ELECTRIC LIGHTWAVE INC, S-1/A, 1997-10-31

ELECTRIC LIGHTWAVE INC
S-1/A, 1997-10-31
TELEGRAPH & OTHER MESSAGE COMMUNICATIONS

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<PAGE>

As filed with the Securities and Exchange Commission on October 31, 1997.
Registration No. 333-35227
================================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

AMENDMENT NO. 4 TO
FORM S-1

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

ELECTRIC LIGHTWAVE, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 4825 93-1035711
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Identification
organization) Classification Number)
Code Number)

8100 N.E. PARKWAY DRIVE, SUITE 150, VANCOUVER, WASHINGTON 98662
(360) 892-1000
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)

ROBERT J. DESANTIS
ELECTRIC LIGHTWAVE, INC.
8100 N.E. PARKWAY DRIVE, SUITE 150
VANCOUVER, WASHINGTON 98662
(360) 892-1000
(Name, address, including zip code, and
telephone number, including area code, of agent for service)

COPIES TO:

JONATHAN H. CHURCHILL, ESQ. VINCENT PAGANO, ESQ.
WINTHROP, STIMSON, PUTNAM & ROBERTS SIMPSON THACHER & BARTLETT
ONE BATTERY PARK PLAZA 425 LEXINGTON AVENUE
NEW YORK, NY 10004 NEW YORK, NY 10017
(212) 858-1000 (212) 455-2000

Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [_]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Proposed
maximum maximum
Title of each class Amount to offering aggregate
of securities to be be price offering Amount of
registered registered per unit price registration fee
====================================================================================
<S> <C> <C> <C> <C>
Common Stock, Class A $207,000,000* $62,672**
====================================================================================
</TABLE>
- -----------------------
* Estimated solely for the purpose of calculating the registration fee pursuant
to Rule 457.

** $60,607 of the registration fee has already been paid. $2,065 is being paid
herewith.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE>

SUBJECT TO COMPLETION DATED OCTOBER 31, 1997

P R O S P E C T U S [LOGO]

10,000,000 Shares
Electric Lightwave, Inc.
Class A Common Stock
___________________

All of the shares of Class A Common Stock, par value $.01 per share (the
"Class A Common Stock"), offered hereby (the "Offering") are being sold by
Electric Lightwave, Inc. ("ELI" or the "Company"), a wholly owned subsidiary of
Citizens Utilities Company. Of the 10,000,000 shares of Class A Common Stock
being offered hereby, 8,000,000 shares are being offered initially in the United
States and Canada (the "U.S. Offering") by the U.S. Underwriters (as defined
herein) and 2,000,000 shares are being offered initially outside of the United
States and Canada (the "International Offering") in a concurrent offering by the
International Managers (as defined herein and, together with the U.S.
Underwriters, the "Underwriters"). Such offerings are collectively referred to
herein as the "Offering." See "Underwriting."

The Company has two classes of common stock: Class A Common Stock and Class B
Common Stock, par value $.01 per share (the "Class B Common Stock" and,
collectively with the Class A Common Stock, the "Common Stock"). The shares of
Common Stock are substantially identical, except that holders of Class A Common
Stock are entitled to one vote per share and holders of Class B Common Stock are
entitled to 10 votes per share on all matters submitted to a vote of
stockholders. Each share of Class B Common Stock is exchangeable at the option
of the holder into one share of Class A Common Stock. Upon completion of the
Offering, Citizens, the holder of the Class B Common Stock, will have
approximately 97.5% of the combined voting power of the outstanding Common Stock
(97.16% if the Underwriters' overallotment options are exercised in full) and
will have the ability to control all matters requiring stockholder approval,
including the election of directors. See "Description of Capital Stock" and
"Risk Factors-Control by Citizens."

At the Company's request, the U.S. Underwriters have reserved up to % of
the shares for sale at the initial public offering price to certain of the
Company's employees. The number of shares available for sale to the general
public will be reduced to the extent these individuals purchase such reserved
shares. Any reserved shares not purchased will be offered by the U.S.
Underwriters to the general public on the same basis as the other shares offered
hereby.

Prior to the Offering, there has been no public market for the Class A Common
Stock. It is currently anticipated that the initial public offering price will
be between $16.00 and $19.00 per share. The initial public offering price and
the underwriting discount and commission per share are identical for each of the
U.S. and International Offerings. See "Underwriting" for a discussion of the
factors considered in determining the initial public offering price. The
Company has applied for listing the Class A Common Stock on the Nasdaq National
Market under the symbol "ELIX."

See "Risk Factors" beginning on page 10 for a discussion of certain factors that
should be considered by prospective purchasers of the Class A Common Stock
offered hereby.
_______________

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

- --------------------------------------------------------------------------------
Underwriting
Price to Discount and Proceeds to
Public Commissions(1) Company (2)
- --------------------------------------------------------------------------------
Per share $ $ $
- --------------------------------------------------------------------------------
Total (3) $ $ $
- --------------------------------------------------------------------------------

(1) The Company and Citizens have agreed to indemnify the U.S. Underwriters and
International Managers against certain liabilities, including liabilities
under the Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."

(2) Before deducting expenses of the Offering payable by the Company estimated
at $[ ].

(3) The Company has granted the U.S. Underwriters and International Managers
options exercisable within 30 days after the date hereof to purchase up to
1,200,000 and 300,000 additional shares of Class A Common Stock,
respectively, solely to cover over-allotments, if any. If such options are
exercised in full, the total Price to Public, Underwriting Discount and
Commissions and Proceeds to Company will be $[ ], $[ ] and $[ ],
respectively. See "Underwriting."

The shares of Class A Common Stock offered hereby are being offered by the U.S.
Underwriters and International Managers named herein, subject to prior sale,
when, as and if accepted by the U.S. Underwriters and International Managers,
subject to approval of certain legal matters by counsel for the U.S.
Underwriters and International Managers and subject to certain conditions. The
U.S. Underwriters and International Managers reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It is
expected that delivery of the shares of Class A Common Stock will be made at the
offices of Lehman Brothers Inc. in New York, New York on or about [ ], 1997
against payment therefor in immediately available funds.

U.S. Underwriters offering shares in the United States

LEHMAN BROTHERS
DEUTSCHE MORGAN GRENFELL
MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
International Managers offering shares outside the United States
LEHMAN BROTHERS
DEUTSCHE MORGAN GRENFELL
MERRILL LYNCH INTERNATIONAL
MORGAN STANLEY DEAN WITTER

[ ], 1997.

1
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[Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.]

[MAP]

Attachment 1

[MAP] Western Build Route Map"

Shows the physical location of the fiber link network as it extends from
Portland, Oregon to Bend, Oregon; Boise, Idaho; Ogden, Salt Lake City and Provo,
Utah; Las Vegas, Nevada; and Los Angeles, California.

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON STOCK.
SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF SHARES OF CLASS A COMMON STOCK
FOLLOWING THE PRICING OF THE OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE
CLASS A COMMON STOCK OR FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE CLASS A
COMMON STOCK, AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."

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<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and the financial statements (including the notes thereto) appearing
elsewhere in this Prospectus. "ELI" and the "Company" refer to Electric
Lightwave, Inc. Unless otherwise indicated, the information set forth in this
Prospectus does not give effect to the exercise of the Underwriters' over-
allotment options. See "Glossary" for definitions of certain terms used in this
Prospectus.

The Company

ELI is a full-service, facilities-based competitive local exchange carrier
("CLEC") providing a broad range of telecommunications services in five major
market clusters in the western United States. The Company provides state-of-the-
art voice and data communications services to retail customers, primarily large-
and medium-sized communications-intensive businesses, and wholesale customers,
primarily telecommunications service providers. The Company operates high-
quality, extensive digital fiber optic networks based on a switched broadband
platform in each of its five market clusters (comprising six metropolitan
statistical areas ("MSAs"), including 59 municipalities) with 38,045 local
access line equivalents, 2,087 route miles and 123,257 fiber miles installed and
540 on-net buildings connected as of September 30, 1997. The Company has
interconnected its market clusters with facilities-based owned and leased long-
haul fiber optic networks.

The Company currently provides services in five markets: Portland, Oregon;
Seattle, Washington; Salt Lake City, Utah; Sacramento, California; and Phoenix,
Arizona ("hub cities") and their respective surrounding areas (together with the
hub cities, "market clusters" or "clusters"). The Company's clusters include an
extensive fiber optic network. The Company currently provides switched
services, including local dial tone, utilizing five Nortel DMS 500 switches, in
all of its market clusters except Phoenix, where the Company expects to initiate
local dial tone service upon installing an additional switch in the first half
of 1998. The Company's clusters are also served by its extensive frame relay
network, which is comprised of 18 state-of-the-art switches and 30 points-of-
presence ("POPs") in 26 western U.S. cities. The Company has also developed an
Internet backbone network providing Internet connectivity in each of its markets
which includes access on a redundant basis to the three largest Internet service
providers in the United States. The Company's goal is to add or expand its
market presence from six to 14 MSAs and from two to five long-haul networks by
the end of 1998.

The Company offers an extensive portfolio of products and services in four
categories: local telephone, long distance, data and video, and network access.
These products and services include: Local dial tone, with voicemail and
enhanced features; long distance with calling cards; advanced data services,
including frame relay, international frame relay and high-speed Internet access;
video conferencing and dialable wideband services; LAN-to-LAN services with very
high transport speeds; ISDN; and point-to-point communications and dedicated DS-
1s and DS-3s. The Company expects to provide Asynchronous Transfer Mode ("ATM")
services during 1998. The Company's data network expertise allows it to provide
a broader range of telecommunications services to customers, which helps to
maximize the amount of telecommunications traffic on its network.

3
<PAGE>

Deregulation in the telecommunications industry has created an enormous market
opportunity for ELI. Based on Federal Communications Commission ("FCC") data,
the Company estimates that in 1996 total revenues from local and long distance
telecommunications services were approximately $183 billion, of which
approximately $107 billion were derived from business telecommunications
services. The Company estimates that based on industry sources, the total
addressable business telecommunications services market in its current five
market clusters (based on access lines) was approximately $4.3 billion in 1997.
The Company believes that the market in its clusters will grow over the next
decade because of the favorable demographics and an increase in use of
telecommunications services and that its share of this market will increase as a
result of the passage of the Telecommunications Act of 1996 (the "1996 Act"),
the actions of various state commissions and other FCC rulings, which
collectively have essentially opened up the market to competition.

Since its inception, ELI believes that it has been at the forefront of industry
efforts to introduce competition to the local telecommunications markets. As
such, ELI believes that it has achieved significant milestones in the CLEC
industry and is well positioned to benefit from the opening of the local
telecommunications market. Before the passage of the 1996 Act, the Company
pursued regulatory and legislative reforms and consummated certain
interconnection agreements with incumbent local exchange carriers ("ILECs") that
in its view allowed the Company to offer economical and operationally efficient
local exchange services. The Company believes that it was early to market in
Portland, Seattle, Salt Lake City and Sacramento and believes it is the leading
CLEC in Portland, Seattle and Salt Lake City. The Company believes that it was
the first CLEC to receive authority from a state regulatory authority in a state
west of the Mississippi River to operate and to offer a full switch-based
product portfolio.

Since 1990, the Company has been a subsidiary of Citizens Utilities Company
(which, together with its subsidiaries, is referred to herein as "Citizens").
Citizens is a publicly-held communications and public services company which
provides, either directly or through subsidiaries, telecommunications, electric
distribution, natural gas transmission and distribution, and water and
wastewater services to over 1.6 million customer connections in 20 states.
Citizens is one of the nation's leading independent communications companies and
operates an integrated distribution network over which it provides local, long
distance, paging, cellular, network sales and other communications products and
services. At September 30, 1997, Citizens' consolidated assets totaled $4.5
billion and shareholders' equity totaled $1.7 billion. Citizens' consolidated
revenues for the twelve months ended September 30, 1997 totaled $1.4 billion.
The Company has historically been funded by capital contributions and advances
from Citizens and through a lease agreement guaranteed by Citizens. Citizens
does not have any obligation to make additional equity investments in or
advances to the Company or to guarantee or otherwise provide financial support
for the Company subsequent to the Offering, other than the guarantees described
herein. See "Capitalization" and "Relationship with Citizens."

Business Strategy

Guided by the business strategy adopted in 1990, the Company has become a
leading facilities-based, full-service CLEC. The key elements of this strategy
include:

. (1) Target Attractive Regional Markets. The Company's focus is on MSAs in the
western United States that the Company believes have few CLEC competitors, a
relatively high proportion of communications-dependent businesses and the
prospect of population and

4
<PAGE>

economic growth above the national average. Growth in these regions has been
fueled to a large degree by the computer, software, semiconductor and aerospace
industries and other telecommunications-intensive businesses such as financial
services and telemarketing call centers. The Company's policy has been and will
continue to be to establish a new market cluster where it expects to become the
leading facilities-based, full-service CLEC in such market in competition with
the ILEC. Due to its superior customer service, advanced network technologies
and the breadth and quality of its networks, the Company believes that it has an
opportunity to capture a significant share of the local market for
communications in its target regions in competition with U S WEST
Communications, Inc. ("U S WEST") and PacBell, which are the ILECs in its target
regions.

. Develop Market Clusters. The Company builds facilities and offers services
in market clusters which exist in and around a hub city in the selected MSA.
Once a potential market is identified, the Company establishes a network in the
hub city and then expands the network to adjacent cities and communities of
interest. Through the use of this strategy, the Company is able to leverage and
extend the depth of its management resources, communications network, switch
assets and product portfolio and reduce its dependence on the ILEC. The Company
realizes economies of scale in terms of network build out, switch deployment,
provisioning and servicing from its cluster strategy. Clustering also enables
the Company to (i) optimize its networks' switching capacity through the
ability to place switches anywhere in the cluster, (ii) cost-effectively offer
services to smaller markets adjacent to its existing networks and in which the
Company is less likely to face strong competition from other CLECs, and (iii)
achieve increased gross margins and improved network reliability due to higher
levels of on-net traffic. The Company believes communications traffic is heavy
between a metropolitan area and its outlying markets and its cluster strategy
takes advantage of this by offering facilities-based, end-to-end service
offerings that cover these broad geographic areas.

. Interconnect Market Clusters. The Company's strategy is to interconnect the
Company's major market clusters with facilities-based broadband, long-haul fiber
optic networks. Interconnecting its market clusters enables the Company to lower
costs and enhance its revenue potential by carrying increasing amounts of long
distance, frame relay, Internet and point-to-point traffic on its own
facilities. By carrying traffic on its own facilities, the Company is able to
improve the utilization of its network facilities and avoid leased facilities
charges and certain interconnection costs.

. Maximize On-net Traffic by Providing Facilities-based Services. The Company
has constructed extensive voice, frame relay, Internet backbone and
interconnecting long-haul networks, and each of the Company's operating clusters
includes an extensive fiber optic network backbone. These extensive networks
are a key aspect of the Company's strategy to maximize the services provided to
customers on the Company's network ("on-net"). Approximately half of the
Company's services provided to customers are currently on-net and the Company's
strategy is to increase this percentage over time. Maximizing the volume of on-
net traffic allows the Company to (i) improve customer loyalty; (ii) increase
network reliability; (iii) provide a wider range of services; (iv) increase
process control and thereby strengthen customer service through end-to-end
management; and (v) reduce its reliance on the ILEC for technologically up-to-
date services which are essential for the Company's enhanced services.

5
<PAGE>

The Company believes that greater on-net traffic will also increase operating
margins by increasing utilization of capacity inherent in the Company's network.

. Penetrate Markets by Leveraging Data Expertise. The Company has undertaken a
major expansion of its networks and products to satisfy the growing demand for
enhanced network services, including frame relay networking services and
Internet access. As a result, the Company has 18 frame relay switches as of
September 30, 1997 servicing customer locations. Enhanced network services,
which are currently provided primarily on the Company's frame relay network, are
specialized interchange services offered by the Company for customers that need
to transport large amounts of data among multiple locations. ELI's relationship
with certain carriers allows the Company to terminate traffic both nationally
and internationally utilizing other companies' networks and to provide a flow of
traffic into the Company's networks. In addition, to further increase efficient
access to a greater customer base, ELI established approximately 30 POPs which
interconnect their frame relay networks to those of U S WEST, PacBell and other
carriers.

. Establish Strategic Relationships With Utility Companies. A strategy of the
Company has been to form strategic relationships with utility companies that
enable it to (i) utilize existing rights-of-way and fiber optic facilities, (ii)
leverage their construction expertise and local permitting experience and (iii)
have access to capital in order for ELI to extend its network infrastructure
more quickly and economically. The Company's strategic alliances include
agreements for the utilization of existing excess facilities and the
construction of long-haul networks which link the Portland and Seattle clusters
and which will link Portland and Spokane, Washington and Portland and Eugene,
Oregon. Another agreement provides for a fiber optic network in the Phoenix
metropolitan area. These relationships allow the Company to achieve economies
of scale and scope by expanding its existing markets rapidly and cost-
effectively and enabling the Company to concentrate its efforts on sales and
marketing.

. Continue its Effective Direct Sales and Superior Customer Service. ELI has
built a highly motivated and experienced direct sales force and customer service
organization that is designed to establish a direct and personal relationship
with its customers. The Company offers its services in custom combinations, and
utilizes a consultative sales approach that provides customers a single point of
contract at the Company and an opportunity to work with the Company to design
innovative, turn-key solutions and new product applications which allow them to
take advantage of the broad array of services offered. Consistent with its
product offerings, the Company utilizes a three-pronged sales approach comprised
of direct retail, direct wholesale and agents. Salespeople are given
incentives through a commission structure which targets 50% of a salesperson's
compensation to be based on performance. A sales account manager is
responsible for managing each customer's account and staying in constant contact
with the customer to satisfy that customer's specific telecommunications needs.
Sales account managers utilize a vertical sales strategy with the goal of
selling additional value-added, high margin services to existing customers. The
Company believes that combining the consultative sales strategy with the
vertical sales strategy will enable it to achieve higher margins on each
account. The Company views its commitment to customer satisfaction as a key
success factor and is developing a superior customer service system which will
automate order processing, including order placement, design, provisioning and
billing, for both retail and wholesale

6
<PAGE>

<PAGE>

customers. This strategy ensures that the Company's processes are aligned with
customer needs and satisfaction.

The Company's principal executive offices are located at 8100 NE Parkway Drive,
Suite 150, Vancouver, Washington 98662 and its phone number is (360) 892-1000.

See "Risk Factors" beginning on page 10 for a discussion of certain risks
relevant to an investment in the Common Stock.

7
<PAGE>

The Offering

Class A Common Stock Offered: 10,000,000 shares (8,000,000 shares in the U.S.
Offering and 2,000,000 shares in the International Offering) (assuming over-
allotment options not exercised)

Common Stock to be outstanding
after the Offering:
Class A Common Stock............... 10,535,000 shares (1)
Class B Common Stock............... 41,165,000 shares
Total............................ 51,700,000 shares

Use of Proceeds......................The net proceeds of the Offering are
estimated to be approximately $164,244,000,
after deducting underwriting discounts and
commissions and the estimated offering
expenses payable by the Company. The
Company intends to use such proceeds to
fund its operating and capital expenditure
requirements. See "Use of Proceeds."

Voting Rights...................... Holders of Class A Common Stock are
entitled to one vote per share and holders
of Class B Common Stock are entitled to 10
votes per share on all matters submitted to
a vote of stockholders. The holders of the
Class A Common Stock and the Class B Common
Stock vote together as a single class on
all matters submitted to a vote of
stockholders, except as otherwise required
by law. Upon completion of the Offering,
Citizens, the holder of the Class B Common
Stock, will have approximately 97.5% of the
combined voting power of the Company's
outstanding Common Stock (97.16% if the
Underwriters' overallotment options are
exercised in full) and will have the
ability to control all matters requiring
stockholder approval, including the
election of directors. See "Risk Factors-
Control by Citizens" and "Description of
Capital Stock-Common Stock."

Exchange........................... Each share of Class B Common Stock is
exchangeable at the option of the holder
into one share of Class A Common Stock. See
"Description of Capital Stock-Common Stock-
Exchange."

Listing............................ The Nasdaq National Market under the
symbol "ELIX"
______________________________
(1) Excludes 2,316,000 shares of Class A Common Stock reserved for issuance
under the Equity Incentive Plan issuable upon the exercise of options
granted at an exercise price per share equal to the initial public offering
price of the Class A Common Stock. Includes 535,000 restricted shares of
Class A Common Stock to be issued at the offering date to officers and
employees under the Equity Incentive Plan. A total of 4,170,600 shares of
Class A Common Stock are reserved for issuance under the Equity Incentive
Plan. See "Management-Equity Incentive Plan."

8
<PAGE>

Summary Financial and Other Operating Data

The following summary Statement of Operations and Balance Sheet Data for
the years ended and as of December 31, 1994, 1995, and 1996 have been derived
from the Company's Financial Statements and related notes thereto included
elsewhere in this Prospectus, which Financial Statements have been audited by
KPMG Peat Marwick LLP, independent Certified Public Accountants. The summary
Statement of Operations and Balance Sheet Data for the nine months ended
September 30, 1996 and 1997 and as of September 30, 1997 have been derived from
the Company's unaudited Financial Statements and related notes thereto included
elsewhere in this Prospectus, and in the opinion of management, include all
adjustments necessary for a fair presentation of the results of operations and
financial condition of the Company for and as of such periods. The results of
operations for interim periods are not necessarily indicative of a full year's
operations. This information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
Company's Financial Statements and related notes thereto and the other financial
data contained elsewhere in this Prospectus.

<TABLE>
<CAPTION>
Years Ended December 31, Nine Months Ended Sept. 30,
---------------------------------- ----------------------------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- -------------------- ------------------
<S> <C> <C> <C> <C> <C>
($ in thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA
Revenues $ 8,152 $ 15,660 $ 31,309 $ 24,965 $ 41,843
Operating expenses:
Network access expenses 6,155 8,728 24,081 16,533 24,217
Sales and marketing expenses 4,534 5,704 8,462 6,303 8,716
Depreciation and amortization 2,476 7,064 7,192 4,997 7,601
Other operating expenses 4,528 14,114 20,957 16,715 26,831
-------- -------- --------- -------- --------
Total operating expenses 17,693 35,610 60,692 44,548 67,365
-------- -------- --------- -------- --------
Operating loss (9,541) (19,950) (29,383) (19,583) (25,522)
Interest expense 873 372 - - 513
-------- -------- --------- -------- --------
Net loss $(10,414) $(20,322) $ (29,383) $(19,583) $(26,035)
======== ======== ========= ======== ========
Net loss per share(2) $ (.70) $ (.47) $ (.62)
========= ======== ========
Pro forma net loss(1) $ (34,399) $(22,955) $(35,799)
========= ======== ========
Pro forma net loss per share(2) $ (.82) $ (.55) $ (.86)
========= ======== ========
<CAPTION>
As at December 31,
-------------------------------- As at Pro forma as at
1994 1995 1996 Sept. 30, 1997 Sept. 30, 1997(3)
-------- -------- --------- ------------------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital (deficiency) $ (9,934) $(17,897) $ (9,940) $(7,734) $ 156,510
Total assets 110,691 128,901 195,656 248,570 412,814
Long-term debt and capital lease obligations 6,565 - - 10,374 10,374
Due to Citizens 35,109 64,941 155,395 219,171 -
Credit Commitment - - - - 100,000
Shareholder's equity (deficiency) 55,991 38,669 9,286 (16,749) 266,666
<CAPTION>

Years Ended December 31, Nine Months Ended
-------------------------------- Sept. 30,
1994 1995 1996 1997
-------- -------- --------- --------
<S> <C> <C> <C> <C>
OPERATING DATA
EBITDA(4) $ (7,065) $(12,886) $ (22,191) $(17,921)
Cash flows used for operating activities (4,097) (1,570) (28,893) (18,040)
Cash flows used for investing activities (60,774) (16,129) (59,169) (48,717)
Cash flows provided by financing activities 64,907 17,751 88,530 67,293
<CAPTION>
As at December 31,
-------------------------------- As at
1994 1995 1996 Sept. 30, 1997
-------- -------- --------- -------------------
<S> <C> <C> <C> <C>
OTHER DATA
Property, plant & equipment-owned $108,549 $127,297 $ 189,334 $249,499
-under lease(5) - 36,858 57,279 87,426
-------- -------- --------- --------
-Total $108,549 $164,155 $ 246,613 $336,925
-------- -------- --------- --------
Market clusters 5 5 5 5
Route miles(6) 601 780 1,428 2,087
Fiber miles(6) 37,504 52,013 97,665 123,257
Buildings connected 191 282 438 540
Switches installed:
Voice 2 2 5 5
Frame relay 2 5 15 18
-------- -------- --------- --------
Total switches installed 4 7 20 23
-------- -------- --------- --------

Employees 127 225 402 482
</TABLE>
__________________________

(1) The pro forma net loss represents the historical net loss as adjusted for
the revised administrative services fee and guarantee fees as if such fees
were in effect since January 1, 1996, and interest on the drawdown of the
Credit Commitment utilized to repay the remaining balance due to Citizens
subsequent to the capitalization of $119.2 million of the due to Citizens
amount, as if the Credit Commitment was in effect on January 1, 1996 (see
Notes 6, 7 and 8 of Notes to Financial Statements).

(2) The net loss per share and pro forma net loss per share have been computed
using weighted average shares outstanding determined on the basis described
in Note 2(i) of Notes to Financial Statements.

(3) The pro forma balance sheet data gives effect to the contribution of $119.2
million of due to Citizens to additional paid-in capital as discussed in
Note 6 of Notes to Financial Statements, to the drawdown of the Credit
Commitment to repay the remaining amount due to Citizens, and to the
issuance of the shares of Class A Common Stock offered hereby, as if such
transactions occurred on September 30, 1997.

(4) EBITDA consists of Earnings Before Interest, Income Taxes, Depreciation and
Amortization. EBITDA is a measure commonly used in the communications
industry to analyze companies on the basis of operating performance. EBITDA
is not a measure of financial performance under generally accepted
accounting principles and should not be considered as an alternative to net
income as a measure of performance nor as an alternative to cash flow as a
measure of liquidity. See the Company's Financial Statements included
elsewhere in this Prospectus.

(5) Facilities under an operating lease agreement under which the Company has
the option to purchase the facilities at the end of the lease term. See Note
7 of Notes to Financial Statements.

(6) Route miles and Fiber miles also include those to which the Company has
exclusive use pursuant to license and lease arrangements (See "Business-
Long-Haul Networks")

9
<PAGE>

RISK FACTORS

Prior to purchasing any shares of Class A Common Stock offered hereby,
prospective investors should consider carefully the following factors in
addition to the other information contained in this Prospectus.

Negative Cash Flow and Operating Losses

The capital expenditures of ELI associated with the installation, development
and expansion of its existing and new telecommunications networks are
substantial, and a significant portion of these expenditures generally are
incurred before any revenues are realized. These expenditures, together with
associated initial operating expenses, result in negative cash flow and
operating losses until an adequate customer base and revenue stream for these
networks have been established. The Company expects to incur net losses for the
foreseeable future as it expands significant amounts on sales, marketing,
customer service, engineering and corporate personnel as it continues to
install, develop and expand its existing and new telecommunications networks.
There can be no assurance that an adequate revenue base will be established in
each of the Company's clusters or that the Company will achieve or sustain
profitability or generate sufficient positive cash flow to fund its operating
and capital requirements and/or service its debt obligations. If the Company is
unable to establish an adequate revenue base in each of its clusters or does not
achieve or sustain profitability or generate sufficient positive cash flow to
fund its operating and capital requirements and/or service its debt obligations,
it may be forced to change its strategic plan and consider alternatives. The
alternatives could include the sale of some or all of ELI's facilities, a
strategic alliance with another telecommunications or utilities company, a
restructuring with or without a new financial partner or with Citizens, or the
failure to continue as a growing concern. The consequences to the Company and
its investors could be materially adverse.

Significant Capital Expenditures

The development and expansion of the Company's existing and new networks and
services will require significant additional capital expenditures. The
Company's capital expenditures for the eighteen months subsequent to the
completion of the Offering are estimated to be approximately $400 million. The
Company continues to evaluate additional revenue opportunities in each of its
markets and, as additional opportunities develop, the Company plans to make
additional capital investments in its existing networks and to expand networks
as may be required to pursue such opportunities.

ELI has historically been funded by capital contributions, advances and
guarantees from Citizens. The Company expects to meet its capital needs with
the proceeds of the Offering, the Credit Commitment (as defined below), together
with internally generated cash flow and lease arrangements, proceeds from other
bank credit facilities, other borrowings and possible issuances of additional
equity securities. Citizens does not have any obligation to make additional
equity investments in or advances to ELI or to guarantee or otherwise provide
financial support for ELI after the completion of the Offering, other than to
guarantee ELI's obligations under the Credit Commitment and the Lease. The
guaranteed fee agreement between Citizens and ELI provides that, if the economic
interest of Citizens in ELI should drop below 50%, Citizens will be entitled to
request ELI to refinance its obligations under the Lease and the Credit
Commitment and ELI shall be obligated to use its best efforts to do so. See
"Relationship with Citizens-Citizens' Guarantees of ELI's Obligations." For a
description of the Credit Commitment and Citizens' undertaking to obtain
regulatory authorization for its guarantee of ELI's debt within 90 days after
the closing of the Credit Commitment, see "Management's Discussion and Analysis-
Liquidity and Capital Resources."

10
<PAGE>

There can be no assurance that ELI will be successful in generating sufficient
cash flow or raising debt or equity capital in sufficient amounts on terms
acceptable to it. The failure to generate sufficient cash flow or to raise
sufficient funds may require the Company to delay or abandon some or all of its
development and expansion plans, which could have a material adverse effect on
ELI's growth, its ability to compete in the telecommunications services
industry and its ability to achieve positive cash flow. See "Use of Proceeds"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources."

Risks Inherent in Expansion

ELI intends to expand its networks in each of the Portland, Seattle, Salt Lake
City, Sacramento and Phoenix metropolitan areas, has commenced construction in
Boise, Idaho (the Salt Lake City cluster) and has completed preparations to
begin construction in Spokane and Tacoma, Washington (the Seattle cluster) and
Ogden, Utah (the Salt Lake City cluster). The Company intends to consider
additional expansion in other areas in the future. There can be no assurance
that the Company will be able to expand its existing clusters or construct new
clusters as currently planned or on a timely basis. The expansion of ELI's
existing clusters and its construction of new clusters will be dependent, among
other things, on its ability to acquire rights-of-way and any required permits
on satisfactory terms and conditions, on its ability to finance such expansion
and construction, its ability to assess markets, design fiber network carrier
rings and backbone routes, install other facilities, and implement
interconnection with ILECs, all in a timely manner, at reasonable costs and on
terms and conditions acceptable to ELI. The Company's ability to manage this
expansion effectively will require it to continue to implement and improve its
operational and financial systems and to expand, train and manage its employee
base. ELI's inability to expand its existing clusters or install new clusters
or manage effectively such expansion and installation could have a material
adverse effect upon the Company's business strategy, financial condition and
results of operations.

Substantial Competition

The Company operates in an increasingly competitive environment. Services
substantially similar to those offered by the Company are also offered by the
ILECs serving the markets currently served or intended to be served by the
Company. ILECs have longstanding relationships with their customers, have
financial and technical resources substantially greater than those of the
Company and benefit from federal and state laws and regulations that, ELI
believes, in some instances favor the ILECs over CLECs. Under certain
circumstances, the FCC and state regulatory authorities provide the ILECs with
an ability to lower selectively the price of certain services within the areas
in which the Company operates. In addition, as a result of the 1996 Act, ILECs
are likely to obtain additional pricing flexibility with regard to services that
compete with those offered by the Company. Increased price competition from
ILECs could have a material adverse effect on the Company's financial condition
and results of operations. See "Business-Competition" and "Government
Regulation."

Also, under the 1996 Act, ILECs formerly subject to anti-trust decree
restrictions on interLATA (interexchange) long distance services are no longer
permanently barred from entry into these businesses, subject to certain
requirements in the 1996 Act and rules and policies to be implemented by the FCC
and the states. Also under the 1996 Act, long distances carriers will be
permitted to enter businesses in which they will be in competition with the
Company. The FCC

11
<PAGE>

may authorize a Regional Bell Operating Company ("RBOC") to provide interLATA
services in a state when the RBOC enters into a state utility commission-
approved agreement with one or more facilities-based competitors which provide
business and residential local exchange service and such agreement satisfies 14
specified interconnection requirements. In evaluating an RBOC application for
interLATA entry, the FCC must consult with the U.S. Department of Justice.
Alternatively, if no such facilities-based competitors request such
interconnection, the RBOC may obtain authority from the FCC to provide interLATA
services if the RBOC obtains state utility commission approval of a statement of
generally available terms and conditions of interconnection that satisfies the
requirements. If and when an RBOC obtains authority to provide interLATA
services, it will be able to offer customers local and long distance telephone
services. This will permit the RBOC to offer a full range of services to
potential customers in a new region and thus eliminate an existing competitive
advantage of the Company. Given the resources and experience the RBOCs currently
possess in the local exchange market, the ability to provide both local and long
distance services could make the RBOCs very strong competitors.

The 1996 Act is intended to increase competition in the local telecommunications
business. The 1996 Act requires all local exchange providers, including new
entrants, to offer their services for resale and requires ILECs to offer their
network facilities on an unbundled basis. There can be no assurance that any
unbundled rates or facilities offered by ILECs to ELI will be economically
attractive or technically viable. See "Government Regulation-Telecommunications
Act of 1996." These requirements facilitate entry by new competitors without
substantial capital risk or investment. See "Business-Competition."

The Company faces strong competition from operational facility-based CLECs in
each of the markets in which the Company operates. In each of the clusters in
which ELI operates, at least one other CLEC, and in some cases several other
CLECs, offers many of the same telecommunications services provided by the
Company, generally at similar prices.

Potential and actual new market entrants in the local telecommunications
services business include RBOCs entering new geographic markets, CLECs, Inter-
Exchange Carriers ("IXCs"), cable television companies, electric utilities,
international carriers, satellite carriers, teleports, microwave carriers,
wireless telephone system operators and private networks built by large end
users, many of which may have financial, personnel and other resources
substantially greater than those of ELI. In addition, the current trend of
business combinations and alliances in the telecommunications industry,
including mergers between RBOCs, may increase competition for the Company. The
Company's competitors for high speed data services include major IXCs,
Competitive Access Providers ("CAPs"), other CLECs, and various providers for
niche services (e.g., Internet access providers, router management services and
systems integrators). The market for Internet access and related services in
the United States is extremely competitive, with no substantial barriers to
entry. The Company expects that competition will intensify as existing services
and network providers and new entrants compete for customers. The Company's
current and future competitors include telecommunications companies and other
Internet access providers. Many of these competitors have greater market
presence and greater financial, technical, marketing and human resources, more
extensive infrastructure and stronger customer and strategic relationships than
the Company.

12
<PAGE>

Dependence Upon Interconnection and Relationship with ILECs

Local Services and Switched Service Strategies

The Company is a recent entrant in the competitive local telecommunications
services industry. The local telecommunications services market has recently
opened up to competition due to the passage of the 1996 Act, state and federal
regulatory rulings designed to implement the 1996 Act, and negotiations with
ILECs under the terms of the 1996 Act and state rulings. The Company believes
that offering a full-service portfolio of local, long distance and data products
is the best method for gaining market share among business customers.

The Company is making significant operating and capital investments and will
have to address numerous operating complexities associated primarily with
providing local services. The Company will be required to enhance current
provisioning and technical support systems and will need to develop new
marketing initiatives and hire and train a continuing growing sales force
responsible for selling its services. There can be no assurance that the
Company can design and install, and coordinate with ILECS regarding, necessary
provisioning, billing and customer management systems in a timely manner to
permit the Company to provision local exchange, toll, long distance or data
communications services as planned.

The Company expects to face significant competition from ILECs, whose core
business is providing local dial tone service. The ILECs, who currently are the
dominant providers of services in their markets, are expected to mount a
significant competitive response to new entrants in their market, such as the
Company. The Company expects to face significant competitive product and
pricing pressures from the ILECs in these markets, as well as from other CLECs.

Federal and State Regulation

The Company is subject to federal and state regulation. In most states, ELI is
subject to certification and tariff filing requirements with respect to
intrastate services. See "Government Regulation-State Regulation." In some
instances, the certificate obtained by the Company in a particular state limits
the services that it is permitted to provide in that state. These current
restrictions on the services that may be provided by the Company should be
eliminated as a result of the 1996 Act, which prohibits states from imposing
legal restrictions that effectively prohibit the provision of any
telecommunications service. States will, however, under the 1996 Act, retain
authority to impose on the Company and other telecommunications carriers

13
<PAGE>

requirements to preserve universal service, protect public safety, ensure
quality of service and protect consumers. States are also responsible under the
1996 Act for mediating and arbitrating interconnection arrangements between
CLECs and ILECs if the carriers fail to agree on such arrangements.

ELI is currently required to file tariffs for some interstate services with the
FCC, although such tariff requirements are less restrictive than those imposed
on ILECs offering similar services. These tariffs, which are presumed to be
lawful on filing, must contain the rates, terms and conditions under which
service is generally available from ELI. While unlikely, challenges by third
parties to the Company's tariff filings or related contractual arrangements may
cause ELI to incur substantial legal and administrative expenses. The FCC has
promulgated rules to eliminate tariffing of interstate long distance services.
Those rules have been stayed during the pendency of judicial review. If and when
these rules are allowed to go into effect, the Company will no longer be
required to file FCC tariffs for its interstate long distance services.
Additionally, under a recent FCC order, CLECs, including ELI, are no longer
required to file tariffs for interstate exchange access services.

Under the 1996 Act, the Company is subject to certain federal regulatory
obligations when it provides local exchange service in a market. All local
exchange carriers, including CLECs, must interconnect with other carriers, make
their services available for resale by other carriers, provide nondiscriminatory
access to rights-of-way, offer reciprocal compensation for termination of
traffic and provide dialing parity and telephone number portability. In
addition, the 1996 Act requires all telecommunications carriers to ensure that
their services are accessible to and usable by persons with disabilities.
Further, ELI and other CLECs will be required to contribute to federal and state
universal service funds provided for in the 1996 Act, but which have not yet
been implemented. Because many FCC rules implementing the 1996 Act are under
challenge in the courts and are still being analyzed by the industry, and
related state implementation processes are not complete, it is uncertain how
burdensome the requirements of the 1996 Act will be for ELI.

The 1996 Act contains other provisions that may be subject to FCC rulemaking and
judicial interpretation.

The FCC recently adopted rules to reform the interstate access charges ILECs may
impose for use of local networks to originate and terminate interstate services.
Among the effects of those rules will be a substantial reduction in ILEC access
prices. Certain of ELI's services permit the customer to bypass the ILEC access
charges. The downward pressure on access prices resulting from the FCC's
actions may adversely impact ELI's revenues from its competitive access
products. However, ELI also pays ILEC access charges in connection with ELI's
long distance products, and to this extent reductions in ILEC access charges
will lower ELI's costs.

In addition, no assurance can be given that changes to current regulations or
the adoption of new regulations by the FCC or state regulatory authorities or
legislative initiatives or court decisions would not have a material adverse
effect on ELI. See "Government Regulation."

Governmental and Other Authorizations

The development, expansion and maintenance of the Company's networks depend on,
among other things, its ability to obtain rights-of-way and any other required
governmental

14
<PAGE>

authorizations and permits, all in a timely manner, at reasonable costs and on
satisfactory terms and conditions. In addition, ELI currently leases and plans
in the future to enter into facility arrangements for significant numbers of
optical fibers from other parties. In some of the cities or municipalities where
ELI provides network services, it may pay license or franchise fees, usually
based on a percentage of gross revenues or a per foot right-of-way fee. The 1996
Act permits municipalities to charge such fees only if they are
nondiscriminatory, but there can be no assurance that municipalities that
presently favor a particular carrier, typically the ILEC, will conform their
practices to the requirements of the 1996 Act in a timely manner or without a
legal challenge. Furthermore, there can be no assurance that certain cities or
municipalities that do not now impose fees will not seek to impose fees, nor can
there be any assurance that, following the expiration or renegotiation of
existing franchises, fees will remain at their current levels or that the
franchises will be renewed.

With respect to the Company's ability to lease or enter into facility
arrangements, there can be no assurance that the Company will be able to obtain
all necessary permits, licenses, conduit agreements or pole attachment
agreements from governmental authorities or private rights-of-way providers
necessary to effectuate such transactions. As a result, there can be no
assurance that ELI will be able to expand its existing networks or develop new
networks successfully, which would have a material adverse effect on the
Company's growth and financial condition.

If any of the Company's existing franchise, license or similar agreements for a
particular market were terminated prior to their expiration dates or not renewed
and ELI were forced to remove its fiber or abandon its network in place, such
termination would have a material adverse effect on the Company's operations in
that market and could have a material adverse effect on ELI.

Dependence on Significant Customers

The Company has substantial business relationships with a few large customers,
including the major long distance carriers. During 1996, the Company's top five
customers accounted for approximately 20% of ELI's total revenues. No customer
accounted for 10% or more of total revenues in 1996. In 1997, one customer, IXC
Communications, is expected to account for approximately 10% of the Company's
revenues. A portion of the Company's services provided to IXC Communications
will no longer be required when IXC Communications completes construction of its
own facilities in the first quarter of 1998. A significant reduction in the
level of services ELI performs for any of these customers could have a material
adverse effect on the Company's results of operations or financial condition.
Most of the Company's customers have short notice contracts.

Services Provided by Third Party Vendors

Sophisticated information and processing systems are vital to the Company's
growth and its ability to monitor costs, bill customers, provision customer
orders and achieve operating efficiencies. Billing and information systems for
the Company's historical lines of business have been produced by third party
vendors. These systems have met the Company's needs, due in part to the
Company's low volume of bills and orders. As the Company provides expanded
local, long distance and data transmission services, the need for sophisticated
billing information systems will increase significantly. The Company's current
local billing platform plans rely on products and services provided by third
party vendors. Additionally, the Company is

15
<PAGE>

implementing new automated systems and expanding customer service centers to
provision orders. Information systems are vital to the success of these centers,
and the information systems for these centers have largely been developed by
third party vendors. The failure of (i) the Company's vendors to deliver
proposed products and services in a timely and effective manner, (ii) the
Company to adequately identify all of its information and processing needs or
(iii) the Company to upgrade systems as necessary, could have a material adverse
impact on the ability of the Company to reach its objectives, and on its
financial condition and results of operations.

While the Company believes that its software applications are "year 2000
compliant," there can be no assurance until the year 2000 occurs that all
systems will then function adequately. Further, if the software applications of
local exchange carriers, long distance carriers or others on whose services the
Company depends are not year 2000 compliant, it could have a material adverse
effect on the Company's financial condition and results of operations.

Minimum Requirements of Long-Haul License Agreements

The Company's license agreements for the exclusive use of long-haul facilities
connecting its Portland to Seattle, Portland to Spokane and Portland to Eugene
long-haul transport networks and for the exclusive use of the Phoenix network
contain annual minimum usage requirements. See "Business-Existing Market
Clusters-Long-Haul Networks." If the Company's traffic on any of these networks
falls below the minimums, the licensor will obtain the right to share usage of a
specified number of fibers with the Company, which could adversely impair the
capacity of such network available to service the Company's customers.

Operating Lease

Under the terms of the operating lease described under "Business-Properties-
Lease," if the Company wishes to continue to make use of its presently leased
facilities past the final lease expiration date in 2002, the Company will be
required to exercise its option to purchase the leased facilities at the
termination of the lease in 2002. If the purchase option is exercised, the
purchase price required will be the original cost to the lessor of purchasing
and installing the facilities subject to the maximum amount available under the
lease (expected to be $110,000,000). If the Company does not purchase the
facilities, they will be sold to a third party and the Company will guarantee
that the sales price to be received by the lessor will equal the acquisition and
installation costs, subject generally to a maximum payment under the guarantee
of 80% of such costs.

Control by Citizens

Citizens is currently the only shareholder of the Company. Upon the completion
of the Offering, Citizens will hold all the Class B Common Stock of the Company
(which Class B Common Stock entitles its holders to 10 votes per share on any
matter submitted to a vote of the Company's shareholders). The Class B Common
Stock will represent approximately 97.5% of the combined voting power of all
classes of voting stock of the Company (97.16% if the Underwriters' over-
allotment options are exercised in full) and thus will be able to direct the
election of all of the members of the Company's Board of Directors and exercise
a controlling influence over the business and affairs of the Company, including
any determinations with respect to mergers or other business combinations, the
acquisition or disposition of assets, the incurrence of indebtedness, the
issuance of any additional Common Stock or other equity

16
<PAGE>

securities and the payment of dividends with respect to the Common Stock.
Similarly, Citizens will have the power to determine matters submitted to a vote
of the Company's shareholders without the consent of the Company's other
shareholders, will have the power to prevent a change of control of the Company
and could take other actions that might be favorable to Citizens. The
disproportionate voting rights of the Class B Common Stock relative to the Class
A Common Stock may render impossible any merger proposal, a tender offer or a
proxy contest, even if such actions were favored by a majority of the holders of
the Class A Common Stock. See "Securities Ownership," "Description of Capital
Stock" and "Relationship with Citizens." Citizens has advised the Company that
its current intent is to continue to hold all of its Class B Common Stock. There
can be no assurance, however, concerning the period of time during which
Citizens will maintain its beneficial ownership of Common Stock. As described
below, pursuant to the Underwriting Agreement, Citizens has agreed, subject to
certain exceptions, not to sell or otherwise dispose of, directly or indirectly,
any shares of Common Stock owned by it for a period of 180 days after the date
of this Prospectus without the prior written consent of Lehman Brothers Inc. on
behalf of the Representatives of the Underwriters.

The Company's Board of Directors currently consists of six members, four of whom
are executive officers and/or directors of Citizens and one of whom is
independent of both Citizens and ELI. Following the Offering, the Board will be
increased to consist of seven members to add an additional independent director.
In light of its ownership of the Company's Class B Common Stock, Citizens will
have the ability to change the size and composition of the Company's Board of
Directors and committees of the Board of Directors.

As of the date of the Prospectus, Citizens has advised ELI that Citizens has no
current plan or intention other than to hold the shares of Class B Common Stock
owned by it for the foreseeable future. However, there is no assurance that
Citizens may not decide in the future to sell all or a portion of its shares of
Common Stock publicly or privately or otherwise. Citizens has the right to
require the Company to register for sale under applicable securities laws all of
the shares of Common Stock (including any shares of Class A Common Stock
acquired by Citizens upon exchange of the Class B Common Stock) which Citizens
or its subsidiaries hold. See "Relationship with Citizens-Registration Rights
Agreement."

Beneficial ownership of at least 80% of the total voting power and value of the
outstanding Common Stock is required in order for Citizens to continue to
include the Company in its consolidated group for federal income tax purposes,
and beneficial ownership of at least 80% of the total voting power and 80% of
each class of nonvoting capital stock is required in order for Citizens to
effect a transaction intended to be tax-free under section 355 of the Internal
Revenue Code of 1986, as amended, of the Company or certain other tax-free
transactions. Each member of a consolidated group for federal income tax
purposes is jointly and severally liable for the federal income tax liability of
each other member of the consolidated group. Each member of the Citizens
controlled group, which includes Citizens, the Company and Citizens's other
subsidiaries, is also jointly and severally liable for pension and benefit
funding and termination liabilities of other group members, as well as certain
benefit plan taxes. Accordingly, if the Company is included in Citizens'
consolidated group it could be liable under such provisions in the event any
such liability is incurred, and not discharged, by any other member of the
Citizens consolidated or controlled group. If the Company were no longer to be
included in Citizens's consolidated group for federal tax purposes, there is no
assurance that the

17
<PAGE>

Company's tax position would not be less favorable than it is at
present. See "Relationship With Citizens."

Conflicts of Interest

Various conflicts of interest between the Company and Citizens may arise in the
future in a number of areas relating to their past and ongoing relationships,
including potential acquisitions of businesses or properties or other corporate
opportunities, the election of new or additional directors, payment of
dividends, incurrence of indebtedness, tax matters, financial commitments,
marketing functions, indemnity arrangements, registration rights, administration
of benefit plans, service arrangements, issuances of capital stock of the
Company, sales or distribution by Citizens of its remaining shares of Common
Stock and the exercise by Citizens of its ability to control the management and
affairs of the Company. In addition, Citizens is in the telecommunications
business and may, now or in the future, provide services which are the same or
similar to those provided by ELI. Citizens will be free to compete with ELI in
certain markets. See "Relationship with Citizens-Customers and Service
Agreement."

Citizens' Representation on Company's Board of Directors and as Officers of the
Company. Certain directors and/or executive officers of Citizens are directors
of the Company. Also, the Chief Executive Officer of Citizens is the Chairman
of the Board of the Company, the President of Citizens is Vice Chairman and
Chief Executive Officer of the Company and another executive officer of Citizens
is an executive officer of the Company. See "Management." Neither the Company
nor Citizens has instituted any formal plan or arrangement to address potential
conflicts of interest that may arise between the Company and Citizens. The
Company's directors intend to exercise reasonable judgment and take such steps
as they deem necessary under all of the circumstances in resolving any specific
conflict of interest that may occur and will determine what, if any, specific
measures may be necessary or appropriate in light of their fiduciary duties
under state law, including whether to have any specific matter approved by a
majority vote of the disinterested directors. There can be no assurance that
any conflicts will be resolved in favor of the Company.

Future Arrangements. The Company and Citizens have entered into a number of
agreements for the purpose of defining the ongoing relationship between them.
Pursuant to these arrangements, Citizens will provide benefits to the Company
that it might not provide to a third party, and there is no assurance that the
terms and conditions of any future arrangements between Citizens and the Company
will be as favorable to the Company as in effect now.

Competition. To address the potential for conflicts between the Company and
Citizens, the Customers and Service Agreement between the Company and Citizens
contains provisions prohibiting the Company from competing with Citizens for
customers in Citizens' existing service areas and in certain new lower density
territories which Citizens will have been first to enter after the Offering.
Citizens has agreed that it will not compete with the Company in the service
territories in which the Company is currently providing services and in certain
new higher density territories which the Company will have been first to provide
services after the Offering, except that Citizens may compete in ELI's new
territories in the provision of long distance services. Neither Citizens nor
ELI may solicit an existing wholesale customer of the other company for services
which such customer is currently receiving under contract from the other
company. The relevant provisions are intended to permit the Company to continue
all activities in which it currently engages, and to expand into related market
areas. The Customers

18
<PAGE>

and Service Agreement will remain in effect for so long as Citizens owns a
majority of the economic or voting interest of the shares of Common Stock of the
Company. See "Relationship with Citizens-Customers and Service Agreement."

Tax Sharing. The Company has heretofore been included in Citizens' federal
consolidated income tax group. After the Offering it is expected that the
Company will no longer be included in the federal consolidated income tax group
although, depending upon Citizens' stock ownership of the Company, it is
conceivable that the Company may continue to be so included. In such case the
Company's federal income tax liability would be included in the consolidated
federal income tax liability of Citizens and its subsidiaries. The Company may
also be included with certain Citizens subsidiaries in combined, consolidated or
unitary income tax groups for state and local tax purposes. The Company and
Citizens will enter into a federal, state and local tax-sharing agreement (the
"Tax Sharing Agreement"). Under the Tax Sharing Agreement, Citizens will have
sole authority to respond to and conduct all tax proceedings (including tax
audits) relating to the Company and to file all returns on behalf of the
Company. The amount of the Company's liability to (or entitlement to payment
from) Citizens under the Tax Sharing Agreement will equal the amount of taxes
that the Company would owe (or refund that it would receive) had it prepared tax
returns on a stand-alone basis. See "Relationship with Citizens-Tax Sharing
Agreement." This arrangement may result in conflicts of interest between the
Company and Citizens. For example, under the Tax Sharing Agreement, Citizens
may choose to contest, compromise or settle any adjustment or deficiency
proposed by the relevant taxing authority in a manner that may be beneficial to
Citizens and detrimental to the Company.

Intercompany Agreements Not Subject to Arm's-Length Negotiation

Citizens and the Company have entered into intercompany agreements that are
material to the Company's business. See "-Conflicts of Interest" above and
"Relationship with Citizens." Because the Company has been a wholly owned
subsidiary of Citizens, these agreements are a result of negotiations between
affiliated parties. Although the administrative costs to be paid by ELI to
Citizens pursuant to the Administrative Services Agreement are not expected to
exceed the fees that would be paid if such services were to be provided by an
independent third party, the prices charged to the Company at a particular time
for services provided under this or the other agreements may be higher or lower
than prices that might have been charged by an unaffiliated third party.

Potential Issuance of Preferred Stock

The Company's Board of Directors has the authority, without any further vote or
action by the Company's stockholders, to issue up to 10,000,000 shares of
Preferred Stock in one or more series and to determine the designations, powers,
preferences and relative, participating, optional or other rights thereof,
including without limitation, the dividend rate (and whether dividends are
cumulative), exchange rights, voting rights, rights and terms of redemption,
redemption price and liquidation preference. Although the Company has no
current plans to issue any shares of Preferred Stock, the rights of the holders
of Common Stock would be subject to, and may be adversely affected by, the
rights of the holders of any Preferred Stock that may be issued in the future.
If at some future time Citizens should have disposed of its majority interest in
ELI, the issuance of Preferred Stock could have the effect of delaying,
deterring or preventing a change in control of ELI, including the imposition of
various procedural and other

19
<PAGE>

requirements that could make it more difficult for holders of Common Stock to
effect certain corporate actions, including the ability to replace incumbent
directors and to accomplish transactions opposed by the incumbent Board of
Directors. See "Description of Capital Stock."

Rapid Technological Changes

The telecommunications industry has experienced and is expected to continue to
experience rapid and significant changes in technology. While ELI believes
that, for the foreseeable future, these changes will neither materially affect
the continued use of fiber optic cable or digital switches and transmission
equipment nor materially hinder the Company's ability to acquire necessary
technologies, the effect of technological changes on the Company's business and
operations cannot be predicted. Also, alternative technologies may develop for
the provision of services to customers. ELI may be required to select in
advance one technology over another but it will be impossible to predict with
any certainty, at the time the Company is required to make its investment, which
technology will prove to be the most economic, efficient or capable of
attracting customer usage.

Dependence on Key Personnel and Citizens

The Company's business is managed by a small number of key management and
operating personnel, the loss of certain of whom could have a material adverse
effect on the Company's business. The Company believes that the future success
of ELI will depend in large part on its continued ability to attract and retain
highly skilled and qualified personnel. See "Management."

The Company believes that a significant factor contributing to its growth has
been its affiliation with Citizens and the provision by Citizens of
administrative and other services. Although the Company has entered into
various ongoing service and other agreements with Citizens, there can be no
assurance of ELI's continued relationship with Citizens. A disruption of
certain of the services provided ELI by Citizens could have a material adverse
effect on the Company's financial condition and results of operations. See
"Relationship with Citizens."

Environmental Matters

The Company and its contractors are subject to various laws and regulations
governing hazardous or environmentally sensitive materials or conditions which
may occur in connection with the construction, installation, operation or
maintenance of the Company's facilities. There can be no assurance that
hazardous materials or conditions of ELI's facilities might not expose the
Company to tort or other claims that could have a material adverse effect on
ELI.

Absence of Prior Public Market; Possible Stock Price Volatility

Prior to the Offering, there has been no public market for the Class A Common
Stock, and, although the Company has applied for listing the Class A Common
Stock on the Nasdaq National Market, there can be no assurance that an active
trading market for the Class A Common Stock will develop or will be sustained.
The initial public offering price of the Class A Common Stock has been
determined through negotiations with the Representatives of the Underwriters and
may not be indicative of the market price for the Class A Common Stock following
the Offering. For a discussion of the factors considered in determining the
initial public offering price, see "Underwriting." No predictions can be made
as to the effect, of any, that future market sales of Class A Common Stock, or
the availability of such shares for sale, will have on the prevailing market
prices of the Class A Common Stock following the Offering;

20
<PAGE>

and there can be no assurance that future market prices for the Class A Common
Stock will equal or exceed the initial public offering price set forth on the
cover page of this Prospectus. The market prices of securities of growth
companies similar to ELI have historically been highly volatile. Future
developments and announcements on matters concerning ELI or its competitors,
including quarterly results, technological innovations, mergers or strategic
alliances, new services or government legislation or regulation, may have a
significant effect on the market price of the Class A Common Stock. See
"Underwriting."

Shares Eligible for Future Sale

Upon completion of the Offering, there will be 10,535,000 shares of Class A
Common Stock issued and outstanding (12,035,000 if the Underwriters' over-
allotment options are exercised in full) and 41,165,000 shares of Class B Common
Stock outstanding. The 10,000,000 shares of Class A Common Stock to be sold in
the Offering will be tradeable without restriction. The shares of Class B Common
Stock and any Class A Common Stock issued upon exchange of Class B Common Stock
held or to be held by Citizens may be offered for sale at any time assuming
compliance with legal requirements.

The Company and Citizens, as the holder of the Class B Common Stock, have agreed
not to offer, sell, contract to sell, file a registration statement pursuant to
the Securities Act or otherwise dispose of any shares of Common Stock without
the prior written consent of Lehman Brothers Inc. on behalf of the
Representatives, for a period of 180 days after the date of this Prospectus. In
addition, Citizens has advised ELI that it currently intends to hold the shares
of the Class B Common Stock owned by it for the foreseeable future. However, no
assurance can be given that Citizens will not decide in the future to register
its shares of Common Stock under the Securities Act and to dispose of all or a
portion of such stock on the public market, or privately, or otherwise.
Citizens and ELI have entered into a Registration Rights Agreement, pursuant to
which Citizens has demand and piggyback registration rights. See
"Relationship with Citizens-Registration Rights Agreement." Alternatively,
Citizens could dispose of shares periodically pursuant to Rule 144 of the
Securities and Exchange Commission. See "Shares Eligible for Future Sale."

No predictions can be made about the effect, if any, that market sales of shares
of Class A Common Stock or the availability of such shares for sale would have
on the market price prevailing from time to time. Nevertheless, sales of
substantial amounts of Class A Common Stock in the public market, or the
perception that such sales could occur, may have a material adverse impact on
the market price for the shares of Class A Common Stock offered hereby or on the
ability of the Company to raise capital through a public offering of its equity
securities. See "Shares Eligible for Future Sale."

Immediate and Substantial Dilution

Purchasers of the Class A Common Stock offered hereby will incur immediate and
substantial dilution in pro forma net tangible book value per share. See
"Dilution."

Absence of Dividends

ELI has never paid or declared dividends on its capital stock and intends to
retain future earnings, if any, to finance the development and expansion of its
networks and operations. Therefore, ELI does not anticipate paying any
dividends in the foreseeable future. The decision whether to pay dividends will
be made by the Company's Board of Directors in light of

21
<PAGE>

conditions then existing, including the Company's results of operations,
financial condition and requirements, business conditions, covenants under loan
agreements and other contractual arrangements, and other factors. See "Dividend
Policy."

FORWARD-LOOKING STATEMENTS

Statements made in this Prospectus which are not historical or current facts,
such as descriptions of the Company's intentions to enter new markets, extend
existing facilities, and deploy switches and other facilities outside of
markets, are forward-looking statements and are only predictions or statements
of current plans, which are constantly under review by the Company. Such
forward-looking statements are subject to risks and uncertainties that could
cause actual results to differ materially from those expressed or implied in the
forward-looking statements. These risks and uncertainties are referred to in
the Risk Factors section immediately above and elsewhere in this Prospectus and
also include, but are not limited to, the Company's ability to identify future
markets and successfully expand existing ones, design and acquire fiber optic
backbone routes, install cable and facilities including switching electronics,
finance its construction and expansion plans, successfully execute its marketing
strategy, surmount competitive challenges and obtain rights-of-way, building
access rights and any required governmental authorizations, franchises and
permits, all in a timely manner, at reasonable costs and on satisfactory terms
and conditions. Future successful results will also depend on favorable
regulatory, legislative and judicial developments.

USE OF PROCEEDS

The net proceeds to the Company from the Offering are estimated to be
approximately $164,244,000 (approximately $188,919,000 if the Underwriters'
over-allotment options are exercised in full) after deducting underwriting
discounts and commissions and estimated expenses of the Offering. ELI intends to
use the net proceeds of the Offering to fund its operating and capital
expenditure requirements. The Company estimates that its capital expenditures
for the eighteen months subsequent to the completion of the Offering will be
approximately $400 million.

The Company's business strategy envisions that the Company will build out its
existing clusters, construct new clusters and interconnect its clusters, which
will require substantial additional capital in addition to the capital raised in
this Offering. The Company expects to meet such additional capital needs with
the proceeds from the Credit Commitment, together with internally generated cash
flow and lease arrangements, proceeds from other bank credit facilities, other
borrowings and possible issuances of additional equity securities.

Because of the number and variability of factors that determine the Company's
use of the net proceeds of the Offering, management will retain discretion over
the application of net proceeds. There can be no assurance that such
application will not vary from the Company's current plans. In addition, there
can be no assurance that the Company will be able to generate or raise
sufficient capital to enable it to fully realize all of its strategic
objectives. See "Risk Factors-Significant Capital Expenditures" and "-Risks
Inherent in Expansion."

22
<PAGE>

Pending the foregoing uses, the net proceeds of the Offering will be invested in
short term and intermediate-term interest-bearing investment-grade securities
with maturities that match the operating and capital expenditure requirements of
the Company.

DILUTION

The pro forma net tangible book value of the Company as of September 30, 1997
was approximately $97.6 million or approximately $2.34 per share of Common Stock
outstanding on such date. See "Description of Capital Stock." Pro forma net
tangible book value per share represents the amount of total tangible assets of
the Company less the amount of total liabilities (adjusted for the
capitalization of $119.2 million of the amount due Citizens) divided by the
total number of shares of Common Stock outstanding after giving effect to the
411,650-for-1 stock split contemplated as part of the Offering. After giving
effect to the Offering (at an assumed offering price of $17.50, the midpoint of
the range set forth on the cover of the Prospectus, less underwriting discounts
and estimated expenses of $255,600 payable in connection with the Offering) and
the issuance of 535,000 restricted shares to officers and employees, the pro
forma net tangible book value of the Company as of September 30, 1997 would have
been approximately $261.8 million, or $5.06 per share of Common Stock. This
represents an increase in pro forma net tangible book value of $2.72 per share
to the existing stockholder and dilution of $12.44 per share to new investors
purchasing shares of Class A Common Stock in the Offering. The following table
illustrates dilution to new investors:

Initial public offering price per share.................... $17.50
Pro forma net tangible book value per share before
the Offering......................................... $2.34
Increase per share attributable to new investors(1) ....... 2.72
Pro forma net tangible book value per share after the Offering 5.06
Dilution per share to new investors(2)(3).................. $12.44
======

__________________________
(1) After deducting the underwriting discount and estimated offering expenses
payable by the Company.

(2) Dilution per share is determined by subtracting the pro forma net tangible
book value per share after the Offering from the initial public offering
price paid by a new investor for a share of Class A Common Stock .

(3) If the Underwriters' over-allotment options are exercised in full, pro forma
net tangible book value of the Company after the Offering would be $5.38 per
share, representing an increase in pro forma net tangible book value of
$3.04 per share and dilution to new investors of $12.12 per share.

The following table summarizes the difference as of September 30, 1997 between
the existing stockholders and new investors with respect to the number of shares
of Common Stock purchased from the Company, the total consideration paid to the
Company and the average price paid per share after giving effect to the 411,650-
for-1 stock split and the issuance of 535,000 shares of restricted stock to
certain officers and employees contemplated as part of the Offering.

Shares Held Total Investment Average Cost
Number Percentage Amount Percentage Per Share
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
New Investors 10,000,000 19.3% $175,000,000 46.9% $17.50
Existing Stockholders(1) 41,700,000 80.7% 198,426,000 53.1% 4.76
---------- ----- ------------ -----
Total(2) 51,700,000 100% $373,426,000 100%
========== ===== ============ ====
</TABLE>

(1) Based on the number of shares of Common Stock outstanding as of September
30, 1997, as adjusted for the 411,650-for-1 stock split contemplated as part
of the Offering, and the capitalization of $119.2 million of the amount due
to Citizens.

23
<PAGE>

Includes 535,000 shares of restricted Class A Common Stock issuable to
certain officers and employees at the effective date of the Offering.

(2) Excludes 2,316,000 options to purchase Class A Common Stock issuable to
certain officers and employees at the effective date of the Offering.

DIVIDEND POLICY

ELI has never paid or declared dividends on its capital stock and intends to
retain future earnings, if any, to finance its operations and the development
and expansion of its networks and, therefore, does not anticipate paying any
dividends in the foreseeable future. The decision whether to pay dividends will
be made by the Company's Board of Directors in light of conditions then
existing, including the Company's results of operations, financial condition and
requirements, business conditions, covenants under loan agreements and other
contractual arrangements, and other factors which the Company cannot now
predict.

CAPITALIZATION

The following table sets forth (i) the historical capitalization of the Company
as of September 30, 1997; (ii) such capitalization pro forma to reflect the
contribution of $119.2 million of the amount due to Citizens to additional paid-
in capital, the drawdown under the Credit Commitment and the use thereof to
repay of the remaining balance due to Citizens, the 411,650-for-1 split of
shares of Common Stock, the authorization of Class A and Class B Common Stock,
the designation of all outstanding Common Stock to Class B Common Stock and the
issuance of 535,000 restricted shares of Class A Common Stock to officers and
employees; and (iii) such capitalization as adjusted to reflect the Offering at
an assumed public offering price of $17.50 per share, the midpoint of the range
set forth on the cover of this Prospectus. This table should be read in
conjunction with the Selected Financial and Operating Data and the financial
statements and notes included elsewhere in this Prospectus.

As at September 30, 1997
($ in thousands)
--------------------------------------------------------------
As Adjusted for the
Actual Pro Forma Offering(4)
-------- --------- --------------------
<S> <C> <C> <C>
Capital lease obligation $ 10,374 $ 10,374 $ 10,374
Due to Citizens 219,171 - -
Credit Commitment - 100,000(1) 100,000
Stockholders' (deficiency) equity:
Preferred Stock, $.01 par value;
0,10,000,000 and 10,000,000 shares authorized,
no shares issued and outstanding - -(2) -
Common Stock, no par value;
500, 0 and 0 shares authorized,
100, 0 and 0 shares issued and outstanding - -(2) -
Class A Common Stock, $.01 par value;
0, 110,000,000 and 110,000,000 shares authorized,
0, 535,000 and 10,535,000 shares issued and outstanding - 5(3) 105
Class B Common Stock, $.01 par value;
0, 60,000,000 and 60,000,000 shares authorized
0, 41,165,000 and 41,165,000 shares issued and outstanding - 412(2) 412
Additional paid-in capital 79,255 198,009(1)(3) 362,153
Deficit (96,004) (96,004) (96,004)

Total stockholders' (deficiency) equity (16,749) 102,422 266,666
------- ------- -------
Total capitalization $ 212,796 $ 212,796 $ 377,040
========= ========= =========
</TABLE>
__________________________________

(1) Reflects recapitalization immediately prior to the Offering whereby Citizens
will contribute $119.2 million of the amount due to Citizens to additional
paid-in capital with the remaining balance of $100 million being repaid to
Citizens with the proceeds of a drawdown under the Credit Commitment.

(2) Reflects the amendment to the Certificate of Incorporation in October 1997
to change the authorized capital stock to 180,000,000 shares, including
110,000,000 shares of Class A Common Stock $.01 par value, 60,000,000 shares
of Class B Common Stock $.01 par value, and 10,000,000 shares of Preferred
Stock $.01 par value; to split the Common Stock 411,650-for-1; and to
designate such Common Stock as Class B Common Stock.

(3) Reflects the issuance of 535,000 restricted shares of Class A Common Stock
to officers and employees immediately prior to the Offering.

(4) Reflects the issuance of 10,000,000 shares of Class A Common Stock at $17.50
per share, less expenses of approximately $256,000.

24
<PAGE>

SELECTED FINANCIAL AND OPERATING DATA

The following selected Statement of Operations and Balance Sheet Data for
the years ended and as of December 31, 1992 and 1993 have been derived from the
Company's unaudited Financial Statements which, in the opinion of management
include all adjustments necessary for a fair presentation of the results of
operations and financial condition of the Company for and as of such periods.
The following selected Statement of Operations and Balance Sheet Data for the
years ended and as of December 31, 1994, 1995 and 1996 have been derived from
the Company's Financial Statements and related notes thereto included elsewhere
in this Prospectus, which Financial Statements have been audited by KPMG Peat
Marwick LLP, independent Certified Public Accountants. The selected Statement
of Operations and Balance Sheet Data for the nine months ended September 30,
1996 and 1997 have been derived from the Company's unaudited Financial
Statements and related notes thereto included elsewhere in this Prospectus and
in the opinion of management, include all adjustments necessary for a fair
presentation of the results of operations and financial condition of the Company
for and as of such periods. The results of operations for interim periods are
not necessarily indicative of a full year's operations. This information should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the Company's Financial Statements and
related notes thereto and the other financial data contained elsewhere in this
Prospectus.

<TABLE>
<CAPTION>
Nine Months
Years Ended December 31, Ended September 30,
------------------------------------------------------------------ -----------------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
($ in thousands, except
per share amounts)
STATEMENT OF OPERATIONS DATA
Revenues $ 1,206 $ 3,705 $ 8,152 $ 15,660 $ 31,309 $ 24,965 $ 41,843
Operating expenses:
Network access expenses 142 1,289 6,155 8,728 24,081 16,533 24,217
Sales and marketing
expenses 1,043 841 4,534 5,704 8,462 6,303 8,716
Depreciation and
amortization 879 1,567 2,476 7,064 7,192 4,997 7,601
Other operating expenses 1,949 2,892 4,528 14,114 20,957 16,715 26,831
------- -------- -------- -------- -------- -------- --------
Total operating expenses 4,013 6,589 17,693 35,610 60,692 44,548 67,365
------- -------- -------- -------- -------- -------- --------
Operating loss (2,807) (2,884) (9,541) (19,950) (29,383) (19,583) (25,522)
Interest expense 754 1,053 873 372 - - 513
------- -------- -------- -------- -------- -------- --------
Net loss $(3,561) $ (3,937) $(10,414) $(20,322) $(29,383) $(19,583) $(26,035)
======= ======== ======== ======== ======== ======== ========
Net loss per share(2) $ (.70) $ (.47) $ (.62)
======== ======== ========
Pro forma net loss(1) $(34,399) $(22,955) $(35,799)
======== ======== ========
Pro forma net loss per
share(2) $ (.82) $ (.55) $ (.86)
======== ======== ========
<CAPTION>
Proforma
As at as at
As at December 31, Sept. 30, Sept. 30,
1992 1993 1994 1995 1996 1997 1997(3)
------------------------------------------------------------------ -----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital
(deficiency) $(5,300) $ (5,699) $ (9,934) $(17,897) $ (9,940) $ (7,734) $156,510
Total assets 25,476 47,840 110,691 128,901 195,656 248,570 412,814
Long-term debt and
capital lease obligations 11,053 9,610 6,565 - - 10,374 10,374
Due to Citizens 4,581 21,481 35,109 64,941 155,395 219,171 -
Credit Commitment - - - - - - 100,000
Shareholder's equity
(deficiency) 4,437 9,150 55,991 38,669 9,286 (16,749) 266,666

<CAPTION>
Nine Months
Years Ended December 31, Ended September 30,
--------------------------------------------------------------
1994 1995 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATING DATA
EBITDA(4) $(7,065) $(12,886) $(22,191) $(17,921)
Cash flows used for
operating activities (4,097) (1,570) (28,893) (18,040)
Cash flows used for
investing activities (60,774) (16,129) (59,169) (48,717)
Cash flows provided by
financing activities 64,907 17,751 88,530 67,293

<CAPTION>
As at December 31, As at
------------------------------------------------------------------ Sept. 30,
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ---------
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA
Property, plant &
equipment-owned $21,083 $ 45,309 $108,549 $127,297 $189,334 $249,499
-under lease(5) - - - 36,858 57,279 87,426
------- -------- -------- -------- -------- --------
-Total $21,083 $ 45,309 $108,549 $164,155 $246,613 $336,925
------- -------- -------- -------- -------- --------
Market clusters 2 5 5 5 5 5
Route miles(6) 71 131 601 780 1,428 2,087
Fiber miles(6) 5,140 9,796 37,504 52,013 97,665 123,257
Buildings connected 57 104 191 282 438 540
Switches installed:
Voice - 1 2 2 5 5
Frame relay - - 2 5 15 18
------- -------- -------- -------- -------- --------
Total switches
installed - 1 4 7 20 23
------- -------- -------- -------- -------- --------
Employees 46 75 127 225 402 482
</TABLE>
________________________

(1) The pro forma net loss represents the historical net loss as adjusted for
the revised administrative services fee and guarantee fees as if such fees
were in effect since January 1, 1996, and interest on the drawdown of the
Credit Commitment utilized to repay the remaining balance due to Citizens
subsequent to the capitalization of $119.2 million of the due to Citizens
and amount, as if the Credit Commitment was in effect on January 1, 1996
(see Notes 6, 7 and 8 of Notes to Financial Statements).

(5) Facilities under an operating lease agreement under which the Company has
the option to purchase the facilities at the end of the lease term. See Note
7 of Notes to Financial Statements.

(6) Route miles and Fiber miles also include those to which the Company has
exclusive use pursuant to license and lease arrangements (See "Business-
Long-Haul Networks")

25
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with ELI's
historical audited financial statements and the notes thereto included elsewhere
in this Prospectus.

Overview

The Company is a full-service, facilities-based competitive local exchange
carrier providing a broad range of telecommunications services in five major
market clusters in the western United States. The Company currently provides
services in the following markets: Portland, Oregon; Seattle, Washington; Salt
Lake City, Utah; Sacramento, California; and Phoenix, Arizona ("hub cities") and
their respective surrounding areas (together with the hub cities, "market
clusters" or "clusters"). Among its five current markets, the Company has been
operating in Portland and Seattle since 1991, Salt Lake City and Sacramento
since 1994 and Phoenix since 1995. The Company began building its switched data
network in 1994. The Company installed its first local switch in the Seattle
market in 1994 and began generating revenues in early 1995 followed by Portland,
Salt Lake City and Sacramento in 1996. The Company intends to install a local
switch in Phoenix in 1998. The Company placed in service its first long haul
network from Phoenix to Las Vegas in 1995 and its second long haul network from
Portland to Seattle in early 1997.

The Company's product portfolio has grown from traditional competitive access
provider services such as point-to-point connectivity for interexchange carriers
and businesses to a full array of switched voice, data and long-haul services
targeted toward communications-intensive businesses in both the retail and
wholesale markets. The Company offers an extensive portfolio of products and
services in four categories:

. Local telephone, long distance, data and video, and network access services
(see "Current Products and Services" below for a description of the product and
services) as follows:

. Local Telephone - local dial tone and switched products and services that
include lines, trunks, local access and Centrex( among other services.

. Long Distance - wholesale and retail services that include 1+, toll-free,
pre-paid, originating and terminating access services.

. Data and Video - switched and dedicated data connectivity services that
include frame relay, video conferencing, ISDN PRI, LAN/WAN and Internet
transport services.

. Network Access - point-to-point services that include special access,
digital private line and other dedicated services both in metropolitan and long-
haul applications.

The Company categorizes its operating expenses into the following five major
groupings:

. Network Access - includes all leased network facilities and resold product
expenses.

26
<PAGE>

. Sales and Marketing - includes all direct and indirect sales channel
expenses and commissions. Also includes all product development, advertising
and promotional expenses.

. Depreciation and Amortization - includes depreciation of telecommunications
network assets including fiber optic cable, network electronics, network
switching and network data equipment.

. Administrative Services - includes administrative services provided by
Citizens. The Company is charged for the direct cost of administrative services
plus an allocation of Citizens' corporate overheads.

. Other Operating - includes all general and other operating and
administrative expenses.

The pace of the Company's revenue and expense growth results from its market
cluster expansion strategy. Once a potential market is identified, the Company
establishes a network in the hub city and then expands the network to adjacent
cities and communities of interest. This strategy requires that significant
capital and operating expenditures be incurred before the realization of
revenues which results in negative cash flow and operating losses until an
adequate customer base and revenue stream for these networks is established.
The Company experiences very minimal customer churn. In addition, the Company
is developing a superior customer service system which will facilitate combining
enhanced services such as data and video with network access services. The
growth in enhanced services is expected to increase revenues with minimal
additional expense.

The Company has been a subsidiary of Citizens since 1990. Citizens is a
publicly-held communications and public services company which provides, either
directly or through subsidiaries, telecommunications, electric distribution,
natural gas transmission and distribution and water and wastewater services to
over 1.6 million customer connections in 20 states. Citizens is one of the
nation's leading independent communications companies and operates an integrated
distribution network over which it provides local, long distance, paging,
cellular, network sales and other communications products and services.
Citizens has funded or guaranteed the financing of nearly all of the Company's
capital and operating needs to date.

Results of Operations

Nine Months Ended September 30, 1996 Compared to Nine Months Ended September
30, 1997

Revenues

Revenues increased from $25.0 million to $41.8 million, an increase of $16.8
million, or 67%, for the nine months ended September 30, 1996 as compared with
the nine months ended September 30, 1997, primarily due to the Company's rapid
customer and product growth. The Company's local telephone services revenues
and local access revenues increased from $1.5 million to $4.4 million, an
increase of $2.9 million, or 193%, for the nine months ended September 30, 1996
as compared with the nine months ended September 30, 1997, primarily due to
local switch implementations for new and existing customers in Portland, Salt
Lake City,

27
<PAGE>

Sacramento and Seattle during the second half of 1996. Annualized monthly local
telephone services revenues increased to $9.1 million based on September 1997
revenues from $3.6 million based on September 1996 revenues as the Company
increased its access line equivalents to 38,045 as of September 1997. Long
distance services revenues decreased from $6.3 million to $6.1 million, a
decrease of $.2 million, or 3%, for the nine months ended September 30, 1996 as
compared with the nine months ended September 30, 1997, primarily due to short
term contract revenues for prepaid debit card services in 1996. The Company's
data and video services revenues increased from $1.4 million to $5.5 million, an
increase of $4.1 million, or 293%, for the nine months ended September 30, 1996
as compared with the nine months ended September 30, 1997, primarily due to the
introduction of ISDN services and increases in frame relay and Internet access
services. ISDN PRI and Internet access services were introduced the last half of
1996 and have obtained considerable market acceptance. The Company believes that
these products will continue to experience exceptional growth based on current
market trends. Network access services and other revenues increased from $15.7
million to $25.8 million, an increase of $10.1 million, or 64%, for the nine
months ended September 30, 1996 as compared with the nine months ended September
30, 1997, primarily due to increased volume on its existing Phoenix to Las Vegas
route as well as volume on the Portland to Seattle route which was placed in
service in February, 1997. Of the $10.1 million increase in network access
services revenues, $3.1 million is pursuant to a contract with a significant
customer which contract will expire in early 1998.

Network Access Expenses

Network access expenses increased from $16.5 million to $24.2 million, an
increase of $7.7 million, or 47%, for the nine months ended September 30, 1996
as compared with the nine months ended September 30, 1997, primarily due to the
Company's expansion of its frame relay product, development of a fully redundant
leased Internet access backbone network with related Internet access costs and
customer growth.

Sales and Marketing Expenses

Sales and marketing expenses increased from $6.3 million to $8.7 million, an
increase of $2.4 million, or 38%, for the nine months ended September 30, 1996
as compared with the nine months ended September 30, 1997, primarily due to
increased product development activities related to local services and data
services, such as Internet access and frame relay. The Company's expanded focus
on direct retail sales which targets large- to medium- size telecommunications
intensive businesses resulted in increased sales expenses. The Company believes
that by focusing on these end-user customers vertical selling opportunities will
be maximized.

Depreciation and Amortization

Depreciation and amortization increased from $5.0 million to $7.6 million, an
increase of $2.6 million, or 52%, for the nine months ended September 30, 1996
as compared with the nine months ended September 30, 1997, primarily due to
higher plant in service balances for newly completed telecommunications network
facilities and electronics in the Portland, Salt Lake City and Sacramento
markets.

28
<PAGE>

Administrative Services Expenses

Administrative services expenses increased from $1.6 million to $2.9 million, an
increase of $1.3 million, or 81%, for the nine months ended September 30, 1996
as compared with the nine months ended September 30, 1997, primarily due to
increases in the volume and cost of services provided by Citizens.

Other Operating Expenses

Other operating expenses increased from $15.1 million to $23.9 million, an
increase of $8.8 million, or 58%, for the nine months ended September 30, 1996
as compared with the nine months ended September 30, 1997, primarily due to
increases in salaries, payroll taxes and employee benefits to support the
expanded delivery of services, new product development, marketing activities and
an expanded customer service organization. The average number of employees
increased 43% for the nine months ended September 30, 1996 as compared with the
nine months ended September 30, 1997.

Interest Expense

Interest expense increased $.5, for the nine months ended September 30, 1996 as
compared with the nine months ended September 30, 1997, primarily due to
interest associated with the capital lease for the Company's long-haul route
between Portland and Seattle which commenced in February, 1997 (see Note 7 of
Notes to Financial Statements).

Year Ended December 31, 1995 Compared to Year Ended December 31, 1996

Revenues

Revenues increased from $15.7 million to $31.3 million, an increase of $15.6
million, or 99%, for the year ended December 31, 1995 as compared with the year
ended December 31, 1996, primarily due to expansion of the customer base,
increased sales of services in Portland and Seattle, and the Company's expansion
in the Salt Lake City and Sacramento markets. The Company's local telephone
services revenues increased from $.6 million to $2.2 million, an increase of
$1.6 million, or 267%, for the year ended December 31, 1995 as compared with the
year ended December 31, 1996, primarily due to increases in the Company's local
dial tone services revenues and local access services revenues associated with
the introduction of local switched services in Portland and Salt Lake City and
expanded local services in the Seattle market. Long distance services revenues
increased from $1.6 million to $5.0 million, an increase of $3.4 million, or
213%, for the year ended December 31, 1995 as compared with the year ended
December 31, 1996, primarily due to revenues associated with a short term
contract which has since expired for wholesale long distance services. The
Company's data and video services increased from $.3 million to $2.4 million, an
increase of $2.1 million, for the year ended December 31, 1995 as compared with
the year ended December 31, 1996, primarily due to increases in frame relay and
Internet access services. Network access services and other revenues increased
from $13.1 million to $21.7 million, an increase of $8.6 million, or 66%, for
the year ended December 31, 1995 as compared with the year ended December 31,
1996, primarily due to the increase of long-haul transport of DS-3 and DS-1
sales.

29
<PAGE>

Network Access Expenses

Network access expenses increased from $8.7 million to $24.1 million, an
increase of $15.4 million, or 177%, for the year ended December 31, 1995 as
compared with the year ended December 31, 1996, primarily due to facilities rent
expense associated with the expansion of the customer base and the establishment
of a leased network linking the Company's five market clusters.

Sales and Marketing Expenses

Sales and marketing expenses increased from $5.7 million to $8.5 million, an
increase of $2.8 million, or 49%, for the year ended December 31, 1995 as
compared with the year ended December 31, 1996, primarily due to sales and
marketing costs associated with the introduction of local switched services in
Portland, Salt Lake City, and Sacramento, expanded local services in the Seattle
market, the expanded frame relay product and newly-introduced Internet access
and ISDN products in 1996.

Depreciation and Amortization

Depreciation and amortization were comparable for both years.

Administrative Services Expenses

Administrative services expenses increased from $1.5 million to $2.3 million, an
increase of $.8 million, or 53%, for the year ended December 31, 1995 as
compared with the year ended December 31, 1996, primarily due to increases in
the volume and cost of services provided by Citizens.

Other Operating Expenses

Other operating expenses increased from $12.6 million to $18.7 million, an
increase of $6.1 million, or 48%, for the year ended December 31, 1995 as
compared with the year ended December 31, 1996, primarily due to an increased
provision for uncollectible accounts of $2.9 million, labor costs and outside
services to support customer growth and expansion in all service categories.
The number of average employees increased 79% for the year ended December 31,
1995 as compared with the year ended December 31, 1996 resulting in increases in
salaries and payroll taxes.

Interest Expense

Interest expense decreased $.4 million, or 100%, for the year ended December 31,
1995 as compared with the year ended December 31, 1996, primarily due to the
repayment in December 1995 of previously outstanding debt.

Year Ended December 31, 1994 Compared to Year Ended December 31, 1995

Revenues

Revenues increased from $8.2 million to $15.7 million, an increase of $7.5
million, or 91%, for the year ended December 31, 1994 as compared with the year
ended December 31, 1995, primarily due to the Company's expansion of its
customer base for network access

30
<PAGE>

services revenues. Local dial tone services were introduced in 1995 in Seattle
and generated $.6 million of local telephone services revenues. Long distance
services revenues increased from $1.4 million to $1.6 million, an increase of
$.2 million , or 14%, for the year ended December 31, 1994 as compared with the
year ended December 31, 1995, primarily due to increases in retail long distance
services. The Company's data and video services increased from $.1 million to
$.3 million, an increase of $.2 million, or 200%, for the year ended December
31, 1994 as compared with the year ended December 31, 1995, primarily due to
increases in frame relay and Internet access services. Network access services
and other revenues increased from $6.7 million to $13.1 million, an increase of
$6.4 million, or 96%, for the year ended December 31, 1994 as compared with the
year ended December 31, 1995, primarily due to increased metropolitan area
network transport and long haul transport services.

Network Access Expenses

Network access expenses increased from $6.2 million to $8.7 million, an increase
of $2.5 million, or 40%, for the year ended December 31, 1994 as compared with
the year ended December 31, 1995, primarily due to the expansion of its customer
base for network access services revenues and the introduction of local
telephone services in Seattle.

Sales and Marketing Expenses

Sales and marketing expenses increased from $4.5 million to $5.7 million, an
increase of $1.2 million, or 27%, for the year ended December 31, 1994 as
compared with the year ended December 31, 1995, primarily due to increased sales
for its network access services revenues and the introduction of local telephone
services in Seattle. Marketing costs also include costs associated with product
development for frame relay and Internet access services products and wider
product offerings to current and potential customers.

Depreciation and Amortization

Depreciation and amortization increased from $2.5 million to $7.1 million, an
increase of $4.6 million, or 184%, for the year ended December 31, 1994 as
compared with the year ended December 31, 1995, primarily due to expansion of
the telecommunications network and the commencement of amortization of deferred
start-up costs in Salt Lake City and Sacramento.

Administrative Services Expenses

Administrative services expenses increased from $1.3 million to $1.5 million, an
increase of $.2 million, or 15%, for the year ended December 31, 1994 as
compared with the year ended December 31, 1995, primarily due to increases in
the volume and cost of service provided by Citizens.

Other Operating Expenses

Other operating expenses increased from $3.2 million to $12.6 million, an
increase of $9.4 million, or 294%, for the year ended December 31, 1994 as
compared with the year ended December 31, 1995, primarily due to increased labor
costs associated with the significant growth of the Company. The Company
increased its number of employees resulting in increases in salaries and payroll
taxes. The Company also supplemented staffing with temporary employees to
support the Company's growth.

31
<PAGE>

Interest Expense

Interest expense decreased from $.9 million to $.4 million, a decrease of $.5
million, or 56%, for the year ended December 31, 1994 as compared with the year
ended December 31, 1995, primarily due to the declining balance of outstanding
debt. This debt was fully paid in December 1995.

Liquidity and Capital Resources

The capital expenditures of the Company associated with the installation,
development and expansion of its existing and new telecommunications networks
are substantial, and a significant portion of these expenditures generally are
incurred before any revenues are realized. The Company's gross property, plant
and equipment has grown from $109 million at December 31, 1994 to $249 million
at September 30, 1997. These expenditures, together with associated initial
operating expenses, have resulted in negative cash flow and operating losses and
will continue to do so until an adequate customer base and revenue stream for
these networks have been established. The Company expects to incur net losses
for the foreseeable future as it continues to install, develop and expand its
new and existing telecommunications networks. There can be no assurance that an
adequate revenue base will be established or that the Company will achieve or
sustain profitability or generate sufficient positive cash flow to fund its
operating and capital requirements and/or service debt.

The development and expansion of the Company's new and existing networks and
services will require significant additional capital expenditures. The
Company's capital expenditure requirements for 1997 are estimated to be $79.3
million (of which $48.7 million was incurred through September 30, 1997) and
for 1998 are estimated to be $275 million. In addition, the Company expects to
lease an additional $22.6 million of network facilities through an existing
operating lease agreement. The Company continues to evaluate opportunities for
revenue growth and to make substantial capital investments in connection with
the entry into new markets and the continued development of its existing
networks. These opportunities include, but are not limited to, acquisitions
and/or joint ventures, which are consistent with the Company's long-range
business plans. Additionally, the Company expects to continue to build on its
existing relationships with providers and other strategic customers, suppliers
and telecommunications carriers. Such acquisitions, investments and/or
strategic arrangements, if available, could require financial resources in
addition to the 1997 and 1998 capital requirements presented above and could
require reallocation of the Company's financial resources.

The Company expects to meet its capital needs with the proceeds of the Offering,
the Credit Commitment, together with internally generated cash flow and lease
arrangements, proceeds from other bank credit facilities, other borrowings and
possible issuances of additional equity securities. The Company has historically
been funded by capital contributions and advances from Citizens which totaled
approximately $312.9 million through September 30, 1997, and through a lease
agreement guaranteed by Citizens. While Citizens will continue to fund the
Company's operating and capital requirements through the completion of the
Offering, Citizens will not have any obligation to make additional equity
investments in or advances to the Company or to guarantee or otherwise provide
financial support for the Company subsequent to the Offering, other than the
guarantees described herein.

32
<PAGE>

Prior to the completion of the Offering, $100 million of the amount due to
Citizens as of September 30, 1997 will be contributed to additional paid-in-
capital and the remaining $119.2 million will be repaid with the proceeds from
the Credit Commitment. In 1994, 1995 and 1996, Citizens had been charging
interest on the amount due to Citizens only to the extent that the Company was
allowed to capitalize interest under Generally Accepted Accounting Principles.
On October 23, 1997, ELI and Citizens entered into a $400 million, 5-year
revolving credit commitment letter arrangement ("Credit Commitment") with
Citibank, N.A. ("Citibank"), under which Citizens has agreed, subject to
receiving regulatory authorization, to substitute its guarantee of the entire
$400 million Credit Commitment amount for that of certain subsidiaries of
Citizens within 90 days of the closing of Credit Commitment. Failure of
Citizens to provide such guarantee would constitute a default under the Credit
Commitment. The Credit Commitment provides that ELI may elect to borrow amounts
at the then current short-term Eurodollar rate plus a spread, or at Citibank's
publicly announced base lending rate plus a spread, both options being based on
Citizens' long-term unsecured debt ratings, or at a competitive bid option.
Facility fees of .05% are payable under the Credit Commitment.

During 1995, the Company entered into an operating lease agreement in connection
with the construction of certain network facilities. The construction is
ongoing and rent is paid on the facilities when completed and placed in service.
The Company will have the option to purchase the facilities at the end of the
lease term. In the event the Company chooses not to exercise this option, the
Company is obligated to arrange for the sale of the facilities to an unrelated
party and is required to pay the lessor any difference between the net sales
proceeds and the lessor's investment in the facilities. However, any amount
required to be paid to the lessor is subject generally to a maximum of 80% of
the lessor's investment, giving effect to previously made lease payments
previously made. The total amount of facilities leased through this agreement
is expected to be $110 million, of which approximately $87.4 million has been
completed and placed in service as of September 30, 1997. Citizens has
guaranteed all obligations of the Company under this operating lease. Effective
with the completion of the Offering, the Company has agreed to pay to Citizens
an annual guarantee fee equal to 3.25% per annum of the lessor's investment in
the leased assets.

Citizens also provides certain administrative services to the Company including,
but not limited to, certain financial management services, information services,
legal and contract services and human resources services. The Company has been
charged for all reasonable costs incurred in the provision of these services.
The Company will enter into an administrative services agreement with Citizens
effective with the completion of this Offering for the continuation of such
services and will continue to be billed for all reimbursable costs plus an
administrative charge.

Effects of Newly-Issued Accounting Standards

In February, 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 128 ("SFAS 128"), "Earnings Per
Share," which supersedes Accounting Principles Board Opinion No. 15 and
establishes standards for computing and presenting earnings per share ("EPS").
It replaces the presentation of primary EPS with a presentation of basic EPS.
Dual presentation of basic and diluted EPS on the face of the income statement
is also required. SFAS 128 is effective for fiscal periods ending after
December 15,

33
<PAGE>

1997. The Company does not expect the adoption of SFAS 128 to have a material
effect on the Company's EPS.

BUSINESS
General

ELI is a full-service, facilities-based CLEC providing a broad range of
telecommunications services in five major market clusters in the western United
States. The Company provides state-of-the-art voice and data communications
services to retail customers, primarily large- and medium-sized communications-
intensive businesses, and wholesale customers, primarily telecommunications
service providers. The Company operates high quality, extensive digital fiber
optic networks based on a switched broadband platform in each of its five market
clusters (comprising six MSAs, including 59 municipalities) with 38,045 local
access line equivalents, 2,087 route miles and 123,257 fiber miles installed and
540 on-net buildings connected as of September 30, 1997. The Company has
interconnected its market clusters with facilities-based owned and leased long-
haul fiber optic networks.

The Company currently provides services in five markets: Portland, Oregon;
Seattle, Washington; Salt Lake City, Utah; Sacramento, California; and Phoenix,
Arizona ("hub cities") and their respective surrounding areas (together with the
hub cities, "market clusters" or "clusters"). The Company's clusters include an
extensive fiber optic network. The Company currently provides switched
services, including local dial tone, utilizing five Nortel DMS 500 switches, in
all of its market clusters except Phoenix, where the Company expects to initiate
local dial tone service upon installing an additional switch in the first half
of 1998. The Company's clusters are also served by its extensive frame relay
network, which is comprised of 18 state-of-the-art switches and 30 POPs in 26
western U.S. cities. The Company has also developed an Internet backbone
network providing Internet connectivity in each of its markets which includes
access on a redundant basis to the three largest Internet service providers in
the United States. The Company's goal is to add to its market presence from six
to 14 MSAs and from two to five long-haul networks by the end of 1998.

The Company offers an extensive portfolio of products and services in four
categories: local telephone, long distance, data and video, and network access.
These products and services include: Local dial tone, with voicemail and
enhanced features; long distance with calling cards; advanced data services,
including frame relay, international frame relay and high-speed Internet access
video conferencing and dialable wideband services; LAN-to-LAN services with very
high transport speeds; ISDN; and point-to-point communications and dedicated DS-
1s and DS-3s. The Company expects to provide ATM services during 1998. The
Company's data network expertise allows it to provide a broader range of
telecommunications services to customers, which helps to maximize the amount of
telecommunications traffic on its network.

The above services are offered to meet customers' complete telecommunications
requirements. The Company offers its services in custom combinations, and
utilizes a consultative sales approach that provides customers a single point of
contact at the Company and an opportunity to work with the Company to design
innovative, turn-key solutions and new product applications which allows them to
take advantage of the broad array of services offered. The Company has
implemented an integrated network management and maintenance system designed to
monitor and test the Company's networks 24 hours a day, seven days a week and is

34
<PAGE>

developing a superior customer care system which will automate the entire order
management process (i.e., order placement, design, provisioning and billing
preparation) for both retail and wholesale customers. The order placement,
design and provisioning components of the order management system have been
installed and are operational. A new customized billing system and an up-to-the
minute trouble ticket tracking module, which is an enhancement of the management
and maintenance system, are being installed and are expected to be operational
and integrated into the information system by the end of the first quarter of
1998.

Deregulation in the telecommunications industry has created an enormous market
opportunity for ELI. Based on FCC data, the Company estimates that in 1996
total revenues from local and long distance telecommunications services were
approximately $183 billion, of which approximately $107 billion were derived
from business telecommunications services. The Company estimates that based on
industry sources, the total addressable business telecommunications services
market in its current five market clusters (based on access lines) was
approximately $4.3 billion in 1997. The Company believes that the market in its
clusters will grow over the next decade because of the favorable demographics
and an increase in use of telecommunications services and that its share of this
market will increase as a result of the passage of the 1996 Act, the actions of
various state commissions and other FCC rulings, which collectively have
essentially opened up the market to competition.

Since its inception, ELI believes that it has been at the forefront of industry
efforts to introduce competition to the local telecommunications markets. As
such, ELI believes that it has achieved significant milestones in the CLEC
industry and is well positioned to benefit from the opening of the local
telecommunications market. Before the passage of the 1996 Act, the Company
pursued regulatory and legislative reforms and consummated certain
interconnection agreements with ILECs that in its view allowed the Company to
offer economical and operationally efficient local exchange services. The
Company believes that it was early to market in Portland, Seattle, Salt Lake
City and Sacramento and believes it is the leading CLEC in Portland, Seattle and
Salt Lake City. The Company believes that it was the first CLEC to receive
authority from a state regulatory authority in a state west of the Mississippi
River to operate and to offer a full switch-based product portfolio.

Since 1990, the Company has been a subsidiary of Citizens. Citizens is a
publicly-held communications and public services company which provides, either
directly or through subsidiaries, telecommunications, electric distribution,
natural gas transmission and distribution, and water and wastewater services to
over 1.6 million customer connections in 20 states. Citizens is one of the
nation's leading independent communications companies and operates an integrated
distribution network over which it provides local, long distance, paging,
cellular, network sales and other communications products and services. At
September 30, 1997, Citizens' consolidated assets totaled $4.5 billion and
shareholders' equity totaled $1.7 billion. Citizens' consolidated revenues for
the twelve months ended September 30, 1997 totaled $1.4 billion. The Company
has historically been funded by capital contributions and advances from Citizens
and through a lease agreement guaranteed by Citizens. See "Capitalization" and
"Relationship with Citizens."

Business Strategy

Guided by the business strategy adopted in 1990, the Company has become a
leading facilities-based, full-service CLEC. The key elements of this strategy
include:

35
<PAGE>

. Target Attractive Regional Markets. The Company's focus is on MSAs in the
western United States that the Company believes have few CLEC competitors, a
relatively high proportion of communications-dependent businesses and the
prospect of population and economic growth above the national average. Growth
in these regions has been fueled to a large degree by the computer, software,
semiconductor and aerospace industries and other telecommunications-intensive
businesses such as financial services and telemarketing call centers. The
Company's policy has been and will continue to be to establish a new market
cluster where it expects to become the leading facilities-based, full-service
CLEC in such market in competition with the ILEC. Due to its superior customer
service, advanced network technologies and the breadth and quality of its
networks, the Company believes that it has an opportunity to capture a
significant share of the local market for communications in its target regions
in competition with U S WEST and PacBell, which are the ILECs in its target
regions.

. Maximize On-net Traffic by Providing Facilities-based Services. The
Company has constructed extensive voice, frame relay, Internet backbone and
interconnecting long-haul networks, and each of the Company's operating clusters
includes an extensive fiber optic network backbone. These extensive networks
are a key aspect of the Company's strategy to maximize the services provided to
customers on-net. Approximately half of the Company's services provided to
customers are currently on-net and the Company's strategy is to increase this
percentage over time. Maximizing the volume of on-net traffic allows the
Company to (i) improve customer loyalty; (ii) increase network reliability;
(iii) provide a wider range of services; (iv) increase process control and
thereby strengthen customer service through end-to-end management; and (v)
reduce its reliance on the ILEC for technologically up-to-date services

36
<PAGE>

which are essential for the Company's enhanced services. The Company believes
that greater on-net traffic will also increase operating margins by increasing
utilization of capacity inherent in the Company's network.

. Penetrate Markets by Leveraging Data Expertise. The Company has
undertaken a major expansion of its networks and products to satisfy the growing
demand for enhanced network services, including frame relay networking services
and Internet access. As a result, the Company has 18 frame relay switches
servicing customer locations as of September 30, 1997. Enhanced network
services, which are currently provided primarily on the Company's frame relay
network, are specialized interchange services offered by the Company for
customers that need to transport large amounts of data among multiple locations.
ELI's relationship with certain carriers allows the Company to terminate traffic
both nationally and internationally utilizing other companies' networks and to
provide a flow of traffic into the Company's networks. In addition, to further
increase efficient access to a greater customer base, ELI established
approximately 30 POPs which interconnect their frame relay networks to those of
U S WEST, PacBell and other carriers.

. Establish Strategic Relationships With Utility Companies. A strategy of
the Company has been to form strategic relationships with utility companies that
enable it to (i) utilize existing rights-of-way and fiber optic facilities, (ii)
leverage their construction expertise and local permitting experience and (iii)
have access to capital in order for ELI to extend its network infrastructure
more quickly and economically. The Company's strategic alliances include
agreements for the utilization of existing excess facilities and the
construction of long-haul networks which link the Portland and Seattle clusters
and which will link Portland and Spokane, Washington and Portland and Eugene,
Oregon. Another agreement provides for a fiber optic network in the Phoenix
metropolitan area. These relationships allow the Company to achieve economies
of scale and scope by expanding its existing markets rapidly and cost-
effectively and enabling the Company to concentrate its efforts on sales and
marketing.

. Continue its Effective Direct Sales and Superior Customer Service. ELI has
built a highly motivated and experienced direct sales force and customer service
organization that is designed to establish a direct and personal relationship
with its customers. Consistent with its product offerings, the Company utilizes
a three-pronged sales approach comprised of direct retail, direct wholesale and
agents. Salespeople are given incentives through a commission structure which
targets 50% of a salesperson's compensation to be based on performance. Each
customer is provided with a single point of contact at the Company. A sales
account manager is responsible for managing each customer's account and staying
in constant contact with the customer to satisfy that customer's specific
telecommunications needs. Sales account managers utilize a vertical sales
strategy with the goal of selling additional value-added, high margin services
to existing customers. The Company believes that combining the consultative
sales strategy with the vertical sales strategy will enable it to achieve higher
margins on each account. The Company views its commitment to customer
satisfaction as a key success factor and is developing a superior customer
service system which will automate order processing, including order placement,
design, provisioning and billing, for both retail and wholesale customers. This
strategy ensures that the Company's processes are aligned with customer needs
and satisfaction.

The Company frequently considers expansion through acquisition
opportunities in the telecommunications industry.

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<PAGE>

EXISTING MARKET CLUSTERS AND LONG-HAUL NETWORKS
COMBINED NETWORK INFORMATION AT SEPTEMBER 30, 1997

<TABLE>
<CAPTION>
EXISTING NUMBER OF ON- NET
MARKET MUNICIPALITIES ROUTE FIBER BUILDINGS VOICE FRAME RELAY
CLUSTERS SERVED MILES MILES CONNECTED SWITCHES SWITCHES
- -------- ------ ----- ----- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Portland.................. 8 287 19,779 239 2 4
Seattle................... 15 130 11,840 72 1 2
Salt Lake City............ 20 222 21,355 121 1 2
Sacramento................ 11 176 16,896 98 1 2
Phoenix(1)................ 5 192 10,485 7 - 1
----------------- --------- ------ ---------- -------- -----------
Total.................... 59 1,007 80,355 537 5 11
=================
Other Frame
Relay Switches(2)........ 7

LONG-HAUL NETWORKS(1)
- --------------------------
Phoenix to Las Vegas.................. 356 18,204 3 - -
Portland to Seattle................... 207 12,410 - - -
Portland to Spokane(3)................ 517 12,288 - - -
--------- ------- ---------- -------- -----------
Total Long-Haul Networks.............. 1,080 42,902 3 - -
--------- ------- ---------- -------- -----------
Total Networks................... 2,087 123,257 540 5 18
========= ======= ========== ======== ===========

</TABLE>
___________________________

(1) Route Miles and Fiber Miles also include 166 miles of which the Company has
exclusive use through license and lease agreements.
(2) The Other Frame Relay Switches are located in San Francisco and Los
Angeles, California; Tremonton, Utah; Kingman and Holbrook, Arizona;
Dallas, Texas; and Gloversville, New York. The Tremonton, Kingman and
Holbrook switches are co-located on the premises of Citizens.
(3) This 570-mile network is currently under construction. Amount shown is
miles completed as of September 30, 1997.

Existing Market Clusters

The Company's existing market clusters currently consist of the Portland,
Seattle, Salt Lake City, Sacramento and Phoenix hub cities and their respective
surrounding areas.
Portland Cluster

Portland represents the Company's most mature network. The Company began
building the network in 1990, generated its first revenues from this cluster in
1991 and installed its first long distance switch in 1993. During 1996, the
hubsite located in downtown Portland doubled in size and more than quadrupled in
capacity. On January 12, 1996, the Company received a Certificate of Authority
to begin providing intrastate services and, on April 18, 1996, ELI reached an
interim interconnection agreement with the ILEC, U S WEST. The Company
installed a new Nortel DMS-500 switch in 1996, providing for both toll and local
switched services. The Company is currently expanding the Portland network into
Vancouver, Washington.

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<PAGE>

Seattle Cluster

Seattle represents the Company's first market in terms of the provisioning of
switched services. The Company began construction of the Seattle network in
1990, generated its first revenues in 1991 and installed its first switch in
1994. The Company received a Certificate of Authority to begin providing
telecommunications services on March 24, 1994. On April 3, 1997, the Company
reached a comprehensive interconnection agreement with U S WEST. Seattle
experienced significant network facilities growth since late 1996. The main
Seattle downtown hubsite was significantly expanded and two mini-hubs were also
constructed to allow for better distribution of traffic loads and to improve
fiber cable plant utilization. In addition to the above facilities growth, the
Bellevue, Washington network was completed in 1996. The Company is currently
finishing the Lake Washington project which will complete the SONET ring around
the Seattle metropolitan area.

Salt Lake City Cluster

The Company began construction of the Salt Lake City cluster in 1993 and began
generating revenues in 1994. On August 16, 1995, the Company received a
Certificate of Authority to begin providing a wide variety of telecommunications
services. On August 21, 1996, the Company began offering switched telephone
services via a Nortel DMS-500 switch. In addition, the Company completed the
first build-out of its customer market by interconnecting Salt Lake City with
the satellite cities of Orem and Provo in 1996.

The Company has begun the construction of a backbone network in Boise, Idaho,
and expects to install a Nortel DMS-500 switch during the first half of 1998.
ELI was authorized by the Idaho Public Utilities Commission to provide
intrastate service in Idaho as of February 17, 1997. ELI's authority covers
long distance business customers with six or more access lines in the greater
Boise area.

Sacramento Cluster

The Company entered the Sacramento market in 1993 and began to generate revenues
from this market in 1994. The Company received a Certificate of Authority from
the California Public Utility Commission on March 16, 1994. During 1996, the
Company accelerated the build-out of this market and installed its first switch
in December 1996. The Company is currently constructing facilities in the
decommissioned Mather Air Force Base which the Company believes is Sacramento's
premier economic development area.

Phoenix Cluster

The Company entered the Phoenix market in 1993 and began to generate revenues in
1995. The Company intends to install a Nortel DMS-500 switch in the first half
of 1998. On September 11, 1996, the Company and Salt River Project Agricultural
Improvement and Power District ("SRP") entered into an agreement whereby SRP
agreed to lease to the Company an existing fiber optic network consisting of 166
route miles, which will be expanded by SRP to 490 route miles in the Phoenix
metropolitan area. The Company's rights to use this network are exclusive
subject to required minimums. The Company has committed to constructing 55
miles of the network and the installation and investment of electronics
equipment for the entire expanded network, at an estimated cost of $30.4
million. In June of 1997, the Company connected its downtown area network to
SRP's network. The agreement with SRP will

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significantly reduce the Company's time to market and capital expenditures in
the Phoenix metropolitan area while increasing network reach and customer
access. On January 16, 1997, the Company received a Certificate of Authority
from the Arizona Corporation Commission and the Company signed an
interconnection agreement effective July 2, 1997 with the ILEC, U S WEST. Of the
number of route miles shown in the above table under "-Existing Market Clusters
and Long-Haul Networks-Combined Network Information at September 30, 1997," 166
represent route miles leased from SRP.

Long-Haul Networks

ELI's long-haul networks are, and will continue to be, built to interconnect the
Company's market clusters and form an integral part of the Company's long-term
strategy. Through the long-haul networks, the Company is able to capture,
control and manage a larger end-to-end share of the regional communications
traffic, enjoy greater margins due to the ability to keep more traffic on-net
and improve customer service. Many of the Company's long-haul routes are the
result of alliances with power utilities. These alliances greatly accelerate
network deployment, minimize the Company's capital requirements, and optimize
the synergies of the alliance partners. A brief overview of each of the
Company's long-haul networks is provided below.

Phoenix to Las Vegas (Southwest Fibernet)

In 1993, the Company began construction of a long-haul transport network
connecting Phoenix and Las Vegas. The completed network is 356 route miles long
and contains 48 fiber strands. The Company began generating revenues from this
network in 1995.

Portland to Seattle

In March 1996, the Company and a utility reached a 15-year license agreement to
implement a long-haul transport network linking Portland and Seattle. This
agreement grants the Company an exclusive right to use capacity from a fiber
optic cable that was constructed by this utility linking Portland and Seattle,
subject to attaining traffic minimums to retain exclusivity. The network is 207
miles long and contains 72 fiber strands. The Company may use 60 fiber strands
for its services, including transport services, enhanced services to end-users
and dark fiber leasing, which includes four strands for diverse routing. The
Company was also granted the right to manage four additional fiber strands from
the fiber cable in a fiber swap arrangement with another IXC in order to create
a diverse SONET ring. The Company began generating revenues from this network
in 1997.

Portland to Spokane

In November 1996, the Company and the same utility reached a 15-year license
agreement to implement a long-haul transport network to link Portland and
Spokane. This agreement provides for the construction of a 570-mile, 36-fiber
strand network linking Portland to Spokane, of which the Company may use 24
strands for its services. Five hundred and seventeen miles of this network had
been constructed as of September 30, 1997. As in the license agreement for the
Portland to Seattle network, the Company will have an exclusive right to use
capacity, subject to attaining traffic minimums to retain exclusivity.

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Portland to Eugene

In July 1997, the Company and the same utility signed a 15-year license
agreement for the construction of a joint long-haul transport network linking
Portland and Eugene, Oregon. The network is scheduled to be completed by April
1, 1998, and will have approximately 140 route miles containing 72 fiber
strands, of which the Company will have exclusive use of 60 for its services,
subject to minimums to retain exclusivity.

Portland to Boise to Salt Lake City to Las Vegas to Los Angeles

In October 1997, the Company entered into a 20-year Pre-Construction Agreement
with FTV Communications, LLC, pursuant to which FTV will construct a fiber optic
communications system linking Portland, Boise, Salt Lake City, Las Vegas and Los
Angeles and the Company will have the right to use 24 optical fibers for its
services. The network is scheduled to be completed in the first quarter of 1999
and will have approximately 1,620 route miles.

Current Products and Services

Since its inception in 1990, the Company's product portfolio has grown from
traditional competitive access provider ("CAP") services such as point-to-point
connectivity for IXCs and businesses to a full array of switched voice and data
services that target communications-intensive companies in both the retail and
wholesale markets.

The Company's product strategy is to continue being a full-service
communications provider offering customers complete "one-stop shopping" for
their communications needs. By offering a diverse product portfolio, the
Company creates custom-tailored product bundles that are capable of delivering
innovative, turn-key solutions for customers. The Company provides facilities-
based products and services over its switched broadband digital network
platform. With a growing array of software-driven intelligent features, this
network platform enables the Company to cost-effectively integrate high revenue
generating products into its existing portfolio. The product and service
offerings are divided into the following four categories: Local Telephone
Services, Long Distance Services, Data and Video Services, and Network Access
Services. The following table summarizes the Company's current product and
service offerings:

Current Products and Services
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Local Telephone Long Distance Data and Video Network Access
Basic Business Lines Retail Switched 1+ Services Dedicated Internet Services 56 KB / 64 KB
PBX/Key Systems Trunks Retail Dedicated 1+ Services Frame Relay DS-1
Virtual Private Exchange Wholesale Termination International Frame Relay DS-3
Centrex(tm) Conferencing LAN / WAN FDDI Disaster Recovery
Foreign Exchange Services 800 Services - Dedicated Switched 56 KB Multiplexing
Voice Mail 800 Services - Switched Dialable Wideband Service Collocation
Multi-Service Fractional T-1 Prepaid Debit Cards Videoconferencing OC-12
Customer Premise Equipment Travel Cards ISDN PRI Diverse Routing
Fax Mail
OC-3 / OC-3C
CLASS(tm) Services
Wholesale LTS

</TABLE>

The following discussion summarizes the Company's primary product and service
offerings.

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<PAGE>

Local Telephone Services

ELI's Local Telephone Services consist of products which involve the switching
of local calls. There are three primary customer segments for Local Telephone
Service: (i) small customers (less than 10 employees) with multi-key telephone
sets; (ii) medium-sized customers (10-50 employees) who use a key system, (iii)
and customers with more than 50 employees who have either their own Private
Branch Exchange ("PBX"), have a hybrid key system, or use the ILEC's Centrex(tm)
product. ELI's Local Telephone Service products are as follows:

Basic Business Lines offer either two-way lines (calls that can be placed or
received) or one-way lines (outgoing calls from the customer) to small and
medium-sized businesses with certain types of customer premise equipment.
Features such as call forwarding, three-way conferencing/call transfer,
directory number hunting, caller/number ID and speed dialing can also be
included.

PBX/Key System Trunk Interface is offered to medium and large businesses that
have their own PBX or key system that require special interface equipment. ELI
offers two types of interfaces: line-side or trunk-side. Trunk-side connections
are used when all calls are directed to an attendant and can accommodate
features such as three-way calling/call transfer, call forwarding and hunting.
Line-side connections are used when calls are directed to each station line.

Virtual Private Exchange ("VPX") is an alternative to the customer's PBX, key
system or ILEC-provided Centrex(tm) for medium and large businesses that require
the advanced functionality of a PBX or key system, such as call park, call pick-
up and last number redial. ELI's switch provides approximately 28 features for
a flat monthly rate with optional features available for an additional charge.
Direct inward dialing is an inherent feature of VPX. ELI also offers the Nortel
electronic business sets which are designed to work with VPX, allowing customers
to use features with the touch of a button. VPX can be purchased separately or
with the electronic business set, and voice mail can be added for an additional
monthly charge.

Foreign Exchange Service ("FEX") provides customers local telephone service from
an exchange (central office) other than the exchange from which they would
normally be served. Therefore, the customer would obtain access to the local
calling area (free calling area) of the foreign exchange office. Customers who
experience significant long distance calling between locations within the same
Local Access Transport Area ("LATA") are typical users of FEX lines in order to
pay one flat rate per month for these calls, rather than usage-based long
distance fees.

Voice Mail offers customers the option of using ELI's voice mail product versus
buying their own system. Voice mail is either offered for a flat additional fee
per month or bundled with other products, such as Enhanced Business Services.
Enhanced Business Service ("EBS") is a package for small business users, usually
with less than 10 lines. EBS is a line with selected special features,
including voice mail, offered for a flat monthly charge.

CustomLink (Multi-service Fractional T-1) is a package of services built around
local telephone services. It is the bundling of local lines/trunks with DS-0s
used for other services, all delivered on the same T-1. Since ELI in many cases
is already taking a T-1 to the customer's premises to deliver dial tone, the
customer is offered the opportunity to utilize the empty DS-0s on the T-1 for
access. Other ELI services, such as dedicated long distance, frame relay or
Internet, are offered at a lower rate than if these services were purchased
separately.

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<PAGE>

Customer Premise Equipment ("CPE") which is provided through a partnership with
various equipment vendors, makes available to the Company's customers Nortel
telephone sets, "2500"-type sets and electronic business sets.

Long Distance Services

ELI's Long Distance Service is comprised of both retail and wholesale, switched
and dedicated, 1+, toll-free and pre-paid services.

Retail Switched 1+ and toll-free service is offered to business customers,
whereby the customer chooses ELI as its long distance/toll-free carrier and
calls are routed to/from ELI through the public switched network. Customers can
call intrastate, interstate, or internationally.

Retail Dedicated 1+ and toll-free service is offered to high volume business
customers, whereby the customer establishes a point-to-point circuit (i.e. DS-1
or DS-3) from their switch/PBX to ELI's switch. Outbound long distance and
toll-free calls are routed directly to/from ELI via this dedicated path.
Customers can call intrastate, interstate, or internationally.

Wholesale Termination encompasses an array of 1+ and toll-free services
providing carriers with LATA-wide termination services, enabling lower cost
access to, or diversity from, the ILEC's facilities. This product aggregates
the termination traffic of many carriers at ELI's switch and terminates it at a
lower cost than each of the carriers could obtain individually.

Prepaid Debit Cards and Travel Cards, are product offerings allowing mobile
people the ability to make long distance calls from any phone, anywhere through
accessing a toll-free number and the pre-paid switch. The service can either be
pre- or post-paid and sold through either retail or wholesale channels. Callers
can utilize the calling card from anywhere in the United States, Canada, or 18
other countries worldwide and can make calls to anywhere in the world.

"ALL CALLS" offers switched customers lower rates when they commit to ELI long
distance service plus ELI ISDN PRI or ELI local telephone services. With ALL
CALLS, the customer uses ELI for all local and long distance calls they make.

Data and Video Services

The Company offers a wide range of switched and dedicated data connectivity and
internetworking products. These products are marketed through both retail and
wholesale channels.

Dedicated Internet Services provides access to Internet service providers and
large businesses. ELI offers Internet access through frame relay, dedicated DS-
1, dedicated DS-3 and shared Ethernet.

Frame Relay is a data communications alternative to traditional point-to-point
networks for wide area network ("WAN") connectivity. The service provides
multi-point, wide-area connectivity using frame relay packet technology that
reduces the connection costs of distributed data networks. The service offers a
choice of interface speeds with multiple virtual circuits possible at each site.
ELI offers worldwide connectivity to its network through its frame relay
partners.

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LAN/WAN Services are turn-key data networking solutions that connect two or more
customer locations at very high speeds, typically, 10Mbps to 100Mbps. Included
in the transparent LAN service is point-to-point connectivity, installed CPE and
the monitoring of the customer's network to insure connectivity. Through the
service, ELI provides native LAN protocols like Ethernet, Token Ring or FDDI in
a variety of configurations.

Videoconferencing is a service whereby ELI operates videoconferencing rooms in
five cities in the western United States: Vancouver, Seattle, Salt Lake City,
Portland and Sacramento. ELI can connect two or more of its rooms together and
can tie in two other non-ELI videoconferencing rooms at the same time.

ISDN PRI provides customers with a high-speed, flexible digital access
connection to ELI's network for voice, video and data applications.
Applications include Internet access, telecommuting, videoconferencing and
remote access to LANs or mainframes. ELI offers ISDN PRI in all of its service
areas.

The Company expects to offer ATM during 1998. It is a service that formats,
switches, and multiplexes various types of information, including voice, video
and data at speeds ranging from T-1 (1.544 megabits per second ("Mbps")) to OC-3
(155 Mbps). ATM provides Quality of Services ("QoS") parameters based on the
type of information being carried in a statistically multiplexed architecture to
reduce network costs. ELI's ATM service will provide interworking between frame
relay, transparent LAN and native ATM locations.

Network Access Services

The Company's dedicated point-to-point services, which include special access
and digital private line services, use high capacity digital circuits to carry
voice, video and data services. Services are offered in flexible configurations
at standardized transmission speeds.

The Company's network services are grouped together under the name "LightLine."
LightLine is a dedicated interstate and intrastate point-to-point transmission
facility (private line). LightLine may require some specific equipment on the
customer's premises on which the connection can be terminated. This equipment
can be leased from ELI by the customer. In most cases, ELI uses its own fiber
optic networks to provide LightLine services. The Company may lease facilities
from another carrier if it does not have the facilities available. LightLine is
labeled as four separate products differentiated by transmission speed: DS-0,
DS-1, DS-3 and OC-3.

Product Strategy and Development

In addition to its voice products, the Company's strategy is to continue to
expand its market role in data products. By expanding the Company's networks
through Network-to-Network Interfaces ("NNIs"), the Company has created an
expansive data network to deliver data solutions in the United States and
internationally. To leverage these networks and expand the Company's product
offerings, the Company is developing video and other high bandwidth
applications. The Company believes that the wholesale market offers a strong
fit with its product offerings. Database, long distance, frame relay, Internet,
ISDN PRI and ATM products can offer ILECs, IXCs and other resellers the
opportunity to expand their product offerings while enabling the Company to
leverage its networks.

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The Company is focusing its product marketing and development efforts in the
following categories:

Local Telephone Services. As a supplement to basic access products, the Company
is focusing on software-based, high margin services including automatic call
distribution, Custom Local Area Signaling Service ("CLASS") features, enhanced
fax, integrated voice and fax mail, integrated voice response and other Advanced
Intelligent Network ("AIN")-based services. Expanded CPE offerings will also be
developed in 1997.

Long Distance. The Company is enhancing its existing product set for both the
wholesale and end-user markets by adding such services as international callback
and international 800.

Data and Video. The Company is focusing on national and international network
expansion and the continued development and delivery of ATM products. In
addition, customer network management products are being developed, as well as
switched access to frame relay and enhanced Internet services. The Company will
continue to focus on developing applications for data intensive markets, with a
particular focus on video applications.

Network and Strategic Services. The Company is focusing on its long-haul
networks and expansion of products into the optical carrier bandwidth range,
enabling customers to take full advantage of the SONET architecture and ATM
offerings. The Company is also developing telecommunications services to aid in
the delivery and management of electric utility services and telemetry
applications.

Network

The Company views the depth and breadth of its networks as a key strategic
asset. The Company's network is designed to simultaneously maximize both the
amount of communications traffic that can travel over the Company's owned
network facilities and the number of products and services that can be offered.
Nortel DMS-500 switches are currently operating in the Portland, Seattle, Salt
Lake City and Sacramento clusters, with an additional switch scheduled to be
installed and operational in Phoenix in the first half of 1998. The Company's
frame relay network, which is comprised of 18 state-of-the-art Cascade 9000
switches, has 30 POPs established in 26 western U.S. cities and is expected to
be capable of providing ATM services during 1998. The Company has also
developed an Internet backbone network providing Internet connectivity in each
of its markets, which includes access on a redundant basis to the nation's three
largest Internet service providers-UUNET, Sprint and MCI. The Company's data
network expertise allows it to provide a broader range of telecommunications
services to customers, which helps to maximize the amount of telecommunications
traffic on its network.

Network Design

To maximize circuit availability for its customers, the Company designs its
networks utilizing diverse fiber facilities, redundant electronics and back-up
power systems including diesel generators at all switching hubs. These
stringent design principles result in an overall circuit reliability of 99.99%.

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<PAGE>

The Company deploys the latest network technologies including SONET rings,
integrated digital loop carrier systems, NORTEL DMS-500 switching platforms,
Cascade Frame Relay and ATM switches, Titan 3/1 cross connects and Alcatel 1/0
cross connect systems. These systems are coupled together to provide a seamless
telecommunications transport infrastructure that is centrally monitored and
managed to deliver services to customers efficiently.

Customer access is provided via several methods, the most prevalent of which is
to connect the customer location directly to the Company's network by splicing
fiber laterals directly into the backbone through diverse paths. A second
method for providing customer access is by way of a 38ghz DS-1 or DS-3 microwave
link connecting the customer location to the Company's fiber infrastructure.
The third mechanism of providing customer access is via a leased circuit
connection from a secondary facilities-based service provider to the Company's
own fiber network.

In addition to providing dedicated customer access, the Company strategically
builds fiber facilities to IXC and LEC POPs and co-locates its own high capacity
SONET systems that provide a medium to facilitate the flow of significant
traffic volumes between an IXC and LEC. Under the 1996 Act, all ILECs were
mandated to provide licensed service providers access to their embedded networks
(referred to as "co-location"). The Company builds diverse fiber entrance
facilities to the chosen ILEC, builds out and then leases floor space adjacent
to ILEC's switching facilities in order to accommodate various transport, data,
and voice frequency ("VF") equipment. In doing so, the Company significantly
reduces the leased circuit costs charged by the ILEC and provides a very
reliable service to the end user. As of September 30, 1997, the Company had co-
located in 17 ILEC offices.

Sales and Marketing

General

The Company serves retail and wholesale customers. The Company's retail
customers cover a broad range of fields. Major customers include companies in
the finance, government, health care, education, and Internet service provider
segments, all of which have high volume and complex telecommunications
requirements. Wholesale customers include IXCs, ILECs, CAPs, CLECs, travel
card/debit card providers and wireless service providers. The Company competes
in this market for point-to-point, high bandwidth products on the basis of
price, reliability, route diversity, ease of ordering, building access and
customer service. This market segment provides the Company with significant
revenues at wholesale margins that contribute to fixed costs coverage. The
Company focuses on serving its wholesale customers in all of its markets with a
view to establishing national preferred vendor relationships. Historically, the
wholesale market has accounted for approximately half of the Company's total
revenues.

The Company targets the higher margin data products category in its marketing
efforts to take advantage of increasing demand customers for sophisticated data
communications solutions.

The Company's sales professionals utilize solutions-based consultative selling
techniques whereby they gain an in-depth understanding of the customer's
operations in order to develop innovative applications-specific solutions for
all of the customer's needs. Each customer is managed by, and directly
interfaces with, a single sales account manager who has an in-depth
understanding of the customer's operations and the Company's product portfolio.
Each sales account manager is supported by a team consisting of a sales engineer
and customer service

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<PAGE>

advisor, who have the ability to offer training to customers in new product
applications. Once the sales relationship has been firmly established, the sales
account manager implements a vertical sales strategy aimed at selling additional
high margin, value-added, switch-based services to the customer. The Company
believes that combining the consultative sales strategy with the vertical sales
strategy should enable it to achieve higher margins on each account.

Sales Channels

In order to effectively market its products and services, the Company has
established the following sales channels: direct retail, direct wholesale and
agent. At September 30, 1997, the Company employed 53 salespeople and 43
customer care professionals.

The retail channel targets medium- to large-sized businesses. The Company
utilizes a direct sales force in each market cluster. Each regional sales force
is headed by a regional general manager and his/her sales team, which consists
of a sales manager, sales engineers, corporate account executives, account
executives and associate account executives, and local customer support
personnel.

The wholesale channel targets telecommunications service providers. The Company
uses a direct sales force, which is comprised of general sales managers, network
service managers, national account managers and account managers.

The Company uses qualified agents in each of its operating markets to sell its
products and services to a wide range of small- to medium-sized end-users.
Using agents for this account size is more cost effective than a direct sales
force. Agents primarily sell local dialtone, long distance and frame relay
services as well as product bundles. The Company supports its agents by
providing market research and training on the Company's products and services.
The Company currently uses approximately 25 agents across all of its markets and
is expanding its agent program.

Competition

ILEC Competition

In each of its markets, the Company faces significant competition from the ILEC,
which currently dominates the local exchange market and is a defacto monopoly
provider of local switched voice services. The Company's primary ILEC
competitors are U S WEST, PacBell and GTE. ILECs have longstanding relationships
with their customers, have financial and technical resources substantially
greater than those of the Company and benefit from federal and state laws and
regulations that, ELI believes, in some instances favor the ILECs over CLECs.
Under certain circumstances, FCC and state regulatory authorities may provide
ILECs with increased flexibility to reprice their services as competition
develops and as ILECs allow competitors to interconnect to their networks. In
addition, some new entrants in the local market may price certain services to
particular customers or for particular routes below the prices charged by the
Company for services to those customers or for those routes, just as the Company
may itself underprice those new entrants for other services, customers or
routes. If the ILECs and other competitors lower their rates and can sustain
significantly lower prices over time, this may adversely affect revenues of the
Company if it is required by market pressure to price at or below the ILECs'
prices. If regulatory decisions permit the ILECs to charge CAPs/CLECs
substantial fees for interconnection to the ILECs' networks or afford ILECs
other regulatory relief, such

47
<PAGE>

decisions could also have a material adverse effect on the Company.
However, the Company believes that the negative effects of the 1996 Act may be
more than offset by (i) the increased revenues available as a result of being
able to address the entire local exchange market, (ii) mutual reciprocal
compensation with the ILEC that results in ELI terminating its local exchange
traffic on the ILEC's network at little or no net cost to ELI, (iii) obtaining
access to off-network customers through more reasonably priced expanded
interconnection with ILEC networks and (iv) a shift by IXCs to purchase access
services from CAPs/CLECs instead of ILECs. There can be no assurance, however,
that these anticipated results will offset the effects of increased competition
as a result of the 1996 Act.

Under the 1996 Act, ILECs formerly subject to anti-trust decree restrictions on
interLATA (interexchange) long distance services are no longer permanently
barred from entry into these businesses, subject to certain requirements in the
1996 Act and rules and policies to be implemented by the FCC and the states.
The FCC may authorize an RBOC to provide interLATA services in a state when the
RBOC enters into a state utility commission-approved agreement with one or more
facilities-based competitors which provide business and residential local
exchange service and such agreement satisfies 14 specified interconnection
requirements. In evaluating an RBOC application for interLATA entry, the FCC
must consult with the U.S. Department of Justice. Alternatively, if no such
facilities-based competitors request such interconnection, the RBOC may obtain
authority from the FCC to provide interLATA services if the RBOC obtains state
utility commission approval of a statement of generally available terms and
conditions of interconnection that satisfies the requirements. If and when an
RBOC obtains authority to provide interLATA services, it will be able to offer
customers local and long distance telephone services. This will permit the RBOC
to offer a full range of services to potential customers in a new region and
thus eliminate an existing competitive advantage of the Company. Given the
resources and experience the RBOCs currently possess in the local exchange
market, the ability to provide both local and long distance services could make
the RBOCs very strong competitors.

The 1996 Act imposes interconnection obligations on ILECs, and generally
requires that interconnection charges be cost-based and nondiscriminatory. To
the extent ELI interconnects with and uses an ILEC's network to service the
Company's customers, ELI is dependent upon the technology and capabilities of
the ILEC to meet certain telecommunications needs of the Company's customers and
to maintain its service standards. ELI will become increasingly dependent on
interconnection with ILECs as switched services become a greater percentage of
the Company's business. However, there can be no assurance that the Company will
be able to obtain the services it requires at rates, and on terms and
conditions, that permit the Company to offer switched services at rates that are
both profitable and competitive. However, the Company believes that the
wholesale customers, and end-users that it targets, demand state-of-the-art
technology, consistent high quality transmission, superior high-speed data
transmission, diverse product offerings and superior customer service, all of
which the Company believes it can competitively provide. In addition,
historically, the Company has been able to build new networks and expand
existing networks in a more timely and economical manner than most CAP or CLEC
competitors through strategic arrangements such as leasing fiber optic cable
from others that already possess rights-of-way and have facilities in place.
The Company intends to use its experience and presence in the telecommunications
industry to further develop and expand its existing telecommunications
infrastructure.

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CLEC Competition

The Company's facility-based operational CLEC competitors in the markets in
which the Company operates include: MCI Metro, Inc.; MFS Telecommunications,
Inc.; Teleport Communications Group, Inc.; Brooks Fiber; NEXTLINK
Communications, Inc.; and GST Telecommunications, Inc.

Based on management's experience, the initial market entrant with an operational
fiber optic CLEC network generally enjoys a competitive advantage over other
CLECs that later enter the market. The Company believes that it is well
positioned in each of its existing clusters due to a combination of factors,
including its early entry into the Portland, Seattle and Salt Lake City markets,
its full-service capabilities, its commitment to superior customer service and
the depth of its network coverage.

In each of the clusters in which ELI operates, at least one other CLEC, and in
some cases several other CLECs, offers many of the same local telecommunications
services provided by the Company, generally at similar prices.

Competition From Others

Potential and actual new market entrants in the local telecommunications
services business include RBOCs entering new geographic markets, IXCs, cable
television companies, electric utilities, international carriers, satellite
carriers, teleports, microwave carriers, wireless telephone system operators and
private networks built by large end users, many of which may have financial,
personnel and other resources substantially greater than those of ELI. In
addition, the current trend of business combinations and alliances in the
telecommunications industry, including mergers between RBOCs, may increase
competition for the Company. With the passage of the 1996 Act and the entry of
RBOCs into the long distance market, the Company believes that IXCs may be
motivated to construct their own local facilities or otherwise acquire the right
to use local facilities and/or resell the local services of the Company's
competitors.

Dedicated Services

Competition for dedicated services is based on price, quality, network
reliability, customer service, service features and responsiveness to the
customer's needs. The Company believes that its reliable, state-of-the-art
digital networks, which offer significant transmission capacity at competitive
prices, will allow it to compete effectively with the ILECs, which may have not
yet fully deployed fiber optic networks in many of the Company's target markets.
The Company's fiber optic networks will provide both diverse access routing and
redundant electronics, design features not widely deployed within the ILEC's
networks.

High-Speed Data Service

The Company's competitors for high-speed data services include major IXCs, CAPs,
other CLECs, and various providers of niche services (e.g., Internet access
providers, router management services and systems integrators). The
interconnectivity of the Company's markets may create additional competitive
advantages over other data service providers that must obtain local access from
the ILEC or another CLEC in each market or that cannot obtain intercity
transport rates on as favorable terms as the Company.

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Internet Services

The market for Internet access and related services in the United States is
extremely competitive, with no substantial barriers to entry. The Company
expects that competition will intensify as existing services and network
providers and new entrants compete for customers. The Company's current and
future competitors include telecommunications companies, including the RBOCs,
IXCs, CLECs and CATVs, and other Internet access providers. Many of these
competitors have greater market presence and greater financial, technical,
marketing and human resources, more extensive infrastructure and stronger
customer and strategic relationships than the Company. The Company believes
that it has a competitive advantage because of its existing Internet backbone
network providing Internet connectivity in each of its market clusters, which
includes access on a redundant basis to the three largest Internet providers.

Operations/Information Technology

The Company views the establishment of a superior information technology
platform as a key strategic advantage in the execution of its goal to operate
effectively and deliver superior customer service. The Company has created
business relationships with selected software support organizations known for
state-of-the-art solutions.

The Company views its commitment to customer satisfaction as a key success
factor. The Company focuses on ensuring the Company's processes are aligned
with customer needs and satisfaction. The Company offers high-quality service
with its state-of-the-art network technology, integrated operations and superior
customer support. The Company has implemented an integrated network management
and maintenance system designed to monitor and test the Company's networks 24
hours a day, seven days a week and is developing a fully integrated superior
customer care system from three leading vendors which will automate the entire
order management process (i.e., order placement, design, provisioning and
billing preparation) for both wholesale and retail customers. The order
placement, design and provisioning components of the order management system
have been installed and are operational. A new customized billing system and an
up-to-the minute trouble ticket tracking module, which is an enhancement of the
management and maintenance system, are being installed and are expected to be
operational and integrated into the information system by the end of the first
quarter of 1998.

The current billing management system is capable of producing a single bill
detailing all of the products and services provided to both wholesale and retail
customers. The Company is installing a new billing system, which will allow the
Company to bill for incremental services and unique product bundles in a more
rapid and cost-efficient manner. The Company expects to complete the
implementation of the system by the first quarter of 1998.

The Company's goal is to have an efficient operating structure in place for
administering, provisioning and maintaining the Company's products and services
so as to become a low-cost telecommunications provider, while delivering
superior customer service.

Employees

As of September 30, 1997 the Company employed 482 persons. None of the
Company's employees are represented by a union, and the Company considers its
employee relations to be excellent.

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Properties

General

The Company manages its operations through its corporate headquarters, located
in Vancouver, Washington. In addition, the Company has local offices and
warehouse facilities in Portland, Seattle, Sacramento, Phoenix and Salt Lake
City. Currently, all of the Company's office and warehouse space is leased. The
Company also leases network hub and network equipment installation sites in
various locations throughout the metropolitan areas in which it provides
products and services. The office, warehouse and other facilities leases expire
on various dates through July 2014. Additional facilities will be needed as
the Company expands its markets. Management believes that the Company will be
able to lease space as needed on acceptable terms. The Company owns a 6.6-acre
parcel of land in Vancouver, Washington, on which it is constructing its new
corporate headquarters building. The Company believes its facilities are, and
the new building will be, suitable and adequate for its purposes.

Lease

In June 1995 the Company entered into agreements to lease certain equipment to
be constructed for the Company (the "Lease"). The lessor has agreed to commit up
to a maximum of $110,000,000 of the cost of purchasing and installing the
equipment. Rental obligations for the equipment commenced in June 1995, and,
with renewal options, will expire on April 30, 2002. The Company may, at its
option, purchase the equipment either at or before the end of the Lease at a
price approximating the amounts expended by the lessor to acquire and install
the leased equipment. If the Company does not purchase the equipment by April
30, 2002, it will be sold to a third party and the Company will guarantee that
the sales price to be received by the lessor will equal the acquisition and
installation costs, subject generally to a maximum payment under the guarantee
of 80% of such costs. Payments under the Lease depend on then current interest
rates, and assuming continuation of current interest rates and full utilization
of the lease facility, payments would amount to approximately $6,500,000
annually through April 30, 2002 and, assuming exercise of the purchase option,
approximately $110,000,000 in 2002. Citizens has guaranteed all obligations of
ELI under the Lease and ELI will pay Citizens a guarantee fee of 3.25% per annum
of the amount of the lessor's investment in the leased assets. See "Relationship
with Citizens-Citizens' Guarantee of ELI's Obligations."

Legal Proceedings

On June 30, 1997, the Company filed a lawsuit in the U.S. District Court in
Seattle, Washington, against U S WEST, Electric Lightwave v. U S WEST
Communications, Inc., alleging that U S WEST was illegally blocking competition
in local telephone service. The lawsuit charges that U S WEST was violating
federal and state antitrust laws, as well as various federal and state
regulatory statutes, by failing to provide adequate interconnection services and
facilities to enable ELI to provide quality services to its customers. ELI is
seeking an unspecified amount of damages to be determined by a jury. In
addition, ELI is seeking an injunction to prohibit U S WEST from discriminating
against ELI and its customers when it provides interconnection facilities and
equipment. As indicated under "Risk Factors - Dependence Upon Interconnection
and Relationship with ILECs," to the extent ELI interconnects with and uses U S
WEST's networks to service the Company's customers, ELI is dependent upon the
technology and capabilities of U S WEST to meet the telecommunications

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<PAGE>

needs of the Company's customers and to maintain ELI's service standards. ELI
will become increasingly dependent on interconnection with U S WEST as switched
services become a greater percentage of ELI's business. In the event the outcome
in the lawsuit is unfavorable it would not have a materially adverse effect on
the Company's financial condition and results of operations since the Company
expects that U S WEST would continue to provide at least the current level of
interconnection services and facilities to the Company.

GOVERNMENT REGULATION

ELI's services are subject to federal and state regulation. In general, ELI's
interstate and international telecommunications services are regulated by the
FCC. ELI's intrastate services are regulated by the public utilities commission
of each state in which ELI operates. Nationally, the recent trend has been for
federal and state legislators and regulators to permit and encourage additional
competition in the local telecommunications industry. ELI believes this public
policy trend should contribute to an increase in the Company's market
opportunities, although the pace and extent of such positive benefits cannot be
predicted with any precision.

Federal Regulation

The FCC exercises regulatory jurisdiction over all facilities of, and services
offered by, telecommunications common carriers to the extent those facilities
are used to provide, originate or terminate interstate or international
communications. The FCC has established through its rules different levels of
regulation for "dominant" carriers and "nondominant" carriers. For domestic
interstate telecommunications services, only the ILECs (subject to limited
exceptions that are not material) are classified as dominant carriers, and all
other carriers are classified as nondominant carriers. Additionally, to the
extent a BOC is engaged in out-of-region long distance services it is also
classified as nondominant as to those services. Non-BOC ILEC-affiliated long
distance services are classified as nondominant regardless of whether conducted
inside or outside the ILEC service area. The FCC regulates many of the rates,
charges and services of dominant carriers to a greater degree than those of
nondominant carriers. As a result of its nondominant carrier status, the
Company believes it has significant flexibility to respond to changes in
interstate market conditions on a timely basis.

As a nondominant carrier, ELI may install and operate facilities for domestic
interstate communications without prior FCC authorization. ELI is presently
required to tariff certain of its domestic interstate tariff services. The FCC
has promulgated rules to eliminate tariffing of interstate long distance
services. Those rules have been stayed during the pendency of judicial review.
If and when these rules are allowed to go into effect, the Company will no
longer be required to file FCC tariffs for its interstate long distance
services. Additionally, under a recent FCC order, CLECs, including ELI, are no
longer required to file tariffs for interstate exchange access services. As a
provider of international long distance services, ELI obtained FCC operating
authority and maintains an international tariff. ELI is also required to submit
certain periodic reports to the FCC and to pay regulatory fees.

Telecommunications Act of 1996

The national public policy framework for telecommunications was changed
dramatically by the 1996 Act. A central focus of this sweeping policy reform
was to open local telecommunications markets to workable competition. ELI
believes that the 1996 Act has begun

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<PAGE>

and will continue to result in substantial changes in the marketplace that
largely are favorable for the Company.

The 1996 Act preempts state and local laws to the extent that they prevent
competitive entry into the provision of any telecommunications service. Under
the 1996 Act, however, states retain authority to impose on carriers, including
ELI, requirements necessary to preserve universal telecommunications service,
protect public safety and welfare, ensure quality of service and protect
consumers. States are also responsible for mediating and arbitrating
interconnection agreements between CLECs and ILECs if voluntary negotiations
fail.

In order to create an environment in which local competition is a practical
possibility, the 1996 Act imposes a number of access and interconnection
requirements on all local telecommunications providers. All local carriers,
including ELI, must interconnect with other carriers, permit resale of their
services, provide local telephone number portability and dialing parity, provide
access to poles, ducts, conduits, and rights-of-way, and complete calls
originated by competing carriers under reciprocal compensation or mutual
termination arrangements.

The 1996 Act also imposes some additional specific obligations on ILECs
(although certain small and rural ILECs may qualify for exemption from some of
these obligations). In particular, ILECs must allow interconnection at any
technically feasible point, provide interconnection service quality at least
equal to that provided to their own customers and other carriers, provide
nondiscriminatory access to unbundled network elements at any technically
feasible point at cost-based rates, provide wholesale discounts to carriers who
wish to resell ILEC services, give notice of network changes, provide physical
co-location, and negotiate in good faith with competitors. ELI believes its
opportunity for success in local telephone service markets is enhanced as a
result of these obligations imposed by federal law on ILECs. The access offered
by the 1996 Act to physical co-location, unbundled local loops and resale
discounts will give the Company the opportunity to expand the geographic reach
of its services in advance of facilities construction. Full implementation of
these provisions of the 1996 Act will require further federal and state rule
makings, industry negotiations, and possible legal enforcement actions and
remedies. Portions of the FCC's rules implementing interconnection, particularly
those related to the FCC's imposition of pricing methodology upon state
regulators, have been vacated by a federal appellate court (as discussed below
under "-Court of Appeals Decision." The appellate court found that, under the
1996 Act, the states are the primary arbiters of charges for interconnection,
unbundled access, resale and the prices for the transport and termination of
calls. However, ELI should be able to continue and expand its CLEC operations
under a variety of negotiated interconnection arrangements and state
interconnection rules and policies, state arbitrated agreements, public policy
processes and judicial proceedings.

RBOCs have generally been barred from participating in the market for interLATA
(primarily long distance) services since the break up of the Bell System in
1984. Under the 1996 Act, an RBOC now is allowed to provide interLATA services
outside of its local telephone service region. RBOC interLATA long distance
entry will increase the level of competition faced by ELI's retail long distance
services. However, ELI believes that RBOCs providing long distance service
outside their telephone service areas may represent new potential customers of
ELI's wholesale services.

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<PAGE>

The 1996 Act also authorizes the FCC to allow an RBOC to provide interLATA
services within its local telephone service area in a state in which the RBOC
has satisfied certain conditions.

During 1996 and 1997 the FCC took several additional actions with respect to
competitive local telecommunications pursuant to the 1996 Act.

On August 1, 1996, the FCC issued an order amending its pole attachment rules to
reflect the 1996 Act by requiring utilities, including ILECs and most electric
companies, to make poles, conduit and rights-of-way available to certain
carriers, including CLECs, at reasonable cost and on a nondiscriminatory basis.
Several utilities have appealed the FCC order to the U.S. Court of Appeals,
which has not yet issued a decision.

On August 8, 1996, the FCC issued an order containing rules providing guidance
to the ILECs, CLECs, long distance companies and state public utility
commissions ("PUCs") on several provisions of the 1996 Act. The rules include,
among other things, FCC guidance on: (i) discounts for end-to-end resale of ILEC
local exchange services; (ii) availability of unbundled local loops and other
unbundled ILEC network elements; (iii) the use of Total Element Long Run
Incremental Costs in the pricing of these unbundled network elements; (iv)
average default proxy prices for unbundled local loops in each state; (v) mutual
compensation proxy rates for termination of ILEC/CLEC local calls; and (vi) the
ability of CLECs and other interconnecters to opt into portions of
interconnection agreements negotiated by the ILECs with other parties on the
basis of the ability to "pick and choose" among the provisions of an existing
agreement. See below for a discussion of the Eighth Circuit Court of Appeals
decision overturning certain aspects of this order.

The 1996 Act requires the FCC to establish explicit mechanisms for subsidizing
service to rural areas, low-income customers, schools and libraries, and rural
health care providers. On May 8, 1997, the FCC adopted an Order in its
universal service proceeding to implement this mandate. All telecommunications
carriers, including ELI and other CLECs, are required under that Order to
contribute to a federal universal service fund. Schools, libraries and other
entities eligible for universal service support represent a potential target
market for the Company. The availability of such support will assist such
entities in obtaining advanced telecommunications and information services, thus
potentially increasing demand for services of the type the Company provides.
Most states are expected to implement state-specific universal service funds to
supplement the federal programs. All carriers, including ELI, will be required
to contribute to those state and federal funds. At this time, the Company is
unable to quantify the total amount of these payments it will be required to
make or the effect these required payments will have on its financial condition.

In a combined Report and Order and Notice of Proposed Rulemaking released on
December 24, 1996, the FCC made changes and proposed further changes in the
interstate access charge structure. In the Report and Order, the FCC removed
restrictions on the ILECs' ability to lower access prices and proposed the
relaxation of the regulation of new switched access services in those markets
where there are other providers of access services. If any such increased
pricing flexibility is allowed but is not effectively monitored by federal
regulators, it could have a material adverse effect on the Company's revenues
from interstate access services. However, the Company believes this potential
impact will be limited by the fact that its private line revenues are only
partially derived from bypass of ILEC switched access services. On May 16,

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<PAGE>

1997, the FCC released an order revising its access charge rate structure. The
new rules substantially increase the costs that ILECs subject to the FCC's price
cap rules ("price cap LECs") recover through monthly, non-traffic sensitive
access charges and substantially decrease the costs that price cap LECs recover
through traffic sensitive access charges. In the May 16 order, the FCC also
announced its plan to bring interstate access rate levels more in line with
cost. The plan will include rules to be established sometime this year that
grant price cap LECs increased pricing flexibility upon demonstrations of
increased competition (or potential competition) in relevant markets. The
manner in which the FCC implements this approach to lowering access charge
levels may have a material adverse effect on the Company's ability to compete in
providing interstate access services. However, the Company also believes it may
benefit from certain aspects of the FCC's access charge restructuring. Under
the FCC's rules, which are the subject of a petition for reconsideration, the
Company will no longer be required to pay a portion of ILEC access charges (the
terminating interconnection charge) by connecting directly to ILEC end offices.
Additionally, the Company may be able to differentiate its access prices from
those of competing ILECs by eliminating certain other rate elements. Several
parties have appealed the May 16 order. Those appeals have been consolidated
and transferred to the United States Court of Appeals for the Eighth Circuit
where they are currently pending.

As part of the overall plan to lower interstate access rates, the FCC also
released an order on May 21, 1997, in which the FCC revised its price cap rules.
In the order, the FCC increased the so-called X-Factor (the percentage by which
price cap LECs must lower their interstate access charges every year, net of
inflation and exogenous cost increases) and made it uniform for all price cap
LECs. The results of these rule changes will be both a one-time overall
reduction in price cap ILEC interstate access charges and an increase in the
rate at which those charges will be reduced in the future. Several parties have
appealed the May 21 order. Those appeals have been consolidated and transferred
to the United States Court of Appeals for the Tenth Circuit where they are
currently pending.

Court of Appeals Decision

Various parties, including ILECs and state PUCs, filed appeals of the FCC's
August 8, 1996 interconnection order, many of which were consolidated and
transferred to the U.S. Court of Appeals for the Eighth Circuit. On July 18,
1997, the Eight Circuit rendered its decision, which held that, in general, the
FCC does not have jurisdiction over prices for interconnection, resale, leased
unbundled network elements and traffic termination. The Eighth Circuit also
overturned the FCC's "pick and choose" rules as well as certain other FCC rules
implementing the 1996 Act's local competition provisions. In addition, the
Eighth Circuit decision substantially limits the FCC's authority to enforce the
local competition provisions of the 1996 Act. The FCC has indicated that it
will seek Supreme Court review of the decision.

In the short term the Company believes that the Eighth Circuit decision will not
have a material adverse effect on it, because the Company already has
interconnection agreements in place, or expects to have such agreements in
place, under the provisions of the FCC's order and the 1996 Act which were not
invalidated by the Court. The decision does not delay the implementation of the
1996 Act by the parties and by the state PUCs, but rather eliminates the
guidance on pricing and pick and choose as well as other issues that the FCC
sought to provide to the parties and the state PUCs.

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<PAGE>

In the long term, the Eighth Circuit's decision makes it more likely that the
rules governing local competition will vary from state to state. Most states
have already begun to establish rules for local competition that are consistent
with the FCC rules overturned by the Eighth Circuit. If a patchwork of state
regulations were to develop, it could increase the Company's costs of regulatory
compliance and could make competitive entry in some markets more difficult and
expensive than in others.

State Regulation

Most state public utilities commissions require telecommunications providers
such as ELI to obtain operating authority prior to initiating intrastate
services. Most states also require the filing of tariffs or price lists and/or
customer-specific contracts. In the states in which ELI currently operates, ELI
is not subject to rate-of-return or price regulation. ELI is subject, however,
to state-specific quality of service, universal service, periodic reporting and
other regulatory requirements, although the extent of such requirements is
generally less than that applicable to ILECs. ELI currently has intrastate
operating authority in the following states:

Arizona: ELI is authorized as a competitive provider to provide intrastate long
distance statewide and other intrastate services in all U S WEST service
territories pursuant to tariff.

California: ELI is authorized as a Competitive Local Carrier to provide basic
local service within PacBell and GTE Corp. service territories and other
intrastate services statewide pursuant to tariff. ELI has a pending application
to provide basic local service within the service territory of Roseville
Telephone Co.

Idaho: ELI is authorized to provide basic local service to business customers
with more than five lines in U S WEST service territory in Southern Idaho and
other intrastate services statewide pursuant to tariff.

Minnesota: ELI is authorized to provide intrastate long distance statewide and
local services in the greater Minneapolis-St. Paul metropolitan area pursuant to
tariff.

Nevada: ELI is authorized to provide intrastate services statewide, excluding
points within the Citizens Telecommunications Company of Nevada service
territory, pursuant to price list.

Oregon: ELI is authorized as a Competitive Telecommunications Provider to
provide intrastate long distance service statewide and local exchange services
in the greater Portland metropolitan area. ELI is not required to file tariffs,
price lists or contracts.

Utah: ELI is authorized as a Competitive Telecommunications Company to provide
intrastate services statewide pursuant to price list or customer-specific
contracts.

Washington: ELI is authorized as a Competitive Telecommunications Company to
provide intrastate services statewide pursuant to price list or customer-
specific contracts.

Local Government Authorizations

ELI generally is required to obtain street opening and construction permits from
city and county authorities prior to installing or expanding its fiber optic
network facilities. In most states in which ELI currently operates as a CLEC,
it must first obtain a franchise or license from each incorporated city and
town, and sometimes from each county, in which it wishes to utilize public
rights of way. The franchise or license establishes the overall terms,
conditions and fees for use

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<PAGE>

of the rights of way in the particular jurisdiction. In California, ELI and
other holders of certification from the California Public Utilities Commission
are not required to obtain municipal franchises nor pay franchise fees.

The 1996 Act now provides that while local governments may continue to manage
the public rights of way, they may not impose conditions on companies like ELI
which constitute barriers to entry in the telecommunications market. Further,
the 1996 Act requires that municipal right-of-way authorizations be granted on a
nondiscriminatory basis and that any fees be reasonable.

THE LOCAL TELECOMMUNICATIONS SERVICES INDUSTRY

On January 1, 1984, AT&T (then referred to as the "Bell System") divested itself
of the Bell Operating Companies (the "BOCs"), which were transferred to seven
holding companies. Following this divestiture (the "Divestiture"), each BOC
continued to conduct local telephone and other telecommunications business in
geographically defined areas, referred to as "Local Access and Transport Areas"
or "LATAs."

Prior to the Divestiture, the BOCs and "independent" local exchange telephone
companies not affiliated with the Bell System had government-regulated
monopolies for most local telephone services. The Divestiture encouraged the
growth of competition for long distance services and equipment manufacturing by
prohibiting the BOCs from entering these markets. However, the BOCs retained
monopoly control over the market for local telephone services. Competition in
the long distance market accelerated dramatically and, by the end of 1995,
AT&T's long distance competitors had captured approximately 40% of the
interstate long distance market.

The Divestiture did not directly provide for competition in local markets.
After the Divestiture, however, a number of factors served to promote
competition in some local telecommunications market segments, including (i)
increasing customer desire for an alternative to the ILEC monopoly, particularly
among business customers, prompted in part by competition in the long distance
market, (ii) technological advances in the transmission of data and video
requiring greater capacity and reliability levels than copper-based ILEC
networks were able to accommodate, (iii) a monopoly position and rate of return-
based pricing structure that provided little incentive for the ILECs to upgrade
their networks or meet specialized customer needs, (iv) the development of fiber
optics and digital electronic technology, which combined the ability to
economically build a high-capacity digital network with the ability to transmit
voice, data and video signals at high speeds and (v) the significant "access
charges" that long distance carriers were required to pay to the ILECs to
originate and terminate long distance telephone calls on the ILECs' networks.

The first competitors in the local market were designated as "competitive access
providers" or "CAPs" by the FCC because they provided special access services
(e.g., dedicated lines for local access links to long distance networks).
Initially, CAPs provided special access (dedicated access lines) by installing
fiber optic facilities connecting long distance carriers' POPs within a
metropolitan area and, in some cases, connecting end users (primarily large
businesses) to long distance carriers' POPs. CAPs also provided private line
services connecting multiple locations of a single end user within a local
market area with dedicated fiber optic lines. CAPs used the technological
advantage and substantial capacity and economies of scale inherent in

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fiber optic technology to offer customers service that initially was generally
less expensive and of higher quality than could be obtained from the ILECs, due
in part to the ILECs' copper-based facilities and higher overhead costs. In
addition, CAPs generally offered shorter installation and repair intervals and
improved reliability in comparison to the ILECs. In recent years, the ILECs
steadily have been increasing the amount of fiber used in their networks,
thereby decreasing the competitive advantage held by the CAPs in the special
access and private line markets.

As CAPs proliferated during the latter part of the 1980s, federal and some state
regulators issued rulings which permitted and sometimes encouraged local
competition and opened some local market segments to new entrants. These
rulings allowed CAPs to offer a number of new services, including, in certain
states, certain switched services (but not basic local exchange telephone
service). A series of state public utility commission decisions beginning in
1989 and FCC decisions beginning in 1991 requiring expanded interconnection (or
"co-location") permitted CAPs to interconnect their networks with the largest
ILECs' networks. This expanded interconnection gave CAPs the option to access
customers by either leasing facilities from an ILEC through a co-location
arrangement or installing extensions to the CAP's own network, depending on the
relative cost and other factors. Beginning in 1994, a few states permitted
CAPs, including ELI, to become "competitive local exchange carriers" or "CLECs,"
and thus to begin providing local exchange services, primarily to business
customers. By the time the 1996 Act was adopted, approximately half the states
had removed legal prohibitions on the provision of competitive local exchange
service. Legal and regulatory restrictions in the remaining states will be
significantly reduced by the 1996 Act.

While many companies have been organized over the last decade to provide CAP or
CLEC services, only a few have grown to significant size. These large CAPs and
CLECs operate in multiple local markets and have acquired a number of smaller
CAPs. Recently, new CAPs or CLECs have been created, primarily to serve small
markets.

The competitive position of the CAPs and CLECs has been improved by the
regulatory commissions of an increasing number of states, which have encouraged
competition in various aspects of the intrastate local telecommunications
market. The intrastate local market consists of intrastate access services,
basic local exchange services and local private line special access services.
While the majority of state initiatives were originally limited to intrastate
private line and special access services, many states are in the process of
changing their statutes or regulations to permit competition for switched
services, including basic local exchange telephone services. Those states that
have not made these changes will be required to do so under the 1996 Act.

MANAGEMENT

Executive Officers and Directors

The executive officers and directors of the Company and their respective ages
and positions are set forth below.

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Name Age Title
- ---- --- -----

Leonard Tow 69 Chairman of the Board
Daryl A. Ferguson 58 Vice Chairman of the Board and Chief
Executive Officer
David B. Sharkey 47 President, Chief Operating Officer
and Director
Robert J. DeSantis 41 Vice President, Chief Financial
Officer and Treasurer
James Berthot 52 Vice President - Marketing and
Product Development
Todd Hanson 36 Vice President - Engineering
Randall Lis 38 Vice President - Staff Operations
Michael J. Miller 41 Vice President - Planning
Kerry Rea 39 Vice President and Controller
John Wolff 51 Vice President - Sales
Ernest D. Yates 52 Vice President - Operations
Stanley Harfenist 66 Director
Robert A. Stanger 57 Director
Maggie Wilderotter 42 Director

Leonard Tow has been a director and Chairman of the Board of the Company since
August 1994. Mr. Tow has been a director of Citizens since April 1989. In June
1990, he was elected Chairman of the Board and Chief Executive Officer of
Citizens. In October 1991, he was appointed to the additional position of Chief
Financial Officer of Citizens. He has also been a Director, Chief Executive
Officer and Chief Financial Officer of Century Communications Corp. since its
incorporation in 1973, and Chairman of its Board of Directors since October
1989.

Daryl A. Ferguson, has been a director of the Company since September 1995 and
Vice Chairman of the Board and Chief Executive Officer of the Company since
October 1997. Mr. Ferguson has been President and Chief Operating Officer of
Citizens since June 1990. Mr. Ferguson was Vice President, Administration of
Citizens from July 1989 through March 1990 and Senior Vice President, Operations
and Engineering of Citizens from March 1990 through June 1990. From April 1987
through July 1989, Mr. Ferguson was President and Chief Executive Officer of
Microtecture Corporation. He is currently also a Director of Centennial
Cellular Corp.

David B. Sharkey joined ELI as President and Chief Executive Officer in August
1994, has been a director since September 1995, and Chief Operating Officer
since October 1997. Mr. Sharkey has 29 years of telecommunications experience.
Prior to joining ELI, from 1989 to 1994, he held the position of Vice President
and General Manager at Mobile Media, Inc., a radio common carrier provider. Mr.
Sharkey spent 21 years with New Jersey Bell Telephone and AT&T in technical
operations and sales & marketing.

Robert J. DeSantis, Vice President, Chief Financial Officer and Treasurer of the
Company since August 1994, has been Vice President and Treasurer of Citizens
since October 1991. Mr. DeSantis was Assistant Treasurer of Citizens from June
1986 through September 1991 and was Assistant to the Treasurer of Citizens from
January 1986 to June 1986.

James Berthot joined ELI as Vice President of Marketing and Product Development
in July 1995. Prior to joining ELI, from January 1990 to July 1995, Mr. Berthot
was Director of Marketing and Public Relations for Century Telephone
Enterprises, Inc.'s Telephone Group, where he led marketing, sales and public
relations activities. Mr. Berthot has served as Sales Director for The
Information Line, a joint venture with United Telecommunications (Sprint) and

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<PAGE>

Volt Information Sciences Inc. He has more than 25 years experience in the
high-technology industry including management positions with Southwestern Bell
Corporation and AT&T.

Todd Hanson joined ELI as Vice President of Engineering in June 1995. Prior to
joining ELI, from 1993 to 1995, Mr. Hanson served as Vice President of Network
Engineering for MFS Telecom, where he was responsible for network planning and
technology on a national basis. Mr. Hanson was Senior Director of Project
Management and Access Engineering at AT&T Canada in 1992 and 1993. Mr. Hanson's
experience comprises 13 years of telecommunications management including
positions with Sprint, AT&T Canada and MFS in the areas of engineering,
operations and project management.

Randall Lis joined ELI as Vice President-Operations in February 1995 and has
served as Vice President-Staff Operations since April 1996. Prior to joining
ELI, from 1993 to 1995, Mr. Lis was General Manager of the Mid-Atlantic Region
of Nextel Communications. His nearly 20 years of telecommunications experience
includes positions with Southwestern Bell Corporation and Ram Mobil Data. From
1985 through 1993, Mr. Lis held several positions with Metromedia and Metromedia
Paging, in which he served as Business Manager, General Manager and Senior
Director of Operations.

Michael J. Miller joined ELI as Director of Accounting in March 1994, was
promoted to Vice President of Finance in October 1995 and became Vice President-
Planning in September 1997. Prior to joining ELI, from February 1988 to
December 1993, Mr. Miller was Manager of Financial Planning and Analysis for
NERCO, Inc., a diversified natural resource company in Portland, Oregon. At
NERCO, Mr. Miller performed economic analyses and evaluations for the
operations, accounting and marketing groups. He is a Certified Public
Accountant.

Kerry D. Rea joined ELI as Vice President and Controller in October 1997. Prior
to joining ELI, Mr. Rea served as Controller for the Portland, Oregon-based
operations of Mattel, Inc. (since March 1997), and its predecessor Tyco Toys,
Inc. (from November 1989 to March 1997). Mr. Rea, a certified public
accountant, previously worked in various accounting and finance positions for
Tyco's predecessor as well as working seven years in public accounting.

John Wolff joined ELI as Vice President-Sales in October 1994. Mr. Wolff has
25 years in the telecommunications industry with experience in sales, marketing,
operations, and training. Mr. Wolff was employed by New Jersey Bell and AT&T
for 16 years. From 1980 to 1983, Mr. Wolff acted as the personal representative
of the Vice President of Sales of AT&T on the Divestiture Reorganization
Committee. After the breakup of the Bell System in 1983, he served as General
Sales Manager at AT&T Communications. Mr. Wolff left AT&T in 1985 to join
Metromedia Paging Service, Inc., as Director of Sales and Marketing, where he
remained until 1987, when he left to join SBC. Mr. Wolff was with SBC from 1987
until 1992, and Mobil Media from 1992 until 1994, at which time he joined the
Company.

Ernest D. Yates joined ELI as Senior Director of Sales in February 1995. In
September 1995 he was promoted to Vice President-Administration and has served
as Vice President-Operations since April 1996. Prior to joining ELI, Mr. Yates,
from 1965 through 1995, was employed by AT&T and Southwestern Bell Corporation
where he held various sales, technical and general management positions. Mr.
Yates is currently responsible for the implementation of ELI's new order
tracking, provisioning and billing systems as well as operations in all ELI-
staffed cities.

60
<PAGE>

Stanley Harfenist has been a director of the Company since October 1997. Mr.
Harfenist has been a director of Citizens since 1992. He has been President and
Chief Executive Officer of Adesso, Inc., a manufacturer of hardware for the
Macintosh computer since 1994. He was President, Chief Operating Officer and
Director of Players International, Inc. from 1985 to 1993, an Officer of Sega
Enterprises from 1982 to 1984 and an Officer of Knickerbocker Toy Company, Inc.
from 1978 to 1982.

Robert A. Stanger has been a director of the Company since October 1997. Mr.
Stanger has been a director of Citizens since 1992. He has been Chairman of
Robert A. Stanger & Company, an investment banking and consulting service since
1978. Mr. Stanger is Publisher of The Stanger Real Estate Report. Mr. Stanger
has been a director of Callon Petroleum Company, Inc. since 1995, which is in
the business of exploration and production of oil and natural gas.

Maggie Wilderotter has been a director of the Company since October 1997. Ms.
Wilderotter has been President and Chief Executive Officer of Wink
Communications since 1997. From 1995 to 1997, Ms. Wilderotter was the Executive
Vice President of National Operations for AT&T Wireless Services, Inc. and Chief
Executive Officer of AT&T's Aviation Communications Division. From 1991 to
1995, she served as Senior Vice President of McCaw Cellular Communications, Inc.
and Regional President of its California/Nevada/Hawaii Region. Ms. Wilderotter
was with U.S. Computer Services, Inc./Cable Data, as Senior Vice President and
General Manager from 1985 to 1991. She is also a director of Gaylord
Entertainment Corporation, ANTEC Corporation, Airborne Express, Jacor and the
California Cable Television Association.

Each executive officer of the Company who is also an executive officer of
Citizens expects to dedicate as much time as is necessary to the Company and its
business, which will necessarily vary from time to time.

Board Composition

Directors are elected annually. The Board presently consists of six members,
four of whom are associated with Citizens and one of whom is independent of
both Citizens and ELI. Following the Offering, the Board will be increased to
consist of seven members to add an additional independent director. At each
annual meeting of the Company's stockholders at which directors are elected, the
holders of Class A Common Stock and Class B Common Stock (all of which will be
held by Citizens) may vote for directors. The holders of Class A Common Stock
are entitled to one vote per share of Class A Common Stock and the holders of
Class B Common Stock are entitled to ten votes per share of Class B Common
Stock. Each director who is not an employee of either the Company or Citizens is
entitled to receive an annual retainer of $20,000, an additional $1,000 plus
reasonable expenses for attending each meeting of the Board of Directors, $1,000
annually for each committee of the Board of Directors for which such director
serves as chairman and an annual grant of options for 5,000 shares of Class A
Common Stock of the Company, exercisable at an exercise price per share equal to
the market price of the Class A Common Stock on the date of grant. In
connection with the Offering, each director who is not an employee of either the
Company or Citizens will also receive a grant of options for 10,000 shares of
Class A Common Stock of the Company, exercisable at an exercise price per share
equal to the initial public offering price of the Class A Common Stock.

61
<PAGE>

Compensation Committee

The Board of Directors of ELI has established a Compensation and Benefits
Committee to address and make recommendations with respect to the compensation
of executive officers and the establishment of compensation and benefit plans.
There was no Compensation Committee of the Company during fiscal year 1996. Mr.
Sharkey, as a member of the Board of Directors of the Company, participated in
deliberations regarding executive officer compensation.

Audit Committee

The Board of Directors has established an Audit Committee to meet with and
consider suggestions from members of management, as well as with the Company's
independent accountants, concerning matters of internal controls. The Audit
Committee also will have the responsibility to review the audited financial
statements of the Company and consider and recommend the employment of, and
approve the fee arrangements with, independent accountants for both audit
functions and for advisory and other consulting services.

Executive Compensation

The following table shows compensation paid to, deferred or accrued for the
benefit of, the Company's Chief Executive Officer during 1996 and each of the
four remaining most highly compensated executive officers (the "Named Executive
Officers") for all services rendered to ELI during the three most recent fiscal
years ended December 31, 1996.

62
<PAGE>

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
Annual Compensation Long-term Compensation
------------------------------------------ ----------------------------------------
Awards Payouts
------------------------

Securities
Underlying Long-term All Other
Other Annual Restricted Options/ Incentive Plan Compensation
Salary Salary Bonus(2) Compensation Stock Awards SARs (3) Payouts (4)
Name and Position(1) Year $ $ $ $ (#) $ $
- -------------------- ------ -------- --------- ------------ ------------ ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David B. Sharkey 1996 155,833 80,000 - - 17,039 - 26,703
President and CEO 1995 150,000 75,000 - - - - -
1994 79,612 - - - 23,267 - -

John Wolff 1996 127,500 40,000 - - 7,987 - 4,750
VP-Sales 1995 120,000 40,000 - - - - 15,535
1994 30,000 - - - 11,326 - 4,681

Randall Lis 1996 114,125 40,000 - - 7,987 - 32,163
VP-Staff Operations 1995 99,634 30,000 - - 11,327 - 18,450
1994 - - - - - - -

Todd Hanson 1996 131,401 40,000 - - - - 3,651
VP-Engineering 1995 95,804 40,000 - - 16,490 - 30,338
1994 - - - - - - -

Ernest Yates 1996 107,833 40,000 - - 7,987 - 3,997
VP-Operations 1995 71,942 18,000 - - - - 34,907
1994 - - - - - - -
</TABLE>
__________________
(1) Messrs. Ferguson and DeSantis are executive officers of Citizens. Their
1996 compensation for services to ELI does not place any of them among the
five most highly compensated executive officers of the Company. Mr.
Sharkey was Chief Executive Officer of the Company from August 1994 until
October 1997, when Mr. Ferguson became Chief Executive Officer.
(2) Bonus amounts awarded were for performance for the stated Salary Year,
notwithstanding determination of the bonus amount in the subsequent year.
(3) All Options in this column are exercisable for shares of common stock, par
value $.01 per share, of Citizens. Options are adjusted to reflect stock
dividends paid subsequent to date of grant. All awards shown are options
granted under the Citizens Utilities Company Management Employee Incentive
Plan or its successor Plan, the Employee Incentive Plan. In 1996, no
compensation was paid to any executive officer or employee in stock or
restricted stock of ELI, and no stock options or SARs denominated in stock
of ELI were awarded or granted to any executive officer or employee of ELI.
(4) Represents the Company's matching contribution to each executive's 401(k)
plan. Additionally represents $25,453 which represents the 1996 economic
benefit of split-dollar life insurance for Mr. Sharkey, $28,271 and $222
for relocation allowances paid to Mr. Lis and Mr. Yates, respectively, in
1996, and $9,935, $18,450, $28,898 and $33,610 for relocation allowances
paid to Messrs. Wolff, Lis, Hanson and Yates in 1995.

The following table sets forth the options granted to the Named Executive
Officers in 1996. All of the options listed below relate only to options to
purchase shares of Citizens' common stock. No options or stock appreciation
rights relating to the Company's Common Stock, and no stock appreciation rights
relating to Citizens' common stock, were granted in 1996. Options relating to
the Company's Common Stock will be granted as of the effective date of the
Offering to the Named Executive Officers. See "-Equity Incentive Plan."

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<PAGE>

OPTION/SAR GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARs EXERCISE
UNDERLYING GRANTED TO OR BASE GRANT DATE
OPTIONS/SARs EMPLOYEES IN PRICE AT EXPIRATION PRESENT
NAME GRANTED (#)(1) FISCAL YEAR GRANT ($/SH)(2) DATE VALUE $(3)
- ------------------- -------------- ------------ --------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
David B. Sharkey 16,000 1% $12.19 02/15/06 $39,030
John Wolff 7,500 .3% 12.19 02/15/06 12,456
Randall Lis 7,500 .3% 12.19 02/15/06 12,456
Todd Hanson - - - - -
Ernest Yates 7,500 .3% 12.19 02/15/06 12,456
</TABLE>

______________
(1) All options are for shares of common stock of Citizens. All options become
exercisable at the rate of 20% per year on February 15, 1997, 1998, 1999, 2000
and 2001.
(2) Fair Market Price at time of grant.
(3) Based on the Black-Scholes option pricing model adapted for use in valuing
executive stock options. The actual value, if any, an executive may realize
will depend on the excess of the stock price over the exercise price on the date
the option is exercised, so that there is no assurance the value realized, if
any, by an executive will be at or near the value estimated by the Black-Scholes
model. The estimated values under that model are based on arbitrary assumptions
as to variables such as interest rates, stock price volatility and future
dividend yield. The pricing model assumes a dividend yield of 6.2%, a riskless
rate of return of 5.6%, a seven-year term of exercise and volatility of 0.198.

The following table sets forth option and stock appreciation rights exercised by
the Named Executive Officers during 1996 and the number and value of options
held by them at December 31, 1996. All of the options listed below relate only
to Citizens' common stock. There were no outstanding stock appreciation rights
relating to Citizens' common stock at December 31, 1996. No exercises occurred
during 1996 of options or stock appreciation rights relating to the Company's
Common Stock and, at December 31, 1996 there were no outstanding options or
stock appreciation rights relating to the Company's Common Stock.

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES

<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
SHARES VALUE UNEXERCISED IN-THE-MONEY
ACQUIRED ON REALIZED OPTIONS/SARs AT OPTIONS/SARs AT
NAME EXERCISE(#) $ FISCAL YEAR-END (#) FISCAL YEAR-END($)
-------------------- ---------------- ------------- ------------------------------ ------------------------------
Exercisable Unexercisable Exercisable Unexercisable
------------ ---------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
David B. Sharkey 0 0 9,304 31,001 0 0
John Wolff 0 0 4,453 14,783 0 0
Randall Lis 0 0 2,265 17,050 0 0
Todd Hanson 0 0 3,298 13,192 0 0
Ernest Yates 0 0 0 7,987 0 0
</TABLE>

All numbers are as of December 31, 1996 and reflect adjustment for stock
dividends paid subsequent to the date of grant. The closing price of Citizens'
common stock on December 31, 1996 was $11.125.

64
<PAGE>

Equity Incentive Plan

The Board of Directors established an Equity Incentive Plan (the "Plan") in
September 1997, which has been approved by the sole stockholder. The purpose of
the Plan is to provide incentives for high levels of performance and
productivity by employees of the Company or a company controlled by or
controlling the Company or under common control with the Company or an
individual who performs services for the Company as a director, consultant or
otherwise. The Plan is intended to strengthen the Company's existing operations
through its ability to attract and retain outstanding employees upon whose
judgment, initiative and efforts the continued efficiency, productivity, growth
and development of the Company is dependent. The Plan became effective on
October 15, 1997 and will remain in effect for 10 years. No awards will be
granted more than 10 years after the effective date of the Plan.

As of the effective date of the Offering, (i) Randy Lis, John Wolff, Earnest
Yates, Todd Hansen, James Berthot and Michael Miller, executive officers of the
Company, will each be granted options for 146,000 shares of Class A Common Stock
of the Company, (ii) Robert J. DeSantis, an executive officer of both the
Company and Citizens, and Stanley Harfenist, a director of both the Company and
Citizens, will each be granted options for 90,000 shares of Class A Common Stock
of the Company, (iii) options for 680,000 shares of Class A Common Stock will be
granted to other officers of ELI, (iv) options for an aggregate of 116,000
shares of Class A Common Stock will be granted to four officers of Citizens who
are expected to render services to ELI either directly or through the
Administrative Services Agreement and (v) options for 464,000 shares of Class A
Common Stock will be granted to other employees of ELI. All of such options are
exercisable at an exercise price per share equal to the initial public offering
price of the Class A Common Stock.

Grants of restricted shares of Class A Common Stock were made to the following
directors and named executive officers: Daryl Ferguson 125,000 shares; David
Sharkey 125,000 shares; Leonard Tow 125,000 shares; Todd Hanson 15,000; Randall
Lis 15,000 shares; John Wolff 15,000 shares; and Ernst Yates 15,000 shares.
Seven other key employees of the Company received grants of a total of 100,000
shares. The restrictions will lapse, as to one-third of the shares on the
later of the first anniversary of the date of this Prospectus or the attainment
of the Company of at least $100,000,000 of revenues in a travelling 12-month
period; as to the second-third of the shares, on the later of the second
anniversary of the date of this Prospectus or the attainment of at least
$125,000,000 of revenues of a travelling 12-month period; and as to the
remainder of the shares, on the later of the third anniversary of the date of
this Prospectus or the attainment of at least $155,000,000 of revenues of a
travelling 12-month period; (in each case, provided that the officer is an
employee of the Company or Citizens on the "lapse" date) except that the
restrictions on Dr. Tow's shares will not lapse unless the Company attains
revenues of at least $13,000,000 for the month of January 2001. Dr. Tow's
continued employment on the lapse date is not a condition to the lapse of the
restrictions.

All employees of the Company and its affiliate companies and persons who render
services directly or indirectly to the Company as director, consultant or
otherwise are eligible for selection to participate in the Plan. Awards granted
under the Plan consist of stock options or other stock-based awards relating to
shares of the Company's Class A Common Stock. The maximum number of shares of
Common Stock which may be issued pursuant to awards is no more than 4,170,600
shares. Under the Plan, no individual may be granted share-denominated
performance awards in any calendar year covering more than 500,000 shares and
dollar value-

65
<PAGE>

denominated performance awards in any calendar year covering more than $750,000
in dollar value. No awards will be granted more than ten years after the
effective date of the Plan.

The Plan is administered by the Compensation Committee of the Board of
Directors. Subject to the express provisions of the Plan, the Compensation
Committee is authorized, among other things, to (a) grant awards to eligible
individuals; (b) determine the terms and conditions of each award; (c) establish
and modify performance objectives; and (d) modify or amend any award unless the
effect adversely and materially affects the rights of any recipient. If the
Compensation Committee so determines, any action or discretion delegated in the
Plan to the Compensation Committee, including the grant of awards, may be
carried out by, or delegated to, the Board of Directors or the stockholders.

Under the Plan, a Stock Option, which may be a nonqualified or an incentive
stock option, may be granted either alone or in conjunction with one or more
other awards. The exercise price, except in the discretion of the Compensation
Committee in the case of new employees or others who commence to render
services, shall be equal to or greater than the 85% of the fair market value of
the underlying Common Stock on the date of grant. The term of each Stock Option
shall be also determined by the Compensation Committee but may not exceed ten
years from the date of grant. Upon exercise, the option price of each Stock
Option is payable by the option holder in cash or, in the sole discretion of the
Compensation Committee, through the delivery of shares of the Company's Common
Stock valued at their fair market value, or in a combination of cash and shares.
The Compensation Committee may grant a replacement Stock Option to an option
holder to replace the shares which the option holder delivered to Company. The
Compensation Committee may also accept the surrender of the right to exercise
any Stock Option for payment in cash or shares or any combination thereof. The
Compensation Committee may also grant stock appreciation rights, free standing
or in tandem with Stock Options, which entitle the holder thereof to receive a
similar payment at his or her election.

The Plan also authorizes the Compensation Committee to grant other stock-based
awards to eligible individuals, which consist of awards that are valued in whole
or in part by reference to, or otherwise based on, the Company's Common Stock
and may include, but are not limited to, restricted stock, performance shares,
phantom shares, and deferred stock. Subject to the terms of the Plan, the
Compensation Committee may determine any and all terms and conditions of other
stock-based awards. The performance objectives determined by the Committee for
each performance share award shall be based on: stock price; market share;
sales; earnings per share; operating cash flow; free cash flow; net income or
loss; net income or loss adjusted to exclude specified items such as gain or
losses from extraordinary or non-recurring items and non-cash expense and income
and before specified expense items such as interest, depreciation, amortization
and income taxes; EBITDA; revenues; return on equity or assets; cost control; or
a combination of any of the foregoing. Payment or settlement of other stock-
based awards will be in cash or in shares of the Company's Common Stock or in
any combination thereof as the Compensation Committee determines in its sole
discretion. The Compensation Committee may permit the payment of withholding
taxes due in connection with awards under the Plan by the withholding of shares
to be issued under the award or by the participant's delivery of other shares of
Common Stock of the Company.

Awards may include terms which provide that any or all of the following actions
may occur as a result of, or in anticipation of, any "Change in Control" (as
defined below) to assure fair and equitable treatment of participants: (i)
acceleration of time periods for purposes of

66
<PAGE>

vesting, or realizing gain from, any outstanding award; (ii) purchase of any
outstanding award from the holder for its equivalent value, as determined by the
Compensation Committee; (iii) adjustments or modifications to outstanding
awards, including the modification or elimination of restrictions and
performance goals, as the Compensation Committee deems appropriate to maintain
and protect the rights and interests of participants. A "Change in Control" is
defined to mean the occurrence of any of the following events: (i) a person or
group (other than Citizens) becomes the owner of stock having 20% or more of the
total number of votes that may be cast for the election of directors of the
Board; (ii) a consolidation or merger or sale of assets in which the Company is
not the surviving corporation or pursuant to which the Company's stock will be
converted into cash, securities or other property or a sale, lease, exchange or
other transfer of 51% or more of the assets of the Company; or (iii) as a result
of any cash tender or exchange offer, merger or other business combination, sale
of assets or contested election, or any combination of the foregoing
Transactions, the persons who are members of the Board before the Transaction
shall cease to constitute a majority of the Board of the Company.

These provisions in the Plan allowing the Compensation Committee and the Board
to award accelerated vesting upon a Change in Control could in some
circumstances have the effect of an "antitakeover" defense because, as a result
of these provisions, a Change in Control of the Company could be more difficult
or costly.

The Plan is subject to suspension, amendment, modification or termination at any
time by the Company's Board of Directors or the stockholders. However, no
amendment or modification would become effective unless approved by the
affirmative vote of the stockholders of the Company if such approval is
necessary or deemed desirable for the continued validity of the Plan or its
compliance with any tax or securities law rule or regulation of any stock
exchange or stock market, or other legal or regulatory, requirement.

PENSION PLAN

Citizens has a noncontributory qualified retirement plan covering Mr. Sharkey
that provides benefits based on formulas related to base salary and years of
service. Benefits shown are not subject to reduction for Social Security
payments. The following table illustrates the estimated annual plan pension
benefits available to Mr. Sharkey upon retirement at age 65 assuming a
preretirement death benefit election of 100% joint and survivorship benefits.
The remuneration classifications are based on the highest five-year average
annual salary (subject to the limitation of the Internal Revenue Code of 1986 on
the amount of annual compensation which may be credited to a participant's
retirement benefits) and the years of service represent years of credited
service.

Pension Plan Table

Years of Service
----------------
Remuneration 5 10 15 20
----- ------ ------ ------
(000 Omitted)
-------------
$160..................... 12 25 37 49

Full years of credited service for Mr. Sharkey are two.

67
<PAGE>

RELATIONSHIP WITH CITIZENS

General

Upon completion of the Offering, Citizens will own 100% of the outstanding Class
B Common Stock of the Company which will represent approximately 97.5% of the
combined voting power of all of the outstanding Common Stock (or approximately
97.16% if the Underwriters' over-allotment options are exercised in full). For
so long as Citizens continues to own shares of Common Stock representing more
than 50% of the combined voting power of the Common Stock of the Company,
Citizens will be able, among other things, to determine any corporate action
requiring approval of holders of Common Stock, including the election of the
entire Board of Directors of the Company, certain amendments to the Certificate
of Incorporation and By-Laws of the Company and approval of certain mergers and
other control transactions, without the consent of the other shareholders of the
Company. See "Description of Capital Stock."

In addition, through its beneficial ownership of Common Stock and, following the
Offering, its control of the Board of Directors, Citizens will be able to
control certain decisions, including decisions with respect to the Company's
dividend policy, the Company's access to capital (including borrowing from
third-party lenders and the issuance of additional equity securities), mergers
or other business combinations involving the Company, the acquisition or
disposition of assets by the Company and any change in control of the Company.
Citizens has advised the Company that Citizens has no present plan or intention
other than to hold all of the Class B Common Stock beneficially owned by it for
the foreseeable future. Citizens has no agreement with the Company not to sell
or distribute such shares, other than pursuant to the Underwriting Agreement in
which Citizens has agreed not to offer, sell, contract to sell or otherwise
dispose of any shares of Common Stock or any securities exchangeable into or
exercisable or exchangeable for Common Stock or file any registration statement
under the Securities Act with respect to any of the foregoing for a period of
180 days from the date of this Prospectus without the prior written consent of
Lehman Brothers Inc. on behalf of the Representatives. There can be no
assurance concerning the period of time during which Citizens will maintain its
beneficial ownership of Common Stock.

Beneficial ownership of at least 80% of the total voting power and value of the
outstanding Common Stock is required in order for Citizens to continue to
include the Company in its consolidated group for federal income tax purposes.
Completion of the Offering made by this Prospectus may terminate the
consolidated group which includes the Company. Beneficial ownership of at least
80% of the total voting power and at least 80% of any class of nonvoting capital
stock is required in order for Citizens to be able to effect a tax-free spin-
off. The Company's relationship with Citizens will also be governed by
agreements to be entered into in connection with the Offering with Citizens,
including an Administrative Services Agreement, a Tax Sharing Agreement, an
Indemnification Agreement, a Customers and Service Agreement and a Registration
Rights Agreement, the material terms of which are described below. In addition,
by virtue of its controlling beneficial ownership and the terms of the Tax
Sharing Agreement between the Company and Citizens, Citizens will effectively
control all of the Company's tax decisions, and conflicts of interest regarding
tax matters between the Company and Citizens may arise. See "-Tax Sharing
Agreement".

68
<PAGE>

The descriptions set forth below are intended to be summaries, and while
material terms of the agreements are set forth herein, the descriptions are
qualified in their entirety to reference to the relevant agreement filed as an
exhibit to the Registration Statement of which this Prospectus is a part.

Administrative Services Agreement

The Administrative Services Agreement (the "Administrative Services Agreement")
provides for Citizens to continue to provide certain financial management
services, information services, legal and contract services, human resources
services and corporate planning services to the Company. Under the terms of the
Administrative Services Agreement, all of the services will be rendered by
Citizens subject to the oversight, supervision and approval of ELI, acting
through its Board of Directors.

The administrative costs to be paid by ELI to Citizens pursuant to the
Administrative Services Agreement are not expected to exceed the fees that would
be paid if such services were to be provided by an independent third party.

The Administrative Services Agreement will become effective upon the public
offering of shares of Class A Common Stock, and shall terminate on December 31,
2005, unless earlier terminated by Citizens or ELI. The Administrative Services
Agreement will be automatically renewed for additional terms of two years unless
either party gives at least six months written notice prior to a scheduled
termination date. The Administrative Services Agreement can be terminated upon
a material breach and will be terminated upon a change of control of ELI. A
change of control shall be deemed to have occurred if (i) Citizens or the
companies controlled by Citizens should own shares representing less than a
majority of the voting power of the then outstanding common stock; (ii) majority
of the seats of the board of directors shall be occupied by persons who are
neither (a) nominated by Citizens or by the board of directors of ELI, nor (b)
appointed by directors of ELI so nominated or (iii) any person or group other
than Citizens and companies controlled by Citizens shall otherwise directly or
indirectly have the power to exercise a controlling influence over ELI.

Tax Sharing Agreement

The Company has heretofore been included in Citizens' federal consolidated
income tax group. After the Offering it is expected that the Company will no
longer be included in the federal consolidated income tax group although,
depending upon the aggregate value of the Common Stock owned by Citizens after
the Offering, the Company may continue to be so included. In such case the
Company's federal income tax liability would be included in the consolidated
federal income tax liability of Citizens and its subsidiaries. The Company may
also be included with certain Citizens subsidiaries in combined, consolidated or
unitary income tax groups for state and local tax purposes. The Company and
Citizens will enter into a federal, state and local tax-sharing agreement (the
"Tax Sharing Agreement"). Pursuant to the Tax-Sharing Agreement, the Company and
Citizens will make payments between them such that, with respect to any period,
the amount of taxes to be paid by the Company, subject to certain adjustments,
will generally be determined as though the Company were to file separate
federal, state and local income or franchise tax returns (including, except as
provided below, any amounts determined to be due as a result of a
redetermination of the tax liability of Citizens arising from an audit or
otherwise). The Company will be responsible for any tax liability due any
foreign jurisdiction arising from its business activities. The Tax Sharing

69
<PAGE>

Agreement will remain in effect so long as any taxing jurisdiction requires the
filing of a combined tax return by both Citizens and ELI.

If the Company continues to be included in Citizens' federal consolidated income
tax group, Citizens will continue to have all the rights of a parent of a
consolidated group. If so provided for by applicable state and local law with
respect to a parent of a combined, consolidated or unitary group Citizens will
have similar rights. Citizens will have sole and exclusive responsibility for
(i) preparing any tax returns (including amended returns or claims for refund)
of the Company; (ii) representing the Company with respect to any tax audit or
tax contest; (iii) engaging outside counsel and accountants with respect to tax
matters regarding the Company; and (iv) performing such other acts and duties
with respect to the Company's tax returns as Citizens determines is appropriate.
Under the Administrative Services Agreement, the amounts that the Company will
pay Citizens will encompass reimbursement to Citizens for all direct and
indirect costs and expenses incurred with respect to the Company's share of the
overall costs and expenses incurred by Citizens with respect to tax related
services.

In general, the Company will be included in Citizens' consolidated group for
federal income tax purposes for so long as Citizens beneficially owns at least
80% of the total voting power and value of the outstanding common stock. Each
member of a consolidated group is jointly and severally liable for the federal
income tax liability of each other member of the consolidated group.
Accordingly, although the Tax Sharing Agreement allocates tax liabilities
between the Company and Citizens, during the period in which the Company is
included in Citizens' consolidated group, the Company could be liable in the
event that any federal tax liability is incurred, but not discharged, by any
other member of Citizens' consolidated group. See "Risk Factors - Control by
Citizens."

Indemnification Agreement

The Company and Citizens have entered into an indemnification agreement (the
"Indemnification Agreement"). The Indemnification Agreement provides that each
party thereto (the "Indemnifying Party") will indemnify the other party thereto
and its directors, officers, employees, agents and representatives (the
"Indemnified Party") for liabilities under federal or state securities laws as a
result of the Offering, including liabilities arising out of or based upon
alleged misrepresentations in or omissions from the Registration Statement, of
which this Prospectus is a part, and for liabilities that may be incurred by the
Indemnified Party relating to, resulting from or arising out of (i) the
businesses and operations conducted or formerly conducted, or assets owned or
formerly-owned, by the Indemnifying Party and its subsidiaries (except, in the
case where Citizens is the Indemnifying Party, such businesses, operations and
assets of the Company and its subsidiaries) or (ii) the failure by the
Indemnifying Party to comply with any other agreements executed in connection
with the Offering, except to the extent caused by the Indemnified Party.

The Indemnification Agreement also provides that the Company will indemnify
Citizens for any liabilities incurred by Citizens under any guarantees of ELI's
obligations or liabilities of the Company and that the Company will pay Citizens
for its direct costs, if any, of maintaining such guarantees.

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<PAGE>

Registration Rights Agreement

The Company and Citizens have entered into a Registration Rights Agreement (the
"Registration Rights Agreement"). The Registration Rights Agreement provides
that, upon the request of Citizens, the Company will use its best efforts to
effect the registration under the applicable federal and state securities laws
of any of the shares of Common Stock (and any other securities issued in respect
of or in exchange therefor) held by Citizens for sale in accordance with
Citizens' intended method of disposition thereof and will take such other
actions necessary to permit the sale thereof in other jurisdictions, subject to
certain specified limitations. Although as of the date of this Prospectus,
Citizens has advised the Company that Citizens has no current plan or intention
other than to hold its shares of Class B Common Stock for the foreseeable
future, Citizens will also have the right, which it may exercise at any time and
from time to time, to include the shares of Common Stock held by it in certain
other registrations of common equity securities of the Company initiated by the
Company on its own behalf or on behalf of its other shareholders. Citizens will
pay the out-of-pocket costs and expenses of registration for registrations which
it initiates. The Company has agreed to pay all out-of-pocket costs and
expenses (other than underwriting discounts and commissions) in connection with
registrations initiated by the Company or others in which Citizens participates.
Subject to certain limitations specified in the Registration Rights Agreement,
such registration rights will be assignable by Citizens and its assigns. The
Registration Rights Agreement contains indemnification and contribution
provisions (i) by Citizens and its permitted assigns for the benefit of the
Company and related persons and (ii) by the Company for the benefit of Citizens
and the other persons entitled to effect registrations of Common Stock and
related persons.

Customers and Service Agreement

The Company and Citizens have entered into a Customers and Service Agreement
(the "Customers and Service Agreement"). The Customers and Service Agreement
contains provisions prohibiting the Company from competing with Citizens for
customers in Citizens' existing service areas and in certain new lower density
territories which Citizens will have been first to enter after the Offering.
Citizens has agreed that it will not compete with the Company in the service
territories in which the Company is currently providing services and in certain
new higher density territories which the Company will have been first to provide
services after Offering. Neither Citizens nor ELI may solicit an existing
wholesale customer of the other company for services which such customer is
currently receiving under contract from the other company. The relevant
provisions are intended to permit the Company to continue all activities in
which it currently engages, and to expand into related markets. The Customers
and Service Agreement will remain in effect until Citizens ceases to own a
majority of the voting interest of the capital stock of the Company or its
designees cease to constitute a majority of the directors.

Citizens' Guarantees of ELI's Obligations

Citizens has guaranteed all obligations of ELI under a lease of certain
equipment described under "Business-Properties." Effective with the Offering,
ELI has agreed to pay Citizens a guarantee fee equal to 3.25% per annum of the
amount of the lessor's investment in the leased assets. See
"Business-Properties-Lease."

In October, 1997, the Company arranged for a bank commitment for a five-year
$400 million revolving Credit Commitment. Citizens has agreed, subject to
receiving regulatory authorization, to substitute its guarantee of all debt
obligations under such Credit Commitment

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<PAGE>

for that of certain subsidiaries of Citizens within 90 days of the Closing of
the Credit Commitment. Effective with the Offering, ELI has agreed to pay
Citizens a guarantee fee equal to 3.25% per annum of the average balance of
outstanding debt.

Citizens and ELI have agreed that, if the economic interest of Citizens in ELI
should drop below 50%, Citizens will be entitled to request ELI to refinance its
obligations under the Lease and the Credit Commitment and ELI shall be obligated
to use its best efforts to do so.

Telecommunications Services

Citizens has leased "dark" fiber optic lines from ELI for which Citizens has
agreed to pay an annual fee of $360,000. Also, Citizens and ELI have agreed to
combine their purchases of long-haul services in an arrangement with a long
distance company in order to receive a lower unit cost. ELI has agreed to
reimburse Citizens for the cost of ELI's usage and pay an additional fee
consisting of 5% of such cost. In 1996, ELI paid Citizens a total of
approximately $7.6 million. The agreement was replaced effective May 1, 1997
with a 24-month term agreement which removed the 5% additional fee.

Conflicts of Interest

Conflicts of interest may arise between the Company and Citizens in a number of
areas relating to their past and ongoing relationships, including potential
acquisitions of businesses or properties or other corporate opportunities,
potential competitive business activities, the election of a new or additional
directors, payment of dividends, incurrence of indebtedness, tax matters,
financial commitments, marketing functions, indemnity arrangements, registration
rights, administration of benefits plans, service arrangements, issuances of
capital stock of the Company, sales or distributions by Citizens of its
remaining shares of Common Stock and the exercise of Citizens of its ability to
control the management and affairs of the Company. The Customers and Service
Agreement contains certain noncompete provisions; however, in many
circumstances, the Company and Citizens are free to engage in competition with
one another.

The Company and Citizens may enter into material transactions and agreements in
the future in addition to those described above. The Board will utilize such
procedures in evaluating the terms and provisions of any material transactions
between the Company and Citizens or its affiliates as the Board may deem
appropriate in light of its fiduciary duties under the state law. In any such
evaluation, the Board may rely on management's statements and opinions and may
or may not utilize outside experts or consultants or obtain independent
appraisals or opinions.

The six current directors of the Company include Leonard Tow, Chairman of the
Board and Chief Executive Officer of Citizens, who is Chairman of the Board of
the Company, Daryl A. Ferguson, President and Chief Operating Officer of
Citizens, who is Vice Chairman of the Board of the Company, and Stanley
Harfenist and Robert Stanger, directors of Citizens. Also, Mr. Ferguson is
Chief Executive Officer of the Company and Robert J. DeSantis, an executive
officer of Citizens is an executive officer of the Company. Directors and
officers of the Company who are also directors and officers of Citizens will
have conflicts of interest with respect to matters potentially or actually
involving or affecting the Company or Citizens, such as acquisitions, financing
and other corporate opportunities that may be suitable for the Company and
Citizens. To the extent that such opportunities arise, such directors may
consult with their legal advisors and make a determination after consideration
of a number of factors, including whether such opportunity is within the
Company's line of business or consistent with its strategic objectives and
whether the Company will be able to undertake or benefit from such opportunity.
In addition, determination may be made by the Board, when appropriate, by the
vote of the

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<PAGE>

disinterested directors only. Notwithstanding the foregoing, there can be no
assurance that conflicts will be resolved in favor of the Company.

So long as the Company remains a subsidiary of Citizens, the directors and
officers of the Company will, subject to certain limitations, be indemnified by
Citizens and insured under insurance policies maintained by Citizens against
liability for actions taken or omitted to be taken in their capacities as
directors and officers of the Company, including actions or omissions that may
be alleged to constitute breaches of the fiduciary duties owed by such persons
to the Company and its shareholders. This insurance may not be applicable to
certain of the claims which Citizens may have against the Company pursuant to
the Indemnification Agreement or otherwise.

SECURITIES OWNERSHIP

ELI Common Stock

No shares of Class A Common Stock were outstanding or beneficially owned prior
to the Offering. Immediately after the Offering, the only shares of Class A
Common Stock that will be outstanding are those that will be issued in the
Offering (including any shares issued upon exercise of the Underwriters' over-
allotment options). All of the 41,165,000 shares of Class B Common Stock
outstanding are beneficially owned by Citizens. Accordingly, upon consummation
of the Offering, Citizens will own Common Stock representing approximately
79.62% of the economic interest in the Company (77.38% if the Underwriters'
over-allotment options are exercised in full) and representing approximately
97.5% of the combined voting power of the Company's outstanding Common Stock (or
97.16% if the Underwriters' over-allotment options are exercised in full).

The following table provides information, as of September 30, 1997, and as
adjusted to reflect the sale of 10,000,000 shares of Class A Common Stock by ELI
in the Offering, with respect to the beneficial ownership of the Company's
Common Stock by each person known by ELI to be the beneficial owner of more than
5% of any class of the Company's voting securities. As of September 30, 1997
none of the directors nor any of the executive officers of the Company
beneficially owned any shares of Class A Common Stock or Class B Common Stock.
See "Management-Equity Incentive Plan" for a discussion of the grant of
restricted shares of Class A Common Stock to directors and officers in
connection with the Offering.

<TABLE>
<CAPTION>
Class A Class B
Common Stock Common Stock
----------------------- ---------------------- Percent of Vote of
Number of Number of All Classes of
Name and Address(1) Shares % Shares % Common Stock
- ------------------- ------------ ---------- ----------- ---------- --------------------
<S> <C> <C> <C> <C> <C>
Citizens Utilities
Company................. 0 0 41,165,000 100% 97.5%
</TABLE>
- ---------------------

(1) The address of Citizens is High Ridge Park, Stamford, Connecticut 06905.

Citizens Common Stock

The following table reflects shares of common stock of Citizens beneficially
owned (or deemed to be beneficially owned pursuant to the rules of the
Securities and Exchange Commission) as of September 15, 1997 by each director
and Named Executive Officer of the Company and all executive officers and
directors of the Company as a group.

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<PAGE>

<TABLE>
<CAPTION>
Acquirable Percentage of
Name Title Shares Owned Within 60 Days(1) Common Stock(2)
- ---- ----- ------------ ----------------- ---------------

<S> <C> <C> <C> <C>
Daryl A. Ferguson Vice Chairman and CEO 325,874 306,875 *
Todd Hanson Vice President 10,829 6,880 *
Stanley Harfenist Director 51,074 37,787 *
Randall Lis Vice President 7,661 6,390 *
David B. Sharkey President and Director 18,519 18,115 *
Robert A. Stanger Director 40,206 37,787 *
Leonard Tow Chairman 8,929,254/(3)(4)/ 2,835,530/(4) 3.6%
John Wolff Vice President 7,738 6,391 *
Earnest Yates Vice President 5,743 1,666 *
All Officers and Directors as
a group 9,544,529/(5)/ 3,393,249/(5)/ 3.9%

</TABLE>
_____________________________

* Represents less than 1% of Citizens' common stock.
(1) Reflects number of shares that could be purchased by exercise of options
available as of September 15, 1997 or within 60 days thereafter under Citizens'
stock option plans.
(2) Based on number of shares outstanding at, or acquirable within 60 days of,
September 15, 1997.
(3) Includes 4,812,549 shares of Citizens' common stock owned by Century
Communications Corp. of which Leonard Tow is Chairman of Board, Chief Executive
Officer, Director and, together with his wife, the holder of a majority
ownership interest in its common stock. These shares are included in the above
table as required by the definition of beneficial ownership of the Securities
and Exchange Commission. Except to the extent of such indirect interest,
Leonard Tow disclaims beneficial ownership of any of these shares of common
stock of Citizens.
(4) Includes 17,438 shares of Citizens' common stock held by his wife as
custodian for her minor grandchildren and 37,787 shares of Citizens' common
stock acquirable by his wife within 60 days. Leonard Tow disclaims beneficial
ownership of all such shares.
(5) Share information is qualified as described in the previous footnotes

DESCRIPTION OF CAPITAL STOCK

Prior to the consummation of the Offering, ELI will amend its Certificate of
Incorporation to change its authorized capital stock to 180,000,000 shares,
including 110,000,000 shares of Class A Common Stock, $.01 par value per share,
60,000,000 shares of Class B Common Stock, $.01 par value per share, and
10,000,000 shares of preferred stock, $.01 par value per share (the "Preferred
Stock"). Upon completion of the Offering, there will be no preferred stock
outstanding and Citizens will own of record all of the outstanding shares of
Class B Common Stock. See "Securities Ownership."

The following summary description relating to the capital stock of the Company
does not purport to be complete. The rights of the holders of ELI's capital
stock will be set forth in ELI's Certificate of Incorporation, the form of which
is filed as an exhibit to the Registration Statement of which this Prospectus
forms a part. The summary set forth below is qualified by reference to such
exhibit and to the applicable provisions of the Delaware General Corporation Law
(the "DGCL").

Common Stock

The preferences and relative rights of the Class A Common Stock and Class B
Common Stock are substantially identical in all respects, except for voting
rights and exchange rights.

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<PAGE>

Voting Rights

Each share of Class A Common Stock entities the holder to one vote and each
share of Class B Common Stock entities the holder to 10 votes on each matter to
be voted upon by the holders of the Common Stock. The holders of the shares of
Class A Common Stock and Class B Common Stock vote as one class on all matters
to be voted on by stockholders, including, without limitation, the election of
directors and any proposed amendment to the Certificate of Incorporation of ELI
that would increase the authorized number of shares of Common Stock or any class
thereof or any other class or series of stock or decrease the number of
authorized shares of any class or series of stock (but not below the number
thereof then outstanding), except as required by the DGCL.

Neither the holders of Class A Common Stock nor the holders of Class B Common
Stock have cumulative voting rights. For a discussion of the effects of the
disproportionate voting rights of the Class A Common Stock and Class B Common
Stock, see "Risk Factors--Control by Principal Stockholder" and "--Conflicts of
Interest."

Dividends

Each share of Common Stock is entitled to receive dividends from funds legally
available therefor if, as and when declared by the Board of Directors of ELI.
Class A Common Stock and Class B Common Stock share equally, on a share-for-
share basis, in any dividends declared by the Board of Directors. If at any
time a distribution of the Class A Common Stock or Class B Common Stock is to be
paid in shares of Class A Common Stock, Class B Common Stock or any other
securities of the Company or any other person, such dividends may be declared
and paid only as follows: (1) a share distribution consisting of Class A Common
Stock to holders of Class A Common Stock and Class B Common Stock, on an equal
per share basis; or to holders of Class A Common Stock only, but in such event
there shall also be a simultaneous share distribution to holders of Class B
Common Stock consisting of shares of Class B Common Stock on an equal per share
basis; (2) a share distribution consisting of Class B Common Stock to holders of
Class B Common Stock and Class A Common Stock, on an equal per share basis; or
to holders of Class B Common Stock only, but in such event there shall also be a
simultaneous share distribution to holders of Class A Common Stock consisting of
shares of Class A Common Stock on an equal per share basis; and (3) a share
distribution of shares of any class of securities of the Company or of any other
person other than the Common Stock, either on the basis of a distribution of
identical securities, on an equal per share basis to the holders of Class A
Common Stock and Class B Common Stock, or on the basis of a distribution of one
class of securities to the holders of Class A Common Stock and another class of
securities to holders of Class B Common Stock, provided that the securities so
distributed do not differ in any respect, other than relative voting rights and
related differences, in designations, exchange and share distribution
provisions, with the holders of Class B Common Stock receiving the class having
the higher relative voting rights, provided that if the securities so
distributed constitute capital stock of a subsidiary of the Company, such rights
shall not differ to a greater extent than the corresponding existing differences
in voting rights, designations, exchange and distribution provisions between
Class A Common Stock and Class B Common Stock. If the Company shall in any
manner subdivide or combine the outstanding shares of Class A Common Stock or
Class B Common Stock, the outstanding shares of the other class of Common Stock
shall be proportionally subdivided or combined in the same manner and on the
same basis as the outstanding shares of

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<PAGE>

Class A Common Stock or Class B Common Stock, as the case may be, that have been
subdivided or combined.

Exchange

Under the Certificate of Incorporation, each share of Class B Common Stock is
exchangeable at any time and from time to time at the option of the holder
thereof into one share of Class A Common Stock. The Class A Common Stock has no
exchange rights.

Other

Stockholders of ELI have no preemptive or other rights to subscribe for
additional shares. All holders of Common Stock, regardless of class, are
entitled to share equally on a share-for-share basis in any assets available for
distribution to stockholders on liquidation, dissolution or winding up of ELI.
No shares of the Common Stock are subject to redemption or a sinking fund. All
outstanding shares are, and all shares offered by this Prospectus will be, when
sold, validly issued, fully paid and nonassessable. ELI may not subdivide or
combine shares of Common Stock without at the same time proportionally
subdividing or combining shares of the other classes.

Preferred Stock

The Company's Board of Directors is authorized to provide for the issuance of
Preferred Stock in one or more series and to fix the designations, preferences,
powers and relative, participating, optional and other rights, qualifications,
limitations and restrictions thereof, including the dividend rate, exchange
rights, voting rights, redemption price and liquidation preference and to fix
the number of shares to be included in any such series. Any such Preferred
Stock so issued may rank senior to the Common Stock with respect to the payment
of dividends or amounts upon liquidation, dissolution or winding up, or both.
In addition, any such shares of Preferred Stock may have class or series voting
rights.

Transfer Agent and Registrar

The Transfer Agent and Registrar for the Common Stock is the Illinois Stock
Transfer Company.

SHARES ELIGIBLE FOR FUTURE SALE

Upon the completion of the Offering, there will be 10,535,000 shares of Class A
Common Stock issued and outstanding (12,035,000 if the Underwriters' over-
allotment options are exercised in full) and 41,165,000 shares Class B Common
Stock issued and outstanding. The 10,000,000 shares of Class A Common Stock to
be sold in the Offering will be tradable without restriction by persons other
than "affiliates" of ELI. The shares of Class B Common Stock and any Class A
Common Stock issued upon exchange of Class B Common Stock held or to be held by
Citizens will be deemed "restricted securities" within the meaning of the
Securities Act, and, as such, may not be sold in the absence of registration
under the Securities Act or an exemption therefrom, including the exemptions
contained in Rule 144.

In general, under Rule 144 as currently in effect, a person (or persons whose
shares are required to be aggregated) who has been deemed to have beneficially
owned shares of an issuer for at least one year, including an "affiliate," is
entitled to sell, within any three-month period, a

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<PAGE>

number of shares that does not exceed the greater of 1% of the then outstanding
number of shares of such class or the average weekly trading volume in composite
trading in all national securities exchanges during the four calendar weeks
preceding the filing of the required notice of such sale, provided that such
issuer has been a reporting company for at least 90 days. As defined in Rule
144, an "affiliate" of an issuer is a person that directly or indirectly,
through one or more intermediaries, controls or is controlled by, or is under
common control with, such issuer. Citizens would be deemed an "affiliate" of ELI
under the Securities Act.

The Company and Citizens, as the holder of the Class B Common Stock, have agreed
not to offer, sell, contract to sell, file a registration statement pursuant to
the Securities Act (except for certain registration statements relating to the
issuance of stock and stock options to employees) or otherwise dispose of any
shares of Common Stock without the prior written consent of Lehman Brothers Inc.
on behalf of the Representatives, for a period of 180 days after the date of
this Prospectus.

The shares of the Company's Class B Common Stock are exchangeable into shares of
Class A Common Stock and, in the event of exchange of such shares and expiration
of the 180-day lock-up period described above, over 500,000 of the aggregate
shares of Class A Common Stock issuable upon exchange of the Class B Common
Stock would be immediately eligible for sale pursuant to the provisions of Rule
144 under the Securities Act or upon registration under the Securities Act.
Citizens has advised ELI that Citizens has no current plan or intention other
than to hold the shares of Class B Common Stock owned by it for the foreseeable
future. However, no assurance can be given that Citizens will not decide in the
future to register its shares under the Securities Act and to dispose of all or
a portion of such stock on the public market from time to time, in an
underwritten transaction, or privately or otherwise. See "Relationship with
Citizens--Registration Rights Agreement." Alternatively, Citizens could dispose
of shares periodically pursuant to Rule 144. Any such offers or dispositions
could have a material adverse effect on the market price of the Class A Common
Stock.

Prior to the Offering, there has been no public market for the Class A Common
Stock, and no predictions can be made about the effect, if any, that market
sales of shares of Class A Common Stock or the availability of such shares for
sale would have on the market price prevailing from time to time. Nevertheless,
sales of substantial amounts of Class A Common Stock in the public market, or
the perception that such sales could occur, may have a material adverse impact
on the market price for the shares of Class A Common Stock offered hereby or on
the ability of the Company to raise capital through a public offering of its
equity securities. See "Risk Factors--Shares Eligible for Future Sale."

CERTAIN TAX CONSIDERATIONS

The following is a general discussion of certain U.S. federal income and estate
tax consequences of the ownership and disposition of Common Stock. This
discussion is intended only as a descriptive summary and does not purport to be
a complete analysis or listing of all possible tax considerations. The
discussion deals only with Common Stock held as capital assets and does not
address any special United States tax consequences that may be applicable to
holders that are subject to special treatment under the United States Internal
Revenue Code of 1986, as amended (the "Code"). Furthermore, the following
discussion is based on provisions of the Code and administrative and judicial
interpretations as of the date hereof, all of which are

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<PAGE>

subject to change. Each prospective holder is urged to consult a tax advisor
with respect to the federal tax consequences of holding and disposing of Common
Stock in light of its particular situation, as well as any tax consequences that
may arise under the laws of any U.S. state, municipality or other taxing
jurisdiction.

Certain Tax Considerations Applicable to A Non-U.S. Holder

As used herein, a "non-U.S. holder" is a holder that is not (i) a citizen or
resident of the United States, (ii) a corporation or partnership created or
organized in or under the laws of the United States or any political subdivision
thereof, (iii) an estate the income of which is subject to United Sates federal
income taxation regardless of its source, or (iv) a trust which is subject to
the supervision of a court within the United States and the control of one or
more United States persons. An individual may, among other ways, be deemed to
be a resident alien (as opposed to a non-resident alien) by virtue of being
present in the United States on at least 31 days in the calendar year and for an
aggregate of 183 days during a three-year period ending in the current calendar
year (counting for such purposes all of the days present in the current year,
one-third of the days present in the immediately preceding year, and one-sixth
of the days present in the second preceding year). Resident aliens are
generally subject to U.S. federal tax as if they were U.S. citizens.

Dividends

As indicated above, the Company has no current intention to pay dividends on its
Common Stock. The following discussion of U.S. federal income taxes would apply
in the event taxable dividends are declared in the future and are paid to non-
U.S. holders. In general, dividends payable in cash or property (or which are
otherwise taxable) received by a non-U.S. holder of Common Stock will be subject
to withholding of U.S. federal income tax at a 30% rate or such rate as may be
specified by an applicable income tax treaty, unless the dividends are
effectively connected with the conduct of a trade or business by the non-U.S.
holder within the United States. Dividends that are effectively connected with
such holder's conduct of a trade or business in the United States are subject to
tax on a net income basis at rates applicable to U.S. holders and are not
generally subject to withholding. Any such effectively connected dividends
received by a non-U.S. corporation may also, under certain circumstances, be
subject to an additional "branch profits tax" at a 30% rate or such rate as may
be specified by an applicable income tax treaty.

Under current U.S. Treasury regulations, dividends paid to an address outside
the United States are presumed to be paid to a resident of such country for
purposes of the withholding rules discussed above, and, under the current
interpretation of U.S. Treasury regulations, for purposes of determining the
applicability of a tax treaty rate. Under final U.S. Treasury regulations
issued October 6, 1997, and generally effective for payments made after December
31, 1998 (the "New Regulations"), however, a non-U.S. holder of Common Stock who
wishes to claim the benefit of an applicable treaty rate will be required to
satisfy applicable certification and other requirements. Currently certain
certification and disclosure requirements must be complied with in order to
claim an exemption from withholding under the effectively connected income
exemption.

A non-U.S. holder of Common Stock that is eligible for a reduced rate of U.S.
withholding tax pursuant to an income tax treaty may obtain a refund of any
excess amounts

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<PAGE>

currently withheld by filing an appropriate claim for refund with the U.S.
Internal Revenue Service (the "IRS").

Gain on Disposition of Common Stock

A non-U.S. holder generally will not be subject to U.S. federal income tax in
respect of gain recognized on a disposition of Common Stock including stock
dividend shares unless (i) the gain is effectively connected with a trade or
business of the non-U.S. holder in the United States, (ii) in the case of a non-
U.S. holder who is an individual and holds the Common Stock as a capital asset,
such holder is present in the United States for 183 or more days in the taxable
year of the sale and certain other conditions are met, (iii) the non-U.S. Holder
is subject to tax pursuant to the provisions of U.S. tax law applicable to
certain U.S. expatriates (including certain former citizens and residents of the
United States), or (iv) the Company is or has been a "U.S. real property holding
corporation" for federal income tax purposes. The Company has not been, is not
and does not anticipate becoming, a "U.S. real property holding corporation" for
U.S. federal income tax purposes.

An individual non-U.S. holder described in clause (i) or (iii) above will be
subject to tax on the net gain derived from the sale under regular graduated
U.S. federal income tax rates. An individual non-U.S. holder described in
clause (ii) above will be subject to a flat 30% tax on the gain derived from the
sale, which may be offset by U.S. source capital losses (even though the
individual is not considered a resident of the United States). If a non-U.S.
holder that is a foreign corporation falls under clause (i) above, it will be
subject to tax on its gain under regular graduated U.S. federal income tax rates
and, in addition, may be subject to the branch profits tax equal to 30% of its
effectively connected earnings and profits within the meaning of the Code for
the taxable year, as adjusted for certain items, unless it qualifies for a lower
rate under an applicable income tax treaty.

Federal Estate Taxes

Common Stock owned or treated as owned by an individual who is neither a citizen
or a resident (as specifically defined for United States federal estate tax
purposes) of the United States at the time of death will be included in such
holder's gross estate for U.S. federal estate tax purposes, unless an applicable
estate tax treaty provides otherwise.

U.S. Reporting Requirements and Backup Withholding Tax

Under U.S. Treasury regulations, the Company must report annually to the IRS and
to each non-U.S. holder the amount of dividends payable in cash or property
received by such holder and the tax withheld with respect to such dividends,
regardless of whether withholding was required. Copies of the returns reporting
such dividends and withholding may also be made available to the tax authorities
in the country in which the non-U.S. holder resides under the provisions of an
applicable income tax treaty.

Backup withholding (which generally is a withholding tax imposed at the rate of
31% on certain payments to persons that fail to furnish certain information
under the U.S. information reporting requirements) will generally not apply to
dividends paid to a non-U.S. holder at an address outside the United States
(unless the payer has knowledge that the payee is a U.S. person). Under the New
Regulations, however, a non-U.S. holder will be subject to back-up withholding
unless applicable certification requirements are met. Backup withholding and

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<PAGE>

information reporting generally will apply to dividends paid to addresses inside
the United States on shares of Common Stock to beneficial owners that are not
"exempt recipients" and that fail to provide in the manner required by
regulation certain identifying information.

In general, backup withholding and information reporting will not apply to a
payment of the proceeds of a sale of Common Stock to or through a foreign office
of a broker. If, however, such broker is, for U.S. federal income tax purposes,
a U.S. person, a controlled foreign corporation, or a foreign person that
derives 50% or more of its gross income for certain periods from the conduct of
a trade or business in the United States, such payments will not be subject to
backup withholding but will be subject to information reporting, unless (i) such
broker has documentary evidence in its records that the beneficial owner is a
non-U.S. holder and certain other conditions are met, or (ii) the beneficial
owner otherwise establishes an exemption. Under the New Regulations, such
payments by a U.S.-related broker will be subject to back up withholding if such
broker has actual knowledge that the payee is a U.S. person.

Payment to or through a U.S. office of a broker of the proceeds of a sale of
Common Stock is subject to both backup withholding and information reporting
unless the beneficial owner certifies under penalties of perjury that it is a
non-U.S. holder, or otherwise establishes an exemption.

Any amounts withheld under the backup withholding rules will be allowed as a
refund or a credit against such holder's U.S. federal income tax liability
provided the required information is furnished to the IRS.

In general, the New Regulations do not alter significantly the substantive
requirements of the rules pertaining to U.S. federal income tax withholding,
backup withholding and information reporting, but, rather, modify certification
procedures and forms and clarify reliance standards. Prospective non-U.S.
holders should consult their own tax advisors regarding the New Regulations and
the effect, if any, the New Regulations will have on their ownership of Common
Stock.

UNDERWRITING

The Underwriters of the U.S. Offering named below (the "U.S. Underwriters") for
whom Lehman Brothers Inc., Deutsche Morgan Grenfell Inc., Merrill Lynch, Pierce,
Fenner & Smith Incorporated and Morgan Stanley & Co. Incorporated are acting as
representatives (the "Representatives") have severally agreed, subject to the
terms and conditions set forth in the U.S. Underwriting Agreement (the "U.S.
Underwriting Agreement") with the Company, to purchase from the Company, and the
Company has agreed to sell to each U.S. Underwriter, the aggregate number of
shares of Class A Common Stock set forth opposite their respective names below.

Number
of
U.S. Underwriters Shares
- ----------------- ------

Total................................................ 8,000,000
=========

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The managers of the International Offering of the Class A Common Stock outside
the United States (the "International Managers"), for whom Lehman Brothers
International (Europe), Morgan Grenfell & Co. Limited, Merrill Lynch
International and Morgan Stanley & Co. International Limited are acting as lead
managers (the "Lead Managers"), have severally agreed, subject to the terms and
conditions of the International Underwriting Agreement (the "International
Underwriting Agreement"), to purchase from the Company, and the Company has
agreed to sell to each International Manager, the aggregate number of shares of
Class A Common Stock set forth opposite their respective names below.

Number
of
International Managers Shares
- ---------------------- ------

Total.............................................. 2,000,000
=========

The U.S. Underwriting Agreement and the International Underwriting Agreement
(collectively, the "Underwriting Agreements") provide that the obligations of
the U.S. Underwriters and the International Managers, respectively, to purchase
shares of Class A Common Stock are subject to the approval of certain legal
matters by counsel and to certain other conditions. Each Underwriting Agreement
provides that, if any shares of Class A Common Stock are purchased pursuant to
such Underwriting Agreement, all the shares of Class A Common Stock agreed to be
purchased pursuant to such Underwriting Agreement must be so purchased. The
offering price and underwriting discounts and commissions for the U.S. Offering
and the International Offering are identical. The closing of the International
Offering is a condition to the closing of the U.S. Offering and the closing of
the U.S. Offering is a condition to the closing of the International Offering.

The Company has granted to the U.S. Underwriters and the International Managers
options to purchase up to an additional 1,200,000 and 300,000 shares of Class A
Common Stock, respectively, at the initial public offering price less the
aggregate underwriting discount, solely to cover over-allotments. The options
may be exercised at any time up to 30 days after the date of this Prospectus. To
the extent that the U.S. Underwriters and International Managers exercise such
options, each of the U.S. Underwriters or International Managers, as the case
may be, will be committed, subject to certain conditions, to purchase a number
of option shares proportionate to such U.S. Underwriter's and International
Manager's initial commitment.

The Company has been advised that the U.S. Underwriters and the International
Managers propose to offer the shares of Class A Common Stock directly to the
public initially at the public offering price set forth on the cover page of
this Prospectus, and to certain selected dealers (who may include the U.S.
Underwriters and the International Managers) at such public offering price less
a selling concession not in excess of $__ per share. The selected dealers may
reallow a concession not in excess of $____ per share on sales to certain other
dealers. After the initial offering of the Class A Common Stock, the public
offering price, concession to selected dealers and reallowance to other dealers
may be changed.

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The Company and Citizens have agreed to indemnify the U.S. Underwriters and the
International Managers against certain liabilities, including liabilities under
the Securities Act of 1933, and to contribute to payments which the U.S.
Underwriters and the International Managers may be required to make in respect
thereof.

The U.S. Underwriters and the International Managers have entered into an
Agreement Among U.S. Underwriters and International Managers (the "Agreement
Among") pursuant to which each U.S. Underwriter has agreed that, as part of the
distribution of the shares of Class A Common Stock offered in the U.S. Offering,
(a) it is not purchasing any of such shares for the account of anyone other than
a U.S. or Canadian Person (as defined below) and (b) it has not offered or sold,
and will not offer, sell, resell or deliver, directly or indirectly, any of such
shares or distribute any prospectus relating to the U.S. Offering outside the
United States or Canada or to anyone other than a U.S. or Canadian Person. In
addition, pursuant to the Agreement Among, each International Manager has agreed
that, as part of the distribution of the shares of Class A Common Stock offered
in the International Offering, (a) it is not purchasing any of such shares for
the account of any U.S. or Canadian Person and (b) it has not offered or sold,
and will not offer, sell, resell or deliver, directly or indirectly, any of such
shares or distribute any prospectus relating to the International Offering
within the United States or Canada or to any U.S. or Canadian Person. The
foregoing limitations do not apply to stabilization transactions or to certain
other transactions specified in the Underwriting Agreements and the Agreement
Among, including: (i) certain purchases and sales between the U.S. Underwriters
and the International Manager; (ii) certain offers, sales, resales, deliveries
or distributions to or through investment advisors or other persons exercising
investment discretion; (iii) purchases, offers or sales by a U.S. Underwriter
who is also acting as an International Manager or by an International Manager
who also is acting as a U.S. Underwriter and (iv) other transactions
specifically approved by the U.S. Underwriters and International Managers. As
used herein, "U.S. or Canadian Person" means any resident or citizen of the
United States or Canada, any corporation, pension, profit sharing or other trust
or other entity organized under or governed by the laws of the United States or
Canada or any political subdivision thereof (other than the foreign branch of
any United States or Canadian Person), any estate or trust the income of which
is subject to United States or Canadian federal income taxation regardless of
the source of its income, and any United States or Canadian branch of a person
other than a United States or Canadian Person. The term "United States" means
the United States of America (including, the states thereof and the District of
Columbia) and its territories, its possessions and other areas subject to its
jurisdiction. The term "Canada" means the provinces of Canada, its territories,
its possessions and other areas subject to its jurisdiction.

Pursuant to the Agreement Among, sales may be made among the U.S. Underwriters
and the International Managers of such number of shares of Class A Common Stock
as may be mutually agreed. The price of any shares so sold shall be the public
offering price as then in effect for Class A Common Stock being sold by the U.S.
Underwriters and International Managers, less an amount not greater than the
selling concession unless otherwise determined by mutual agreement. To the
extent that there are sales pursuant to the Agreement Among, the number of
shares initially available for sale by the U.S. Underwriters and the
International Managers may be more or less than the amount specified on the
cover page of this Prospectus.

Each International Manager has represented and agreed that: (i) it has not
offered or sold and, prior to the date six months after the date of issue of the
shares of Class A Common Stock,

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will not offer or sell any shares of Class A Common Stock to persons in the
United Kingdom except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as principal or agent)
for the purpose of their business or otherwise in circumstances which have not
resulted and will not result in an offer to the public in the United Kingdom
within the meaning of the Public Offers of Securities Regulations 1995; (ii) it
has complied and will comply with all applicable provisions of the Financial
Services Act of 1986 with respect to anything done by it in relation to the
Class A Common Stock in, from or otherwise involving the United Kingdom; and
(iii) it has only issued or passed on, and will only issue or pass on, to any
person in the United Kingdom, any document received by it in connection with the
issue of the Class A Common Stock if that person is of a kind described in
Article 11(3) of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1995.

Purchasers of the shares offered hereby may be required to pay stamp taxes and
other charges in accordance with the laws and practices of the country of
purchase in addition to the public offering price.

The Representatives have informed the Company that the Underwriters do not
intend to confirm sales of Class A Common Stock to accounts over which they
exercise discretionary authority.

Prior to the Offering, there has been no public market for the Class A Common
Stock. The initial public offering price of the Class A Common Stock has been
determined by negotiations among the Company and the Underwriters. Among the
principal factors considered in making such determination were the past and
present operations of the Company, the historical results of operations of the
Company and the trend of its revenues and earnings, the prospects for future
earnings of the Company, an assessment of the Company's management, the history
of and prospects for the industry in which the Company competes, the prices of
similar securities of generally comparable companies and the general condition
of the securities markets at the time of the Offering. There can be no
assurance that an active trading market will develop for the Class A Common
Stock or that the Class A Common Stock will trade in the public market
subsequent to the Offering at or above the initial public offering price.

The Company has applied for listing the Class A Common on the Nasdaq National
Market under the symbol "ELIX."

Until the distribution of the Class A Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters and
certain selling group members to bid for and purchase shares of Class A Common
Stock. As an exception to these rules, the Representatives are permitted to
engage in certain transactions that stabilize the price of the Class A Common
Stock. Such transactions may consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the Class A Common Stock.

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If the Underwriters create a short position in the Class A Common Stock in
connection with the Offering (i.e., if they sell more shares of Class A Common
Stock than are set forth on the cover page of this Prospectus), the
Representatives may reduce that short position by purchasing Class A Common
Stock in the open market. The Representatives may also elect to reduce any
short position by exercising all or part of the over-allotment options described
herein.

The Representative may also impose a penalty bid on certain Underwriters and
selling group members. This means that if the Representatives purchase shares
of Class A Common Stock in the open market to reduce the Underwriters' short
position or to stabilize the price of the Class A Common Stock, they may reclaim
the amount of the selling concession from the Underwriters and selling group
members who sold those shares as part of the Offering.

In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security by purchasers in the Offering.

Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Class A Common Stock. In addition,
neither the Company nor any of the Underwriters makes any representation that
the Representatives will engage in such transactions or that such transactions,
once commenced, will not be discontinued without notice.

At the Company's request, the U.S. Underwriters have reserved up to ____% of the
shares for sale at the initial public offering price to certain of the Company's
employees. The number of shares available for sale to the general public will
be reduced to the extent these individuals purchase such reserved shares. Any
reserved shares not purchased will be offered by the U.S. Underwriters to the
general public on the same basis as the other shares offered hereby.

Certain of the U.S. Underwriters and International Managers have provided, from
time to time, and expect to provide in the future, brokerage and investment
banking services to the Company and its affiliates for which they receive
customary fees and compensation.

LEGAL MATTERS

The legality of the Class A Common Stock offered hereby and certain other legal
matters will be passed upon for the Company by Winthrop, Stimson, Putnam &
Roberts, New York, New York, and for the Underwriters by Simpson Thacher &
Bartlett (a partnership which includes professional corporations), New York, New
York. Legal matters relating to required authorization, if any, of the Common
Stock Series A by the public utilities commissions in the various states will be
passed upon by local counsel to the Company in the states of Washington, Oregon,
California, Utah, Nevada, Arizona and Idaho. Winthrop, Stimson, Putnam &
Roberts and Simpson Thacher & Bartlett may rely upon such counsel as to certain
matters governed by the laws of such states.

EXPERTS

The financial statements of Electric Lightwave, Inc. as of December 31, 1995 and
1996 and for each of the years in the three-year period ended December 31, 1996
have been included herein and in the registration statement in reliance upon the
report of KPMG Peat Marwick LLP,

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independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.

ADDITIONAL INFORMATION

ELI has filed with the Securities and Exchange Commission (the "SEC") a
Registration Statement on Form S-1 under the Securities Act with respect to the
Class A Common Stock being offered in the Offering. For the purposes hereof,
the term "Registration Statement" means the original Registration Statement and
any and all amendments thereto, including the schedules and exhibits to such
original Registration Statement or any such amendment. This Prospectus does not
contain all of the information set forth in the Registration Statement, to which
reference hereby is made. Each statement made in this Prospectus concerning a
document filed as an exhibit to the Registration Statement is qualified in its
entirety by reference to such exhibit for a complete statement of its
provisions.

ELI is not currently subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). As a result of the
Offering, ELI will become subject to the informational requirements of the
Exchange Act and in accordance therewith will file periodic reports, proxy and
information statements and other information relating to its business, financial
statements and other matters. Any interested party may inspect the Registration
Statement, the reports, proxy and information statements and other information
without charge, at the public reference facilities of the SEC at its principal
office at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549, and at its regional offices in Chicago (Citicorp Center, Suite 1400, 500
West Madison Street, Chicago, Illinois 60601), and in New York (Seven World
Trade Center, Suite 1300, New York, New York 10048). Any interested party may
obtain copies of all or any portion of the Registration Statement, the reports,
proxy statements and other information at prescribed rates from the Public
Reference Section of the SEC at its principal office at Judiciary Plaza, 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549. The SEC also maintains a
web site (http://www.sec.gov.) that contains reports, proxy and information
statements and other information regarding Citizens.

Citizens is subject to the informational requirements of the Exchange Act and
its periodic reports, proxy statements and other information relating to its
business, financial statements and other matters may be inspected and obtained
as described above.

The Company intends to distribute to all holders of the shares of Class A Common
Stock offered hereby annual reports containing audited consolidated financial
statements and a report thereon by its independent certified public accountants
and quarterly reports containing unaudited consolidated financial information
for each of the first three quarters of each fiscal year.

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GLOSSARY

Access. 1) Point at which entry is gained into a circuit or a network
interconnection may be switched or dedicated. 2) Ability to obtain data from a
storage device or peripheral. 3) Type of connection between customer premises
equipment and an interexchange carrier's network.

Access Charge. When the local facilities of the local exchange carrier are used
for the origination or termination of long distance calls, the access charge is
the fee paid by the long distance carrier to the local telephone companies for
the use of local facilities to gain access to or make connection with, the
originating and terminating telephone subscribers.

Access Line. 1) Circuit between a subscriber and a switching center. 2)
Private lines feeding a common control switching arrangement or enhanced private
switched communications service switch from a PBX.

Asynchronous Transfer Mode (ATM). 1) High bandwidth, low-delay packet switching
and multiplexing technique used to transfer voice, video, images and character-
based data. 2) Method of formatting, multiplexing, cross-connecting and
switching information in 53-byte cells (see below). 3) Transmission method that
operates over various physical media. including Synchronous Optical Network
(SONET), Synchronous Digital Hierarchy (SDH) and digital cross-connect (DCS)
systems. ATM is recently commercialized switching and transmission technology
that is one of a general class of packet technologies that relay traffic by way
of an address contained within the first five bits of a standard fifty-three
bit-long packet or cell. ATM-based packet transport was specifically developed
to allow switching and transmission of mixed voice, data and video at varying
rates. The ATM includes a protocol that specifies how diverse kinds of traffic,
mixed voice, data and video, are transformed into standardized packets whose
transport can be managed uniformly within the network. The ATM format can be
used by many different information systems, including LANs.

Backbone. The core high-density infrastructure of a network. The portion of
the network that transports information from one central location to another
central location where it is off-loaded onto a local system.

Bandwidth. Difference between the top and bottom limiting frequency band. 2)
Indicates the information-carrying capacity of a channel. Analog transmission
is usually expressed in kHz or MHz. Digital transmission in bps or Mbps.
Fiber-optic bandwidth is usually given as its capacity to transmit information
in a specific time period for a specific length (e.g., 10 Mbps/km).

BOC (Bell Operating Company). A local exchange carrier owned by any of the
seven Regional Bell Operating Companies, which are holding companies established
following the Divestiture to serve as parent companies for the BOCs.

Broadband. 1) Transmission facility having a bandwidth greater than 20 kHz.
capable of high-speed data transmission. 2) Analog transmission technique used
with data and video transmission that provides multiple channels for uses
through frequency division multiplexing. Broadband communications systems can
transmit large quantities of voice, data and video by way of digital or analog
signals. Examples of broadband communication systems include DS-3 fiber optic
systems, which can transmit 672 simultaneous voice conversations, or a broadcast

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television station signal, that transmits high resolution audio and video
signals into the home. Broadband connectivity is also an essential element for
interactive multimedia applications.

CAP (Competitive Access Provider). A company that provides its customers with
an alternative to the local telephone company for local transport of private
line, special access and interstate transport of switched access
telecommunications services. CAPs are also referred to in the industry as
alternative local telecommunications service providers (ALTs) and metropolitan
area network providers (MANs) and were formerly referred to as alternative
access vendors (AAVs).

Central Office. 1) Location of telephone switching equipment at which
customer's lines are terminated and interconnected. 2) Switching center that
provides local access to the public network. Synonyms: end office, local
office, wire center, or switching center. CAPs may connect with local telephone
company networks either at this location or through a remote location.

Centrex(TM). A telephone company switched service that uses central office
switching equipment to route internal calls from one extension to another, to
route incoming calls directly to the appropriate extension, to handle direct
dialing of outbound calls, and to provide many PBX-like service features.
Centrex offers dial tone and other features similar to those of Private Branch
Exchange ("PBX"), except the switching equipment is located at the carrier's
premises and not at the customer's premises. Centrex uses a separate dedicated
line between each telephone at the customer premises and the switch at the
telephone company's central office. Centrex features include direct dialing
within a given telephone system, direct dialing of outgoing telephone calls and
automatic identification of incoming telephone calls. This is a value-added
service that carriers can provide to a wide range of business customers.

CLEC (Competitive Local Exchange Carrier). A CAP that also provides switched
local services, such as local dial tone and Centrex, in competition with the
incumbent local exchange carrier.

Co-location. The ability of a telecommunications carrier, such as a CAP or
CLEC, to interconnect its network to the ILEC's network by extending its
facilities to the ILEC's central office. Physical co-location occurs when the
interconnecting carrier places its network equipment within the ILEC's central
offices. Virtual co-location is an alternative to physical co-location under
which the ILEC permits a carrier to interconnect its network to the ILEC's
network in a manner which is technically, operationally and economically
comparable to physical co-location, even though the interconnecting carrier's
network connection equipment is not physically located within the central
offices.

Common Carrier. Government-regulated, private company that furnishes the
general public with telecommunications services and facilities (e.g., telephone
or telegraph company).

Customer Premises Equipment. Equipment employed on the premises of a person
(other than a carrier) to originate, route, or terminate telecommunications.

Dedicated Lines. Telecommunications lines dedicated to, or reserved for use by,
a particular customer along predetermined routes and charged on a flat, usually
monthly basis (in contrast to links which are temporarily established and in
contrast to telecommunications lines within the ILEC's public switched network.

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Dedicated Access. Connection between a customer's premises and a long distance
carrier. All transmissions on this dedicated line are automatically routed to
the carrier. Provided by a local phone company, alternate access provider or
long distance carrier.

Dialing Parity. "Dialing Parity" means that a person that is not an affiliate
of a local exchange carrier is able to provide telecommunications services in
such a manner that customers have the ability to route automatically, without
the use of any access code, their telecommunications to the telecommunications
services provider of the customer's designation from among two or more
telecommunications services providers (including such local exchange carrier).

Digital. A means of storing, processing and transmitting information by using
distinct electronic or optical pulses that represent the binary digits 0 and 1.
Digital transmission and switching technologies use a sequence of these pulses
to represent information as opposed to the continuously variable analog signal.
The precise digital numbers preclude any distortion (such as graininess or snow
in the case of video transmission, or static or other background distortion in
the case of audio transmission). Digital transmission and switching
technologies offer a threefold improvement in speed and capacity over analog
techniques, allowing much more efficient and cost-effective transmission of
voice, video, and data.

Diverse routing. A telecommunications network configuration in which signals
are transmitted simultaneously along two different paths so that if one path is
cut or impaired, traffic can continue on the other path without interrupting
service.

Divestiture. The 1984 divestment of AT&T of its wholly owned BOCs from its Long
Lines Division and manufacturing operations and generally prohibited BOCs from
providing long distance telephone service between LATAs.

Dominant Carrier. A carrier found by the FCC [or a local state commission] to
have market power, i.e., the power to control prices for its services.

DS-0, DS-1, DS-3. Standard North American telecommunications industry digital
signal formats, which are distinguishable by bit rate (the number of binary
digits (0 and 1) transmitted per second). DS-0 service has a bit rate of 64
kilobits per second. DS-1 service (also referred to as T1) has a bit rate of
1.544 megabits per second (the equivalent of 24 DS0 circuits) and DS-3 service
(also referred to as T-3) has a bit rate of 44.736 megabits per second (the
equivalent of 28 DS1 circuits). A DS-0 can transmit a single uncompressed voice
conversation.

Enhanced Service. Any for-profit telecommunications service that adds value to
users' voice and data messages during the course of transmission. Examples of
enhanced services would include storage of a spoken message within the network
for forwarding or retrieval at some future time, or processing data within the
network and sending the results to the intended recipient.

Ethernet. A local area network technology used for connecting computers,
printers, workstations terminals, etc., within the same building. Ethernet
operates over twisted wire or coaxial cable at speeds up to 100 megabits per
second. Ethernet is the most popular LAN technology.

Exchange. A central office telephone switch.

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Exchange Access. The offering of access to telephone exchange services or
facilities for the purpose of the origination or termination of telephone toll
services i.e., intraLATA and long distance.

FCC. Federal Communications Commission.

FDDI (Fiber Distributed Data Interface). Based on fiber optics, FDDI is a 100
megabit per second local area network technology used to connect computers,
printers, and workstations at very high speeds. FDDI is also used as backbone
technology to interconnect other LANs.

Fiber mile. The number of route miles installed (excluding pending
installations) along a telecommunications path multiplied by the number of
fibers along that path. See the definition of "route mile" below.

Fiber Optics. Means of providing a high-speed transmission, using light to send
images through a flexible bundle of glass fibers. The technology involves
sending coded laser light pulses across glass strands in order to transmit
digital information. Fiber optic cable is the medium of choice for the
telecommunications and cable industries. Fiber is immune to electrical
interference and environmental factors that affect copper wiring and satellite
transmission.

Frame Relay. Frame Relay is a high-speed data packet switching service used to
transmit data between computers. Frame relay employs statistical multiplexing
over a shared network, intended for use between intelligent end-points and
implemented over high-quality transmission facilities that connect programmable
switches. Frame Relay supports data units of variable lengths at access speeds
ranging from 56kbs to 1.5mbs. This service is ideal for connecting LANS, but is
not appropriate for voice and video applications due to the variable delays
which can occur. Frame Relay was designed to operate at higher speeds on modern
fiber optic networks. Frame relay reduces redundant processing within the
packet network by relieving intermediate relay nodes of responsibility for
ensuring that data is transmitted accurately. The intermediate nodes check only
the outer "frame" of a data packet that gives the addresses and routing
instructions. Accuracy of packet "payload" is checked only after the packet
arrives at the terminating location. Frame relay is being used in private data
networks. Some U.S. interexchange carriers offer frame relay in data networking
applications and many manufacturers offer frame relay equipment.

Hubs. Collection centers located centrally in an area where telecommunications
traffic can be aggregated at a central point for transport and distribution.
ILECs (Incumbent Local Exchange Carrier). The local phone companies either a
BOC or an independent (such as GTE), which provides local exchange services.

Interconnection. Connection of a piece of telephone equipment to the telephone
network, or a data terminal to a data communications network. Also refers to
the connection of one communications network to another so that users of one
network can communicate with users of another network.

IntraLATA Long Distance. IntraLATA long distance calls, also known as short-
haul calls, are those calls that originate and terminate within the same LATA,
but are outside the local calling area. Such calls are usually priced on a
measured basis. At present, the RBOCs are prohibited from providing IntraLATA
long distance service within their service areas.

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InterLATA service. Telecommunications between a point located in a local access
and transport area and a point located outside such area.

Internet. The name used to describe the global open network of computers that
permits a person with access to the Internet to exchange information with any
other computer connected to the network.

ISDN (Integrated Services Digital Network). ISDN is an internationally agreed
standard which, through special equipment, allows two-way, simultaneous voice
and data transmission in digital formats over the same transmission line. ISDN
permits video conferencing over a single line, and other enhanced services, such
as high-speed data file transfer, desk top videoconferencing, telepublishing,
telecommuting, telepresence learning (distance learning), remote collaboration
(screened sharing), data network linking and home information services. It also
supports a multitude of value-added switched service applications such as
Incoming Calling Line Identification. ISDN's combined voice and data networking
capabilities reduce costs for end users and result in more efficient use of
available facilities. ISDN combines standards for highly flexible customer to
network signaling with both voice and data within a common facility.

IXC (Inter-Exchange Carriers). Usually referred to as long distance providers.
There are many facilities-based IXCs including AT&T, MCI, WorldCom, Sprint and
Frontier, as well as a select few CAPs that are authorized for IXC service.

Kilobit. One thousand bits of information. The information-carrying capacity
(i.e., bandwidth) of a circuit may be measured in "kilobits per second." One
kilobit is approximately sufficient to encode a standard telegram.

LAN (Local Area Network). The interconnection of computers for the purpose of
sharing files, programs and peripheral devices such as printers and high-speed
modems. More generally, a private data communications network linking a
variety of data devices, such as computer terminals, personal computers and
minicomputers, all housed in a defined building, plant or geographic area. LANs
are generally confined to a single customer's premises and may be extended or
interconnected to other locations through the use of bridges and routers. LANs
range widely in size and complexity, from simple user-installable networks
connecting together a few personal computers to vast networks tying thousands of
terminals to multiple mainframe computers. LANs will allow a computer user to
access a computer other than the user's own in order to send and retrieve
electronic mail and data files at transmission rates generally between 100Kbps
and 50Mbps. LANs are owned or leased by customers; they generally do not employ
circuits from telephone common carriers or other network service provider. LANs
may, however, provide a bridge or gateway to other public or private networks.
Some telephone common carriers offer data communications services with
capabilities resembling those of LANs, as an alternative to the purchase of a
LAN.

LATA (Local Access Transport Area). The approximately 164 geographic areas
which define the regions in which each RBOC is allowed to provide service, as
defined in the divestiture order known as the Modified Final Judgment ("MFJ")
unless and until redefined by the FCC pursuant to the Telecommunications Act of
1996. These LATAs roughly reflect the population density of their respective
states (California has 11 LATAs while Wyoming has only one). The BOCs are
generally prohibited from providing long distance service between LATA in their
territory.

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<PAGE>

LEC (Local Exchange Carrier). A company providing local telephone services,
also referred to in the industry as a "local exchange telephone company." These
include the BOCs, GTE and more than 1,000 other independents. The term includes
ILECs and CLECs, that is, Incumbent and Competitive Local Exchange Carriers.

Local competition. The term "local competition" describes the events which are
presently in an early state in the local arena to afford true "co-carrier"
status to CAPs. Specifically, the ILECs, who once had a monopoly on local
exchange telephone service, are beginning to experience competition at the local
level from CAPs, CLECs, and other providers of local exchange services.
Critical issues such as number portability, dialing parity, reciprocal
compensation arrangements, and number assignments must be negotiated in order to
ensure that true co-carrier status is achieved for CAPs and CLECs.

Local exchange. (1) A geographic area defined by the appropriate state
regulatory authority in which telephone calls generally are transmitted without
toll charges to the calling or called party. (2) An exchange where subscribers'
lines are terminated.

Local exchange carrier. Any person that is engaged in the provision of
telephone exchange service or exchange access.

Local Exchange Services. Local Exchange Services generally refers to all
services provided by an ILEC or CLEC including local dial tone, the provision of
telephone numbers, calling within the local exchange area, Centrex and Long
Distance Access Services. Sometimes also referred to as Local Telephone
Services and Local Telecommunications Services.

Local Loop. Communications lines/services between the telephone subscriber and
the phone company switching center.
Local Telecommunications or Local Telephone Services. See Local Exchange
Services.

Long distance access services. Long distance access services are the services
provided by an ILEC or CLEC to a long distance company that connect the IXC POP
to end users, including special access services and switched access services.

Long Distance Carrier. A company providing inter-LATA or long distance services
between local exchanges on an intrastate or interstate basis. Long distance
carriers may also be long distance reseller companies. A long distance carrier
may offer services over its own or another carrier's facilities. Major long
distance carriers include AT&T, MCI, Sprint, WorldCom and Frontier, and may also
include resellers of long distance capacity.

Megabit. One million bits of information. The information-carrying capacity
(i.e., bandwidth) of a circuit may be measured in "megabits per second." One
megabit is approximately sufficient to encode a 3-inch by 5-inch photograph.

Multiplex. 1) To interleave or simultaneously transmit two or more messages on
a single channel. 2) Optical or electronic communications arrangements whereby
multiple devices share a common transmission channel, though only one may
transmit at a time. 3) Process or equipment that combines data from two or more
individual circuits onto a higher speed circuit for transmission. Two methods
are used; (a) splitting the total available bandwidth into narrower bands and
transmitting all channels at the same time (frequency division) or (b) allotting
a common channel to several different messages or transmitting devices, one at a
time in sequence (time division).

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<PAGE>

Network. Any system designed to provide one or more access paths for
communications between users at different geographic locations. Communications
networks may be designed for voice, text, data, facsimile image and/or video.
They may feature limited access (private networks) or open access (public
networks) and will employ whatever switching and transmission technologies are
appropriate.

NNI. Network-to-Network Interfaces.

Node. An individual point of origination and termination of data on the network
transported using frame relay or similar technology.

Number portability. The ability of users of telecommunications services to
retain, at the same location, existing telecommunications numbers without
impairment of quality, reliability, or convenience when switching from one
telecommunications carrier to another. If number portability does not exist,
customers will have to change phone numbers when they change local exchange
carriers.

Off-net. A customer of the Company that is not physically connected to one of
the Company's networks but who is accessed through interconnection with an ILEC
network.

On-net. A customer of the Company that is physically connected to one of the
Company's networks.

PBX. A Private Branch Exchange is a switching system within the user's premises
which allows calls from outside to be routed directly to the individual instead
of through a central number. PBX also provides for the automatic selection of
outgoing lines in accordance with user-defined criteria. PBX may also allow for
calling within an office by way of four digit extensions. Centrex is a service
which can simulate this service from an outside switching source, thereby
eliminating the need for a large capital expenditure on a PBX.

Physical Co-location. Physical Co-location occurs when a CAP or CLEC places its
own network connection equipment inside the ILEC central office. A recent Court
of Appeals decision found that, while ILECs must allow CAPs or CLEC to
interconnect with their facilities, ILECs are not required by law to allow CAPs
or CLECs to place its own equipment inside the ILEC central office. The 1996
Act overturned the decision.

Points of Presence (POPs). Physical locations where a long distance carrier has
installed transmission equipment in a service area that serves as, or relays
calls to, a network switching center of that long distance carrier and connects
with the lines of the local telephone company serving the LATA within which the
POP is located.

PRI. Primary rate interface, a service offering of ISDN which operates at T-1
bandwidth. See ISDN.

Private line. 1) A telephone access line provided to a single subscriber
connecting different locations of the same subsidiaries and used exclusively by
that subscriber (does not include long distance carriers' POPs). 2) A
dedicated, non-switched telecommunications channel provided between two or more
points and leased or purchased by a telecom subscriber for high-volume voice,
data, audio or video transmissions. 3) Leased, owned or otherwise dedicated
channel. 4) Channel and channel equipment furnished to a user as a unit for
exclusive use without interexchange switching arrangements.

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<PAGE>

Public switched network. That portion of a ILEC's network available to all
users generally on a shared basis (i.e., not dedicated to a particular user).
Traffic along the public switched network is generally switched at the ILEC's
central offices.

Public Utility Commission (PUC). A state regulatory body, established in most
states, which regulates utilities, including telephone companies providing
intrastate services.

Regional Bell Operating Company (RBOC). One of regional companies created by
the AT&T divestiture to take over ownership of the Bell operating companies
within their region. They are Ameritech, Bell Atlantic, BellSouth, NYNEX, SBC
Corporation (formerly Southwestern Bell) and U S WEST. The RBOCs also have set
up numerous unregulated subsidiaries engaged in variety of communications-
related and non-communications businesses. The divestiture agreement barred
RBOCs from providing inter-LATA services within their service areas and from
manufacturing telecommunications equipment and certain other business
activities, such as providing long distance service, but provided mechanisms for
review, waiver, modification or removal of the prohibitions. The RBOCs are also
known as regional holding companies. In this Prospectus, the term RBOC may
include the Bell operating companies.

Redundant. A telecommunications facility using two separate electronic devices
to transmit a telecommunications signal so that if one device malfunctions, the
signal may continue without interruption.

Resale. To hire circuits or services from a major carrier and resell them to
individual users.

Reseller. A carrier that does not operate its own transmission facilities
(although it may own its own switches or other equipment), but obtains
communications services from another carrier for resale to the public for
profit.

Route Mile. A geographical measure defined as one physical mile of fiber optic
cable, regardless of the number of fibers or telecommunications paths within
that cable.

Signaling System #7. Sophisticated network signaling system that utilizes out-
of-band signaling where signaling information is sent over a separate channel
than the call itself. improves call processing set-up times and frees circuits
for voice, data and video transmissions.

Special access services. The lease of private, dedicated telecommunications
lines or "circuits" along the network of an ILEC or a CAP, which lines or
circuits run to or from the long distance carrier POPs. Examples of special
access services are telecommunications lines running between POPs of a single
long distance carrier, from one long distance carrier POP to the POP of another
long distance carrier or from an end user to its long distance carrier POP.
Special access services do not require the use of switches.

Switch. A mechanical or electronic device that opens or closes circuits or
selects the paths or circuits to be used for the transmission of information.
Switching is a process of interconnecting different circuits to create a
temporary transmission path between users. In operation a switch may be a
sophisticated computer that accepts instructions from a caller in the form of a
telephone number. Like an address on an envelope, the numbers tell the switch
where to route the call. The switch opens or closes circuits or selects the
paths or circuits to be used for transmission of information. Switches allow
local telecommunications service providers to connect calls directly to their
destination, while providing advanced features and recording

93
<PAGE>

connection information for future billing. Nortel DMS-500, Cascade, Titan 3/1
and Alcatel 1/0 are brand names for switches and related equipment.

Switched access. 1) Method to test telecommunications circuits using
electromechanical circuitry. 2) Calls transmitted partially on shared or common
transport circuits. Used primarily by residential or small business companies
using regular home or business lines.

Switched access services. Switched access services are the services provided by
an ILEC or CLEC through its switching facilities to a long distance carrier, in
addition to switched access transport, to connect the IXC POP to end users, for
the purpose of originating or terminating toll calls. Long distance companies
pay switched access charges to the ILECs and CLEC for each switched call
originated or terminated on the ILEC's or CLEC's network.

Switched access transport. Transportation of switched traffic along dedicated
lines between the ILEC central offices and long distance carrier POPs.

Switched traffic. Telecommunications traffic along the public switched network
that is charged on a per-minute or other range sensitive basis. This traffic is
generally switched at the ILEC's central offices.

Synchronous Optical Network (SONET). SONET is the electronics and network
architecture which enable transmission of voice, video and data (multimedia) at
very high speeds. This state-of-the-art self-healing ring network offers
advantages over older linear networks in that a cut line or equipment failure
can be overcome by rerouting calls within the network. If the line is cut, the
traffic is simply reversed and sent to its destination around the other side of
the ring.

Telephone Exchange Service. The term "telephone exchange service" means (A)
service within a telephone exchange, or within a connected system of telephone
exchanges within the same exchange area operated to furnish to subscribers
intercommunicating service of the character ordinarily furnished by a single
exchange, and which is covered by the exchange service charge, or (B) comparable
service provided through a system of switches, transmission equipment, or other
facilities (or combination thereof) by which a subscriber can originate and
terminate a telecommunications service.

Telephone Toll Service. The term "telephone toll service" means telephone
service between stations in different exchange areas for which there is made a
separate charge not included in contracts with subscribers for exchange service.

Token Ring. A local area network technology used to interconnect personal
computers, file servers, printers, and other devices. Token Ring LANs typically
operate at either 4 megabits per second or 16 megabits per second.

Toll services. Otherwise known as EAS or intraLATA toll services are those
calls that are beyond the local calling area but originate and terminate within
the same LATA; such calls are usually priced on a measured basis.

Traffic. A generic term that includes any and all calls, messages and data sent
and received by means of telecommunications.

Trunk. 1) Group of circuits that carry call traffic in and out of the switch;
2) Circuit or channel connecting two exchanges or two switching devices; 3)
Circuit capable of being switched at both ends.

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<PAGE>

Unbundling. 1) The separate pricing of hardware, software and related services.
2) The separate pricing of each component or element of a communications product
or service, so that the customer may select only those components or elements it
needs without having to accept unnecessary element or components.

800 Service. A telecommunications service for businesses that allows calls to
be made to a specific location at no charge to the calling party. Use of the
"800" service code denotes calls that are to be billed to the receiving party.
A computer database in the provider's network translates the 800 number into a
conventional telephone number.

95
<PAGE>

<TABLE>
<CAPTION>
ELECTRIC LIGHTWAVE, INC.

INDEX TO FINANCIAL STATEMENTS

Page
----

<S> <C>
Independent Auditors' Report.....................................................................F-1
Statements of Operations for the Years Ended December 31, 1994, 1995 and 1996
and for the Nine Months Ended September 30, 1996 and 1997 (unaudited).......................F-2
Balance Sheets at December 31, 1995 and 1996 and September 30, 1997 (unaudited)..................F-3
Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996
and for the Nine Months Ended September 30, 1996 and 1997 (unaudited).......................F-4
Statements of Changes in Stockholder's Equity (Deficiency) for the Years Ended
December 31, 1994, 1995 and 1996 and for the Nine Months Ended
September 30, 1997 (unaudited)..............................................................F-5
Notes to Financial Statements....................................................................F-6
</TABLE>

96
<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholder
Electric Lightwave, Inc.

We have audited the balance sheets of Electric Lightwave, Inc. (a wholly-
owned subsidiary of Citizens Utilities Company) as of December 31, 1995 and 1996
and the consolidated statements of operations, stockholder's equity (deficiency)
and cash flows for each of the years in the three-year period ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Electric Lightwave, Inc. as
of December 31, 1995 and 1996, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1996, in
conformity with generally accepted accounting principles.

KPMG PEAT MARWICK LLP

New York, New York
September 4, 1997

F-1
<PAGE>

ELECTRIC LIGHTWAVE, INC.
Statements of Operations
(in thousands, except per share amounts)

For the nine months ended
For the years ended December 31, September 30,
------------------------------------------------- --------------------------------
1994 1995 1996 1996 1997
-------------- ---------- ----------- ------------ -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues $ 8,152 $ 15,660 $ 31,309 $ 24,965 $ 41,843
---------- ---------- ----------- ------------ -----------

Operating expenses:
Network access expenses 6,155 8,728 24,081 16,533 24,217
Sales and marketing expenses 4,534 5,704 8,462 6,303 8,716
Depreciation and amortization 2,476 7,064 7,192 4,997 7,601
Administrative services expenses 1,300 1,511 2,254 1,648 2,945
Other operating expenses 3,228 12,603 18,703 15,067 23,886
---------- ---------- ----------- ------------ -----------
Total operating expenses 17,693 35,610 60,692 44,548 67,365
---------- ---------- ----------- ------------ -----------

Loss from operations (9,541) (19,950) (29,383) (19,583) (25,522)

Interest expense, net 873 372 - - 513
---------- ---------- ----------- ------------ -----------

Net loss $ (10,414) $ (20,322) $ (29,383) $ (19,583) $ (26,035)

========== ========== =========== ============ ===========

Net loss per share $ $ $
=========== ============ ===========

Weighted average shares outstanding
=========== ============ ===========
</TABLE>

The accompanying Notes are an integral part of these Financial Statements.

F-2
<PAGE>

ELECTRIC LIGHTWAVE, INC.
Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
-------------------------------- ---------------
1995 1996 1997
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS:
Current assets:
Cash $ 143 $ 611 $ 1,147
Trade receivables, net 3,097 4,610 10,187
Other receivables 45 8,329 85
Other current assets 168 224 306
----------- ----------- -----------
Total current assets 3,453 13,774 11,725
----------- ----------- -----------

Property, plant and equipment 127,297 189,334 249,499
Less accumulated depreciation and
amortization (11,307) (17,337) (23,144)
----------- ----------- -----------

Property, plant and equipment, net 115,990 171,997 226,355

Other assets 9,458 9,885 10,490
----------- ----------- -----------

Total assets $ 128,901 $ 195,656 $ 248,570
=========== =========== ===========

LIABILITIES and SHAREHOLDER'S EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable $ 18,596 $ 18,892 $ 12,427
Taxes other than income taxes 1,577 2,329 4,996
Other current liabilities 1,177 2,493 2,036
------------ ----------- -----------
Total current liabilities 21,350 23,714 19,459
------------ ----------- -----------

Deferred credits 1,313 1,435 1,793
Capital lease obligation - - 10,374
Deferred income taxes payable 2,628 5,826 14,522
Due to Citizens Utilities Company 64,941 155,395 219,171

Shareholder's equity (deficiency) 38,669 9,286 (16,749)
------------ ----------- -----------

Total liabilities and shareholder's
equity (deficiency) $ 128,901 $ 195,656 $ 248,570
=========== =========== ===========
</TABLE>

The accompanying Notes are an integral part of these Financial Statements.

F-3
<PAGE>

ELECTRIC LIGHTWAVE, INC.
Statements of Cash Flows
(in thousands)

<TABLE>
<CAPTION>
For nine months ended
For the years ended December 31, September 30,
--------------------------------------------- --------------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flow from operating activities:
Net loss $ (10,414) $ (20,322) $ (29,383) $ (19,583) $ (26,035)
Adjustments to reconcile net loss
to net cash used for operating
activities:
Depreciation and
amortization 2,476 7,064 7,192 4,997 7,601
Administrative services expenses
charged by Citizens 1,300 1,511 2,254 1,648 2,945
Changes in operating assets and liabilities:
Receivables (805) (1,698) (9,797) (10,075) 2,667
Accounts payable and other
accrued liabilities 3,056 10,444 295 (10,427) (6,465)

Taxes other than income taxes 520 967 765 1,681 2,667
Other (230) 464 (219) 1,320 (1,420)
--------- ---------- --------- --------- ---------
Net cash used for operating activities (4,097) (1,570) (28,893) (30,439) (18,040)

--------- ---------- --------- --------- ---------
Cash flow used for investing activities:
Capital expenditures (60,774) (16,129) (59,169) (47,840) (48,717)
--------- ---------- --------- --------- ---------
Cash flow from financing activities:
Citizens fundings 67,636 26,862 88,530 78,626 67,693
Repayment of debt (2,729) (9,111) - - -
--------- ---------- --------- --------- ---------
Net cash provided by financing
activities 64,907 17,751 88,530 78,626 67,693
--------- ---------- --------- --------- ---------
Change in cash 36 52 468 347 536

Cash at beginning of period 55 91 143 143 611
--------- ---------- --------- --------- ---------
Cash at end of period $ 91 $ 143 $ 611 $ 490 $ 1,147
========= ========= ========= ========= =========
Supplemental cash flow information:
Cash paid for interest $ 1,086 $ 630 $ -
========= ========= =========
Other non-cash transactions:
Issuance of preferred stock in
exchange for reduction of amount
due to Citizens $ 57,255 $ - $ -
========= =========== =========
Acquisition of minority interest by
Citizens $ - $ 3,000 $ -
========= ========== =========
Deferred income taxes charged to
due to Citizens $ 519 $ 1,160 $ 3,198
========= ========== =========
Capitalized interest added to due
to Citizens $ 2,466 $ 2,619 $ 2,868
========= ========== =========
</TABLE>

The accompanying Notes are an integral part of these Financial Statements.

F-4
<PAGE>

ELECTRIC LIGHTWAVE, INC.
Statements of Shareholder's Equity (Deficiency)
For the years ended December 31, 1994, 1995 and 1996
and for the nine months ended September 30, 1997 (unaudited)
(in thousands, except share amounts)

<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Shareholder's
------------------------- -------------------- Paid-in- Equity
Shares Amount Shares Amount Capital Deficit (Deficiency)
------ -------- ------- -------- -------- --------- -----------

<S> <C> <C> <C> <C> <C> <C> <C>
Balance January 1, 1994 23 $ - 1 $ - $ 19,000 $ (9,850) $ 9,150
Issuance of preferred
shares to Citizens 76 - - - 57,255 - 57,255
Net loss - - - - - (10,414) (10,414)

------- -------- ------- -------- --------- --------- ---------

Balance December 31, 1994 99 - 1 - 76,255 (20,264) 55,991
Acquisition of minority
interest by Citizens - - - - 3,000 - 3,000
Net loss - - - - - (20,322) (20,322)

------- -------- ------- -------- --------- --------- ---------
Balance December 31, 1995 99 - 1 - 79,255 (40,586) 38,669
Conversion of preferred
stock to common stock (99) - 99 - - - -
Net loss - - - - - (29,383) (29,383)

------- -------- ------- -------- --------- --------- ---------

Balance December 31, 1996 - - 100 - 79,255 (69,969) 9,286
Net loss (unaudited) - - - - - (26,035) (26,035)

------- -------- ------- -------- --------- --------- ---------

Balance September 30, 1997
(unaudited) - $ - 100 $ - $ 79,255 $ (96,004) $ (16,749)

======== ======== ======= ======== ========= ========= =========
</TABLE>

The accompanying Notes are an integral part of these Financial Statements.

F-5
<PAGE>

ELECTRIC LIGHTWAVE, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 1994, 1995 AND 1996
(Information as of September 30, 1997 and for the nine months ended
September 30, 1997 and 1996 is unaudited)

(1) ORGANIZATION AND DESCRIPTION OF BUSINESS

The Company is a full service, facilities based provider of
communications services in five major market clusters in and around the
western United States cities of Portland, Oregon; Seattle, Washington;
Salt Lake City, Utah; Sacramento, California; and Phoenix, Arizona. The
Company targets retail customers, primarily large- and medium-sized
communications-intensive businesses, and wholesale customers, primarily
telecommunications service providers, that require state-of-the-art
communications and data services.

The Company is a subsidiary of Citizens Utilities Company ("Citizens").
The Company has invested solely in its telecommunications networks and
is experiencing significant recurring losses and negative cash flows
during the construction and start up phase of its business. Since the
Company does not presently generate operating profits or sufficient
operating cash flows to meet operating and capital requirements, the
Company is dependent upon its ability to obtain financing from either
Citizens or external sources. Currently, the Company's sources of
funding are Citizens and a lease facility guaranteed by Citizens.
Citizens has indicated its intent to continue to provide the necessary
operating and capital funding through the successful completion of the
Company's initial public offering ("Offering"), currently expected to
be completed before the end of 1997. In October 1997, the Company
obtained a commitment for a revolving Credit Commitment (see
note 8).

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Basis of Presentation and Use of Estimates

The financial statements have been prepared in accordance with
Generally Accepted Accounting Principles ("GAAP"). The
preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions which
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Actual results
could differ from those estimates.

(b) Revenue Recognition

Revenues from telecommunications services are recognized when
the services are provided. The revenue from long-term leases
of fiber optic cable is recognized on a straight line basis
over the terms of the related leases.

The Company's trade customers are primarily large- and
medium-sized communications-intensive businesses and
telecommunications service providers that require
state-of-the-art communications and data services. Trade
accounts receivable is shown net of an allowance for doubtful
accounts in amounts of approximately $75,000, $1,166,000 and
$2,130,000 at December 31, 1995, 1996 and September 30, 1997,
respectively. At December 31, 1996, the Company's trade
receivables are concentrated in and around the five cities
referred to in note 1. Other receivables at December 31, 1996
include approximately $6.7 million due under a construction
agency agreement, which amount was received by the Company in
January 1997.

F-6
<PAGE>

(d) Property, Plant and Equipment

Property, plant and equipment are stated at cost and include
certain costs which are capitalized during the installation
and expansion of telecommunications networks including
interest costs related to construction of approximately
$2,466,000, $2,619,000, and $2,868,000 for the years ended
December 31, 1994, 1995 and 1996, respectively. Depreciation
is computed using the straight line method over the estimated
useful lives of the assets. Leasehold improvements are
amortized using the straight line method over the shorter of
the estimated useful lives of the assets or the remaining
terms of the leases. A capital lease included in
telecommunications networks is being amortized using the
straight line method over the life of the capital lease. The
estimated useful lives of owned assets are as follows:

Telecommunications networks 25 years
Electronics and related equipment 7 - 8 years
Office equipment and other 5 - 7 years

The Company's telecommunications networks are subject to
technological risks and rapid market changes due to new
products and services and changing customer demand. These
changes may result in future adjustments to the estimated
useful lives of these assets.

(e) Other Assets

Other assets include third party direct costs incurred in
connection with negotiating and securing initial rights-of-way
and developing network design for new market clusters or
locations, which costs are deferred until service is ready to
commence. Such costs are then amortized over a 5 year period
utilizing the straight line method. Also included in other
assets at December 31, 1995 and 1996 is goodwill of $4,866,000
and $4,680,000, respectively, resulting from the acquisition
of the minority interests in the Company by Citizens, which
amounts were recorded in the Company's accounts. Goodwill is
being amortized utilizing the straight line method over a 25
year period.

(f) Income Taxes

The Company is included in the consolidated federal income tax
return of Citizens. The Company utilizes the asset and
liability method of accounting for income taxes. Under the
asset and liability method, deferred income taxes are recorded
for the tax effect of temporary differences between the
financial statements and the tax bases of assets and
liabilities using tax rates expected to be in effect when the
temporary differences are expected to turn around. Citizens'
policy has been to record tax provisions, assets and
liabilities at the subsidiary level on a stand alone basis.
However, Citizens reimburses the Company on an annual basis
(through reductions in the "Due to Citizens" account) for the
benefit of the Company's changes in temporary differences
utilized by Citizens in its consolidated federal income tax
return, but not for the book losses or permanent tax
adjustments until such items can be used on a stand alone
basis.

F-7
<PAGE>

(g) Impairment

In accordance with Statement of Financial Accounting Standards
No. 121 ("SFAS 121"), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed
of," the Company reviews for the impairment of long-lived
assets and certain identifiable intangibles to be held and
used by the Company whenever events or changes in
circumstances indicate that the carrying amount of the asset
may not be recoverable.

The Company assesses the recoverability of an asset by
determining whether the amortization of the asset balance over
its remaining life can be recovered through projections of
undiscounted future cash flows of the related asset. The
amount of asset impairment, if any, is measured based on
projected discounted future cash flows using a discount rate
reflecting the Company's average cost of funds.

(h) Employee Stock Plans

The Company currently participates in the Management Equity
Incentive Plan ("MEIP") of Citizens, which may grant awards of
Citizens Common Stock to eligible officers, management
employees and non-management exempt employees of Citizens and
its subsidiaries in the form of incentive stock options,
non-qualified stock options, stock appreciation rights,
restricted stock or other stock-based awards and in the
Employee Stock Purchase Plan ("ESPP") of Citizens in which
employees of Citizens and its subsidiaries may subscribe to
purchase shares of Citizens' common stock at 85% of the lower
of the average market price on the first or last day of the
purchase period.

Prior to January 1, 1996, the Company accounted for the
Citizens employee stock option plans in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees", and related
interpretations. As such, compensation expense is recorded on
the date of grant only if the current market price of the
underlying stock exceeded the exercise price. On January 1,
1996, the Company adopted SFAS 123, "Accounting for
Stock-Based Compensation", which permits entities to recognize
as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS
123 also allows entities to continue to apply the provisions
of APB Opinion No. 25 and provide pro forma net income and pro
forma earnings per share disclosures for employee stock option
grants made in 1995 and future years as if the fair-value
based method defined in SFAS 123 had been applied. The Company
elected to continue to apply the provisions of APB Opinion No.
25 and provide the pro forma disclosure provisions of SFAS 123
(see Note 6). The Company had no stock plans involving its own
stock as of December 31, 1996.

(i) Pro Forma Net Loss Per Share

Net loss per share is not presented because it is not
meaningful. Weighted average share and per share amounts will
be presented after the recapitalization of the Company
contemplated as part of its Offering (see last paragraph
of Note 5). Net loss per common and common equivalent share
will be based on the weighted average number of common shares
outstanding during the year, as adjusted for the effects of
the application of Securities and Exchange Commission Staff
Accounting Bulletin ("SAB") No. 83. Pursuant to SAB No. 83,
all stock issued within one year of the Offering at less than
the offering price and all options granted within one year of
the Company's Offering which have an exercise price less than
the Offering price are treated as outstanding for all periods
presented (using the treasury stock method at the assumed
Offering price) even though the effect is to reduce the loss
per share. The

F-8
<PAGE>

ELECTRIC LIGHTWAVE, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 1994, 1995 and 1996
(Information as of September 30, 1997 and for the nine months ended September
30, 1997 and 1996 is unaudited)

application of SAB No. 83 will have the effect of increasing
outstanding shares by 535,000 for all periods.

j) Interim Financial Information

The financial statements and notes related thereto as of
September 30, 1997 and for the nine months ended September 30,
1996 and 1997 are unaudited, but in the opinion of management,
include all normal recurring adjustments necessary for a fair
presentation of financial position and results of operations.
The operating results for the interim periods are not
necessarily indicative of a full year's operations.

(3) Property, Plant and Equipment:
-----------------------------

The components of property, plant and equipment at December 31,
1995 and 1996 and at September 30, 1997 are as follows:

------------------ (in thousands) ------------------

December 31, September 30,
--------------------------------- -------------
1995 1996 1997
---- ---- ----

<S> <C> <C> <C>
Telecommunications networks $ 80,501 $ 113,997 $ 134,204
Electronics and related equipment 14,997 20,417 21,264
Office equipment, leasehold improvements and
other 4,414 11,201 12,842

Construction work in progress 24,980 37,433 77,448
Inventory 2,405 6,286 3,741
------------- ------------- -------------
Property, plant and equipment 127,297 189,334 249,499
Accumulated depreciation and amortization (11,307) (17,337) (23,144)
------------- ------------- --------------
Property, plant and equipment, net $ 115,990 $ 171,997 $ 226,355
============= ============= =============
</TABLE>

Telecommunications networks include a capital lease at September 30,
1997 in the amount of $11,320,000.

Inventory consists primarily of new and reusable parts to maintain and
build fiber optic networks.

The Company has leased fiber optic cable included in its
telecommunications networks to an unrelated long distance carrier for
10 years beginning in 1995 and to Citizens for 10 years. The lease
agreement with the long distance carrier provided for $1,500,000 in
cash at inception, which amount is being amortized utilizing the
straight line method over the lease period, and $144,000 per month over
the 10 year lease period. The lease agreement with Citizens calls for
monthly rentals of $30,000 over the 10 year lease period (see note 6).

F-9
<PAGE>

(4) Income Taxes:
------------

The components of deferred income taxes are as follows:
<TABLE>
<CAPTION>

------ (in thousands) -------
December 31,
------------------------------
1995 1996
---- ----
<S> <C> <C>
Benefit of operating loss carryforwards $ 14,108 $ 24,348
Less valuation allowance (14,108) (24,348)
----------- ----------
$ - $ -
=========== ==========
Deferred income tax liability,

primarily property, plant and equipment $ 2,628 $ 5,826
=========== ==========
</TABLE>

The benefit of the operating loss carryforwards represent amounts due
from Citizens for the utilization by Citizens of the Company's
operating losses in the consolidated federal income tax return, and is
net of amounts reimbursed to the Company by Citizens for the benefit of
the Company's changes in temporary differences. A 100% valuation
allowance has been recognized to offset the benefit of the operating
loss carryforwards since Citizens' policy is to reimburse the Company
for such losses only when the Company becomes profitable. Since the
Company has a history of recurring losses, a full valuation allowance
has been provided each year against the benefit of the operating loss
carryforwards.

The effective income tax rates were zero for the years ended December
31, 1994, 1995 and 1996 as a result of the Company incurring net
operating losses for which the tax benefit thereon was fully reserved.
The tax expense consisted of deferred tax expenses of $519,000,
$1,160,000 and $3,198,000 net of current tax benefits of $519,000,
$1,160,000 and $3,198,000 for the years ended December 31, 1994, 1995
and 1996, respectively.

Upon consummation of the Offering it is expected that, the Company may
no longer be included in the consolidated federal income tax return of
Citizens, and in such case would file its own federal income tax
return. The Company intends to enter into a federal, state and local
tax sharing agreement with Citizens whereby the Company's income tax
liability (federal liability only in the event the Company is included
in Citizens' federal consolidated income tax group) would be computed
on a stand alone basis. Additionally, upon completion of the Offering,
if the Company is no longer included in Citizens consolidated federal
income tax returns, the Company, on a stand alone basis, may not have
any federal net operating loss carryovers, and in such case Citizens
would not reimburse the Company for losses incurred prior to the
Offering, except as described above.

(5) Capital Stock:
-------------

At December 31, 1993, the Company had authorized 1,750,000 shares of
preferred stock, $.01 par value, and 2,000,000 shares of common stock,
$.01 par value. The preferred shares were convertible into common stock
on a one-for-one basis and contained voting rights whereby each share
entitled the holder to one vote on all matters. At December 31, 1993,
the Company had 1,750,000 shares of preferred stock outstanding, all of
which were owned by Citizens, and 125,009 shares of common stock
outstanding, of which 66,259 were owned by Citizens. In 1994, the
Company increased its authorized preferred to 10,750,000 shares and
issued 5,725,527 additional shares of preferred stock to Citizens for
$57,255,000,

F-10
<PAGE>

raising the number of outstanding preferred shares to
7,475,527. The shares were paid for by recording $57,255,000 of the
amount due to Citizens as additional paid-in-capital. During 1995,
Citizens acquired 58,750 shares of common stock from the minority
shareholder of the Company for $3,000,000 giving Citizens 100%
ownership of the Company. Such amount has been recorded in the
Company's accounts as goodwill and additional paid-in-capital.

During 1996, all of the preferred stock was converted into 7,475,527
shares of common stock. On June 14, 1996 there was a reverse stock
split of common stock in the amount of 100 for 7,600,536. The split
reduced the shares of common stock outstanding from 7,600,536 to 100
shares, and the number of authorized shares was reduced to 500 shares
of preferred and 500 shares of common. All share and per share data
have been restated to reflect the reverse stock split.

Prior to the completion of the Offering, the Company intends to amend
its Certificate of Incorporation to change its authorized capital stock
to 180 million shares, including 110 million shares of Class A Common
Stock, $.01 par value per share, 60 million shares of Class B Common
Stock, $.01 par value per share, and 10 million shares of preferred
stock, $.01 par value per share. At that time, the outstanding common
stock will convert to Class B Common Stock and the Company will declare
a stock split of 411,650 for one. Upon completion of the Offering of 10
million shares of Class A Common Stock to the public assuming no
exercise of the underwriter overallotment option, there will be no
preferred stock outstanding and Citizens will own all of the
outstanding shares of Class B Common Stock. Each share of Class A
Common Stock will entitle the holder to one vote and each share of
Class B Common Stock will entitle the holder to 10 votes on each matter
to be voted upon by the holders of the Common Stock. As a result, after
the completion of the Offering, Citizens will have 97.5% of the voting
control of the Company (97.16% if the underwriters' overallotment
options are exercised in full). With the exception of voting rights,
the rights and privileges of Class A and Class B Common Stock are
identical. Class B Common Stock is convertible into Class A Common
Stock on a one-for-one basis.

(6) Related Party Transactions:
--------------------------
Transactions with Citizens

The Company has been a subsidiary of Citizens since 1990. In connection
with this ownership interest, Citizens has advanced funds to the
Company to finance operations, construction and capital expenditures.
Interest is not charged on Citizens advances for operations and capital
expenditures, except for intercompany advances used to fund
construction-in-progress. Subsequent to the construction period, the
advances become non-interest bearing. Interest on Citizens advances are
recorded as an increase to the amount due to Citizens. The amount of
interest charged on construction-in-progress has in turn been
capitalized as part of property, plant and equipment.

The Company is also charged by Citizens for administrative services
which includes an allocation of Citizens' corporate overhead. The
overhead allocation rate is based on four factors: the Company's plant
assets, operating expenses, number of customers and payroll expenses.
Effective with the completion of the Offering, the Company will enter
into an Administrative Services Agreement ("Agreement") under which
Citizens will provide administrative services to the Company, including
but not limited to, certain financial management services, information
services, legal and contract services and human resources services.
Under the terms of such Agreement, the Company will pay Citizens for
reimbursable costs as defined in the Agreement plus an administrative
charge.

F-11
<PAGE>

A summary of the activity in the amount due to Citizens is as follows:
<TABLE>
<CAPTION>

------------------------(in thousands) ------------------------

Years Ended December 31, Nine months ended
------------------------ September 30,
--------------
1994 1995 1996 1997
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance beginning of period $ 21,481 $ 35,109 $ 64,941 $ 155,395
Cash advances from Citizens, net 67,636 26,862 88,530 67,293
Acquisition of preferred stock (57,255) - - -
Deferred income taxes (519) (1,160) (3,198) (8,696)
Interest 2,466 2,619 2,868 2,234
Administrative services fees 1,300 1,511 2,254 2,945
------------- -------------- ---------- -----------
Balance end of period $ 35,109 $ 64,941 $ 155,395 $ 219,171
============= ============== ========== ===========
</TABLE>

Prior to the completion of the Offering, $119.2 million of the amount
due to Citizens as of September 30, 1997 will be contributed to
additional paid-in-capital and the remaining $100 million will be
repaid with the proceeds from the Credit Commitment (see Note 8). In
1994, 1995 and 1996, Citizens had been charging interest on the amount
due to Citizens only to the extent that the Company was allowed to
capitalize interest under Generally Accepted Accounting Principles.

Telecommunications Services

Citizens entered into a lease for fiber optic cable from the Company
for 10 years and calls for rentals of $30,000 per month. Also during
1996, Citizens and the Company combined their purchasing power of
long-haul services in arrangements Citizens entered into with a long
distance carrier in order to receive a lower unit cost. The Company
reimbursed Citizens $7.6 million in 1996 representing the cost of the
Company's usage of these long-haul services plus 5%. This arrangement
with Citizens was replaced effective May 1, 1997 with a 24-month term
agreement which removed the 5% additional fee.

Stock Plans

At December 31, 1996, Company employees participated in two Citizens
stock based compensation plans which are described below. The Company
applies APB Opinion No. 25 and related interpretations in accounting
for the Citizens employee stock plans. Accordingly, no compensation
cost has been recognized in the financial statements for options issued
pursuant to the MEIP or ESPP. The following tables reflect MEIP and
ESPP information for Company employees and exclude full time employees
and officers of Citizens. Had the Company determined compensation cost
based on the fair value at the grant date for the MEIP and ESPP under
SFAS 123, the Company's pro forma net loss would have been as follows:
<TABLE>
<CAPTION>

($ in thousands) 1995 1996
-------------------------------------------------- ------------ ----- ------------
<S> <C> <C>
Net loss As reported $ (20,322) $ (29,383)
Pro forma $ (20,343) $ (29,474)
Net loss per share As reported $ $
Pro forma $ $
</TABLE>

F-12
<PAGE>

Under the Citizens' MEIP, the exercise price of stock options and SARs
shall be equal to or greater than the fair market value of the
underlying Citizens common stock on the date of grant. Stock options
are generally not exercisable on the date of grant but vest over a
period of time. A summary of Citizens shares subject to option for
Company employees is as follows:

Shares Weighted
Subject to Average Option
Option Price Per Share

Balance at January 1, 1994 36,184 $ 13.52
Options granted 73,138 11.56
Options exercised - -
Options canceled or lapsed - -
-------------- -------------
Balance at December 31, 1994 109,322 12.60
Options granted 27,831 10.57
Options exercised - -
Options canceled or lapsed 19,722 12.29
-------------- -------------
Balance at December 31, 1995 117,431 12.19
Options granted 102,877 11.08
Options exercised - -
Options canceled or lapsed 5,909 11.52
============== =============
Balance at December 31, 1996 214,399 $ 11.84
============== =============

The following table summarizes information about Citizens shares
subject to option for Company employees under the MEIP at December 31,
1996.

Options Outstanding Options Exercisable
------------------------------------------------------------------------------------------------
Weighted
Weighted Average Weighted
Average Remaining Average
Number Range of Exercise Life in Number Exercise
Outstanding Exercise Prices Price Years Exercisable Price

--------------- ----------------- ------------- ------------- ----------------- -----------
<S> <C> <C> <C> <C> <C>
214,399 $9.85 - $14.96 $11.84 6.5 45,817 $12.06
</TABLE>

The weighted-average fair value of options granted during 1995 and 1996
were $2.12 and $1.51, respectively. For purposes of the pro forma
calculation under SFAS 123, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions used for grants
in 1995 and 1996:

1995 1996
---------------------------------------------- ---------------------
Dividend yield 5.6% 6.2%
Expected volatility 20% 20%
Risk-free interest rate 6.25% 5.63%
Expected life 7 years 7 years

F-13
<PAGE>

The ESPP allows eligible employees of Citizens and its subsidiaries to
subscribe to purchase shares of Citizens Common Stock at 85% of the
lower of the average market price on the first or last day of the
purchase period. An employee may elect to have up to 20% of annual base
pay withheld in equal installments throughout the designated payroll-
deduction period for the purchase of shares. The value of an employee's
subscription may not exceed $25,000 in any one calendar year. As of
December 31, 1996, 175 Company employees were participating in the
ESPP.

The weighted-average fair value of purchase rights granted in 1995 and
1996 was $3.18 and $3.30, respectively. For purposes of the pro forma
calculation under SFAS 123, compensation cost is recognized for the
fair value of the employees' purchase rights, which was estimated using
the Black-Scholes Model with the following assumptions for subscription
periods beginning in 1995 and 1996:

1995 1996
---------------------------------------------- ---------------------
Dividend yield 6.2% 6.4%
Expected volatility 20% 20%
Risk-free interest rate 5.56% 5.30%
Expected life 6 months 6 months

(7) Commitments and Contingencies:
-----------------------------

In 1995, the Company entered into a $110 million construction agency
agreement and an operating lease agreement in connection with the
construction of certain telecommunications networks and fiber cable
links. The Company serves as agent for the construction of these
projects and upon completion of each project has agreed to lease the
facilities for a three year term, with one year renewals available
through April 30, 2002. At December 31, 1995, 1996 and at September 30,
1997, the Company was leasing assets with an original cost of $36.8
million, $57.3 million and $87.4 million, respectively, under this
agreement. The Company has the option to purchase the facilities at the
end of the lease terms for the amount of the lessor's investment in the
facilities, which is expected to be $110 million. In the event the
Company chooses not to exercise this option, the Company is obligated
to arrange for the sale of the facilities to an unrelated party and is
required to pay the lessor any difference between the net sales
proceeds and the lessor's investment in the facilities. However, any
amount required to be paid to the lessor is subject generally to a
maximum of 80% of the lessor's investment, giving effect to lease
payments previously made. The performance of these lease obligations is
guaranteed by Citizens. Effective with the completion of the Offering,
the Company has agreed to pay to Citizens an annual guarantee fee equal
to 3.25% per annum of the lessor's average investment in the leased
assets.

The Company conducts certain of its operations in leased premises and
also leases certain equipment; obligations, renewals and maintenance
costs vary by lease.

The Company has entered into an operating lease contract and a capital
lease contract with a third party in order to develop long-haul routes
between Portland, Oregon and Seattle, Washington and between Portland,
Oregon and Spokane, Washington. The operating lease agreement provides
for rental payments based on a percentage of the Company's monthly
leased traffic over such route and is expected to become operational
before the end of 1997. The capital lease agreement provides for a
monthly minimum lease payment of $105,000 plus a percentage of leased
traffic over such route in excess of certain minimums and became
operational in February, 1997. Both agreements have terms of 15 years.

F-14
<PAGE>

The Company has entered into an operating lease contract to develop a
local network in Phoenix, Arizona. The operating lease provides for
rental payments based on a percentage of the network's operating income
for a period of 15 years.

Future minimum rental commitments for all long-term noncancelable
operating leases as of December 31, 1996 are:

Year Amount

--------------------------- ---------------------------
1997 $ 7,727,000
1998 7,364,000
1999 7,401,000
2000 7,295,000
2001 6,176,000
2002 to 2007 4,306,000
=======================================================
Total $40,269,000
=======================================================

Total rental expense included in the Company's results of operations
for the years ended December 31, 1994, 1995 and 1996 was $663,000,
$2,475,000 and $5,193,000, respectively.

The Company is also a party to contracts with several unrelated long
distance carriers. The contracts provide for fees based on leased
traffic subject to minimum monthly fees which aggregate $2.6 million
for 1997, $12.1 million for 1998 and $16.8 million for 1999.

The Company's budgeted capital expenditures for 1997 are $79.3 million
and certain commitments have been entered into in connection therewith.

Contingencies

The Company is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse
effect on the Company's results of operations, financial position or
liquidity.

(8) Subsequent Events:

Credit Commitment

In October 1997, the Company arranged for a bank commitment for a
five-year $400 million revolving Credit Commitment. Citizens has agreed
to guarantee all of the Company's obligations under the Credit
Commitment and effective with the Offering, the Company has agreed to
pay Citizens a guarantee fee equal to 3.25% per annum of the average
balance outstanding under the facility. Concurrent with the completion
of the Offering, the Company intends to draw down enough funds to repay
the balance of all amounts due to Citizens at the time of the Offering
(see Note 6).

F-15
<PAGE>

Equity Incentive Plan

In October 1997, the Board of Directors adopted the 1997 Equity
Incentive Plan ("the plan"), which authorizes, among other things, the
grant of incentive stock options, nonqualified stock options, stock
appreciation rights or combinations thereof and restricted stock. The
exercise price for such awards shall be determined by the Compensation
Committee of the Board of Directors at the date of grant at no less
than fair market value. The exercise period for such awards is
generally 10 years from the date of grant. The Company has reserved
4,170,600 shares for issuance under the terms of the plan.

Concurrent with the effective date of the Offering, the Company will
grant stock options at the Offering price to certain officers and
employees for 2,316,000 shares of Class A Common Stock exercisable at
the Offering price and will grant certain officers and employees
535,000 restricted shares of Class A Common Stock.

Indefeasible Right to Use

In October, 1997, the Company entered into a 20 year indefeasible right
to use contract for 24 optical fibers with an unrelated third party for
approximately $50.2 million. The third party intends to construct a
fiber optic communications system linking Portland, Boise, Salt Lake
City, Las Vegas and Los Angeles. The network is scheduled to be
completed by February 28, 1999 and will have approximately 1,620 route
miles.

F-16
<PAGE>

SCHEDULE II

Electric Lightwave, Inc.
Valuation and Qualifying Accounts
($ in thousands)
<TABLE>
<CAPTION>

Balance at Charged to Charge to
beginning Cost and other Balance at end
Accounts of period Expense accounts Deductions of period
- --------------------------------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
1994:
Allowance for doubtful accounts $ - (36) - - $ (36)
Deferred income taxes valuation
allowance $ (3,442) - (3,603) - $ (7,045)

1995:
Allowance for doubtful accounts $ (36) (111) - 72 $ (75)
Deferred income taxes valuation
allowance $ (7,045) - (7,063) - $ (14,108)

1996:
Allowance for doubtful accounts $ (75) (3,010) - 1,919 $ (1,166)
Deferred income taxes valuation
allowance $ (14,108) - (10,240) - $ (24,348)
</TABLE>

F-17
<PAGE>

NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE SHARES OF CLASS A COMMON
STOCK OFFERED HEREBY IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS
PROSPECTUS OR THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
--------------------

TABLE OF CONTENTS
Page

Prospectus Summary............................................................3
Risk Factors.................................................................10
Forward-looking Statements...................................................22
Use Of Proceeds..............................................................22
Dilution.....................................................................23
Dividend Policy..............................................................24
Capitalization...............................................................24
Selected Financial and Operating Data........................................25
Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................................26
Business.....................................................................34
Government Regulation........................................................52
The Local Telecommunications Services Industry...............................57
Management...................................................................58
Relationship With Citizens...................................................68
Securities Ownership ........................................................73
Description of Capital Stock.................................................74
Shares Eligible for Future Sale..............................................76
Certain Tax Considerations...................................................77
Underwriting.................................................................80
Legal Matters................................................................84
Experts......................................................................84
Additional Information.......................................................85
Glossary.....................................................................86
Index to Financial Statements................................................96

UNTIL _______, 1997, (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL DEALERS
EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK OFFERED HEREBY, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.

10,000,000 SHARES

[LOGO]

ELECTRIC LIGHTWAVE, INC.

CLASS A COMMON STOCK

-----------

PROSPECTUS

-------------

U.S. Underwriters

LEHMAN BROTHERS
DEUTSCHE MORGAN GRENFELL
MERRILL LYNCY & CO.
MORGAN STANLEY DEAN WITTER

International Managers

LEHMAN BROTHERS
DEUTSCHE MORGAN BROTHERS
MERRILL LYNCH INTERNATIONAL
MORGAN STANLEY DEAN WITTER

[__________], 1997
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

Set forth below are the expenses (other than underwriting discounts and
commissions) expected to be incurred in connection with the issuance and
distribution of the securities to be registered hereby. With the exceptions of
the Securities and Exchange Commission registration fee and the NASDAQ
registration fee, the amounts set forth below are estimates.

Securities and Exchange Commission $ 60,607
registration fee.......................
NASDAQ registration fee................. 5,000
Transfer agent and registrar fees....... 10,000
Costs of printing and engraving......... 70,000
Legal fees and expenses................. 60,000
Accounting fees and expenses............ 30,000
Blue Sky fees and expenses.............. 10,000
Miscellaneous expenses.................. 10,000
-----------
TOTAL.................................. $255,607
===========

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

As authorized by Section 145 of the General Corporation Law of
Delaware, Electric Lightwave, Inc. (the "Company") has agreed to indemnify each
director and officer of the Company against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with the defense or settlement of any threatened,
pending or completed action, suit or proceeding, in which he is involved by
reason of the fact that he is or was a director or officer of the Company if he
acted in good faith and in a manner that he reasonably believed to be in or not
opposed to the best interests of the Company and, with respect to any criminal
action or proceeding, if he had no reasonable cause to believe that his conduct
was unlawful. If, however, any threatened, pending or completed action, suit or
proceeding is by or in the right of the Company, the director or officer shall
not be indemnified in respect of any claim, issue or matter as to which he is
adjudged to be liable to the Company unless the Court of Chancery of Delaware
determines otherwise.

Article Seventh of The Company's Certificate of Incorporation provides
that no director of the Company shall be personally liable to the Company or any
of its stockholders for monetary damages for any breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the Company or its shareholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of the
law, (iii) under Section 174 of the General Corporation Law of Delaware, or (iv)
for any transaction from which the director derived an improper personal
benefit.

The Company's By-Laws provide that the Company shall indemnify its
officers and directors to the fullest extent permitted by the General
Corporation Law of Delaware.

II-1
<PAGE>

The Company participated in the directors' and officers' insurance
coverage of Citizens Utilities Company relating to loss, liabilities and
expenses incurred in connection with any legal proceeding arising from his or
her being or having been a director or officer of the Company.

The Company has agreed to indemnify and hold harmless Citizens and its
other subsidiaries and their directors, officers, employees and agents from all
losses, liabilities and costs and expenses resulting from liabilities of the
Company or material breaches by the Company arising out of the offering of the
shares of Class A Common Stock contemplated by this registration statement.
Citizens has undertaken a reciprocal obligation to indemnify the Company and its
directors, officers, employees and agents against losses, liabilities, costs and
expenses resulting from liabilities of Citizens or material breaches by Citizens
arising out of such offering.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

In 1994, the Company issued 5,725,527 shares of preferred stock of the
Company to Citizens for $57,255,270 in a private placement. Exemption from
registration is claimed under Section 4.2 of the Securities Act of 1933. No
underwriters were involved in such issuance. In 1996, 76 shares of common stock
were issued upon conversion of such preferred stock to common stock. Exemption
from registration under the Securities Act is claimed under Section 3(a)(9) of
the Securities Act of 1933.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) EXHIBITS

An Exhibit Index, containing a list of all exhibits to this
registration statement, commences on page II-6.

(b) FINANCIAL STATEMENT SCHEDULES

All schedules are omitted because the information is not required, is
not material or is otherwise included in the financial statements or related
notes thereto.

ITEM 17. UNDERTAKINGS.

The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with

II-2
<PAGE>

the securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court appropriate jurisdiction the question whether such indemnification by it
is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.

The undersigned registrant hereby undertakes that:

(i) for purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) hereunder the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.

(ii) for the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

II-3
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the
registrant has caused this Amendment No. 4 to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Vancouver, State of Washington, on October 31, 1997.

ELECTRIC LIGHTWAVE, INC.

/s/Daryl Ferguson
-------------------------------
By: Daryl Ferguson
Title: Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 4 to the registration statement has been signed by the following
persons in the capacities and on the dates indicated.

SIGNATURE TITLE(S)
--------- --------

Chief Executive Officer, Vice October 31, 1997
/s/Daryl A. Ferguson Chairman and Director
- ---------------------------
Daryl A. Ferguson

President, Chief Operating October 31, 1997
*David B. Sharkey Officer and Director
- ---------------------------
David B. Sharkey

Vice President, Chief
Financial Officer and October 31, 1997
/s/Robert J. DeSantis Treasurer
- ---------------------------
Robert J. DeSantis

*Kerry Rea Vice President and Controller October 31, 1997
- ---------------------------
Kerry Rea

*Leonard Tow Chairman of the Board October 31, 1997
- ---------------------------
Leonard Tow

*Stanley Harfenist Director October 31, 1997
- ---------------------------
Stanley Harfenist

*Robert A. Stanger Director October 31, 1997
- ---------------------------
Robert A. Stanger

II-4
<PAGE>

*Maggie Wilderotter Director October 31, 1997
- ---------------------------
Maggie Wilderotter

*By__/s/Robert J. DeSantis
- ---------------------------
Attorney-in-fact

II-5
<PAGE>

EXHIBIT INDEX

EXHIBIT NO. DESCRIPTION

1.1* Underwriting agreement

3.1**** Amended and Restated Certificate of Incorporation

3.2**** By-laws

4.1**** (Contained in Exhibit 3.1)

5.1* Opinion regarding legality of the securities being registered

10.1** License Agreement between the Company and the United States of
America Department of Energy acting by and through the
Bonneville Power Administration dated March 29, 1996

10.2** License Agreement between the Company and the United States of
America Department of Energy acting by and through the
Bonneville Power Administration dated November 11, 1996

10.3** License Agreement between the Company and the United States of
America Department of Energy acting by and through the
Bonneville Power Administration dated July 18, 1997

10.4** Optical Fiber License Agreement between the Company and Salt
River Project Agricultural Improvement and Power District dated
as of September 11, 1996

10.5**** Participation Agreement between the Company, Shawmut Bank
Connecticut, National Association, the Certificate Purchasers
named therein, the Lenders named therein, BA Leasing & Capital
Corporation and Citizens Utilities Company dated as of April 28,
1995, and the related operating documents

10.6**** Agreement For Lease of Dark Fiber between the Company and
Citizens Utilities Company dated as of March 24, 1995

10.7**** Form of Administrative Services Agreement between the Company
and Citizens Utilities Company dated as of _______, 1997

10.8**** Form of Tax Sharing Agreement between the Company and Citizens
Utilities Company dated as of _______, 1997

10.9**** Form of Indemnification Agreement between the Company and
Citizens Utilities Company dated as of _______, 1997

10.10* Form of Registration Rights Agreement between the Company and
Citizens Utilities Company dated as of _______, 1997

10.11**** Form of Customers and Service Agreement between the Company and
Citizens Utilities Company dated as of _______, 1997

II-6
<PAGE>

EXHIBIT NO. DESCRIPTION

10.12* Bank Credit Agreement dated _________, 1997

10.13* Equity Incentive Plan of the Company

10.14* Form of Option Agreement for the Company's Equity Incentive Plan

10.15*** Citizens Utilities Company 1996 Equity Incentive Plan, as
amended

10.16* Form of Guaranty Fee Agreement dated as of ___________, 1997
between the Company and Citizens Utilities Company

10.17***** Pre-Construction IRU Agreement between the Company and FTV
Communications, LLC dated October 16, 1997

11.1* Statement regarding computation of per share earnings

23.1 Consent of KPMG Peat Marwick LLP

23.2* Consent of Winthrop, Stimson, Putnam & Roberts (to be
contained in Exhibit No 5.1)

24.1**** Powers of attorney

27.1**** Financial Data Schedule

_____________________
* To be filed by Amendment.

** Previously filed. Portions of such exhibit are omitted pursuant to a
request for confidential treatment.

*** The 1996 Equity Incentive Plan is incorporated by reference to Citizens'
Proxy Statement dated March 29, 1996, File No. 001-11001. Amendment No. 1
to the 1996 Equity Incentive Plan is incorporated by reference to
Citizens' Current Report on Form 8-K dated August 7, 1997, File No. 001-
11001.

**** Previously filed.

***** Filed herewith. Portions of such exhibit are omitted pursuant to a request
for confidential treatment.

II-7

<PAGE>

EXHIBIT 10.17

PRE-CONSTRUCTION IRU AGREEMENT

Between

FTV COMMUNICATIONS, LLC

and

ELECTRIC LIGHTWAVE, INC.

Dated October 16, 1997
<PAGE>

TABLE OF CONTENTS
-----------------

Page
----
ARTICLE I. CONSTRUCTION.................................... 1
------------

ARTICLE II. PAYMENT; CONVEYANCE OF IRU...................... 4
--------------------------

ARTICLE III. CONNECTION OF ELI NETWORK TO THE SYSTEM......... 6
---------------------------------------

ARTICLE IV. ACCEPTANCE AND TESTING OF IRU FIBERS............ 6
------------------------------------

ARTICLE V. SYSTEM DOCUMENTATION............................ 7
--------------------

ARTICLE VI. TERM............................................ 7
----

ARTICLE VII. OPERATION, MAINTENANCE, AND REPAIR OF THE SYSTEM 8
------------------------------------------------

ARTICLE VIII. PERMITS; PHYSICAL PLANT AND REQUIRED RIGHTS..... 10
-------------------------------------------

ARTICLE IX. RELOCATION...................................... 10
----------

ARTICLE X. USE OF THE SYSTEM............................... 12
-----------------

ARTICLE XI. INDEMNIFICATION................................. 13
---------------

ARTICLE XII. INSURANCE....................................... 14
---------

ARTICLE XIII. TAXES AND FRANCHISE, LICENSE AND PERMIT FEES.... 15
--------------------------------------------

ARTICLE XIV. SYSTEM WARRANTIES............................... 16
-----------------

ARTICLE XV. NOTICE.......................................... 17
------

ARTICLE XVI. CONFIDENTIALITY................................. 18
---------------

ARTICLE XVII. DEFAULT......................................... 19
-------

ARTICLE XVIII. FORCE MAJEURE................................... 22
-------------

ARTICLE XIX. ARBITRATION..................................... 22
-----------

-i-
<PAGE>

ARTICLE XX. WAIVER.......................................... 23
------

ARTICLE XXI. GOVERNING LAW................................... 23
-------------

ARTICLE XXII. RULES OF CONSTRUCTION........................... 23
---------------------

ARTICLE XXIII. ASSIGNMENT...................................... 24
----------

ARTICLE XXIV. REPRESENTATIONS AND WARRANTIES.................. 25
------------------------------

ARTICLE XXV. ENTIRE AGREEMENT; AMENDMENT..................... 26
---------------------------

ARTICLE XXVI. RELATIONSHIP OF THE PARTIES..................... 26
---------------------------

ARTICLE XXVII. SEVERABILITY.................................... 26
------------

ARTICLE XXVIII. COUNTERPARTS.................................... 26
------------

ARTICLE XXIX. CERTAIN DEFINITIONS............................. 27
-------------------

ARTICLE XXX. AUDIT RIGHTS.................................... 30
------------

-ii-
<PAGE>

EXHIBITS
- --------

Exhibit A Cable Installation Specifications

Exhibit B Fiber Specifications

Exhibit C Fiber Splicing, Testing and Acceptance Standards

Exhibit D Regenerator/Amplifier Site Specifications

Exhibit E As-Built Drawing Specifications

Exhibit F Operations Specifications

Exhibit G Colocation

Exhibit H Pass-Through Provisions

ATTACHMENTS
- -----------

Attachment 1 Route Map

-iii-
<PAGE>

PRE-CONSTRUCTION IRU AGREEMENT

THIS IRU PRE-CONSTRUCTION AGREEMENT (this "Agreement") is made as of the
16th day of October, 1997, (the "Effective Date") by and among FTV
COMMUNICATIONS, LLC, a Delaware limited liability company ("FTV"), having its
principal office at 210 SW Morrison, Suite 300, Portland, Oregon 97204 and
ELECTRIC LIGHTWAVE, INC. ("ELI"), a Delaware corporation, whose address is 8100
NE Parkway Drive, Suite 150, Vancouver, Washington 98662.

BACKGROUND
----------

WHEREAS, FTV intends to construct a fiber optic communication system as set
forth in Attachment 1 hereto (the "System Route"); and
------------

WHEREAS, ELI desires to purchase from FTV and FTV desires to sell to ELI an
indefeasible right to use (an "IRU") in the optical fibers (the "IRU Fibers") in
the quantity and of the type to be determined upon the terms and conditions set
forth below.

NOW, THEREFORE, in consideration of the mutual promises set forth below,
the parties hereby agree as follows:

ARTICLE I. CONSTRUCTION
------------

A. FTV shall install the Cable (capitalized terms used in this Agreement
are defined in Article XXIX of this Agreement entitled Certain Definitions) as
-------------------
described in this Paragraph I.A. Specifically FTV shall:

1. Install the Cable according to the specifications set forth in

Exhibit A, using the fiber specifications given in Exhibit B, along the System
- --------- ---------
Route.

2. Splice and test the installed Cable pursuant to the requirements
set forth in Article IV of this Agreement entitled Acceptance and Testing of IRU
-----------------------------
Fibers and in Exhibit C.
- ------ ---------

3. Comply with all applicable laws, rules and regulations (including
environmental) and obtain all necessary permits, franchises, easements and
rights-of-way needed to install the Cable and to deliver the IRU Fibers to ELI.

4. If requested, provide ELI with a monthly progress report which
shall include, among other things, notice of any anticipated events that may
materially delay or accelerate the Scheduled Completion Date or the Revised
Scheduled Completion Date, as applicable, or the anticipated Completion Date.
Upon reasonable request by ELI, FTV shall also

________________________________________________________________________________
PRE-CONSTRUCTION IRU AGREEMENT Page 1 of 30
<PAGE>

provide such reports during periods between the monthly reports; provided
--------
that such reports shall not be requested more frequently than once per week.

5. At any location where ELI has optronic equipment in FTV-operated
space, as part of the Enhanced Maintenance Services, allow ELI access at no
additional cost to all environmental alarms relating to such space by means of
an electrical contact point located in such space. ELI shall be responsible for
obtaining any facilities needed to connect these contact points to ELI's
monitoring system.

B. FTV warrants and represents that, upon the Completion Date:

1. The System shall be designed, engineered, installed and
constructed to perform in accordance with the specifications set forth in the
Exhibits.
- --------

2. It shall have performed all necessary surveying and mapping for
the System, including, without limitation:

a) A complete locations survey of the System Route, in
accordance with standard telecommunication engineering practices; and

b) Survey of sites for regeneration stations and other
facilities.

3. It shall have acquired all land, rights-of-way and easements
necessary for the continuous operation and maintenance of the System, and for
the connection of the ELI network to the System in accordance with Article III
of this Agreement, to enable ELI to use the IRU Fibers to provide
telecommunications services over the System throughout the Term of this
Agreement, including:

a) Easements, IRU's, rights-of-way, conduit or other leases,
fee interests and other rights, that are recorded (as applicable), in the
Office of the Recorder of Deeds of the appropriate county or in such other
offices as may be appropriate; and

b) Permits for highway, railroad and waterway crossings as
well as all other permits necessary for the construction of the System.

C. ELI shall have the right, but not the obligation, to inspect all R of W
Agreements. Any inspection by ELI shall be in compliance with and subject to
confidentiality and similar provisions of such R of W Agreements. In the event
any problem arises concerning either the adequacy or validity of such R of W
Agreements or their termination prior to the Term of this Agreement, FTV, at its
expense, shall take all reasonably necessary steps to allow the System to
operate and be maintained through the Term of this Agreement. FTV shall not
have any obligation to ELI under the preceding sentence to the extent that such
problem is due to a Force Majeure Event, ELI's violation of this Agreement, or
to ELI's intentional or negligent act or

________________________________________________________________________________
PRE-CONSTRUCTION IRU AGREEMENT Page 2 of 30
<PAGE>

omission. In the event FTV refuses to fulfill its obligations under this
paragraph, ELI shall be entitled to obtain specific performance of such
obligations from FTV.

D. ELI shall have the right to review permits, franchises, easements,
rights-of-way and similar contracts and records of FTV relating to the System
and the construction and maintenance of the Cable. In addition, ELI shall have
the right at its own expense and without unreasonable interference with the
Installation or FTV's construction schedule, to observe construction and to
perform reasonable inspections to ensure that all construction is in accordance
with the provisions of this Agreement, including the specifications set forth on
Exhibit A, drawings, easement provisions, and the terms of applicable contracts
- ---------
and codes. FTV shall keep ELI advised of the progress of the Installation in
order to facilitate ELI's right to conduct such observations and inspections.
ELI's right to observe and inspect shall include, but not be limited to, the
following:

1. Observing and inspecting construction operations, including, but
not limited to, clearing, grading, ditching, fiber placement, splicing, and
clean-up; and

2. Observing tests of the fiber within the Cable, which observation
shall not unreasonably interfere with such tests.

E. FTV shall diligently seek to complete the Installation of the Cable by
the Scheduled Completion Date. However, FTV shall have the one time right to
extend the Scheduled Completion Date to a Revised Scheduled Completion Date, on
the terms and conditions set forth in this Paragraph I.E. If it appears
reasonably certain that Installation of the Cable will be delayed beyond the
Scheduled Completion Date, FTV, at least ninety (90) days prior to the Scheduled
Completion Date, may give written notice to ELI of such circumstance. If FTV
does not notify ELI of the delay at least ninety (90) days before the Scheduled
Completion Date, the original Scheduled Completion Date shall remain in effect
and FTV shall not have any further right to request an extension of time to
complete the Installation of the Cable. Within thirty (30) days of such notice,
FTV shall provide to ELI a new schedule for the completion of the Installation
including a Revised Scheduled Completion Date. The Revised Scheduled Completion
Date may not be more than ninety (90) days after the original Scheduled
Completion Date. During the time a new construction schedule is being
developed, FTV shall continue the Installation of the Cable.

F. If Installation has not been completed by the sixtieth (60th) day
following the original Scheduled Completion Date or the Revised Scheduled
Completion Date, as applicable, FTV shall continue work to complete the
Installation of the Cable. However, FTV shall pay to ELI liquidated damages in
the amount of $25,000.00 per day for each day beyond the thirtieth (30th) day
following the original Scheduled Completion Date or the Revised Scheduled
Completion Date, as applicable, through and including the date Installation is
completed. FTV shall pay such liquidated damages to ELI within ten (10) days of
demand from ELI, which demand may be made not more frequently than once per
month. Late payments of such amounts shall accrue interest from the date due
until paid at a rate equal to eighteen percent (18%) per

________________________________________________________________________________
PRE-CONSTRUCTION IRU AGREEMENT Page 3 of 30
<PAGE>

annum or, if lower, the highest percentage allowed by law. If Installation has
not been completed by the sixtieth (60th) day following the original Scheduled
Completion Date or the Revised Scheduled GCompletion Date, as applicable, ELI,
at is option, may notify FTV in writing that ELI will assume all or part of the
construction project administration, and FTV shall work with ELI to transfer to
ELI that part of the construction project administration as may be requested by
ELI. No penalty shall be assessed against FTV after ELI has exercised its option
to complete the Installation of the Cable. If ELI participates in such
construction, FTV shall promptly reimburse ELI the Direct Costs necessarily (as
determined by the specifications contained in Exhibits A and C) incurred by ELI
----------------
in such participation; provided, however, that FTV may elect to set off any such
-------- -------
reimbursement against the payments in Paragraph II.A. in the following order -
first to II.A.4., then to II.A.3., then to II.A.2. ELI shall provide reasonable
supporting documentation for its Direct Costs.

ARTICLE II. PAYMENT; CONVEYANCE OF IRU
--------------------------

A. FTV, upon the terms, covenants and conditions contained in this
Agreement hereby grants to ELI an exclusive IRU in and to the IRU Fibers. ELI
shall pay FTV $________/*/ per actual Route Mile, payable as follows:

1. Twenty-five percent (25%) of the estimated IRU payment [based on
the estimated 1,620 Route Miles] on or before November 15, 1997;

2. Twenty-five percent (25%) of the IRU payment [based on the actual
Route Miles] within thirty (30) days of the Completion Date;

3. Twenty-five percent (25%) of the IRU payment [based on the actual
Route Miles] within thirty (30) days of the first anniversary of the Completion
Date; and

4. Twenty-five percent (25%) of the IRU payment [based on the actual
Route Miles] within thirty (30) days of the second anniversary of the Completion
Date.

To the extent that the actual Route Miles varies from 1,620 miles, the payment
in Paragraph II.A.1. above shall be adjusted to reflect the actual Route Miles
at $________* per Route Mile, and any decrease or increase resulting from such
adjustment shall be reflected in the payment to be made pursuant to Paragraph
II.A.2. above. As a condition precedent to ELI's payment obligations under this
Paragraph II.A., FTV shall deliver to ELI on or before November 15, 1997, a
comfort letter from the parent of each of FTV's members stating that the
transaction contemplated by this Agreement has been authorized and will be
funded in accordance with the terms of this Agreement. If FTV fails to deliver
such comfort letters to ELI by such date, ELI shall not be required to make the
payment described in Paragraph II.A.1. and, at its option, may terminate this
Agreement.

- --------------------
/*/ Confidential material has been omited pursuant to a request for confidential
treatment. Such material has been filed separately with the Securities and
Exchange Commission.

________________________________________________________________________________
PRE-CONSTRUCTION IRU AGREEMENT Page 4 of 30
<PAGE>

B. FTV and ELI intend that the price charged to ELI for the IRU in the
System be at the lowest price charged by FTV for any comparable transactions
made by FTV within two years from the Completion Date. In order to accomplish
such intention, an adjustment may be required on more than one occasions, and
one or more of the payments scheduled above may require adjustment. If the
following conditions are satisfied, the total amount due from ELI to FTV will be
adjusted: (1) prior to the second anniversary of the Completion Date, FTV sells
an IRU in the Cable to another party in an installment sale or cash transaction
similar to that described in this Agreement; (2) the sale of an IRU covers a
segment of the System Route in excess of 150 miles; and (3) the Present Value
price, including basic maintenance elements (comparable to the Basic Maintenance
Services provided to ELI pursuant to this Agreement), for such other party is
less than $1,291.66 per actual fiber mile for less than or equal to 24 fibers.
In such event, the adjustment would be in such amount as to reduce ELI's cost
per Route Mile for the segment of the System Route to which such sale of an IRU
applies to the effective cost per Route Mile for such other party. ELI's next
payment due as set forth in Paragraph II.A. above shall be adjusted accordingly.

C. The amounts described in Paragraphs II.A.3. and 4. shall bear interest
until paid in full at the Prime Rate plus 3%. Such amounts, including any
accrued interest, may be prepaid at anytime prior to the date due without
premium or penalty

D. ELI hereby grants to FTV a security interest in the IRU, the IRU Fibers
and the proceeds from any sale, swap or other transfer of IRU in the IRU Fibers
to secure the payments, including interest, described in Paragraphs II.A. and
II.C., and agrees to execute, deliver and cooperate with respect to the filing
of such documents, including financing statements, as FTV may reasonably request
to evidence and perfect its security interest. FTV's security interests shall
terminate upon payment in full of all such amounts and, following such payment,
FTV shall terminate all filings it may have made to perfect its security
interests.

E. After the Fiber Acceptance Testing for any segment of the System has
been accepted or deemed accepted by ELI as described in Article IV of this
Agreement entitled Acceptance and Testing of IRU Fibers, and following receipt
------------------------------------
by FTV of the payment described in Paragraph II.A.1., ELI may exercise its IRU
for such segment. At any time after payment of the amount described in
Paragraph II.A.1., ELI may sell, lease, assign or swap an IRU or other interest
in the IRU Fibers to another party upon prior or simultaneous payment to FTV in
cash of $1,200 per fiber mile for the number of IRU Fibers in which the IRU or
other interest is sold, leased, assigned or swapped; provided that such party is
--------
subject to and bound by provisions substantially the same as those set forth in

Exhibit H. Such payment to FTV shall be applied by FTV to reduce the amount of
- ---------
the payments due from ELI to FTV pursuant to Paragraph II.A. in the following
order - first to II.A.4., then to II.A.3., then to II.A.2. FTV agrees that upon
receipt of the payment called for in this Paragraph II.E. it shall release its
security interests in the IRU, the IRU Fibers and proceeds to which the payment
relates, if not previously released. The IRU granted to ELI shall be for the
exclusive use of the IRU Fibers in each segment of the System along the entirety
of the System Route. After ELI has paid in full the amounts described in
Paragraph II.A., with any accrued interest as described in Paragraph II.C.
above, it may sell,

________________________________________________________________________________
PRE-CONSTRUCTION IRU AGREEMENT Page 5 of 30
<PAGE>

lease, assign, swap or otherwise transfer an IRU in the IRU Fibers without
further payment obligation to FTV or FTV's consent.

ARTICLE III. CONNECTION OF ELI NETWORK TO THE SYSTEM
---------------------------------------

A. Subject to the provisions herein, ELI shall be responsible for all
costs to connect its facilities with the IRU Fibers. Subject to Exhibit G, ELI
---------
may connect its system or other fiber optic systems controlled by it with the
IRU Fibers at ELI's sole cost, at any Connecting Point along the System;
provided, however, any connection requiring a splice to be entered shall be
- -------- -------
performed by FTV at ELI's sole expense. In order to schedule a connection of
this type ELI shall coordinate the work at least thirty (30) days in advance of
the date the connection is requested to be completed. FTV shall use
commercially reasonable efforts to accommodate the request. Such work shall be
restricted to the Planned System Work Period set forth in Exhibit F to this
---------
Agreement unless otherwise agreed to in writing for specific projects. FTV
shall also provide ELI reasonable access to any Connecting Point during the Term
of this Agreement.

B. FTV may prohibit ELI from making a connection if FTV can demonstrate to
ELI's reasonable satisfaction that use of a proposed Connecting Point would
materially and adversely affect the System. ELI shall not employ equipment or
technologies that will interfere with the use of the remaining fibers or damage
the fibers in the System.

ARTICLE IV. ACCEPTANCE AND TESTING OF IRU FIBERS
------------------------------------

A. FTV shall test the IRU Fibers in accordance with the Fiber Acceptance
Testing Standards to verify that they are operating in accordance with the
specifications in Exhibit C. Fiber Acceptance Testing shall progress segment by
---------
segment along the System as cable splicing progresses, so that test results may
be reviewed in a timely manner. ELI shall have the right, but not the
obligation, to have a person or persons present to observe FTV Fiber Acceptance
Testing and FTV agrees to provide ELI prior notice of FTV's testing schedule.
Within fourteen (14) days of the conclusion of FTV Fiber Acceptance Testing of
the IRU Fibers along a segment, FTV shall provide ELI with a copy of the test
results.

B. If, within ten (10) days after receipt by ELI from FTV of the initial
test results referred to above or of the results of re-testing as set forth
below, ELI reasonably determines that the test results are unacceptable, ELI
shall, within such ten (10) day period, notify FTV of such determination and ELI
shall have the right, but not the obligation, at its sole expense, to conduct
its own Fiber Acceptance Testing of the IRU Fibers to verify that they are
operating in accordance with the specifications in Exhibit C. Subject to
---------
Paragraph IV.D., ELI shall commence its Fiber Acceptance Testing of the IRU
Fibers within ten (10) days of such notice to FTV and shall complete such
testing within fourteen (14) days thereafter. FTV shall have the right, but not
the obligation, to have a person or persons present to observe ELI's Fiber

________________________________________________________________________________
PRE-CONSTRUCTION IRU AGREEMENT Page 6 of 30
<PAGE>

Acceptance Testing. Within fourteen (14) days of the conclusion of ELI's Fiber
Acceptance Testing of the IRU Fibers, ELI shall provide FTV with a copy of the
test results.

C. In the event the results of the tests of the IRU Fibers show the IRU
Fibers are not operating within the parameters of the applicable specifications,
ELI shall notify FTV in writing that the results with respect to some or all
portions of the IRU Fibers are unacceptable. Thereupon, FTV shall expeditiously
take such action as shall be reasonably necessary with respect to such portion
of the IRU Fibers that do not operate within the parameters of the
specifications to bring the operating standards of such portion of the IRU
Fibers within such parameters. After taking such actions and re-testing of the
IRU Fibers, FTV shall provide ELI with a copy of the new test results and ELI
shall again have the right to conduct its own Fiber Acceptance Testing as set
forth above. The cycle described above of testing, taking corrective action and
re-testing shall take place as many times as necessary to ensure that the IRU
Fibers operate within the parameters of the applicable specifications.

D. ELI shall be deemed to have accepted the IRU Fibers unless it notifies
FTV within ten (10) days of receipt of FTV Fiber Acceptance Testing results that
such results are unacceptable. If the test results of ELI Fiber Acceptance
Testing are within the parameters of the specifications in Exhibit C, ELI shall,
---------
within ten (10) days of receipt of ELI's test results, provide FTV with a
written notice accepting the IRU Fibers. The date of this notice or the date of
deemed acceptance of the IRU Fibers (for all segments in the System), as the
case may be, shall be the "Completion Date."

ARTICLE V. SYSTEM DOCUMENTATION
--------------------

After the Completion Date and upon ninety (90) days prior notice from ELI,
FTV shall provide ELI with documentation ("Deliverables") that shall consist of
the following:

1. As-built drawings for the System complying with the specifications
for as-built drawings set forth in Exhibit E; and
---------

2. Technical specifications of the Cable and associated splices and
other equipment placed in the System as set forth on Exhibits A, B, C and D.
----------------------

ARTICLE VI. TERM
----

A. The Term of this Agreement shall begin on the Effective Date and shall
end on the twentieth (20th) anniversary of the Completion Date. Subject to the
conditions set forth below, ELI may, by written notice, extend the Term for an
additional ten (10) year period and, if it has so elected to extend the Term, it
may, by written notice, extend the term for a second ten (10) year period. ELI
shall provide the written notice at least one year in advance of the date the
Term would expire absent such notice. Subject only to the renegotiation of
charges for the Basic

________________________________________________________________________________
PRE-CONSTRUCTION IRU AGREEMENT Page 7 of 30
<PAGE>

Maintenance Services and the Enhanced Maintenance Services (as described in
Paragraph VII.H. below), any extension of the Term shall be on the same terms
and conditions as contained in this Agreement, for no additional consideration.

B. ELI may not exercise its initial or subsequent right to extend the Term
of this Agreement if FTV, in its reasonable opinion, determines that operation
or maintenance of the Cable is no longer commercially practicable; provided that
--------
FTV shall in such case offer to quitclaim to ELI all of FTV's rights in the IRU
Fibers, together with licenses or assignments (at FTV's option) allowing ELI to
maintain the IRU Fibers in the existing rights-of-way, to the extent FTV has the
right to convey such licenses. If ELI accepts FTV's offer, then all FTV
obligations under this Agreement shall terminate as of the date as of such
conveyance, except for those set forth in Articles XI, XVI and XIX of this
------
Agreement entitled Indemnification, Confidentiality, and Arbitration,
--------------- --------------- -----------
respectively. SUCH QUITCLAIM TRANSFER SHALL BE ON AN "AS IS" BASIS AND WITHOUT
WARRANTIES AS TO THE SYSTEM OR TITLE TO THE RIGHTS OF WAY.

C. Subject to the extension rights described above, upon the expiration of
the Term of this Agreement, ELI's IRU in the System shall immediately terminate
and all rights of ELI to use the System, or any part thereof, shall cease and
FTV shall owe ELI no additional duties or consideration. Within sixty (60) days
after the end of the Term, unless the parties agree otherwise, ELI shall remove
all electronics and equipment from any FTV facilities at ELI's sole cost under
FTV's supervision.

D. Notwithstanding the foregoing and except as provided in Paragraph A of
------
this Article, no termination of this Agreement shall affect the rights or
obligations of any party hereto with respect to any payment hereunder for
services rendered prior to the date of termination or pursuant to Articles XI,
XII, XIII, XVI and XIX of this Agreement entitled Indemnification, Insurance,
--------------- ---------
Taxes and Franchise, License and Permit Fees, Confidentiality, and Arbitration,
- -------------------------------------------- --------------- -----------
respectively.

ARTICLE VII. OPERATION, MAINTENANCE, AND REPAIR OF THE SYSTEM
---------------------------------------------------

A. During the Initial Term, FTV shall be responsible, at its sole expense
(including training), for the maintenance and repair of the System (including,
without limitation, the provision of Basic Maintenance Services), the IRU Fibers
and any common equipment on the System, all pursuant to the operations
specifications set forth on Exhibit F. FTV shall maintain the System and the
---------
IRU Fibers at all times in good working order and in a safe condition, in
conformity with the operations specifications set forth on Exhibit F and all
---------
applicable laws and regulations. FTV, at ELI's sole expense and at FTV's then
prevailing rates, shall repair damage caused by ELI's negligence or willful
misconduct or ELI's elective maintenance or repair requests. During the Initial
Term, the Enhanced Maintenance Services, however, shall be provided at ELI's
cost at the price stated in Paragraph X.B. of this Agreement. FTV shall not be
responsible for any maintenance or repair of any ELI equipment except as set
------
forth above.

________________________________________________________________________________
PRE-CONSTRUCTION IRU AGREEMENT Page 8 of 30
<PAGE>

B. FTV may subcontract for maintenance and restoration services hereunder.
All such subcontractors shall perform their work in accordance with the
applicable specifications contained in this Agreement and the Exhibits attached
--------
hereto, and industry standards.

C. ELI shall perform all maintenance on ELI equipment on the System.
However, in the event FTV agrees to perform repair or maintenance with respect
to such ELI equipment, ELI shall pay for all repair and maintenance of such
equipment performed by FTV at FTV's rates then in effect. FTV shall, upon
written request, provide ELI notice of FTV's rates for repair and maintenance.
ELI reserves the right to perform maintenance on any of its own equipment,
except as expressly restricted by this Agreement.
- ------

D. Upon notification from ELI of any Service Interruption, FTV shall
immediately begin to mobilize FTV crews and make its best effort to achieve
necessary repairs or restoration, in accordance with the procedures set forth in
Exhibit F. FTV shall, without limiting the above, make its best efforts to
- ---------
restore service within four (4) hours in the case of Cable cuts or other
significant physical damage and within one (1) hour in the case of Service
Interruptions caused by other circumstances. For purposes hereof, "best
efforts" means activities and performance consistent with prudent industry
practice, and response times that do not jeopardize the health and safety of
employees or agents of FTV or ELI. In the event the Service Interruption is not
cured within such four (4) or one (1) hour period, ELI may perform maintenance
and repair services subject to the provisions of applicable R of W Agreements.
In such event, ELI may access any part of the System reasonably necessary to
perform such service. In the event ELI requires FTV personnel to unlock any FTV
facility, FTV shall cooperate fully with ELI to allow ELI access. In those
parts of the System that ELI does not require FTV personnel to enter FTV
facilities, ELI shall provide FTV with oral notification of those parts of the
System that were entered as soon as possible. ELI shall only use the preceding
rights to enter the System to the extent necessary for emergency situations.
FTV shall reimburse ELI its Direct Costs and out-of-pocket expenses of providing
such maintenance services. ELI shall provide reasonable supporting
documentation for its Direct Costs.

E. FTV shall use a degree of care in performing repair and maintenance
pursuant to this Agreement that equals or exceeds that which is normal and
customary in the telecommunications industry.

F. In the event ELI notifies FTV of a need for repair to the System, or of
damage to the System that results from a specific accident or disaster, or
deterioration of the fibers in the System requiring replacement of fibers
("Damage or Deterioration"), FTV, at its cost, shall promptly repair such Damage
or Deterioration using its best efforts as defined in Paragraph VII.D. above.
However, if the Damage or Deterioration is due to the negligence or willful
misconduct of FTV or ELI, the party responsible for such Damage or Deterioration
shall be responsible for the costs of repairing the System to the extent the
Damage or Deterioration was caused by such party. FTV and ELI shall cooperate
reasonably with each other to collect any

________________________________________________________________________________
PRE-CONSTRUCTION IRU AGREEMENT Page 9 of 30
<PAGE>

available insurance proceeds and to resolve any disputes with insurance carriers
regarding the availability of insurance proceeds to repair any Damage or
Deterioration to the System.

G. ELI shall pay FTV's invoice for ELI's proportionate amount of the cost
to repair the Damage or Deterioration within thirty (30) days after receipt of
the invoice. Upon request by ELI, FTV shall promptly provide the necessary
substantiating information that will allow ELI to verify the accuracy of the
invoice.

H. After the Initial Term, FTV and ELI shall meet to renegotiate the terms
under which FTV will continue to provide the Basic Maintenance Services and the
Enhanced Maintenance Services, if any. If FTV and ELI are unable to agree on
the terms under which FTV will continue to provide such services, ELI shall have
the right to perform such services itself or to select an independent contractor
to perform such work. The selection of an independent contractor and all
agreements with such contractor must be approved by FTV, which approval shall
not be unreasonably withheld. The agreements with such contractor shall require
it to: (1) maintain insurance coverages not less than those required by Article
XII of this Agreement entitled Insurance and to provide FTV evidence of such
---------
coverage upon request; (2) maintain the confidentiality of confidential
information disclosed to it; and (3) comply with applicable provisions of R of W
Agreements. FTV shall have the right to have an inspector present at any work
performed by ELI or any such contractor, and ELI shall reimburse FTV for the
associated Inspection Costs. ELI or such contractor shall provide not less than
ten (10) days notice to FTV of such work.

ARTICLE VIII. PERMITS; PHYSICAL PLANT AND REQUIRED RIGHTS
-------------------------------------------

A. As of the Completion Date, FTV shall have obtained all R of W
Agreements, including without limitation, rights, licenses, authorizations,
rights-of-way and other agreements necessary for the use of poles, conduit,
cable, wire or other physical plant facilities, as well as any other such
rights, licenses, franchise, authorizations (including any necessary state,
tribal or federal authorizations such as environmental permits), rights-of-way
and other agreements necessary for the installation and use of the System
hereunder (all of which are referred to as "FTV Required Rights").

B. FTV shall cause all FTV Required Rights to remain effective through the
Term of this Agreement, except as provided in and subject to the provisions of
------
Articles IX and XVIII of this Agreement entitled Relocation, and Force Majeure,
---------- -------------
respectively.

ARTICLE IX. RELOCATION
----------

A. FTV, at FTV's cost and expense, shall be responsible for renewing or
replacing existing rights-of-way, easements, IRU or other underlying rights
necessary to maintain the System in place through the Initial Term. If FTV
determines it is not commercially practicable

________________________________________________________________________________
PRE-CONSTRUCTION IRU AGREEMENT Page 10 of 30
<PAGE>

to renew or replace its existing rights-of-way, easements, IRUs or other
underlying rights, then FTV, at its sole expense, shall relocate the segment of
the System so affected as provided in this Article IX. However, prior to any
such relocation ELI, at its election, may attempt to renew or replace any such
right-of-way, IRU or other underlying right, but at ELI's sole expense. FTV
shall cooperate with ELI during the notice period, as provided in Paragraph
IX.B. below, to allow ELI to make such renewal or replacement. In the event ELI
successfully renews or replaces any such right-of-way, IRU or other underlying
right, FTV shall allow ELI to continue its use of the affected IRU Fibers,
without relocation, as provided in this Agreement. In addition, if ELI desires,
ELI may extend the Term of this Agreement consistent with the provisions of
Article VI of this Agreement entitled Term, if such an extension is then
----
available, and such extension shall include ELI's right to continue using the
IRU Fibers in the renewed or replacement rights-of-way obtained by ELI.

B. If, following the Completion Date, FTV is required to relocate the
Cable or any of the facilities used or required in providing ELI with the IRU,
FTV shall give ELI sixty (60) days prior notice of any such relocation, if
possible, and shall proceed with such relocation. FTV shall have the right to
direct such relocation, including, but not limited to, the right to determine
the extent of, the timing of, and methods to be used for such relocation;
provided that any such relocation: (1) shall be constructed and tested in
- --------
accordance with the specifications and requirements set forth in Exhibits A and
--------------
C; (2) shall not result in a materially adverse change to the operations,
- -
performance, Connecting Points with the network of ELI, or end points of the
System; and (3) shall not unreasonably interrupt service on the System. If the
relocation is required due to the circumstances described in Paragraph IX.A.
above, FTV shall pay the Relocation Costs. If the relocation is required due to
the circumstances described in Paragraph IX.C. below, ELI shall pay the
Relocation Costs. In all other circumstances, ELI shall reimburse FTV for ELI's
proportionate share of the Relocation Costs (including, without limitation,
fiber acquisition, splicing and testing) based on the ratio between the number
of ELI's IRU Fibers to the total fiber count in the affected Cable so relocated.
In the event that a third party (that does not have an interest in the fibers in
the Cable) reimburses FTV for all of or a portion of the cost to relocate the
System, then this reimbursement amount shall reduce on a dollar-for-dollar basis
the aggregate amount of Relocation Costs deemed to have been spent by FTV under
this Article IX. FTV shall deliver to ELI updated as-built drawings consistent
with the specifications set forth in Exhibit E with respect to any relocated
---------
portion of the System no later than thirty (30) days following completion of the
work. FTV shall prepare a budget for the costs associated with such relocation.
Except in the event of an emergency, FTV, before beginning such relocation work,
shall provide ELI a copy of the proposed budget. ELI, within thirty (30) days
after receipt of the proposed budget, shall approve or reject the same. If
notice of rejection is not given by ELI within such 30-day period, ELI shall be
deemed to have approved the budget. ELI and FTV shall cooperate with each other
in resolving any disagreements over the terms of a proposed relocation budget.
FTV shall provide information and documentation to ELI sufficient to demonstrate
the basis for and the proportionate amount of the Relocation Costs chargeable to
ELI. ELI shall pay ELI's proportionate share of such Relocation Costs within
thirty (30) days of receipt of the foregoing information.

________________________________________________________________________________
PRE-CONSTRUCTION IRU AGREEMENT Page 11 of 30
<PAGE>

C. If relocation is requested by ELI, or if relocation is necessitated by
a breach of ELI's obligations under this Agreement, FTV shall complete the
relocation at ELI's expense.

ARTICLE X. USE OF THE SYSTEM
-----------------

A. ELI warrants that its use of the System shall comply in all material
respects with applicable government codes, ordinances, laws, rules, regulations
and restrictions and shall not have an adverse effect on the System or its use.

B. At the Completion Date, FTV shall deliver to ELI a concrete pad meeting
the specifications given in Exhibit D attached hereto for each Transmission
---------
Site. During the Term, ELI, at is own expense, shall have the right to enter
upon such Transmission Sites to install, repair, maintain and replace
Transmission Site structures (huts) and the equipment contained therein used by
ELI in the conduct of its business. In addition, FTV, at ELI's option, shall
provide the Enhanced Maintenance Services. ELI shall pay FTV a monthly
maintenance fee of $1,000.00 per Transmission Site for the Enhanced Maintenance
Services. Technical specifications applicable for the Enhanced Maintenance
Services are set forth on Exhibit D. In addition, ELI shall have the right
---------
during the Term, subject to availability, to space and power at the FTV sites at
FTV's then prevailing rates (which rates shall not be unreasonable).

C. After receipt by FTV of all payments due under Paragraphs II.A. and
II.C. and if ELI is not otherwise in default under this Agreement, ELI shall
have the right, by twelve (12) months' advance written notice, to abandon its
interest in the IRU Fibers, in which event the right to the use thereof shall
revert to FTV. Effective upon abandonment, ELI shall have no further rights
with respect to its IRU Fibers and this Agreement shall be terminated pursuant
to Paragraph VI.D. of this Agreement. Such abandonment shall not reduce or
otherwise affect ELI's obligations incurred before such abandonment.

D. ELI may use the IRU Fibers for any lawful purpose. FTV agrees and
acknowledges that FTV has no right to use the IRU Fibers during the Term.

E. FTV and ELI shall promptly notify each other of any matters pertaining
to any damage or impending damage to or loss of the System that are known to
such party and that could reasonably be expected to affect the System.

F. ELI shall take all reasonable precautions against, and shall assume
liability, subject to the terms of this Agreement, for, any damage caused by ELI
to the fibers used or owned by FTV or third parties. FTV shall take all
reasonable precautions against, and shall assume liability, subject to the terms
of this Agreement, for, any damage caused by FTV to the IRU Fibers, or fibers
used or owned by third parties.

G. ELI shall not use the IRU Fibers in a manner that interferes in any way
with or adversely affects the use of the fibers of FTV or third parties within
the Cable or their respective

________________________________________________________________________________
PRE-CONSTRUCTION IRU AGREEMENT Page 12 of 30
<PAGE>

equipment and facilities associated with the Cable. FTV shall not use and shall
prohibit third parties from using the Cable in a manner that interferes in any
way with or adversely affects ELI's use of the IRU Fibers or ELI's equipment and
facilities associated with the IRU Fibers.

H. FTV and ELI each agree to cooperate with and support the other in
complying with any requirements directly applicable to the IRU Fibers by any
governmental or regulatory agency or authority.

ARTICLE XI. INDEMNIFICATION
---------------

A. ELI hereby releases and agrees to indemnify, defend, protect and hold
harmless FTV, its employees, members, managers, officers, agents, contractors
and affiliates, from and against, and assumes liability for:

1. Any injury, death, loss or damage to any person, tangible property
or facilities of any person or entity (including reasonable attorneys' fees and
costs at trial and appeal), to the extent arising out of or resulting from the
acts or omissions, negligent or otherwise, of ELI, its officers, employees,
servants, affiliates, agents or contractors in connection with its performance
under this Agreement; and

2. Any claims, liabilities or damages arising out of any violation by
ELI of regulations, rules, statutes or court orders of any local, state or
federal governmental agency, court or body in connection with its performance
under this Agreement.

B. FTV hereby releases and agrees to indemnify, defend, protect and hold
harmless ELI, its employees, officers, directors, agents, contractors,
shareholders and affiliates, from and against, and assumes liability for:

1. Any injury, death, loss or damage to any person, tangible property
or facilities of any person or entity (including reasonable attorneys' fees and
costs at trial and appeal), to the extent arising out of or resulting from the
acts or omissions, negligent or otherwise, of FTV, its officers, employees,
servants, affiliates, agents or contractors in connection with its performance
under this Agreement; and

2. Any claims, liabilities or damages arising out of any violation by
FTV of regulations, rules, statutes or court orders of any local, state or
federal governmental agency, court or body in connection with its performance
under this Agreement.

C. FTV and ELI hereby expressly recognize and agree that each party's
obligation to indemnify, defend, protect and save the other harmless is a
material obligation to the continuing performance of the parties' other
obligations, if any, hereunder. However, in the event that either FTV or ELI
fails for any reason to so indemnify, defend, protect and save the other
harmless, the injured party's sole remedy in such event shall be the right to
bring an arbitration proceeding

________________________________________________________________________________
PRE-CONSTRUCTION IRU AGREEMENT Page 13 of 30
<PAGE>

pursuant to the terms of this Agreement against the other for damages as a
result of such failure to indemnify, defend, protect and save harmless. The
obligations of this Paragraph XI.C. shall survive the expiration or earlier
termination of this Agreement. FTV and ELI each affirmatively state and warrant
to the other that its indemnity obligation will be supported by liability
insurance to be furnished by it; provided that recovery under or in respect of
--------
this indemnity shall not be limited to the proceeds of any such insurance. In
addition, FTV and ELI hereby expressly agree that in no event shall either of
them be liable to the other for any lost or prospective profits or any other
special punitive, exemplary, consequential, incidental or indirect losses or
damages (in tort, contract or otherwise) under or in respect of this Agreement
or for any failure of performance related hereto howsoever caused, whether or
not arising from sole, joint or concurrent negligence.

D. Nothing contained herein shall operate as a limitation on the right of
either FTV or ELI to bring an action for damages against any third party,
including indirect, special, or consequential damages, based on any acts or
omissions of such third party as such acts or omissions may affect the
construction, operation or use of the IRU Fibers or the System. Each of FTV and
ELI shall assign such rights of claims, execute such documents and do whatever
else may be reasonably necessary to enable the other to pursue any such action
against such third party, provided however, that the provisions of this
-------- -------
Paragraph XI.D. shall not permit either FTV or ELI to bring an action for
damages against a third party for indirect, special, or consequential damages if
such third party, directly or through one or more intermediate parties, has a
right of indemnification, impleader, cross-claim, contribution, or other right
of recovery against FTV or ELI.

ARTICLE XII. INSURANCE
---------

A. During the term of this Agreement, FTV and ELI shall each obtain and
maintain, and shall require their respective permitted contractors to obtain and
maintain, not less than the following insurance:

1. Commercial General Liability Insurance with a combined single
limit of $10,000,000 for bodily injury and property damage.

2. Worker's Compensation Insurance in amounts required by applicable
law and Employers Liability Insurance with limits not less than $1,000,000 each
accident. If work is to be performed in Nevada, North Dakota, Ohio, Washington,
Wyoming or West Virginia, the party shall participate in the appropriate state
fund(s) to cover all eligible employees and provide a stop gap endorsement.

3. Automobile Liability Insurance with a combined single limit of
$2,000,000 for bodily injury and property damage, to include coverage for all
owned, non-owned and hired vehicles.

________________________________________________________________________________
PRE-CONSTRUCTION IRU AGREEMENT Page 14 of 30
<PAGE>

The limits set forth above are minimum limits and shall not be construed to
limit the liability of either FTV or ELI.

B. Unless otherwise agreed, the FTV insurance policies required above
shall be obtained and maintained with companies rated A or better by Best's Key
Rating Guide and ELI, its parent and affiliated companies shall be named as
additional insureds as respects the indemnifications under this Agreement. FTV
shall provide ELI with an insurance certificate confirming compliance with the
insurance requirements of this Article XII. The insurance certificate shall
indicate that ELI shall be notified not less than thirty (30) days prior to any
cancellation or material change in coverage.

C. Unless otherwise agreed, the ELI insurance policies required above
shall be obtained and maintained with companies rated A or better by Best's Key
Rating Guide and FTV, its parent and affiliated companies shall be named as
additional insureds as respects the indemnifications under this Agreement. ELI
shall provide FTV with an insurance certificate confirming compliance with the
insurance requirements in this Article XII. The insurance certificate shall
indicate that FTV shall be notified not less than thirty (30) days prior to any
cancellation or material change in coverage.

D. In the event coverage is denied or reimbursement of a properly
presented claim is disputed by the carrier for insurance provided above, the
party carrying such coverage shall make commercially reasonable efforts to
pursue such claim with its carrier.

E. FTV and ELI shall each obtain from the insurance companies providing
the coverages required by this Agreement a waiver of all rights of subrogation
or recovery in favor of the other party and, as applicable, its parent
corporation, members, managers, shareholders, affiliates, subsidiaries,
assignees, officers, directors, and employees or any other party entitled to
indemnity under this Agreement.

F. Nothing in this Agreement shall be construed to prevent either FTV or
ELI from satisfying its insurance obligations pursuant to this Agreement under a
blanket policy or policies of insurance which meet or exceed the requirements of
this Article XII.

ARTICLE XIII. TAXES AND FRANCHISE, LICENSE AND PERMIT FEES
--------------------------------------------

A. Subject to Paragraph XIII.B. below, ELI shall be responsible for any
and all sales, use, income, gross receipts, excise, transfer, ad valorem or
other taxes, and any and all franchise fees or similar fees assessed against it
due to its ownership of an IRU, its use of the IRU Fibers, including the
providing of services over the IRU Fibers, or its ownership or use of facilities
connected to the IRU Fibers.

B. Subject to Paragraph XIII.A. above, FTV shall be responsible for any
and all sales, use, income, gross receipts, excise, transfer, ad valorem or
other taxes, and any and all

________________________________________________________________________________
PRE-CONSTRUCTION IRU AGREEMENT Page 15 of 30
<PAGE>

franchise fees or similar fees assessed against it due to its construction,
ownership or use of the System, including providing of services over the System,
or its ownership or use of facilities connected to the System.

C. In the event that FTV is assessed for any taxes or fees related to
ELI's ownership of an IRU or ELI's use of the IRU Fibers, FTV, within thirty
(30) days of receipt of an invoice therefor, shall provide information and
documentation to ELI sufficient to demonstrate the basis for the tax or fee and
the amount and due date for payment of the tax or fee. In addition, FTV shall
provide ELI with all information reasonably requested by ELI with respect to any
such taxes or fees. After such thirty (30) day period, FTV, in it sole
discretion, may pay such tax or fee and invoice ELI for reimbursement. ELI
shall reimburse FTV for such payment within ten (10) days of receipt of FTV's
invoice. Notwithstanding such payment by FTV, ELI, at its option, shall have
the right to contest any such tax or fee and FTV will reasonably cooperate with
ELI in pursuing any such contest; provided that ELI shall have reimbursed FTV
--------
for such tax or fee. In the event FTV, in its sole discretion, elects to not
pay such tax or fee, it shall so notify ELI. ELI, at its option, may pay the
tax or fee, or contest the payment; provided that ELI shall indemnify and hold
--------
harmless FTV for the payment of such tax or fee and all interest and penalties
related thereto, and provided further, that such contest shall be resolved or
----------------
such tax or fee shall be paid so as to prevent any forfeiture of rights or
property or the imposition of any lien on the System.

D. In the event, following construction of any System segment, FTV
determines that it should relocate a portion of the System to bypass a
jurisdiction that has imposed or assessed taxes or fees on FTV or the System,
FTV shall give ELI sixty (60) days prior notice of the proposed relocation.
ELI, at its option, may agree to the relocation or determine to continue use of
the System through the jurisdiction in question. If ELI agrees to the
relocation, FTV shall proceed with the relocation as provided in, and ELI shall
bear its proportionate share of the Relocation Cost as described in, Article IX
of this Agreement entitled Relocation. If ELI determines to continue use of the
----------
System through the jurisdiction in question, ELI shall pay the additional tax or
fee attributable to ELI's use of the System.

E. FTV shall not, without the prior consent of ELI, enter into any
agreement relating to any easement, right-of-way (or similar right) for the
System that provides for payment for such easement, right-of-way or similar
right based upon System usage, revenues, profitability or other similar
compensation method.

ARTICLE XIV. SYSTEM WARRANTIES
-----------------

A. EXCEPT AS OTHERWISE SPECIFICALLY SET FORTH IN THE REPRESENTATIONS,
------
WARRANTIES, COVENANTS AND CONDITIONS OF THIS AGREEMENT, FTV MAKES NO WARRANTY TO
ELI OR ANY OTHER PERSON OR ENTITY, WHETHER EXPRESS, IMPLIED OR STATUTORY, AS TO
THE INSTALLATION, DESCRIPTION, QUALITY, MERCHANTABILITY, COMPLETENESS

________________________________________________________________________________
PRE-CONSTRUCTION IRU AGREEMENT Page 16 of 30
<PAGE>

OR FITNESS FOR ANY PURPOSE OF ANY FIBERS OR ANY SERVICE PROVIDED HEREUNDER OR
DESCRIBED HEREIN, OR AS TO ANY OTHER MATTER, ALL OF WHICH WARRANTIES ARE HEREBY
EXCLUDED AND DISCLAIMED.

B. In procuring and obtaining materials for the Installation of the Cable,
FTV shall use reasonable efforts to obtain from the vendors and suppliers
thereof, for the mutual benefit of ELI and FTV, warranties that such materials
are: (1) of the kind and quality described in the purchase order or supply
contract; (2) free of defects in workmanship, material, design and title; (3) of
good and merchantable quality; and (4) where appropriate, fit for their intended
purpose. In addition, FTV shall attempt to obtain standard warranty periods for
all System materials, and shall use reasonable efforts to obtain longer warranty
periods, if such extended warranties do not materially increase the cost of such
materials. ELI's and FTV's sole obligation and liability to each other with
respect to the System materials warranties shall be to administer such
warranties. In no event shall either ELI or FTV be deemed to have guaranteed
any such warranties provided by vendors or suppliers.

C. In the event any maintenance or repairs to the System are required as a
result of a breach of any warranty made by any manufacturer, contractor or
vendor, FTV shall pursue any remedies it may have against such manufacturer,
contractor or vendor, and FTV shall reimburse ELI for any maintenance costs that
ELI has incurred as a result of any such breach of warranty to the extent the
manufacturer, contractor or vendor has paid such costs; provided that: (1) FTV
--------
shall be entitled to reduce such amount by legal and collection costs incurred;
and (2) FTV shall have the right to prorate such payment among itself and other
parties, based on IRU or fiber ownership.

ARTICLE XV. NOTICE
------

A. Unless otherwise provided in this Agreement, all notices and
communications concerning this Agreement shall be in writing and addressed to
the other party as follows:

If to ELI: ELECTRIC LIGHTWAVE, INC.
8100 N.E. Parkway Drive, Suite 200
Vancouver, Washington 98662
Attn: Legal Department
Telephone No.: (360) 892-1000
Facsimile No.: (360) 253-4425

If to FTV: FirstPoint Communications, Inc.
Attn: FTV Representative
210 S.W. Morrison Street, Suite 400
Portland, Oregon 97204
Telephone No.: (503) 464-3500
Facsimile No.: (503) 464-7438

________________________________________________________________________________
PRE-CONSTRUCTION IRU AGREEMENT Page 17 of 30
<PAGE>

with a copy to: Vyvx, Inc.
Attn: General Counsel
One Williams Center, Suite 4100
Tulsa, Oklahoma 74172
Facsimile No.: (918) 588-3005

and to: Touch America, Inc.
Attn: President, FTV Representative
40 East Broadway
Butte, Montana 59701-9394
Telephone No.: ____________________________
Facsimile No.: (406) 497-2150

or at such other address as may be designated in writing to the other party.

B. Unless otherwise provided in this Agreement, notices shall be sent by
registered or certified U.S. Mail, postage prepaid, or by commercial overnight
delivery service, or by facsimile, and shall be deemed served or delivered to
the addressee at its office on the date of receipt acknowledgment or, if postal
claim notices are given, on the date of its return marked "unclaimed," provided,
--------
however, that upon receipt of a returned notice marked "unclaimed," the sending
- -------
party shall make reasonable effort to contact and notify the other party by
telephone.

ARTICLE XVI. CONFIDENTIALITY
---------------

A. If FTV and ELI have entered into (or later enter into) a
Confidentiality Agreement, the terms of such an agreement shall control and
Paragraph XVI.B. shall not apply; however, if any such Confidentiality Agreement
expires or is no longer effective at any time during the Term of this Agreement,
Paragraph XVI.B. shall be in effect during those periods.

B. In the absence of a separate Confidentiality Agreement between FTV and
ELI, if either FTV or ELI provides confidential information to the other in
writing and identified as such or if in the course of performing under this
Agreement a party learns confidential information regarding the facilities or
plans of the other, the receiving party shall protect the confidential
information from disclosure to third parties with the same degree of care
accorded its own confidential and proprietary information; provided, however,
-------- -------
that FTV and ELI shall each be entitled to provide such confidential information
to their respective directors, officers, members, managers, employees, agents,
and contractors ("Representatives"), entities controlling, controlled by or
under common control with ("Affiliates") FTV or ELI, respectively, or the
Representatives of such Affiliates, in each case whose access is reasonably
necessary. Each such recipient of confidential information shall be informed by
the party disclosing confidential information of its confidential nature, and
shall be directed to treat such

________________________________________________________________________________
PRE-CONSTRUCTION IRU AGREEMENT Page 18 of 30
<PAGE>

information confidentially and shall agree to abide by these provisions. In any
event, each party shall be responsible for any breach of this provision by any
person to whom that party discloses confidential information. Neither FTV nor
ELI shall be required to hold confidential any information that: (1) becomes
publicly available other than through the recipient; (2) is required to be
disclosed by a governmental or judicial order, rule or regulation; (3) is
independently developed by the disclosing party; or (4) becomes available to the
disclosing party without restriction from a third party. These obligations shall
survive expiration or termination of this Agreement for a period of two (2)
years.

C. Notwithstanding Paragraphs XVI.A. and B., confidential information
shall not include information disclosed by the receiving party as required by
applicable law or regulation; provided, however, that the information disclosed
-------- -------
is limited to the existence and general nature of the relationship between FTV
and ELI, including, as required, the scope, approximate revenues, purposes and
expectations related to such relationship and a description of any disputes
relating thereto. Notwithstanding the foregoing, this Agreement may be provided
to any governmental agency or court of competent jurisdiction to the extent
required by applicable law.

D. Neither FTV nor ELI shall use the name, tradename, servicemark or
trademark of the other or the existence of this Agreement in any promotional or
advertising material without the prior written consent of the other.

ARTICLE XVII. DEFAULT
-------

A. FTV shall not be in default under this Agreement unless and until ELI
shall have given FTV written notice of such default and FTV shall have failed to
cure the same within thirty (30) days after receipt of such notice; provided,
--------
however, that where such default cannot reasonably be cured within such thirty
- -------
(30) day period, if FTV shall proceed promptly to cure the same and prosecute
such curing with due diligence, the time for curing such default shall be
extended for a period no longer than sixty (60) days from the date of the
receipt of the default notice. Events of default shall include, but not be
limited to: (1) the breach by FTV of any material term, covenant or condition of
this Agreement; (2) the making by FTV of a general assignment for the benefit
of its creditors; (3) the filing of a voluntary petition in bankruptcy or the
filing of a petition in bankruptcy or other insolvency protection against FTV
that is not dismissed within ninety (90) days thereafter; or (4) the filing by
FTV of any petition or answer seeking, consenting to, or acquiescing in
reorganization, arrangement, adjustment, composition, liquidation, dissolution
or similar relief. Any event of default by FTV may be waived under the terms of
this Agreement at ELI's option. Upon the failure by FTV to timely cure any such
default after notice thereof from ELI, ELI may: (a) take such action as ELI
determines, in its sole discretion, to be necessary to correct the default; and
(b) subject to the terms of Article XIX of this Agreement entitled Arbitration,
-----------
pursue any legal remedies it may have under applicable law or principles of
equity relating to such breach.

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PRE-CONSTRUCTION IRU AGREEMENT Page 19 of 30
<PAGE>

B. Default by ELI under the payment provisions of Article II of this
Agreement shall be governed by the following:

1. If ELI fails to fully pay the amount described in Article II.A.I.
when due, FTV may, in addition to any other remedies that it may have under this
Agreement or by operation of law, its sole discretion, terminate this Agreement.

2. If ELI fails to fully pay any amounts described in Article
II.A.2., 3. or 4. of this Agreement, including accrued interest, within five (5)
days after it becomes due, then, if ELI fails to make such full payment within
ten (10) days after notice from FTV of such failure, FTV may, in addition to any
other remedies that it may have under this Agreement or by operation of law,
terminate ELI's rights in the IRU Fibers and transfer such rights or similar
rights to another party.

3. If ELI fails to fully pay any amounts, including interest,
described in Article II.E. within the time periods specified in this Paragraph
XVII.B., then, in addition to any other remedies that it may have under this
Agreement or by operation of law, FTV may, in its sole discretion, suspend ELI's
right to use the IRU Fibers. If ELI subsequently pays all amounts due, together
with applicable interest and the reasonable costs incurred by FTV in suspending
ELI's use of the IRU Fibers within ten (10) days of such suspension, FTV shall
allow ELI to resume its use of the IRU Fibers. If ELI fails to subsequently pay
such amounts within such time periods, FTV may, in addition to any other
remedies that it may have under this Agreement or by operation of law, terminate
ELI's rights in the IRU Fibers and transfer such rights or similar rights to
another party.

4. Following any such termination of ELI's rights to the IRU Fibers,
ELI shall have forty-five (45) days in which to disconnect and remove its
equipment from the Cable. If ELI fails to make such disconnections and removal
within the allotted time, FTV, at its election, may disconnect ELI's equipment
from the IRU Fibers at ELI's cost.

C. With respect to any breach or failure to perform by ELI under this
Agreement other than as provided in Paragraph XVII.B., above, ELI shall not be
in default under this Agreement unless and until FTV shall have given ELI
written notice of such default and ELI shall have failed to cure the same within
thirty (30) days after receipt of such notice; provided, however, that where
-------- -------
such default cannot reasonably be cured within such thirty (30) day period, if
ELI shall proceed promptly to cure the same and prosecute such curing with due
diligence, the time for curing such default shall be extended for a period no
longer than sixty (60) days from the date of the receipt of the default notice.
Events of default shall include, but not be limited to: (1) the breach by ELI
of any material term, covenant or condition of this Agreement; (2) the making by
ELI of a general assignment for the benefit of its creditors; (3) the filing of
a voluntary petition in bankruptcy or the filing of a petition in bankruptcy or
other insolvency protection against ELI that is not dismissed within ninety (90)
days thereafter; or (4) the filing by ELI of any petition or answer seeking,
consenting to, or acquiescing in reorganization, arrangement, adjustment,
composition, liquidation, dissolution or similar relief. Any event of

________________________________________________________________________________
PRE-CONSTRUCTION IRU AGREEMENT Page 20 of 30
<PAGE>

default by ELI may be waived under the terms of this Agreement at FTV's option.
Upon the failure by ELI to timely cure any such default after notice thereof
from FTV, FTV may: (a) take such action as it determines, in its sole
discretion, to be necessary to correct the default; and (b) subject to the
provisions of Article XIX of this Agreement entitled Arbitration, pursue any
-----------
legal remedies it may have under applicable law or principles of equity relating
to such breach.

D. EXCEPT AS OTHERWISE PROVIDED IN PARAGRAPH XVII.E. BELOW RELATING TO
LIQUIDATED DAMAGES, DAMAGES RECOVERABLE BY FTV OR ELI AGAINST THE OTHER DUE TO A
BREACH OF THIS AGREEMENT SHALL BE LIMITED TO ACTUAL DAMAGES. LIABILITY FOR TORT
CLAIMS RELATING TO THE ACTIONS OF THE PARTIES UNDER THIS AGREEMENT SHALL BE
LIMITED TO GENERAL DAMAGES. IN NO EVENT SHALL FTV OR ELI BE LIABLE FOR DAMAGES
FOR LOST OR PROSPECTIVE PROFITS, OR ANY OTHER SPECIAL, PUNITIVE, EXEMPLARY,
CONSEQUENTIAL, INCIDENTAL OR INDIRECT LOSSES OR DAMAGES AS A RESULT OF THE
PERFORMANCE OR NONPERFORMANCE OF ITS OBLIGATIONS UNDER THIS AGREEMENT, OR ITS
ACTS OR OMISSIONS RELATED TO THIS AGREEMENT, WHETHER OR NOT ARISING FROM SOLE,
JOINT OR CONCURRENT NEGLIGENCE OR STRICT LIABILITY. THIS PARAGRAPH SHALL NOT BE
CONSTRUED TO LIMIT EITHER PARTY'S ABILITY TO RECOVER UNDER ARTICLE XI OF THIS
AGREEMENT ENTITLED INDEMNIFICATION WITH RESPECT TO CLAIMS OF THIRD PARTIES
---------------
BROUGHT AGAINST SUCH PARTY. THE ABOVE LIMITATION OF LIABILITY SHALL APPLY TO
INDIRECT LIABILITY INVOLVING SUITS BROUGHT AGAINST THIRD PARTIES WHO, DIRECTLY
OR THROUGH ONE OR MORE OTHER PARTIES, HAVE A RIGHT OF INDEMNIFICATION,
IMPLEADER, CROSS-CLAIM, CONTRIBUTION, OR OTHER RIGHT OF RECOVERY AGAINST A PARTY
TO THIS AGREEMENT (e.g., if an affiliate of Party A sues Party B's contractor
under circumstances in which the contractor has a right of indemnity against
Party B).

E. FTV and ELI acknowledge and agree that substantial damages may be
suffered by ELI if FTV wrongfully fails to complete the Installation of the
Cable by the Scheduled Completion Date or, if applicable, the Revised Scheduled
Completion Date. With the fluctuation in the value and pricing of
telecommunications services, the current and unpredictable state of the national
economy, and other factors which directly affect the value of this Agreement to
ELI, FTV and ELI realize that it would be extremely difficult and impractical,
if not impossible, to ascertain with any degree of certainty prior to signing
this Agreement, the amount of damages which would be suffered by ELI in the
event of FTV's wrongful failure to complete the Installation of the Cable on
time. Therefore, FTV and ELI hereby acknowledge and agree that the damages for
late delivery of the installed Cable described in Paragraph I.F. of this
Agreement constitute a reasonable estimate of such damages. In addition, in the
event of FTV's failure to complete the Installation of the Cable within the time
frames established by this Agreement, ELI shall be entitled to payment of such
damages as full liquidated damages for such failure by FTV.

F. In the event either FTV or ELI fails to make any payment under this
Agreement when due, such amounts shall accrue interest, from the date such
payment is due until paid,

________________________________________________________________________________
PRE-CONSTRUCTION IRU AGREEMENT Page 21 of 30
<PAGE>

including accrued interest, at a rate (unless specifically described elsewhere
in this Agreement) equal to eighteen percent (18%) per annum or, if lower, the
highest percentage allowed by law.

ARTICLE XVIII. FORCE MAJEURE
-------------

Neither FTV nor ELI shall be in default under this Agreement with respect
to any delay in its performance caused by any of the following conditions (each
a "Force Majeure Event"): (1) act of God; (2) fire; (3) flood; (4) material
shortage or unavailability not resulting from the responsible party's failure to
timely place orders or take other necessary actions therefor; (5) government
codes, ordinances, laws, rules, regulations or restrictions (collectively,
"Regulations") (but not to the extent the delay caused by such Regulations could
be avoided by rerouting the Cable if such a reroute was commercially
reasonable); (6) war or civil disorder; or (7) any other cause beyond the
reasonable control of such party. The party claiming relief under this Article
XVIII shall promptly notify the other in writing of the existence of the Force
Majeure Event relied on, the expected duration of the Force Majeure Event, and
the cessation or termination of the Force Majeure Event. The party claiming
relief under this Article XVIII shall exercise commercially reasonable efforts
to minimize the time for any such delay.

ARTICLE XIX. ARBITRATION
-----------

A. Any dispute or disagreement arising between FTV and ELI in connection
with this Agreement that is not settled to their mutual satisfaction within the
applicable notice or cure periods provided in this Agreement, shall be settled
by arbitration in Portland, Oregon, in accordance with the Commercial
Arbitration Rules of the American Arbitration Association in effect on the date
that such notice is given. If FTV and ELI cannot agree on a single arbitrator
within fifteen (15) days after the applicable notice or cure period has expired,
FTV and ELI shall each select an arbitrator within such fifteen (15)day period
and the two (2) arbitrators shall select a third arbitrator within ten (10)
days. If the parties fail to appoint arbitrators or the arbitrators cannot
agree on a third arbitrator, then either party may request that the American
Arbitration Association select and appoint a neutral arbitrator who shall act as
the sole arbitrator. The decision of the arbitrator or arbitrators shall be
final and binding upon FTV and ELI and shall include written findings of law and
fact, and judgment may be obtained thereon by either FTV or ELI in a court of
competent jurisdiction. FTV and ELI shall each bear the cost of preparing and
presenting its own case. The cost of the arbitration, including the fees and
expenses of the arbitrator or arbitrators, shall be shared equally by FTV and
ELI unless the award otherwise provides. The arbitrator or arbitrators shall be
instructed to establish procedures such that a decision can be rendered within
sixty (60) days of the appointment of the arbitrator or arbitrators. Except as
otherwise provided in Paragraph XVII.E. of this Agreement (relating to
liquidated damages), in no event shall the arbitrator or arbitrators have the
power to award any damages for lost or prospective profits, or any other
special, punitive, exemplary, consequential, incidental or indirect losses or
damages as a result of the performance or nonperformance of its obligations
under this Agreement, or its acts or omissions related to this Agreement,
whether or not arising

________________________________________________________________________________
PRE-CONSTRUCTION IRU AGREEMENT Page 22 of 30
<PAGE>

from sole, joint or concurrent negligence or strict liability, regardless of
whether such damages may be available under applicable law. FTV and ELI hereby
waive their rights, if any, to recover any such damages, whether in arbitration
or litigation. This paragraph shall not be construed to limit either party's
ability to recover under Article XI of this Agreement entitled Indemnification
---------------
with respect to claims of third parties brought against such party (as described
in Paragraph XVII.D. of this Agreement).

B. The obligation to arbitrate shall not be binding upon any party with
respect to requests for preliminary injunctions, temporary restraining orders,
specific performance or other procedures in a court of competent jurisdiction to
obtain interim relief when deemed necessary by such court to preserve the status
quo or prevent irreparable injury pending resolution by arbitration of the
actual dispute.

ARTICLE XX. WAIVER
------

The failure of either FTV or ELI to enforce any of the provisions of this
Agreement, or the waiver thereof in any instance, shall not be construed as a
general waiver or relinquishment on its part of any such provision, but the same
shall nevertheless be and remain in full force and effect.

ARTICLE XXI. GOVERNING LAW
-------------

This Agreement shall be governed by and construed in accordance with the
domestic laws of the State of Oregon without reference to its choice of law
principles. With respect to any suit, action or proceedings relating to this
Agreement (the "Proceedings"), each party: (1) irrevocably submits to the
exclusive jurisdiction of the courts of the State of Oregon and the United
States District Court located in Multnomah County, Oregon; (2) irrevocably
waives any objection which it may have at any time to the laying of venue of any
Proceedings brought in any such court; (3) waives any claim that such
Proceedings have been brought in an inconvenient forum; and (4) waives the right
to object, with respect to such Proceedings, that such court does not have
jurisdiction over such party. Nothing in this Agreement precludes either party
from enforcing in any jurisdiction any judgment, order or award obtained in any
such court.

ARTICLE XXII. RULES OF CONSTRUCTION
---------------------

A. The captions or headings in this Agreement are strictly for convenience
and shall not be considered in interpreting this Agreement or as amplifying or
limiting any of its content. Words in this Agreement that import the singular
connotation shall be interpreted as plural, and words that import the plural
connotation shall be interpreted as singular, as the identity of the parties or
objects referred to may require.

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PRE-CONSTRUCTION IRU AGREEMENT Page 23 of 30
<PAGE>

B. Unless expressly defined herein, words having well-known technical or
trade meanings shall be so construed.

C. Except as set forth to the contrary herein, any right or remedy of FTV
------
or ELI shall be cumulative and without prejudice to any other right or remedy,
whether contained herein or not.

D. Nothing in this Agreement is intended to provide any legal rights to
anyone not an executing party of this Agreement.

E. This Agreement has been fully negotiated between and jointly drafted by
FTV and ELI.

F. In the event of a conflict between the provisions of this Agreement and
those of any Exhibit, the provisions of this Agreement shall prevail and such
-------
Exhibits shall be corrected accordingly.
- --------

G. All actions, activities, consents, approvals and other undertakings of
the parties in this Agreement shall be performed in a reasonable and timely
manner. Except as specifically set forth herein, for the purpose of this
------
Article XXII the normal standards of performance within the telecommunications
industry in the relevant market shall be the measure of whether a party's
performance is reasonable and timely.

ARTICLE XXIII. ASSIGNMENT
----------

A. Following the execution of this Agreement, ELI may sell, lease, assign
or swap an IRU in the IRU Fibers as provided in Paragraph II.B. of this
Agreement. ELI may not assign or otherwise transfer this Agreement or its
rights or obligations hereunder to any other party without the prior written
consent of FTV, which consent shall not be unreasonably withheld. Any such
assignee or transferee shall agree in writing to be bound and abide by this
Agreement. ELI shall have the right, without FTV's consent, to assign or
otherwise transfer this Agreement as collateral to any lender or to any parent,
subsidiary or affiliate of ELI or to any person, firm or corporation that shall
control, be under the control of or be under common control with ELI, or any
corporation into which ELI may be merged or consolidated or that purchases all
or substantially all of the assets of ELI; provided, however, that: (1) any
-------- -------
such assignment or transfer shall be subject to FTV's rights under this
Agreement and any assignee or transferee shall continue to perform ELI's
obligations to FTV under the terms and conditions of this Agreement; and (2)
such assignee or transferee shall agree in writing to be bound and abide by this
Agreement. In the event of any permitted partial assignment of any rights
hereunder or in any IRU Fibers, ELI shall remain the sole point of contact with
FTV. ELI, whether or not it receives FTV's permission to assign its rights,
shall guaranty the assignee's payment of the amount described in Article II of
this Agreement entitled Payment; Conveyance of IRU.
--------------------------

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PRE-CONSTRUCTION IRU AGREEMENT Page 24 of 30
<PAGE>

B. Until the Completion Date, FTV shall not assign or otherwise transfer
this Agreement or its rights or obligations under this Agreement to any other
party (except to a wholly-owned subsidiary of FTV, one of its members, a wholly-
------
owned subsidiary of one of its members, the corporate parent of one of its
members, or a wholly-owned subsidiary of the corporate parent of one or more of
its members) without the prior written consent of ELI, which shall not be
unreasonably withheld or delayed. FTV shall have the right, without ELI's
consent, to assign or otherwise transfer this Agreement as collateral to any
institutional lender or to any member, parent, subsidiary or affiliate of FTV or
to any person, firm or corporation that shall control, be under the control of
or be under common control with FTV, or to any entity into which FTV may be
merged or consolidated or that purchases all or substantially all of the assets
of FTV; provided, however, that: (1) any such assignment or transfer shall be
-------- -------
subject to ELI's rights under this Agreement and any assignee or transferee
shall continue to perform FTV's obligations to ELI under the terms and
conditions of this Agreement; and (2) such assignee or transferee shall agree in
writing to be bound and abide by this Agreement. In the event of any permitted
partial assignment of any rights hereunder or in any fibers in the Cable, FTV
shall remain the sole point of contact with ELI.

C. This Agreement and the rights and obligations under this Agreement,
shall be binding upon and shall inure to the benefit of FTV and ELI and their
respective permitted successors and assigns.

ARTICLE XXIV. REPRESENTATIONS AND WARRANTIES
------------------------------

A. Each of FTV and ELI represents and warrants to the other that:

1. It has the full right and authority to enter into, execute,
deliver and perform its obligations under this Agreement;

2. It has taken all requisite corporate action or limited liability
company action (as applicable) to approve the execution, delivery and
performance of this Agreement;

3. This Agreement constitutes a legal, valid and binding obligation
enforceable against such party in accordance with its terms; and

4. Its execution of and performance under this Agreement shall not
violate any applicable existing regulations, rules, statutes or court orders of
any local, state or federal government agency, court or body.

B. Neither FTV nor ELI shall cause or permit the Cable or the System to
become subject to any material mechanic's lien, materialman's lien, vendor's
lien, or any similar lien whether by operation of law or otherwise; provided
--------
that FTV may encumber the System in a sale and lease-back or similar financing
transaction in which the purchaser's or creditor's interest in the System is
subordinate to ELI's rights in and to the IRU Fibers. In the event either FTV
or

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PRE-CONSTRUCTION IRU AGREEMENT Page 25 of 30
<PAGE>

ELI breaches its obligations under this Paragraph XXIV.B., it shall immediately
notify the other in writing, shall promptly cause such lien to be discharged and
released of record without cost to the other, and shall indemnify the other
against all costs and expenses (including reasonable attorneys' fees and court
costs at trial and on appeal) incurred in discharging and releasing such lien;
provided that: (1) FTV and ELI shall each have the right to contest such lien
- --------
or the validity thereof in good faith by appropriate proceeding which shall
operate to prevent the collection or foreclosure of the contested lien; and (2)
the contesting party shall cause any such lien to be discharged prior to the
commencement of any foreclosure action on such lien.

ARTICLE XXV. ENTIRE AGREEMENT; AMENDMENT
---------------------------

Except as set forth in Paragraph XVI.A. this Agreement, this Agreement
------
constitutes the entire and final agreement and understanding between FTV and ELI
with respect to the subject matter hereof and supersedes all prior agreements
relating to the subject matter hereof, which are of no further force or effect.
The Exhibits and Attachment referred to herein are integral parts hereof and are
-----------------------
made a part of this Agreement by reference. This Agreement may only be modified
or supplemented by an instrument in writing executed by duly authorized
representatives of FTV and ELI.

ARTICLE XXVI. RELATIONSHIP OF THE PARTIES
---------------------------

The relationship between FTV and ELI shall not be that of partners, agents
or joint venturers for one another, and nothing contained in this Agreement
shall be deemed to constitute a partnership or agency agreement between them for
any purposes, including, but not limited to federal income tax purposes. FTV
and ELI, in performing any of their obligations hereunder, shall be independent
contractors or independent parties and shall discharge their contractual
obligations at their own risk.

ARTICLE XXVII. SEVERABILITY
------------

If any term, covenant or condition in this Agreement shall, to any extent,
be invalid or unenforceable in any respect under the laws governing this
Agreement, the remainder of this Agreement shall not be affected thereby, and
each term, covenant or condition of this Agreement shall be valid and
enforceable to the fullest extent permitted by law.

ARTICLE XXVIII. COUNTERPARTS
------------

This Agreement may be executed in one or more counterparts, all of which
taken together shall constitute one and the same instrument.

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PRE-CONSTRUCTION IRU AGREEMENT Page 26 of 30
<PAGE>

ARTICLE XXIX. CERTAIN DEFINITIONS
-------------------

The following terms shall have the stated definitions in this Agreement.

A. "Basic Maintenance Services" include the following maintenance and
regeneration site elements: (1) general route maintenance, including monthly
visual inspections and routine equipment maintenance to be provided on a
quarterly basis; (2) disaster restoration; (3) minor relocations (including the
first 1000 feet, System wide, per year); (4) concrete pad at each Transmission
Site (sized to accommodate ELI's choice of hut); and (5) access to commercial
alternating current electrical power.

B. "Cable" means the optical fiber cable and the fibers contained therein,
and associated splicing connections, splice boxes and vaults, and conduit, to be
installed by FTV.

C. "Completion Date" shall have the definition set forth in Paragraph D
of Article IV of this Agreement entitled Acceptance and Testing of IRU Fibers.
------------------------------------

D. "Connecting Point" means the point where the network or facilities of
ELI connect to the System. The Connecting Point may be either: (1) the fiber
optic patch panel, if the connection is made in an existing building; or (2) any
other splice point in the Cable created during the construction of the Cable.

E. "Damage or Deterioration" shall have the definition set forth in
Paragraph F of Article VII of this Agreement entitled Operation, Maintenance,
-----------------------
and Repair of the System.
- ------------------------

F. "Deliverables" shall have the definition set forth in Article V of this
Agreement entitled System Documentation.
--------------------

G. "Direct Costs" means actual and related costs accumulated in accordance
with the established accounting procedures used by ELI to bill third parties for
reimbursable projects which costs include, without limitation, the following:
(1) labor costs, including wages and salaries, and benefits and overhead
allocable to such labor costs (overhead allocation percentage shall not exceed
the lesser of: (a) the percentage ELI allocates to its internal projects; or
(b) one hundred thirty percent (130%)); and (2) other direct costs and out-of-
pocket expenses on a pass-through basis (such as equipment, materials, supplies
and contract services). All costs shall be computed in accordance with
generally accepted accounting principles.

H. "Effective Date" means the date first given in the opening paragraph of
this Agreement.

I. "Enhanced Maintenance Services" means a package of maintenance and
regeneration site elements at the Transmission Sites which are in addition to
the Basic Maintenance Services, including: (1) emergency power via generator at
each Transmission Site; (2) Transmission Site structures (huts); (3) HVAC at
each Transmission Site; (4) 48-volt plant at

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PRE-CONSTRUCTION IRU AGREEMENT Page 27 of 30
<PAGE>

each Transmission Site capable of providing 100 amps service and equipped with
eight hours of battery reserve; and (5) battery maintenance (including monthly
visual inspection and voltage check, and quarterly internal resistance check,
both to be recorded and reported to ELI).

J. "Fiber Acceptance Testing" means the fiber acceptance testing described
in Exhibit C and in Article IV of this Agreement entitled Acceptance and Testing
--------- ----------------------
of IRU Fibers.
- -------------

K. "Force Majeure Event" shall have the definition set forth in Article
XVIII of this Agreement entitled Force Majeure.
-------------

L. "FTV Required Rights" shall have the definition set forth in Paragraph
A of Article VIII of this Agreement entitled Permits, Physical Plant and
---------------------------
Required Rights.
- ---------------

M. "Indefeasible Right of Use" or "IRU" is an unrestricted indefeasible
right to use the IRU Fibers, as granted by this Agreement, provided, however,
-------- -------
that granting of such IRU does not convey ownership of the fibers.

N. "Initial Term" shall mean the Term excluding any extensions thereof.
---------

O. "Inspection Costs" means actual and related costs including, without
limitation, the following: (1) labor costs, including wages and salaries, and
benefits and overhead allocable to such labor costs (overhead allocation
percentage shall not exceed the lesser of: (a) the percentage FTV allocates to
its internal projects; or (b) one hundred thirty percent (130%)); (2) travel
costs incurred by FTV or by its employees and reimbursed in accordance with FTV
policies and Internal Revenue Service regulations (such as air fare, personal
automobile mileage, lodging, meals); and (3) other direct costs and out-of-
pocket expenses on a pass-through basis (such as equipment, materials, supplies
and contract services). All costs shall be computed in accordance with
generally accepted accounting principles.

P. "Installation" means the completion of construction and installation of
the Cable so that it meets all of the specifications detailed in Exhibits A and
--------------
C.
- -

Q. "IRU Fibers" means the twenty-four (24) single mode SMF-28 optical
fibers in the Cable as described in Exhibit B along the entirety of the System
---------
Route in which FTV, pursuant to the terms of this Agreement, grants to ELI an
exclusive IRU.

R. "Present Value" means the value as of a certain date of future or prior
payments using a nine percent (9%) per year simple interest discount rate
prorated (by day) for partial years.

S. "Regulations" shall have the definition set forth in Article XVIII of
this Agreement entitled Force Majeure.
-------------

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PRE-CONSTRUCTION IRU AGREEMENT Page 28 of 30
<PAGE>

T. "Relocation Costs" means actual and related costs including, without
limitation, the following: (1) labor costs, including wages and salaries, and
benefits and overhead allocable to such labor costs (overhead allocation
percentage shall not exceed the lesser of: (a) the percentage FTV allocates to
its internal projects; and (b) one hundred thirty percent (130%)); (2) travel
costs incurred by FTV or by its employees and reimbursed in accordance with FTV
policies and Internal Revenue Service regulations (such as air fare, personal
automobile mileage, lodging, meals); and (3) other direct costs and out-of-
pocket expenses on a pass-through basis (such as equipment, materials, supplies
and contract services). All costs shall be computed in accordance with
generally accepted accounting principles.

U. "Revised Scheduled Completion Date" means the extended date for the
completion of the Installation of Cable which, as provided in Paragraph I.E. of
this Agreement, may not be more than ninety (90) days after the original
Scheduled Completion Date.

V. "R of W Agreements" means all agreements with right of way owners,
property owners, utilities, government entities or other parties that FTV must
reasonably obtain in order to get access to or the authority to undertake
activities on the System Route.

W. "Route Miles" means the actual miles traversed by the Cable (including
spurs) based on as-built surveys.

X. "Scheduled Completion Date" means February 28, 1999, but as described
in Paragraph I.E. of this Agreement, the actual date may be later or earlier.

Y. "Service Interruption" means, with respect to the IRU Fibers, any
interruption in service, failure, disrepair, impairment or other need for repair
or restoration of the IRU Fibers which, in the case of a fiber cut, is longer
than four (4) hours or, in the case of equipment (i.e., buildings, HVAC, power
and uninterruptible power systems) failure or human negligence, is longer than
one (1) hour.

Z. "System" means the FTV fiber optic telecommunications deployed and to
be deployed by FTV along the System Route.

AA. "System Route" means the corridors in which the Cable for the System
has been or will be deployed as depicted on Attachment 1.
------------

BB. "Term" shall have the definition set forth in the Article VI of this
Agreement entitled Term and any extensions thereof.
----

CC. "Transmission Site" shall mean the regenerator stations, junctions, or
points of presence performing the same function as regeneration stations or
junctions at those locations identified in accordance with Exhibit D.
---------

________________________________________________________________________________
PRE-CONSTRUCTION IRU AGREEMENT Page 29 of 30
<PAGE>

ARTICLE XXX. AUDIT RIGHTS
------------

ELI shall have the right to audit FTV's books and records relating to FTV's
costs of Installation, Relocation Costs, Inspection Costs, taxes and fees
relating to the System, and other costs if FTV, under the terms of this
Agreement, seeks reimbursement or contribution thereof from ELI. FTV shall have
the right to audit ELI's books and records relating to ELI's Direct Costs and
other costs if ELI, under the terms of this Agreement, seeks reimbursement
thereof from FTV.

In confirmation of their consent to the terms and conditions contained in
this Agreement and intending to be legally bound hereby, FTV and ELI have
executed this Agreement as of the Effective Date.

"FTV"

FTV COMMUNICATIONS LLC, a Delaware
limited liability company

By: /s/Diane D. Whitaker
-----------------------------------
Name: Diane D. Whitaker
---------------------------------
Title: Manager Representative
--------------------------------

"ELI"

ELECTRIC LIGHTWAVE, INC., a Delaware
corporation

By: /s/David B. Sharkey
-----------------------------------
Name: David B. Sharkey
---------------------------------
Title: President
--------------------------------

________________________________________________________________________________
PRE-CONSTRUCTION IRU AGREEMENT Page 30 of 30
<PAGE>

EXHIBITS

Exhibit A - Cable Installation Specifications

Exhibit B - Fiber Specifications

Exhibit C - Fiber Splicing, Testing, & Acceptance Standards

Exhibit D - Regenerator / Amplifier Site Specifications

Exhibit E - As-Built Drawing Specifications

Exhibit F - Operations Specifications

Exhibit G - Colocation

Exhibit H - Passthrough Provisions

Attachment 1 - Route Map
<PAGE>

EXHIBIT A

Cable Installation Specifications

1. General

The intent of this document is to outline the specifications for
construction of a fiber optic cable system. In all cases the standards
contained in this document, or the standards of the federal, state,
local or private agency having jurisdiction, whichever is stricter,
shall be followed.

2. Material

Steel, PVC conduit with a minimum schedule 40 wall thickness, or HDPE
SDR11 duct.

Any exposed steel conduit, brackets or hardware (i.e., bridge
attachments) shall be hot-dipped galvanized after fabrication.

All split steel shall be flanged.

Handholes shall have a minimum H-15 loading rating.

Manholes shall have a minimum H-20 loading rating.

Buried cable warning tape shall be a minimum of three inches (3") wide
and display "Warning-Buried Fiber Optic Cable," a company name, logo and
emergency One Call 800 number repeated every twenty-four inches (24").
Warning signs will display universal do not dig symbol, "Warning-Buried
Fiber Optic Cable," company name and logo, local and emergency One Call
800 numbers.

3. Minimum Depths

. Minimum cover required in the placement conduit/cable shall be
forty-two inches (42"), except in the following instances:

. The minimum cover in ditches adjacent to roads, highways, railroads and
interstates is forty-eight inches (48 ") below the clean out line or
existing grade, whichever is greater.

. The minimum cover across streams, river washes, and other waterways is
sixty inches (60") below the clean out line or existing grade,
whichever is greater.

. At locations where fiber optic cable crosses other subsurface utilities
or other structures, the fiber optic cable/conduit shall be installed
to provide a minimum of twelve inches (12") of vertical clearance from
the utility/obstacle. The fiber optic cable/conduit can be placed above
the utility/obstacle, provided the minimum clearance and applicable
minimum depth can be maintained; otherwise the fiber optic
cable/conduit will be installed under the existing utility or other
structure.

. In rock, the cable/conduit shall be placed to provide a minimum of
eighteen inches (18") below the surface of the solid rock, or provide a
minimum of forty-two inches (42") of total cover, whichever requires
the least rock excavation.

A-1
<PAGE>

. Where existing pipe is used, current depth is sufficient. However,
either party will exercise commercially reasonable efforts to lower any
exposed pipe to avoid damage to the pipe, interduct and fiber cable due
to foreseeable operations over the affected right-of-way.

4. Buried Cable Warning Tape

All cable/conduit will be installed with buried cable warning tape. The
warning tape shall be laid a minimum of twelve inches (12") above the
cable/conduit. The warning tape shall generally be placed at a depth of
twenty-four inches (24") below grade and directly above the
cable/conduit.

5. Conduit Construction

Conduits may be placed by means of trenching, plowing, jack and bore,
multi-directional bore or directional bore. Conduits will generally be
placed on a level grade parallel to the surface, with only gradual
changes in grade elevation. Steel conduit will be joined with flush
threaded collars, Zap-Lok or welding. (Welding is the preferred method.)

All paved city, county, state, federal and interstate highways, and
railroad crossings will be encased in steel conduit

All longitudinal cable runs under paved streets will be placed in
steel or concrete encased HDPE or PVC conduit.

All cable placed in metro areas will be placed in steel or concrete
covered HDPE or PVC conduit.

Metro areas shall be defined as areas where either of the following
conditions exist:

1) Developed and improved areas.

2) High growth areas.

All crossings of major streams, rivers, bays and navigable waterways
will be placed in HDPE, PVC, steel conduit, or be specially armored
submarine cable. At all foreign utility/underground obstacle crossings,
steel conduit will be placed and will extend at least five feet (5')
beyond the outer limits of the obstacle in both directions.

All jack and bores will use steel conduit.

All directional or mini-directional bores will use HDPE or steel
conduit.

Any cable placed in swamp or wetland areas will be placed in HDPE, PVC
or steel conduit.

All conduits placed on bridges will be steel.

All conduits placed on bridges shall have an expansion joint placed at
each structural (bridge) expansion joint or at least every one hundred
fifty feet (150'), whichever is the shorter distance.

A-2
<PAGE>

6. Innerduct Installation

Innerduct(s) shall be installed in all steel conduits. No cable will
be placed directly in any split/solid steel conduit without innerduct.

Innerduct(s) shall extend beyond the end of all conduits a minimum of
eighteen inches (18").

7. Cable Installation in Conduit

The fiber optic cable shall be installed using either a sealed pneumatic
cable blowing system, or a powered pulling winch and hydraulic powered
assist pulling wheels. The maximum pulling force to be applied to the
fiber optic cable shall be six hundred pounds (600 lbs.). Sufficient
pulling assists will be available and used to insure the maximum pulling
force is not exceeded at any point along the pull. The cable shall be
lubricated at the reel and all pulling assist locations.

A pulling swivel breakaway rated at six hundred pounds (600 lbs.)
shall be used at all times.

Splices will only be allowed at planned junctions and reel ends. The
cable will not be cut and spliced for the contractor's convenience
during the cable pulling operation.

All splices will be contained in a handhole or manhole.

A minimum of twenty meters (20m) of slack cable will be left in all
-------
intermediate handholes and manholes.

A minimum of thirty meters (30m) of slack cable will be left in all
-------
splice locations.

A minimum of fifty meters (50m) of slack cable will be left in all
-------
facility locations, i.e., POP sites, switch sites, regen sites, or
CEV'S.

8. Manholes and Handholes

Manholes shall be placed in traveled surface streets, and shall have
locking lids. Handholes shall be placed in all other areas, and be
installed with a minimum of eighteen inches (18") of soil covering
lid.

9. EMS Markers

EMS markers shall be placed directly below the lid of all buried
handholes. EMS markers fabricated into the lids of the handholes are
acceptable.

10. Cable Markers (Warning Signs)

Cable markers shall be installed at all changes in cable running line
direction, splices, pull boxes, assist pulling locations, and at both
sides of street, highway or railroad crossings. At no time shall any
markers be spaced more than five hundred feet (500') apart in metro
areas or within line of site exceeding one

A-3
<PAGE>

thousand feet (1,000') in non-metro areas. Markers shall be
positioned so that they can be seen from the location of the cable and
generally set facing perpendicular to the cable running line.

Splices and pull boxes shall be marked on the cable marker post.

11. Safety and Environmental

All work will be done in strict accordance with federal, state, and
local applicable private rules and laws regarding safety and
environmental issues, including those set forth by OSHA and the EPA.

A-4
<PAGE>

EXHIBIT B

Fiber Specifications

As attached

B-1
<PAGE>

Pl1036 Corning(R) SMF-28(TM) CPC6
Issued: 3/96 Single-Mode Optical Fiber
Supersedes: 8/95
ISO 9001 Registered

GENERAL

Corning(R) SMF(TM)-28(TM) single-mode fiber is considered the "standard" optical
fiber for telephony, cable television, submarine, and private network
applications in the transmission of data, voice and/or video services. Corning
SMF-28 fiber is manufactured to the most demanding specifications in the
industry.

SMF-28 fiber is optimized for use in the 1310 nm wavelength region. The
information-carrying capacity of the fiber is at its highest in this
transmission window, and it is also where dispersion is the lowest. SMF-28
fiber can also be effectively used in the 1550 nm wavelength region.

Corning's enhanced, dual layer acrylate CPC6 coating provides excellent fiber
protection and is easy to work with. CPC6 can be mechanically stripped and has
an outside diameter of 245 _m. CPC6 is optimized for use in many single and
multi-fiber cable designs including loose tube, ribbon, slotted core, and tight
buffer cables.

SMF-28 fiber is manufactured using the Outside Vapor Deposition (OVD) process,
which produces a totally synthetic, ultra-pure fiber. As a result, Corning SMF-
28 has consistent geometric properties, high strength and low attenuation.
Corning SMF-28 fiber can be counted on to deliver excellent performance and high
reliability, reel after reel.

FEATURES & BENEFITS

.Versatility in 1310 nm and 1550 nm applications.

.Outstanding geometrical properties for low splice loss and high splice yields.

.OVD manufacturing reliability and product consistency

.Optimized for use in ribbon, loose tube, and other common cable designs.

OPTICAL SPECIFICATIONS

Attenuation

Uncabled Fiber Attenuation Cells Point Discontinuity
Attenuation Cells (dB/km) No point discontinuity greater than
0.10 dB at either 1310 nm or 1550 nm.
Wavelength Premium* Standard
(nm)
1310 _0.35 _0.40 Attenuation at the Water Peak
1550 _0.25 _0.30 The attenuation at 1383 plus or
minus 3 nm does not exceed 2.1
dB/km.

*Lower attenuation available in limited quantities.
<PAGE>

OPTICAL SPECIFICATIONS, (continued)

Attenuation vs. Wavelength The attenuation in a given
Range Ref._ Max Increase wavelength range does not exceed the
(nm) (nm) _(dB/km) attenuation of the reference
1285-1330 1310 0.05 wavelength (_) by more than the
1525-1575 1550 0.05 value _.

Attenuation With Bending
Mandrel Number Wavelength Induced The induced attenuation due
Diameter(nm)of Turns (nm) Attenuation(dB) to fiber wrapped around a
32 1 1550 _0.50 mandrel of a specified
75 100 1310 _0.05 diameter.
75 100 1550 _0.10

Cable Cutoff Wavelength (_ccf) Mode-Field Diameter
_ccf _1260 nm 9.30 plus or minus 0.50 _m at 1310 nm
10.50 plus or minus 1.00 _m at
1550 nm
Dispersion

Zero Dispersion Wavelength (_o): 1301.5 nm __ _1321.5 nm
Zero Dispersion Slope (So): _0.092 ps/(nm/2/.km)
Fiber Polarization Mode Dispersion Coefficient (PMD): _0.5 p/s/__km

Dispersion Calculation

ENVIRONMENTAL SPECIFICATIONS

Environmental Test Condition Induced Operating Temperature Range
Attenuation (dB/km) -60(degrees) C
to +85(degrees) C
Temperature Dependence 1310 nm 1550 nm
- -60(degrees) to + 85(degrees) C _0.05 _0.05
Temperature-Humidity Cycling
- -10(degrees) C to + 85(degrees) C, up to 98% RH.
_0.05 _0.05
Water Immersion, 23(degrees) C _0.05 _0.05
Heat Aging, 85(degrees) C _0.05 _0.05
<PAGE>

DIMENSIONAL SPECIFICATIONS

Standard Length (km/reel): 2.2 - 25.2
.Longer spliced lengths available at a premium.

Glass Geometry Coating Geometry
Fiber Curl: _2.0m radius of curvature Coating Diameter: 245 plus or
minus 10 _m
Cladding Diameter: 125.0 plus or minus
1.0_m Coating-Cladding Concentricity_12_m
Core-Clad Concentricity: _0.8_m
Cladding Non-Circularity: _1.0%

Defined as: Min. Cladding Diameter x 100
Max. Cladding Diameter

MECHANICAL SPECIFICATIONS

Proof Test:

The entire length of fiber is subjected to a tensile proof stress _ 100 kpsi
(0.7 GN/m/2/)*.
* Higher proof test available at a premium.

PERFORMANCE CHARACTERIZATIONS

Characterized parameters are typical values.

Core Diameter: Refractive Index Difference:
8.3_m 0.36%

Numerical Aperture: Effective Group Index of Refraction
(Neff):

0.13 1.4675 at 1310 nm
1.4681 at 1550 nm
NA was measured at the one percent
power angle of a one-dimensional
far-field scan at 1310 nm.
Fatigue Resistance Parameter (nd):
_20

Zero Dispersion Wavelength (_o):
1312 nm

Zero Dispersion Slope (So): Coating Strip Force:
0.090 ps/(nm/2/.km) Dry: 07 lbs. (3.2 N)
Wet, 14 days room temperature:
0.7 lbs. (3.2N)
<PAGE>

Refractive Index Profile (typical fiber)
Title: [Table] Graphic
Showing Refractive Index Profile (typical fiber)
D Refractive Index (%) on the Y-axis
- --Radius (um) X-axis

Spectral Attenuation (typical fiber)
Title: [Table]-Graphic
Showing Special Attenuation (typical fiber) Attenuation (dB/Km) on the Y-axis
Wavelength (nm)

COATINGS
.Corning SMF-28 optical fiber also is available with CSB4 500_m coating.

[Table]
Ordering Information
Gives information about the ordering procedure to be followed when ordering
Fiber Type Corning(C) SMF-28(TM)

CORNING
Corning Incorporated
Opto-Electronics Group
Corning, NY 14831 USA
Tel.: 800-525-2524
Fax: 800-FAX-CORNING

Corning Fiber is
Made in the USA.
<PAGE>

EXHIBIT C
Fiber Splicing, Testing, and Acceptance Standards

1. General

This exhibit defines the standard procedures for testing and acceptance
of the fiber and splices. In general, the Constructing Party, will
perform all tests as laid out in Paragraphs 2, 3, and 4. The tests should
follow the requirements and meet the criteria as laid out in Paragraphs 5
and 6. The Constructing Party will use the test equipment and follow the
testing standards as laid out in Paragraph 7. The Constructing Party will
provide test data to the other parties according to the standards as laid
out in Paragraph 8.

2. Initial Testing

Initially, OTDR tests will be taken from one direction because both ends
of the cable may not have connectors. As soon as fiber connectivity has
been achieved to both regen sites, the Constructing Party will verify
and record the continuity of all fibers. During this time, the
Constructing Party will take and record power level readings on all
fibers at both wavelengths in both directions. The Constructing Party
will then begin bi-directional OTDR testing of all fibers. When
requested in the following paragraphs, the Constructing Party will
provide the other party with copies of the OTDR traces on diskette
recorded according to the standards in Paragraph 8.

3. End-to-End Testing

After the contractor has provided end-to-end connectivity on the fibers,
bi-directional end-to-end testing will be done. Continuity tests will be
done to verify that no fibers have been "frogged" or crossed in any of
the splice points. Loss measurements will be recorded using a laser
source and a power meter. OTDR traces will be taken and splice loss
measurements will be recorded. The Constructing Party will also store
OTDR traces on diskette.

A. It is imperative to verify that all fibers have one-to-one
continuity on the new cable. This should be done at the fiber level, not
just the pigtail level. For each pigtail, a HE-NE laser will be used to
verify fiber color and buffer tube color. Once the fiber color and
buffer tube color have been recorded, a laser light source will be
attached and a power meter reading will be taken at the far end. Then at
the far end, a HE-NE laser should be used to verify the fiber color and
the buffer tube color of the fiber receiving the light. Then power level
readings should be taken in the opposite direction. The power
measurements should be made at both 1310 nm and 1550 nm.

B. OTDR traces should be taken in both directions at both 1310 nm and
1550 nm. Loss measurements for each splice point should be measured and
recorded in

C-1
<PAGE>

both directions. These loss values should then be averaged. The traces
for all fibers should be recorded on diskette and provided to the other
party.

4. Bi-directional Test Requirements

The test requirements for the final bi-directional testing are as follows
(for all testing, it is critical that all test connections are clean
during all testing
procedures):

A. The continuity tests should prove that there is a one-to-one
correspondence of all fibers. Any "frogs" or fibers that cross en route
will be remedied by the Constructing Party.

B. Bi-directional OTDR data will be the tool used to make final
acceptance of the fibers. The average loss of each splice should not
exceed 0. IO dB. Any splice points that exceed this value will be marked
Out-of-Spec (OOS) and initialed by the other party's representative on
the data sheet. The other party will then make a decision as to how to
act upon this condition.

5. Optical Time Domain Reflectometry

The OTDRs that are acceptable for testing are the Laser Precision
TD1000A, TD2000 or TD3000, or equivalent. These must have a floppy disk
drive for storing the trace files. Again, it should be noted that it
is vital that during all these tests (OTDR, power meter, etc.) all
connectors are clean. This can dramatically affect results if this is
not resolved. The following settings should be used during the various
tests:

For all OTDRs, the following index of refraction setting should be used:

[Table]
1310 nm 1550 nm

For AT&T fiber 1.4659 1.4666
For Corning SMF-21 1.4640 1.4640
For Corning SMF-28 1.4675 1.4681
For Sumitomo fiber 1.4670 1.4670
For Corning SMF-LS 1.471 1.470

C-2
<PAGE>

[Table]
Bi- TD1000A TD2000 TD3000
Directional

64 km Range 64 km Range 64 km Range

960 ns Pulse @ 1310 Long Pulse @ 1310 1 us Pulse@ 1310
(for high loss use (for high loss use 2 us)
1980 ns)

480 ns Pulse @ 1550 Medium Pulse @ 500 ns Pulse @ 1550
1550

4m Resolution 4m Resolution

Medium Averaging Medium Scan Medium Averaging

1310/1550 nm 1310/1550 nm 1310/1550 nm

Note:
For spans which are longer than 64 km between regens, a TD3000 will be
required set at 128 km range setting. Bi-directional data will only be
required at 1550 nm.

6. Recording Data

Documentation standards and sheets for recording the cable information
are in development.

C-3
<PAGE>

EXHIBIT D

Regenerator/Amplifier Site Specifications

1. General

This specification is still in development. The intent of the span
design is to accommodate either Standard Single Mode Fiber, or Non-Zero
Dispersion Shifted Fiber.

2. Site Spacing

Span spacing will be the minimum to allow optical amplification,
regeneration, or wavelength division multiplexing. Geographic location
of the sites is currently being determined. Preliminary guidelines stand
at forty (40) miles with a seventy (70) mile maximum spacing between
facilities that support regeneration / optical amplification.

3. Site Power

Minimum AC power to the site shall be 240V, 200Arnp service.

4. Building Specifications

Building shall be constructed of armor cast concrete with steel doors.

If not paved, sites will be accessible with four wheel drive vehicles.

Site will be fenced and topped with wire for security.

Building dimensions (currently in design stage)

Dual HVAC units will be installed that can carry the cooling load
independently. Housekeeping alarms will be wired to allow multiple
parties to access the alarms.

5. Specifications and Drawings

Specifications and drawings showing location and groundings and system
design for sites and buildings shall be provided to ELI within thirty
(30) days of selection by ELI of sites for such building. ELI shall make
all building site selection by no later than January 31, 1998.

D-1
<PAGE>

EXHIBIT E

As-Built Drawing Specifications

1. As Built Alignment Sheets

Survey information (either from existing data or new information) will be
put on drawings.

Drawings will contain cable information, splice locations, assist point
locations with permanent structures, survey stations, landowner
information, conduit information, regen locations, and optical distances
to each regen from each splice location.

Drawings will be "blue lines" as such term is understood in the industry
or in CAD format revision 13.

Drawings will be updated with actual field data during and after
construction. Metro areas scale shall not exceed 1 "=200'.

Rural areas scale shall not exceed 1 "=500'.

Cable information shall include manufacturer and type of fiber and
manufacturer and style of cable.

Splice vaults and transmission sites to be GPS coded.

2. Regen/Amplifier Sites

Floor plans showing rack placement and assignment shall be provided
within thirty (30) days after notice from ELI of its selection of
enhanced maintenance on the regeneration/amplifier sites. Such notice
from ELI shall be provided by no later than January 1, 1998.

E-1
<PAGE>

EXHIBIT F
Operations Specifications

1. General

A. FTV as services provider ("Service Provider") shall operate and
maintain a Network Control Center ("NCC") staffed twenty-four (24) hours
a day, seven (7) days a week, by trained and qualified personnel.
Service Provider shall maintain a toll-free telephone number to contact
personnel at the NCC. Service Provider's NCC personnel shall dispatch
maintenance and repair personnel along the System to handle and repair
problems detected through the NCC's remote surveillance equipment, by the
Service Recipient, or otherwise.

B. Service Provider's maintenance employees shall be available for
dispatch twenty-four (24) hours a day, seven (7) days a week. Service
Provider shall use best reasonable efforts to have its first maintenance
employee at the site requiring an emergency maintenance activity within
two (2) hours from the time of alarm identification by Service Provider's
NCC or notification by ELI (the "Service Recipient,"). Emergency
maintenance is defined as any service affecting situations requiring an
immediate response.

C. Service Recipient shall utilize the attached Operations Escalation
List, to report and seek immediate initial redress of exceptions noted in
the performance of Service Provider in meeting maintenance service
objectives.

D. In performing its services hereunder, Service Provider shall take
workmanlike care to prevent impairment to the signal continuity and
performance of the System. The precautions to be taken by Service
Provider shall include notification to Service Recipient. In addition,
Service Provider shall reasonably cooperate with Service Recipient in
sharing information and analyzing the disturbances regarding the cable
and/or fiber facilities.

E. Service Provider shall use its best efforts to notify Service
Recipient ten (10) days prior to the date of any planned non-emergency
fiber activity. In the event that a Service Provider planned activity is
canceled or delayed for whatever reason as previously notified, Service
Provider shall notify Service Recipient at Service Provider's earliest
opportunity and will comply with the provisions of the previous sentence
to reschedule any delayed activity.

F. The Service Provider shall provide Service Recipient new or updated
as built drawings within ninety (90) days of completion for any Cable
relocations or other engineering changes affecting the Cable.

G. In accordance with the Agreement, each party will be responsible for
maintaining its own electronic equipment using company technicians or
contracting with the other party or a third party. The Constructing
Party will

F-1
<PAGE>

provide timely and reasonable access to all Sites where the other party
is responsible to maintain its own electronic equipment on the
Constructing Party's System. If the Constructing Party agrees to
maintain the other party's electronic equipment, the other party shall
provide equipment manuals for each site for all equipment to be
maintained by the Constructing Party.

2. Facilities

A. Service Provider shall provide all power and associated environmental
control systems necessary at the common regenerator/optical
amplifier/junctions buildings ("Buildings") in accordance with the
following common facilities specifications:

D.C. Power - When commercial AC power is present, D.C. voltage will be
maintained at 54.0 VDC +1/-0.5 V and will not exceed 56VDC.

Temperature and humidity in buildings will be controlled by commercially
available HVAC equipment as would be appropriate for a manned site.

Remote high and low temperature alarms will be provided for buildings and
set for 85 degrees F and 65 degrees F respectively.

B. Service Provider shall perform or cause a third party to perform
appropriate routine maintenance on the Cable in accordance with Service
Provider's then current preventative maintenance procedures. Service
Provider's preventative maintenance procedures shall not substantially
deviate from industry practice.

C. Service Provider shall perform appropriate routine maintenance on the
regen/amplifier buildings, DC powerplant and HVAC equipment and basic
building safety equipment including alarms and emergency generators in
accordance with Service Provider then current preventative maintenance
procedures. Service Provider's preventative maintenance procedures shall
not substantially deviate from industry practice.

D. If Service Recipient is collocated in the same physical structure as
Service Provider, Service Provider's NCC shall monitor the same
housekeeping alarms, and in a similar fashion, as it does for the rest of
its network, including, intrusion, high/low temperature, fire or smoke,
toxic/explosive gas (where applicable), DC and commercial AC power, and
high water (where applicable). Upon receipt of an alarm, Service
Provider shall take appropriate action and immediately notify Service
Recipient of a major service jeopardy situation. All housekeeping alarms
will be wired in such a way to allow multiple parties (including the
Service Recipient) to remotely access and monitor alarm status.

E. Service Provider shall use reasonable efforts to provide within four
(4) hours after a power outage at a regenerator site emergency generators
with sufficient capability to restore one (1) unit of all redundant HVAC
systems and a sufficient number of rectifiers to carry the site load and
recharge batteries.

F-2
<PAGE>

F. Service Provider shall by January 1, 1998, deliver an escalation list
to Service Recipient.

3. Fiber and Cable

A. Subject to the provisions of this Agreement and any underlying Right
of Way Agreements that parties have entered into or may enter into,
Service Provider shall maintain or cause a third party to maintain the
Cable in a good and operable condition and shall repair or cause a third
party to repair the Cable in a workmanlike manner.

B. Service Provider shall patrol the route of the buried portion of the
Cable on a reasonable, routine basis and shall perform all required
Cable locates. Service Provider shall have qualified representatives
on site at anytime another company is crossing the Cable or digging
within five (5) feet of the Cable. Service Provider shall belong to a
state or regional one call center when available.

C. Service Provider maintenance employees shall be responsible for
correcting or repairing Cable discontinuity or damage, including, but not
limited to, the emergency repair of the Cable. Service Provider shall
use its best commercially reasonable efforts to repair Cable traffic
discontinuity within four (4) hours after the Service Provider
maintenance employee's arrival at the problem site. Service Provider
shall maintain sufficient capability to teleconference with Service
Recipient during an emergency repair in order to provide continuous
communication. Within twenty-four (24) hours after completion of an
emergency repair, Service Provider shall commence its planning for
permanent repair, shall notify Service Recipient of such plans, and shall
implement such permanent repair within an appropriate time thereafter.
Restoration of open fibers on fiber strands not immediately required for
service shall be completed on a mutually agreed upon schedule. If the
fiber is required for immediate service, the repair shall be scheduled
for the next available Planned Service Work Period (PSWP) weekend.

D. Service Provider shall comply with the Cable splicing specifications
as provided in the Exhibit C entitled "Fiber Cable Splicing, Testing and
Acceptance Standards". Service Provider shall provide to Service
Recipient any modifications to these specifications for Service
Recipient's approval, which shall not be unreasonably withheld, so long
as the modifications do not deviate from industry standards.

E. Service Provider's representatives that are responsible for initial
restorations of a cut Cable shall carry on their vehicles the appropriate
equipment to be usable to quickly put the Cable back together using a
temporary slice. The objective is to get the Cable back in an operating
condition in as little time as possible. Service Provider shall also
maintain an inventory of spare Cable at strategic locations to facilitate
timely restoration.

F-3
<PAGE>

F. The demarcation point is the Fiber distribution panel. Service
Providers responsibility, with respect to maintenance and repair of the
Fiber, will end at the demarcation point.

4. Planned Service Work Period (PSWP)

Non-emergency work which is reasonably expected to produce any signal
discontinuity must be coordinated between the parties. Generally, this
work should be scheduled after midnight and before 6:00 a.m., local
time. Major system work such as fiber rolls and hot cuts will be
scheduled for PSWP weekends. A calendar showing approved PSWP weekends
will be agreed upon in the last quarter of every year for the year to
come. The intent is to avoid jeopardy work on the first and last
weekends of the month and high traffic holidays. Other work such as
power work or work within fiber bays shall be scheduled to occur after
6:00 p.m. local time.

5. Restoration

A. When restoring a cut Cable, the parties agree to work together to
restore all traffic as quickly as possible. The Service Provider,
immediately upon arriving on the site of the cut, shall determine the
course of action to be taken to restore the Cable and shall begin
restoration efforts. The Service Provider shall initially splice a
buffer tube of its choice containing the Service Provider's fibers. Once
continuity is established allowing transmission systems to come back on
line, the Service Provider shall begin splicing a buffer tube chosen by
the Service Recipient. This process will continue until all fibers in
all buffer fibers are spliced and all traffic restored. Service Provider
repair and restoration efforts shall be conducted in a nondiscriminatory
manner whereby no IRU owner, lessor, customer or other System user
(including the System owner) receives preferential repair or restoration
service.

B. Emergency restorations splicing has as its goal to get service up as
quickly as possible. This requires the use of some type of mechanical
splice such as the "3M Fiber Lock" to complete the temporary
restorations. Permanent restorations will take place as soon as possible
after the temporary splice is complete.

C. If at any time it becomes apparent that the service outage is going
to extend beyond eight (8) hours, the corresponding management of each
company will work together to determine a plan to restore the Cable.

6. Addition of Drop / Splice Points

A. Service Recipient will have no right to access Service Recipient IRU
Fibers within the Service Provider Cable other than as provided herein.
Service Recipient will provide Service Provider a request for the
addition of a fiber drop point at an existing splice point (i.e., a point
where a fiber is terminated on a system or where a splice occurs). Such
request will detail the splice location and

F-4
<PAGE>

set forth the work required to be performed. Service Recipient will
provide a spur cable adequate to reach the splice location with an
additional length (minimum 25 meters) sufficient for Service Provider to
splice into the Service Recipient IRU Fibers at the designated splice
location.

B. Service Recipient will obtain the necessary ROW Agreements (or other
rights, if required) and be responsible for the installation of fiber
cable connecting to the drop points.

C. Service Recipient will pay to Service Provider all costs incurred by
Service Provider associated with the addition of drop points within
thirty (30) days of receipt of invoice from Service Provider setting
forth the calculation of and including reasonable supporting
documentation for such costs.

D. Service Provider will not be obligated to add a drop point at a
particular splice location if it determines, in its reasonable
discretion, that there is likely to be a material adverse effect to
its System or a significant technical impediment involved at such splice
location. At Service Recipient's request, the nearest splice location at
which such conditions do not exist will be used as an alternative.

E. Service Recipient will be responsible for all maintenance of spur
fiber cable connecting to the drop point.

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EXHIBIT G

Colocation

The parties shall enter into colocation agreements containing customary terms
and conditions relating to the colocation of equipment described in this
agreement. Any dispute as to the terms of such agreement shall be resolved
through arbitration as set forth in the Agreement.

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<PAGE>

EXHIBIT H

Passthrough Provisions

ARTICLE I. DISCLAIMER OF WARRANTY
- -----------------------------------

LIMITATION OF LIABILITY [SYSTEM OWNER/PROVIDER] MAKES NO WARRANTY TO THE
OTHER PARTY OR ANY OTHER PERSON OR ENTITY, WHETHER EXPRESS, IMPLIED OR
STATUTORY, AS TO THE INSTALLATION DESCRIPTION, QUALITY, MECHANTABILITY,
COMPLETENESS OR FITNESS FOR ANY PURPOSE OF ANY FIBERS OR ANY SERVICE PROVIDED
HEREUNDER OR DESCRIBED HEREIN, OR AS TO ANY OTHER MATTER, ALL OF WHICH
WARRANTIES ARE HEREBY EXCLUDED AND DISCLAIMED.

IN NO EVENT SHALL [SYSTEM OWNER/PROVIDER] OR ANY CONTRACTOR PROVIDING
MAINTENANCE AND REPAIR SERVICE FOR THE [SYSTEM OWNER/PROVIDER] BE LIABLE TO THE
OTHER PARTY FOR DAMAGES FOR LOST OR PROSPECTIVE PROFITS, OR ANY OTHER SPECIAL,
PUNITIVE, EXEMPLARY, CONSEQUENTIAL, INCIDENTAL OR INDIRECT LOSSES OR DAMAGES AS
A RESULT OF THE PERFORMANCE OR NONPERFORMANCE OF ITS OBLIGATIONS UNDER THIS
AGREEMENT, WHETHER OCCASIONED BY ANY REPAIR OR MAINTENANCE PERFORMED BY, OR
FAILED TO BE PERFORMED BY, THE [SYSTEM OWNER/PROVIDER] OR CONTRACTOR, AND
WHETHER OR NOT ARISING FROM SOLE, JOINT OR CONCURRENT NEGLIGENCE OR STRICT
LIABILITY.

ARTICLE 2. FORCE MAJEURE
- --------------------------

Service provider/owner shall not be in default under this Agreement with
respect to any delay in such party's performance caused by any of the following
conditions: (I) act of God, (ii) fire, (iii) flood, (iv) material shortage or
unavailability not resulting from the responsible party's failure to timely
place orders or take other necessary actions therefor, (v) government codes,
ordinances, laws, rules, regulations or restrictions (collectively,
"Regulations") (but not to the extent the delay caused by such Regulations could
be avoided by rerouting the Cable if such a reroute was commercially
reasonable), (vi) war or civil disorder, or (vii) any other cause beyond the
reasonable control of such party. The party claiming relief under this Article
shall promptly notify the other in writing of the existence of the event(s) (I)
through (vii) relied on, the expected duration of the force majeure event, and
the cessation or termination of said event. The party claiming relief under
this Article shall exercise commercially reasonable efforts to minimize the time
for any such delay.

H-1

<PAGE>

EXHIBIT 23.1

The Board of Directors and Stockholder
Electric Lightwave, Inc.:

The audits referred to in our report dated September 4, 1997, included the
related financial statement schedule as of December 31, 1996, and for each of
the years in the three-year period ended December 31, 1996, included in the
registration statement. This financial statement schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion on
this financial statement schedule based on our audits. In our opinion, this
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

We consent to the use of our reports included herein and to the reference to our
firm under the heading "Summary Financial and Other Operating Data," "Selected
Financial and Operating Data" and "Experts" in the prospectus.

KPMG Peat Marwick LLP

New York, New York
October 30, 1997