**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549-0001**

 

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**FORM 10-Q**

 

| **(MARK  ONE)**                                    |
|----------------------------------------------------|
|                                               |   |
| **ý**                                         | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15**(d)**OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                               |
| **For the three months ended March 31, 2004** |
|                                               |
| **OR**                                             |
|                                               |
| **o**                                              | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15**(d)**OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                               |
| **Commission File Number 000-50706**               |

 

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**ESCHELON TELECOM, INC.**

**(Exact name of registrant as specified in its charter)**

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

 

Registrant’stelephone number, including area code: **(612)376-4400**

 

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Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to the filingrequirements for the past 90 days.  Yes o     No ý

 

Indicate bycheck mark whether the registrant is an accelerated filer as defined in Rule12b-2 of the Exchange Act.  Yes o    No ý

 

As ofJune 23, 2004, the number of outstanding shares of the Registrant’s CommonStock, par value $.01 per share, was 3,986,854 shares and the number ofoutstanding shares of the Registrant’s Preferred Stock, par value $.01 pershare, was 84,306,677 shares, convertible into 98,050,953 shares of CommonStock.

 

 

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**ESCHELON TELECOM, INC.**

**INDEX TO FORM 10-Q**

 
| **PART I.  FINANCIAL INFORMATION** | 3      |
|-----------------------------------------|--------|
|                                    |   |   |   |
| Item 1.                                 |   | Financial Statements: | 3 |
|                                    |   |   |   |
|                                    |   | Consolidated  Balance Sheets - March 31, 2004 (Unaudited) and December 31, 2003 | 3 |
|                                    |   |   |   |
|                                    |   | Unaudited  Consolidated Statements of Operations – Three months ended March 31,  2004 and 2003 | 4 |
|                                    |   |   |   |
|                                    |   | Unaudited  Consolidated Statements of Cash Flows – Three months ended March 31,  2004 and 2003 | 5 |
|                                    |   |   |   |
|                                    |   | Notes  to Consolidated Financial Statements | 6 |
|                                    |   |   |   |
| Item 2.                                 |   | Management’s Discussion and Analysis of  Financial Condition and Results of Operations | 11 |
|                                    |   |   |   |
| Item 3.                                 |   | Quantitative and Qualitative Disclosures About  Market Risk | 17 |
|                                    |   |   |   |
| Item 4.                                 |   | Controls and Procedures | 17 |
|                                    |   |   |   |
| **PART II.  OTHER INFORMATION**    | 18     |
|                                    |   |   |   |
| Item 1.                                 |   | Legal  Proceedings | 18 |
|                                    |   |   |   |
| Item  2.                                |   | Changes  in Securities and Use of Proceeds | 18 |
|                                    |   |   |   |
| Item  3.                                |   | Defaults  Upon Securities | 19 |
|                                    |   |   |   |
| Item 4.                                 |   | Submission of Matters  to a Vote of Security Holders | 19 |
|                                    |   |   |   |
| Item 5.                                 |   | Other  Information | 19 |
|                                    |   |   |   |
| Item  6.                                |   | Exhibits  and Reports on Form 8-K | 19 |
|                                    |   |   |   |
| Signatures                              |   |

 

2

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**PARTI.  FINANCIAL INFORMATION**

 

## **Item 1.  Financial Statements**

## ** **

**Eschelon Telecom, Inc.**

**Consolidated Balance Sheets**

**(Dollars in Thousands, Except per Share Amounts)**

 
|                                                                                                                                                                                                                                     |   | **March 31,  2004** |    | **December 31,  2003** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|---------|-----------------------------|--------|
|                                                                                                                                                                                                                                     |   | **(Unaudited)**          |    |                        |   |
| **Assets**                                                                                                                                                                                                                               |   |                     |    |                        |   |
| Current assets:                                                                                                                                                                                                                          |   |                     |    |                        |   |
| Cash and cash equivalents                                                                                                                                                                                                                |   | $                        | 23,596  |                        | $      | 8,606 |   |
| Accounts receivable, net of allowance for doubtful accounts of $710  and $739, respectively                                                                                                                                              |   | 13,402                   |    | 13,537                      |   |
| Inventories                                                                                                                                                                                                                              |   | 3,174                    |    | 3,169                       |   |
| Other current assets                                                                                                                                                                                                                     |   | 3,644                    |    | 4,143                       |   |
| Total current assets                                                                                                                                                                                                                     |   | 43,816                   |    | 29,455                      |   |
|                                                                                                                                                                                                                                     |   |                     |    |                        |   |
| Property and equipment, net                                                                                                                                                                                                              |   | 86,112                   |    | 86,777                      |   |
|                                                                                                                                                                                                                                     |   |                     |    |                        |   |
| Other assets                                                                                                                                                                                                                             |   | 1,196                    |    | 1,269                       |   |
| Goodwill                                                                                                                                                                                                                                 |   | 7,168                    |    | 7,168                       |   |
| Intangible assets, net                                                                                                                                                                                                                   |   | 30,166                   |    | 29,052                      |   |
| Total assets                                                                                                                                                                                                                             |   | $                        | 168,458 |                        | $      | 153,721 |   |
|                                                                                                                                                                                                                                     |   |                     |    |                        |   |
| **Liabilities and stockholders’  equity (deficit)**                                                                                                                                                                                 |   |                     |    |                        |   |
| Current liabilities:                                                                                                                                                                                                                     |   |                     |    |                        |   |
| Accounts payable and accrued expenses                                                                                                                                                                                                    |   | $                        | 16,971  |                        | $      | 14,761 |   |
| Deferred revenue                                                                                                                                                                                                                         |   | 3,076                    |    | 3,000                       |   |
| Accrued compensation expenses                                                                                                                                                                                                            |   | 3,935                    |    | 4,261                       |   |
| Capital lease obligation, current maturities                                                                                                                                                                                             |   | 666                      |    | 1,020                       |   |
| Total current liabilities                                                                                                                                                                                                                |   | 24,648                   |    | 23,042                      |   |
|                                                                                                                                                                                                                                     |   |                     |    |                        |   |
| Long-term liabilities:                                                                                                                                                                                                                   |   |                     |    |                        |   |
| Commitments and contingencies                                                                                                                                                                                                            |   | —                   |    | —                      |   |
| Capital lease obligation                                                                                                                                                                                                                 |   | 746                      |    | 576                         |   |
| Notes payable                                                                                                                                                                                                                            |   | 84,882                   |    | 86,226                      |   |
| Total liabilities                                                                                                                                                                                                                        |   | 110,276                  |    | 109,844                     |   |
|                                                                                                                                                                                                                                     |   |                     |    |                        |   |
| Series A convertible preferred stock, $0.01 par value; 100,000,000  shares authorized; 84,306,677 shares outstanding at March 31, 2004 and  December 31, 2003                                                                  |   | 49,802                   |    | 48,948                      |   |
|                                                                                                                                                                                                                                     |   |                     |    |                        |   |
| Stockholders’ equity (deficit):                                                                                                                                                                                                     |   |                     |    |                        |   |
| Common stock, $0.01 par value; 160,000,000 shares authorized;  4,497,599 shares issued and 3,818,489 shares outstanding at March 31,  2004, and 4,457,579 shares issued and 3,372,501 shares outstanding at  December 31, 2003 |   | 45                       |    | 45                          |   |
| Additional paid-in capital                                                                                                                                                                                                               |   | 119,253                  |    | 120,105                     |   |
| Accumulated deficit                                                                                                                                                                                                                      |   | (110,884                 | )       | (125,167                    | )      |
| Deferred compensation                                                                                                                                                                                                                    |   | (34                      | )       | (54                         | )      |
| Total stockholders’ equity (deficit)                                                                                                                                                                                                |   | 8,380                    |    | (5,071                      | )      |
| Total liabilities and stockholders’ equity (deficit)                                                                                                                                                                                |   | $                        | 168,458 |                        | $      | 153,721 |   |

 

*Seeaccompanying notes.*

 

3

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**Eschelon Telecom, Inc.**

**Unaudited Consolidated Statements of Operations**

**(Dollars in Thousands, Except per Share Amounts)**

 
|                                                |   | **Three months  ended  March 31,  2004** |   | **Three months  ended  March 31,  2003** |   |
|-----------------------------------------------------|--------|-----------------------------------------------|--------|-----------------------------------------------|--------|
|                                                |   |                                          |   |                                          |   |
| Revenue:                                            |   |                                          |   |                                          |   |
| Network services                                    |   | $                                             | 32,113 |                                          | $      | 26,654 |   |
| BTS                                                 |   | 6,083                                         |   | 5,260                                         |   |
| Total revenue                                       |   | 38,196                                        |   | 31,914                                        |   |
|                                                |   |                                          |   |                                          |   |
| Cost of revenue:                                    |   |                                          |   |                                          |   |
| Network services                                    |   | 11,766                                        |   | 10,665                                        |   |
| BTS                                                 |   | 3,662                                         |   | 3,367                                         |   |
| Total cost of revenue                               |   | 15,428                                        |   | 14,032                                        |   |
|                                                |   |                                          |   |                                          |   |
| Gross profit:                                       |   |                                          |   |                                          |   |
| Network services                                    |   | 20,347                                        |   | 15,989                                        |   |
| BTS                                                 |   | 2,421                                         |   | 1,893                                         |   |
| Total gross profit                                  |   | 22,768                                        |   | 17,882                                        |   |
|                                                |   |                                          |   |                                          |   |
| Operating expenses:                                 |   |                                          |   |                                          |   |
| Sales, general and administrative                   |   | 16,422                                        |   | 15,448                                        |   |
| Depreciation and amortization                       |   | 7,934                                         |   | 7,649                                         |   |
| Operating loss                                      |   | (1,588                                        | )      | (5,215                                        | )      |
|                                                |   |                                          |   |                                          |   |
| Other income (expense):                             |   |                                          |   |                                          |   |
| Interest income                                     |   | 11                                            |   | 92                                            |   |
| Interest expense                                    |   | (2,314                                        | )      | (431                                          | )      |
| Gain on debt restructuring                          |   | 18,195                                        |   | —                                        |   |
| Other expense                                       |   | (21                                           | )      | (70                                           | )      |
| Income (loss) before taxes                          |   | 14,283                                        |   | (5,624                                        | )      |
| Income taxes                                        |   | —                                        |   | —                                        |   |
| Net income (loss)                                   |   | 14,283                                        |   | (5,624                                        | )      |
| Less preferred stock dividends                      |   | (854                                          | )      | (845                                          | )      |
| Net income (loss) applicable to common stockholders |   | $                                             | 13,429 |                                          | $      | (6,469 | ) |
|                                                |   |                                          |   |                                          |   |
| Net income (loss) per share:                        |   |                                          |   |                                          |   |
| Basic                                               |   | $                                             | 3.01   |                                          | $      | (1.59 | ) |
| Diluted                                             |   | $                                             | 3.01   |                                          | $      | (1.59 | ) |
|                                                |   |                                          |   |                                          |   |
| Weighted average number of shares outstanding:      |   |                                          |   |                                          |   |
| Basic                                               |   | 4,464,112                                     |   | 4,074,380                                     |   |
| Diluted                                             |   |                                          |   |                                          |   |

 

*Seeaccompanying notes.*

 

4

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**Eschelon Telecom, Inc.**

**Unaudited Consolidated Statements of Cash Flows**

**(Dollars in Thousands)**

 
|                                                                                      |   | **Three months  ended  March 31,  2004** |   | **Three months  ended  March 31,  2003** |   |
|-------------------------------------------------------------------------------------------|--------|-----------------------------------------------|--------|-----------------------------------------------|--------|
| **Operating activities**                                                                  |   |                                          |   |                                          |   |
| Net income (loss)                                                                         |   | $                                             | 14,283 |                                          | $      | (5,624 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by  operating activities: |   |                                          |   |                                          |   |
| Depreciation and amortization expense                                                     |   | 7,934                                         |   | 7,649                                         |   |
| Other non-cash items                                                                      |   | 654                                           |   | 476                                           |   |
| Gain on extinguishment of debt                                                            |   | (18,195                                       | )      | —                                        |   |
| Changes in operating assets and liabilities:                                              |   |                                          |   |                                          |   |
| Accounts receivable                                                                       |   | (164                                          | )      | (1,313                                        | )      |
| Inventories                                                                               |   | (5                                            | )      | (178                                          | )      |
| Other current assets                                                                      |   | 572                                           |   | 1,185                                         |   |
| Accounts payable and accrued expenses                                                     |   | 2,210                                         |   | (116                                          | )      |
| Deferred revenue                                                                          |   | 76                                            |   | 134                                           |   |
| Accrued compensation expense                                                              |   | (326                                          | )      | (1,395                                        | )      |
| Net cash provided by operating activities                                                 |   | 7,039                                         |   | 818                                           |   |
|                                                                                      |   |                                          |   |                                          |   |
| **Investing activities**                                                                  |   |                                          |   |                                          |   |
| Purchases of property and equipment                                                       |   | (3,914                                        | )      | (4,144                                        | )      |
| Cash paid for customer installation costs                                                 |   | (2,780                                        | )      | (2,577                                        | )      |
| Net cash used in investing activities                                                     |   | (6,694                                        | )      | (6,721                                        | )      |
|                                                                                      |   |                                          |   |                                          |   |
| **Financing activities**                                                                  |   |                                          |   |                                          |   |
| Proceeds from issuance of notes payable                                                   |   | 84,813                                        |   | —                                        |   |
| Payments made on bank debt and capital lease obligations                                  |   | (65,950                                       | )      | (738                                          | )      |
| fees associated with issuance of preferred stock                                          |   | —                                        |   | (13                                           | )      |
| Proceeds from issuance of common stock                                                    |   | 2                                             |   | —                                        |   |
| Increase in debt issuance costs                                                           |   | (4,220                                        | )      | (13                                           | )      |
| Net cash provided by (used in) financing activities                                       |   | 14,645                                        |   | (764                                          | )      |
|                                                                                      |   |                                          |   |                                          |   |
| Net increase (decrease) in cash and cash equivalents                                      |   | 14,990                                        |   | (6,667                                        | )      |
| Cash and cash equivalents at beginning of period                                          |   | 8,606                                         |   | 19,733                                        |   |
| Cash and cash equivalents at end of period                                                |   | $                                             | 23,596 |                                          | $      | 13,066 |   |
|                                                                                      |   |                                          |   |                                          |   |
| **Supplemental cash flow information**                                                    |   |                                          |   |                                          |   |
| Cash paid for interest                                                                    |   | $                                             | 1,980  |                                          | $      | 112 |   |
|                                                                                      |   |                                          |   |                                          |   |
| **Supplemental noncash activities**                                                       |   |                                          |   |                                          |   |
| Equipment purchases under capital leases                                                  |   | $                                             | 345    |                                          | $      | — |   |
| Value of restricted common stock issued to management                                     |   | $                                             | — |                                          | $      | 124 |   |

 

*Seeaccompanying notes*

 

5

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**Eschelon Telecom, Inc.**

**Notes to Consolidated Financial Statements**

**(Dollars in Thousands, Except per Share Amounts)**

**(Unaudited)**

 

**1.)****          Summary of SignificantAccounting Policies**

 

**Basis ofPresentation**

 

The accompanyingunaudited consolidated financial statements of Eschelon Telecom, Inc. and itssubsidiaries (the “Company”) have been prepared in accordance with accountingprinciples generally accepted in the United States of America for interimfinancial information and the instructions to Form 10-Q and Article 10 ofRegulation S-X promulgated by the United States Securities and ExchangeCommission (the “SEC”).  Accordingly,they do not include all of the information and notes required by accountingprinciples generally accepted in the United States of America for completefinancial statements.  In the opinion ofmanagement, all adjustments (consisting of normal and recurring adjustments andaccruals) considered necessary for a fair presentation for the periodsindicated have been included.  Operatingresults for the three months ended March 31, 2004 are not necessarilyindicative of the results that may be expected for the year endingDecember 31, 2004.  Theconsolidated balance sheet at December 31, 2003 has been derived from theaudited consolidated financial statements at that date but does not include allof the information and footnotes required by generally accepted accountingprinciples for complete financial statements. These financial statements should be read in conjunction with theCompany’s audited financial statements and related notes thereto for the yearended December 31, 2003 included in the Eschelon Operating Company FormS-4/A, File No. 333-114437-08, filed with the Securities and ExchangeCommission on May 6, 2004.

 

**Principlesof Consolidation**

 

The consolidatedfinancial statements include the accounts of the Company and its wholly ownedsubsidiaries.  All intercompany balancesand transactions have been eliminated in consolidation.

 

## **Propertyand Equipment**

## ** **

Property and equipment,including leasehold improvements, are stated at cost.  All internal costs directly related to the construction of theswitches and operating and support systems, including salaries of certainemployees, are capitalized. Depreciation is provided using the straight-line method over theestimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the relatedlease term or the estimated useful life of the asset.

 

Property and equipmentconsist of the following:

 
|                                      |   | **March 31,  2004** |   | **December 31,  2003** |   |
|-------------------------------------------|--------|--------------------------|--------|-----------------------------|--------|
|                                      |   |                     |   |                        |   |
| Vehicles                                  |   | $                        | 39     |                        | $      | 39 |   |
| Office furniture and equipment            |   | 13,534                   |   | 13,243                      |   |
| Computer equipment and software           |   | 30,928                   |   | 30,264                      |   |
| Leasehold improvements                    |   | 17,076                   |   | 16,931                      |   |
| Switching and data equipment and software |   | 79,764                   |   | 76,751                      |   |
|                                      |   | 141,341                  |   | 137,228                     |   |
| Less accumulated depreciation             |   | (55,229                  | )      | (50,451                     | )      |
|                                      |   | $                        | 86,112 |                        | $      | 86,777 |   |

 

## **Goodwilland Intangibles**

## ** **

Goodwill represents theexcess of cost over the fair value of net assets acquired.

 

6

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Intangibles consist ofdebt issuance costs, customer installation costs, and noncompeteagreements.  Debt issuance costs arebeing amortized over the term of the respective debt obligation.  The customer installation costs are beingamortized over a period of 48 months, which approximates the average life of acustomer contract.  Noncompete agreementcosts represent costs associated with various agreements the Company hasentered into with existing management of the companies they have acquired.  These costs are being amortized over theterms of the agreements.

 

Intangible assets consistof the following:

 
|                          |   | **March 31,  2004** |   | **December 31,  2003** |   |
|-------------------------------|--------|--------------------------|--------|-----------------------------|--------|
|                          |   |                     |   |                        |   |
| Customer set-up costs         |   | 55,575                   |   | 52,794                      |   |
| Debt issuance costs           |   | 4,220                    |   | 5,833                       |   |
| Non-compete agreements        |   | 15                       |   | 15                          |   |
|                          |   | 59,810                   |   | 58,642                      |   |
| Less accumulated amortization |   | (29,644                  | )      | (29,590                     | )      |
|                          |   | 30,166                   |   | 29,052                      |   |

 

## **RevenueRecognition**

## ** **

Revenues from networkservices are recognized in the period in which subscribers use the relatedservices.  Revenues from equipment salesand related installation charges are recognized upon delivery, completion ofthe installation of the related equipment, and acceptance by the customer, atwhich point legal title passes to the customer.  Revenues for carrier interconnection and access are recognized inthe period in which the service is provided.

 

## **Use ofEstimates**

## ** **

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the amounts reported in the financial statements andaccompanying notes.  Actual resultscould differ from those estimates.

 

## **Stock-BasedCompensation**

## ** **

The Company accounts forits stock-based employee compensation under the recognition and measurementprinciples of Accounting Principles Board (APB) Opinion No. 25, *Accounting for Stock Issued to Employees,*andrelated interpretations.  Under APB No.25, when the exercise price of stock options equals the market price of theunderlying stock on the date of grant, no compensation expense is recognized inthe consolidated statement of operations.

 

The following tableillustrates the effect on net income (loss) per share if the company hadapplied the fair value recognition provision of SFAS No. 123, *Accounting for Stock-Based Compensation,*tostock-based employee compensation:

 

7

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|                                                                                                              |   | **Three months ended  March 31,** |   |
|-------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------|--------|
|                                                                                                              |   | **2004**                               |   | **2003** |   |
| Net income (loss) applicable to common stockholders, as reported                                                  |   | $                                      | 13,429 |   | $ | (6,469 | ) |
| Add: Stock-based employee compensation expense included in reported  net income (loss)                            |   | 20                                     |   | 70 |   |
| Deduct: Total stock-based employee compensation expense determined  under fair value-based methods for all awards |   | (4                                     | )      | (127 | ) |
| Pro forma net income (loss) applicable to common stockholders                                                     |   | $                                      | 13,445 |   | $ | (6,526 | ) |
|                                                                                                              |   |                                   |   |   |   |
| Net income (loss) per share:                                                                                      |   |                                   |   |   |   |
| Basic - as reported                                                                                               |   | $                                      | 3.70   |   | $ | (2.70 | ) |
| Basic - pro forma                                                                                                 |   | $                                      | 3.70   |   | $ | (2.72 | ) |
|                                                                                                              |   |                                   |   |   |   |
| Diluted - as reported                                                                                             |   | $                                      | 0.19   |   | $ | (2.70 | ) |
| Diluted - pro forma                                                                                               |   | $                                      | 0.19   |   | $ | (2.72 | ) |

 

Pro forma informationregarding net income (loss) and net income (loss) per share is required by SFASNo. 123, and has been determined as if the Company had accounted for itsemployee stock options under the fair value method of SFAS No. 123.  The fair value of these options wasestimated at the date of grant using the Black-Scholes option pricing modelwith the following assumptions for the three months ended March 31, 2004and 2003:  a risk-free interest rate of3.25%; dividend yield of 0%;volatility factor of the expected market price ofthe Company’s common stock of 25%; and a weighted average life of the optionsof five years.

 

The Black-Scholes optionvaluation model was developed for using in estimating the fair value of tradedoptions which have no vesting restrictions and are fully transferable.  In addition, option valuation models requirethe input of highly subjective assumptions. Because the Company’s employee stock options have characteristicssignificantly different from those of traded options and because changes in thesubjective input assumptions can materially affect the fair value estimate, inmanagement’s opinion, the existing models do not necessarily provide a reliablesingle measure of the fair value of its employee stock options.

 

## **NetIncome (Loss) Per Share**

## ** **

Basic earnings per shareis computed based on the weighted average number of common sharesoutstanding.  Diluted earnings per shareis computed based on the weighted average number of common shares outstandingadjusted by the number of additional shares that would have been outstandinghad the potentially dilutive common shares been issued.  Potentially dilutive shares of common stockinclude stock options, unvested restricted stock grants and convertiblepreferred stock.

 

The following tablepresents a reconciliation of the numerators and denominators of basic anddiluted earnings per common share:

 
| ** **                                                        |   | **Three months ended  March 31,** |       |
|-------------------------------------------------------------------|--------|-----------------------------------|------------|
|                                                              |   | **2004**                          | ** ** | **2003** |   |
| Numerator:                                                        |   |                              |       |   |   |
| Net  income (loss) applicable to common stockholders, as reported |   | $                                 | 13,429     |   | $ | (6,469 | ) |
| Add:  Cumulative preferred stock dividends                        |   | 6,980                             |       | - |   |
| Deduct:  Unrecognized deferred compensation expense               |   | (34                               | )          | - |   |
| Numerator  for diluted earnings per share                         |   | $                                 | 20,375     |   | $ | (6,469 | ) |
|                                                              |   |                              |       |   |   |
| Denominator:                                                      |   |                              |       |   |   |
| Weighted  average number of common shares outstanding             |   | 3,629,541                         |       | 2,395,776 |   |
| Effect  of dilutive securities:                                   |   |                              |       |   |   |
| Restricted  stock grants                                          |   | 512,859                           |       | - |   |
| Employee  stock options                                           |   | 4,592,774                         |       | - |   |
| Convertible  preferred stock                                      |   | 98,050,954                        |       | - |   |
| Denominator  for diluted earnings per share                       |   | 106,786,128                       |       | 2,395,776 |   |
|                                                              |   |                              |       |   |   |
| Net  income (loss) per share:                                     |   |                              |       |   |   |
| Basic  - as reported                                              |   | $                                 | 3.70       |   | $ | (2.70 | ) |
| Diluted  - as reported                                            |   | $                                 | 0.19       |   | $ | (2.70 | ) |

 

## **NewAccounting Pronouncements**

## ** **

In May 2003, theFinancial Accounting Standards Board issued SFAS No. 150, *Accounting for Certain Financial Instruments withCharacteristics of Both Liabilities and Equity. *SFAS No. 150 requires that certain financialinstruments, which under previous guidance were accounted for as equity, mustnow be accounted for as liabilities. The financial instruments affected include mandatorily redeemable stock,certain financial instruments that require or may require the issuer to buyback some of its shares in exchange for cash or other assets and certainobligations that can be settled with shares of stock.  SFAS No. 150 is effective for all financial instruments enteredinto or modified after May 31, 2003, and otherwise is effective the beginningof the first interim period after June 15, 2003.  The adoption of SFAS No. 150 did

 

8

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not have a materialimpact on the Company’s financial statements and did not require the Company toreclassify its Series A Preferred Stock to a liability as the shares arecontingently redeemable.

 

## **Reclassifications**

## ** **

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

 

**2.)****          Notes Payable**

 

In March 2004, theCompany completed an offering of $100,000 of 8 3/8% senior second secured notesdue 2010 at a discount resulting in a 12% yield.  Proceeds from the offering were used to retire bank debt with aprincipal balance of $65,421 and provide additional liquidity to the Company.

 

The carrying value ofnotes payable is comprised of the following:

 
|                     |   | **March 31,**

**2004** |    | **December 31,**

**2003** |   |
|--------------------------|--------|------------------------------|---------|---------------------------------|--------|
|                     |   |                         |    |                            |   |
| Principal balance due    |   | $                            | 100,000 |                            | $      | 64,355 |   |
| Excess carrying value    |   | —                       |    | 21,871                          |   |
| Discount on note payable |   | (15,118                      | )       | —                          |   |
| Carrying value           |   | $                            | 84,882  |                            | $      | 86,226 |   |

 

**3.)****          Commitments andContingencies**

 

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

 
| April 2003-March 2004 |   | $ | 80/month |   |
|---------------------------------|--------|---|----------|--------|
| April 2004-March 2005 |   | $ | 84/month |   |
| April 2005-March 2006 |   | $ | 88/month |   |
| April 2006-March 2007 |   | $ | 93/month |   |
| April 2007-March 2008 |   | $ | 97/month |   |

 

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

 

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

 

In August 2000, theCompany entered into a ten-year agreement with Global Crossing to purchase atotal of $100,000 of services.  Theagreement does not contain monthly minimums, however a penalty is assessed forearly termination upon change in control. Upon change in control, the early termination penalties are as follows:

 
| Months 1-24   |   | $      | 15,000 |   |
|---------------|--------|--------|--------|--------|
| Months 25-48  |   | 10,000 |   |
| Months 49-120 |   | 5,000  |   |

 

**4.)****          Capital Stock**

 

9

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Under the terms of theSeries A Preferred Stock, the holders are entitled to receive, when and ifdeclared by the Board of Directors, cumulative dividends on each share of theSeries A Preferred Stock at a rate of 8% per year which shall accrue daily and,to the extent not paid, shall accumulate quarterly in arrears.  At March 31, 2004 and December 31,2003, dividends in arrears are $6,980 and $6,126, respectively.

 

The shares of Series APreferred Stock, plus all accrued and unpaid dividends at the time ofconversion, are convertible at any time, at the option of the holder, intoshares of the Company’s common stock at the initial conversion price which isthe original issue price of $0.5079. The conversion price is subject to adjustment in the event of certainevents, such as dilutive issuances of additional securities.  The Series A Preferred Stock willautomatically convert into common stock in the event of an initial publicoffering raising at least the greater of $50,000 or the amount of principal andinterest outstanding under the Credit Agreement.  The Series A Preferred Stock may be automatically converted uponthe consent of the holders of at least 60% of the then outstanding shares ofSeries A Preferred Stock.

 

The shares of Series APreferred stock will be redeemed on the tenth anniversary of the originalissuance, if the shares have not previously been redeemed or converted.  The Company may redeem all of the Series APreferred Stock upon the effectiveness of an initial public offering.  The redemption price of the Series APreferred stock will be the greater of (i) the original issue price plus allaccrued and unpaid dividends or (ii) the fair market value of the shares ofcommon stock, as determined by the Board of Directors, that would be receivedupon conversion of (a) the Series A Preferred Stock, and (b) any accrued andunpaid dividends on the Series A Preferred Stock.  Upon a change of control, the holders of 60% of the thenoutstanding shares of the Series A Preferred Stock may require the Company toredeem all of or a portion of the Series A Preferred Stock at a price equal to(1) the liquidation preference (as described below) if the change of controloccurs before the fifth anniversary of the original issue date and (2) theredemption price if the change of control occurs after the fifth anniversary ofthe original issue date.

 

In the event of theCompany’s liquidation, the holders of the Series A Preferred Stock will receiveany distribution of corporate assets before any distributions are made to ajunior class of equity.  The amount tobe distributed to the holders of Series A Preferred Stock will be the greaterof (i) two times the original issue price plus all accrued and unpaid dividends(whether or not yet accumulated) as of the date of distribution, or (ii) thefair market value of the shares of the Company’s common stock, as determined bythe Board of Directors, that would be received upon (1) conversion of theSeries A Preferred Stock, (2) any accrued and unpaid dividends and, (3) if theliquidation is prior to the fifth anniversary of the date of issuance of theSeries A Preferred Stock, all additional dividends that would have been accruedthrough the fifth anniversary date.

 

## **StockOptions**

## ** **

In November 2002,the Board of Directors approved the Eschelon Telecom, Inc. Stock Option Plan of2002 (the 2002 Plan).  A total of14,117,647 shares of the Company’s common stock have been reserved for issuanceunder the 2002 Plan.  At March 31,2004, the Company had 9,545,522 options outstanding and 2,484,979 shares ofrestricted common stock issued to certain directors and members of managementunder the 2002 Plan.

 

## **RestrictedCommon Stock**

## ** **

In February 2003,the Company granted 2,484,979 shares of restricted common stock to certaindirectors and members of management. The fair value per share of this restricted stock was $0.05.  The Company records compensation expense as therestrictions are removed from the stock. At March 31, 2003, 1,399,902 shares had vested resulting incompensation expense related to restricted common stock of $70.  At March 31, 2004, an additional405,968 shares had vested resulting in compensation expense of $20.

 

10

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**Item 2****.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

## **Forward-Lookingand Cautionary Statements**

## ** **

We make “forward-lookingstatements” throughout this document. Whenever you read a statement that is not solely a statement ofhistorical 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 negativethereof, and other similar statements), you should understand that ourexpectations may not be correct, although we believe that they arereasonable.  You should also understandthat our plans may change.  We do notguarantee that the transactions and events described in this document willhappen as described or that any positive trends noted in this document willcontinue.

 

Forward-lookingstatements, such as those regarding management’s present plans or expectationsfor new product offerings, capital expenditures, cost-saving strategies andgrowth are not guarantees of future performance.  They involve risks and uncertainties relative to returnexpectations and related allocation of resources, and changing economic orcompetitive conditions, as well as the negotiation of agreements with thirdparties and other factors discussed herein, which could cause actual results todiffer from present plans or expectations, and such differences could bematerial.  Similarly, forward-lookingstatements regarding management’s present expectations for operating resultsand cash flow involve risks and uncertainties relative to these and otherfactors, such as the ability to increase revenues and/or to achieve costreductions and other factors discussed herein, which also would cause actualresults to differ from present plans. Such differences could be material. All forward-looking statements attributable to us or by any personsacting on our behalf are expressly qualified in their entirety by thesecautionary statements.

 

As such, actual resultsor circumstances may vary materially from such forward-looking statements orexpectations.   Readers are alsocautioned not to place undue reliance on these forward-looking statements whichspeak only as of the date these statements were made.  Except as required by law, we will not update theseforward-looking statements, even if our situation changes in the future.

 

## **CompanyOverview**

## ** **

We are a leadingfacilities-based provider of integrated voice and data communications servicesto small and medium-sized businesses in 12 markets in the western UnitedStates.  Our voice and data services,which we refer to as network services, include local dial tone, long distance,enhanced voice features and dedicated Internet access services.  We also sell, install and maintain businesstelephone and data systems and equipment, which we call BTS.  We provide these products and servicesindividually or in customized packages to address our customers’ need for anoutsourced voice and data network solution.

 

We have increased ourannual revenue every year from $41.7 million for the year endedDecember 31, 1999 to $141.1 million for the year ended December 31,2003, and we have increased our gross profit from $14.8 million to $80.3million over the same period.  As ofMarch 31, 2004, we provided service through 215,534 total access lines.

 

Our goal is to provideservices to our customers on our network, or on-net, which will allow us tocontinue to expand our operating margins and improve profitability.  We have continued to increase the percentageof on-net customers with a strategically deployed and incentivized salesforce.  Increasing our on-net percentageimproves customer retention, leverages our network, increases profitability andreduces our exposure to regulatory risk. We selectively provide service via the unbundled networkelement-platform, or UNE-P, to reach locations outside of our network footprintof on-net customers.  For the quarterended March 31, 2004, 85.9% of our new access lines installed were on-netand as of March 31, 2004, 75.6% of our total access lines in service wereon-net.

 

Customer retention is akey metric that we use to measure the success of our business.  We report monthly access line attrition, orchurn, as measured by dividing total access lines disconnected for the month byour total access lines at the end of the month.  We believe our low level of churn reflects our high quality ofservice and the value proposition we provide to new and existingcustomers.  Due to our focus on improvedservice levels, competitive pricing and customer credit quality, we havereduced our monthly churn to levels that we believe are industry leading.  For the quarter ended March 31, 2004, ourmonthly churn averaged 1.55%.

 

***Revenue.***  Network services revenue consists primarilyof local dial tone, long distance, access charges, and data service.  Revenue from local telephone serviceconsists of charges for basic local service, including dedicated T1 access, andcustom-calling features such as call waiting and call forwarding.  Revenue from long distance service consistsof per-minute-of-use charges for a full range of traditional switched anddedicated long distance, toll-free calling, international, calling card andoperator services.  Revenue from dataservices consists primarily of monthly usage fees for dedicated Internet accessservices.

 

Network services revenue is recognized in the monththe services are used.  In the case oflocal service revenue, local services charges are billed in advance but accruedfor and recognized on a prorated basis based on length of service in any givenmonth.  Long distance and access chargesare billed in arrears but accrued based on monthly average usage per line perday.  We do not receive any revenuesfrom reciprocal compensation due to our bill-and-keep arrangement with Qwestnor do we have any wholesale revenue other than access revenue.  For the three months ended March 31, 2004,carrier access revenue represented 8.6% of our total revenue.

 

BTS revenue consists of revenue from both the sale oftelephone equipment and the servicing of telephone equipment systems.  Telephone equipment revenue is recognizedupon delivery and acceptance by the customer. Service revenue is recognized upon completion of service or, in the caseof maintenance agreements, is spread equally over the life of the maintenancecontract.

 

***Cost of revenue.***  Our network services cost consists primarilyof the cost of operating and maintaining our network facilities.  The network components for ourfacilities-based business include the cost of:

 

•  leasing  local loops and digital T1 lines whichconnect our customers to our network;

•  leasinghigh capacity digital lines that interconnect our network with ILECs;

•  leasinghigh capacity digital lines that connect our switching equipment to ourcolocations;

•  leasingspace in ILEC central offices for colocating our equipment;

•  signalingsystem network connectivity; and

•  leasingour ATM backbone network.

 

The costs to lease local loops, digital T1 lines andhigh capacity digital interoffice facilities from the ILECs varies by carrierand by state and are regulated under the Telecommunications Act of 1996.  In virtually all areas, we lease localloops, T1 lines and interoffice capacity from the ILECs.  We lease interoffice facilities fromcarriers other than the ILEC where possible in order to lower costs and improvenetwork redundancy.  However, in mostcases, the ILEC is the only source for local loops and T1 lines.  We also purchase, on a wholesale ornegotiated basis, UNE-P and customized network element packages, or UNE-E, fromQwest and Centrex services from SBC. The rates for UNE-P and Centrex are regulated and established by thevarious state corporation or utility commissions.  The rates for UNE-E were negotiated with Qwest under the terms ofa five-year contract that expires December 31, 2005.  As of March 31, 2004, we had 2,259 UNE-E access lines in service.

 

We have entered into wholesale purchasing agreementswith long distance and other service providers.  Some of these agreements also contain termination penaltiesand/or minimum usage volume commitments. In the event we fail to meet minimum volume commitments, we may beobligated to pay underutilization charges. We do not anticipate having to pay any underutilization charges in theforeseeable future.

 

We carefully review all of our vendor invoices andfrequently dispute inaccurate or inappropriate charges.  Our single largest vendor is Qwest, to whomwe paid $25.8 million for the year ended December 31, 2003.  We frequently short pay vendor invoices inorder to pay proper amounts owed.  Weuse significant estimates to determine the level of success in disputeresolution and consider past historical experience, basis of dispute, financialstatus and current relationship with vendors and aging of prior disputes inquantifying our estimates.

 

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

 

11

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Our most significant BTS costs are the equipmentpurchased from manufacturers and labor for service and equipmentinstallation.  To take advantage of volumepurchase discounts, we purchase equipment primarily from threemanufacturers.  For all BTSinstallations we require a 30% deposit before ordering the equipment so ourrisk of excess inventory or inventory obsolescence is low.  BTS cost of revenue also includes salariesand benefits of field technicians as well as vehicle and incidental expensesassociated with equipment installation, maintenance and service provisioning.

 

***Sales, general andadministrative expenses.*** Sales, general and administrative expenses are comprised primarily ofsalaries and benefits, bonuses, commissions, occupancy costs, sales andmarketing expenses, bad debt, billing and professional services.

 

Determining our allowance for doubtful accountsreceivable requires significant estimates. We consider a number of factors in determining the proper level of theallowance, including historical collections experience, current economictrends, the aging of the accounts receivable portfolio and changes in thecreditworthiness of our customers.  Weperform a rigorous credit review process on each new customer that involvesreviewing the customer’s current service provider bill and payment history,matching customers with the National Telecommunications Data Exchange databasefor delinquent customers and, in some cases, requesting credit reviews throughDun and Bradstreet.  For the threemonths ended March 31, 2004 and 2003, our bad debt expense as a percentage ofrevenue was 0.8% and 0.3%, respectively.

 

***Depreciation andamortization.***  Ourdepreciation and amortization currently includes depreciation for networkrelated voice and data equipment, back office systems, furniture, fixtures,office equipment and computers.  Allinternal costs directly related to the expansion of our network and operatingand support systems, including salaries of certain employees, are capitalizedand depreciated over the lives of the switches or systems, as the case maybe.  Capitalized customer installationcosts are amortized over the approximate average life of a customer.  Detailed annual time studies are used todetermine labor capitalization.  Thesetime studies are based on employee time sheets for those engaged incapitalizable activities.

 

In 2002 we adopted Statement of Financial AccountingStandards (SFAS) No. 142, “Goodwill and Intangible Assets.”  SFAS No. 142 provides that goodwill andintangible assets that have indefinite useful lives not be amortized but ratherbe tested at least annually for impairment.

 

## **RegulatoryOverview**

## ** **

FCC rules implementingthe Telecommunications Act permit CLECs to lease UNEs at rates determined byPUCs 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 re-examining theTELRIC methodology and wholesale pricing rules for communications services madeavailable for resale by ILECs in accordance with the TelecommunicationsAct.  This proceeding willcomprehensively re-examine whether the TELRIC pricing model produces unpredictablepricing inconsistent with appropriate economic signals; fails to adequatelyreflect the real-world attributes of the routing and topography of an ILEC’snetwork; and creates disincentives to investment in facilities by understatingforward-looking costs in pricing RBOC network facilities and overstatingefficiency assumptions.  We have joineda coalition of CLECs to participate in this proceeding.  The application and effect of a revisedTELRIC pricing model on the communications industry generally and on certain ofour business activities cannot be determined at this time.

 

In August 2003, inits TRO, the FCC substantially modified its rules governing access to UNEs byCLECs.  However, on March 2, 2004,the D.C. Circuit vacated certain portions of the TRO and remanded the TRO tothe FCC for further proceedings. Specifically, the Court vacated the FCC’s delegation of decision-makingauthority to state commissions and several of the FCC’s nation-wide impairmentdeterminations.    The Court also foundthat the FCC used a flawed methodology when making certain network elementunbundling determinations and remanded those determinations back to the FCC forfurther analysis and justification.  TheCourt temporarily stayed the effectiveness of its decision until (1) the denialof any petition for rehearing or (2) May 2, 2004.  The Court subsequently extended the effective date untilJune 15, 2004, when it became effective.

 

The FCC and the SolicitorGeneral have declined to appeal the Court’s order.  The deadline for appealing the order is June 30, 2004.  We expect that the CLEC parties to the TROproceeding will appeal and that the National Association of Regulatory UtilityCommissioners (NARUC) will also appeal. Eschelon plans to join in the CLEC appeal.  We do not know if the Supreme Court will take the appeal.

 

Although the Court’sorder is now in effect, we do not know how or when the FCC will respond toit.  The FCC could issue interim rulesin a relatively short time period that would remain in effect until permanentrules were issued or the FCC could forego interim rules.  We do not know when the FCC might issueeither interim or permanent rules nor do we know what the rules will be or theeffect such rules could have upon our business.  The FCC has encouraged the ILECs to continue to provide UNEs atexisting rates until new rules are in place. We do not know whether the ILECs will do so.

 

The ILECs have statedthat they interpret the order as eliminating unbundled switching, transport,high capacity loops and dark fiber as UNEs. Except for dark fiber, Eschelon uses all of these UNEs.  Eschelon, along with many other CLECs,interprets the effect of the order differently, reasoning that under the 1996Telecommunications Act as well as under state statutes, unbundling is stillrequired where CLECs are impaired without access to UNEs.

 

The ILECs have alsostated that they will follow the “change of law” provisions in ourinterconnection agreements.  Theseprovisions provide that when a party to the agreement believes the governinglaw has changed its obligations under the agreement, it may request that theother party enter into negotiations to amend the agreement.  If the parties are unable to agree upon anamendment, the dispute is arbitrated either by a neutral arbitrator or by therelevant state commission.  Weanticipate that “change of law” negotiations will commence soon.  We do not know when the negotiations mightconclude nor the effect of any amendments arrived at upon our business.

 

The FCC has encouragedILECs and CLECs to engage in commercial negotiations to provide access to ILECfacilities that may no longer be available as UNEs.  Although a few such agreements have been announced, the greatmajority of CLECs, including Eschelon, have not succeeded in negotiating newagreements as of this date.

 

12

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As a condition ofentering the long distance markets, the Act requires ILECs to provide CLECswith loops, transport, and unbundled switching.  In the TRO, the FCC determined, and the D.C. Circuit Courtagreed, that these facilities must be made available to CLECs at “just andreasonable” rates, in contrast to UNEs which are available at TELRICrates.  We do not know what “just andreasonable” rates would be nor do we know when such rates might be establishednor the roles of the FCC or state commissions in establishing such rates.

 

13

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## **Comparisonof Financial Results**

## ** **

**Overviewof Results**

 

Select consolidatedfinancial and operating data for the three months ending March 31, 2004 and2003 is as follows (dollars in thousands, except per unit amounts):

 
|                                        |   | **2004**        |   | **2003**        |   | **% Change** |   |
|---------------------------------------------|--------|-----------------|--------|-----------------|--------|--------------|--------|
|                                        |   | **(unaudited)** |   | **(unaudited)** |   |         |   |
| Total  revenue                              |   | $               | 38,196 |            | $      | 31,914       |   | 19.7 | % |
| Total  gross profit as a percent of revenue |   | 59.6            | %      | 56.0            | %      | 6.4          | %      |
| EBITDA                                      |   | $               | 6,346  |            | $      | 2,434        |   | 160.8 | % |
| Capital  expenditures                       |   | $               | 7,041  |            | $      | 6,722        |   | 4.7 | % |
| Cash                                        |   | $               | 23,596 |            | $      | 13,066       |   | 80.6 | % |
|                                        |   |            |   |            |   |         |   |
| Voice  ALEs in service                      |   | 159,354         |   | 138,966         |   | 14.7         | %      |
| Data  ALEs in service                       |   | 56,180          |   | 31,036          |   | 81.0         | %      |
| Total  ALEs in service                      |   | 215,534         |   | 170,002         |   | 26.8         | %      |
| ALEs  on-net (%)                            |   | 75.6            | %      | 66.8            | %      | 13.3         | %      |
| ALEs  sold                                  |   | 19,463          |   | 22,977          |   | (15.3        | )%     |
| Monthly  churn (%)                          |   | 1.55            | %      | 1.78            | %      | (13.1        | )%     |
| Network  revenue per ALE                    |   | $               | 50.42  |            | $      | 53.48        |   | (5.7 | )% |
|                                        |   |            |   |            |   |         |   |
| Total  associates                           |   | 885             |   | 906             |   | (2.3         | )%     |
| Total  sales associates                     |   | 173             |   | 191             |   | (9.4         | )%     |
| Network  sales associates                   |   | 140             |   | 155             |   | (9.7         | )%     |

 

### **Three Months Ended March31, 2004 versus Three Months Ended March 31, 2003**

 

***Revenue.***  Revenue for the three months ended March 31, 2004 and 2003 is asfollows:

 
|                        |   | **2004**        |   | **2003**        |   | **% Change** |   |
|-----------------------------|--------|-----------------|--------|-----------------|--------|--------------|--------|
|                        |   | **(unaudited)** |   | **(unaudited)** |   |         |   |
| Revenue  (in millions):     |   |            |   |            |   |         |   |
| Voice  and data services    |   | $               | 23.5   |            | $      | 19.2         |   | 22.9 | % |
| Long  distance              |   | 5.3             |   | 4.5             |   | 18.1         | %      |
| Access                      |   | 3.3             |   | 3.0             |   | 8.7          | %      |
| Total  network services     |   | 32.1            |   | 26.7            |   | 20.5         | %      |
| Business  telephone systems |   | 6.1             |   | 5.2             |   | 15.7         | %      |
| Total  revenue              |   | $               | 38.2   |            | $      | 31.9         |   | 19.7 | % |

 

Networkservices revenue was $32.1 million for the three months ended March 31,2004, an increase of 20.5% from $26.7 million in the same period of 2003.  The increase in revenue was primarily due toan increase in the average number of voice and data access lines inservice.  Over the past 12 months thenumber of voice lines increased by 14.7% to 159,354 lines at March 31,2004 and the number of data lines increased by 81.0% to 56,180 lines atMarch 31, 2004.  The growth inaccess lines was partially offset by declines in long distance and accessrevenue per minute of use and a decline in data revenue per line.  Due to continued high levels of competition,long distance revenue per minute of use declined.  Access revenue per minute of use declined in line with thescheduled FCC reduction of interstate rate levels.  Data revenue per line declined due to a combination of customerspurchasing more bandwidth at discounted prices and general pricing pressuresfor data services in our markets.  Weexpect all of the above trends in line growth, long distance rates, accessrates and data revenue per line to continue for the foreseeable future.  As we continue to grow, our size and churnwill begin to limit our access line growth rate on both an absolute and on apercentage basis unless we increase our sales force and geographic territory.

 

BTS revenuewas $6.1 million for the three months ended March 31, 2004, an increase of15.7% from $5.2 million in the same period of 2003.  The increase in revenue was primarily due to an increase inrevenue from new system sales.  Revenuefrom change orders also contributed to the increase.  We cannot predict future trends in capital spending by small andmedium-sized business customers.

 

***Cost of Revenue.***  Cost of revenue for the three months endedMarch 31, 2004 and 2003 is as follows:

 
|                           |   | **2004**        |       | **2003**        |       | **% Change** |   |
|--------------------------------|--------|-----------------|------------|-----------------|------------|--------------|--------|
|                           |   | **(unaudited)** |       | **(unaudited)** |       |         |   |
| Cost of revenue (in millions): |   |            | ** ** |            | ** ** |         |   |
| Network services               |   | $               | 11.7       |            | $          | 10.6         |   | 10.3 | % |
| Business telephone systems     |   | 3.7             |       | 3.4             |       | 8.8          | %      |
| Total cost of revenue          |   | $               | 15.4       |            | $          | 14.0         |   | 9.9 | % |

 

Networkservices cost of revenue was $11.7 million for the three months endedMarch 31, 2004, an increase of 10.3% from $10.6 million in the same periodof 2003.  This increase is due to ourgrowth in access lines.  As a percentageof related revenue, network services cost of revenue for the three months endedMarch 31, 2004 declined to 36.6% from 40.0% for the same period of2003.  This improvement was due to theincrease in our percentage of access lines on-net to 75.6% as of March 31,2004 from 66.8% as of March 31, 2003.

 

14

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BTS cost ofrevenue was $3.7 million for the three months ended March 31, 2004, anincrease of 8.8% from $3.4 million in the same period of 2003.  This increase was due to an increase inmaterials cost related to the new system sales and change orders mentionedpreviously.  As a percentage of relatedrevenue, BTS cost of revenue for the three months ended March 31, 2004declined to 60.2% from 64.0% for the same period of 2003.  We do not expect future improvements in BTScost of revenue as a percentage of related revenue unless we are able tosignificantly increase BTS revenue and therefore achieve greater volumediscounts or economies of scale in our workforce.

 

***Gross Profit.***  Gross profit for the three months endedMarch 31, 2004 and 2003 is as follows:

 
|                        |   | **2004**        |       | **2003**        |       | **% Change** |   |
|-----------------------------|--------|-----------------|------------|-----------------|------------|--------------|--------|
|                        |   | **(unaudited)** |       | **(unaudited)** |       |         |   |
| Gross profit (in millions): |   |            | ** ** |            | ** ** |         |   |
| Network services            |   | $               | 20.4       |            | $          | 16.1         |   | 27.3 | % |
| Business telephone systems  |   | 2.4             |       | 1.8             |       | 27.9         | %      |
| Total gross profit          |   | $               | 22.8       |            | $          | 17.9         |   | 27.3 | % |

 

Theincrease in gross profit for the three months ended March 31, 2004, from thesame period of 2003, is due to the increase in revenue mentioned previously.

 

***Sales, General and Administrative Expense.***  Sales, general and administrative expenseswere $16.4 million for the three months ended March 31, 2004, an increaseof 6.3% from $15.4 million in the same period of 2003.  The increase is primarily due to increasesin wages and benefits, bad debt expense and professional services costs.  As a percentage of revenue, sales, generaland administrative expenses for the three months ended March 31, 2004declined to 43.0% from 48.4% in the same period of 2003 due to the improvedefficiency of our existing operations resulting from our fixed cost structuresupporting a higher level of revenue. We expect this trend to continue as we add more access lines with onlymodest increase in our employee base.

 

***EBITDA.***  Earnings before interest, taxes,depreciation and amortization (EBITDA) was $6.3 million for the three monthsended March 31, 2004, an increase of 160.8% from $2.4 million in the sameperiod of 2003.  This increase was dueto increased profit margins and lower sales, general and administrativeexpenses as a percentage of revenue.

 

EBITDA is anot a measure of financial performance under generally accepted accountingprinciples (GAAP).  EBITDA is providedbecause it is a measure of financial performance commonly used as an indicatorof a company’s historical ability to service debt.  We have presented EBITDA to enhance your understanding of ouroperating results.  You should notconstrue it as an alternative to operating income, as an indicator of operatingperformance nor as an alternative to cash flows provided by operatingactivities as a measure of liquidity determined in accordance with GAAP.  We may calculate EBITDA differently thanother companies.  The following is aschedule reconciling EBITDA with reported GAAP net income (loss) (dollars inthousands):

 
|                           |   | **2004**        |       | **2003**        |   |
|--------------------------------|--------|-----------------|------------|-----------------|--------|
|                           |   | **(unaudited)** |       | **(unaudited)** |   |
| **EBITDA**                     |   | **$**           | **6,346**  | ** **      | **$**  | **2,434** | ** ** |
| Depreciation  and amortization |   | (7,934          | )          | (7,649          | )      |
| Interest  expense              |   | (2,314          | )          | (431            | )      |
| Deferred  compensation         |   | (20             | )          | (70             | )      |
| Loss  on disposal of assets    |   | (1              | )          | —          |   |
| Interest  income               |   | 11              |       | 92              |   |
| Gain  on debt restructuring    |   | 18,195          |       | —          |   |
| **Net income (loss)**          |   | **$**           | **14,283** | ** **      | **$**  | **(5,624** | **)** |

 

***Depreciation and Amortization.***  Depreciation and amortization expense was$7.9 million for the three months ended March 31, 2004, an increase of3.7% from $7.6 million in the same period of 2003.  This increase was primarily due to our network growth andassociated capital expenditures.  As apercentage of revenue, depreciation and amortization decreased to 20.8% for thethree months ended March 31, 2004 from 24.0% for the same period of 2003.

 

***Interest.***  Interest expense was $2.3 million for the threemonths ended March 31, 2004, an increase of 436.5% from $0.4 million inthe same period of 2003.  This increasewas primarily due to the payment of a $1.6 million prepayment penalty on theearly extinguishment of our bank facility.

 

***Gain on Extinguishment of Debt.***  Net income for the three months endedMarch 31, 2004 included a gain on extinguishment of debt of $18.2million.  The gain on the extinguishmentof debt was the result of paying off our bank facility.  In June 2002, we restructured our bankfacility and because the future cash flows could not be calculated withcertainty, the gain was deferred.  As aresult of the repayment, the excess carrying value of $20.9 million net of debtissuance costs of $2.7 million resulted in the $18.2 million gain onextinguishment of debt.

 

## **Liquidity and Capital Resources**

## ** **

***Financings.* **In March 2004, the Companycompleted an offering of $100 million of 8 3/8%, pay fees related to theoffering senior second secured notes due 2010 at a discount resulting in a 12% yield.  Proceeds from the offering were used toretire bank debt and provide additional liquidity to the Company.  After repayment of the Company’s seniorsecured bank facility and fees related to the issuance of the new notes, theCompany received incremental cash of approximately $13.6 million.

 

***Cash Flows Provided by OperatingActivities. ***Cashprovided by operating activities was $7.0 million for the three months endedMarch 31, 2004 compared to cash provided by operating activities of $0.8million for the three months ended March 31, 2003.  Our improvement in cash provided byoperating activities was primarily due to our growth in gross profitaccompanied by a smaller increase in our operating expenses.  We also generated incremental workingcapital cash primarily through improvement in our accounts receivablecollections and an increase in our accounts payable days outstanding.  We do not expect further improvement in ouraccounts receivable or accounts payable days outstanding in the future.

 

15

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***Cash Flows Used in Investing Activities.***  Cash used in investing activities was $6.7million for the three months ended March 31, 2004 and for the three monthsended March 31, 2003.  The cashused in investing activities was primarily for the maintenance and expansion ofour network and back office systems.

 

***Cash Flows Provided by (Used in) FinancingActivities.***  Cashprovided by financing activities was $14.6 million for the three months endedMarch 31, 2004.  The net proceedsfrom the issuance of the senior second secured notes generated approximately$13.6 million which is net of a $1.6 million prepayment penalty included ininterest expense.  For the three monthsended March 31, 2003, net cash used in financing activities was $0.8million, primarily for payment on capital lease obligations.

 

16

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# **Item 3**.  Quantitative and Qualitative DisclosuresAbout Market Risk

# ** **

We are not exposed tomarket risks from changes in foreign currency exchange rates or commodityprices.  We do not hold any derivativefinancial instruments nor do we hold any securities for trading or speculativepurposes.

 

We are exposed to changesin interest rates on our investments in cash equivalents and short-terminvestments.  All of our investments arein cash equivalents with maturities of less than three months which reduces ourexposure to long-term interest rate changes. Interest income for the quarter was $0.01 million, therefore notexposing us to any meaningful interest income risk had rates dropped.  Excluding capital leases, we had $84.9million in senior second secured notes outstanding as of March 31,2004.  These notes are fixed interestrate and are therefore not exposed to any interest rate risk.

 

# **Item 4**:  Controls and Procedures

# ** **

Based on their evaluationas of the end of the period covered by this Quarterly Report on Form 10-Q, ourprincipal executive officer and principal financial officer with theparticipation and assistance of our management, concluded that our disclosurecontrols and procedures, as defined in Rules 13a-15(e) promulgated under theSecurities Exchange Act of 1934, were effective in design and operation.  There have been no changes in our internalcontrols over financial reporting that occurred during the quarter endedMarch 31, 2004 that have materially affected, or are reasonably likely tomaterially affect, our internal controls over financial reporting.

 

17

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# **PART II**.OTHER INFORMATION

# ** **

# **Item 1.  Legal Proceedings**

# ** **

We are a party to severalcomplaint proceedings against Qwest filed with the Arizona, Colorado, Minnesotaand Washington public utility commissions, or PUCs, and two federal courtlawsuits involving Qwest.  The MinnesotaPUC recently ordered Qwest to pay us $0.5 million as a refund of overchargesrelated to enhanced extended loops and Qwest may appeal the order.  We intend to appeal recent unfavorabledecisions by the Minnesota PUC in relation to our complaints regarding Qwest’swithholding of Direct Measures of Quality, or DMOQ billing credits and ourrequest for a refund from Qwest for overcharges for our colocations.  The Minnesota PUC and the ArizonaCorporation Commission recently granted, and the Washington PUC denied in partand granted in part, our complaints regarding retroactive application ofcertain favorable UNE rates.  We havefiled a similar complaint in Colorado. We continue to pursue a lawsuit against Qwest in the United StatesDistrict Court, Western District of Washington regarding the financial harm wehave suffered as a result of Qwest’s violations of our interconnectionagreements by failing to provide accurate records relating to interstate andintrastate long distance calls, failing to develop an unbundled networkplatform and failing to make DSL available for resale.  We also are opposing Qwest’s federal courtappeal of the Minnesota PUC’s UNE Cost Order. If Qwest is successful, our UNE rates in Minnesota could increase.

 

We are a defendant in alawsuit filed in Federal Court in New Jersey by a competitor allegingdefamation and interference with contract. We disagree with the allegations and are moving to dismiss the action.

 

We are a party to certainregulatory investigations underway in Arizona, Colorado and Washington relatingto the alleged failure of Qwest and several CLECs, including us, to submitinterconnection agreements for approval by state regulatory agencies.  We cannot predict the outcome of theArizona, Colorado or Washington investigations or the effect that anycorresponding regulatory actions may have on our business.  A similar investigation by the Minnesota PUCresulted in no direct penalties against us. The Minnesota Department of Commerce has filed a complaint with theMinnesota PUC concerning agreements that CLECs, including us, have with certaininterexchange carriers for pricing access services.  They have asserted that the agreements are unlawfullydiscriminatory and required to be filed. We cannot predict the outcome of any of these proceedings or theireffect on our business.

 

**Item 2. Changes in Securitiesand Use of Proceeds**

 

On March 17, 2004,Eschelon Operating Company (a wholly owned subsidiary) issued $100 millionprincipal amount at maturity of 8 3/8% Senior Second Secured Notes due in2010.  Jefferies & Company, Inc. andWachovia Securities were the joint book-running managers for thetransaction.  These were priced at 84.813%of the principal amount and the gross proceeds were $84.813 million.

 

We offered these notes toqualified institutional buyers as defined in Rule 144A under the SecuritiesAct, to persons outside the United States under Regulation S of the SecuritiesAct and to a limited number of institutional accredited investors within themeaning of Rule 501 (a) (1), (2), (3) or (7) of the Securities Act.  Subsequent to the end of the period coveredby this Report, we engaged in an exchange offer with the holders of the noteswhereby the notes were exchanged for a like principal amount of registered 83/8% Senior Second Secured Notes due 2010 which was substantially completed onJune 18, 2004.

 

The proceeds of thistransaction were used to repay existing indebtedness, for general corporatepurposes and to pay all associated fees and expenses of the offering.

 

We relied upon Rule 701promulgated under the Securities Act to issue the following securities:

 

On March 15, 2004,we issued to 86 participants under the Eschelon Telecom, Inc. Stock Option Planof 2002 options to purchase an aggregate of 277,617 shares of common stock atan exercise price of $0.10 per share. These options generally vest 20% upon the date of the initial grant and20% per year over four years from the date of grant.

 

18

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# **Item 3.  Defaults Upon Securities**

# ** **

None

 

# **Item 4.  Submission of Matters to a Vote of SecurityHolders**

# ** **

No matters were submittedto a vote of the security holders during the quarter ended March 31, 2004

 

# **Item 5.  Other Information**

# ** **

None

 

# **Item 6.  Exhibits and Reports on Form 8-K**

# ** **

| **Exhibit  No.** |   | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1*             |   | Fifth Amended and  Restated Certificate of Incorporation of Eschelon Telecom, Inc. filed on  June 27, 2002.                                                                                                                                                                                                                                                                                                                                     |
| 3.2*             |   | By-Laws of Eschelon  Telecom, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 4.1*             |   | Fourth Amended and  Restated Stockholders Agreement dated June 27, 2002.                                                                                                                                                                                                                                                                                                                                                                        |
| 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 8 3/8%  Senior Second Secured Notes due 2010.                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.11**           |   | Form of Guarantee of  Initial 8 3/8% Senior Second Secured Notes due 2010.                                                                                                                                                                                                                                                                                                                                                                           |
| 4.12**           |   | Form of Exchange 8 3/8%  Senior Second Secured Notes due 2010.                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.13**           |   | Form of Guarantee of  Exchange 8 3/8% Senior Second Secured Notes due 2010.                                                                                                                                                                                                                                                                                                                                                                          |
| 10.1*            |   | Change-in-Control  Severance Pay and Employment Agreement dated November 22, 2002 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.                                                                                                                                                                                                                                                                                                                            |
| 10.3*            |   | 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 Eschelon Telecom, Inc. to Steven K. Wachter.                                                                                                                                                                                                                                                                                                                                                  |

 

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| 10.5*    |   | Stock Restriction  Agreement dated February 7, 2003 between Eschelon Telecom, Inc. and  Marvin C. Moses.                                                                          |
|----------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.6*    |   | Stock Restriction  Agreement dated February 7, 2003 between Eschelon Telecom, Inc. and  Anthony J. Cassara.                                                                       |
| 10.7*    |   | Stock Restriction  Agreement dated February 7, 2003 between Eschelon Telecom, Inc. and  Peter M. Van Genderen.                                                                    |
| 10.8*    |   | Carrier Global Services  Agreement dated July 28, 2000 by and between MCI WorldCom  Communications, Inc. and Eschelon Telecom, Inc.                                               |
| 10.8.1*  |   | 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.  |
| 10.8.2*  |   | 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. |
| 10.8.3*  |   | 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.  |
| 10.8.4*  |   | WorldCom Internet  Dedicated Service Agreement and Service Order Form dated June 12, 2003.                                                                                        |
| 10.8.5*  |   | WorldCom Internet  Dedicated Service Agreement and Service Order Form dated January 23,  2004.                                                                                    |
| 10.8.6*  |   | WorldCom Internet  Dedicated T3 Price-Protected Agreement dated July 26, 2001.                                                                                                    |
| 10.8.7*  |   | WorldCom Wholesale  Dedicated Internet Pricing Sheet                                                                                                                                   |
| 10.9*    |   | Carrier Service  Agreement dated August 25, 2000 between Global Crossing Bandwidth, Inc.  and Eschelon Telecom, Inc.                                                              |
| 10.9.1*  |   | Amendment #1 dated  November 10, 2000 to Carrier Service Agreement dated August 25,  2000 between Global Crossing Bandwidth, Inc. and Eschelon Telecom, Inc.                 |
| 10.9.2*  |   | Amendment #2 dated  January 2, 2001 to Carrier Service Agreement dated August 25, 2000  between Global Crossing Bandwidth, Inc. and Eschelon Telecom, Inc.                   |
| 10.9.3*  |   | Amendment #3 dated  June 25, 2001 to Carrier Service Agreement dated August 25, 2000  between Global Crossing Bandwidth, Inc. and Eschelon Telecom, Inc.                     |
| 10.9.4*  |   | Amendment #4 dated  July 17, 2001 to Carrier Service Agreement dated August 25, 2000  between Global Crossing Bandwidth, Inc. and Eschelon Telecom, Inc.                     |
| 10.9.5*  |   | Amendment #5 dated  April 25, 2002 to Carrier Service Agreement dated August 25, 2000  between Global Crossing Bandwidth, Inc. and Eschelon Telecom, Inc.                    |
| 10.9.6*  |   | Amendment #6 dated  July 12, 2002 to Carrier Service Agreement dated August 25, 2000  between Global Crossing Bandwidth, Inc. and Eschelon Telecom, Inc.                     |
| 10.9.7*  |   | Amendment #7 dated  March 26, 2004 to Carrier Service Agreement dated August 25, 2000  between Global Crossing Bandwidth, Inc. and Eschelon Telecom, Inc.                    |
| 10.10*   |   | Advisory Agreement  dated March 15, 2004 among Eschelon Telecom, Inc.; Bain Capital  Investors, LLC; Wind Point Advisor, L.L.C.; and Stolberg, Meehan & Scano,  L.L.C.        |
| 10.11*   |   | 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.                                                      |

 

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| 10.14*   |   | 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.                                                  |
| 10.17*   |   | 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. |
| 10.19*   |   | Lease by and between  Alco Investment Company and Advanced Telecommunications, Inc. dated  November 19, 1999.                                                                |
| 21.1*    |   | Subsidiaries of  Eschelon Telecom, Inc.                                                                                                                                           |
| 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.                                                      |

 

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*                                                                                         Incorporatedherein by reference to Eschelon Telecom, Inc. Registration Statement on Form10, No. 000-50706.

 

**                                                                                  Incorporatedherein by reference to Eschelon Operating Company Registration Statement onForm S-4, No. 333-114437.

 

Reports on Form 8-K

 

None.

 

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