Document:

exv10w67

 

EXHIBIT 10.67

PAC-WEST TELECOMM, INC.

2000 EMPLOYEE STOCK PURCHASE PLAN

(Amended and Restated on June 16, 2004)

          The following constitute the provisions of the 2000 Employee Stock Purchase Plan of Pac-West
Telecomm, Inc.

          1. Purpose. The purpose of the Plan is to provide employees of the Company and its
Designated Parents or Subsidiaries with an opportunity to purchase Common Stock of the Company
through accumulated payroll deductions. It is the intention of the Company to have the Plan
qualify as an “Employee Stock Purchase Plan” under Section 423 of the Code. The provisions of the
Plan, accordingly, shall be construed so as to extend and limit participation in a manner
consistent with the requirements of that section of the Code.

          2. Definitions. As used herein, the following definitions shall apply:

          (a) “Administrator” means either the Board or a committee of the Board that is
responsible for the administration of the Plan as is designated from time to time by resolution of
the Board.

          (b) “Applicable Laws” means the legal requirements relating to the administration of
employee stock purchase plans, if any, under applicable provisions of federal securities laws,
state corporate and securities laws, the Code, the rules of any applicable stock exchange or
national market system, and the rules of any foreign jurisdiction applicable to participation in
the Plan by residents therein.

          (c) “Board” means the Board of Directors of the Company.

          (d) “Change in Control” means a change in ownership or control of the Company effected
through the direct or indirect acquisition by any person or related group of persons (other than an
acquisition from or by the Company or by a Company-sponsored employee benefit plan or by a person
that directly or indirectly controls, is controlled by, or is under common control with, the
Company) of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of
securities possessing more than fifty percent (50%) of the total combined voting power of the
Company’s outstanding securities.

          (e) “Code” means the Internal Revenue Code of 1986, as amended.

          (f) “Common Stock” means the common stock of the Company.

          (g) “Company” means Pac-West Telecomm, Inc., a California corporation.

          (h) “Compensation” means an Employee’s base salary, overtime, commissions and bonuses
from the Company or one or more Designated Parents or Subsidiaries, including such amounts of base
salary as are deferred by the Employee (i) under a qualified cash

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or deferred arrangement described in Section 401(k) of the Code, or (ii) to a plan qualified
under Section 125 of the Code. Compensation does not include reimbursements or other expense
allowances, fringe benefits (cash or noncash), moving expenses, deferred compensation,
contributions (other than contributions described in the first sentence) made on the Employee’s
behalf by the Company or one or more Designated Parents or Subsidiaries under any employee benefit
or welfare plan now or hereafter established, and any other payments not specifically referenced in
the first sentence.

          (i) “Corporate Transaction” means any of the following transactions:

     (1) a merger or consolidation in which the Company is not the surviving entity,
except for a transaction the principal purpose of which is to change the state in
which the Company is incorporated;

     (2) the sale, transfer or other disposition of all or substantially all of the
assets of the Company (including the capital stock of the Company’s subsidiary
corporations) in connection with complete liquidation or dissolution of the Company;

     (3) any reverse merger in which the Company is the surviving entity but in
which securities possessing more than fifty percent (50%) of the total combined
voting power of the Company’s outstanding securities are transferred to a person or
persons different from those who held such securities immediately prior to such
merger; or

     (4) acquisition by any person or related group of persons (other than the
Company or by a Company-sponsored employee benefit plan) of beneficial ownership
(within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more
than fifty percent (50%) of the total combined voting power of the Company’s
outstanding securities (whether or not in a transaction also constituting a Change
in Control), but excluding any such transaction that the Administrator determines
shall not be a Corporate Transaction

          (j) “Designated Parents or Subsidiaries” means the Parents or Subsidiaries which have
been designated by the Administrator from time to time as eligible to participate in the Plan.

          (k) “Effective Date” means the date the Administrator deems appropriate to commence
the first Offer Period. However, should any Designated Parent or Subsidiary become a participating
company in the Plan after such date, then such entity shall designate a separate Effective Date
with respect to its employee-participants.

          (l) “Employee” means any individual, including an officer or director, who is an
employee of the Company or a Designated Parent or Subsidiary for purposes of Section 423 of the
Code. For purposes of the Plan, the employment relationship shall be treated as continuing intact
while the individual is on sick leave or other leave of absence approved by the individual’s

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employer. Where the period of leave exceeds ninety (90) days and the individual’s right to
reemployment is not guaranteed either by statute or by contract, the employment relationship will
be deemed to have terminated on the ninety-first (91st) day of such leave, for purposes of
determining eligibility to participate in the Plan.

          (m) “Enrollment Date” means the first day of each Offer Period.

          (n) “Exchange Act” means the Securities Exchange Act of 1934, as amended.

          (o) “Exercise Date” means the last day of each Purchase Period.

          (p) “Fair Market Value” means, as of any date, the value of Common Stock determined as
follows:

     (1) Where there exists a public market for the Common Stock, the Fair Market
Value shall be (A) the closing price for a share of Common Stock for the last market
trading day prior to the time of the determination (or, if no closing price was
reported on that date, on the last trading date on which a closing price was
reported) on the stock exchange determined by the Administrator to be the primary
market for the Common Stock or the Nasdaq National Market, whichever is applicable
or (B) if the Common Stock is not traded on any such exchange or national market
system, the average of the closing bid and asked prices of a share of Common Stock

on the Nasdaq Small Cap Market for the day prior to the time of the determination
(or, if no such prices were reported on that date, on the last date on which such
prices were reported), in each case, as reported in The Wall Street Journal or such
other source as the Administrator deems reliable; or

     (2) In the absence of an established market of the type described in (1),
above, for the Common Stock, the Fair Market Value thereof shall be determined by
the Administrator in good faith.

          (q) “Offer Period” means an Offer Period established pursuant to Section 4 hereof.

          (r) “Parent” means a “parent corporation,” whether now or hereafter existing, as
defined in Section 424(e) of the Code.

          (s) “Participant” means an Employee of the Company or Designated Parent or Subsidiary
who is actively participating in the Plan.

          (t) “Plan” means this Employee Stock Purchase Plan.

          (u) “Purchase Period” means a period specified as such pursuant to Section 4(b)
hereof.

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          (v) “Purchase Price” shall mean an amount equal to 85% of the Fair Market Value of a
share of Common Stock on the Enrollment Date or on the Exercise Date, whichever is lower.

          (w) “Reserves” means the sum of the number of shares of Common Stock covered by each
option under the Plan which have not yet been exercised and the number of shares of Common Stock
which have been authorized for issuance under the Plan but not yet placed under option.

          (x) “Subsidiary” means a “subsidiary corporation,” whether now or hereafter existing,
as defined in Section 424(f) of the Code.

          3. Eligibility.

          (a) General. Any individual who is an Employee on a given Enrollment Date shall be
eligible to participate in the Plan for the Offer Period commencing with such Enrollment Date.

          (b) Limitations on Grant and Accrual. Any provisions of the Plan to the contrary
notwithstanding, no Employee shall be granted an option under the Plan (i) if, immediately after
the grant, such Employee (taking into account stock owned by any other person whose stock would be
attributed to such Employee pursuant to Section 424(d) of the Code) would own stock and/or hold
outstanding options to purchase stock possessing five percent (5%) or more of the total combined
voting power or value of all classes of stock of the Company or of any Parent or Subsidiary, or
(ii) which permits the Employee’s rights to purchase stock under all employee stock purchase plans
of the Company and its Parents or Subsidiaries to accrue at a rate which exceeds Twenty-Five
Thousand Dollars ($25,000) worth of stock (determined at the Fair Market Value of the shares at the
time such option is granted) for each calendar year in which such option is outstanding at any
time. The determination of the accrual of the right to purchase stock shall be made in accordance
with Section 423(b)(8) of the Code and the regulations thereunder.

          (c) Other Limits on Eligibility. Notwithstanding Subsection (a), above, the following
Employees shall not be eligible to participate in the Plan for any relevant Offer Period: (i)
Employees whose customary employment is 20 hours or less per week; (ii) Employees whose customary
employment is for not more than 5 months in any calendar year; (iii) Employees who have been
employed for fewer than 30 days; and (iv) Employees who are subject to rules or laws of a foreign
jurisdiction that prohibit or make impractical the participation of such Employees in the Plan.

          4. Offer Periods.

          (a) The Plan shall be implemented through overlapping or consecutive Offer Periods until such
time as (i) the maximum number of shares of Common Stock available for issuance under the Plan
shall have been purchased or (ii) the Plan shall have been sooner terminated in accordance with
Section 19 hereof. The maximum duration of an Offer Period

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shall be six (6) months. Initially, the Plan shall be implemented through consecutive Offer
Periods of six (6) months’ duration commencing each January 1 and July 1 following the Effective
Date (except that the initial Offer Period shall commence on the Effective Date and shall end on
the date determined by the Administrator at the commencement of the initial Offer Period).

          (b) A Participant shall be granted a separate option for each Offer Period in which he or she
participates. The option shall be granted on the Enrollment Date and shall be automatically
exercised on the last day of the Offer Period. However, with respect to any Offer Period, the
Administrator may specify shorter Purchase Periods within an Offer Period, such that the option
granted on the Enrollment Date shall be automatically exercised in successive installments on the
last day of each Purchase Period ending within the Offer Period.

          (c) Except as specifically provided herein, the acquisition of Common Stock through
participation in the Plan for any Offer Period shall neither limit nor require the acquisition of
Common Stock by a Participant in any subsequent Offer Period.

          5. Participation.

          (a) An eligible Employee may become a Participant in the Plan by completing a subscription
agreement authorizing payroll deductions in the form of Exhibit A (or in such other form or
procedure the Administrator determines for evidencing elections to participate) to this Plan and
filing it with the designated payroll office of the Company at least ten (10) business days prior
to the Enrollment Date for the Offer Period in which such participation will commence, unless a
later time for filing the subscription agreement is set by the Administrator for all eligible
Employees with respect to a given Offer Period.

          (b) Payroll deductions for a Participant shall commence with the first partial or full payroll
period beginning on the Enrollment Date and shall end on the last complete payroll period during
the Offer Period, unless sooner terminated by the Participant as provided in Section 10.

          6. Payroll Deductions.

          (a) At the time a Participant files a subscription agreement, the Participant shall elect to
have payroll deductions made during the Offer Period in amounts between one percent (1%) and not
exceeding ten percent (10%) of the Compensation which the Participant receives during the Offer
Period.

          (b) All payroll deductions made for a Participant shall be credited to the Participant’s
account under the Plan and will be withheld in whole percentages only. A Participant may not make
any additional payments into such account.

          (c) A Participant may discontinue participation in the Plan as provided in Section 10, or may
increase or decrease the rate of payroll deductions during the Offer Period by completing and
filing with the Company a change of status notice in the form of Exhibit B to this Plan authorizing
an increase or decrease in the payroll deduction rate. Any increase or decrease

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in the rate of a Participant’s payroll deductions shall be effective with the first full
payroll period commencing ten (10) business days after the Company’s receipt of the change of
status notice unless the Company elects to process a given change in participation more quickly. A
Participant’s subscription agreement (as modified by any change of status notice) shall remain in
effect for successive Offer Periods unless terminated as provided in Section 10. The Administrator
shall be authorized to limit the number of payroll deduction rate changes during any Offer Period.

          (d) Notwithstanding the foregoing, to the extent necessary to comply with Section 423(b)(8) of
the Code and Section 3(b) herein, a Participant’s payroll deductions shall be decreased to 0%.
Payroll deductions shall recommence at the rate provided in such Participant’s subscription
agreement, as amended, at the time when permitted under Section 423(b)(8) of the Code and Section
3(b) herein, unless such participation is sooner terminated by the Participant as provided in
Section 10.

          7. Grant of Option. On the Enrollment Date, each Participant shall be granted an
option to purchase (at the applicable Purchase Price) one thousand (1,000) shares of the Common
Stock, subject to adjustment as provided in Section 18 hereof; provided that such option shall be
subject to the limitations set forth in Sections 3(b), 6 and 12 hereof. Exercise of the option
shall occur as provided in Section 8, unless the Participant has withdrawn pursuant to Section 10,
and the option, to the extent not exercised, shall expire on the last day of the Offer Period.

          8. Exercise of Option. Unless a Participant withdraws from the Plan as provided in
Section 10, below, the Participant’s option for the purchase of shares will be exercised
automatically on each Exercise Date, by applying the accumulated payroll deductions in the
Participant’s account to purchase the number of full shares subject to the option by dividing such
Participant’s payroll deductions accumulated prior to such Exercise Date and retained in the
Participant’s account as of the Exercise Date by the applicable Purchase Price. No fractional
shares will be purchased; any payroll deductions accumulated in a Participant’s account which are
not sufficient to purchase a full share shall be carried over to the next Offer Period or returned
to the Participant, if the Participant withdraws from the Plan. Notwithstanding the foregoing, any
amount remaining in a Participant’s account following the purchase of shares on the Exercise Date
due to the application of Section 423(b)(8) of the Code or Section 7, above, shall be returned to
the Participant and shall not be carried over to the next Offer Period. During a Participant’s
lifetime, a Participant’s option to purchase shares hereunder is exercisable only by the
Participant.

          9. Delivery. Upon receipt of a request from a Participant after each Exercise Date on
which a purchase of shares occurs, the Company shall arrange the delivery to such Participant, as
promptly as practicable, of a certificate representing the shares purchased upon exercise of the
Participant’s option.

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          10. Withdrawal; Termination of Employment.

          (a) A Participant may either (i) withdraw all but not less than all the payroll deductions
credited to the Participant’s account and not yet used to exercise the Participant’s option under
the Plan or (ii) terminate future payroll deductions, but allow accumulated payroll deductions to
be used to exercise the Participant’s option under the Plan at any time by giving written notice to
the Company in the form of Exhibit B to this Plan. If the Participant elects withdrawal
alternative (i) described above, all of the Participant’s payroll deductions credited to the
Participant’s account will be paid to such Participant as promptly as practicable after receipt of
notice of withdrawal, such Participant’s option for the Offer Period will be automatically
terminated, and no further payroll deductions for the purchase of shares will be made during the
Offer Period. If the Participant elects withdrawal alternative (ii) described above, no further
payroll deductions for the purchase of shares will be made during the Offer Period, all of the
Participant’s payroll deductions credited to the Participant’s account will be applied to the
exercise of the Participant’s option on the next Exercise Date, and after such Exercise Date, such
Participant’s option for the Offer Period will be automatically terminated. If a Participant
withdraws from an Offer Period, payroll deductions will not resume at the beginning of the
succeeding Offer Period unless the Participant delivers to the Company a new subscription
agreement.

          (b) Upon termination of a Participant’s employment relationship (as described in Section 2(k))
at a time more than three (3) months from the next scheduled Exercise Date, the payroll deductions
credited to such Participant’s account during the Offer Period but not yet used to exercise the
option will be returned to such Participant or, in the case of his/her death, to the person or
persons entitled thereto under Section 14, and such Participant’s option will be automatically
terminated. Upon termination of a Participant’s employment relationship (as described in Section
2(k)) within three (3) months of the next scheduled Exercise Date, the payroll deductions credited
to such Participant’s account during the Offer Period but not yet used to exercise the option will
be applied to the purchase of Common Stock on the next Exercise Date, unless the Participant (or in
the case of the Participant’s death, the person or persons entitled to the Participant’s account
balance under Section 14) withdraws from the Plan by submitting a change of status notice in
accordance with subsection (a) of this Section 10. In such a case, no further payroll deductions
will be credited to the Participant’s account following the Participant’s termination of employment
and the Participant’s option under the Plan will be automatically terminated after the purchase of
Common Stock on the next scheduled Exercise Date.

          11. Interest. No interest shall accrue on the payroll deductions credited to a
Participant’s account under the Plan.

          12. Stock.

          (a) The maximum number of shares of Common Stock which shall be made available for sale under
the Plan shall be 1,000,000 shares, subject to adjustment upon changes in capitalization of the
Company as provided in Section 18. If the Administrator determines that on a given Exercise Date
the number of shares with respect to which options are to be exercised may

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exceed (x) the number of shares then available for sale under the Plan or (y) the number of
shares available for sale under the Plan on the Enrollment Date(s) of one or more of the Offer
Periods in which such Exercise Date is to occur, the Administrator may make a pro rata allocation
of the shares remaining available for purchase on such Enrollment Dates or Exercise Date, as
applicable, in as uniform a manner as shall be practicable and as it shall determine to be
equitable, and shall either continue all Offer Periods then in effect or terminate any one or more
Offer Periods then in effect pursuant to Section 19, below.

          (b) A Participant will have no interest or voting right in shares covered by the Participant’s
option until such shares are actually purchased on the Participant’s behalf in accordance with the
applicable provisions of the Plan. No adjustment shall be made for dividends, distributions or
other rights for which the record date is prior to the date of such purchase.

          (c) Shares to be delivered to a Participant under the Plan will be registered in the name of
the Participant or in the name of the Participant and his or her spouse.

          13. Administration. The Plan shall be administered by the Administrator which shall
have full and exclusive discretionary authority to construe, interpret and apply the terms of the
Plan, to determine eligibility and to adjudicate all disputed claims filed under the Plan. Every
finding, decision and determination made by the Administrator shall, to the full extent permitted
by Applicable Law, be final and binding upon all persons.

          14. Designation of Beneficiary.

          (a) Each Participant will file a written designation of a beneficiary who is to receive any
shares and cash, if any, from the Participant’s account under the Plan in the event of such
Participant’s death. If a Participant is married and the designated beneficiary is not the spouse,
spousal consent shall be required for such designation to be effective.

          (b) Such designation of beneficiary may be changed by the Participant (and the Participant’s
spouse, if any) at any time by written notice. In the event of the death of a Participant and in
the absence of a beneficiary validly designated under the Plan who is living (or in existence) at
the time of such Participant’s death, the Company shall deliver such shares and/or cash to the
executor or administrator of the estate of the Participant, or if no such executor or administrator
has been appointed (to the knowledge of the Administrator), the Administrator shall deliver such
shares and/or cash to the spouse (or domestic partner, as determined by the Administrator) of the
Participant, or if no spouse (or domestic partner) is known to the Administrator, then to the issue
of the Participant, such distribution to be made per stirpes (by right of representation), or if no
issue are known to the Administrator, then to the heirs at law of the Participant determined in
accordance with Section 27.

          15. Transferability. Neither payroll deductions credited to a Participant’s account
nor any rights with regard to the exercise of an option or to receive shares under the Plan may be
assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of
descent and distribution, or as provided in Section 14 hereof) by the Participant. Any

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such attempt at assignment, transfer, pledge or other disposition shall be without effect,
except that the Administrator may treat such act as an election to withdraw funds from an Offer
Period in accordance with Section 10.

          16. Use of Funds. All payroll deductions received or held by the Company under the
Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated
to segregate such payroll deductions.

          17. Reports. Individual accounts will be maintained for each Participant in the Plan.
Statements of account will be given to Participants at least annually, which statements will set
forth the amounts of payroll deductions, the Purchase Price, the number of shares purchased and the
remaining cash balance, if any.

          18. Adjustments Upon Changes in Capitalization; Corporate Transactions.

          (a) Adjustments Upon Changes in Capitalization. Subject to any required action by the
stockholders of the Company, the Reserves, the Purchase Price, the maximum number of shares that
may be purchased in any Offer Period or Purchase Period, as well as any other terms that the
Administrator determines require adjustment shall be proportionately adjusted for (i) any increase
or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse
stock split, stock dividend, combination or reclassification of the Common Stock, (ii) any other
increase or decrease in the number of issued shares of Common Stock effected without receipt of
consideration by the Company, or (iii) as the Administrator may determine in its discretion, any
other transaction with respect to Common Stock to which Section 424(a) of the Code applies;
provided, however that conversion of any convertible securities of the Company shall not be deemed
to have been “effected without receipt of consideration.” Such adjustment shall be made by the
Administrator and its determination shall be final, binding and conclusive. Except as the
Administrator determines, no issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no adjustment by reason hereof
shall be made with respect to, the Reserves and the Purchase Price.

          (b) Corporate Transactions. In the event of a proposed Corporate Transaction, each
option under the Plan shall be assumed by such successor corporation or a parent or subsidiary of
such successor corporation, unless the Administrator determines, in the exercise of its sole
discretion and in lieu of such assumption, to shorten the Offer Period then in progress by setting
a new Exercise Date (the “New Exercise Date”). If the Administrator shortens the Offer Period then
in progress in lieu of assumption in the event of a Corporate Transaction, the Administrator shall
notify each Participant in writing, at least ten (10) days prior to the New Exercise Date, that the
Exercise Date for the Participant’s option has been changed to the New Exercise Date and that the
Participant’s option will be exercised automatically on the New Exercise Date, unless prior to such
date the Participant has withdrawn from the Offer Period as provided in Section 10. For purposes
of this Subsection, an option granted under the Plan shall be deemed to be assumed if, in
connection with the Corporate Transaction, the option is replaced with a comparable option with
respect to shares of capital stock of the successor corporation or Parent thereof. The
determination of option comparability shall be made by the Administrator

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prior to the Corporate Transaction and its determination shall be final, binding and
conclusive on all persons.

          19. Amendment or Termination.

          (a) The Administrator may at any time and for any reason terminate or amend the Plan. Except
as provided in Section 18, no such termination can affect options previously granted, provided that
the Plan or any one or more Offer Periods may be terminated by the Administrator on any Exercise
Date or by the Administrator establishing a new Exercise Date with respect to any Offer Period
and/or any Purchase Period then in progress if the Administrator determines that the termination of
the Plan or such one or more Offer Periods is in the best interests of the Company and its
stockholders. Except as provided in Section 18 and this Section 19, no amendment may make any
change in any option theretofore granted which adversely affects the rights of any Participant
without the consent of affected Participants. To the extent necessary to comply with Section 423
of the Code (or any successor rule or provision or any other Applicable Law), the Company shall
obtain stockholder approval in such a manner and to such a degree as required.

          (b) Without stockholder consent and without regard to whether any Participant rights may be
considered to have been “adversely affected,” the Administrator shall be entitled to limit the
frequency and/or number of changes in the amount withheld during Offer Periods, change the length
of Purchase Periods within any Offer Period, determine the length of any future Offer Period,
determine whether future Offer Periods shall be consecutive or overlapping, establish the exchange
ratio applicable to amounts withheld in a currency other than U.S. dollars, establish additional
terms, conditions, rules or procedures to accommodate the rules or laws of applicable foreign
jurisdictions, permit payroll withholding in excess of the amount designated by a Participant in
order to adjust for delays or mistakes in the Company’s processing of properly completed
withholding elections, establish reasonable waiting and adjustment periods and/or accounting and
crediting procedures to ensure that amounts applied toward the purchase of Common Stock for each
Participant properly correspond with amounts withheld from the Participant’s Compensation, and
establish such other limitations or procedures as the Administrator determines in its sole
discretion advisable and which are consistent with the Plan.

          20. Notices. All notices or other communications by a Participant to the Company
under or in connection with the Plan shall be deemed to have been duly given when received in the
form specified by the Administrator at the location, or by the person, designated by the
Administrator for the receipt thereof.

          21. Conditions Upon Issuance of Shares. Shares shall not be issued with respect to an
option unless the exercise of such option and the issuance and delivery of such shares pursuant
thereto shall comply with all Applicable Laws and shall be further subject to the approval of
counsel for the Company with respect to such compliance. As a condition to the exercise of an
option, the Company may require the Participant to represent and warrant at the time of any such
exercise that the shares are being purchased only for investment and without any present intention
to sell or distribute such shares if, in the opinion of counsel for the Company, such a
representation is required by any of the aforementioned Applicable Laws. In addition, no

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options shall be exercised or shares issued hereunder before the Plan shall have been approved
by stockholders of the Company as provided in Section 23.

          22. Term of Plan. The Plan shall become effective upon the earlier to occur of its
adoption by the Board or its approval by the stockholders of the Company. It shall continue in
effect for a term of twenty (20) years unless sooner terminated under Section 19.

          23. Plan Approval. The Plan was originally adopted by the Board and by the Company’s
stockholders during 2000. On June 16, 2004, the Board adopted and approved an amendment and
restatement of the Plan to provide that each Participant in an Offer Period shall be granted an
option to purchase 1,000 shares of Common Stock, which amendment and restatement is not subject to
stockholder approval. The amendment described in the previous sentence shall be effective for
Offer Periods commencing on July 1, 2004 and later dates.

          24. No Employment Rights. The Plan does not, directly or indirectly, create any right
for the benefit of any employee or class of employees to purchase any shares under the Plan, or
create in any employee or class of employees any right with respect to continuation of employment
by the Company or a Designated Parent or Subsidiary, and it shall not be deemed to interfere in any
way with such employer’s right to terminate, or otherwise modify, an employee’s employment at any
time.

          25. No Effect on Retirement and Other Benefit Plans. Except as specifically provided
in a retirement or other benefit plan of the Company or a Designated Parent or Subsidiary,
participation in the Plan shall not be deemed compensation for purposes of computing benefits or
contributions under any retirement plan of the Company or a Designated Parent or Subsidiary, and
shall not affect any benefits under any other benefit plan of any kind or any benefit plan
subsequently instituted under which the availability or amount of benefits is related to level of
compensation. The Plan is not a “Retirement Plan” or “Welfare Plan” under the Employee Retirement
Income Security Act of 1974, as amended.

          26. Effect of Plan. The provisions of the Plan shall, in accordance with its terms,

be binding upon, and inure to the benefit of, all successors of each Participant, including,
without limitation, such Participant’s estate and the executors, administrators or trustees
thereof, heirs and legatees, and any receiver, trustee in bankruptcy or representative of creditors
of such Participant.

          27. Governing Law. The Plan is to be construed in accordance with and governed by the
internal laws of the State of California (as permitted by Section 1646.5 of the California Civil
Code, or any similar successor provision) without giving effect to any choice of law rule that
would cause the application of the laws of any jurisdiction other than the internal laws of the
State of California to the rights and duties of the parties, except to the extent the internal laws
of the State of California are superseded by the laws of the United States. Should any provision
of the Plan be determined by a court of law to be illegal or unenforceable, the other provisions
shall nevertheless remain effective and shall remain enforceable.

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          28. Dispute Resolution. The provisions of this Section 28 (and as restated in the
Subscription Agreement) shall be the exclusive means of resolving disputes arising out of or
relating to the Plan. The Company and the Participant, or their respective successors (the
“parties”), shall attempt in good faith to resolve any disputes arising out of or relating to the
Plan by negotiation between individuals who have authority to settle the controversy. Negotiations
shall be commenced by either party by notice of a written statement of the party’s position and the
name and title of the individual who will represent the party. Within thirty (30) days of the
written notification, the parties shall meet at a mutually acceptable time and place, and
thereafter as often as they reasonably deem necessary, to resolve the dispute. If the dispute has
not been resolved by negotiation, the parties agree that any suit, action, or proceeding arising
out of or relating to the Plan shall be brought in the United States District Court for the
Northern District of California (or should such court lack jurisdiction to hear such action, suit
or proceeding, in a California state court in the County of San Francisco) and that the parties
shall submit to the jurisdiction of such court. The parties irrevocably waive, to the fullest
extent permitted by law, any objection the party may have to the laying of venue for any such suit,
action or proceeding brought in such court. THE PARTIES ALSO EXPRESSLY WAIVE ANY RIGHT THEY HAVE
OR MAY HAVE TO A JURY TRIAL OF ANY SUCH SUIT, ACTION OR PROCEEDING. If any one or more provisions
of this Section 28 shall for any reason be held invalid or unenforceable, it is the specific intent
of the parties that such provisions shall be modified to the minimum extent necessary to make it or
its application valid and enforceable.

12

 

B-13exv10w68

 

EXHIBIT 10.68

EXECUTION COPY 

ASSET PURCHASE AGREEMENT

BY AND BETWEEN

U.S. TELEPACIFIC CORP.,

a California corporation

AND

PAC-WEST TELECOMM, INC.,

a California corporation

December 17, 2004

 

 

TABLE OF CONTENTS

	 	 	 	 	 	 	 
	 	 	 	 	Page
	I. PURCHASE AND SALE OF ACQUIRED ASSETS	 	 	1	 
	1.1

	 	Purchase and Sale
	 	 	1	 
	1.2

	 	Acquired Assets
	 	 	1	 
	1.3

	 	Transfer of Title to Acquired Assets
	 	 	3	 
	1.4

	 	Excluded Assets
	 	 	3	 
	1.5

	 	Certain Liabilities Assumed
	 	 	3	 
	1.6

	 	Liabilities Not Assumed
	 	 	4	 
	1.7

	 	Purchase Price
	 	 	4	 
	1.8

	 	Purchase Price Adjustments
	 	 	4	 
	1.9

	 	Accounts Receivable
	 	 	6	 
	1.10

	 	Allocation; Characterization for Tax Purposes
	 	 	9	 
	1.11

	 	Earnest Money Deposit
	 	 	9	 
	 
	 	 	 	 	 	 
	II. CLOSING	 	 	10	 
	2.1

	 	Closing Date
	 	 	10	 
	2.2

	 	Deliveries at Closing
	 	 	10	 
	2.3

	 	Unassignable Contracts; Third Party Consents
	 	 	10	 
	 
	 	 	 	 	 	 
	III. REPRESENTATIONS AND WARRANTIES OF SELLER	 	 	12	 
	3.1

	 	Organization
	 	 	12	 
	3.2

	 	Authority and Enforceability
	 	 	12	 
	3.3

	 	Third Party Consents
	 	 	12	 
	3.4

	 	No Conflict or Violation
	 	 	13	 
	3.5

	 	Financial Information
	 	 	13	 
	3.6

	 	Absence of Certain Changes
	 	 	13	 
	3.7

	 	Title
	 	 	15	 
	3.8

	 	Condition of Assets
	 	 	15	 
	3.9

	 	Leased Personal Property
	 	 	15	 
	3.10

	 	Employment/Consulting Matters
	 	 	15	 
	3.11

	 	Material Contracts
	 	 	16	 
	3.12

	 	Clients/Customers
	 	 	17	 
	3.13

	 	Tax Returns and Taxes
	 	 	17	 
	3.14

	 	Licenses and Permits
	 	 	18	 
	3.15

	 	Intellectual Property Rights
	 	 	18	 
	3.16

	 	No Pending Litigation or Proceedings
	 	 	19	 
	3.17

	 	Compliance with Laws
	 	 	19	 
	3.18

	 	Insurance Coverage
	 	 	19	 
	3.19

	 	Product Warranties
	 	 	19	 
	3.20

	 	Insider Interests
	 	 	19	 
	3.21

	 	Brokers and Finders
	 	 	19	 
	3.22

	 	Accounts Payable
	 	 	19	 

i

 

 

	 	 	 	 	 	 	 
	 	 	 	 	Page
	3.23

	 	Accounts Receivable; Monthly Billed Revenues; Open Credit Disputes
	 	 	20	 
	3.24

	 	Seller’s Solvency
	 	 	20	 
	3.25

	 	Absence of Regulatory Impairment
	 	 	20	 
	 
	 	 	 	 	 	 
	IV. REPRESENTATIONS AND WARRANTIES OF BUYER	 	 	21	 
	4.1

	 	Organization
	 	 	21	 
	4.2

	 	Authority and Enforceability
	 	 	21	 
	4.3

	 	Third Party Consents
	 	 	21	 
	4.4

	 	No Conflict or Violation
	 	 	21	 
	4.5

	 	No Pending Litigation or Proceedings
	 	 	21	 
	4.6

	 	Brokers and Finders
	 	 	21	 
	4.7

	 	Availability of Funds
	 	 	22	 
	 
	 	 	 	 	 	 
	V. COVENANTS	 	 	22	 
	5.1

	 	Access to Information
	 	 	22	 
	5.2

	 	Conduct of SME Business
	 	 	22	 
	5.3

	 	Consents
	 	 	23	 
	5.4

	 	Best Efforts
	 	 	23	 
	5.5

	 	Further Assurances
	 	 	23	 
	5.6

	 	Update Schedules
	 	 	24	 
	5.7

	 	Payments Received; Checks and Drafts
	 	 	25	 
	5/8

	 	Employees
	 	 	25	 
	5.9

	 	Endorsement Authorization
	 	 	27	 
	5.10

	 	Cooperation in Litigation
	 	 	27	 
	5.11

	 	Cooperation in Tax Matters
	 	 	27	 
	5.12

	 	Exclusivity
	 	 	27	 
	5.13

	 	Public Announcements
	 	 	28	 
	5.14

	 	Expenses of Transfer
	 	 	28	 
	5.15

	 	Non-Competition; Non-Solicitation
	 	 	28	 
	5.16

	 	Seller’s Accounts Receivable
	 	 	30	 
	5.17

	 	Regulatory Applications
	 	 	30	 
	5.18

	 	Excluded Names
	 	 	30	 
	5.19

	 	In Flight Customer Orders
	 	 	30	 
	5.20

	 	Maintenance and Delivery of Certain Inventory
	 	 	31	 
	 
	 	 	 	 	 	 
	VI. CONDITIONS TO CLOSING	 	 	31	 
	6.1

	 	Conditions to Obligations of Buyer at Closing
	 	 	31	 
	6.2

	 	Conditions to Obligations of Seller at Closing
	 	 	32	 
	 
	 	 	 	 	 	 
	VII. INDEMNIFICATION	 	 	33	 
	7.1

	 	Indemnification By Seller
	 	 	33	 
	7.2

	 	Indemnification by Buyer
	 	 	34	 
	7.3

	 	Indemnification and Liability for the Payment of Certain Taxes
	 	 	35	 
	7.4

	 	Defense of Claims
	 	 	35	 
	7.5

	 	Survival of Representations and Warranties
	 	 	36	 
	7.6

	 	Right of Setoff
	 	 	36	 
	7.7

	 	Exclusive Remedies
	 	 	37	 

ii

 

 

	 	 	 	 	 	 	 
	 	 	 	 	Page
	7.8

	 	Limitations on Indemnity Claims
	 	 	37	 
	 
	 	 	 	 	 	 
	VIII. TERMINATION	 	 	38	 
	8.1

	 	Termination
	 	 	38	 
	8.2

	 	Effect of Termination
	 	 	39	 
	 
	 	 	 	 	 	 
	IX. OTHER PROVISIONS	 	 	39	 
	9.1

	 	Specific Performance
	 	 	39	 
	9.2

	 	Dispute Resolution
	 	 	39	 
	9.3

	 	Exhibits and Schedules
	 	 	40	 
	9.4

	 	Amendment
	 	 	40	 
	9.5

	 	Extension; Waiver
	 	 	40	 
	9.6

	 	Entire Agreement; No Third Party Beneficiaries
	 	 	40	 
	9.7

	 	Governing Law
	 	 	40	 
	9.8

	 	Waiver of Jury Trial
	 	 	41	 
	9.9

	 	Construction
	 	 	41	 
	9.10

	 	Certain Definitions
	 	 	42	 
	9.11

	 	Notices
	 	 	43	 
	9.12

	 	Counterparts; Headings
	 	 	44	 
	9.13

	 	Expenses
	 	 	45	 
	9/14

	 	Successors and Assigns
	 	 	45	 
	9.15

	 	Partial Invalidity
	 	 	45	 
	9.16

	 	Bulk Transfer Laws
	 	 	45	 
	9.17

	 	Disclosure Schedules
	 	 	45	 
	9.18

	 	Recovery of Fees by Prevailing Party
	 	 	45	 

iii

 

 

EXHIBITS

Exhibit A Transition Services Agreement

INDEX OF SCHEDULES

	 	 	 	 	 
	Schedule 1.2(c)

	 	-
	 	Acquired Vehicles
	Schedule 1.2(e)

	 	-
	 	Field Testing Equipment
	Schedule 1.2(f)

	 	-
	 	SME Business Facilities
	Schedule 1.2(g)(i)

	 	-
	 	Excluded Customer Contracts
	Schedule 1.2(g)(iii)

	 	-
	 	Other Excluded Contracts
	Schedule 1.2(g)(iv)

	 	-
	 	Acquired Agent Agreements
	Schedule 1.2(h)

	 	-
	 	Acquired Auto Call Distributor
	Schedule 1.2(j)

	 	-
	 	Prepaid Deposits and Expenses
	Schedule 1.2(l)(i)

	 	-
	 	Acquired Intellectual Property
	Schedule 1.2(l)(ii)

	 	-
	 	Phone Numbers
	Schedule 1.5

	 	-
	 	Assumed Liabilities
	Schedule 1.5(iii)

	 	-
	 	Commission Arrangements
	Schedule 1.8(b)

	 	-
	 	Sample Monthly Billed Revenue Calculation
	Schedule 1.9

	 	-
	 	Seller’s Wire Transfer Information
	Schedule 3.3(a)

	 	-
	 	Seller Third Party Consents
	Schedule 3.3(b)

	 	-
	 	Lender Consents
	Schedule 3.4

	 	-
	 	No Conflict or Violation
	Schedule 3.5

	 	-
	 	Fixed Asset Register
	Schedule 3.6

	 	-
	 	Absence of Certain Changes
	Schedule 3.6(d)

	 	-
	 	Seller Material Adverse Effect
	Schedule 3.7(a)

	 	-
	 	Permitted Encumbrances
	Schedule 3.7(b)

	 	-
	 	Sufficiency of Assets
	Schedule 3.9

	 	-
	 	Leased Personal Property
	Schedule 3.10(a)

	 	-
	 	Business Employees
	Schedule 3.10(b)

	 	-
	 	Business Employees’ Agreements
	Schedule 3.11(a)

	 	-
	 	Material Contracts
	Schedule 3.11(b)

	 	-
	 	Consents and Defaults to Material Contracts
	Schedule 3.11(c)

	 	-
	 	Certain Extraordinary Agreements
	Schedule 3.11(e)

	 	-
	 	Termination of Material Contracts
	Schedule 3.12(a)

	 	-
	 	Termination or Limitation of Significant Customers
	Schedule 3.12(b)

	 	-
	 	Significant Customers
	Schedule 3.13

	 	-
	 	Tax Returns
	Schedule 3.14

	 	-
	 	Licenses and Permits
	Schedule 3.15(a)

	 	-
	 	Intellectual Property Rights of SME Business
	Schedule 3.15(b)

	 	-
	 	Infringement of Intellectual Property Rights
	Schedule 3.15(c)

	 	-
	 	Third Party Infringement of Intellectual Property Rights
	Schedule 3.16

	 	-
	 	Pending Litigation, Proceedings, Investigations or Orders
	Schedule 3.17

	 	-
	 	Compliance with Laws
	Schedule 3.19

	 	-
	 	Product Warranties

iv

 

	 	 	 	 	 
	Schedule 3.20

	 	-
	 	Insider Interests
	Schedule 3.22

	 	-
	 	Seller or Vendor Disputes/Accounts Payable
	Schedule 3.23(a)

	 	-
	 	Accounts Receivable
	Schedule 3.23(b)

	 	-
	 	Credit Disputes
	Schedule 4.3

	 	-
	 	Buyer Third Party Consents
	Schedule 5.3

	 	-
	 	Seller Third Party Consents
	Schedule 5.8(a)

	 	-
	 	Protected Employees
	Schedule 5.15(b)

	 	-
	 	Non-Competition; Non-Solicitation
	Schedule 6.1(d)

	 	-
	 	Certain Buyer Closing Conditions
	Schedule 6.2(d)

	 	-
	 	Certain Seller Closing Conditions
	Schedule 9.10(a)

	 	-
	 	Excluded Customers
	Schedule 9.10(c)

	 	-
	 	VOIP Customers

v

 

ASSET PURCHASE AGREEMENT

     THIS ASSET PURCHASE AGREEMENT (this “Agreement”) is made as of December 17, 2004, by
and between U.S. TelePacific Corp., a California corporation (“Buyer”), and Pac-West
Telecomm, Inc., a California corporation (“Seller”).

     Seller is a facilities-based communications provider offering telecommunication services,
including an integrated bundle of broadband data and voice communication services on a direct or
retail basis to small- and medium-sized business customers located in California and Nevada, but
excluding businesses and services that Seller provides to residential customers, VOIP Customers (as
defined in Section 9.10) or resellers (collectively, the “SME Business”).

     Buyer and Seller entered into a non-binding Letter of Intent on November 8, 2004 (the
“Letter of Intent”) outlining the terms of this Agreement and the agreements contemplated
hereby.

     Seller wishes to sell to Buyer, and Buyer wishes to purchase from Seller, the Acquired Assets
(as defined in Section 1.2), upon the terms and subject to the conditions of this
Agreement.

     Simultaneously with the execution of this Agreement, Seller and Buyer are entering into a
Transition Services Agreement in the form attached hereto as Exhibit A (the “Transition
Services Agreement”) pursuant to which, among other things, Seller will provide Buyer with
certain transition services and will provide Buyer with a Two Million Dollar ($2,000,000) credit
for the services to be provided by Seller thereunder.

     NOW THEREFORE, in consideration of the foregoing premises and the respective covenants,
representations, warranties and conditions hereinafter set forth, and for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the parties agree as
follows:

I. PURCHASE AND SALE OF ACQUIRED ASSETS

     1.1 Purchase and Sale. Upon the terms and subject to the conditions of this Agreement, Seller
agrees to sell, assign, transfer, convey and deliver, or cause to be sold, assigned, transferred,
conveyed and delivered, to Buyer and Buyer agrees to purchase, at the Closing (as defined in
Section 2.1), all of the Acquired Assets; provided that, all of the
Acquired Assets shall be free and clear of all Liens (as defined in Section 9.10), other
than Permitted Liens (as defined in Section 9.10).

     1.2 Acquired Assets. The term “Acquired Assets” means the following (as the same
exist on the Closing Date):

          (a) all customer premises equipment owned or leased by Seller and located on the premises of
Acquired Customers (as defined in Section 9.10) of the SME Business, including

1

 

all such PBX equipment, cards, channel banks (e.g., Verilink) and phone systems (and, to the
extent transferable, any software embedded in such equipment);

          (b) all stock of inventory of equipment held for installation at customer premises in
connection with the SME Business (and, to the extent transferable, any software embedded in such
equipment), and all used customer premises equipment formerly installed at customer premises in
connection with the SME Business, and used PBX equipment and phone systems used by customers in the
SME Business undergoing refurbishment by third parties on behalf of Seller;

          (c) all of the vehicles of Seller set forth on Schedule 1.2(c) (the
“Vehicles”) and all stock of tools, equipment and inventory maintained by Seller on the
Vehicles;

          (d) all trade accounts receivable and other rights to payment directly arising from the SME
Business comprised of receivables from Acquired Customers, carrier revenue allocable to the
Acquired Customers and the right to payment for minutes-of-use in respect of pre-Closing periods to
be billed by Buyer after the Closing and all other accounts or notes receivable of Seller to the
extent related to both the Acquired Assets and the SME Business, and any claim, remedy or other
right arising out of any of the foregoing (collectively, “Accounts Receivable”);

          (e) all field testing equipment (including any software embedded in such equipment) used
primarily in the SME Business in order to support the Acquired Customers, including “side kick” and
T-1 test sets, test and provisioning boxes and test PBX’s, including all such equipment identified
on Schedule 1.2(e);

          (f) (i) all rights in, to and under all equipment used by field technicians, back office
support groups and sales personnel (including desktop and laptop computers, desktop and/or laptop
computer software (to the extent assignable by Seller), tools, furniture, fixtures, machinery,
supplies, cell phones and cell phone numbers), in each case, located at the facilities listed on
Schedule 1.2(f); and (ii) all rights in, to and under (A) all desktop and laptop computers,
desktop and/or laptop computer software (to the extent assignable by Seller), tools, furniture,
fixtures, machinery, supplies, cell phones and cell phone numbers that are located at Seller’s
other facilities and (B) all such equipment used by field technicians, back office support groups
and sales personnel, but in each case of (A) and (B), only to the extent such assets are primarily
related to the SME Business and directly support the Business Employees (as defined in Section
3.10(a)) offered employment by Buyer pursuant to Section 5.8;

          (g) to the extent transferable, all right, title and interest of Seller in, to and under (i)
all customer contracts entered into with the Acquired Customers with respect to the SME Business
other than those customer contracts listed on Schedule 1.2(g)(i) (the customer contracts
being acquired, the “Customer Contracts”), (ii) all customer orders, customer accounts and
customer deposits related to the Customer Contracts, (iii) all other contracts, agreements,
purchase orders, work orders and other agreements of Seller that are Material Contracts and
primarily related to the SME Business other than those contracts listed on Schedule
1.2(g)(iii), and (iv) all agent agreements listed on Schedule 1.2(g)(iv);

2

 

          (h) the Auto Call Distributor listed on Schedule 1.2(h) (“ACD”), including the
hardware, software and CPE associated with the ACD;

          (i) all rights, claims and causes of action against suppliers of, or arising under warranties
covering, any inventory, machinery or equipment included within the Acquired Assets;

          (j) all prepaid deposits and expenses (e.g., advertising deposits and expenses) listed on
Schedule 1.2(j);

          (k) to the extent permitted by Applicable Law (as defined pursuant to Section 3.4),
original version, or, where more practicable, copies of all books and records to the extent
primarily relating to the Acquired Assets (and reasonable access to all books and records relating
to the Acquired Assets), including financial, accounting and personnel records, files, invoices,
customer lists and records (including names of any applicable contacts, addresses, nature and
volume of orders, and date of purchases), supplier lists and records, maintenance trouble history
with customers, and to the extent available a list of all customers who voluntarily churned away
from Seller over the three-year period prior to the date hereof; provided that Seller may retain
copies of any such items as it deems reasonably necessary or prudent for its Tax, accounting, human
resources, legal or other business purposes;

          (l) (i) all Intellectual Property listed on Schedule 1.2(l)(i) (the “Acquired
IP”) and (ii) any local and toll-free telephone numbers listed on Schedule 1.2(l)(ii)
and any marketing materials, brochures and sales literature used by Seller primarily in connection
with the SME Business; and

          (m) all insurance benefits and proceeds therefrom received after the date hereof under
insurance policies in respect of any Losses (as defined in Section 7.1) arising from the
Acquired Assets prior to Closing.

     1.3 Transfer of Title to Acquired Assets. The sale, assignment, conveyance, transfer and
delivery by Seller of the Acquired Assets shall be made at the Closing by such bills of sale,
assignments, licenses, endorsements and other appropriate instruments of transfer as shall be
necessary to vest in Buyer, as of the Closing, good and marketable title to the Acquired Assets,
free and clear of all Liens other than Permitted Liens.

     1.4 Excluded Assets. The term “Excluded Assets” means all assets, properties and
rights of Seller (whether tangible or intangible) other than the Acquired Assets. Without limiting
the generality of the foregoing, the Acquired Assets shall not include, and Seller is not selling,
assigning, transferring, conveying or delivering to Buyer, and Buyer is not purchasing or acquiring
any right to receive cash payments arising out of the settlement by Seller of any disputes with
carriers and/or customers in respect of any pre-Closing period other than the Accounts Receivable
(subject to Section 1.9 and the dispute resolution procedures contained therein).

     1.5 Certain Liabilities Assumed. Upon the terms and subject to the conditions of this
Agreement, on the Closing Date Buyer shall assume and agree to pay, perform and discharge when due
all executory obligations and liabilities arising after the Closing Date under (i) the

3

 

Customer
Contracts of Seller included in the Acquired Assets, (ii) all other agreements and obligations of
Seller included in the Acquired Assets that are specifically listed on Schedule 1.5, in
each of (i) and (ii), which are not in default by Seller as of the Closing Date and (iii) all sales
commissions arising under the commission arrangements identified on Schedule 1.5(iii)
resulting directly from sales by Retained Employees completed prior to the Closing Date of products
and services to Acquired Customers to the extent such sales commissions would in the ordinary
course of business, consistent with Seller’s past practices, be due and payable to such Retained
Employees following the Closing Date (collectively, (i), (ii) and (iii), the
“Assumed Liabilities”).

     1.6 Liabilities Not Assumed. Except as set forth in Section 1.5, Buyer shall not
assume and shall not be responsible to pay, perform or discharge any other obligations,
liabilities, contracts or commitments of Seller of any kind or nature whatsoever (the “Excluded
Liabilities”). Seller shall pay and satisfy when due all Excluded Liabilities where failure to
pay or satisfy such Excluded Liabilities would impair Buyer’s use of or benefit from the Acquired
Assets or cause Buyer to be held liable for such Excluded Liabilities.

     1.7 Purchase Price. The purchase price for the Acquired Assets shall be Twenty-Seven Million
Dollars ($27,000,000) (the “Initial Purchase Price”) as adjusted pursuant to Section
1.8 plus the aggregate amount of all Seller’s Accounts Receivable (as defined in Section
1.9) (together with the Initial Purchase Price, the “Purchase Price”). The Initial
Purchase Price, as adjusted pursuant to Section 1.8, shall be paid in cash at the Closing
by wire transfer of immediately available funds to an account specified by Seller.

     1.8 Purchase Price Adjustments.

          (a) If the average of the Monthly Billed Revenue (as defined below) for the two-month period
ending on the last day of the calendar month immediately preceding the Closing Date (the
“Closing Average”) is less than Two Million Seven Hundred Thousand Dollars ($2,700,000),
the Initial Purchase Price shall be reduced by an amount (the “Purchase Price Adjustment”)
equal to (i) the Initial Purchase Price multiplied by (ii) (A) one minus (B) (1)
the Closing Average divided by (2) $2,700,000; provided however, that
notwithstanding the amount of the Purchase Price Adjustment calculated pursuant to the formula set
forth above or set forth in Section 1.8(f), the maximum amount of the Purchase Price
Adjustment shall be Three Million Dollars ($3,000,000) if the Closing occurs on or prior to
February 28, 2005, Four Million Dollars ($4,000,000) if the Closing occurs after February 28, 2005
and before April 1, 2005, Five Million Dollars ($5,000,000) if the Closing occurs after March 31,
2005 and before May 1, 2005, and Six Million Dollars ($6,000,000) if the Closing occurs after April
30, 2005.

          (b) “Monthly Billed Revenue” shall mean, with respect to any given calendar month, an
amount, determined on a good faith basis consistent with Seller’s books and records, equal to (i)
Monthly Re-Occurring Billed Revenue plus (ii) $75,000, representing a fixed amount
for all carrier switched access and reciprocal compensation bills allocable to the SME
Business (“CABS Revenue”) per month, plus (iii) amounts invoiced in respect of
hardware sales to customers of the SME Business (“Hardware Sales Revenue”), plus
(iv) amounts invoiced in respect of labor supplied to customers of the SME Business (“Labor
Revenue”), net of Labor Revenue in respect of installation labor supplied to customers of the
SME Business in connection

4

 

with DDTS installations (“Installation Labor Revenue”),
plus (v) twenty percent (20%) of Installation Labor Revenue, plus (vi) five percent
(5%) of any termination charges assessed to customers of the SME Business (“Termination
Charges”), minus (vii) any credits applied by Seller to customers of the SME Business
that are associated with (A) equipment returns (“Equipment Return Credits”), (B) customer
financing costs (“Customer Financing Credits”), (C) billing and dispute resolutions
(“Billing Credits”), and (D) service outages (“Service Outage Credits”). Monthly
Billed Revenue shall be calculated in the same manner as the sample calculation of the Monthly
Billed Revenue for October set forth on Schedule 1.8(b). If one of the calendar months
included within the Closing Average is February, the Monthly Billed Revenue for such month shall be
increased for purposes of determining the Closing Average by an amount equal to (i) the Monthly
Billed Revenue for February as determined pursuant to the foregoing sentences of this Section
1.8(b) multiplied by (ii) a fraction the numerator of which is thirty-one (31) and the denominator
of which is twenty-eight (28). Notwithstanding the foregoing, Monthly Billed Revenue shall not
include any amounts collected by Seller from carriers and customers in connection with settlements
of disputes with such carriers and customers. “Monthly Re-Occurring Billed Revenue” shall
mean, with respect to any given calendar month, an amount, determined on a good faith basis
consistent with Seller’s books and records, equal to the aggregate of each of the following line
items from Seller’s Revenue Report (the “Revenue Report Summary”) corresponding to each
customer of the SME Business: “Bandwidth,” “Calls-Dir Assist,” “Calls-LD,” “Calls-Local,”
“Calls-MRC,” “Centrex,” “Circuit Install,” “Circuits,” “COLO,” “Conf Bridge,” “Data Advantage,”
“DDTS,” “Eqt Rental,” “FBDT,” “FBDT-CLEC,” “Finance Charge,” “IAS,” “Payphone,” “PICC,” “RCF,”
“Resale,” “Type 3,” “Type 6 — Rate Ctr,” and “Voice Mail.” The Revenue Report Summary shall
include for any given calendar month invoiced amounts in respect of customers of the SME Business
from invoices generated by Seller as of the fifteenth (15th) day (Bill Cycle 15), the twentieth
(20th) day (Bill Cycle 20), the twenty-first (21st) day (Bill Cycle 21) and the last day (Bill
Cycle 0) of such calendar month, and the first day (Bill Cycle 1) of the immediately following
calendar month.

          (c) Seller shall provide to Buyer a statement (the “Initial Closing Invoice
Statement”) setting forth the Closing Average, in form substantially similar to Schedule
1.8(b), together with the Revenue Report Summary, as soon as practicable after they become
available, but in no event later than fifteen (15) days after the Closing Date. To the extent that
Seller provides Buyer the Initial Closing Invoice Statement prior to the Closing Date, the Initial
Purchase Price shall be reduced by the Purchase Price Adjustment, if any. To the extent that
Seller provides Buyer the Initial Closing Invoice Statement on or subsequent to the Closing Date,
Seller shall promptly pay to Buyer by wire transfer of immediately available funds the amount of
the Purchase Price Adjustment, if any, within three (3) business days of providing Buyer the
Initial Closing Invoice Statement.

          (d) Buyer shall have thirty (30) days to review the Initial Closing Invoice Statement from the
date of its receipt thereof (the “Review Period”). On or prior to the
expiration of the Review Period, Buyer may deliver a written notice of objection (the
“Objection Notice”) to Seller with respect to the Initial Closing Invoice Statement. Buyer
may so object to the Initial Closing Invoice Statement based only on mathematical errors or on the
failure of the Initial Closing Invoice Statement to be prepared in accordance with Section
1.8(b) above. The Objection Notice shall specify in reasonable detail any proposed adjustment
to the Closing

5

 

Average and the basis therefor, on an item-by-item basis, including, in each case, a
specific dollar amount and reasonably detailed explanation of how such proposed adjustment was
calculated. Except to the extent properly challenged in an Objection Notice as provided in this
Section 1.8(d), Buyer shall be deemed to have agreed to the Initial Closing Invoice
Statement in its entirety, which agreed upon portions of or items in the Initial Closing Invoice
Statement shall be final, binding, conclusive and non-appealable for all purposes hereunder. If
Buyer does not deliver an Objection Notice to Seller as provided in this Section 1.8(d)
prior to the expiration of the Review Period, Buyer shall be deemed to have agreed to the Initial
Closing Invoice Statement in its entirety, which shall thereupon be final, binding, conclusive and
non-appealable for all purposes hereunder. If Buyer delivers an Objection Notice to Seller prior
to the expiration of the Review Period as provided in this Section 1.8(d), Buyer and Seller
shall, within fifteen (15) days thereafter (the “Resolution Period”), attempt to resolve
their differences, and any written resolution, signed by each of Buyer and Seller, as to a disputed
adjustment shall be final, binding, conclusive and non-appealable for all purposes hereunder.

          (e) If, at the conclusion of the Resolution Period, Buyer and Seller have not reached an
agreement with respect to all proposed adjustments contained in the Objection Notice, then within
ten (10) business days thereafter, Buyer and Seller shall submit all items properly included in the
Objection Notice and remaining in dispute to a mutually acceptable nationally recognized
independent accounting firm (the “Neutral Auditor”). All fees and expenses relating to the
work performed by the Neutral Auditor shall be borne equally by Buyer and Seller, and all other
costs and expenses incurred by the parties in connection with resolving any such dispute before the
Neutral Auditor shall be borne by the party incurring such cost and expense. The Neutral Auditor
shall act as an arbitrator to determine only those items properly included in the Objection Notice
and still in dispute at the end of the Resolution Period, and the resolution of such disputed items
by the Neutral Auditor shall be limited to determining whether, for each of such disputed items,
Seller’s proposed amount for such item in the Initial Closing Invoice Statement or Buyer’s proposed
amount for such item in the Objection Notice is more nearly calculated in accordance with
Section 1.8(b) above. The determination of the Neutral Auditor shall be set forth in a
written statement delivered to each of the parties, shall be final, binding, conclusive and
non-appealable for all purposes hereunder, and shall be deemed to modify the Initial Closing
Invoice Statement as to the items determined thereby. The Initial Closing Invoice Statement, once
modified and/or agreed to in accordance with Section 1.8(d) or this Section 1.8(e),
shall become the “Final Closing Invoice Statement.”

          (f) If the Closing Average set forth in the Final Closing Invoice Statement is less than the
Closing Average set forth in the Initial Closing Invoice Statement, Seller shall promptly pay to
Buyer by wire transfer of immediately available funds within three business days, the amount of the
difference between (i) an amount equal to (A) $27,000,000 multiplied by (B) (1) one
minus (2) (x) the Closing Average as set forth in the Final Closing Invoice Statement
divided by (y) $2,700,000 and (ii) any Purchase Price Adjustment calculated pursuant to
Section 1.8(a).

     1.9 Accounts Receivable.

          (a) Buyer shall pay to Seller all amounts collected by or on behalf of Buyer in respect of the
Accounts Receivable relating to all periods prior to the Closing Date within the

6

 

first one hundred eighty (180) days after the Closing Date (the “Seller’s Accounts Receivable”) as offset by
the resolution of any open credit disputes pursuant to Sections 1.9(c) and (d).
All amounts collected by or on behalf of Buyer from Acquired Customers with any obligation to
Seller included within the Accounts Receivable shall be applied such that amounts collected from
such Acquired Customer shall first be applied to the oldest outstanding Accounts Receivable balance
attributable to such Acquired Customer, subject to Sections 1.9(c) and (d).
Seller’s Accounts Receivable, as adjusted pursuant to Sections 1.9(c) and (d),
shall be paid to Seller in cash by wire transfer of immediately available funds to the account
information set forth in Schedule 1.9 as follows:

          (i) the first installment, paid ninety (90) days following the Closing Date, in an
amount equal to all Seller’s Accounts Receivable collected by or on behalf of Buyer since
the Closing; and

          (ii) the second installment, paid one hundred eighty (180) days following the Closing
Date, in an amount equal to all Seller’s Accounts Receivable collected by or on behalf of
Buyer that was not previously paid by Buyer to Seller in connection with the first
installment date;

in each case of (i) and (ii), together with a report describing on an account-by-account basis for
each Acquired Customer with obligations to Seller included within the Accounts Receivable the
beginning balance, all amounts collected with respect to such Acquired Customer, the ending
balance, the application of amounts collected to open receivables and all credits applied.

          (b) For purposes of clarification and not limitation, the parties hereto agree that any
Seller’s Accounts Receivable collected by Buyer after one hundred eighty (180) days after the
Closing Date, for any reason other than Buyer not acting in good faith compliance with Section
5.16, shall be retained by Buyer.

          (c) In the event of any claims (whether such claims are made before, on or after the Closing
Date) by any Acquired Customer with obligations to Seller included within the Accounts Receivable
of rights to any credit for services provided by Seller prior to the Closing or rights to refunds
in respect of any period prior to the Closing Date (each, a “Credit Dispute”) that are
unresolved as of the Closing, including those Credit Disputes set forth on Schedule 3.23(b)
(as updated on the Closing Date in accordance with Section 5.6(b)), Buyer may seek to
resolve such Credit Disputes, and to the extent it does, shall use its collection policies and
procedures, administered in the ordinary course of business consistent with Buyer’s past practices.
The amounts payable by Buyer to Seller pursuant to Section 1.9(a) shall be net of the
aggregate amount (x) paid to any Acquired Customer by Buyer post-Closing in respect of any Credit
Disputes that are resolved by Seller pre-Closing but not paid or applied to the applicable Acquired
Customer by Seller pre-Closing and/or (y) applied as a credit to the account of any Acquired
Customer by Buyer post-Closing in respect of any Credit Disputes that are resolved by Seller
pre-Closing but not paid or applied to the applicable Acquired Customer by Seller pre-
Closing. In addition, the amounts payable by Buyer to Seller pursuant to Section
1.9(a) shall be net of the aggregate dollar amount (x) paid to such Acquired Customer by Buyer
for all Credit Disputes resolved by Buyer post-Closing and/or (y) applied as a credit to the
account of such Acquired Customer by Buyer for all Credit Disputes resolved by Buyer post-Closing
(such

7

 

aggregate amount, the “Aggregate Credit Dispute Offset Amount”). Within 10 business
days after the end of each calendar month, Buyer shall provide Seller with (i) a detailed list,
dated as of the end of such month, of (A) all of the outstanding Credit Disputes, (B) the credit
amount or refund amount requested by each Acquired Customer, (C) the amount paid or applied by
Buyer in respect of each resolved Credit Dispute, and (D) the Aggregate Credit Dispute Offset
Amount and (ii) copies of all written correspondence between Buyer and any Acquired Customers
relating to any Credit Disputes.

          (d) Any amount paid or applied by Buyer in respect of any Credit Dispute shall be final and
binding upon the parties hereto; provided, however, that Seller may challenge
pursuant to the terms of this Section 1.9(d) any amount paid or applied by Buyer in respect
of any individual Credit Dispute resolved by Buyer post-Closing in an amount of more than Five
Hundred Dollars ($500) (each such Credit Dispute subject to challenge, a “Challengeable Credit
Dispute”). Notwithstanding the foregoing, in the event that the Aggregate Credit Dispute
Offset Amount is greater than Thirty-Two Thousand Eight Hundred Thirty Dollars ($32,830) as of or
prior to the end of the 180 day period after the Closing Date, then any and all Credit Disputes
resolved by Buyer post-Closing involving an amount paid or applied by Buyer shall be deemed a
Challengeable Credit Dispute. In the event that Seller disagrees with any amount paid or applied
by Buyer in respect of any Challengeable Credit Dispute, Seller and Buyer will negotiate in good
faith in an effort to reach agreement with respect to the proper amounts to be paid or applied in
respect of such Challengeable Credit Dispute, and for this purpose, Buyer shall grant Seller
reasonable access to its books and records relating to the Accounts Receivable. In the event that
Seller and Buyer are unable to reach agreement with respect to the appropriate amounts or credits
applicable to any such Challengeable Credit Disputes as of the time for payment of the first
installment of Seller’s Accounts Receivable collections pursuant to Section 1.9(a)(i) or as
of the time for payment of the second installment of Seller’s Accounts Receivable collections
pursuant to Section 1.9(a)(ii), as the case may be, Buyer shall hold back from the amounts
payable to Seller, and deposit in a joint bank account established by Buyer and Seller, an amount
equal to the aggregate dollar amount in dispute between Seller and Buyer with respect to all such
Challengeable Credit Disputes. No withdrawal shall be made from such joint bank account except
upon the signatures of authorized officers of both Buyer and Seller. Seller and Buyer shall,
within fifteen (15) days after such first installment date or second installment date, as the case
may be, submit to an independent industry expert mutually acceptable to Seller and Buyer the
determination as to the appropriate amounts or credits that should be paid or applied in respect of
such Challengeable Credit Disputes in light of customary and prevailing industry standards used by
businesses in the SME business (the “Industry Standards”). Any determinations by such
independent industry expert shall be final, binding, conclusive and non-appealable for all purposes
hereunder, and all amounts withheld by Buyer shall, in accordance with such determination, be
retained by Buyer or distributed to Seller promptly after the rendering thereof. To the extent
such independent industry expert determines that the amounts paid or applied by Buyer in respect of
all Challengeable Credit Disputes exceed the amounts that would be paid or applied for such
Challengeable Credit Disputes under the Industry Standards, Buyer and Seller shall each cause an
authorized officer to execute and deliver the necessary
instrument(s) to effectuate payment of (i) the aggregate amount of such excess, together with
any interest actually earned thereon in the joint bank account, to Seller and (ii) all amounts
remaining in the joint bank account (including the pro rata portion of any accrued interest
actually earned thereon) to Buyer, in each case, within three (3) business days after the  date of such

8

 

determination. To the extent such independent industry expert determines that the amounts
paid or applied by Buyer in respect of all Challengeable Credit Disputes do not exceed the amounts
that would be paid or applied for such Challengeable Credit Disputes under the Industry Standards,
Buyer and Seller shall each cause an authorized officer to execute and deliver the necessary
instrument(s) to effectuate payment of all of the amounts in the joint bank account (including all
of the accrued interest actually earned thereon) to Buyer within three (3) business days after the
date of such determination. The dispute resolution mechanism in this Section 1.9(d) shall
be Seller’s exclusive remedy for challenging Buyer’s determination of any amount paid or applied by
Buyer for any Challengeable Credit Dispute.

     1.10 Allocation; Characterization for Tax Purposes.

          (a) For all Tax purposes, the sum of the Purchase Price and the Assumed Liabilities that are
treated as consideration for the Acquired Assets for Tax purposes shall be allocated among the
Acquired Assets and the agreement not to compete set forth in Section 5.11, as set forth on
a schedule to be presented by Seller in a manner consistent with Section 1060 of the Internal
Revenue Code of 1968, as amended (the “Code”) and the treasury regulations thereunder and
delivered to Buyer at least twenty (20) days prior to the Closing Date (the “Tax Allocation
Schedule”). The parties shall work together in good faith to resolve any dispute relating to
the allocation prior to the Closing Date, and if the parties are unable to agree, each party shall
use its own allocation, which each shall share with the other party. Seller and Buyer each hereby
covenant and agree that, unless otherwise required by law, it will not take a position on any Tax
Return, before any governmental agency charged with the collection of any income tax, or in any
judicial proceeding, that is in any way inconsistent with the terms of this Section 1.10,
except that Buyer’s cost for the Acquired Assets may differ from the amount so allocated to the
asset in the Tax Allocation Schedule to the extent necessary to reflect its capitalized acquisition
costs other than the amount realized by Seller. Any subsequent adjustments to the sum of the
Purchase Price and the Assumed Liabilities will be reflected in the allocation hereunder in a
manner consistent with Section 1060 of the Code and the treasury regulations thereunder. Each of
Seller and Buyer agrees to timely file Internal Revenue Service Form 8594 (and any comparable forms
required by any state or local jurisdictions) and reflecting therein the purchase price allocation
among the Acquired Assets in a manner described in this Section 1.10.

          (b) Any indemnification payment shall be treated as an adjustment to the total consideration
paid for the Acquired Assets and shall be reflected as an adjustment to the consideration allocated
to a specific asset, if any, giving rise to the adjustment and if any such adjustment does not
relate to a specific asset, such adjustment shall be allocated among the Acquired Assets in
accordance with the allocation method provided in this Section 1.10.

     1.11 Earnest Money Deposit. Simultaneously with the execution of this Agreement, Buyer has
deposited with Seller Two
Million Five Hundred Thousand Dollars ($2,500,000), and, unless Buyer has waived the condition
to Closing set forth in Item 4 of Schedule 6.1(d), Buyer agrees to deposit with Seller
prior to the close of business on December 22, 2004 an additional One Million Dollars ($1,000,000),
which amounts will be held as an earnest money deposit by Seller and retained by Seller, or
returned to Buyer, as provided for in this Section 1.11. Buyer will have the right to
deposit with Seller an additional Two Million Five Hundred Thousand

9

 

Dollars ($2,500,000) to be held
by Seller as additional earnest money deposit pursuant to this Section 1.11 if Buyer has
not irrevocably waived the condition to the Closing set forth in Item 4 of Schedule 6.1(d)
prior to January 6, 2005; in which event, Seller will not be entitled to terminate this Agreement
pursuant to Section 8.1(f). (Any amounts deposited by Buyer with Seller pursuant to the
preceding two sentences are referred to herein, collectively, as the “Earnest Money
Deposit.”) In the event that, at any time prior to the termination of this Agreement, Buyer
notifies Seller in writing that it irrevocably waives the condition to closing set forth in Item 4
of Schedule 6.1(d), then Seller shall promptly refund by wire transfer to Buyer (or to its
investors at the written instruction of Buyer) the entire Earnest Money Deposit. In the event that
Seller terminates this Agreement pursuant to Sections 8.1(e), (f) or (g),
Buyer will forfeit to Seller any and all rights to the Earnest Money Deposit then held by Seller,
and such amount shall serve as liquidated damages and Seller’s sole and exclusive remedy or
recourse against Buyer for (but only for) any claims or causes of action against Buyer arising out
of Buyer’s failure to obtain the consent identified in Item 4 of Schedule 6.1(d). In the
event that this Agreement is terminated for any other reason, Seller shall promptly refund by wire
transfer to Buyer (or to its investors at the written instruction of Buyer) the entire Earnest
Money Deposit. In the event that the Closing occurs, Seller will credit the full amount of any
Earnest Money Deposit then held by Seller toward the Purchase Price. Nothing in this Section
1.11 shall limit Seller from pursuing any other remedies available to it at law or in equity
for any claims or causes of action other than those against Buyer arising out of Buyer’s failure to
obtain the consent identified in Item 4 of Schedule 6.1(d).

II. CLOSING

     2.1 Closing Date. Subject to the conditions set forth in this Agreement, the purchase and
sale of the Acquired Assets pursuant to this Agreement (the “Closing”) shall take place at
the offices of Buyer’s counsel at 333 South Grand Avenue, Los Angeles, CA 90071, at 10:00 o’clock
A.M., local time, on the third business day following the satisfaction or waiver of all conditions
to the obligations of the parties set forth in Sections 6.1 and 6.2, or at such
other time, place and date as shall be mutually agreed on by Buyer and Seller in writing. The date
on which the Closing is to occur is herein referred to as the “Closing Date” and the
Closing shall be deemed for accounting and risk of benefits/loss purposes to be effective as of
8:00 a.m. PST, on the Closing Date.

     2.2 Deliveries at Closing. At the Closing:

          (a) Seller shall deliver to Buyer (i) the various agreements, certificates and other documents
and instruments referred to in Section 6.1, and (ii) a receipt for the Initial Purchase
Price (as adjusted in accordance with Section 1.8); and

          (b) Buyer shall deliver to Seller (i) the Initial Purchase Price (as adjusted in accordance
with Section 1.8), and (ii) the various agreements, certificates and other documents and
instruments referred to in Section 6.2.

     2.3 Unassignable Contracts; Third Party Consents.

10

 

          (a) To the extent that Seller’s rights under any agreement, contract, commitment, lease,
Permits or other asset to be assigned to Buyer hereunder may not be assigned without the consent of
another person which has not been obtained, this Agreement shall not constitute an agreement to
assign the same if an attempted assignment would constitute a breach thereof or be unlawful, and
Seller shall use commercially reasonable efforts to obtain any such required consent(s) set forth
on Schedule 3.3(a), and Buyer shall use commercially reasonable efforts to obtain any such
required consent(s) set forth on Schedule 4.3, as promptly as possible. Until any such
consent is obtained, Seller and Buyer shall cooperate to enter into any lawful and reasonable
arrangement designed to provide the benefits and burdens with respect to such asset to Buyer.
Notwithstanding anything else to the contrary in this Agreement, under no circumstances shall
Seller or Buyer be obligated to expend money or other consideration in exchange for any such
consents (other than any applicable regulatory filing fees); provided, however,
that this limitation of Seller’s and Buyer’s obligations hereunder shall be disregarded for
purposes of determining whether the conditions to the obligations of Buyer and Seller at Closing
under Section 6.1(d) and Section 6.2(d) have been satisfied.

          (b) If, by the Closing Date, Buyer has not received authorization from the CPUC to provide
local exchange service to Acquired Customers within the local exchange service territories of
Surewest Telephone and Citizens Telecommunications Company of California, Inc., the Customer
Contracts for such Acquired Customers shall be excluded from the assets to be transferred to Buyer
until such time as Buyer has obtained such authorization (the period from the Closing Date through
the date such authorization becomes effective shall be deemed the “Interim Service
Period”). Notwithstanding the exclusion of such contracts (“Excluded Customer
Contracts”), Buyer shall, during the Interim Service Period, undertake on Seller’s behalf all
service-provider functions reasonably required for the continued provision of local exchange
service pursuant to the Excluded Customer Contracts, including the handling of all customer
inquiries and orders, provisioning of services, and billing and collection of customer accounts.
Buyer shall use commercially reasonable efforts to carry out the provision of such service (at
Buyer’s sole expense) in a manner that is of a quality equal to that provided by Seller at the time
of Closing and that, in all respects, is of a quality that is no less than at parity with Buyer’s
on-going provision of local exchange service pursuant to non-excluded Customer Contracts. Buyer
and Seller shall each use commercially reasonable efforts to cooperate with each other to ensure
that such transfer of functions from Seller to Buyer can be carried out in a manner that remains
transparent to affected customers during the Interim Service Period.

          (c) During the Interim Service Period, Buyer shall bill and collect all government-imposed
surcharges, fees and taxes that are required to be collected from the customers served under the
Excluded Customer Contracts. Buyer shall provide Seller with all billed revenue data and other
information reasonably requested by Seller in order to enable Seller to make any required reports
or other filings relating to such surcharges, fees and taxes. Buyer
shall transfer to Seller all such surcharges, fees and taxes collected from such customers
during the Interim Service Period, and thereafter for services performed during the Interim Service
Period, which Seller shall remit to the appropriate governmental agency. Sixty (60) days after the
end of the Interim Service Period, Buyer and Seller shall perform a true-up of surcharges, fees,
and taxes so collected and remitted in order to ensure that any undercollection or overcollection
is appropriately accounted for and collected. Buyer shall be responsible for

11

 

reporting and paying
all FCC-mandated fees relating to services provided during the Interim Service Period.

          (d) Notwithstanding anything to the contrary in this Agreement, the transfer to Buyer of the
Excluded Customer Contracts shall not be deemed effective until Buyer has obtained authority to
provide local exchange service under those contracts, and Seller, at all times, shall retain
ultimate control over the provision of service under those Excluded Customer Contracts, including
the right and authority to take such formal or informal action as is reasonably required in order
to ensure that such service is carried out in a manner consistent with Seller’s obligations as a
public utility. Except as set forth in Sections 2.3(b) and (c), all provisions of
this Agreement, including the payment of the Purchase Price by Buyer and the transfer to Buyer of
rights and obligations with respect to Accounts Receivable and under Customer Contracts (including
the Excluded Customer Contracts) shall be construed as if the Excluded Customer Contracts had been
transferred to Buyer at the Closing Date, it being the intent of the parties to consummate and
carry out the Agreement to the fullest extent consistent with applicable law.

III. REPRESENTATIONS AND WARRANTIES OF SELLER

     Seller represents and warrants to Buyer that the following representations and warranties are
correct and complete on the date hereof.

     3.1 Organization. Seller is a corporation duly organized, validly existing, and prior to the
Closing Date will be in good standing, under the laws of California. Seller is licensed or
qualified as a foreign corporation in California and Nevada. Seller has all requisite corporate
power and authority to own, lease and operate its properties and assets used or held for use in
connection with the operation of the SME Business and to carry on the SME Business as and where now
being conducted.

     3.2 Authority and Enforceability. Seller has full corporate power and authority to enter into
this Agreement and to carry out the transactions contemplated hereby. The execution, delivery and
performance by Seller of this Agreement and the other agreements and documents to be executed and
delivered pursuant to the provisions of this Agreement (the “Operative Documents”) have
been or prior to Closing will be duly authorized by all necessary corporate action on the part of
Seller. This Agreement and the Operative Documents to which Seller is a party have been, or will
be prior to the Closing, duly executed and delivered by Seller and constitute, or will constitute
at the Closing, the legal, valid and binding obligation of Seller enforceable in accordance with
their respective terms, except as enforcement may be limited by applicable bankruptcy, insolvency,
reorganization or similar laws
from time to time in effect affecting creditor’s rights generally and by legal and equitable
limitations on the availability of specific remedies (the “Enforceability Limitations”).

     3.3 Third Party Consents.

          (a) Except as set forth on Schedule 3.3(a), no material consent, authorization or
approval of, and no registration or filing with, any third parties or any governmental or
regulatory body or authority, is required for the execution, delivery and performance of this

12

 

Agreement and the Operative Documents by Seller and the consummation of the transactions
contemplated hereby and thereby.

          (b) Except as set forth on Schedule 3.3(b), Seller has obtained the consents from all
of its lenders to the extent necessary to transfer title to the Acquired Assets free and clear of
all Liens other than the Permitted Liens, and has provided copies of such consents to Buyer.

     3.4 No Conflict or Violation. The execution, delivery and performance of this Agreement and
the Operative Documents, the consummation by Seller of the transactions contemplated hereby and
thereby, and the compliance with the terms hereof and thereof do not and will not (with or without
notice, the passage of time, or both), (a) violate any provision of the Articles of Incorporation
of Seller, (b) violate, conflict with or result in a breach of or constitute a default under, any
term, condition, or provision of any material agreement, contract, mortgage, lease or other
instrument, document or understanding included in the Acquired Assets to which Seller is a party,
by which Seller may have rights or by which any of the Acquired Assets may be bound, (c) except as
set forth on Schedule 3.4, violate any law, ordinance, code, rule, regulation, order,
judgment, injunction, award or decree of any court, arbitrator, administrative agency, or
governmental body or authority applicable to Seller and the Acquired Assets (“Applicable
Law”), (d) except as set forth on Schedule 3.4, give any person the right to terminate,
modify, accelerate or otherwise change the existing rights or obligations of any material
agreement, contract, mortgage, lease or other instrument, document or understanding included in the
Acquired Assets to which Seller is a party, by which Seller may have rights or by which any of the
Acquired Assets may be bound, or (e) result in the creation of any Lien (other than Permitted
Liens) on any of the Acquired Assets.

     3.5 Financial Information. Set forth on Schedule 3.5 is a fixed asset register of the
SME Business, as of October 31, 2004, which has been prepared from the books and records of Seller.

     3.6 Absence of Certain Changes. Except as set forth on Schedule 3.6, since October
31, 2004, Seller has not, with respect to the SME Business:

          (a) made or suffered any amendment or termination of any material agreement, contract,
commitment, lease or plan, that would be materially adverse to the SME Business, or canceled,
modified or waived any material debts or claims material to the SME Business held by it or waived
any rights material to the SME Business;

          (b) sold or in any way transferred or otherwise disposed of any of its assets or property
material to the SME Business except for sales of inventory and other transfers and dispositions in
the ordinary course of business;

          (c) suffered any material casualty, damage, destruction or loss, or any material interruption
in use, of any material assets or properties of the SME Business, whether or not covered by
insurance, or suffered any material repeated, recurring or prolonged shortage, cessation or
interruption of supplies or utility or other services required to conduct the SME Business;

13

 

          (d) except as set forth in Schedule 3.6(d), suffered any Material Adverse Effect (as
defined in Section 9.10);

          (e) made any change in the rate of compensation, commission, bonus, or other remuneration
payable, or paid or agreed to pay any bonus, extra compensation, pension, severance, vacation pay,
loan or advance, to any Business Employee other than increases in the ordinary course of business
consistent with past practices;

          (f) changed any of the accounting principles followed by it and applied to the SME Business or
the methods of applying such principles or revalued any of the Acquired Assets;

          (g) transferred or granted any rights under, or entered into any settlement regarding the
breach or infringement of any Intellectual Property included in the Acquired Assets, or modified
any existing rights with respect thereto;

          (h) instituted, settled, or agreed to settle any litigation, action, proceeding, or
arbitration related to the Acquired Assets or the SME Business;

          (i) failed to replenish its inventories or supplies included in the Acquired Assets in a
normal and customary manner consistent with Seller’s prior practices or made any material purchase
commitment other than in the ordinary course of business;

          (j) failed to use commercially reasonable efforts to preserve the SME Business intact and to
conserve the goodwill related thereto in the ordinary course of business consistent with Seller’s
past practices;

          (k) failed to use commercially reasonable efforts to preserve intact, in the ordinary course
of business consistent with Seller’s past practices, the present business organization of the SME
Business, and to keep available the services of present key employees to the extent necessary to
maintain sales, billings, network operability, and customer service;

          (l) failed to use commercially reasonable efforts to preserve, in the ordinary course of
business consistent with Seller’s past practices, present relationships with regulators, suppliers,
vendors and customers to the extent necessary to maintain sales, billings, network operability, and
customer service;

          (m) failed to use commercially reasonable efforts to maintain in full force and effect all
Permits required for the operation of the SME Business as presently conducted in the ordinary
course of business consistent with Seller’s past practices;

          (n) failed to use commercially reasonable efforts to maintain, in the ordinary course of
business consistent with Seller’s past practices, any of the networks and other properties material
to and used or held for use in the SME Business;

          (o) failed to use commercially reasonable efforts to retrieve and maintain, in the ordinary
course of business consistent with Seller’s past practices, customer equipment

14

 

located at customer
and third party locations after such customer disconnects or terminates all of the services
provided by Seller; and

          (p) except for the execution of this Agreement, entered into any material transaction
involving the SME Business other than in the ordinary course of business consistent with past
practice.

     3.7 Title.

          (a) Seller has good and marketable title to all of the tangible Acquired Assets free and clear
of all Liens of any nature whatsoever, other than Permitted Liens and those encumbrances set forth
on Schedule 3.7(a). As of the Closing, Seller will convey to Buyer title to the tangible
Acquired Assets free and clear of all Liens other than the Permitted Liens.

          (b) Except as set forth on Schedule 3.7(b), and except for the Intellectual Property
listed on Schedule 3.15(a) but not on Schedule 1.2(l)(i), the Acquired Assets
together with the assets, rights and services available to Buyer under the Transition Services
Agreement in accordance with the terms thereof, include all the assets, properties, rights and
services which are necessary to conduct the SME Business in substantially the manner as presently
conducted (except to the extent modified by the Transition Services Agreement), and to perform all
of the contracts, leases, agreements, commitments, purchase orders, work orders, customer orders,
and other arrangements of the SME Business. Except as set forth on Schedule 3.7(b), there
are no properties or assets necessary to conduct the SME Business that are owned by any person
other than Seller which are not either (i) to be leased or licensed to Buyer under valid, current
lease or license agreements included in the Acquired Assets or (ii) to be leased or made available
to Buyer pursuant to the Transition Services Agreement, in accordance with the terms thereof.
Notwithstanding the foregoing, nothing in this Section 3.7 shall constitute a
representation or warranty with respect to infringement or non-infringement of any Intellectual
Property.

     3.8 Condition of Assets. All of the personal property owned or leased by Seller that is
included in the Acquired Assets is in good operating condition and repair, subject only to ordinary
wear and maintenance.

     3.9 Leased Personal Property. Schedule 3.9 contains a correct and complete list of
all leases and other agreements obligating Seller to make annual lease payments in excess of Ten
Thousand Dollars ($10,000) under which Seller leases, holds or operates any tools, furniture,
machinery, equipment, vehicles or other personal property included in the Acquired Assets that is
owned by any other person. Seller has
made available to Buyer true, correct and complete copies of all such leases and agreements.
All of such leases and agreements are included within the Acquired Assets and are valid, binding,
enforceable and in full force and effect, except for Enforceability Limitations, and there is no
payment default or other material default thereunder and no event has occurred which, with notice
or lapse of time or both, would constitute a material default or permit termination, modification
or acceleration thereunder.

     3.10 Employment/Consulting Matters.

          (a) Schedule 3.10(a) lists the name, date of hire and/or appointment, location and
current annual salary, commissions, allowances or wage rates, along with any arrangement to

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increase such annual salary, commissions, allowances or wage rates or for severance or incentive
compensation, of (i) each current employee, officer, director, consultant or independent contractor
of Seller and (ii) each other employee, officer, director, consultant or independent contractor of
Seller as of November 10, 2004 (each an “Employee”), in each case whose employment relates
primarily to the SME Business (each a “Business Employee”) and who is paid at an annual
rate in excess of Thirty Thousand Dollars $30,000 per annum, together with a statement of the
nature of the services rendered.

          (b) Schedule 3.10(b) lists each contract or agreement relating to the employment or
compensation of any Business Employee.

     3.11 Material Contracts.

          (a) Schedule 3.11(a) lists and includes copies of all contracts, leases, agreements,
commitments, purchase orders, work orders, customer orders, and other arrangements, including all
amendments thereto, to which Seller is a party and which are primarily related to the SME Business,
except for (i) those Customer Contracts (A) which were entered into in the ordinary course of
business and (B) which individually involve annualized revenue of less than Fifty Thousand Dollars
($50,000) or (ii) those other contracts, leases, commitments, purchase orders, work orders and
agreements (A) which were entered into in the ordinary course of business and (B) which
individually involve an obligation or liability on the part of Seller in any amount less than
Twenty Five Thousand Dollars ($25,000) (collectively, the “Material Contracts”).

          (b) All of the Material Contracts are valid and binding obligations of Seller and, except as
set forth on Schedule 3.11(b), do not require the consent of any other party thereto to the
sale of the Acquired Assets to Buyer hereunder to continue to be valid and binding. Except as set
forth in Schedule 3.11(b), (i) none of the payments required to be made to Seller under any
of the Customer Contracts have been prepaid more than thirty (30) days prior to the due date of
such payment thereunder, and (ii) to the knowledge of Seller, there is not any existing breach or
default, or event which, with notice or lapse of time, or both, would constitute a breach or
default under any of the Material Contracts.

          (c) Except as set forth on Schedule 3.11(c), Seller is not a party to any of the
following:

          (i) any indenture, mortgage, note, guaranty, letter of credit, installment obligation,
agreement, or other instrument relating to the borrowing of money or the guaranteeing of any
obligation for the borrowing of money which in any way encumbers the Acquired Assets;

          (ii) any agreement, contract, or other commitment included within the Acquired Assets
that would limit the ability of Seller (or any manager or officer thereof) to conduct the
SME Business (x) as presently conducted or (y) as presently being conducted in a new
geographic area (other than the fact that the SME Business is only licensed in the State of
California or Nevada) or in any line of business, or to use or disclose any information in
the possession of Seller related to the SME Business; or

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          (iii) any existing letters of intent or other agreements to which Seller is bound with
respect to the sale of Seller, the SME Business or substantially all of the assets of the
SME Business.

          (d) To the knowledge of Seller, all contracts, leases, agreements and instruments of Seller
included in the Acquired Assets have been performed by Seller in all material respects with respect
those obligations required to be performed prior to the date hereof.

          (e) Except as set forth on Schedule 3.11(e), all Material Contracts with the Acquired
Customers that are not Customer Contracts primarily related to the SME Business are terminable by
Seller, without liability, upon thirty days written notice.

     3.12 Clients/Customers.

          (a) Except as set forth on Schedule 3.12(a), to the knowledge of Seller, no
Significant Customer (as defined below) has any intention to, or has made any indication that it
plans to terminate its business relationship with Seller or to limit or alter its business
relationship with Seller in any materially adverse respect. As used in this Agreement,
“Significant Customer” means the fifty (50) largest Acquired Customers, measured by gross
revenue for the twelve month period ending October 31, 2004.

          (b) Schedule 3.12(b) contains a true and correct list of the Significant Customers.

     3.13 Tax Returns and Taxes.

          (a) For purposes of this Agreement, the following terms shall have the following meanings:

          (i) “Tax(es)” means (A) all federal, state, local, foreign and other net income, gross
income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license,
service, service use, withholding, payroll, employment, excise, severance, stamp,
occupation, premium, property, windfall profits, alternative minimum, estimated, customs,
duties, fees, assessments, charges or other taxes of any kind whatsoever, together with any
interest and any penalties, additions to tax or additional amounts with respect thereto, (B)
any obligations or liabilities for payment of amounts described in
clause (A) whether as a result of transferee obligations or liabilities, of being a
member of an affiliated, consolidated, combined or unitary group for any period or otherwise
through operation of law and (C) any obligations or liabilities for the payment of amounts
described in clauses (A) or (B) as a result of any tax sharing, tax indemnity or tax
allocation agreement or any other express or implied agreement to indemnify any other
Person.

          (ii) “Tax Return” means any return, declaration, report, statement, information
statement or other document filed or required to be filed with respect to Taxes, including
any claims for refunds of Taxes and any amendments or supplements of any of the foregoing.

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          (b) Except as set forth on Schedule 3.13, to the extent a breach or inaccuracy of any
of the following could result in a liability of Buyer to any person, whether as a result of
Applicable Law, contract or otherwise, (i) Seller has filed all Tax Returns it was required to file
for periods prior to the Closing Date (taking into account any extensions) and all such Tax Returns
are true, correct, and complete, (ii) Seller has paid all Taxes that have become due or payable,
and (iii) there are no claims, examinations, proceedings or proposed deficiencies for any Taxes
pending or, to the knowledge of Seller, threatened against Seller. There are no Taxes of the
Seller that form or could form the basis for Lien, other than a Permitted Lien, on any of the
Acquired Assets.

     3.14 Licenses and Permits. Seller owns, holds, possesses or lawfully uses all material
franchises, licenses, permits, orders, certificates, approvals and other governmental
authorizations which are necessary to own or lease and operate the Acquired Assets and to conduct
the SME Business as now conducted by it (“Permits”). Set forth on Schedule 3.14 is
a correct and complete list of the Permits. Seller has fulfilled and performed in all material
respects its obligations under each of the Permits, and no event has occurred which constitutes or,
after notice or lapse of time or both, would constitute a material breach or material default under
any of the Permits or would permit revocation or termination of any of the Permits. The Permits
are in full force and effect and are renewable by their terms or in the ordinary course of business
without the need to comply with any special qualification procedures or to pay any amounts other
than routine filing fees.

     3.15 Intellectual Property Rights.

          (a) Schedule 3.15(a) identifies each patent, patent application, trademark
registration and application, material unregistered trademark, material software program, copyright
registration and application and domain name that is owned by the Seller and that is used by Seller
primarily in the SME Business. With respect to each such item that is listed both on Schedule
1.2(l)(i) and Schedule 3.15(a) (other than unregistered trademarks and software
licensed by Seller from a third party), Seller owns all right, title and interest in and to such
item, free and clear of any Liens other than Permitted Liens.

          (b) Except as set forth on Schedule 3.15(b), to the knowledge of Seller, (i) the
operation of the SME Business as it is presently conducted by Seller does not infringe or
misappropriate in any material respect any Intellectual Property of third parties, and (ii)
Seller has not received, within the past 36 months, any charge, complaint, claim, demand or notice
alleging any infringement or misappropriation of Intellectual Property with respect to the SME
Business.

          (c) Except as set forth on Schedule 3.15(c), to the knowledge of Seller, no third
party is currently infringing or misappropriating any of the Acquired IP. To the knowledge of
Seller, (i) none of the Acquired IP is invalid or unenforceable, and (ii) no third-party has
challenged the validity or enforceability of any Acquired IP. To the knowledge of Seller, no third
party has breached within the past 36 months, or is currently breaching, any material Intellectual
Property license or other agreement related primarily to the Acquired IP.

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     3.16 No Pending Litigation or Proceedings. Except as set forth on Schedule 3.16,
there is no litigation, arbitration or proceeding pending or, to the knowledge of Seller,
threatened against Seller relating to or adversely affecting the Acquired Assets, at law or in
equity, by or before any court, arbitrator or governmental or regulatory official, body or
authority, nor does Seller know of any reasonably likely basis for any such litigation, arbitration
or proceeding, the result of which is reasonably likely to have a Material Adverse Effect. Except
as set forth on Schedule 3.16, to the knowledge of Seller, there is no investigation
pending or threatened against Seller relating to or adversely affecting the Acquired Assets, by or
before any court, arbitrator or governmental or regulatory official, body or authority, nor to the
knowledge of Seller is there any reasonably likely basis for any such investigation, in each case,
the result of which is reasonably likely to have a Material Adverse Effect. Except as set forth on
Schedule 3.16, there are presently no outstanding judgments, decrees or orders of any court
or any governmental or administrative agency against Seller adversely affecting the Acquired
Assets.

     3.17 Compliance with Laws. Except as set forth on Schedule 3.17, the SME Business has
been conducted in all material respects in compliance with all Applicable Laws. No notice,
citation, summons or order has been assessed and no investigation or review is to the knowledge of
Seller, pending or threatened by any governmental or other entity with respect to any alleged
violation by Seller of any such laws, statutes, rules, regulations or orders in connection with the
operation of the SME Business.

     3.18 Insurance Coverage. Seller presently maintains adequate liability, casualty, property
loss and other insurance coverage upon its properties with respect to the conduct of the SME
Business. There is no material default with respect to any provision contained in any such policy,
nor has there been any failure to give any notice or present any claim under any such policy for
any matter related to the SME Business in a timely fashion or in the manner or detail required by
the policy. No notice of cancellation or non-renewal with respect to any matter related to the SME
Business under, any such policy has been received by Seller.

     3.19 Product Warranties. Except as set forth on Schedule 3.19, Seller has made no
written warranties with respect to the quality or absence of defects of the products or services of
the SME Business which are in force or effect as of the date of this Agreement.

     3.20 Insider Interests. Except as set forth on Schedule 3.20, no manager or executive
of Seller has any interest in any Acquired Assets, and no such person has any business relationship
with Seller pertaining to the Acquired Assets, except as such manager or executive.

     3.21 Brokers and Finders. Except for UBS Investment Bank, Seller has not employed any broker
or finder or incurred any liability for any financial advisory fees, brokerage fees, commissions or
finders’ fees, and no broker or finder has acted directly or indirectly for Seller in connection
with this Agreement or the transactions contemplated herein.

     3.22 Accounts Payable. Except as set forth in Schedule 3.22, Seller has no material
dispute relating to the Acquired Assets with any supplier or vender and shall not withhold or
offset payments to such supplier nor institute or threaten litigation or take any other
extraordinary actions.

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     3.23 Accounts Receivable; Monthly Billed Revenues; Open Credit Disputes.

          (a) Schedule 3.23(a), as updated in accordance with Section 5.6(b), sets forth
a list of all Accounts Receivable along with a range of days elapsed since the original invoice, as
calculated consistent with Seller’s prior practices.

          (b) All Accounts Receivable arose in the ordinary course of business in connection with bona
fide transactions with Acquired Customers and carriers, are carried on Seller’s financial
statements at values determined in accordance with Generally Accepted Accounting Principles on the
date hereof (“GAAP”). Schedule 3.23(b), as updated in accordance with Section
5.6(b), sets forth (i) a detailed list of (A) all outstanding Credit Disputes, (B) the credit
amount or refund amount requested by each Acquired Customer in respect of such Credit Disputes, and
(C) if applicable, the amount agreed to be paid or applied by Seller in respect of any such Credit
Dispute.

          (c) The Monthly Billed Revenues arose in the ordinary course of business in connection with
bona fide transactions with Acquired Customers and carriers, are determined in accordance with
Section 1.8(b) and are carried on Seller’s financial statements at amounts determined on a
good faith basis consistent with Seller’s books and records and past practices and are collectible
in the aggregate in such amounts subject to the reserves applicable thereto which have been made in
good faith on Seller’s books in accordance with Seller’s past practices.

     3.24 Seller’s Solvency. Immediately after giving effect to the transactions contemplated by
this Agreement, the Company (i) shall be able to pay its debts as they become due, (ii) shall own
property having a fair saleable value greater than the amounts required to pay its debts (including
a reasonable estimate of the amount of all contingent liabilities) and (iii) will have adequate
capital to carry on its business. No transfer of property is being made and no obligation is being
incurred in connection with the transactions contemplated by this Agreement with the intent to
hinder, delay or defraud either present or future creditors of the Company.

     3.25 Absence of Regulatory Impairment. In its conduct of the SME Business, Seller complied in
all material respects with (a) the Communications Act of 1934, as amended, (b) the rules,
regulations and policies of the Federal Communications Commission, the California Public Utilities
Commission and the Nevada Public Utilities Commission, (c) any and all Universal Service Fund
obligations, and (d) all other material federal, state, local or municipal laws or regulations that
govern telecommunications service providers and the delivery of services such as Seller has sold to
its SME Business customers. Seller represents and warrants that it has received no claim or notice
of any material violation of federal, state, local or municipal law, code, regulation, statute,
ordinance or order as concerns services rendered to SME Business customers, including claim or
notice of complaints of “slamming” or “cramming,” and that it is not aware of any investigation or
inquiry pending by any governmental entity (federal, state, local or municipal) concerning the
services it has provided to SME Business customers. In addition, Seller represents that it has no
liability for payment, to any ILEC, CLEC or RLEC, of reciprocal compensation, carrier switched
access, or “Universal Service” charges, that imposes or could result in any current or prospective
payment obligation for its SME Business customers.

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IV. REPRESENTATIONS AND WARRANTIES OF BUYER

     Buyer represents and warrants to Seller that the following representations and warranties are
correct and complete on the date hereof:

     4.1 Organization. Buyer is a corporation duly organized, validly existing and in good
standing under the laws of the State of California. Buyer has all requisite corporate power and
authority to own, lease and operate its properties and assets and to carry out its business as and
where now being conducted.

     4.2 Authority and Enforceability. The execution, delivery and performance by Buyer of this
Agreement and the Operative Documents have been duly authorized by all necessary corporate action
on the part of Buyer. This Agreement and the Operative Documents to which Buyer is a party have
been duly executed and delivered by Buyer and constitute the legal, valid and binding obligation of
Buyer, enforceable in accordance with their respective terms.

     4.3 Third Party Consents. Except as set forth on Schedule 4.3, no material consent,
authorization or approval of, and no registration or filing with, any third parties or any
governmental or regulatory body or authority is required for the execution, delivery and
performance of this Agreement and the Operative Documents by Buyer and the consummation of the
transactions contemplated hereby and thereby.

     4.4 No Conflict or Violation. The execution, delivery and performance of this Agreement and
Operative Documents, the consummation by Buyer of the transactions contemplated hereby and thereby,
and the compliance with the terms hereof and thereof by Buyer do not and will not (with or without
notice, the lapse of time, or both) (a) violate any provision of the Articles of Incorporation or
Bylaws of Buyer, (b) violate, conflict with or result in a breach of or constitute a default
under, any term, condition, or provision of any material agreement, contract, mortgage, lease or
other instrument, document or understanding to which Buyer is a party, by which it may have rights
or by which any of its assets may be bound or affected, or (c) violate any law, ordinance, code,
rule, regulation, order, judgment, injunction, award or decree of any court, arbitrator,
administrative agency or governmental body or authority applicable to Buyer or its assets.

     4.5 No Pending Litigation or Proceedings. There is not currently in effect, and no action
pending or, to the knowledge of Buyer, threatened the effect of which could be, any order of any
court or other governmental or administrative authority or arbitrator restraining, enjoining, or
otherwise preventing Buyer from the carrying out of this Agreement or the consummation of the
transactions contemplated by this Agreement.

     4.6 Brokers and Finders. Except for Brown Brothers Harriman & Co., Buyer has not employed any
broker or finder or incurred any liability for any financial advisory fees, brokerage fees,
commissions or finders’ fees, and no broker or finder has acted directly or indirectly for Buyer in
connection with this Agreement or the transactions contemplated herein.

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     4.7 Availability of Funds. Buyer has funds available to it, or financing commitments in place
as of the date hereof, that are sufficient to pay to Seller the Purchase Price at Closing and to
perform all of Buyer’s obligations pursuant to, and to consummate the transactions contemplated by,
this Agreement.

V. COVENANTS

     5.1 Access to Information.

          (a) Subject to state and federal legal restrictions, from the date of this Agreement until the
Closing, (i) Seller will afford to the officers, employees, accountants, attorneys and authorized
representatives of Buyer reasonable access to the facilities, properties, books and records and
employees of Seller used or held for use in the SME Business in order that Buyer may have full
opportunity to make such investigation as it shall desire at reasonable times and upon reasonable
notice, and (ii) Seller will use commercially reasonable efforts to make all of the Material
Contracts available to Seller in an organized, alphabetical and legible form. Subject to state and
federal legal restrictions, Seller will furnish Buyer with such additional financial and operating
data and other information relating to the SME Business, including the properties, assets,
financial condition and prospects of the SME Business, including accurate data files and product
guides for customer billing and pricing structure, as Buyer may reasonably request from time to
time. If this Agreement is terminated prior to the Closing, upon Seller’s request, all books,
records and other material obtained by Buyer from Seller, including copies thereof, will be
returned by Buyer, and Buyer will not disclose or use any such information so obtained. Buyer will
afford to the officers, employees, accountants, attorneys and authorized representatives of Seller
reasonable access, at reasonable times and upon reasonable prior notice, to all books, records and
other material related to the SME
Business received by Buyer reasonably necessary for Seller to be able to verify the Closing
Invoice Statement.

          (b) For a period of seven (7) years after the Closing Date, Buyer will maintain the books and
records relating to the SME Business in a manner that allows Seller to reasonably access
information necessary to facilitate the resolution of any claims made against, or incurred by,
Seller for the operation of the SME Business and the Acquired Assets prior to the Closing and, at
reasonable times and upon reasonable prior notice, will allow Seller reasonable access to such
books and records.

     5.2 Conduct of SME Business.

          (a) Except as otherwise contemplated by this Agreement, during the period from the date of
this Agreement and continuing until the Closing, Seller agrees to operate the SME Business in the
ordinary course and consistent with past practices (including billings and collections, accounting,
the application of credit policies and procedures and the handling of customer accounts, disputes
with carriers and Credit Disputes with respect to the Acquired Assets) and to use its commercially
reasonable efforts to:

          (i) preserve the SME Business intact and conserve the goodwill related thereto,

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          (ii) preserve intact the present business organization of the SME Business, keep
available the services of present key employees,

          (iii) preserve present relationships with regulators, suppliers, vendors and customers;
provided that Buyer and Seller acknowledge that disputes with regulators and vendors
concerning the compensation to be received from, or paid to, carriers, occur in the ordinary
course of Seller’s business,

          (iv) maintain in full force and effect all Permits required for the operation of the
SME Business as presently conducted,

          (v) maintain consistent with past practices of Seller, all of the networks and other
properties material to, and used or held for use in, the SME Business,

          (vi) retrieve and maintain customer equipment located at customer and third party
locations after such customer disconnects or terminates all of the services provided by
Seller, and

          (vii) not knowingly do any act or omit any act or permit any omission to act which will
cause a material breach or default under any of the material contracts, commitments or
obligations included in the Acquired Assets or Assumed Liabilities.

          (b) During the period from the date of this Agreement to the Closing Date, without the prior
written consent of Buyer, Seller will not engage in any activity, take any action, or enter into
any transaction of the type described in Section 3.6 (it being understood that the
limitation set forth in this Section 5.2 shall not apply to actions, omissions or
circumstances arising, which are outside of the control of Seller).

     5.3 Consents. Seller will use its commercially reasonable efforts to obtain, prior to the
Closing Date, all consents, authorizations and registrations specified on Schedule 5.3, and
Buyer will use its commercially reasonable efforts to obtain, prior to the Closing Date, all
consents, authorizations and registrations specified on Schedule 4.3. Notwithstanding
anything else to the contrary in this Agreement, under no circumstances shall Buyer or Seller be
obligated to expend money or other consideration in exchange for any such consents;
provided, however, that this limitation of Buyer’s and Seller’s obligations
hereunder shall be disregarded for purposes of determining whether the conditions to the
obligations of Buyer and Seller at Closing under Section 6.1(d) and Section 6.2(d)
have been satisfied.

     5.4 Best Efforts. Subject to the terms and conditions of this Agreement, each of the parties
shall use its reasonable best efforts to take, or cause to be taken, all actions and to do, or
cause to be done, all things necessary or desirable to consummate the transactions provided for in
this Agreement. Seller shall cooperate with Buyer to transfer the Acquired Customers to Buyer in
any manner reasonably requested by Buyer and at the expense of Buyer. Seller hereby consents to
Buyer filing UCC-1 financing statements, in a form reasonably satisfactory to Seller, after the
Closing Date giving notice of Buyer’s interest in the Accounts Receivable.

     5.5 Further Assurances. Seller, after the Closing, without further consideration but with all
reasonable expenses paid by Buyer, shall execute, acknowledge, and deliver any further

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deeds,
assignments, conveyances, and other assurances, documents, and instruments of transfer, reasonably
requested by Buyer, and shall take any other action consistent with the terms of this Agreement
that may reasonably be requested by Buyer for the purpose of assigning, transferring, granting,
conveying, and confirming the Acquired Assets or any part of the Acquired Assets to Buyer or to
better enable Buyer to complete, perform or discharge any of the Assumed Liabilities. Each of the
parties hereto will cooperate with the other and execute and deliver to the other parties hereto
such other instruments and documents and take such other actions as may be reasonably requested
from time to time by any other party hereto as necessary to carry out, evidence and confirm the
intended purposes of this Agreement. Prior to the Closing Date, Buyer shall be permitted to
designate in writing as Acquired Assets any contracts that are primarily related to the SME
Business but are not Material Contracts, subject to Seller’s prior written consent (not to be
unreasonably withheld). Seller will use reasonable efforts to identify for Buyer all such
contracts. All such contracts so designated by Buyer and consented to by Seller shall thereupon by
added to Schedule 1.5 and be deemed Acquired Assets hereunder except with respect to the
satisfaction of the conditions to Buyer’s obligation to consummate the transactions provided for
hereby (including the truth and correctness of any representations and warranties) under
Section 6.1.

     5.6 Update Schedules.

          (a) Prior to the Closing, each party shall promptly identify and disclose to the other party
any statement or information contained in any of such other party’s representations and warranties
or the Schedules thereto that is incomplete or inaccurate; provided, however, that
except as provided in Section 5.6(b), none of such disclosures shall be deemed to modify,
amend or supplement such representations and warranties for the purpose of Articles III and IV
hereof, unless such other party shall have consented thereto in writing.

          (b) Seller shall prepare and deliver to Buyer on the Closing Date an updated Schedule
3.23(a) and an updated Schedule 3.23(b) setting forth all Accounts Receivable, Credit
Disputes and other matters required to be disclosed thereon, in each case, as of the most recent
practicable date prior to the Closing Date, which updated Schedule 3.23(a) and Schedule
3.23(b) shall not be subject to the other provisions of this Section 5.6.

          (c) Subject to Section 5.6(d), Seller shall be entitled to modify and supplement the
Schedules hereto that were initially delivered concurrently with the execution and delivery of this
Agreement with respect to any fact, circumstance or event that occurs after the date of this
Agreement and that is (or the consequences of which are) or would be required to be set forth on or
described in such Schedules in order to cause the representations and warranties contained in
Article III hereof to be true and correct in all material respects as of the Closing Date as though
made on that date; provided, however, that if such update of a representation or
warranty reflects a Material Adverse Effect occurring since the date of this Agreement and not
resulting from any transaction expressly consented to in writing by Buyer or contemplated by this
Agreement, Buyer shall be entitled to terminate this Agreement pursuant to Section 8.1(b),
but Seller shall not be in breach of the representation and warranty provisions of this Agreement,
and will have no liability to Buyer hereunder, as a result of such a breach of the representation
and warranty provisions of this Agreement. If Buyer elects to consummate the Closing
notwithstanding any modified or supplemented disclosure by Seller permitted by this

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Section
5.6(c), Seller shall not have any liability to Buyer (including any indemnification obligation
under Article VII) with respect to any Losses incurred by the Buyer in connection with the matter
or matters so disclosed.

          (d) Sellers shall not be entitled to cure any breach of any covenant or agreement set forth in
this Agreement or any of the Operative Documents as a result of any such modification or supplement
to the Schedules pursuant to this Section 5.6. Any modification or supplement to the
Schedules pursuant to Section 5.6(b) shall be disregarded for purposes of determining
whether the condition to the obligations of Buyer at Closing under Section 6.1(a) have been
satisfied.

     5.7 Payments Received; Checks and Drafts.

          (a) Seller and Buyer agree that, on and after the Closing Date, they will hold and will
promptly transfer and deliver to the other, from time to time as and when received by them, any
cash, checks with appropriate endorsements (using their best efforts not to convert such checks
into cash), or other property that they may receive on or after the Closing Date which properly
belongs to the other party, including any insurance proceeds belonging to the other party, and will
account to the other for all such receipts.

          (b) Seller will honor (whether presented before, on, or after the Closing) all checks and
drafts drawn by it on or prior to the Closing to pay trade payables and accrued expenses of the SME
Business.

     5.8 Employees.

          (a) The parties hereto understand and agree that Buyer shall have no obligation to hire any
Employee; provided, however, that Buyer shall, upon prior written notice, have
reasonable access to and be free to negotiate in good faith with any Business Employee (other than
the Business Employees listed on Schedule 5.8(a)), and, on or after the Closing Date, until
the date that is ninety (90) days after the Closing Date, (i) hire any Business Employee (other
than the Business Employees listed on Schedule 5.8(a)) or (ii) provide any incentives to
any Business Employee (other than the Business Employees listed on Schedule 5.8(a)) with
bonuses or other compensatory arrangements for periods before, on or after the Closing Date.
Seller shall take commercially reasonable actions to cooperate with Buyer in connection with
Buyer’s efforts to encourage such Business Employees to accept any reasonable and appropriate offer
of employment with Buyer. Until such time as Buyer has notified Seller in writing that it does not
intend to offer employment to such Business Employees or such Business Employees have formally
declined Buyer’s offer of employment, Seller agrees not to offer new or additional compensation or
benefits to any such Business Employees in excess of the compensation or benefits provided to such
Business Employees as of the date hereof unless such new or additional compensation or benefits are
offered (x) to such Business Employees in the ordinary course consistent with Seller’s past
practices or (y) to Seller’s employees generally. Any Business Employee who accepts and commences
employment with Buyer shall be referred to herein as a “Retained Employee.”

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          (b) Nothing in this Agreement shall be deemed to prevent or restrict in any way the right of
Buyer to terminate, reassign, promote or demote any of the Retained Employees or to change
adversely or favorably the title, powers, duties, responsibilities, functions, locations, salaries,
other compensation or terms or conditions of employment of such Retained Employees.

          (c) The parties understand and agree that Buyer shall not have any liability for any severance
or other termination pay or obligations with respect to any of the Business Employees (including
the Retained Employees) arising from Seller’s actions at or prior to the Closing Date and Buyer
shall not be liable for any severance or other termination payments required to be made to any
Employee (including any Retained Employee) as a result of the termination or deemed termination of
any such Employee’s employment by Seller in connection with the consummation of the transactions
contemplated by this Agreement. In addition, Buyer shall not be responsible or liable for any
salary, wages, bonuses, commissions, and any other compensation or benefits, as well as any actions
or causes of action, including claims, unemployment compensation claims and workers’ compensation
claims and claims for race, age, and sex discrimination and sexual harassment that any Employee
(including any Retained Employee) asserts to the extent attributable to the period of employment
with Seller. Without limiting the generality of the foregoing, Buyer shall not be liable for any
claims made or incurred by the Retained Employees and their beneficiaries on or prior to the
Closing Date under Seller’s employment arrangements and benefit plans. For the purposes of this
Section 5.8(c), a claim
shall be considered incurred when the services giving rise to the claim are rendered, the
event giving rise to the claim occurs, or the expense giving rise to the claim is otherwise
incurred.

          (d) Buyer shall not be responsible or liable for any vacation or sick leave time accrued by
any Business Employee through the Closing Date. Buyer shall not be responsible for the provision
of health plan continuation coverage in accordance with the requirements of the Consolidated
Omnibus Budget Reconciliation Act (“COBRA”) (as codified in Section 4980B of the Code and
Sections 601 through 608, inclusive, of ERISA) to any Employee (including any Retained Employee)
and/or any beneficiary thereof who is entitled to elect such coverage on account of a “qualifying
event” (as defined under COBRA) occurring on or prior to the Closing Date. Buyer will not be
responsible for any notification or liability under the Worker Adjustment and Retraining
Notification Act, as amended, with respect to any event occurring on or prior to the Closing Date
or otherwise in connection with the transactions contemplated by this Agreement. Neither Seller
nor any of its Affiliates will make any transfer of pension or other Employee Plan assets to Buyer.

          (e) To the extent permitted by Applicable Law, Buyer and Seller shall provide each other with
such employee data or other information as may be reasonably required to carry out the arrangements
described in this Section 5.8. Seller shall provide Buyer with completed I-9 forms and
attachments with respect to all Retained Employees, except for such Business Employees as Seller
certifies in writing to Buyer are exempt from such requirement.

          (f) Notwithstanding anything else contrary in this Agreement or the Transition Services
Agreement, Seller’s obligations to perform under Section 5.8(a) shall terminate on the date
that is ninety (90) days following the Closing Date; provided, however, that such
limitation shall not alter or effect Buyer’s remedies for any breach of Section 5.8(a)
prior to such date pursuant to the indemnity and survival provisions set forth in Article VII.

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     5.9 Endorsement Authorization. Effective as of the Closing Date, Seller appoints Buyer its
attorney-in-fact to open all mail relating to the Acquired Assets addressed to Seller and to
endorse in the name of Seller any checks, drafts, or other instruments received to the extent (and
only to the extent) they include payment of Accounts Receivable. Buyer promptly will send to
Seller all mail and payments not relating to the Acquired Assets, except personal mail of any
Retained Employee.

     5.10 Cooperation in Litigation. If, after the Closing Date, Seller or Buyer shall require the
participation of officers and employees employed by the other to aid in the defense or settlement
of litigation or claims by third parties, and so long as there exists no conflict of interest
between the parties, Seller and Buyer shall use their reasonable best efforts to make such officers
and employees available to participate in such defense, provided that the party requiring the
participation of such officers or employees shall pay all reasonable out-of-pocket costs, charges
and expenses arising from such participation.

     5.11 Cooperation in Tax Matters. Seller and Buyer shall provide each other with such
cooperation and information as either of them reasonably may request of the other in filing any Tax
Return, amended Tax Return or
claim for refund, determining a liability for Taxes or a right to a refund of Taxes or in
conducting any audit or other proceeding in respect of Taxes, in each case, to the extent relating
to the Acquired Assets or the SME Business, including using best efforts to make officers and
employees available for such purposes, provided that the party requiring the participation of such
officers or employees shall pay all reasonable out-of-pocket costs, charges and expenses arising
from such participation.

     5.12 Exclusivity. Seller grants to Buyer the exclusive right to acquire the SME Business and
the Acquired Assets unless and until this Agreement is validly terminated as provided in
Section 8.1. From the date of this Agreement until the earlier to occur of the Closing
Date and the valid termination of this Agreement as provided in Section 8.1, Seller shall
not, and shall cause its stockholders, directors, employees, managers and affiliates to not, (a)
solicit, initiate, encourage, seek, negotiate, discuss or accept (or enter into any agreement with
respect to) any proposal or offer to invest in, acquire or purchase (directly or indirectly, by way
of merger, consolidation, stock purchase, asset purchase or otherwise) (i) substantially all of the
assets of the Seller that do not constitute the Acquired Assets (the “Non-SME Assets”) (a
“Non-SME Asset Sale”), (ii) a majority of, or all of, the outstanding capital stock of
Seller (a “Controlling Stock Sale”), or (iii) any of the Acquired Assets or (b) participate
in any discussions or negotiations regarding, furnish any information with respect to, assist or
participate in, or facilitate in any other manner any effort or attempt by any person to do or seek
any of the foregoing. In the event that Seller receives an unsolicited offer from a third party
for a Non-SME Asset Sale or a Controlling Stock Sale (an “Acquisition Proposal”), Seller
will promptly notify Buyer in writing of the identity of the proposed acquiror and the material
terms (including price) in the Acquisition Proposal. Notwithstanding anything to the contrary, the
board of directors of Seller may, in response to a bona fide unsolicited Acquisition Proposal from
a third party that does not otherwise result from a breach of this Agreement, (x) (i) furnish
information with respect to Seller to the person making such Acquisition Proposal and its
representatives (including providing to such person a copy of this Agreement and the Transition
Services Agreement), and (ii) participate in discussions or negotiations with the person making
such Acquisition Proposal and its representatives regarding such Acquisition Proposal and (y)(i)

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furnish information with respect to Seller to any other person and its representatives (including
providing to such person a copy of this Agreement and the Transition Services Agreement), (ii)
solicit, initiate, encourage or seek a proposal or offer for a Non-SME Asset Sale or a Controlling
Stock Sale from any other person and (iii) participate in discussions or negotiations with any
other person and its representatives regarding an Acquisition Proposal; provided that, (A) Seller’s
Board of Directors (“Seller’s Board”), by a majority vote, determines in its good faith
judgment, after consultation with its outside legal counsel, that such actions are required by its
fiduciary duties under Applicable Law and (B) Seller’s Board, by a majority vote, reasonably
determines in good faith that the provision of information to such persons and/or such discussions
or negotiations could result in a Qualifying Proposal (as defined below); and provided further that
Seller receives from any such persons referenced in clauses (x) and (y) an executed confidentiality
agreement in reasonably customary form. Notwithstanding anything to the contrary, Seller may enter
into a binding agreement with a third party with respect to an Acquisition Proposal if such
Acquisition Proposal constitutes a Qualifying Proposal. The term “Qualifying Proposal”
means an Acquisition Proposal (a) that includes as an express provision thereof (i) a covenant
providing for the assumption of Seller’s obligations hereunder and under the Transition Services
Agreement by any successor to Seller in any
transaction in which Seller does not survive, (ii) a covenant providing for the assumption of
Seller’s obligations under the Transition Services Agreement by any successor to or acquiror of
substantially all of the Non-SME Assets, and (iii) a covenant by the acquiring person and, to the
extent the Seller’s Board reasonably determines in good faith that such acquiring person is
insufficiently capitalized, any parent entity of such acquiring person that the Seller’s Board
reasonably determines in good faith is sufficiently capitalized, in any Non-SME Asset Sale or
Controlling Stock Sale to cause Seller or its successor, as applicable, to honor the obligations of
Seller hereunder and under the Transition Services Agreement and (b) in which any successor to
Seller, any successor to substantially all of the Non-SME Assets, or Seller, as the case may be,
will in the good faith reasonable judgment of the board of directors, have sufficient financial
resources to perform, and the capability to perform with a level of service commensurate with the
level of service to be provided by Seller under the Transition Services Agreement.

     5.13 Public Announcements. No party shall issue any press release or public announcement
relating to the subject matter of this Agreement without the prior written approval of the other
party; provided, however, that any party may make any public disclosure it believes
in good faith is required by Applicable Law, regulation or stock market rule (in which case the
disclosing party shall use reasonable efforts to consult the other party and provide such party
with a copy of the proposed disclosure prior to making the disclosure).

     5.14 Expenses of Transfer. All transfer, documentary, sales, use, value-added and other
similar Taxes assessed upon or with respect to the sale, assignment, transfer, conveyance and
delivery of the Acquired Assets, and any recording or filing fees with respect thereto
(collectively, “Transfer Expenses”) shall be borne equally by Seller and Buyer;
provided, however, that notwithstanding anything in this Agreement to the contrary,
in no event shall Buyer be responsible for more than $150,000 of Transfer Expenses. For the sake
of clarity, such Taxes included within the Transfer Expenses shall not include any income Taxes.

     5.15 Non-Competition; Non-Solicitation.

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          (a) Seller agrees that, for a period commencing on the Closing Date and terminating three
years after the Closing Date, it will not, directly or indirectly,

          (i) engage in any Competing Business (as defined in Section 9.10) anywhere in
the States of California and Nevada;

          (ii) solicit or encourage any Acquired Customers, or suppliers or vendors of the SME
Business, to terminate or adversely alter in any material respect any relationship such
Acquired Customer, supplier or vendor, as applicable, may have with Buyer or any of its
successors; or

          (iii) solicit, offer employment to or employ any existing or future employee of Buyer
or its successor (including the Retained Employees); provided,
however, that Seller may solicit such employees through general, public
solicitation for new employees for Seller’s business.

          (b) Notwithstanding Section 5.15(a), (i) Seller will not be prohibited from selling or
providing any services to (A) other direct providers of telecommunications and
telecommunications-related services, including CLECs, VARs or resellers, IXCs, ISPs, ESPs, ASPs and
paging companies, (B) Seller, or (C) Seller’s Affiliates (other than any person or entity that is
not a stockholder of the Company as of the date hereof, but who after the date hereof becomes a
stockholder owning greater than five percent (5%) of the outstanding equity securities of the
Company), and Seller’s directors, officers and employees and the persons identified on Schedule
5.15(b), (iii) the acquisition (by asset purchase, stock purchase, merger, consolidation or
otherwise) by Seller of the stock, business or assets of any person that at the time of such
acquisition is engaged in the Competing Business, and the continuation of such Competing Business
following such acquisition, will not be prohibited hereunder if the portion of the revenues of such
person and its subsidiaries on a consolidated basis for the fiscal year ending prior to the date of
such acquisition that are attributable to the Competing Business by such person and its
subsidiaries account for less than twenty percent (20%) of the revenues of such person and its
subsidiaries on a consolidated basis for such fiscal year and (iv) the acquisition of the stock,
business or assets of Seller (by asset purchase, stock purchase, merger, consolidation or
otherwise) by any person who is not a current affiliate of Seller will not be prohibited hereunder.

          (c) Nothing in this Section 5.15 will restrict or prevent Seller from maintaining or
undertaking passive investments in any person primarily engaged in the Competing Business so long
as the aggregate interest represented by such investments does not exceed five percent (5%) of any
class of the outstanding debt or equity securities of any such person.

          (d) Buyer agrees that, for a period commencing on the date hereof and terminating three years
after the Closing Date, except as set forth in Section 5.8(a), it will not, directly or
indirectly solicit, offer employment to or employ any existing or future employee of Seller or its
successor; provided, however, that Seller may solicit such employees through
general, public solicitation for new employees for Seller’s business.

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     5.16 Seller’s Accounts Receivable. Buyer shall use commercially reasonable efforts to bill
and collect all of Seller’s Accounts Receivable in accordance with Applicable Law prior to one
hundred and eighty days (180) after the Closing Date. The parties hereto agree that (a)
outsourcing such function to a collection firm of national or regional recognition shall not be
deemed to be inconsistent with such commercially reasonable efforts standard or Seller’s
obligations under this Section 5.16 and (b) the term “commercially reasonable efforts,”
shall mean, for purposes of this Section 5.16, at least those efforts that Buyer
customarily undertakes in accordance with its policies and procedures for the billing and
collection of accounts receivable in the ordinary course of its business consistent with its past
practices as of the Closing.

     5.17 Regulatory Applications. As soon as reasonably practicable after the date hereof, Buyer
and Seller shall each make, or jointly
make, as the case may require, any and all filings required to be made by the Federal
Communications Commission and any state regulatory agency having regulatory authority over the SME
Business, and shall provide such customer notices as may be required by those agencies, in order to
obtain approval of the transactions contemplated herein and as otherwise may be required by such
agencies in connection with those transactions.

     5.18 Excluded Names. As promptly as practicable following the Closing, but in no event later
than 30 days after the Closing Date, Buyer will stop using any trademark, service mark, brand name,
certification mark, trade name, service name, corporate name, domain name, logo or other indication
of source or origin owned by Seller or any of its Affiliates and not included within Acquired
Intellectual Property (collectively “Excluded Names”) by removing, permanently obliterating
or covering all Excluded Names that appear on any Acquired Asset, including labels and badges on
all equipment on the premises of Acquired Customers and any Excluded Names that appear on trucks
and other equipment included within the Acquired Assets. Without limiting the foregoing, in no
event will Buyer use or display any Excluded Name in any way (i) other than in the same manner used
by Seller in the SME Business immediately prior to Closing, (ii) in connection with products or
services not conforming to the same standard of quality that existed for the products and services
of the SME Business prior to Closing, or (iii) that would detract from or impair the goodwill
associated with such Excluded Names. Notwithstanding the foregoing, Buyer shall continue to use
Seller’s name for invoicing and collecting the Accounts Receivable for 180 days after the Closing.
Buyer will not, and will cause its Affiliates not to, use any Excluded Name, and neither Buyer nor
any of its Affiliates is granted any right hereunder to use any Excluded Name except as expressly
permitted pursuant to this Section 5.18.

     5.19 In Flight Customer Orders. At the Closing, Seller will deliver to Buyer a list as of the
close of business on the date immediately prior to the Closing Date describing with reasonable
specificity (including the customer name and the applicable products and services) any sales of
products and services to Acquired Customers booked by Seller prior to the Closing Date as to which
Seller has not yet begun to provide such products or services to the Acquired Customer
(“In-Flight Orders”), together with information with respect to any Promotional Credits
issued to such Acquired Customers in connection with such In-Flight Orders.

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     5.20 Maintenance and Delivery of Certain Inventory. At the Closing, Seller shall convey to
Buyer as part of the Acquired Assets, an inventory of customer premises equipment for use in the
SME Business sufficient to fulfill In-Flight Orders for a period of 21 days following the Closing
Date.

VI. CONDITIONS TO CLOSING

     6.1 Conditions to Obligations of Buyer at Closing. The obligations of Buyer to consummate the
transactions provided for by this Agreement are subject, in the discretion of Buyer to waive such
condition, to the satisfaction at or prior to the Closing of each of the following conditions:

          (a) Representations and Warranties.

          (i) The representations and warranties of Seller set forth in Article III (other than
the representations and warranties identified in Section 6.1(a)(ii) and
(iii)) of this Agreement (A) that are not qualified as to “materiality” shall be
true and correct in all material respects as of the Closing Date as if made on the Closing
Date, (B) that are qualified as to materiality shall be true and correct in all respects as
of the Closing Date as if made on the Closing Date, except, in either (A) or (B), to the
extent such representations and warranties are made as of a specified date, in which case
such representations and warranties shall be true and correct in all material respects or
true and correct in all respects, as the case may be, as of that date.

          (ii) The representations and warranties set forth in Sections 3.10,
3.13, 3.14, 3.18, 3.19, 3.23 and 3.25 shall
be true and correct as of the Closing Date, with only such exceptions as, individually or in
the aggregate, have not had a Material Adverse Effect, except to the extent such
representations and warranties are made as of a specified date, in which case such
representations and warranties need be true and correct as of such specified date, with only
such exceptions as, individually or in the aggregate, have not had a Material Adverse
Effect.

          (iii) The representations and warranties set forth in Sections 3.6 (other than
Sections 3.6(c), (g) and (i)), 3.11(a), (b) and
(c)(ii), 3.15, 3.16 and 3.17 shall be true and correct as of
the Closing Date, with only such exceptions as, individually or in the aggregate, have not
materially adversely impacted the Acquired Assets or Seller’s ability to perform its
obligations under the Transition Services Agreement in accordance with its terms, taking
into account Seller’s right and ability to cure any breaches or defaults thereunder.

          (b) Covenants. Seller shall have performed and complied with, in all material respects, all
agreements and covenants required by this Agreement to be performed by it prior to or at the
Closing Date.

          (c) Material Adverse Effect. Since the date of this Agreement, there shall not have occurred
and be continuing any Material Adverse Effect.

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          (d) Consents. All consents, authorizations, assignments, registrations, and waivers from
third parties and governmental agencies specified in Schedule 6.1(d) shall have been
obtained, and such consents shall be in full force and effect as of the Closing Date.

          (e) Seller’s Certificates. The Chief Financial Officer of Seller will have executed and
delivered to Buyer a certificate to the effect that each of the conditions specified in
Sections 6.1(a) – (d) is satisfied in all respects. The Secretary of Seller will
have executed and delivered to Buyer a certificate certifying as to the incumbency of the officers
of Seller authorized to close the transactions contemplated by this Agreement, and Seller will have
delivered a certified copy of the appropriate proceedings of the Board of Directors of Seller
authorizing and approving this Agreement and the transactions and documents contemplated hereby.

          (f) Assignment and Bill of Sale. Seller shall have executed and delivered to Buyer an
appropriately executed assignment and bill of sale.

          (g) No Injunction. There will not be in effect at the Closing, any order of any court or
other governmental or administrative authority restraining, enjoining, or otherwise preventing
Buyer from the carrying out of this Agreement or the consummation of the material transactions
contemplated by this Agreement.

     6.2 Conditions to Obligations of Seller at Closing. The obligations of Seller to consummate
the transactions provided for by this Agreement are subject, in the discretion of Seller to waive
such condition, to the satisfaction at or prior to the Closing Date of the following conditions:

          (a) Representations and Warranties. The representations and warranties of Buyer set forth in
Article IV of this Agreement (i) that are not qualified as to “materiality” shall be true and
correct in all material respects as of the Closing Date as if made on the Closing Date, (ii) that
are qualified as to materiality shall be true and correct in all respects as of the Closing Date as
if made on the Closing Date, except, in either (i) or (ii), to the extent such representations and
warranties are made as of a specified date, in which case such representations and warranties shall
be true and correct in all material respects or true and correct in all respects, as the case may
be, as of that date.

          (b) Covenants. Buyer shall have performed and complied with, in all material respects, all
agreements and covenants required by this Agreement to be performed by it prior to or at the
Closing Date.

          (c) Buyer’s Certificates. The President or a Vice President of Buyer will have executed and
delivered to Seller a certificate to the effect that each of the conditions specified in
Sections 6.2(a), (b) and (d) are satisfied in all respects. The Secretary
of Buyer will have executed and delivered to Seller a certificate certifying as to the incumbency
of the officers of Buyer authorized to close the transactions contemplated by this Agreement, and
Buyer will have delivered a certified copy of the appropriate proceedings of the Board of Directors
of Buyer authorizing and approving this Agreement and the transactions and documents contemplated
hereby.

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          (d) Consents. All consents, authorizations, assignments, registrations and waivers from third
parties and governmental agencies specified in Schedule 6.2(d) shall have been obtained,
and such consents shall be in full force and effect as of the Closing Date.

          (e) Assumption Agreement. Buyer shall have executed and delivered to Seller the assumption
agreement related to the Assumed Liabilities.

          (f) No Injunction. There will not be in effect at the Closing, any order of any court or
other governmental or administrative authority restraining, enjoining, or otherwise preventing
Seller from the carrying out of this Agreement or the consummation of the material transactions
contemplated by this Agreement.

VII. INDEMNIFICATION

     7.1 Indemnification By Seller.

          (a) Subject to the limitations set forth in this Article VII, after the Closing, Seller shall
indemnify, defend and hold harmless Buyer, its successors and assigns, and its officers, directors,
employees, agents and affiliates (“Buyer’s Indemnified Persons”) from and against any and
all losses, liabilities, claims, obligations, damages, deficiencies, actions, judgments,
regulatory, legislative or judicial proceedings or investigations, assessments, levies, fines,
penalties, costs and Legal Expenses (as defined in Section 9.10) (collectively,
“Losses”) incurred by them arising out of, based upon or resulting from the following:

          (i) any misrepresentation in or breach of any representation or warranty or
nonfulfillment of any covenant, agreement or other obligation of Seller set forth in this
Agreement or in any Operative Document delivered to Buyer pursuant to the provisions of this
Agreement, including the Transition Services Agreement;

          (ii) any Excluded Liability;

          (iii) any claims by parties other than any Buyer’s Indemnified Persons to the extent
caused by acts or omissions of Seller on or prior to the Closing Date, including claims for
Losses which arise or arose out of Seller’s operation of the SME Business or by virtue of
Seller’s ownership of the SME Business prior to the Closing;

          (iv) any claims which arise out of (A) the entry of any decree, judgment or order
adjudicating Seller as bankrupt or insolvent, or approving as properly filed a petition
seeking reorganization of Seller under any bankruptcy or similar law, or (B) entry of a
decree, order or judgment appointing a receiver, liquidator, trustee or assignee in
bankruptcy or insolvency for Seller or for the winding up or liquidation of its affairs;

          (v) any claims which arise out of (A) the institution by Seller of proceedings to be
adjudicated a voluntary bankrupt, or consent by Seller to the filing of a bankruptcy
proceeding against it, (B) Seller filing a petition or answer or consent seeking
reorganization under any bankruptcy or similar law or statute, or consenting to the filing
of any such petition, or consenting to the appointment of a custodian, receiver, liquidator,

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trustee, or assignee in bankruptcy or insolvency of it or any substantial part of its assets
or property, or (C) Seller making a general assignment for the benefit of creditors, or
admission in writing of its inability to pay its debts as they become due;

          (vi) any Seller’s Taxes; and

          (vii) any amount owed by Seller under Section 5.14.

          (b) Notwithstanding Section 7.1(a), the obligations of Seller pursuant to Section
7.1(a)(i) will: (i) not apply until, and then only to the extent that, the aggregate amount of
all Losses incurred by all Buyer’s Indemnified Persons exceeds Two Hundred Fifty Thousand Dollars
($250,000) (the “Basket”), and (ii) be limited to, and will not exceed, Five Million
Dollars ($5,000,000) (the “Cap”). In addition, the obligations of Seller pursuant to
Section 7.1(a)(i) will not apply to any Losses arising out of, based upon or resulting from
a breach by Seller of any representation or warranty to the extent that facts, events or
circumstances giving rise to such breach are specifically taken into account by Seller and Buyer
(or the Neutral Arbitrator, as the case may be) in the process of determining Monthly Billed
Revenue on the Final Closing Invoice Statement, but only if there has been an adjustment to the
Purchase Price pursuant to Section 1.8.

7.2 Indemnification by Buyer.

          (a) Subject to the limitations set forth in this Article VII, after the Closing, Buyer shall
indemnify, defend and hold harmless Seller, its successors and assigns, and its officers,
directors, employees, agents and affiliates (“Seller’s Indemnified Persons”) from and
against any and all Losses incurred by them arising out of, based upon or resulting from the
following:

          (i) any misrepresentation in or breach of any representation or warranty or
nonfulfillment of any covenant, agreement or other obligation of Buyer set forth in this
Agreement or in any Operative Document delivered to Seller pursuant to the provisions of
this Agreement, including the Transition Services Agreement;

          (ii) any Assumed Liability;

          (iii) any claims by parties other than any Seller’s Indemnified Persons to the extent
caused by the acts or omissions of Buyer after the Closing Date, including claims for Losses
which arise out of Buyer’s operation of the SME Business or Buyer’s use or ownership of the
Acquired Assets after the Closing;

          (iv) any amount owed by Buyer under Section 5.14; and

          (v) Buyer’s provision of or failure to provide local exchange and other services under
Sections 2.3(b), (c) and (d).

          (b) Notwithstanding Section 7.2(a), the obligations of Buyer pursuant to Section
7.2(a)(i) will: (i) not apply until, and then only to the extent that, the aggregate amount of

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all Losses incurred by all Seller’s Indemnified Persons exceeds the Basket; and (ii) be limited to,
and will not exceed, the Cap.

     7.3 Indemnification and Liability for the Payment of Certain Taxes. Notwithstanding any other
provision herein, all ad valorem and similar Tax obligations levied with respect to the Acquired
Assets for a taxable period that includes (but does not end on) the Closing Date shall be
apportioned between Seller and Buyer as of the Closing Date based on the number of days of such
taxable period included in the period through and including the Closing Date (“Pre-Closing Tax
Period”) and the number of days of such taxable period included in the period commencing on the
day after the Closing Date (“Post-Closing Tax Period”). Seller shall be liable for the
proportionate amount of such Taxes that is attributable to the Pre-Closing Tax Period, and Buyer
shall be liable for the proportionate amount of such Taxes that is attributable
to the Post-Closing Tax Period; provided, however, that notwithstanding in
this Agreement to the contrary, in no event shall Buyer be responsible for more than $75,000 of
Taxes pursuant to this Section 7.3. Buyer and Seller each covenant to timely file such Tax
Returns as either may be required to file with respect to such Taxes, and within a reasonable
period, Seller and Buyer shall present a statement to the other setting forth the amount of
reimbursement to which each is entitled under this Section 7.3, together with such
supporting evidence as is reasonably necessary to calculate the proration amount. The proration
amount shall be paid by the party owing it to the other party within ten (l0) days after delivery
of such statement. Any payment required under this Section 7.3 and not made within ten
(10) days after delivery of the statement shall bear interest at the rate per annum determined,
from time to time, under the provisions of Section 6621(a)(2) of the Code for each day until paid.

     7.4 Defense of Claims. If any legal proceedings shall be instituted or any claim is asserted
by any third party in respect of which any party hereto may have an obligation to indemnify the
other party, the party asserting such right to indemnity (the “Indemnified Party”) shall
give the party from whom indemnity is sought (the “Indemnifying Party”) written notice
thereof within thirty (30) days after the institution or assertion of such legal proceeding or
claim, but any failure to so notify the Indemnifying Party shall not relieve it from any liability
that it may have to the Indemnified Party other than to the extent the Indemnifying Party is
prejudiced thereby. The Indemnifying Party shall have the right to control, at its option and
expense, the defense (with counsel of its choosing), negotiation or settlement of any such claim or
proceeding, provided that the Indemnifying Party admits in writing it’s liable to the Indemnified
Party hereunder with respect to the full amount of Losses with respect to such proceeding or claim
(and in such event the Indemnified Party will fully cooperate as reasonably requested by the
Indemnifying Party in the defense or settlement of such matter); provided, however,
that:

          (a) the Indemnified Party shall be entitled to participate in the defense of such claim and to
employ counsel at its own expense to assist in the handling of such claim; except that the
employment of such counsel shall be at the expense of the Indemnifying Party if the Indemnifying
Party determines after consultation with its outside legal counsel that defense of the Indemnified
Party by counsel to the Indemnifying Party is not appropriate in light of conflicts of interest or
other similar circumstances;

35

 

          (b) the Indemnifying Party shall obtain the prior written approval of the Indemnified Party
before entering into any settlement of such claim or ceasing to defend against such claim (with
such approval not to be unreasonably withheld, conditioned or delayed);

          (c) the Indemnifying Party shall not consent to the entry of any judgment or enter into any
settlement that does not include as an unconditional term thereof the giving by each claimant or
plaintiff to each Indemnified Party of a release from all liability in respect of such claim; and

          (d) the Indemnifying Party shall not be entitled to control (but shall be entitled to
participate at its own expense in the defense of), and the Indemnified Party shall be entitled to
have sole control over, the defense or settlement of any claim to which the Indemnified Party is
entitled to indemnification under Sections 7.1 or 7.2 to the extent (and only to
the extent) such
claim seeks an order, injunction, non-monetary or other equitable relief against the
Indemnified Party which, if successful, could materially adversely interfere with the business,
operations, assets, condition (financial or otherwise) or prospects of the Indemnified Party, in
each case taken as a whole.

After written notice by the Indemnifying Party to the Indemnified Party of its election to assume
control of the defense of any such action, the Indemnifying Party shall not be liable to such
Indemnified Party hereunder for any Legal Expenses subsequently incurred by such Indemnified Party
in connection with the defense thereof; provided, however, that the Indemnifying
Party shall be liable for such Legal Expenses if the Indemnified Party reasonably determines in
good faith that conflicts of interest exist that require the Indemnified Party to be represented by
its own counsel. If the Indemnifying Party does not assume control of the defense of such claim as
provided in this Section 7.4, the Indemnified Party shall have the right to defend such
claim in such manner as it may deem appropriate at the cost and expense of the Indemnifying Party,
and the Indemnifying Party will promptly reimburse the Indemnified Party therefore in accordance
with this Section 7.4. The reimbursement of fees, costs and expenses required by this
Section 7.4 shall be made by periodic payments during the course of the investigations or
defense, as and when bills are received or expenses incurred.

     7.5 Survival of Representations and Warranties. The representations and warranties of each
party contained in this Agreement shall survive the Closing Date for a period of twelve (12)
months, except for the representation and warranty contained in the first sentence of Section
3.7 (Title), which shall survive indefinitely, and the representations and warranties contained
in Section 3.13 (Tax Returns and Taxes), which shall survive for sixty (60) days longer
than any applicable statute of limitations. Notwithstanding anything to the contrary, no claim may
be made under this Article VII with respect to any representations or warranties made or given in
this Agreement or in any Operative Document after the expiration of the applicable survival period
set forth in this Section 7.5.

     7.6 Right of Setoff. In the event Buyer incurs any Losses for which it is entitled to
indemnification pursuant to Section 7.2 above, Buyer may offset such Losses against any
amounts payable to Seller as Seller’s Accounts Receivable pursuant to Section 1.9 in
accordance with the following procedures:

36

 

          (a) Buyer shall deposit the amount of such Losses up to the amount payable to Seller as
Seller’s Accounts Receivable (the “Offset Amount”) into a joint account established jointly
by Buyer and Seller, from which account no withdrawal shall be made except solely upon the
signatures of an authorized officer of each of Buyer and Seller (the “Joint Account”).

          (b) Simultaneously with the deposit of the Offset Amount into the Joint Account, Buyer shall
provide Seller with written notice thereof and a reasonably detailed description of the factual and
legal basis for such claim of offset (the “Offset Notice”).

          (c) If Seller agrees with Buyer’s basis and calculation of the Offset Amount, Seller and Buyer
shall each cause an authorized officer to execute the necessary and appropriate instrument(s) to
effectuate payment of the Offset Amount (and any interest accrued thereon) to
Buyer. If Seller disagrees with Buyer’s basis or calculation of the Offset Amount (in whole
or in part), and Seller and Buyer cannot reach agreement on the appropriate amount of offset within
thirty (30) days after Seller’s receipt of the Offset Notice, the dispute shall be resolved in
accordance with Section 9.2.

          (d) Upon entry of a final and binding award pursuant to Section 9.2 resolving any
dispute over the Offset Amount, Buyer and Seller shall each cause an authorized officer to execute
the necessary and appropriate instrument(s) to effectuate payment of the Offset Amount (or portions
thereof), together with any interest accrued thereon (divided pro-rata based on each party’s
respective share of the Offset Amount) to either or both of Seller and Buyer consistent with such
final resolution, within five (5) days after the entry of such final binding award or resolution.

     7.7 Exclusive Remedies. Except in the case of specific performance and other non-monetary
equitable remedies as set forth in Section 9.1 and for any other remedies available to the
parties pursuant to the Transition Services Agreement (but only with respect to disputes under the
Transition Services Agreement) and under Sections 1.8 and 1.9 hereof, following the
Closing the remedies provided in this Article VII will be the sole and exclusive remedies of the
parties hereto for all disputes arising out of or relating to this Agreement or any Operative
Document, and will supersede and replace all other remedies that any of the parties may have under
any law with respect to such disputes.

7.8 Limitations on Indemnity Claims.

          (a) NEITHER BUYER NOR SELLER WILL BE LIABLE UNDER THIS ARTICLE VII IN RESPECT OF ANY CLAIM OR
LOSSES IN RESPECT OF INCIDENTAL, SPECIAL, PUNITIVE OR CONSEQUENTIAL DAMAGES OF ANY KIND, INCLUDING
CONSEQUENTIAL DAMAGES RESULTING FROM BUSINESS INTERRUPTION OR LOST PROFITS.

          (b) The obligations of Buyer and Seller to provide indemnification under this Article VII will
be terminated, modified or abated as appropriate to the extent the underlying claim (i) would not
have arisen but for a voluntary act that is carried out at the express written request of, or with
the express written approval, concurrence of or with the knowing assistance of the party seeking
indemnification, or (ii) is based, in whole or in part, on the bad faith or

37

 

willful misconduct of
the party seeking indemnification. For purposes of this Section 7.8, “voluntary” means an
act other than any act which is required to be taken by law or which, if taken, would constitute
prudent business practice.

          (c) The amount of any indemnification payable under this Article VII will be net of the amount
of any insurance proceeds actually received to such party under any policies of insurance covering
the Loss giving rise to the claim. The party seeking indemnification will use commercially
reasonable efforts to collect any such insurance and will account therefor to the party from whom
indemnification is sought. If, at any time subsequent to the party seeking indemnification
receiving an indemnity payment for a claim under this Article VII, such party receives payment in
respect of the Losses underlying such claim through recovery, settlement or
otherwise under or pursuant to any insurance coverage, or pursuant to any claim, recovery,
settlement or payment by or against third party, the amount of such payment, less any expenses
incurred to obtain such payment, will promptly be remitted to the party from whom indemnification
was obtained.

VIII. TERMINATION

     8.1 Termination. This Agreement may be terminated at any time prior to Closing:

          (a) by mutual consent of Buyer and Seller;

          (b) by either Buyer or Seller if there has been a material breach of any (i) representation or
warranty set forth in this Agreement that with the passage of time would result in the failure of a
condition to Closing under the applicable standard in Section 6.1(a) or 6.2(a), or
(ii) covenant or agreement set forth in this Agreement, in either case on the part of the other
party and such other party is unable to cure such breach within thirty (30) days after its receipt
of notice thereof, or by Buyer in the event Seller supplements the Schedules pursuant to
Section 5.6 and such supplement reflects a Material Adverse Effect occurring at any time
since the date of this Agreement; provided the party seeking to terminate this Agreement is
not itself in material breach of this Agreement;

          (c) by Buyer or Seller if the Closing shall not have occurred by June 30, 2005 by reason of
the material failure of any of the conditions specified in Sections 6.1 or 6.2;
provided that the party seeking to terminate this Agreement is not itself in material
breach of this Agreement;

          (d) by either Buyer or Seller if a court of competent jurisdiction or governmental, regulatory
or administrative agency or commission shall have issued an order, decree or ruling or taken any
other action, in each case permanently restraining, enjoining or otherwise prohibiting the
transactions contemplated by this Agreement and such order, decree, ruling or other action shall
have become final and nonappealable;

          (e) by Seller if Buyer does not deposit with Seller prior to the close of business on December
22, 2004 an additional One Million Dollars ($1,000,000) to be held as a part of the Earnest Money
Deposit to the extent required pursuant to Section 1.11;

38

 

          (f) by Seller if, prior to the close of business on January 6, 2005, Buyer has not either (i)
notified Seller in writing of its waiver of the condition to Closing set forth in Item 4 of
Schedule 6.1(d) or (ii) deposited with Seller an additional Two Million Five Hundred
Thousand Dollars ($2,500,000) to be held by Seller as a part of the Earnest Money Deposit pursuant
to Section 1.11; or

          (g) by Seller at any time after the close of business on January 28, 2005, provided that Buyer
has not notified Seller in writing of its waiver of the condition to closing set forth in Item 4 of
Schedule 6.1(d) prior to Seller’s written notice of termination pursuant to this
Section 8.1(g).

     8.2 Effect of Termination. In the event of termination of this Agreement by either Seller or
Buyer, as provided above, this Agreement shall forthwith terminate and there shall be no liability
on the part of either Seller or Buyer or Seller’s or Buyer’s officers or directors, except for
liabilities arising from a material breach by a party hereto of any of its representations,
warranties, covenants or agreements set forth in this Agreement prior to such termination;
provided, however, that the obligations of the parties set forth in Section
5.15(d) (Non-Solicitation), this Article VIII, (Termination) and Section 9.13
(Expenses) hereof shall survive such termination.

IX. OTHER PROVISIONS

     9.1 Specific Performance. EACH PARTY ACKNOWLEDGES AND AGREES THAT THE OTHER PARTY MAY BE
IRREPARABLY HARMED IN THE EVENT OF A BREACH OR THREATENED BREACH OF THE PROVISIONS OF THIS
AGREEMENT, FOR WHICH DAMAGES, EVEN IF AVAILABLE, MAY NOT PROVIDE AN ADEQUATE REMEDY. ACCORDINGLY,
IN THE EVENT OF A BREACH OR THREATENED BREACH, THE AGGRIEVED PARTY WILL BE ENTITLED TO (A) AN
INJUNCTION, WITHOUT POSTING A BOND, RESTRAINING THE BREACHING PARTY FROM ENGAGING IN ANY OF THE
ACTIVITIES PROHIBITED BY THE AGREEMENT, WHETHER SUCH ACTIVITIES ACTUALLY HAVE BEEN ENGAGED IN OR
ARE THREATENED, AND (B) THE GRANTING BY ANY COURT OF COMPETENT JURISDICTION OF THE REMEDY OF
SPECIFIC PERFORMANCE OF ITS OBLIGATIONS HEREUNDER. NOTWITHSTANDING THE FOREGOING, NOTHING HEREIN
WILL BE CONSTRUED AS PROHIBITING A PARTY FROM PURSUING ANY OTHER AVAILABLE REMEDIES AT LAW OR IN
EQUITY FOR SUCH BREACH OR THREATENED BREACH, INCLUDING THE RECOVERY OF DAMAGES.

     9.2 Dispute Resolution.

          (a) Any dispute arising under this Agreement shall be settled by arbitration in Los Angeles,
California, in accordance with the Commercial Arbitration Rules of the American Arbitration
Association, except as provided in Section 1.8(e) and Section 1.9(d). It is the
intention of the parties that the arbitration award will be final and binding, shall not be
appealable and that a judgment of any circuit court having jurisdiction thereof may be rendered
upon the award, and enforcement may be had according to its terms. This agreement to arbitrate
shall be specifically enforceable against each of the parties.

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          (b) When a matter has been submitted for arbitration, within thirty (30) days of such
submission, Buyer will choose an arbitrator and Seller will choose an arbitrator, and an additional
arbitrator independent of the parties will be selected unanimously by the two arbitrators chosen by
the parties. The dispute shall then be resolved by majority vote of the three arbitrators. If the
arbitrator chosen by Buyer and the arbitrator chosen by Seller cannot agree upon a third
independent arbitrator within thirty (30) days of their appointment, the independent third
arbitrator will be selected according to the procedures of the American Arbitration Association or
any successor to the function thereof.

          (c) The parties hereto agree that an action to compel arbitration pursuant to this Agreement
may be brought in any court of competent jurisdiction. Application may also be made to any such
court for confirmation of any decision or award of the arbitrators, for an order of enforcement and
for other remedies which may be necessary to effectuate such decision or award. The parties hereto
hereby consent to the jurisdiction of the arbitrators and of such court and waive any objection to
the jurisdiction of such arbitrator and court.

     9.3 Exhibits and Schedules. All Exhibits and Schedules referred to herein are intended to be
and hereby are specifically made a part of this Agreement.

     9.4 Amendment. This Agreement and the Exhibits and Schedules hereto may not be amended,
restated, supplemented or otherwise modified except by an instrument in writing signed by each of
the parties hereto.

     9.5 Extension; Waiver. At any time prior to the applicable Closing Date, the parties hereto
may (a) extend the time for the performance of any of the obligations or other acts of the other
party hereto, (b) waive any inaccuracies in the representations and warranties of the other party
contained herein or in any document delivered pursuant hereto and (c) waive compliance by the other
party with any of the agreements or conditions contained herein. Any agreement on the part of a
party hereto to any such extension or waiver shall be valid if set forth in an instrument in
writing signed on behalf of such party. Failure by any party to assert any of its rights hereunder
will not constitute a waiver of such rights. Any waiver of a term or condition herein will not be
construed as a waiver of a subsequent breach or waiver of the same term or condition, or waiver of
any other term or condition of this Agreement.

     9.6 Entire Agreement; No Third Party Beneficiaries. This Agreement, together with the
Exhibits and Schedules hereto, (a) constitutes the entire Agreement between the parties pertaining
to the subject matter hereof and supersedes all prior and contemporaneous agreements, covenants,
representations, warranties, undertakings, understandings, negotiations and discussions, whether
oral or written, of the parties, including the Letter of Intent, with respect to the subject matter
hereof, and (b) is not intended to confer upon any person other than the parties hereto any rights
or remedies hereunder.

     9.7 Governing Law. This Agreement shall be governed by, construed, interpreted and the rights
of the parties determined in accordance with the laws of the State of California (regardless of the
laws that might be applicable under principles of conflicts of law). Each of the parties hereto
hereby irrevocably and unconditionally consents to submit to the exclusive jurisdiction of the
courts of the State of California and of the United States, in each case located

40

 

in the County of
San Francisco, for any litigation arising out of or relating to this Agreement (and agrees not to
commence any litigation relating thereto except in such courts), and further agrees that service of
any process, summons, notice or document by U.S. registered mail to its respective address set
forth in this Agreement shall be effective service of process for any litigation brought against it
in any such court. Each of the parties hereto hereby irrevocably and unconditionally waives any
objection to the laying of
venue of any litigation arising out of this Agreement or the transactions contemplated hereby
in the courts of the State of California or the United States, in each case located in the County
of San Francisco, and hereby further irrevocably and unconditionally waives and agrees not to plead
or claim in any such court that any such litigation brought in any such court has been brought in
an inconvenient forum.

     9.8 Waiver of Jury Trial. THE PARTIES HERETO HEREBY WAIVE TO THE FULLEST EXTENT PERMITTED BY
APPLICABLE LAW ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO ANY LITIGATION DIRECTLY OR
INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR THE TRANSACTIONS
CONTEMPLATED BY THIS AGREEMENT. THE PARTIES HERETO (A) CERTIFY THAT NO REPRESENTATIVE, AGENT OR
ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD
NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THAT FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT
AND THE OTHER PARTY HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED BY THIS AGREEMENT, AS APPLICABLE, BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND
CERTIFICATIONS IN THIS SECTION 9.8.

     9.9 Construction.

          (a) For purposes of this Agreement, whenever the context requires, the singular number will
include the plural, and vice versa, the masculine gender will include the feminine and neuter
genders, the feminine gender will include the masculine and neuter genders, and the neuter gender
will include masculine and feminine genders.

          (b) As used in this Agreement, the words “include” and “including,” and variations thereof,
will not be deemed to be terms of limitation, but rather will be deemed to be followed by the words
“without limitation.”

          (c) Except as otherwise expressly indicated, all references in this Agreement to a “Section”
or “Exhibit” are intended to refer to a Section or Exhibit of this Agreement, and all references to
a “Schedule” are intended to refer to a Schedule to this Agreement.

          (d) As used in this Agreement, the terms “hereof,” “hereunder,” “herein” and words of similar
import will refer to this Agreement as a whole and not to any particular provision of this
Agreement.

          (e) Each Party has participated in the drafting of this Agreement, which each party
acknowledges is the result of extensive negotiations between the parties. Consequently, this
Agreement will be interpreted without reference to any rule or precept of law that requires that
any ambiguity in a document be construed against the drafter.

41

 

     9.10 Certain Definitions. For purposes of this Agreement:

     “Acquired Customers” means customers of the SME Business, other than the customers
identified on Schedule 9.10(a).

     “Affiliate” means, with respect to any Person, any Person directly or indirectly
controlling, controlled by or under direct or indirect common control with such other Person,
through the ownership of all or part of any Person.

     “Competing Business” means the business of selling on a retail basis directly to small
and medium sized business customers telecommunications services of the type and nature sold on a
retail basis directly to small and medium sized business customers of the SME Business as of the
Closing Date.

     “Intellectual Property” means all intellectual property rights arising from or
associated with any of the following, whether protected, created or arising under the laws of the
United States or any other jurisdiction anywhere in the world: (a) copyrights, (b) trademarks
(including trade dress, service marks, and other designations of source, origin, sponsorship,
certification or endorsement), (c) patents and inventions, (d) trade secrets and (e) moral rights,
internet domain names, software and data base rights, publicity rights and any other proprietary or
intellectual rights of any kind or nature.

     “Legal Expenses” means reasonable attorneys’, accountants’, investigators’, and
experts’ fees, and expenses reasonably sustained or incurred in connection with the defense or
investigation of any Losses.

     “Lien” shall mean any pledge, lien (including any tax lien), charge, claim,
encumbrance, security interest, mortgage, option, restriction on transfer (including any buy-sell
agreement or right of first refusal or offer), forfeiture, penalty, license, equity or other right
of another person of every nature and description whatsoever.

     “Material Adverse Effect” shall mean any circumstance, change in or effect on the SME
Business that is materially adverse to the results of operations or the financial condition of the
SME Business, taken as a whole; provided, however, that a Material Adverse Effect shall not include
any event, circumstance, change, occurrence, fact or effect resulting from or relating to (a) any
changes in the telecommunications industry in California or Nevada, unless such changes have a
materially disproportionate impact on the SME Business, taken as a whole, as compared to the SME
business of other companies in such industry and region, (b) the public announcement of this
Agreement or the transactions contemplated hereby or (c) any action or omission contemplated or
required by this Agreement, and none of the foregoing shall be taken into account in determining
whether a Material Adverse Effect exists or has occurred.

     “Permitted Liens” shall mean such of the following as to which no enforcement,
collection, execution, levy or foreclosure proceeding shall have been commenced: (a) Liens for
Taxes, assessments, charges, levies or other claims not yet delinquent, or the validity of which
are being contested in good faith; (b) encumbrances, irregularities, easements, reserves,
servitudes, encroachments, rights of way or other imperfections of title or possession the
existence of which do not materially interfere with the present use of the Acquired Assets;

42

 

(c) registered easements, rights-of-way, restrictive covenants and servitudes and other similar
rights in land granted to, reserved or taken by any governmental authority or public utility
or any registered subdivision, development, servicing, site plan or other similar agreement with
any governmental authority or public utility; and (d) customary contractual provisions providing
for retention of title to goods until payment is made.

     “Seller Taxes” shall mean any liability for Taxes of Seller with respect to all
periods, including (i) any Taxes that relate to, or otherwise arise out of, the Acquired Assets for
any period prior to the Closing Date (including any Taxes that are the liability of Seller under
Section 7.3); (ii) any Taxes of Seller for any period that is not related to the Acquired
Assets, and (iii) any Taxes of Seller for any period that could become a liability of, or be
assessed or collected against, Buyer, or that could become a Lien on the Acquired Assets, in each
case, other than Taxes for which Buyer is responsible under Section 5.14.

     “To the knowledge,” or “known” and words of similar import shall mean the
actual knowledge of Hank Carabelli, H. Ravi Brar, Todd M. Putnam, Michael B. Hawn, Wayne Bell, Eric
Jacobs, John F. Sumpter and Peggy McGaw.

     “VOIP Customers” shall mean those Voice Over Internet Protocol customers of Seller
listed on Schedule 9.10(c).

     9.11 Notices. All notices, consents, requests, demands, claims and other communications
hereunder shall be in writing. Any notice, consent, request, demand, claim or other communication
shall be deemed duly given (a) two (2) business days after it is sent by registered or certified
mail, return receipt requested, postage prepaid, (b) one (1) business day after it is sent for next
business day delivery via a reputable nationwide overnight courier service, or (c) on the date sent
after transmission by facsimile with written confirmation, in each case to the intended recipient
as set forth below:

          If to Buyer, addressed to:

U.S. TelePacific Corp.

515 South Flower Street

47th Floor

Los Angeles, CA 90071

Phone: (213) 213-3500

Fax: (213) 213-3501

Attention: President and Chief Executive Officer

43

 

          With a copy to (which shall not constitute notice):

U.S. TelePacific Corp.

515 South Flower Street

47th Floor

Los Angeles, CA 90071

Phone: (213) 213-3690

Fax: (213) 213-3691

Attention: General Counsel

and

Gibson, Dunn & Crutcher LLP

333 South Grand Avenue

Los Angeles, CA 90071

Phone: (213) 229-7000

Fax: (213) 229-7520

Attention: Bradford P. Weirick

          If to Seller, addressed to:

Pac-West Telecomm, Inc.

1776 West March Lane, Suite 250

Stockton, CA 95207

Phone: (209) 926-3358

Fax: (209) 926-4444

Attention: Robert C. Morrison

          With a copy to (which will not constitute notice):

Jenner & Block LLP

One IBM Plaza

Chicago, IL 60611

Phone: (312) 840-7206

Fax: (312) 840-7306

Attention: Michael T. Wolf

or to such other place and with such other copies as either party may designate as to itself by
written notice to the others.

     9.12 Counterparts; Headings. This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original, but all of which together shall constitute one and the same
instrument. This Agreement will be binding on any party hereto once signed by such party and a
signature by facsimile, with an original hard copy to follow, will be deemed to be due execution.
The headings of the several Articles and Sections, the Table of Contents and the Index of Schedules
herein are inserted for convenience of reference only and are not intended to be part of or to
affect the meaning or interpretation of this Agreement.

44

 

     9.13 Expenses. Except as otherwise specified in this Agreement, regardless of whether the
transactions contemplated hereby are consummated, each party hereto shall pay its or their own
costs and expenses, including legal, accounting, consulting and other professional fees, incurred
in connection with the negotiation, preparation, investigation, and performance by such party of
this Agreement and the transactions contemplated hereunder.

     9.14 Successors and Assigns. This Agreement, and all rights and powers granted hereby, will
bind and insure to the benefit of the parties hereto and their respective successors and assigns.

     9.15 Partial Invalidity. Insofar as possible, each provision of this Agreement shall be
interpreted so as to render it valid and enforceable under Applicable Law and severable from the
remainder of this Agreement. A finding that any provision is prohibited, invalid or unenforceable
in any jurisdiction shall not affect the validity or enforceability of any other provision or the
validity or enforceability of such provision under the laws of any other jurisdiction.

     9.16 Bulk Transfer Laws. Buyer hereby waives compliance by Seller with any applicable bulk
sale or bulk transfer laws of any jurisdiction in connection with the sale of the Acquired Assets
to Buyer hereunder.

     9.17 Disclosure Schedules. The representations and warranties of Seller set forth in this
Agreement are made and given subject to the disclosures contained in the Schedules hereto. The
specific disclosures set forth in the Schedules have been organized to correspond to Section
references in this Agreement to which the disclosure may be most likely to relate, together with
appropriate cross references when disclosure is applicable to other Sections of this Agreement. In
the event that there is any inconsistency between this Agreement and matters disclosed in the
Schedules, information contained in the Schedules will prevail and will be deemed to be the
relevant disclosure.

     9.18 Recovery of Fees by Prevailing Party. In any action at law or in equity to enforce any
of the provisions or rights under this Agreement, the party which does not prevail in such
litigation, as determined by the court in a final judgment or decree, shall pay to the prevailing
party all costs, expenses and reasonable attorneys’ fees incurred by the prevailing party,
including such costs, expenses and fees of any appeals. If the prevailing party shall recover
judgment in any action or proceeding, its costs, expenses and attorney’s fees shall be included as
part of such judgment.

[Signatures on next page.]

45

 

     IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above
written.

	 	 	 	 	 
	 	U.S. TELEPACIFIC CORP.

 	 
	 	By:  	 	 
	 	 	 	 
	 	Its:  President and Chief Executive Officer 	 
	 

	 	 	 	 	 
	 	PAC-WEST TELECOMM, INC.

 	 
	 	By:  	 	 
	 	 	 	 
	 	Its:  President and Chief Executive Officer 	 
	 

[Signature Page to Asset Purchase Agreement]

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