed to deny or lessen the powers and privileges granted Licensor by the laws of the State of Arizona and the U.S.A. Licensor shall not be liable to Licensee for any damage to Licensee’s improvements located upon the Licensed Property, unless due to negligent or willful acts or omissions of Licensor or its agents or employees.

8.2       If Licensee defaults in the performance of the obligations set forth in Section 8.1, and Licensor gives notice of the default, Licensee shall correct such default to the reasonable satisfaction of Licensor within the required period of time set forth in the notice of default (the “Correction Period”), which period of time shall be reasonable under the circumstances. If Licensee fails to correct the default within the Correction Period, Licensor may take any action reasonably determined by Licensor to be necessary to correct such default, including without limitation making any repair or modification to or removing any of Licensee’s improvements. Licensee shall reimburse Licensor for the reasonable costs it incurs to correct such default within thirty (30) calendar days after Licensor presents Licensee with a statement of such costs. Licensee shall release Licensor, Association and U.S.A. from all damages resulting to Licensee from the correction of such default, including, without limitation, those damages arising from all repairs or modifications to or removal of any of Licensee’s improvements.

9.        Nonexclusive Rights

This License is nonexclusive and nothing herein shall be construed to prevent or restrict Licensor from granting other privileges to use the Licensed Property in a manner not inconsistent with Licensee’s use of the Licensed Property in accordance with this License.

10.      Existing Easements and Licenses

This License is subject to all existing encumbrances of record, including easements and licenses. It shall be Licensee’s obligation and responsibility to ascertain the rights of all third parties in the Licensed Property. Licensor consents only to the use of the Licensed Property for the purposes described herein. Nothing in this License shall be construed as Licensor’s representation, warranty, approval or consent regarding rights in the Licensed Property held by other parties. Licensee shall indemnify and hold Licensor harmless from any liability arising out of any dispute or claim regarding actual or alleged interests in the Licensed Property, affecting Licensee’s interests created herein.

11.      Indemnification

To the extent not prohibited by law, Licensee, its successors and assigns, shall indemnify, release, and hold harmless Licensor, Association and the United States of America, and the directors, officers, employees, agents, successors and assigns thereof, against and from any claim, demand, lawsuit or action of any kind for damages or loss, whether such damage or loss is to person or property, arising in whole or in part out of: (a) negligent or otherwise wrongful acts or omissions of Licensee, its agents, contractors, officers, directors, or employees; (b) Licensee’s use or occupancy of the Licensed Property for the purposes contemplated by this License, including but not limited to claims by third parties who are invited or permitted onto the Licensed Property, either expressly or impliedly, by Licensee or by the nature of Licensee’s improvement or other use of the Licensed Property pursuant to this License; or (c) Licensee’s failure to comply with or fulfill its obligations established by this License or by law. Such obligation to indemnify shall extend to and encompass all costs incurred by Licensor in defending against such claims,

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demands, lawsuits or actions, including but not limited to attorney, witness and expert fees, and any other litigation related expenses. Licensee’s obligations pursuant to this Section 11 shall not extend to claims, demands, lawsuits or actions for liability attributable to the sole exclusive negligence or willful action of Licensor, its directors, officers, employees, agents, successors or assigns. The provisions of this Section shall survive termination of this License.

12.      Insurance

Without limiting any liabilities or any other obligations of Licensee, Licensee shall provide and maintain, with forms and insurers acceptable to Licensor, and until all obligations under the License are satisfied, the minimum insurance coverages, as follows:

12.1     Worker’s compensation insurance to cover obligations imposed by applicable federal and state statutes and employers liability insurance with a minimum limit of One Million and No/100 Dollars ($1,000,000.00).

12.2     Commercial general liability insurance with a minimum combined single limit of Two Million and No/100 Dollars ($2,000,000.00) each occurrence. The policy shall include coverage for bodily injury liability, property damage liability, personal injury liability, and contractual liability for liability assumed under this License. The policy shall contain a severability of interests provision.

12.3     If applicable, comprehensive automobile liability insurance with a combined single limit for bodily injury and property damage of not less than Two Million and No/100 Dollars ($2,000,000.00) each occurrence with respect to Licensee’s vehicle, whether owned, hired or non-owned, assigned to or used in the performance of the work.

12.4     The policies required by Sections 12.2 and 12.3 hereof shall be endorsed to include Licensor, members of its governing bodies, its officers, agents and employees as additional insureds and shall stipulate that the insurance afforded for Licensor, members of its governing bodies, its officers, agents and employees shall be primary insurance and that any insurance carried by Licensor, members of its governing bodies, its officers, agents or employees shall be excess and not contributory insurance.

12.5     Licensee shall waive their rights of recovery and require its insurers providing the required coverages to waive all rights of subrogation against Licensor and members of its governing bodies, its officers, agents and employees for matters arising out of this License.

12.6     Prior to commencing any work, Licensee shall furnish Licensor with Certificates of Insurance as evidence that policies providing the required coverages, conditions and limits are in full force and effect. Such certificates shall provide that not less than thirty (30) days advance notice of cancellation, termination, or alteration shall be sent directly to Licensor addressed as follows:

Supervisor, Property Management, PAB348
Salt River Project
P.O. Box 52025
Phoenix, Arizona 85072-2025

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13.      Construction

13.1     The provision of this Section shall apply only to the extent that the Master Fiber License Agreement authorizes Licensee to make any improvements on the Licensed Property. If the Master Fiber License Agreement does not authorize Licensee to make such improvements, the provisions of this Section shall not apply. Prior to making any improvements on the Licensed Property, Licensee shall submit to Licensor for its approval final construction documents and plan showing the location of any such improvements. Licensor shall approve or disapprove such documents and plans within 30 days. If applicable, Licensee shall obtain a Construction License from Water Engineering (Bob Maurer 236-2962, or Susana Ortega 236-5799) prior to the start of construction. Construction on the Licensed Property shall be performed only in accordance with approved construction documents and plan. At least ten (10) days prior to the beginning of any construction on the Licensed Property, Licensee shall give Licensor notice of the date that construction will begin and a schedule listing all construction activities and the dates when such construction activities will be performed. Licensee shall give Licensor written notice of all changes in the schedule and delays in construction immediately upon it being reasonably foreseeable that such change or delay will occur.

13.2     Licensee’s improvements constructed, installed, operated and maintained on the Licensed Property shall not interfere with Licensor’s use of Licensor’s existing or any future irrigation or electric facilities on or adjacent to the Licensed Property.

13.3     Licensor may request Licensee to alter the scheduling of construction undertaken pursuant to Section 13.1 but only when and to the extent necessary to prevent any material interference with Licensor’s use of the Licensed Property, and if such improvements do interfere with Licensor’s use, Licensor may request Licensee to relocate Licensee’s material, facilities and improvements as deemed necessary by Licensor.

13.4     If relocation of Licensee’s materials, facilities, or improvements is necessitated by Licensor’s use of existing facilities or the construction of improvements by or on behalf of Licensor, Licensee shall bear the entire actual cost of relocating said materials, facilities and improvements.

13.5     Licensor shall not exercise its right to require relocation of Licensee’s facilities, materials, and improvements in an unreasonable or arbitrary manner.

14.      Permits, Statutes and Codes

Licensee shall comply with all requirements of all statutes, acts, ordinances, regulations, codes, and standards of legally constituted authorities with jurisdiction, applicable to Licensee’s use of the Licensed Property. Licensee shall obtain or cause to be obtained at its expense, all permits, approvals and authorizations required by Licensee’s actions pursuant to this License.

15.      Licensor’s Right to Inspect

15.1     Licensor may enter any part of the Licensed Property at all reasonable times to make an inspection thereof. During any construction by Licensee, Licensor may inspect all trenching, backfilling and other related construction activity that potentially affects Licensor’s facilities, and require conformance with all Licensor’s requirements and specifications related thereto.

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15.2     Licensee shall release Licensor, Association and the U.S.A. from any claims for damages arising out of any delay caused by Licensor in permitting or inspecting any work on the Licensed Premises. The provisions of this Section shall survive termination of this License.

16.      Service of Notice

All notices and demands required or permitted by this License shall be in writing and shall be deemed to have been given properly when (i) sent by certified mail (postage fully prepaid) to the respective address below or to such other address furnished by either party to the other pursuant to this Section; or (ii) delivered personally to either party hereto.

Notices to Licensor	Notices to Licensee
Attn: Supervisor, PAB348	Attn:
SALT RIVER PROJECT
Property Management Division
P.O. Box 52025
Phoenix, AZ 85072-2025

17.      Waiver

No waiver by either party of any breach of any of the covenants or conditions of this License which are to be performed by the other party shall be construed as a waiver of any succeeding breach of the same or any other covenant or conditions.

18.      Attorneys’ Fees Upon Default

If either party brings or defends any legal action, suit or proceeding based on rights or obligations arising from this License, the successful party shall be entitled to recover reasonable litigation expenses, court costs and reasonable attorneys’ fees, as determined by a court, in any such action, suit or proceeding. The foregoing shall not in any way limit or restrict any other right or remedy at law or equity otherwise available to such party.

19.      Force Majeure

If either party is rendered unable, wholly or in part, by force majeure to carry out its obligations under this License, other than the obligation of Licensee to make payments of amounts due hereunder, then the obligations of both Licensee and Licensor, so far as they are af­fected by such force majeure, shall be suspended during the continuance of any inability so caused, but for no longer period, and such cause shall so far as possible be remedied within a reasonable time. The term “force majeure” as used herein shall mean acts of God, strikes, lockouts, or other industrial disturbances, acts of public enemies, wars, blockades, insurrections, riots, epidemics, landslides, lightning, earthquakes, fires, storms, floods, washouts, interruptions by government not due to the fault of the parties, civil disturbances, explosions, or unforeseeable action or nonaction by governmental bodies in approving the applications for approvals or permits or any material change in circumstances arising out of legislation, regulation or litigation. Nothing in this Section shall require Licensor to settle a strike.

6

20.      Entire Agreement; Changes After Execution

This License, including its specified addenda and exhibits, if any, constitutes the entire agreement between the parties, and any amendment hereto must be in writing, signed by both parties.

21.      Water Damage

Except when the result of the negligent or willful act or omission of Licensor or its directors, officers, employees, agents or assigns, neither Licensor, Association nor the U.S.A. shall be liable for any loss sustained by Licensee, its officers, employees, agents or invitees on the Licensed Property because of water damage resulting from any source whatsoever, including, but not limited to, flood, drainage or run-off, irrespective of any prior knowledge by Licensor of the possibility of such flood, drainage or run-off, arising from or in connection with the operation or maintenance of any Reclamation Project dam, canal or other facility.

22.      Reservation of Remedies

Unless otherwise provided herein, each party shall have available to it, all remedies provided by law or equity.

23.      Archaeological and Environmental Compliance

23.1     Licensee shall obtain a cultural resource clearance from the Environmental Department of the Arizona Projects Office of the Bureau of Reclamation prior to construction on the Licensed Property whenever required by the National Historic Preservation Act, Section 106, and ensuing 36 CFR 800 regulations. A copy of the Bureau of Reclamation archaeological clearance shall be provided to Licensor’s staff archaeologist prior to any construction activity on the Licensed Property.

23.2     Licensee shall notify Licensor’s staff archaeologist should any cultural resources or human remains be found on the Licensed Property, and when appropriate, shall be responsible for other notifications and legal requirements as required by the Archeological Resource Protection Act and the Native American Graves Protection and Repatriation Act and ensuing 43 CFR 10 regulations. All costs are the responsibility of the Licensee.

23.3     Licensee hereby assumes and accepts all liability and responsibility for initiation and completion of response, cleanup, and corrective and remedial action, and the cost thereof, required on the Licensed Property and any other affected premises, due to any action taken during use of the Licensed Property that results in release of any hazardous substance within the meaning of the Federal Comprehensive Environmental Response, Compensation and Liability Act – 42 U.S.C. § 9601 et seq., or the Arizona Environmental Quality Act – A.R.S. § 49-101 et seq., as such laws have been or are amended from time to time, or regulated substance within the meaning of Subtitle I of the Federal Resource Conservation and Recovery Act (Underground Storage Tanks) – 42 U.S.C. § 6991a et seq., or the Arizona Underground Storage Tank Law – A.R.S. § 49-1001 et seq., as such laws have been or are amended from time to time. This Section 23.2 shall survive termination of this License.

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24.      Motor Vehicle Use – Special Conditions

When operating a motor vehicle on the Licensed Property, Licensees must at all times:

24.1     Enter onto and exit from the Licensed Property at the point of reasonable access closest to the component of Licensee’s facilities requiring maintenance;

24.2     Maintain a speed not to exceed five (5) miles per hour;

24.3     Ensure safe and reasonable passage through and around Licensee’s vehicle and other repair facilities to all recreational users of the Licensed Property;

24.4     Ensure that no site of ongoing maintenance of Licensee’s facilities is left unattended; and

24.5     Refrain from accessing the Licensed Property with a motor vehicle except when necessary to effectuate maintenance of Licensees facilities.

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IN WITNESS WHEREOF, the parties hereto have executed this License this                     day of                      , 20          

LICENSOR:

SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND
POWER DISTRICT

By:

Its:

STATE OF ARIZONA	)
	) ss.
COUNTY OF MARICOPA	)

On this           day of                               , 20     , the foregoing instrument was acknowledged before me by                                          , a                                         of the Telecom Department, SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT DISTRICT, an agricultural improvement district organized and existing under the laws of the State of Arizona (“SRP”), on behalf of SRP.

Notary Public

My Commission Expires:

9

IN WITNESS WHEREOF,                                                                                                                        caused its name to be executed by its duly authorized representative(s), this          day of                             , 20      .

LICENSEE:

*,

By

Its

By

Its

STATE OF	)
	) ss.
COUNTY OF	)

On this               day of                                    20                 before me, the undersigned, personally appeared . the and                                                                     and                                                                     respectively, of                                                                    , and such authorized representative(s) acknowledged that this document was executed on behalf of the corporation for the purposes therein contained.

IN WITNESS WHEREOF, I hereunto set my hand and official seal.

My Commission Will Expire:

Notary Public

Notary Stamp/Seal

10

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 March 8, 2007, with respect to the consolidated financial statements and schedule of Eschelon Telecom, Inc., Eschelon Telecom, Inc., management’s assessment of the effectiveness of internal control over financial reporting, and the effectiveness of  internal control over financial reporting of Eschelon Telecom, Inc., included in this Annual Report (Form 10-K) for the year ended December 31, 2006.

Minneapolis, Minnesota

March 9, 2007

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(f) and 15d-15(f)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statement for external purposes in accordance with generally accepted accounting principles;

c)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

d)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 12, 2007
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 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(f) and 15d-15(f)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statement for external purposes in accordance with generally accepted accounting principles;

c)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

d)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 12, 2007
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, 2006 (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 12, 2007

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, 2006 (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 12, 2007